UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2012
or
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:000-50356
EAST COAST DIVERSIFIED CORPORATION
(Exact Name of registrant as specified in its charter)
| Nevada | 55-0840109 |
| (State or other Jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification Number) |
810 Franklin Court, Suite H
Marietta, Georgia 30067
(Address of principal executive offices)
(770) 953-4184
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No£
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesý No£
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:
| £ | Large Accelerated Filer | £ | Accelerated Filer |
| £ | Non-Accelerated Filer | S | Smaller Reporting Company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No ý
As of November 14, 2012, there were 1,957,787,326 shares outstanding of the registrant’s common stock.
TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | Page | |
| Item 1. | Financial Statements | 3 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 |
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 32 |
| Item 4. | Controls and Procedures | 32 |
| PART II – OTHER INFORMATION | 33 | |
| Item 1. | Legal Proceedings | 33 |
| Item 1.A. | Risk Factors | 33 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 33 |
| Item 3. | Defaults Upon Senior Securities | 34 |
| Item 4. | Mine Safety Disclosures | 34 |
| Item 5. | Other Information | 34 |
| Item 6. | Exhibits | 35 |
| SIGNATURES | 35 | |
| 2 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
East Coast Diversified Corporation and Subsidiaries
Consolidated Balance Sheets
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 74,611 | $ | 53,519 | ||||
| Accounts receivable, net | 542,391 | 273,031 | ||||||
| Inventory | 113,784 | 33,523 | ||||||
| Prepaid license fees | 200,000 | 50,000 | ||||||
| Prepaid expenses | 11,000 | 3,076 | ||||||
| Total current assets | 941,786 | 413,149 | ||||||
| Property and equipment, net | 16,581 | 22,814 | ||||||
| Other assets | ||||||||
| Capitalized research and development costs, net | – | 9,273 | ||||||
| Intangible assets, net | 624,750 | 739,500 | ||||||
| Goodwill | 742,107 | 742,107 | ||||||
| Prepaid license fees | 100,000 | 137,500 | ||||||
| Escrow deposits | 3,910 | 3,462 | ||||||
| Security deposits | 20,000 | 4,521 | ||||||
| Total other assets | 1,490,767 | 1,636,363 | ||||||
| Total assets | $ | 2,449,134 | $ | 2,072,326 | ||||
See accompanying notes to consolidated financial statements.
| 3 |
East Coast Diversified Corporation and Subsidiaries
Consolidated Balance Sheets
| September 30, | December 31, | |||||||||||
| 2012 | 2011 | |||||||||||
| (unaudited) | ||||||||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||||||
| Current liabilities | ||||||||||||
| Bank overdraft | $ | – | $ | 16,675 | ||||||||
| Loans payable, current | 203,895 | 711,882 | ||||||||||
| Loans payable - related party, current | 606,131 | 630,298 | ||||||||||
| Due to related party | 79,432 | – | ||||||||||
| Accounts payable and accrued expenses | 411,951 | 721,010 | ||||||||||
| Accrued payroll and related liabilities | 1,894,364 | 1,717,582 | ||||||||||
| Total current liabilities | 3,195,773 | 3,797,447 | ||||||||||
| Other liabilities | ||||||||||||
| Loans payable, non-current | 38,922 | – | ||||||||||
| Total liabilities | 3,234,695 | 3,797,447 | ||||||||||
| Commitments and contingencies: | ||||||||||||
| Contingent acquisition liabilities | 1,104,973 | 1,104,973 | ||||||||||
| Amounts payable in common stock | 325,630 | – | ||||||||||
| Derivative liability | 175,339 | – | ||||||||||
| Stockholders' deficit | ||||||||||||
| Preferred stock, $0.001 par value, 100,000,000 and 20,000,000 shares authorized | ||||||||||||
| Series A preferred stock, 38,451,581 and 10,513,813 shares issued and outstanding at September 30, 3012 and December 31, 2011, respectively | 38,452 | 21,028 | ||||||||||
| Series B preferred stock, 2,169 and nil shares issued and outstanding at September 30, 3012 and December 31, 2011, respectively | 2 | – | ||||||||||
| Common stock, $0.001 par value, 5,900,000,000 and 480,000,000 shares authorized, 1,705,489,448 and 289,895,481 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively | 1,705,489 | 289,895 | ||||||||||
| Additional paid-in capital | 13,655,732 | 10,180,384 | ||||||||||
| Preferred stock subscriptions receivable | (1,174,998 | ) | – | |||||||||
| Accumulated deficit | (16,284,075 | ) | (13,062,595 | ) | ||||||||
| Total East Coast Diversified stockholders' deficit | (2,059,398 | ) | (2,571,288 | ) | ||||||||
| Noncontrolling interest | (332,105 | ) | (258,806 | ) | ||||||||
| Total stockholders' deficit | (2,391,503 | ) | (2,830,094 | ) | ||||||||
| Total liabilities and stockholders' deficit | $ | 2,449,134 | $ | 2,072,326 | ||||||||
See accompanying notes to consolidated financial statements.
| 4 |
East Coast Diversified Corporation and Subsidiaries
Consolidated Statements of Operations
(unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Revenues: | ||||||||||||||||
| Product sales | $ | 52,721 | $ | 20,027 | $ | 514,397 | $ | 189,657 | ||||||||
| Consulting and development | 64,710 | 62,720 | 473,920 | 230,220 | ||||||||||||
| User fees | 13,593 | 10,444 | 44,401 | 43,406 | ||||||||||||
| Total revenues | 131,024 | 93,191 | 1,032,718 | 463,283 | ||||||||||||
| Due from officer | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Cost of revenues: | ||||||||||||||||
| Product sales | 41,096 | 14,121 | 333,289 | 100,960 | ||||||||||||
| Consulting and development | 20,484 | 12,182 | 135,221 | 71,548 | ||||||||||||
| User fees | 10,006 | 20,199 | 48,184 | 42,068 | ||||||||||||
| Selling, general and administrative expense | 1,024,595 | 319,157 | 2,797,541 | 972,314 | ||||||||||||
| Total operating expenses | 1,096,181 | 365,659 | 3,314,235 | 1,186,890 | ||||||||||||
| Loss from operations | (965,157 | ) | (272,468 | ) | (2,281,517 | ) | (723,607 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Other income | 57,019 | – | 58,431 | – | ||||||||||||
| Interest expense | (134,083 | ) | (44,152 | ) | (635,280 | ) | (88,535 | ) | ||||||||
| Gain on settlement of debt | – | – | 141,141 | – | ||||||||||||
| Loss on conversion of debt | – | (20,239 | ) | (575,263 | ) | (20,239 | ) | |||||||||
| Change in derivative liability | 8,518 | – | (2,291 | ) | – | |||||||||||
| Total other income (expense) | (68,546 | ) | (64,391 | ) | (1,013,262 | ) | (108,774 | ) | ||||||||
| Net loss | (1,033,703 | ) | (336,859 | ) | (3,294,779 | ) | (832,381 | ) | ||||||||
| Net loss attributable to noncontrolling interests | 58,710 | 9,001 | 73,299 | 26,324 | ||||||||||||
| Net loss attributable to East Coast Diversified Corporation | $ | (974,993 | ) | $ | (327,858 | ) | $ | (3,221,480 | ) | $ | (806,057 | ) | ||||
| Net loss per share - basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| Weighted average number of shares outsanding during the period -basic and diluted | 1,142,756,004 | 180,067,427 | 720,718,304 | 165,205,586 | ||||||||||||
See accompanying notes to consolidated financial statements.
| 5 |
East Coast Diversified Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | September 30, | |||||||
| 2012 | 2011 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (3,221,480 | ) | $ | (806,057 | ) | ||
| Adjustments to reconcile net loss to net cash used in operations: | ||||||||
| Noncontrolling interests | (73,299 | ) | (26,324 | ) | ||||
| Depreciation and amortization | 130,956 | 86,098 | ||||||
| Provision for doubtful accounts | 311,671 | – | ||||||
| Issuance of loan payable for consulting services | 60,000 | – | ||||||
| Stock issued for services and compensation | 425,205 | 239,625 | ||||||
| Amortization of prepaid license fee | 37,500 | – | ||||||
| Amortization of payment redemption premium as interest | 12,076 | 7,683 | ||||||
| Gain on recovery of redemption premiums | (28,975 | ) | – | |||||
| Gain on settlement of loans payable | (38,646 | ) | – | |||||
| Gain on settlement of accounts payable | (102,495 | ) | – | |||||
| Loss on conversion of debt | 575,263 | 20,239 | ||||||
| Change in derivative liability | 2,291 | – | ||||||
| Accretion of beneficial conversion feature on convertible notes payable as interest | 604,841 | 13,535 | ||||||
| Accretion of stock discounts to convertible notes payable as interest | 2,160 | – | ||||||
| Interest accrued on loans payable | 47,224 | 63,237 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | (581,031 | ) | (194,463 | ) | ||||
| Inventory | (80,261 | ) | 14,525 | |||||
| Prepaid expenses | (10,000 | ) | (173 | ) | ||||
| Security deposits | (15,479 | ) | – | |||||
| Escrow deposits | (448 | ) | 16,873 | |||||
| Bank overdraft | (16,675 | ) | – | |||||
| Due to related party | (70,568 | ) | – | |||||
| Accounts payable and accrued expenses | 619,802 | 52,476 | ||||||
| Accrued payroll and related liabilities | 239,282 | 188,528 | ||||||
| Net cash used in operating activities | (1,171,086 | ) | (324,198 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | (700 | ) | – | |||||
| Net cash from investing activities | (700 | ) | – | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of common stock | 1,000 | 169,250 | ||||||
| Proceeds from issuance of preferred stock | 151,900 | – | ||||||
| Proceeds from preferred stock subscription | 325,002 | – | ||||||
| Proceeds from loans payable | 676,076 | 113,072 | ||||||
| Proceeds from loans payable - related party | 56,500 | 154,919 | ||||||
| Repayments of loans payable | (12,600 | ) | – | |||||
| Repayments of loans payable - related party | (5,000 | ) | (105,976 | ) | ||||
| Net cash from financing activities | 1,192,878 | 331,265 | ||||||
| Net increase (decrease) in cash | 21,092 | 7,067 | ||||||
| Cash at beginning of period | 53,519 | 1,278 | ||||||
| Cash at end of period | $ | 74,611 | $ | 8,345 | ||||
See accompanying notes to consolidated financial statements
| 6 |
East Coast Diversified Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | September 30, | |||||||
| 2012 | 2011 | |||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | – | $ | 4,080 | ||||
| Cash paid for taxes | $ | – | $ | – | ||||
| Non-cash investing and financing activities: | ||||||||
| Issuance of 851,372,252 and 14,748,313 shares of common stock in conversion of loans payable | $ | 768,036 | $ | 138,478 | ||||
| Issuance of 13,055,556 shares of common stock in conversion of loans payable - related party, respectively | $ | – | $ | 137,500 | ||||
| Issuance of 1,000,000 shares of series A preferred stock in conversion of loans payable | $ | 57,000 | $ | – | ||||
| Issuance of 2,592,898 shares of series A preferred stock in conversion of loans payable - related party | $ | 87,500 | $ | – | ||||
| Payment redemption premiums on convertible notes payable | $ | 10,000 | $ | 17,625 | ||||
| Loans and accounts payable converted to Amounts payable in common stock | $ | 1,068,345 | $ | – | ||||
| Issuance of 620,200,000 shares of common stock in settlement of loans and accounts payable converted to Amounts payable in common stock | $ | 1,144,930 | $ | – | ||||
| Issuance of 4,324,515 shares of Series A preferred stock to related parties in conversion of 86,490,344 shares of common stock | $ | 86,490 | $ | – | ||||
| Issuance of 372,000 shares of Series A preferred stock to third parties in conversion of 7,440,000 shares of common stock | $ | 7,440 | $ | – | ||||
| Issuance of 16,782,828 shares of common stock and 56 shares of Series B preferred stock to third parties in conversion of 1,032,014 shares of Series A preferred stock | ||||||||
| Issuance of 1,500,000 shares of series B preferred stock under stock subscription | $ | 1,500,000 | $ | – | ||||
| Beneficial conversion feature of convertible notes payable | $ | 708,137 | $ | 33,565 | ||||
| Discount for stock issued in connection with issuance of note payable | $ | 2,160 | $ | – | ||||
| Issuance of 357,143 shares of common stock in conversion of accounts payable | $ | – | $ | 2,500 | ||||
| Issuance of 7,500,000 and 32,857,143 shares of common stock in conversion of accrued salaries | $ | 22,500 | $ | 230,000 | ||||
| Issuance of 408,164 shares of series A preferred stock in conversion of accrued salaries | $ | 40,000 | $ | – | ||||
| Prepaid license fee accrued | $ | 150,000 | $ | – | ||||
See accompanying notes to consolidated financial statements.
| 7 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 1 – Nature of Business, Presentation, and Going Concern
Organization
EarthSearch Communications International, Inc. (“EarthSearch”) was founded in November 2003 as a Georgia corporation. The company subsequently re-incorporated in Delaware on July 8, 2005.
On December 18, 2009, East Coast Diversified Corporation's (“ECDC” or the “Company”) former principal stockholders, Frank Rovito, Aaron Goldstein and Green Energy Partners, LLC (collectively the “Sellers”), entered into a Securities Purchase Agreement (the "Purchase Agreement") with Kayode Aladesuyi (the “Buyer”), pursuant to which the Sellers beneficial owners of an aggregate of 6,997,150 shares of the Company's common stock (the “Sellers' Shares”), agreed to sell and transfer the Sellers' Shares to the Buyer for an aggregate of Three Hundred Thousand Dollars ($300,000.00). The Purchase Agreement also provided that the Company would enter into a share exchange agreement with EarthSearch.
On January 15, 2010, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with EarthSearch, pursuant to which the Company agreed to issue 35,000,000 shares of the Company's restricted common stock to the shareholders of EarthSearch. On April 2, 2010, EarthSearch consummated all obligations under the Share Exchange Agreement. In accordance with the terms and provisions of the Share Exchange Agreement, the Company acquired 93.49% of the issued and outstanding common stock of EarthSearch. As a result of the Purchase Agreement and Share Exchange Agreement, our principal business became the business of EarthSearch. The Board of Directors of the Company (the “Board”) passed a resolution electing the new members of the Board and appointing new management of the Company and effectively resigning as their last order of business.
The Share Exchange was accounted for us as an acquisition and recapitalization. EarthSearch is the acquirer for accounting purposes and, consequently, the assets and liabilities and the historical operations that are reflected in the consolidated financial statements herein are those of EarthSearch. The accumulated deficit of EarthSearch was also carried forward after the acquisition.
On December 31, 2011, the Company acquired 1,800,000 additional shares of EarthSearch from a non-controlling shareholder in exchange for 439,024 shares of the Company's common stock. As of December 31, 2011, the Company owns 94.66% of the issued and outstanding stock of EarthSearch.
On October 23, 2011, the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Rogue Paper, Inc., a California corporation (“Rogue Paper”), and shareholders of Rogue Paper (the “Rogue Paper Holders”). Rogue Paper is headquartered in San Francisco, California and is a developer of mobile and branded applications for major media enterprises. The Company acquired fifty-one percent (51%) of the issued and outstanding common stock of Rogue Paper in exchange for 2,500,000 shares of the Company’s Series A convertible preferred stock (the “Series A Preferred”).
Pursuant to the Share Exchange Agreement, no sooner than twelve months from the Effective Date, the Series A Preferred shares shall be convertible, at the option of the holder of such shares, into an aggregate of fifty million shares of the Company’s common stock, par value $0.001 per share. Beginning sixth months from the Effective Date, both the Company and holders of the Series A Preferred shares shall have the option to redeem any portion of such holders’ Series A Preferred shares, for cash, at a price of sixty cents ($0.60) per share. Additionally, commencing twenty-four (24) months from the Effective Date, the holders of the remaining, unsold shares of Rogue Paper common stock may require the Company to redeem such shares, for cash, at a price of three cents ($0.03) per share.
On January, 12, 2012, StudentConnect Inc., a Georgia corporation, was formed as a subsidiary of the Company.
On July, 4, 2012, WetWinds Inc., a Georgia corporation, was formed as a subsidiary of the Company.
| 8 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 1 – Nature of Business, Presentation, and Going Concern (Continued)
Nature of Operations
The Company is a holding company for several subsidiaries offering products and services in several areas of technology. EarthSearch Communications is a Logistics and Asset Management Company. The Company has created an integration of Radio Frequency Identification Technology (“RFID”) and GPS technology and is an international provider of supply chain management solutions offering real-time visibility in the supply chain with integrated RFID/GPS and other telemetry products. These solutions help businesses worldwide to increase asset management, provide safety and security, increase productivity, and deliver real-time visibility of the supply chain through automation.
StudentConnect provides school transportation technology that would allow parents to receive real time notification about the status of their children. The company utilizes wireless communication between GPS and RFID to provide these services. The product is provided to schools and parents at zero cost. The Company’s business model allows it to charge business advertisers who sponsor alerts and messages to parents receiving the messages.
Rogue Paper, Inc., (“Rogue Paper”) the Company’s majority owned subsidiary offers second screen technology to media organizations and businesses. Additionally, ECDC recently completed the acquisition of a social media technology and through its subsidiary, WetWinds, intends to launch this operation during the fourth quarter of 2012.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in The United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required in annual financial statements. In the opinion of management, the unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position and results of operations and cash flows. All intercompany transactions and accounts have been eliminated in consolidation. The results of operations presented are not necessarily indicative of the results to be expected for any other interim period or for the entire year.
These unaudited consolidated financial statements should be read in conjunction with our 2011 annual consolidated financial statements included in our annual report on Form 10-K/A, filed with the SEC on May 4, 2012.
Going Concern
The accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As reflected in the accompanying unaudited consolidated financial statements, the Company had an accumulated deficit of $16,284,075 at September 30, 2012, a net loss and net cash used in operations of $3,221,480 and $1,171,086, respectively, for the nine months ended September 30, 2012. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan, generate revenues, and continue to raise additional investment capital. No assurance can be given that the Company will be successful in these efforts.
The unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management believes that actions presently being taken to obtain additional funding and implement its strategic plans will afford the Company the opportunity to continue as a going concern.
| 9 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 1 – Nature of Business, Presentation, and Going Concern (Continued)
Concentration of Credit Risk
The Company grants unsecured credit to commercial and governmental customers in the United States and abroad. Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. As of September 30, 2012, five customers account for 70% of the total accounts receivable compared to three customers accounting for 77% at December 31, 2011.
The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense was $311,671 and $nil for the nine months ended September 30, 2012 and 2011, respectively. At September 30, 2012 and December 31, 2011, the allowance for doubtful accounts was $311,671 and $nil, respectively.
Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure to its customers.
Note 2 – Loans Payable
Loans payable at September 30, 2012 and December 31, 2011 consist of the following:
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Loans Payable, Current: | ||||||||
| Unsecured $450,000 note payable to Azfar Haque, which bears interest at 9% per annum and was originally due June 15, 2008. At December 31, 2011 the note was in default. On September 19, 2011, $25,000 of this note was transferred to an investor and was converted to common stock. During the year ended December 31, 2011, $227,250 of this note was converted to common stock. During the nine months ended September 30, 2012, the remaining $372,655 plus $3,595 of additional accrued interest was purchased by multiple investors. Accrued interest is equal to $ nil and $174,905 respectively. | $ | – | $ | 372,655 | ||||
| Unsecured $80,000 note payable to Rainmaker Global, Inc. which bears interest at 30% per annum and was originally due December 31, 2009. At December 31, 2011 the note was in default. During the nine months ended September 30, 2012, $102,000 of this note was purchased by Ironridge Global IV, Ltd. Pursuant to the purchase agreement, Rainmaker Global agreed to settle the entire amount due for the purchase price of $102,000, creating a gain on the settlement of $38,125. Accrued interest is equal to $nil and $54,125 respectively. | – | 134,125 | ||||||
| $20,000 convertible note payable to Leonard Marella, which bears interest at 10% per annum and was originally due October 1, 2009. At December 31, 2011 the note was in default. During the nine months ended September 30, 2012, $24,862 of this note was purchased by Ironridge Global IV, Ltd. Pursuant to the purchase agreement, Mr. Marella agreed to settle the entire amount due for the purchase price of $24,862, creating a gain on the settlement of $521. Accrued interest is equal to $nil and $4,883, respectively. | – | 24,883 | ||||||
| 10 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 2 – Loans Payable (Continued)
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Unsecured non-interest bearing note payable, due on demand, to Syed Ahmed. During the nine months ended September 30, 2012, the note was purchased by Ironridge Global IV, Ltd. | – | 7,000 | ||||||
| Unsecured non-interest bearing note payable, due on demand, to Alina Farooq. During the nine months ended September 30, 2012, the note was purchased by Ironridge Global IV, Ltd. | – | 3,500 | ||||||
| Unsecured non-interest bearing note payable, due on demand, to William Johnson. The note holder loaned the Company an additional $5,100 and the entire note of $12,000 was converted to preferred stock during the nine months ended September 30, 2012. | – | 6,900 | ||||||
| Unsecured non-interest bearing note payable, due on demand, to Robert Saidel. The note holder loaned the Company an additional $1,976 during the six months ended June 30, 2012. During the nine months ended September 30, 2012, the note was purchased by Ironridge Global IV, Ltd. | – | 23,964 | ||||||
| Unsecured non-interest bearing note payable, due on demand, to Michael Johnstone. The note was repaid during the nine months ended September 30, 2012. | – | 1,100 | ||||||
| Unsecured non-interest bearing note payable, due on demand, to Michael Carbone, Sr. The note was converted to preferred stock during the nine months ended September 30, 2012. | – | 5,000 | ||||||
| Unsecured $25,000 convertible note payable to Mindshare Holdings, Inc., which bears interest at 8% per annum and due January 5, 2012. The note includes a redemption premium of $7,500 and is discounted for its unamortized beneficial conversion feature of $289 at December 31, 2011. During the nine months ended September 30, 2012, the note balance of $25,000, plus $1,000 of accrued interest, was converted to common stock. | – | 32,133 | ||||||
| Unsecured $25,000 convertible note payable to Southridge Partners II LP, which bears interest at 8% per annum and due January 5, 2012. The note includes a redemption premium of $7,500 and is discounted for its unamortized beneficial conversion feature of $367 at December 31, 2011. During the nine months ended September 30, 2012, the note balance of $25,000, plus $1,249 of accrued interest, was converted to common stock. | – | 32,211 | ||||||
| Unsecured $17,500 convertible note payable to Southridge Partners II LP, which bears interest at 5% per annum and due February 1, 2012. The note includes a redemption premium of $2,625 and is discounted for its unamortized beneficial conversion feature of $1,885 at December 31, 2011. During the nine months ended September 30, 2012, the note balance of $17,500, plus $439 of accrued interest, was converted to common stock. | – | 18,240 | ||||||
| Unsecured $9,000 convertible note payable to Southridge Partners II LP, which bears interest at 5% per annum and due June 30, 2012. This note is currently in default. The note includes a redemption premium of $1,350 and is discounted for its unamortized beneficial conversion feature of $nil and $7,337 as of September 30, 2012 and December 31, 2011, respectively. During the nine months ended September 30, 2012, the note balance of $9,000 was converted to common stock. | – | 3,013 | ||||||
| Unsecured $16,290 convertible note payable to First Trust Management, which bears interest at 7% per annum and due September 25, 2012. During the nine months ended September 30, 2012, the note was purchased by Ironridge Global IV, Ltd. The note is discounted for its unamortized beneficial conversion feature of $nil and $6,247 as of September 30, 2012 and December 31, 2011, respectively. | – | 10,043 | ||||||
| 11 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 2 – Loans Payable (Continued)
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Unsecured non-interest bearing note payable, due on demand, to Syed Ahmed. During the nine months ended September 30, 2012, the note was purchased by Ironridge Global IV, Ltd. | – | 7,000 | ||||||
| Unsecured non-interest bearing note payable, due on demand, to Alina Farooq. During the nine months ended September 30, 2012, the note was purchased by Ironridge Global IV, Ltd. | – | 3,500 | ||||||
| Unsecured non-interest bearing note payable, due on demand, to William Johnson. The note holder loaned the Company an additional $5,100 and the entire note of $12,000 was converted to preferred stock during the nine months ended September 30, 2012. | – | 6,900 | ||||||
| Unsecured non-interest bearing note payable, due on demand, to Robert Saidel. The note holder loaned the Company an additional $1,976 during the six months ended June 30, 2012. During the nine months ended September 30, 2012, the note was purchased by Ironridge Global IV, Ltd. | – | 23,964 | ||||||
| Unsecured non-interest bearing note payable, due on demand, to Michael Johnstone. The note was repaid during the nine months ended September 30, 2012. | – | 1,100 | ||||||
| Unsecured non-interest bearing note payable, due on demand, to Michael Carbone, Sr. The note was converted to preferred stock during the nine months ended September 30, 2012. | – | 5,000 | ||||||
| Unsecured $25,000 convertible note payable to Mindshare Holdings, Inc., which bears interest at 8% per annum and due January 5, 2012. The note includes a redemption premium of $7,500 and is discounted for its unamortized beneficial conversion feature of $289 at December 31, 2011. During the nine months ended September 30, 2012, the note balance of $25,000, plus $1,000 of accrued interest, was converted to common stock. | – | 32,133 | ||||||
| Unsecured $25,000 convertible note payable to Southridge Partners II LP, which bears interest at 8% per annum and due January 5, 2012. The note includes a redemption premium of $7,500 and is discounted for its unamortized beneficial conversion feature of $367 at December 31, 2011. During the nine months ended September 30, 2012, the note balance of $25,000, plus $1,249 of accrued interest, was converted to common stock. | – | 32,211 | ||||||
| Unsecured $17,500 convertible note payable to Southridge Partners II LP, which bears interest at 5% per annum and due February 1, 2012. The note includes a redemption premium of $2,625 and is discounted for its unamortized beneficial conversion feature of $1,885 at December 31, 2011. During the nine months ended September 30, 2012, the note balance of $17,500, plus $439 of accrued interest, was converted to common stock. | – | 18,240 | ||||||
| Unsecured $9,000 convertible note payable to Southridge Partners II LP, which bears interest at 5% per annum and due June 30, 2012. This note is currently in default. The note includes a redemption premium of $1,350 and is discounted for its unamortized beneficial conversion feature of $nil and $7,337 as of September 30, 2012 and December 31, 2011, respectively. During the nine months ended September 30, 2012, the note balance of $9,000 was converted to common stock. | – | 3,013 | ||||||
| Unsecured $16,290 convertible note payable to First Trust Management, which bears interest at 7% per annum and due September 25, 2012. During the nine months ended September 30, 2012, the note was purchased by Ironridge Global IV, Ltd. The note is discounted for its unamortized beneficial conversion feature of $nil and $6,247 as of September 30, 2012 and December 31, 2011, respectively. | – | 10,043 | ||||||
| 12 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 2 – Loans Payable (Continued)
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Unsecured $10,000 convertible note payable to Southridge Partners II LP, which bears interest at 5% per annum and due June 30, 2012. The note is currently in default. The note includes a redemption premium of $2,000 and is discounted for its unamortized beneficial conversion feature of $nil at September 30, 2012. During the nine months ended September 30, 2012, the note balance of $10,000 was converted to common stock. Accrued interest is equal to $226. | – | – | ||||||
| Unsecured $37,500 convertible note payable to Asher Enterprises, Inc., which bears interest at 8% per annum and due November 16 2012. The note is discounted for its unamortized beneficial conversion feature of $nil at September 30, 2012. During the nine months ended September 30, 2012, the note balance of $39,000, including accrued interest of $1,500, was converted to common stock. | – | – | ||||||
| Unsecured $30,000 convertible note payable to Hanover Holdings I, LLC, which bears interest at 12% per annum and due October 17 2012. The note is discounted for its unamortized beneficial conversion feature of $856 at September 30, 2012. During the nine months ended September 30, 2012, $15,000 of the note balance was converted to common stock. Accrued interest is equal to $2,229. | 16,373 | – | ||||||
| On February 17, 2012, Panache Capital, LLC entered into an agreement to purchase $50,000 of the note payable to Azfar Haque. The Company exchange the original note to Mr. Haque with a new note to Pananche which bears interest at 10% per annum and due February 17, 2013. During the nine months ended September 30, 2012, $44,348 of the note was converted to common stock. The note is discounted for its unamortized beneficial conversion feature of $nil at September 30, 2012. Accrued interest is equal to $628. | 6,280 | – | ||||||
| In February 2012, Magna Group, LLC entered into two agreements to purchase a total of $275,000 of the note payable to Azfar Haque. The Company exchanged the original note to Mr. Haque with new notes to Magna which bear interest at 12% per annum and due February 24, 2013. During the nine months ended September 30, 2012, the entire note balance, including accrued interest of $600, totaling $275,600 was converted to common stock. | – | – | ||||||
| Unsecured $16,000 convertible note payable to Hanover Holdings I, LLC, which bears interest at 12% per annum and due May 3, 2013. The note is discounted for its unamortized beneficial conversion feature of $7,853 at September 30, 2012. Accrued interest is equal to $789. | 8,936 | |||||||
| Unsecured $10,000 convertible note payable to Hanover Holdings I, LLC, which bears interest at 12% per annum and due January 3, 2013. The note is discounted for its unamortized beneficial conversion feature of $3,607 at September 30, 2012. Accrued interest is equal to $450. | 6,843 | |||||||
| Unsecured $3,000 convertible note payable to Hanover Holdings I, LLC, which bears interest at 12% per annum and due January 21, 2013. The note is discounted for its unamortized beneficial conversion feature of $1,137 at September 30, 2012. Accrued interest is equal to $130. | 1,993 | |||||||
| Unsecured $12,000 convertible note payable to Hanover Holdings I, LLC, which bears interest at 12% per annum and due February 5, 2013. The note is discounted for its unamortized beneficial conversion feature of $5,094 at September 30, 2012. Accrued interest is equal to $462. | 7,368 | |||||||
| 13 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 2 – Loans Payable (Continued)
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Unsecured $32,500 convertible note payable to Asher Enterprises, Inc., which bears interest at 8% per annum and due February 25, 2013. The note is discounted for its unamortized beneficial conversion feature of $12,749 at September 30, 2012. Accrued interest is equal to $926. | 20,677 | – | ||||||
| On November 2, 2011, the Company entered into a Unsecured Convertible Promissory Note Agreement with Bulldog Insurance for up to $250,000, which bears interest at 8% per annum. On May 10, 2012, the Company received $3,200, which is due September 30, 2012. The note is currently in default. The draw on the note is discounted for its unamortized beneficial conversion feature of $nil at September 30, 2012. Accrued interest is equal to $62. | 3,262 | – | ||||||
| On November 2, 2011, the Company entered into a Unsecured Convertible Promissory Note Agreement with Bulldog Insurance for up to $250,000, which bears interest at 8% per annum. On June 7, 2012, the Company received $2,500, which is due September 30, 2012. The note is currently in default. The draw on the note is discounted for its unamortized beneficial conversion feature of $nil at September 30, 2012. Accrued interest is equal to $40. | 2,540 | – | ||||||
| On November 2, 2011, the Company entered into a Unsecured Convertible Promissory Note Agreement with Bulldog Insurance for up to $250,000, which bears interest at 8% per annum. On June 12, 2012, the Company received $9,500, which is due September 30, 2012. The note is currently in default. The draw on the note is discounted for its unamortized beneficial conversion feature of $nil at September 30, 2012. Accrued interest is equal to $143. | 9,643 | – | ||||||
| Unsecured $5,500 convertible note payable to Hanover Holdings I, LLC, which bears interest at 12% per annum and due March 6, 2013. The note is discounted for its unamortized beneficial conversion feature of $2,654 at September 30, 2012. Accrued interest is equal to $157. | 3,003 | – | ||||||
| Unsecured $42,500 convertible note payable to Asher Enterprises, Inc., which bears interest at 8% per annum and due April 19, 2013. The note is discounted for its unamortized beneficial conversion feature of $24,671 at September 30, 2012. Accrued interest is equal to $708. | 18,537 | – | ||||||
| On November 2, 2011, the Company entered into a Unsecured Convertible Promissory Note Agreement with Bulldog Insurance for up to $250,000, which bears interest at 8% per annum. On July 17, 2012, the Company received $3,700, which is due March 31, 2013. The draw on the note is discounted for its unamortized beneficial conversion feature of $1,004 at September 30, 2012. Accrued interest is equal to $39. | 2,735 | – | ||||||
| 14 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 2 – Loans Payable (Continued)
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Unsecured $15,000 convertible note payable to Hanover Holdings I, LLC, which bears interest at 12% per annum and due March 26, 2013. The note is discounted for its unamortized beneficial conversion feature of $7,254 at September 30, 2012. Accrued interest is equal to $330. | 8,076 | – | ||||||
| On November 2, 2011, the Company entered into a Unsecured Convertible Promissory Note Agreement with Bulldog Insurance for up to $250,000, which bears interest at 8% per annum. On August 3, 2012, the Company received $18,350, which is due March 31, 2013. The draw on the note is discounted for its unamortized beneficial conversion feature of $5,543 at September 30, 2012. Accrued interest is equal to $148. | 12,955 | – | ||||||
| On November 2, 2011, the Company entered into a Unsecured Convertible Promissory Note Agreement with Bulldog Insurance for up to $250,000, which bears interest at 8% per annum. On August 20, 2012, the Company received $10,000, which is due March 31, 2013. The draw on the note is discounted for its unamortized beneficial conversion feature of $3,061 at September 30, 2012. Accrued interest is equal to $56. | 6,995 | – | ||||||
| On November 2, 2011, the Company entered into a Unsecured Convertible Promissory Note Agreement with Bulldog Insurance for up to $250,000, which bears interest at 8% per annum. On August 27, 2012, the Company received $40,000, which is due March 31, 2013. The draw on the note is discounted for its unamortized beneficial conversion feature of $14,445 at September 30, 2012. Accrued interest is equal to $192. | 25,747 | – | ||||||
| Unsecured $10,000 convertible note payable to Southridge Partners II LP, which bears interest at 5% per annum and due March 31, 2013. The note is discounted for its unamortized beneficial conversion feature of $4,375 at September 30, 2012. Accrued interest is equal to $57. | 5,682 | – | ||||||
| On November 2, 2011, the Company entered into a Unsecured Convertible Promissory Note Agreement with Bulldog Insurance for up to $250,000, which bears interest at 8% per annum. On September 5, 2012, the Company received $4,100, which is due March 31, 2013. The draw on the note is discounted for its unamortized beneficial conversion feature of $1,802 at September 30, 2012. Accrued interest is equal to $14. | 2,312 | – | ||||||
| Unsecured $40,000 convertible note payable to Southridge Partners II LP, which bears interest at 5% per annum and due March 31, 2013. The note is discounted for its unamortized beneficial conversion feature of $12,444 at September 30, 2012. Accrued interest is equal to $116. | 27,672 | – | ||||||
| Subtotal, Loans Payable, Current | 203,895 | 711,882 | ||||||
| Loans Payable, Non-current: | ||||||||
| Unsecured $70,000 convertible note payable to Hanover Holdings I, LLC, which bears interest at 12% per annum and due October 24, 2013. The note is discounted for its unamortized beneficial conversion feature of $36,117 at September 30, 2012. Accrued interest is equal to $5,039. | 38,922 | – | ||||||
| Total Loans Payable | $ | 242,817 | $ | 711,882 | ||||
The Company accrued interest expense of $35,390 and $95,583 for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively, on the above loans. Accrued interest is included in the loan balances.
| 15 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaud6ited)
Note 2 – Loans Payable (Continued)
The Company borrowed $676,076 and $244,755 during the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. The Company made payments of $12,600 and $2,500 on the loans during the nine months ended September 30, 2012 and the year ended December 31, 2011. During the nine months ended September 30, 2012, the Company converted $768,036 of loans payable into 851,372,252 shares of the Company’s common stock and $57,000 of loans payable into 1,000,000 shares of the Company’s Series A preferred stock. During the year ended December 31, 2011, the Company converted $394,619 of loans payable into 14,748,313 shares of the Company’s common stock.
On November 2, 2011, the Company entered into an unsecured convertible promissory note agreement with Bulldog Insurance. The notes issued under the agreement bear interest at 8% per annum, are generally due 6 months after issuance, and are convertible at a 35% discount to the market price of the average closing prices of the previous 3 closing days prior to the conversion date. $164,150 was drawn against the note on January 2, 2012 and $4,500 was repaid during the nine months ended September 30, 2012. The draw is due September 30, 2012 and is discounted by the value of its beneficial conversion feature of $66,686, of which, the entire amount has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $4,016 has been accrued for the nine months ended September 30, 2012. During the nine months ended September 30, 2012, $52,400 of the note has been converted into 59,135,976 shares of the Company’s common stock and $40,000 of the note has been converted into 800,000 shares of Series A preferred stock. During the nine months ended September 30, 2012, $65,000 of the note was sold by the note holder to various parties. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $6,266. The note is currently in default.
On January 3, 2012, the Company issued a $40,000 unsecured convertible promissory note to Southridge Partners II LP. The note bears interest at 5% per annum, is due June 30, 2012, and is convertible at a 50% discount to the average of the two low closing bid prices during the five day period prior to the conversion date. The note includes a redemption premium of $8,000 which is being amortized as interest expense over the term of the loan. The note is discounted by the value of its beneficial conversion feature of $38,261, which has been fully accreted as interest expense during the nine months ended September 30, 2012. During the nine months ended September 30, 2012, the note balance of $40,000 was converted into 49,786,633 shares of the Company’s common stock.
On January 3, 2012, the Company issued a $32,500 unsecured convertible promissory note to Asher Enterprises, Inc. The note bears interest at 8% per annum, is due October 5, 2012, and is convertible at a 40% discount to the average of the three low trading prices during the ten day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $21,667, which has been fully accreted as interest expense during the nine months ended September 30, 2012. Interest of $1,300 has been accrued for the nine months ended September 30, 2012. During the nine months ended September 30, 2012, the note balance of $33,800 was converted into 27,644,522 shares of the Company’s common stock.
On January 5, 2012, the Company issued a $60,000 unsecured convertible promissory note to Street Capital, Inc. for services to be rendered. The note bears no interest and is due July 5, 2012. The Company issued 600,000 shares of common stock to Street capital as an incentive to provide the loan. The note is discounted for the fair value of the common stock of $2,160, which has been fully accreted as interest expense during the nine months ended September 30, 2012. During the nine months ended September 30, 2012, the note was purchased by Ironridge Global IV, Ltd. (see Note 4).
On January 17, 2012, the Company issued a $10,000 unsecured convertible promissory note to Southridge Partners II LP. The note bears interest at 5% per annum, is due June 30, 2012, and is convertible at a 50% discount to the average of the two low closing bid prices during the five day period prior to the conversion date. The note includes a redemption premium of $2,000 which is being amortized as interest expense over the term of the loan. The note is discounted by the value of its beneficial conversion feature of $9,167, which has been fully accreted as interest expense during the nine months ended September 30, 2012. During the nine months ended September 30, 2012, the note balance of $10,000 was converted into 12,811,644 shares of the Company’s common stock.
On February 13, 2012, Azfar Haque transferred $10,000 of the $450,000 note payable to him to SGI Group, LLC per a Securities Transfer Agreement between the two parties. The Company exchanged the original note to Mr. Haque with a new note to SGI Capital, LLC which bears interest at 10% per annum and due February 13, 2013. The note is discounted by the value of its beneficial conversion feature of $5,455, all of which has been accreted as interest expense for the nine months ended September 30, 2012. On February 16, 2012, the entire note of $10,000 was converted to 9,103,332 shares of common stock.
| 16 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 2 – Loans Payable (Continued)
On February 14, 2012, the Company issued a $37,500 unsecured convertible promissory note to Asher Enterprises, Inc. The note bears interest at 8% per annum, is due November 16, 2012, and is convertible at a 50% discount to the average of the three low trading prices during the ten day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $33,750, all of which has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $1,500 has been accrued for the nine months ended September 30, 2012. During the nine months ended September 30, 2012, the note balance of $39,000 was converted into 70,619,043 shares of the Company’s common stock.
On February 16, 2012, Azfar Haque transferred $41,250 of the $450,000 note payable to him to Southridge Partners II LP per a Securities Transfer Agreement between the two parties. The Company exchanged the original note to Mr. Haque with a new note to Southridge Partners II LP which bears interest at 10% per annum and due February 16, 2013. The note is discounted by the value of its beneficial conversion feature of $19,286, which has been fully accreted as interest expense for the nine months ended September 30, 2012. During the nine months ended September 30, 2012, the entire note of $41,250 was converted to 25,662,101 shares of common stock.
On February 17, 2012, the Company issued a $30,000 unsecured convertible promissory note to Hanover Holdings I, LLC. The note bears interest at 12% per annum, is due October 17, 2012, and is convertible at a 55% discount to the average of the three low trading prices during the three day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $29,999, of which, $29,143 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $2,229 has been accrued for the nine months ended September 30, 2012. During the nine months ended September 30, 2012, $15,000 of the note balance was converted to 74,257,426 shares of common stock. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $16,373.
On February 17, 2012, Azfar Haque transferred $50,000 of the $450,000 note payable to him to Panache Capital, LLC per a Securities Transfer Agreement between the two parties. The Company exchanged the original note to Mr. Haque with a new note to Panache Capital, LLC which bears interest at 10% per annum and due February 17, 2013. The note is discounted by the value of its beneficial conversion feature of $26,667, which has been fully accreted as interest expense for the nine months ended September 30, 2012. During the nine months ended September 30, 2012, $44,348 of the note was converted to 39,342,949 shares of the Company’s common stock. Interest of $628 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $6,280.
On February 17, 2012, Azfar Haque transferred $75,000 of the $450,000 note payable to him to Magna Group, LLC per a Securities Transfer Agreement between the two parties. The Company exchanged the original note to Mr. Haque with a new note to Magna Group, LLC which bears interest at 12% per annum and due February 17, 2013. The note is discounted by the value of its beneficial conversion feature of $61,184, which has been fully accreted as interest expense for the nine months ended September 30, 2012. During the nine months ended September 30, 2012, the entire note of $75,000 was converted to 23,241,401 shares of common stock.
On February 24, 2012, Azfar Haque transferred $50,000 of the $450,000 note payable to him to Magna Group, LLC per a Securities Transfer Agreement between the two parties. The Company exchanged the original note to Mr. Haque with a new note Magna Group, LLC which bears interest at 12% per annum and due February 24, 2013. The note is discounted by the value of its beneficial conversion feature of $150,000, which has been fully accreted as interest expense during the nine months ended September 30, 2012. During the nine months ended September 30, 2012, the entire note balance of $60,600, including accrued interest of $600, was converted to 147,537,153 shares of the Company’s common stock.
On February 24, 2012, the Company issued a $70,000 unsecured convertible promissory note to Hanover Holdings I, LLC. The note bears interest at 12% per annum, is due October 24, 2013, and is convertible at a 45% discount to the average of the three low trading prices during the three day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $56,452, of which, $20,335 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $5,039 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $38,922.
| 17 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 2 – Loans Payable (Continued)
On November 2, 2011, the Company entered into an unsecured convertible promissory note agreement with Bulldog Insurance. The notes issued pursuant to the agreement bear interest at 8% per annum, are generally due 6 months after issuance, and are convertible at a 35% discount to the market price of the average closing prices of the previous 3 closing days prior to the conversion date. $2,500 was drawn against the note on April 2, 2012 and was fully repaid during the nine months ended September 30, 2012. The draw is due September 30, 2012 and is discounted by the value of its beneficial conversion feature of $972, which has been fully accreted as interest expense for the nine months ended September 30, 2012.
On May 3 2012, the Company issued a $16,000 unsecured convertible promissory note to Hanover Holdings I, LLC. The note bears interest at 12% per annum, is due May 3, 2013, and is convertible at a 45% discount to the average of the three low trading prices during the three day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $13,333, of which, $5,480 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $789 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $8,936. The note is currently in default.
On November 2, 2011, the Company entered into an unsecured convertible promissory note agreement with Bulldog Insurance. The notes issued pursuant to the agreement bear interest at 8% per annum, are generally due 6 months after issuance, and are convertible at a 35% discount to the market price of the average closing prices of the previous 3 closing days prior to the conversion date. $3,200 was drawn against the note on May 10, 2012. The draw is due September 30, 2012 and is discounted by the value of its beneficial conversion feature of $1,414, which has been fully accreted as interest expense during the nine months ended September 30, 2012. Interest of $62 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $3,262. The note is currently in default.
On November 2, 2011, the Company entered into an unsecured convertible promissory note agreement with Bulldog Insurance. The notes issued pursuant to the agreement bear interest at 8% per annum, are generally due 6 months after issuance, and are convertible at a 35% discount to the market price of the average closing prices of the previous 3 closing days prior to the conversion date. $3,000 was drawn against the note on May 11, 2012 and was fully repaid during the nine months ended September 30, 2012. The draw is due September 30, 2012 and is discounted by the value of its beneficial conversion feature of $1,275, which has been fully accreted as interest expense for the nine months ended September 30, 2012.
On May 16, 2012, the Company issued a $10,000 unsecured convertible promissory note to Hanover Holdings I, LLC. The note bears interest at 12% per annum, is due January 16, 2013, and is convertible at a 45% discount to the average of the three low trading prices during the three day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $8,182, of which, $4,575 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $450 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $6,843.
On May 21, 2012, the Company issued a $3,000 unsecured convertible promissory note to Hanover Holdings I, LLC. The note bears interest at 12% per annum, is due January 21, 2013, and is convertible at a 45% discount to the average of the three low trading prices during the three day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $2,464, of which, $1,327 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $130 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $1,993.
On November 2, 2011, the Company entered into an unsecured convertible promissory note agreement with Bulldog Insurance. The notes issued pursuant to the agreement bear interest at 8% per annum, are generally due 6 months after issuance, and are convertible at a 35% discount to the market price of the average closing prices of the previous 3 closing days prior to the conversion date. $1,500 was drawn against the note on May 22, 2012 and was fully repaid during the nine months ended September 30, 2012. The draw is due September 30, 2012 and is discounted by the value of its beneficial conversion feature of $611, which has been fully accreted as interest expense for the nine months ended September 30, 2012.
| 18 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 2 – Loans Payable (Continued)
On May 23 2012, the Company issued a $32,500 unsecured convertible promissory note to Asher Enterprises, Inc. The note bears interest at 8% per annum, is due February 25, 2013, and is convertible at a 42% discount to the average of the three low trading prices during the ten day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $23,947, of which, $11,198 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $926 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $20,677.
On June 5, 2012, the Company issued a $12,000 unsecured convertible promissory note to Hanover Holdings I, LLC. The note bears interest at 12% per annum, is due February 5, 2013, and is convertible at a 45% discount to the average of the three low trading prices during the three day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $9,750, of which, $4,656 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $462 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $7,368.
On November 2, 2011, the Company entered into an unsecured convertible promissory note agreement with Bulldog Insurance. The notes issued pursuant to the agreement bear interest at 8% per annum, are generally due 6 months after issuance, and are convertible at a 35% discount to the market price of the average closing prices of the previous 3 closing days prior to the conversion date. $2,500 was drawn against the note on June 7, 2012. The draw is due September 30, 2012 and is discounted by the value of its beneficial conversion feature of $1,111, which has been fully accreted as interest expense for the nine months ended September 30, 2012. Interest of $40 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $2,540. The note is currently in default.
On November 2, 2011, the Company entered into an unsecured convertible promissory note agreement with Bulldog Insurance. The notes issued pursuant to the agreement bear interest at 8% per annum, are generally due 6 months after issuance, and are convertible at a 35% discount to the market price of the average closing prices of the previous 3 closing days prior to the conversion date. $9,500 was drawn against the note on June 12, 2012. The draw is due September 30, 2012 and is discounted by the value of its beneficial conversion feature of $4,222, which has been fully accreted as interest expense for the nine months ended September 30, 2012. Interest of $143 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $9,643. The note is currently in default.
On July 6, 2012, the Company issued a $5,500 unsecured convertible promissory note to Hanover Holdings I, LLC. The note bears interest at 12% per annum, is due March 6, 2013, and is convertible at a 45% discount to the average of the three low trading prices during the three day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $4,125, of which, $1,471 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $157 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $3,003.
On July 17, 2012, the Company issued a $42,500 unsecured convertible promissory note to Asher Enterprises, Inc. The note bears interest at 8% per annum, is due April 19, 2013, and is convertible at a 42% discount to the average of the three low trading prices during the ten day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $34,000, of which, $9,329 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $708 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $18,537.
On November 2, 2011, the Company entered into an unsecured convertible promissory note agreement with Bulldog Insurance. The notes issued pursuant to the agreement bear interest at 8% per annum, are generally due 6 months after issuance, and are convertible at a 35% discount to the market price of the average closing prices of the previous 3 closing days prior to the conversion date. $3,700 was drawn against the note on July 17, 2012. The draw is due March 31, 2013 and is discounted by the value of its beneficial conversion feature of $1,423, of which, $419 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $39 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $2,735.
| 19 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 2 – Loans Payable (Continued)
On July 26, 2012, the Company issued a $15,000 unsecured convertible promissory note to Hanover Holdings I, LLC. The note bears interest at 12% per annum, is due March 26, 2013, and is convertible at a 45% discount to the average of the three low trading prices during the three day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $10,000, of which, $2,746 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $330 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $8,076.
On November 2, 2011, the Company entered into an unsecured convertible promissory note agreement with Bulldog Insurance. The notes issued pursuant to the agreement bear interest at 8% per annum, are generally due 6 months after issuance, and are convertible at a 35% discount to the market price of the average closing prices of the previous 3 closing days prior to the conversion date. $18,350 was drawn against the note on August 3, 2012. The draw is due March 31, 2013 and is discounted by the value of its beneficial conversion feature of $7,340, of which, $1,797 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $148 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $12,955.
On November 2, 2011, the Company entered into an unsecured convertible promissory note agreement with Bulldog Insurance. The notes issued pursuant to the agreement bear interest at 8% per annum, are generally due 6 months after issuance, and are convertible at a 35% discount to the market price of the average closing prices of the previous 3 closing days prior to the conversion date. $10,000 was drawn against the note on August 20, 2012. The draw is due March 31, 2013 and is discounted by the value of its beneficial conversion feature of $3,750, of which, $389 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $56 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $6,995.
On August 21, 2012, Bulldog Insurance transferred $25,000 of the $164,150 note payable to Bulldog Insurance to Magna Group, LLC per a Securities Transfer Agreement between the two parties. The Company exchanged the original note to Bulldog Insurance with a new note to Magna Group, LLC which bears interest at 12% per annum and due August 21, 2013. The note is discounted by the value of its beneficial conversion feature of $12,500, which has been fully accreted as interest expense for the nine months ended September 30, 2012. During the nine months ended September 30, 2012, the entire note of $25,000 was converted to 64,814,816 shares of common stock.
On August 21, 2012, Bulldog Insurance transferred $40,000 of the $164,150 note payable to Bulldog Insurance to Southridge Partners II LP per a Securities Transfer Agreement between the two parties. The Company exchanged the original note to Bulldog Insurance with a new note to Southridge Partners II LP which bears interest at 12% per annum and due August 21, 2013. The note is discounted by the value of its beneficial conversion feature of $17,143, which has been fully accreted as interest expense for the nine months ended September 30, 2012. During the nine months ended September 30, 2012, the entire note of $40,000 was converted to 110,242,674 shares of common stock.
On November 2, 2011, the Company entered into an unsecured convertible promissory note agreement with Bulldog Insurance. The notes issued pursuant to the agreement bear interest at 8% per annum, are generally due 6 months after issuance, and are convertible at a 35% discount to the market price of the average closing prices of the previous 3 closing days prior to the conversion date. $40,000 was drawn against the note on August 27, 2012. The draw is due March 31, 2013 and is discounted by the value of its beneficial conversion feature of $17,143, of which, $2,698 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $192 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $25,747.
On September 4, 2012, the Company issued a $10,000 unsecured convertible promissory note to Southridge Partners II LP. The note bears interest at 8% per annum, is due March 31, 2013, and is convertible at a 35% discount to the lowest closing bid prices during the ten day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $5,000, of which, $625 has been accreted as interest expense during the nine months ended September 30, 2012. Interest of $57 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $5,682.
| 20 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 2 – Loans Payable (Continued)
On November 2, 2011, the Company entered into an unsecured convertible promissory note agreement with Bulldog Insurance. The notes issued pursuant to the agreement bear interest at 8% per annum, are generally due 6 months after issuance, and are convertible at a 35% discount to the market price of the average closing prices of the previous 3 closing days prior to the conversion date. $4,100 was drawn against the note on September 5, 2012. The draw is due March 31, 2013 and is discounted by the value of its beneficial conversion feature of $2,050, of which, $248 has been accreted as interest expense for the nine months ended September 30, 2012. Interest of $14 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $2,312.
On September 17, 2012, the Company issued a $40,000 unsecured convertible promissory note to Southridge Partners II LP. The note bears interest at 8% per annum, is due March 31, 2013, and is convertible at a 35% discount to the lowest closing bid prices during the ten day period prior to the conversion date. The note is discounted by the value of its beneficial conversion feature of $13,333 of which, $889 has been accreted as interest expense during the nine months ended September 30, 2012. Interest of $116 has been accrued for the nine months ended September 30, 2012. The outstanding balance of the loan, net of discounts, at September 30, 2012 is $27,672.
Note 3 – Related Parties
Loans payable – related parties at September 30, 2012 and December 31, 2011 consist of the following:
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Unsecured non-interest bearing note payable, due on demand, to Frank Russo, a Director of the Company. During the nine months ended September 30, 2012, $5,000 was paid on the note. | $ | 404,979 | $ | 409,979 | ||||
| Unsecured note payable to Edward Eppel, a Director of the Company, which bears interest at 10% per annum and is due on demand. Accrued interest is equal to $27,596 and $15,763, respectively. | 201,152 | 189,319 | ||||||
| Unsecured non-interest bearing note payable, due on demand, to Anis Sherali, a Director of the Company. During the nine months ended September 30, 2012, Mr. Sherali loaned an additional $56,500 to the Company and converted the entire note balance of $87,500 preferred stock. | – | 31,000 | ||||||
| Total | $ | 606,131 | $ | 630,298 | ||||
Frank Russo, a Director of the Company, is a holder of an unsecured non-interest bearing note of the Company. At December 31, 2010, $422,006 was due to Mr. Russo. The Company repaid $5,000 and $12,027 to Mr. Russo during the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. During the nine months ended September 30, 2012, the Company converted $10,000 of accrued board compensation due to Mr. Russo into 102,041 shares of Series A preferred stock. Additionally, during the nine months ended September 30, 2012, Mr. Russo converted 6,922,685 shares of common stock owned by him into 346,134 shares of Series A preferred stock.
Edward Eppel, a Director of the Company, is a holder of a note of the Company which bears interest at 10% per annum. At December 31, 2010, $173,256 was due to Mr. Eppel. The Company borrowed $0 and $299 from Mr. Eppel during the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. $11,833 and $15,763 of interest was accrued and included in the loan balance for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. During the nine months ended September 30, 2012, the Company converted $10,000 of accrued board compensation due to Mr. Eppel into 102,041 shares of series A preferred stock.
| 21 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 3 – Related Parties (Continued)
During the year ended December 31, 2011, the Company borrowed $195,000 from Mr. Sherali and issued a non-interest bearing note. Also during the year ended December 31, 2011, the Company converted $127,000 of the note and issued 13,005,556 shares of common stock and converted $37,000 of the note and issued 462,500 shares of Series A preferred stock to Mr. Sherali. During the nine months ended September 30, 2012, the Company borrowed an additional $56,500 from Mr. Sherali and converted the $87,500 balance of the note and issued 2,592,898 shares of Series A preferred stock to Mr. Sherali. During the nine months ended September 30, 2012, Mr. Sherali purchased 3,830,076 shares of the Company’s Series A preferred stock for $104,500 and the Company converted $10,000 of accrued board compensation due to Mr. Sherali into 102,041 shares of Series A Preferred stock. Additionally, during the nine months ended September 30, 2012, Mr. Sherali converted 32,420,942 shares of common stock owned by him into 1,621,047 shares of Series A preferred stock.
Kayode Aladesuyi, the Company’s Chairman, Chief Executive Officer, and President, was the holder of an unsecured non-interest bearing note of the Company. At December 31, 2010, the outstanding balance on the note was $18,456. During the year ended December 31, 2011, the Company borrowed $10,619 from and repaid $29,075 to Mr. Aladesuyi. The balance of the note at December 31, 2011 is $0.
The Company issued 4,000,000 shares of its common stock to Mr. Aladesuyi for services during the years ended December 31, 2011 and converted $230,000 of accrued salaries due to Mr. Aladesuyi to 32,857,143 shares of common stock. During the nine months ended September 30, 2012, the Company converted $10,000 of accrued board compensation due to Mr. Aladesuyi into 102,041 shares of Series A preferred stock and issued 14,583,333 shares of Series A preferred stock as a bonus award to Mr. Aladesuyi.
On October 5, 2011, the Company entered into a license with BBGN&K LLC (“BBGN&K”) for the rights to use certain patented technologies of which BBGN&K owns the patents. Mr. Aladesuyi is the managing member of BBGN&K. The license agreement calls for royalty payments beginning in 2012 of 8% of EarthSearch’s revenues to be paid quarterly. Also on October 5, 2011, the Company's Board of Directors approved the issuance of 1,428,572 shares of Series A preferred stock to Mr. Aladesuyi as payment of $200,000 initial license fee.
On November 2, 2011, the Company issued 4,285,714 shares of its preferred stock to Mr. Aladesuyi in conversion of $600,000 of accrued compensation due him.
On November 2, 2011, the Company issued 1,375,000 shares of its preferred stock to Mr. Russo in conversion of $125,000 of accrued compensation due him.
On August 5, 2012, the Company entered into a license agreement with Web Asset, LLC (“Web Asset”) for the rights to use certain social media concept and idea created by Mr. Kayode Aladesuyi. Mr. Aladesuyi is the managing member of Web Asset. The license agreement calls for royalty payments of 49% of the revenues earned by the Company in its use of the social media concept after the Company has earned its first $2,000,000 of revenue, payable quarterly. In addition, the Company is required to pay to Web Asset a one-time fee of $150,000.
Andrea Sousa, Comptroller of the Company, is the wife of Kayode Aladesuyi. On January 12, 2012 the Company issued 7,500,000 shares of the Company’s common stock in exchange of salaries payable to Ms. Rocha of $22,500.
During the nine months ended September 30, 2012, Mr. Aladesuyi, his five children, and BBGN&K converted a combined 46,027,281 shares of common stock owned by them into 2,301,363 shares of Series A preferred stock.
During the nine months ended September 30, 2012, Ms. Sousa converted 1,119,436 shares of common stock owned by her into 55,971 shares of Series A preferred stock.
| 22 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 4 – Amounts Payable in Common Stock and Derivative Liability
During the nine months ended September 30, 2012, Ironridge Global IV, Ltd. (“Ironridge”) purchased $826,367 of accounts payable and $241,978 of loans payable, for a total of $1,068,345, from certain creditors of the Company. On April 20, 2012, the Superior Court of the State of California for the County of Los Angeles, Central District approved a Stipulation for Settlement of Claims (the “Settlement of Claims”) in the favor of Ironridge. The Settlement of Claims calls for the amount to be paid by issuance of the Company’s common stock. The number of shares of the common stock is to be calculated based on the volume weighted average price (“VWAP”) of the common stock over the calculation period, not to exceed the arithmetic average of the individual daily VWAPs of any five trading days during the calculation period, less a discount of 35%. The calculation period is defined as the period from the approval of the Settlement of Claims until the settlement is completed.
As the terms of the settlement include issuing common stock at a 35% discount to the conversion price, a derivative liability for the discount was established at the time of the Settlement of Claims of $575,263, which was charged to operations during the nine months ended September 30, 2012 as a loss on conversion of debt. The derivative liability is revalued at the end of each reporting period with any change in the liability being charged to operations. For the nine months ended September 30, 2012, the change in derivative liability of $2,291 has been expensed.
As common stock is issued in installments on the settlement, the Amounts Payable in Common Stock and the Derivative Liability will be reduced accordingly. During the nine months ended September 30, 2012, 620,200,000 shares of common stock, with a market value of $1,144,930, were issued to Ironridge in settlement of $742,715 of the liability, resulting in the reduction of the derivative liability of $402,215.
Note 5 – Stockholders’ Deficit
Authorized Capital
On September 17, 2010, the Board authorized the creation of a common stock incentive plan (the “2010 Stock Incentive Plan”) for our management and consultants. The Company registered twenty five million (25,000,000) shares of its common stock pursuant to the 2010 Stock Incentive Plan on Form S-8 filed with the Commission on September 27, 2010. As of September 30, 2012, no options have been granted under the plan.
On October 19, 2012 the Company filed a certificate of amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada to increase the Company’s authorized capital stock to 6,000,000,000 shares, par value $0.001 per share, including (i) 5,900,000,000 shares of common stock, par value $0.001 per share and (ii) 100,000,000 shares of preferred stock, par value $0.001 per share.
Preferred Stock Issued for Cash
During the nine months ended September 30, 2012, the Company issued 5,081,385 shares of Series A preferred stock in private placements for a total of $151,900 ($0.0299 per share average).
Preferred Stock Issued for Subscriptions
During the nine months ended September 30, 2012, the Company issued 1,500 shares of series B preferred stock in a private placement for a total of $1,500,000 ($1,000 per share). During the nine months ended September 30, 2012, $325,002 of the subscription receivable was received in cash.
Preferred Stock Issued in Conversion of Debt
During the nine months ended September 30, 2012, the Company issued 2,592,898 shares of Series A preferred stock in the conversion of $87,500 of notes payable to related parties (see Note 3 – Related Parties) and 1,000,000 shares of Series A Preferred in the conversion of $57,000 of notes payable to unrelated parties (see Note 2 – Loans Payable).
| 23 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 5 – Stockholders’ Deficit (Continued)
Preferred Stock Issued for Services
During the nine months ended September 30, 2012, the Company converted $40,000 of accrued compensation to its board of directors to 408,164 shares of Series A preferred stock and issued 14,583,333 shares of Series A preferred stock to its Chief Executive Officer as a bonus award (see Note 3 – Related Parties) and issued 607,487 shares of Series A preferred stock to an unrelated party for services at the fair value of the services rendered of $45,000.
Preferred Stock Issued in Conversion of Common Stock
During the nine months ended September 30, 2012, the Company issued 4,324,515 shares of Series A preferred stock to related parties for the conversion and return of 86,490,344 shares of common stock and issued 372,000 shares of Series A preferred stock to unrelated parties for the conversion and return of 7,440,000 shares of common stock.
Common Stock Issued for Cash
During the nine months ended September 30, 2012, the Company issued 250,000 shares of common stock in private placements for a total of $1,000 ($0.004 per share).
Common Stock Issued in Conversion of Debt
During the nine months ended September 30, 2012, the Company issued 851,372,252 shares of common stock in the conversion of $768,036 of notes payable to unrelated parties (see Note 2 – Loans Payable).
During the nine months ended September 30, 2012, the Company issued 620,200,000 shares of common stock, with a market value of $1,144,930, to Ironridge in settlement of $742,715 of amounts payable in common stock (see Note 4 – Amounts Payable in Common Stock and Derivative Liability).
Common Stock Issued for Services
During the nine months ended September 30, 2012, the Company issued 12,819,231 shares of common stock to unrelated parties for services of $80,205, or an average price of $0.006 per share based on the market value of the shares at the time of issuance. These shares were issued under the 2010 Stock Incentive Plan (“2010 Plan”) dated September 17, 2010. As of September 30, 2012, 230,000 shares remain unissued under the 2010 Plan.
During the nine months ended September 30, 2012, the Company converted $22,500 of accrued salaries due to Ms. Rocha to 7,500,000 shares of common stock, at a price of $0.007 per share based on the market value of the shares at the time of issuance (see Note 3 – Related Parties).
During the nine months ended September 30, 2012, the Company issued 600,000 shares of common stock to an unrelated party for an incentive to enter into a loan agreement, at an average price of $0.0036 per share based on the market value of the shares at the time of issuance (see Note 2 – Loans Payable).
Common Stock Issued in Conversion of Preferred Stock
During the nine months ended September 30, 2012, the Company issued 16,782,828 shares of common stock and 56 shares of Series B preferred stock to an unrelated parties for the conversion and return of 1,032,014 shares of Series A preferred stock.
| 24 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 6 – Commitments and Contingencies
Operating Leases
The Company leases its office facilities in Marietta, Georgia. The term of the lease is 66 months with escalating lease payments beginning at $2,163 per month. At September 30, 2012, future minimum lease payments under the lease are as follows:
| 2012 | $ | 6,489 | ||
| 2013 | 26,735 | |||
| 2014 | 27,550 | |||
| 2015 | 28,366 | |||
| 2016 | 29,219 | |||
| 2017 | 15,054 | |||
| $ | 133,413 |
Rent expense was $26,920 and $49,005 for the nine months ended September 30, 2012 and 2011, respectively.
Acquisition Liabilities
Pursuant to the Share Exchange Agreement with Rogue Paper, Inc., commencing nine months from October 23, 2011 (the “Execution Date”), both the Company and the holders of the Preferred Shares shall have the option to redeem any portion of such holders Preferred Shares for cash, at a price of sixty cents ($0.60) per share, or $1,075,000. Commencing twenty four (24) months from the Execution date, holders of the remaining forty-nine percent (49%) of Rogue Paper Common Shares, have the option to have such shares redeemed by the Company for cash, at a price of $0.03 per share, or $29,973.
License Agreements
On October 5, 2011, the Company entered into a license with BBGN&K LLC (“BBGN&K”) for the rights to use certain patented technologies of which BBGN&K owns the patents. The license agreement calls for royalty payments beginning in 2012 of 8% of EarthSearch’s revenues to be paid quarterly (see Note 3 – Related Parties).
On August 5, 2012, the Company entered into a license agreement with Web Asset, LLC (“Web Asset”) for the rights to use certain social media concept and idea created by Mr. Kayode Aladesuyi. The license agreement calls for royalty payments of 49% of the revenues earned by the Company in its use of the social media concept after the Company has earned its first $2,000,000 of revenue, payable quarterly (see Note 3 – Related Parties).
Note 7 – Subsequent Events
On October 1, 2012, the Company issued a $15,000 unsecured convertible promissory note to SC Advisors, Inc. The note bears interest at 8% per annum, is due June 30, 2013, and is convertible at the average of the three low losing bid prices during the five day period prior to the conversion date.
On October 3, 2012, the Company issued a $10,000 unsecured convertible promissory note to Southridge partners II LP. The note bears interest at 8% per annum, is due June 30, 2013, and is convertible at a 50% discount to the lowest closing bid price during the fifteen day period prior to the conversion date.
On October 25, 2012, the Company issued a $39,647 unsecured promissory note to Azfar Haque. The note bears interest at 9% per annum, is due May 25, 2013.
| 25 |
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2012
(unaudited)
Note 7 – Subsequent Events (Continued)
On October 26, 2012, the Company issued 1,250,000 shares of its Series A preferred stock to a related party for $6,000 in cash.
On October 23, 2012, the Company issued 100,000,000 shares of the Company’s common stock to Ironridge in reliance on the private placement exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Section 3(a)(10) thereof. The shares issued to Ironridge were issued pursuant to a Stipulation for Settlement of Claims (the “Stipulation”) filed by the Company and Ironridge in the Superior Court for the State of California, County of Los Angeles (Case No. BC481395) on April 20, 2012 in settlement of claims purchased by Ironridge from certain creditors of the Company.
On October 24, 2012, the Company issued a $5,000 unsecured convertible promissory note to Bulldog Insurance. The note bears interest at 5% per annum, is due March 30, 2013, and is convertible at a 30% discount to the average closing price during the three day period prior to the conversion date.
On October 26, 2012, the Company issued 78,787,878 shares of its common stock in conversion of loans payable in the amount of $13,000.
On November 8, 2012, the Company issued a $7,000 unsecured convertible promissory note to Southridge partners II LP. The note bears interest at 8% per annum, is due June 30, 2013, and is convertible at a 50% discount to the lowest closing bid price during the fifteen day period prior to the conversion date.
On November 8, 2012, the Company issued 73,510,000 shares of its common stock in conversion of loans payable in the amount of $7,351.
On November 15, 2012, the Company issued a $5,000 unsecured convertible promissory note to Bulldog Insurance. The note bears interest at 5% per annum, is due May 15, 2013, and is convertible at a 30% discount to the average closing price during the three day period prior to the conversion date.
The Company has evaluated subsequent events through the date the financial statements were issued and filed with Securities and Exchange Commission. The Company has determined that there are no other events that warrant disclosure or recognition in the financial statements.
| 26 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This quarterly report on Form 10-Q and other reports filed by East Coast Diversified Corporation from time to time with the U.S. Securities and Exchange Commission contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates.
Plan of Operation
For the next 12 months, the Company’s plan of operation shall be to expand the overall marketing and sales efforts of its proprietary technologies in all four subsidiaries which include EarthSearch, StudentConnect, Roque Paper and WetWinds.
Third (3rd) quarter operations represented a significant shift in focus and business restructuring for the Company. We added two (2) additional divisions to the Company, “StudentConnect and WetWinds,” and expanded operations into new areas. We are currently in the final development phase of Vir2o, our new social media product under WetWinds, and have added new staff to facilitate the management and long term growth of these operations.
A significant amount of time in the third (3rd) and fourth (4th) quarters were and will be dedicated to certification and customization of our applications, training all of the new employees brought on board to help facilitate the new direction of the business as well as completion of the development of Vir2o and further implementation of our StudentConnect operation.
Marketing and Business Development
ECDC recently hired a Director of Marketing and Business Development responsible for orchestrating marketing and sales support and managing market research, advertising and sales support to sales teams within each corporate subsidiary. We also added the following personnel to our staff:
| · | Advertisement and Sales Manager |
| · | Sales Manager GPS Solutions |
| · | Sales Manager StudentConnect Solutions |
| · | Sr Communication and Media Relations Manager |
| · | Creative Director |
| · | Director of System Engineering and Design |
The Marketing and Business Development division will help manage communications outreach to launch and promote products and services within various mediums including print, interactive media and industry events as a means to gain exposure and visibility in the marketplace.
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EarthSearch Communications
Clients
We successfully tested our GATIS software for the Kenya Revenue Authority (KRA) on behalf of our local distributor. At the request of the KRA, we have recently completed a modified version of our software called CARAS – Customs and Revenue Authority Systems designed specifically to meet requirements of Customs and Revenue department only. We anticipate the completion of the software once presented to KRA by our partner will allow our partner to begin selling products and services in the market. Our commercial department has started to market the solution to other customs authorities specifically, Tunisia and Tanzania.
We experienced some temporary setbacks with our EarthSearch and StudentConnect operations. Our agreement with Komtelecom Russia executed earlier in the year is under renegotiation. We could not accept the request that the source code to our proprietary software be submitted to the Russian secret service for review as matter of national policy related to technologies used to track assets and people. We hope to secure a different agreement that will allow us to assist Komtelecom develop its own software while offering our product to customers in Russia.
Our GATIS software was also successfully tested and certified by SAP. We have also successfully implemented our GATIS software with Mcleod Software with the objective of opening up the US market to our sales operation.
StudentConnect
ECDC has officially launched StudentConnect, our school transportation and safety division. We have had several presentations to a number of school districts throughout metro Atlanta. We expect to formally launch services to a number of schools during the new school year. Our strategy is to focus on the metro Atlanta market and strategically expand service offering to other parts of the country for effective deployment of the product.
We plan to expand the use of StudentConnect in other countries, specifically Nigeria, Guatemala and Dubai and will look to develop support operations for international deployment over the next 12 months.
WetWinds
WetWinds is technology company that provides interactive social media experiences for users across the globe. We began the development of Vir2o, the social media product for WetWinds and expect to implement a beta launch on December 12, 2012. We expect to complete full product launch by March 2013. The beta product will feature 80% of all the features and functionalities that users can expect to see in the full version of the platform. The social media product was designed to improve social engagement on the internet.
We expect to launch Vir2o in 3 additional markets in early 2013 - Brazil, Nigeria and Canada, all of who represent major social media markets in their respective regions. Vir2o monetization strategies include product placement, banner advertisement, impression advertisement and ecommerce.
We intend to deploy the site on game consoles, mobile devices and desktops.
Rogue Paper
The Rogue Paper division extended its agreement with MTV/VH1 and continue to provide services to those organizations. Rogue Paper also expanded its product offerings to the collegiate sports market with an agreement with IMG Sport as a partner in an agreement with Duke university to continue to use the Rogue Paper technology.
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Results of Operations
For the Three Months Ended September 30, 2012 and 2011
Revenues
For the three months ended September 30, 2012, our revenue was $131,024 compared to $93,191 for the same period in 2011, representing an increase of 41%. This increase in revenue was directly attributable to the Company’s decision to change its business focus and product portfolio in 2010 and early 2011 from simply marketing GPS devices to developing full-fledged supply chain solutions which include RFID technologies, other supply chain and warehouse solutions, as well as the expansion of marketing activities to develop a global distribution network for its new product portfolios, and the acquisition of Rogue Paper, which represented $64,710 of total revenues for the three months ended September 30, 2012.
Revenues are generated from three separate but related offerings, RFID/GPS product sales, consulting services, and user fees for GATIS – our advanced web based asset management platform. We generated revenues from product sales of $52,721 and $20,027 for the three months ended September 30, 2012 and 2011, respectively. Revenues for consulting services were $64,710 for the three months ended September 30, 2012, compared to $62,720 for the three months ended September 30, 2011. User fees were $13,593 and $10,444 for the three months ended September 30, 2012 and 2011, respectively.
Operating Expenses
For the three months ended September 30, 2012, operating expenses were $1,096,181 compared to $365,659 for the same period in 2011, an increase of 200%.
Cost of revenues increased $25,084 and is directly attributable to the increase in revenues for the three months ended September 30, 2012.
For the three months ended September 30, 2012, selling, general and administrative expenses were $1,024,595 compared to $319,157 for the same period in 2011, an increase of 221%. This increase was primarily caused by $67,863, $94,785, and $55,645 of selling general and administrative expenses of Rogue Paper, Inc., Wet Winds and StudentConnect, respectively, in 2012; professional fees related to public company compliance and investor relations increased from $121,207 to $164,699; royalties owed on a license agreement increased from $0 to $3,702; salary expenses increased from $91,000 to $325,153; bad debt expense increased from $nil to $125,002; and amortization of intangible assets and prepaid license fees increased from $0 to $50,750.
Our professional fees related to public company compliance and investor relations increased significantly because we filed a Registration Statement on Form S-1 in 2011, as well as increases in our investor relations efforts.
Net Loss
We generated net losses of $974,993 for the three months ended September 30, 2012 compared to $327,858 for the same period in 2011, an increase of 197%. Included in the net loss for the three months ended September 30, 2012 was interest expense of $134,083 (of which $138,230 represents accretion of embedded beneficial conversion features on notes payable), change in derivative liability $8,518, reduced by other income of $57,019, and non-controlling interests’ share of the net loss of EarthSearch and Rogue Paper of $58,710. Included in the net loss for the three months ended September 30, 2012 was interest expense of $44,152, loss on the conversion of debt od $20,239, reduced by non-controlling interests’ share of the net loss of EarthSearch of $9,001.
For the Nine months Ended September 30, 2012 and 2011
Revenues
For the nine months ended September 30, 2012, our revenue was $1,032,718 compared to $463,283 for the same period in 2011, representing an increase of 123%. This increase in revenue was directly attributable to the Company’s decision to change its business focus and product portfolio in 2010 and early 2011 from simply marketing GPS devices to developing full-fledged supply chain solutions which include RFID technologies, other supply chain and warehouse solutions, as well as the expansion of marketing activities to develop a global distribution network for its new product portfolios, and the acquisition of Rogue Paper, which represented $322,000 of total revenues for the nine months ended September 30, 2012. Management believes these changes will result in greater stability and long term growth for the Company.
Revenues are generated from three separate but related offerings, RFID/GPS product sales, consulting services, and user fees for GATIS – our advanced web based asset management platform. We generated revenues from product sales of $514,397 and $189,657 for the nine months ended September 30, 2012 and 2011, respectively. Revenues for consulting services were $473,920 for the nine months ended September 30, 2012, compared to $230,220 for the nine months ended September 30, 2011. User fees were $44,401 and $43,406 for the nine months ended September 30, 2012 and 2011, respectively.
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Operating Expenses
For the nine months ended September 30, 2012, operating expenses were $3,314,235 compared to $1,186,890 for the same period in 2011, an increase of 179%.
Cost of revenues increased $302,118 and is directly attributable to the increase in revenues for the nine months ended September 30, 2012.
For the nine months ended September 30, 2012, selling, general and administrative expenses were $2,797,541 compared to $972,314 for the same period in 2011, an increase of 188%. This increase was primarily caused by $267,543, $94,785, and $55,645 of selling general and administrative expenses of Rogue Paper, Inc., Wet Winds and StudentConnect, respectively, in 2012; professional fees related to public company compliance and investor relations increased from $257,125 to $569,948; royalties owed on a license agreement increased from $0 to $43,575; salary expenses increased from $347,721 to $732,105; board compensation increased from $40,000 to $120,000; research and development expense increased from $0 to $138,350; bad debts expense increased from $nil to $311,671; and amortization of intangible assets and prepaid license fees increased from $0 to $152,250.
Our professional fees related to public company compliance and investor relations increased significantly because we filed a Registration Statement on Form S-1 in 2011 as well as increases in our investor relations efforts.
Net Loss
We generated net losses of $3,221,480 for the nine months ended September 30, 2012 compared to $806,057 for the same period in 2011, an increase of 300%. Included in the net loss for the nine months ended September 30, 2012 was interest expense of $635,280 (of which $604,841 represents accretion of embedded beneficial conversion features on notes payable), a loss on the conversion of debt of $575,263, change in derivative liability of $2,291, and reduced by other income of $58,431, a gain on the settlement of debt of $141,141, and non-controlling interests’ share of the net loss of EarthSearch and Rogue Paper of $58,710. Included in the net loss for the nine months ended September 30, 2012 was interest expense of $88,535, loss on the conversion of debt of $20,239, reduced by non-controlling interests’ share of the net loss of EarthSearch of $26,324.
Liquidity and Capital Resources
Overview
For the nine months ended September 30, 2012 and 2011, we funded our operations through financing activities consisting of private placements of equity securities with outside investors and loans from related and unrelated parties. Our principal use of funds during the nine months ended September 30, 2012 and 2011 has been for working capital and general corporate expenses.
Liquidity and Capital Resources during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011
As of September 30, 2012, we had cash of $74,611 and a working capital deficit of $2,253,987. The Company generated a negative cash flow from operations of $1,171,086 for the nine months ended September 30, 2012, as compared to cash used in operations of $324,198 for the nine months ended September 30, 2011. The negative cash flow from operating activities for the nine months ended September 30, 2012 is primarily attributable to the Company's net loss from operations of $3,221,480, offset by noncash depreciation and amortization of $130,956, provision for doubtful accounts of $311,671, issuance of loan payable for prepaid services of $60,000, stock issued for services and compensation of $425,205, amortization of prepaid license fees of $37,500, amortization of payment redemption premiums of $12,076, accretion of beneficial conversion features on convertible notes payable of $604,841, accretion of stock discounts on convertible notes payable of $2,160, accrued interest on loans payable of $47,224, loss on conversion of debt of $575,263, change in derivative liability of $2,291, changes in operating assets and liabilities of $84,622, and increased by a gain on recovery of redemption premiums of $28,975, gains on settlement of accounts payable of $102,495, gains on settlement of debt of $38,646, and noncontrolling interests in the losses of EarthSearch and Rogue Paper of $73,299.
The negative cash flow from operating activities for the nine months ended September 30, 2011 is primarily attributable to the Company's net loss from operations of $806,057, offset by noncash depreciation and amortization of $86,098, stock issued for services of $239,625, accrued interest on loans payable of $63,237, amortization of payment redemption premiums of $7,683, loss on conversion of debt of $20,239, accretion of beneficial conversion features on convertible notes payable of $13,535, and net cash from changes in operating assets and liabilities of $77,766, and increased by noncontrolling interests in the loss of EarthSearch of $26,324.
Cash used in investing activities consisted of $700 in capital expenditures for the nine months ended September 30, 2012 compared to $nil for the same period in 2011.
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Cash generated from our financing activities was $1,192,878 for the nine months ended September 30, 2012, compared to $331,265 during the comparable period in 2011. This increase was primarily attributed to the proceeds from proceeds from the issuance of preferred stock of $151,900 in 2012, proceeds from preferred stock subscriptions of $325,002 in 2012, proceeds from loans payable of $676,076 in 2012 compared to $113,072 in 2011, a decrease in repayments of loans payable to related parties from $105,976 to $5,000; offset by a decrease in proceeds from the issuance of common stock from $169,250 to $1,000, a decrease in proceeds from loans payable – related parties from $154,919 to $56,500, and the repayment of loans payable of $12,600 in 2012.
We will require additional financing during the current fiscal year. During the period from October 1, 2012 to November 14, 2012, we received proceeds of $10,000 from the issuance of convertible promissory notes.
On July 1, 2011, we entered into an Equity Purchase Agreement (the “Equity Purchase Agreement”) with Southridge Partners II, LP (“Southridge”). Pursuant to the Equity Purchase Agreement, Southridge shall commit to purchase up to Ten Million Dollars ($10,000,000) of our common stock over the course of twenty four (24) months commencing the effective date of the initial Registration Statement (as defined below) covering the Registrable Securities pursuant to the Equity Purchase Agreement. For each share of our common stock purchased under the Agreement, Southridge will pay ninety-two percent (92%) of the average of the lowest closing bid price of our common stock in any two trading days, consecutive or inconsecutive, of the five consecutive trading day period (the “Valuation Period”) commencing the date a put notice (the “Put Notice”) is delivered to Southridge in a manner provided by the Equity Purchase Agreement.Subject to certain limitations and floor price reductions, the Company may, at its sole discretion, issue a Put Notice to Southridge and Southridge will then be irrevocably bound to acquire such shares. To date, the Company has not completed the registration process and therefore is unable to put shares under the Equity Purchase Agreement.
On April 20, 2012, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Ironridge Technology Co., a division of Ironridge Global IV, Ltd. (“Ironridge”), providing for the issuance and sale by the Company to the Ironridge of an aggregate of 1,500 shares of the Company’s Series B Preferred Stock (the “Preferred Shares”) in fifteen (15) equal tranches of 100 Preferred Shares each, at a price of $1,000 per Preferred Share. Pursuant to the Certificate of Designation to create the Series B Preferred Shares, each Preferred Share may be converted at any time at the option of Ironridge into shares of the Company’s common stock, par value $0.001 at a conversion price of $.01 per share, subject to certain adjustments. During the quarter ended September 30, 2012, the Company received $100,000 for the first tranche of 100 shares and $15,002 towards the second tranche of 100 shares of Series B Preferred stock sold to Ironridge.
In connection with the Closing, on April 20, 2012 the Company entered into a Registration Rights Agreement with Ironridge, pursuant to which the Company will file a registration statement related to the Stock Purchase Agreement with the Securities and Exchange Commission covering the resale of the Common Stock that will be issued to Ironridge upon conversion of the Preferred Shares.
On April 20, 2012, the Company issued 49,700,000 shares of the Company’s common stock to Ironridge in reliance on the private placement exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Section 3(a)(10) thereof. The shares issued to Ironridge were issued pursuant to a Stipulation for Settlement of Claims (the “Stipulation”) filed by the Company and Ironridge in the Superior Court for the State of California, County of Los Angeles (Case No. BC481395) on April 20, 2012 in settlement of claims purchased by Ironridge from certain creditors of the Company in the aggregate amount equal to $1,079,991 (the “Claim Amount”), plus attorney’s fees and costs. Pursuant to the Stipulation, the Company was required to issue and deliver 49,700,000 shares of Common Stock (the “Initial Issuance”). Ironridge will ultimately be entitled to retain a number of shares of Common Stock (the “Final Amount”) that is equal to: (a) the sum of $1,068,344.86 plus a transaction fee of $40,000 and reasonable attorney’s fees, (b) divided by sixty-five percent (65%) of the volume weighted average price (“VWAP”) of the Common Stock as reported by Bloomberg Professional service of Bloomberg LP over a period of time beginning on the date on which Ironridge receives the Initial Issuance and ending on the date on which the aggregate trading volume of the Company’s Common Stock exceeds $5,000,000 (such period being the “Calculation Period”), not to exceed the arithmetic average of the individual daily VWAPs of any five trading days during the Calculation Period. For every 20 million shares that trade during the Calculation Period, or if any time during the Calculation Period a daily VWAP is below 80% of the closing price of the Company’s Common Stock on the day before the date of the Initial Issuance, Ironridge has the right to cause the Company to immediately issue to Ironridge additional shares of Common Stock (each, an “Additional Issuance”) (provided, however, that at no time may Ironridge and its affiliates collectively own more than 9.99% of the total number of shares of Common Stock outstanding). At the end of the Calculation Period, (a) if the sum of the Initial Issuance and any Additional Issuance is less than the Final Amount, the Company shall immediately issue additional shares to Ironridge so that the total issuance is equal to the Final Amount and (b) if the sum of the Initial Issuance and any Additional Issuance is greater than the Final Amount, Ironridge will return any remaining shares to the Company for cancellation. Subsequent to April 24, 2012 and through August 8, 2012, the Company has issued an additional 570,500,000 shares of the Company’s common stock pursuant to the Stipulation.
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Going Concern
Due to the uncertainty of our ability to meet our current operating and capital expenses, our independent auditors included an explanatory paragraph in their report on the consolidated financial statements for the year ended December 31, 2011 regarding concerns about our ability to continue as a going concern. Our consolidated financial statements contain additional note disclosures describing the circumstances that lead to this conclusion by our independent auditors.
Our unaudited consolidated financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that we will be able to continue as a going concern. Our unaudited consolidated financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.
There is no assurance that our operations will be profitable. Our continued existence and plans for future growth depend on our ability to obtain the additional capital necessary to operate either through the generation of revenue or the issuance of additional debt or equity.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions and conditions. We continue to monitor significant estimates made during the preparation of our financial statements. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2, “Summary of Significant Accounting Policies” in our audited consolidated financial statements for the year ended December 31, 2011, included in our Annual Report on Form 10-K/A as filed on May 4, 2012, for a discussion of our critical accounting policies and estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We do not hold any derivative instruments and do not engage in any hedging activities.
Item 4. Controls and Procedures.
| (a) | Evaluation of Disclosure Controls and Procedures |
The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on this evaluation, the PEO and PFO concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective to ensure that information that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the PEO and PFO, as appropriate, to allow timely decisions regarding required disclosure.
| (b) | Changes in Internal Control over Financial Reporting |
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors
We believe that there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2011, filed with the Securities and Exchange Commission on May 4, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On July 10, 2012, pursuant to three debt conversion notices, the Company issued 95,447,777 shares of the Company’s common stock to satisfy debt obligations of $133,092.
On July 12, 2012, pursuant to two debt conversion notices, the Company issued 22,106,061 shares of the Company’s common stock to satisfy debt obligations of $25,400.
On July 13, 2012, pursuant to a debt conversion notice, the Company issued 5,272,727 shares of the Company’s common stock to satisfy a debt obligation of $5,800.
On July 19, 2012, pursuant to a debt conversion notice, the Company issued 40,000,000 shares of the Company’s common stock to satisfy a debt obligation of $44,200.
On July 23, 2012, pursuant to two debt conversion notices, the Company issued 62,598,277 shares of the Company’s common stock to satisfy debt obligations of $50,000.
On July 31, 2012, pursuant to two debt conversion notices, the Company issued 72,222,223 shares of the Company’s common stock to satisfy debt obligations of $40,000.
On August 7, 2012, pursuant to two debt conversion notices, the Company issued 74,641,025 shares of the Company’s common stock to satisfy debt obligations of $60,950.
On August 17, 2012, pursuant to a debt conversion notice the Company issued 101,000,000 shares of the Company’s common stock to satisfy a debt obligation of $65,650.
On August 22, 2012, pursuant to a debt conversion notice the Company issued 24,000,000 shares of the Company’s common stock to satisfy a debt obligation of $12,000.
On August 27, 2012, pursuant to a debt conversion notice, the Company issued 23,148,149 shares of the Company’s common stock to satisfy a debt obligation of $12,500.
On August 28, 2012, pursuant to a debt conversion notice, the Company issued 34,285,714 shares of the Company’s common stock to satisfy a debt obligation of $12,000.
On August 30, 2012, pursuant to a debt conversion notice, the Company issued 67,582,418 shares of the Company’s common stock to satisfy a debt obligation of $30,750.
On September 4, 2012, pursuant to a debt conversion notice, the Company issued 43,333,333 shares of the Company’s common stock to satisfy a debt obligation of $13,000.
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On September 7, 2012, pursuant to two debt conversion notices, the Company issued 151,666,667 shares of the Company’s common stock to satisfy debt obligations of $55,400.
On September 11, 2012, pursuant to a debt conversion notice, the Company issued 8,000,000 shares of the Company’s common stock to satisfy a debt obligation of $2,000.
On September 14, 2012, pursuant to a debt conversion notice, the Company issued 74,257,426 shares of the Company’s common stock to satisfy a debt obligation of $15,000.
On September 15, 2012, pursuant to a debt conversion notice, the Company issued 85,000,000 shares of the Company’s common stock to satisfy a debt obligation of $22,950.
On September 20, 2012, pursuant to a debt conversion notice, the Company issued 14,326,923 shares of the Company’s common stock to satisfy a debt obligation of $3,725.
On September 27, 2012, pursuant to a debt conversion notice, the Company issued 28,333,333 shares of the Company’s common stock to satisfy a debt obligation of $5,525.
These securities were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified for exemption under Section 4(2) of the Securities Act. The securities were exempt from registration under Section 4(2) of the Securities Act because the issuance of such securities by the Company did not involve a “public offering,” as defined in Section 4(2) of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of securities offered.
Item 3. Defaults Upon Senior Securities.
The Company is in default with several of its noteholders as reflected below and disclosed within this report in Note 2 of the Notes to the Consolidated Financial Statements dated September 30, 2012.
| Loans Payable: | ||||
| Bulldog Insurance | $ | 6,266 | ||
| Bulldog Insurance | 3,262 | |||
| Bulldog Insurance | 2,540 | |||
| Bulldog Insurance | 9,643 | |||
| $ | 21,711 | |||
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
There is no other information required to be disclosed under this item which was not previously disclosed.
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Item 6. Exhibits
| Exhibit No. | Description |
| 31.1 | Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). * |
| 31.2 | Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). * |
| 32.1 | Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * |
| 32.2 | Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * |
| 101.INS ** | XBRL Instance Document |
| 101.SCH ** | XBRL Taxonomy Extension Schema Document |
| 101.CAL ** | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF ** | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB ** | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE ** | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith
*** Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Form 10-Q .
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 19, 2012 | By: /s/ Kayode Aladesuyi | |
| Kayode Aladesuyi | ||
Chief Executive Officer (Principal Executive Officer) Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) |
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