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WORLD SURVEILLANCE GROUP INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. Certain statements in this Quarterly Report on Form 10-Q may contain words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "could," "would" and other similar language and are considered forward looking statements or information. In addition, any information or statements that refer to expectations, beliefs, plans, projections, objectives, performance or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking, and based on our current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which we operate. Such forward-looking information or statements are subject to important assumptions, risks and uncertainties that are difficult to predict, and the actual outcome may be materially different. Our assumptions, although considered reasonable by us at the date of this Report, may prove to be inaccurate and consequently our actual results could differ materially from the expectations set out herein. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements or information. You should carefully review documents we file from time to time with the Securities and Exchange Commission. A number of factors may materially affect our business, financial condition, operating results and prospects. These factors include but are not limited to those set forth in our Annual Report on Form 10-K and elsewhere in this Quarterly Report on Form 10-Q. Any one of these factors may cause our actual results to differ materially from recent results or from our anticipated future results. You should not rely too heavily on the forward-looking statements contained in this Quarterly Report on Form 10-Q, because these forward-looking statements are relevant only as of the date they were made. The following MD&A is intended to help readers understand the results of our operation and financial condition, and is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying Notes to Condensed Consolidated Financial Statements under Part I, Item1 of this Quarterly Report on Form 10-Q. Growth and percentage comparisons made herein generally refer to the three months ended March 31, 2013 compared with the three months ended March 31, 2012 unless otherwise noted. Unless otherwise indicated or unless the context otherwise requires, all references in this document to "we," "us," "our," the "Company" and similar expressions are references to World Surveillance Group Inc. and, depending on the context, its subsidiaries. General We design, develop, market, and sell, autonomous lighter-than-air (LTA) aerostats and unmanned aerial systems (UAS) capable of carrying payloads that provide semi-persistent intelligence, surveillance and reconnaissance (ISR), security and/or wireless communications from air to ground solutions at low and mid altitudes. Our business focuses primarily on the design and development of innovative aerostats and UAS that provide situational awareness and other communications capabilities via the integration of wireless capabilities and customer payloads. Our aerostats and airships when integrated with cameras, electronics systems and other high technology payloads, are designed for use by government-related and commercial entities that require real-time ISR or communications support for military, homeland defense, border control, drug interdiction, natural disaster relief, maritime and environmental missions. Through our wholly owned subsidiary Global Telesat Corp. (GTC), we provide mobile voice and data communications services globally via satellite to the U.S. government, defense industry and commercial users. GTC specializes in services related to the Globalstar satellite constellation, including satellite telecommunications voice airtime, tracking devices and services, and ground station construction. GTC has an e-commerce mobile satellite solutions portal and is an authorized reseller of satellite telecommunications equipment and services offered by other leading satellite network providers such as Inmarsat, Iridium, Globalstar and Thuraya. GTC also has a new subscription based online tracking portal called GTCTrack, designed to attract new satellite and GSM tracking customers by offering an easy-to-use interface and compatibility with a wide range of devices. GTC's equipment is installed in various ground stations across Africa, Asia, Australia, Europe and South America. Through our wholly owned subsidiary Lighter Than Air Systems Corp. (LTAS), we provide critical aerial and land-based surveillance and communications solutions to government and commercial customers. LTAS systems are designed and developed in-house utilizing proprietary technologies and processes that result in compact, rapidly deployable aerostat solutions and mast-based systems. The LTAS systems have been proven to fulfill critical requirements of the military and law enforcement in the U.S. and internationally. 17 On September 22, 2008 we filed a Certificate of Merger with the Secretary of State of the State of Delaware pursuant to which our newly formed wholly-owned subsidiary, Sanswire Corp., a Delaware corporation, was merged into us and our corporate name was changed from GlobeTel Communications Corp. to Sanswire Corp. Effective April 19, 2011, we merged a newly created, wholly-owned Delaware subsidiary, World Surveillance Group Inc., with and into the Company, with the Company being the surviving corporation. Our Restated Certificate of Incorporation is the charter of the surviving corporation except that our name has been changed to World Surveillance Group Inc. In connection with the change of our corporate name, effective April 25th our stock ticker symbol, under which our common stock is now traded, was changed to "WSGI". On May 25, 2011 we completed our acquisition of privately-held Global Telesat Corp. We acquired 100% of the issued and outstanding securities of GTC, making GTC a wholly owned subsidiary of the Company. GTC supplies satellite based tracking and communication solutions to government, defense and commercial customers. On March 28, 2013 we completed our acquisition of privately-held Lighter Than Air Systems Corp. We acquired 100% of the issued and outstanding securities of LTAS, making LTAS a wholly owned subsidiary of the Company. LTAS provides critical aerial and land-based surveillance and communications solutions to government and commercial customers. Our current principal office is at State Road 405, Building M6-306A, Room 1400, Kennedy Space Center, FL 32815, and our telephone number at that location is (321) 452-3545. Our internet address is www.wsgi.com. Information contained on our website is not a part of this report and the inclusion of our website address in this report is an inactive textual reference only. Results of Operations Comparison of Three Months Ended March 31, 2013 and 2012 Revenues. Revenue for the three months ended March 31, 2013 was $526,177 compared to $146,729 for the three months ended March 31, 2012 reflecting an increase of $379,448 or 259%, due primarily to the sale by GTC of a BiB aerostat system for $302,703. Cost of Sales. The cost of sales for the three months ended March 31, 2013 was $364,309 compared to $131,229 for the three months ended March 31, 2012 reflecting an increase of $233,080 or 178%, reflecting primarily the cost of the BiB aerostat system sold. Operating Expenses. Operating expenses consist primarily of compensation, professional fees, research and development, as well as expenses for executive and administrative personnel, insurance, facilities expenses, travel and related expenses, depreciation and amortization and other general corporate expenses. Operating expenses for the three months ended March 31, 2013 were $507,586 compared to $1,344,379 for the three months ended March 31, 2012. The decrease of $836,793, or 62%, resulted primarily from a $689,978 decrease in general and administrative expenses as compared to the first quarter of 2012. The decrease in general and administrative expense is primarily attributable to the $310,000 share-based compensation related to stock grants to the former Chairman of the Board of Directors pursuant to his revised compensation agreement, $272,020 related to performance-based restricted stock grants, and $107,695 in performance-based stock options that vested, all during the quarter ended March 31, 2012. Research and development expenses reflected a $76,114 decrease during the three months ended March 31, 2013 compare to the prior year period due largely to performance-based options and restricted stock that vested during the first quarter of 2012. Professional fees also declined by $70,701 during the three months ended March 31, 2013 as compared to the same period in 2012, primarily due to higher corporate consulting fees incurred during the first quarter of 2012. Loss From Operations. The loss from operations of $345,718 for the three months ended March 31, 2013 compares to an operating loss of $1,328,379 for the three months ended March 31, 2012. The decrease of $983,161, or 74%, primarily reflects the increase in sales and decrease in operating expenses in the three months ended March 31, 2013, as described above. Net Other Income (Expense). Net other expense totaled $171,363 for the three months ended March 31, 2013 compared to $63,018 for the three months ended March 31, 2012, reflecting an increase expense of $108,345 or 172%, consisting of: a $50,433 reduction in gain on the fair value of derivative liabilities attributable to increased volatility in our stock price; a $21,597 loss on the conversion of debt; and additional interest expense of $36,315, which includes the 2.0 million common shares totaled $34,400 issued to an individual investor as an inducement for new loans. Net Income (Loss). We had a net loss of $517,081 for the three months ended March 31, 2013 compared to a net loss of $1,391,897 for the three months ended March 31, 2012, a decrease in net loss of $874,816 or 63%, primarily attributable to the increase in sales and the reduction of operating expenses in the three months ended March 31, 2013, as described above. Liquidity and Capital Resources Assets. Our cash balance was $161,854 at March 31, 2013 compared to $49,343 at December 31, 2012, an increase of $112,511 or 228%, primarily attributable to $158,350 of cash acquired in the LTAS acquisition. Total assets at March 31, 2013 were $3,893,460 compared to $2,698,714 at December 31, 2012, an increase of $1,194,746 or 44%, which reflects the $1,220,822 total assets from LTAS, including the accounts receivable of $250,506. 18 Liabilities. At March 31, 2013, we had total liabilities of $16,591,946 versus $15,859,403 at December 31, 2012, an increase of $732,543 or 5%. This increase is primarily attributable to the $150,000 in new unsecured promissory notes payable, $261,662 in liabilities assumed and $250,000 payable related to LTAS acquisition, and $105,230 interest on the notes payable accrued during the period. Cash Flows. Our cash used in operating activities during the three months ended March 31, 2013 was $260,839 compared to $418,990 for the same period in 2012, reflecting a decrease of $158,151 or 38% reflecting only nominal adjustments for shared-based compensation and the fair value of vested options during the three months ended March 31, 2013 as compared to the same period during 2012. Cash flows from investing activities for the quarter ended March 31, 2013 reflect the $158,350 in cash acquired in the LTAS acquisition completed on March 28, 2013. Net cash provided by financing activities was $215,000 and $437,973 during the first quarter of 2013 and 2012, respectively, reflecting a decrease of $222,973 or 51%. During the three months ended March 31, 2013, we received $150,000 in funding from the issuance of two short-term unsecured promissory notes and $65,000 in funding from the sale of common stock during the period. During the three months ended March 31, 2012, we received net proceeds of $437,973 ($500,000 less financing cost of $62,027) from a 4 ¾% Secured Convertible Debenture. These proceeds represented the first tranche of a total $5.5 million financing (the "Financing") evidenced by a Securities Purchase Agreement (the "Agreement") with a California-based institutional investor (the "Investor"), which closed on February 2, 2012. Pursuant to the terms of a related Equity Investment Agreement (the "EIA"), the Company began receiving the balance of $5.0 million in minimum monthly tranches of $250,000 beginning on the date the effectiveness of the Registration Statement and on each successive thirty (30) day anniversary of the initial investment date. The minimum monthly tranches shall increase from $250,000 to $500,000 if certain stock price performance criteria set forth in the EIA are met. Under the terms of the EIA, the Investor also has the right to purchase an additional $5.0 million of our common stock at an exercise price of $0.21 per share for a period of three years. The payment of the balance of the $5.0 million to the Company has been and may continue to be negatively impacted by our stock price. Pursuant to a Stock Purchase Agreement relating to our acquisition of GTC in May 2011, the purchase price includes an earn-out equal to 5% of the gross revenues related to the construction by GTC of certain potential satellite ground stations. These earn-out payments are unlikely to materially impact our liquidity and capital resources since payments are required to be made to the former shareholder of GTC by us only upon the actual receipt of cash from a customer related to a ground station construction contract. The earn-out payments would have the effect of reducing our margin on any such contract. We are obligated to make these earn-out payments until the earlier of May 25, 2036 or the date on which GTC no longer has the right to construct ground stations under the applicable agreement with Globalstar. Pursuant to a Stock Purchase Agreement relating to our acquisition of LTAS in March 2013, the purchase price includes an earn-out equal to varying percentages of the gross revenues based on the level of revenue from contracts with an identified group of potential customers. These earn-out payments are unlikely to materially impact our liquidity and capital resources since payments are required to be made to the former shareholder of LTAS by us only upon the actual receipt of cash from the customer. The earn-out payments would have the effect of reducing our margin on any such contract. We are obligated to make these earn-out payments for a period equal to one year from the closing of the LTAS acquisition. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. However, as reflected in the accompanying condensed consolidated financial statements, the Company incurred a loss from operations of $345,718 and negative cash flows from operations of $260,839 for the three months ended March 31, 2013. The Company also had a working capital deficit of $15,342,549 and total stockholders' deficit of $12,698,486 as well as an accumulated deficit of $149,512,433 at March 31, 2013. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to raise additional funds either through investments or by generating revenue from the sale of the Company's products to continue its business operations and implement its strategic plan, which includes, among other things, continued development of its aerostats and UAS, the pursuit or continued development of strategic relationships and expansion of the Company's subsidiaries' businesses. The Company's business plan, which if successfully implemented, will allow it to sell aerostats, UAS and other products for a profit, which in turn will reduce the Company's dependence on raising additional funds from outside sources. The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The Company anticipates a net loss to continue for at least the next several quarters if not for all of the year 2013. Additional cash will be needed to support our ongoing operations until such time that operations provide sufficient cash flow to cover expenditures. We are currently pursuing both short and long-term financing options from private investors as well as through institutional investors. We are also working to commercialize our aerostats, Argus One airship, and our subsidiaries' products to generate revenues from customers. We anticipate generating revenues from the sale of our airships in 2013 and are already generating revenue from our aerostats and our subsidiaries' products. The costs associated with our strategic plan are variable and contingent on our ability to raise capital or generate revenue from customer contracts, but we expect to need funding of approximately $3 million over the next 12 months. We have an agreement with La Jolla Cove Investors for $5 million of funding, however, such funding has been and may continue to be negatively impacted by our stock price. We continue to have discussions with various entities relating to funding, but there can be no assurance that such funding will be received in the amounts required, on a timely basis, or at all. While we believe we will be able to continue to raise capital from various funding sources in such amounts sufficient to sustain operations at our current levels through at least December 31, 2013, if we are not able to do so and if we are not able to generate sufficient revenue through the sale of our products, we would likely need to modify our strategy or cut back or terminate some of our operations. If we are able to raise additional funds through the issuance of equity securities, substantial dilution to existing shareholders may result. However, if our plans are not achieved, if significant unanticipated damaging events occur, or if we are unable to obtain the necessary additional funding on favorable terms or at all, we will likely have to modify our business plan and reduce, delay or discontinue some or all of our operations to continue as a going concern or seek a buyer for all or a portion of our assets. As of the date hereof, we continue to raise capital to sustain our current operations. 19 Off-Balance Sheet Arrangements We do not enter into off-balance sheet financing as a matter of practice except for the use of operating leases for office space; none of which have, or potentially may have, a material effect on our financial condition, revenue, expenses, results of operations, liquidity, capital expenditures or capital resources. In accordance with U.S. GAAP, these leases do not meet the criteria for capitalization and are recorded as operating leases. Critical Accounting Policies and Use of Estimates Our Management's Discussion and Analysis of Financial Condition and Results of Operation is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of our condensed consolidated financial statements in accordance with U.S. GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts and classification of revenues and expense during the periods presented, and the disclosure of contingent assets and liabilities. We evaluate our estimates and assumptions on an ongoing basis and material changes in these estimates or assumptions could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances and at that time, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates if past experience or other assumptions do not turn out to be substantially accurate. Please refer to our Note 1 of our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q, and our Management's Discussion and Analysis of Financial Condition and Results of Operation contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2012 and Note 1 of our consolidated financial statements contained therein for a more complete discussion of our critical accounting policies and use of estimates. |