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[November 20, 2012]
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 Registration Statements on Form S-1 and 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. The numbers included in this MD&A include the financial results of Global Telesat Corp. from our acquisition date of such company on May 25, 2011.
Growth and percentage comparisons made herein generally refer to the three and nine months ended September 30, 2012 compared with the three and nine months ended September 30, 2011 unless otherwise noted. Where we say "we", "us", "our", "WSGI" or "the Company", we mean World Surveillance Group Inc. or World Surveillance Group Inc. and its subsidiaries, as applicable.
The Company We design, develop and market, and intend to sell, autonomous lighter-than-air (LTA) unmanned aerial vehicles (UAVs) and aerostats capable of carrying payloads that provide persistent security and/or wireless communications from air to ground solutions at low, mid and high altitudes. Our airships and aerostats when integrated with electronics systems and other high technology payloads, are designed for use by government-related and commercial entities that require real-time intelligence, surveillance and reconnaissance or communications support for military, homeland defense, border control, drug interdiction, natural disaster relief and maritime missions. Our business focuses primarily on the design and development of innovative UAVs and aerostats that provide situational awareness and other communications capabilities via the integration of wireless capabilities and customer payloads.
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 ground station construction, satellite telecommunications voice airtime and tracking services. 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 and Thuraya. GTC's equipment is installed in various ground stations across Africa, Asia, Australia, Europe and South America. 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.
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".
19 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 September 30, 2012 and 2011 Revenues. Sales of satellite airtime and usage for the three months ended September 30, 2012 were $190,951 as compared to $104,051 during the same period of 2011, reflecting an increase of $86,900 or approximately 83.5% over year ago levels, in large part as a result of the launch of GTC's e-commerce mobile satellite solutions website.
Cost of Sales. Cost of sales, principally the costs of airtime and usage fees, totaled $164,794 for the three months ended September 30, 2012 compared to $91,643 for the same period of 2011. Gross profit margins rose slightly from 11.9% in 2011 to 13.7% for the three month period ended September 30, 2012.
Operating Expenses. Our operating expenses consist primarily of compensation, professional fees, research and development and depreciation, as well as expenses for executive and administrative personnel, insurance, facilities, travel and related expenses, amortization and other general corporate expenses.
Operating expenses for the three months ended September 30, 2012 totaled $768,223, compared to the $1,091,001 during the same period of 2011, a reduction of $322,778, or 29.6%. Reductions in general and administrative expenses of $388,439, primarily reflect the vesting of share-based compensation awards during 2011. The reduction in research and development of $115,065 reflects lower expenditures for testing primarily during the three months ended 2012 as compared to the same period of 2011. These reductions were partially offset by the increase in professional fees of $180,726 reflecting increases in legal fees and settlement activity during the three months ended September 30, 2012 as compared to the same period of 2011.
Loss From Operations. The loss from operations of $742,066 for the three months ended September 30, 2012 compares to the loss from operations of $1,078,593 for the same period of 2011. The decrease of $336,527, or 31.2%, reflects the increase in sales and the net reduction in operating expenses described above.
Net Other Income (Expense). Net other expenses totaled $244,897 for the three months ended September 30, 2012, as compared to net other income of $850,070 during the same period of 2011. Significant fluctuations in fair value of derivatives, principally stock warrants, between September 30, 2012 and 2011 account for $950,592 of the change. Losses on debt conversions of $135,958 during the third quarter of 2012 also contributed to the change.
Net Loss. We had a net loss of $986,963 for the three months ended September 30, 2012 compared to a net loss of $228,523 for the three months ended September 30, 2011, an increased loss of $758,440. The significant reductions in share-based compensation and the change in the fair value of derivatives accounted for the majority of the increased net loss during the quarter ended September 30, 2012 as compared to the same period of 2011.
Comparison of Nine Months Ended September 30, 2012 and 2011 Revenues. We had total revenues of $889,344 during the nine months ended September 30, 2012, comprised of $200,000 in contract revenues and $689,344 in sales of satellite airtime and usage, which reflects an increase of $759,200 over the total revenues of $130,144 in sales of satellite airtime and usage reported during the same period of 2011.
Cost of Sales. Cost of sales, principally the costs of airtime and usage fees, totaled $611,242 for the nine months ended September 30, 2012 compared to $107,988 for the same period of 2011, an increase of $503,254 due to the increase in net sales.
Operating Expenses. Our operating expenses consist primarily of compensation, professional fees, research and development and depreciation, as well as expenses for executive and administrative personnel, insurance, facilities, travel and related expenses, and other general corporate expenses. Operating expenses for the nine months ended September 30, 2012 were $3,522,132, compared to $3,219,712 for the nine months ended September 30, 2011, an increase of $302,420 or 9.4%. Increases in general and administrative expenses of $451,720, and professional fees of $91,011, during the nine months ended 2012 were partially offset by the decrease in research and development costs of $253,861.
The increase in depreciation expense during 2012 and acquisition expenses during 2011 relate to the GTC acquisition in May 2011.
Loss From Operations. The loss from operations of $3,244,030 for the nine months ended September 30, 2012 compares to the operating loss of $3,197,556 for the same period of 2011. The increased loss of $46,474 resulted from the increase in operating expenses described above, offset by increased revenues.
20 Net Other Income (Expense). Net other income totaled $1,737,273 for the nine months ended September 30, 2012, compared to net other income of $2,857,401 for the same period of 2011. The net other income for the nine months ended September 30, 2012 primarily reflects the $2,331,525 write-off adjustment of the net liabilities of the discontinued operations and legacy debt. The $373,078 loss on convertible debt conversion relates to the fair value of the converted common shares and the required cash true-up accrual when the shares are converted using the floor price of $.075 per share as opposed to the specified conversion price as computed under the debenture agreement. The $125,364 gain on the fair value of derivative liabilities in 2012 resulted from the fair value calculation of the outstanding warrants using the Black-Scholes option pricing model. Interest expense for the nine months ended 2012 was $346,538 and includes interest on the notes payable, convertible debt and amortization of the deferred financing costs. During the same period in 2011, net other income of $2,857,401, includes a $2,474,753 gain on the extinguishment of liabilities due to a former joint venture partner; a $733,578 gain on the fair value of derivative liabilities; and interest expense of $350,930.
Net Loss. We had a net loss of $1,506,757 for the nine months ended September 30, 2012 compared to a net loss of $340,155 for the nine months ended September 30, 2011, an increased loss of $1,166,602, primarily attributable to the difference in net other income (expense) of $1,120,128, between the two periods.
Liquidity and Capital Resources Assets. Our cash balance at September 30, 2012 was $14,189 compared to $5,532 at December 31, 2011. The increases in accounts receivable of $41,553, prepaid expenses of $24,849 and deferred financing costs of $48,243 were partially offset by the $137,250 decrease in property and equipment caused by an increase in accumulated depreciation during the period, accounting for the $24,854 reduction in total assets at September 30, 2012.
Liabilities. During the three months ended June 30, 2012, the Company conducted a detailed analysis of certain of its accounts payable and accrued liabilities including (i) liabilities from discontinued operations of $1,365,929, and (ii) legacy payables and accrued liabilities of $1,787,324. Certain of these liabilities represented legal judgments and thus were excluded from the potential write-off and remain on the Company's books. The remaining analyzed liabilities from discontinued operations and legacy payables and accrued liabilities are no longer enforceable debts of the Company due to the passage of the applicable statutes of limitation and were written-off. These liabilities along with the assets of discontinued operations of $6,406 resulted in the Company's net write-off of discontinued operations adjustment of $2,331,525.
At September 30, 2012, we had total liabilities of $16,018,674 compared to $16,977,458 at December 31, 2011, a decrease of $958,784 or 5.6%. This decrease reflects the $2,331,525 write-off of the net liabilities of the discontinued operations and legacy debts; the $200,000 decline in deferred revenues due to recognition of the Space Florida contract revenue; and the $125,364 decline in the fair value of the derivatives. These reductions were partially offset by the convertible debt outstanding of $370,000 from the Company's February financing; the $314,557 increase in accrued interest; and the $216,102 increase in accrued liabilities.
Cash Flows. Our cash used in operating activities in the nine months ended September 30, 2012 was $1,014,317 compared to $1,583,868 for the same period of 2011, reflecting a decrease in net cash outflows of $569,551, attributable largely to the increase in accounts payable of $87,236 and accrued liabilities of $440,716 during the nine months ended September 30, 2012.
There were no investing activities during the nine months ended September 30, 2012. Net cash used in investing activities totaled $339,366 for the comparable period of 2011, primarily reflecting the funds used to acquire GTC. .
Net cash provided by financing activities, principally the convertible debt and additional funding under the EIA, totaled $1,022,974 during the nine months ended September 30, 2012, compared to $1,941,625 in proceeds received from the sale of common stock during the nine months ended September 30, 2011.
21 Pursuant to the Stock Purchase Agreement relating to our acquisition of GTC, 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.
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, we incurred a loss from operations of $3,244,030 and negative cash flow from operations of $1,014,317 for the nine months ended September 30, 2012.
We had a working capital deficit of $15,445,048, a total stockholders deficit of $13,268,089 and an accumulated deficit of $147,139,256 at September 30, 2012.
These factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional funds either through investments or by generating revenue from the sale of our products to continue our business operations and implement our strategic plan, which includes, among other things, continued development of our UAVs and aerostats, the pursuit or continued development of strategic relationships and expansion of our subsidiary GTC's business. Our business plan, which if successfully implemented, will allow us to sell UAVs, aerostats and other products for a profit thereby reducing our dependence on raising additional funds from outside sources. The condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. We anticipate a net loss to continue for at least the next six months.
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 Argus One airship, our aerostats and GTC products to begin generating revenues from customers. We anticipate generating revenues from the sale of our airships in 2013, our aerostats in 2012 and are already generating revenue from our GTC products. The costs associated with our strategic plan are variable and contingent on our ability to raise capital or begin generating 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 $5.0 million of funding. We continue to have discussions with other 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 for the next 12 months, if we are not able to do so and if we are not able to generate 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 and/or if significant unanticipated 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.
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 and computer equipment. In accordance with U.S. GAAP, neither the lease liability nor the underlying assets are carried on the balance sheet, as the terms of the leases do not meet the criteria for capitalization.
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, 2011 and Note 1 of our consolidated financial statements contained therein for a more complete discussion of our critical accounting policies and use of estimates.
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