Friday, November 14, 2014 5:01:11 PM
10-Q http://biz.yahoo.com/e/141114/wsgi10-q.html
14-Nov-2014
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 and nine months ended September 30, 2014 compared with the three and nine months ended September 30, 2013 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 and develop autonomous lighter-than-air (LTA) unmanned aerial systems (UAS) designed to carry 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 UAS that are designed to provide situational awareness and other communications capabilities via the integration of wireless capabilities and customer payloads. Our 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 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.
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".
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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. On May 5, 2014, we exchanged 100% of the outstanding stock of LTAS for a cash payment of $335,000 and 10,000,000 shares of common stock of Drone Aviation Corp. (DAC). For purposes of this Form 10-Q, our financial statements reflect the accounts and operations of LTAS as discontinued operations. Following the LTAS sale, we intend to refocus our efforts on our Argus One program and GTC's business. The DAC shares were converted into 10,000,000 share of Series D Convertible Preferred stock (the "Preferred Shares") of Drone Aviation Holding Corp. (DAHC) on June 3, 2014. The Preferred Shares are convertible on a one-for-one basis into common shares of DAHC and are recorded as an asset of the Company. The Preferred Shares were valued at $9,000,000 based upon the closing price of DAHC common stock on June 30, 2014. As a result of the sale of LTAS, WSGI received cash for working capital and shares in DAHC, which will allow WSGI to hopefully benefit in the future success of the LTAS business.
Our current principal office is located 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, 2014 and 2013
Revenues. Revenues for the three-months ended September 30, 2014 were $476,981 compared to $428,668 for the three-months ended September 30, 2013 reflecting an increase of $48,313 or 11.3%. The increase in revenues during the 2014 period resulted primarily from an increase in the volume of GTC website and Amazon/eBay stores sales.
Cost of Sales. The cost of sales for the three-months ended September 30, 2014 was $351,733 compared to $412,579 for the three- months ended September 30, 2013 reflecting a decrease of $60,846 or 14.7%. The decrease in cost of sales during the third quarter of 2014 is attributed to the greater GTC website and Amazon/eBay stores sales volume and higher margin product mix.
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 September 30, 2014 were $411,899 compared to $864,216 for the three-months ended September 30, 2013. The decrease of $452,317, or 52.3%, resulted primarily from decreased general and administrative expenses of $443,918 compared to the third quarter of 2013. The decrease in general and administrative expenses is primarily attributable to reductions in vested share-based compensation and accrued salaries of approximately $437,000 during the third quarter of 2014.
Loss From Operations. The loss from operations of $286,651 for the three-months ended September 30, 2014 compares to a loss from operations of $848,127 for the three-months ended September 30, 2013. The decreased loss of $561,476, or 66.2%, is primarily attributable to the increased GTC sales and reductions in compensation described above.
Net Other Income (Expense). Interest expense totaled $118,410 for the three-months ended September 30, 2014 compared to interest expense of $111,469 for the three-months ended September 30, 2013, an increase of $6,941, or 6.2%.
Net Loss from Continuing Operations. The net loss from continuing operations of $405,061 for the three-months ended September 30, 2014 compared to net loss from continuing operations of $959,596 for the three-months ended September 30, 2013, a decreased loss of $554,535, or 57.8%. This decreased loss reflects the increase in GTC sales and the decrease in compensation during the quarter ended 2014 described above.
Other Comprehensive Income (Expense). We received 10,000,000 shares of Drone Aviation Corp. common stock as part of the proceeds from the sale of LTAS on May 5, 2014. These shares were converted into 10,000,000 shares of Series D Convertible Preferred Stock of Drone Aviation Holding Corp. (the "DAHC Stock") on June 3, 2014, which are convertible into shares of DAHC common stock. We recorded the DAHC Stock as available-for-sale securities, although the shares are subject to a contractual 15-month lock-up provision, we will be able to sell a certain volume of shares in months 13 through 15. We have elected to value the DAHC Stock at fair value using the DAHC common stock closing price at the end of each reporting period. On September 30, 2014, the DAHC Stock held by the Company was valued at $3,720,000 and is recorded as an asset. We will record changes in fair value of the DAHC Stock as Other Comprehensive Income (Expense), which is reported separately from Net Loss as it represents income (expense) outside the control or influence of our operations.
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Comparison of Nine-Months Ended September 30, 2014 and 2013
Revenues. Revenues for the nine-months ended September 30, 2014 were $1,306,386 compared to $1,192,150 for the nine-months ended September 30, 2013 reflecting an increase of $114,236 or 9.6%. The increase in revenues during the 2014 period resulted primarily from increased sales volume from the GTC website and Amazon/eBay stores. Revenues during the nine-months ended September 30, 2013 included the sale of a BiB aerostat system by GTC for $302,703. Sales generated by GTC's website and Amazon/eBay stores during the nine-months ended September 30, 2014 increased $416,939 or 46.9% over the same period of 2013.
Cost of Sales. The cost of sales for the nine-months ended September 30, 2014 was $979,663 compared to $912,178 for the nine-months ended September 30, 2013 reflecting an increase of $67,485 or 7.4%. The increase in cost of sales during the nine-months ended September 30, 2014 is attributed to the higher GTC website and Amazon/eBay store sales volume.
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 nine-months ended September 30, 2014 were $1,936,787 compared to $2,009,297 for the nine-months ended September 30, 2013. The decrease of $72,510 or 3.6%, resulted primarily from decreased general and administrative expenses of $102,878, which reflects lower share-based compensation and accrued salaries during the nine-months ended September 30, 2014.
Loss From Operations. The loss from operations of $1,610,064 for the nine-months ended September 30, 2014 compares to a loss from operations of $1,729,325 for the nine-months ended September 30, 2013. The decreased loss of $119,261 or 6.9%, is primarily attributable to the lower share-based compensation awarded or vesting and salary expense during the nine-months ended 2014.
Net Other Income (Expense). Net other expense totaled $793,800 for the nine-months ended September 30, 2014 compared to net other expense of $613,004 for the same period ended September 30, 2013, an increased loss of $180,796 or 29.5%. Net other expense for the nine-months ended September 30, 2013 included $233,381 in losses from conversion agreement true-up, which are no longer being incurred in 2014. Net other expense for the nine-months ended September 30, 2014 included $443,183 in losses from sale of discontinued operations, which didn't incur in 2013.
Net Loss from Continuing Operations. The net loss from continuing operations of $2,403,864 for the nine-months ended September 30, 2014 compared to net loss from continuing operations of $2,342,329 during the nine-months ended September 30, 2013, an increased loss of $61,535 or 2.6%, reflects the increase in GTC sales volume, the reduction in vested share-based compensation and salary expense, and the discontinuation of the loss from conversion agreement true-up, described above offset by the loss on sale of discontinued operations.
Other Comprehensive Income (Expense). We received 10,000,000 shares of Drone Aviation Corp. common stock as part of the proceeds from the sale of LTAS on May 5, 2014. These shares were converted into 10,000,000 shares of Series D Convertible Preferred Stock of Drone Aviation Holding Corp. ( the "DAHC Stock") on June 3, 2014, which are convertible into shares of DAHC common stock. We recorded the DAHC Stock as available-for-sale securities, although the shares are subject to a contractual 15-month lock-up provision, we will be able to sell a certain volume of shares in months 13 through 15. We have elected to value the DAHC Stock at fair value using the DAHC common stock closing price at the end of each reporting period. On September 30, 2014, the DAHC Stock held by the Company was valued at $3,720,000 and is recorded as an asset. We will record changes in fair value of the DAHC Stock as Other Comprehensive Income (Expense), which is reported separately from Net Loss as it represents income (expense) outside the control or influence of our operations.
Liquidity and Capital Resources
Assets. Our cash balance was $5,021 at September 30, 2014 compared to $8,907 at December 31, 2013, reflecting a decrease of $3,886. Accounts receivable increased $34,036 at September 30, 2014 compared to September 30, 2013 reflecting a higher volume of credit sales from GTC's website. Total assets at September 30, 2014 excluding discontinued operations were $6,143,786 compared to $2,459,695 at December 31, 2013, reflecting an increase of $3,684,091 due principally to the fair value of the 10,000,000 shares of DAHC Stock. The DAHC Stock is subject to a 15-month lock-up provision, although we will be able to sell a certain volume of DAHC Stock in months 13 through 15. The Company has elected to record the DAHC Stock as available-for-sale securities and value them at fair value using the DAHC common stock's closing price at the end of each reporting period. On September 30, 2014, the DAHC Stock was valued at $3,720,000. Fair value adjustments are recorded as Other Comprehensive Income (Expense) in the Statements of Comprehensive Income and listed separately as a component of Stockholders' Deficit on the Consolidated Balance Sheets.
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Liabilities. At September 30, 2014, the Company had total current liabilities excluding the discontinued operations of $17,292,275 compared to $16,816,772 at December 31, 2013, an increase of $475,503 or 2.8%. This increase is primarily attributable to the increases in accrued interest capitalized in notes payable of $266,152 and other accrued liabilities of $196,507.
Cash Flows. Net cash used by operating activities in continuing operations during the nine-months ended September 30, 2014 was $493,886 compared to net cash used by operating activities of $577,423 for the same period in 2013, a decrease of $83,537, primarily reflecting a reduction in net loss.
Net cash provided by investing activities in continuing operations for the nine-month period ended September 30, 2014 included the cash proceeds from the sale of LTAS of $335,000 less $10,000 paid in attorney fees. There were no cash flows from investing activities from continuing operations for the nine-months ended September 30, 2013.
Net cash provided by financing activities in continuing operations was $165,000 and $20,000 during the nine-months of 2014 and 2013, respectively. During the nine-months ended September 30, 2014, we received $215,000 in proceeds from the sale of common stock and paid-off a $50,000 unsecured promissory note with accrued interest. During the nine-months ended September 30, 2013, we received $120,000 from the sale of common stock, $150,000 in proceeds from the issuance of two short-term unsecured promissory notes and paid $110,000 against the LTAS acquisition payable and $140,000 to the LTAS shareholder.
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.
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 $1,610,064 for the nine-months ended September 30, 2014. The Company also had a working capital deficit of $17,008,096 and total stockholders' deficit of $11,148,489, as well as an accumulated deficit of $154,823,252 at September 30, 2014. 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 UAS, the pursuit or continued development of strategic relationships and expansion of the Company's subsidiary's business. The Company's business plan, which if successfully implemented, will allow it to sell 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.
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 subsidiary's products to generate revenues from customers. While we have not sold any of our Argus One airships, we are already generating revenue from our subsidiary's 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 are currently in litigation with La Jolla Cove Investors and do not expect any future funding under those agreements. 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 the next several quarters, 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.
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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, 2013 and Note 1 of our consolidated financial statements contained therein for a more complete discussion of our critical accounting policies and use of estimates.
14-Nov-2014
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 and nine months ended September 30, 2014 compared with the three and nine months ended September 30, 2013 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 and develop autonomous lighter-than-air (LTA) unmanned aerial systems (UAS) designed to carry 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 UAS that are designed to provide situational awareness and other communications capabilities via the integration of wireless capabilities and customer payloads. Our 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 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.
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".
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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. On May 5, 2014, we exchanged 100% of the outstanding stock of LTAS for a cash payment of $335,000 and 10,000,000 shares of common stock of Drone Aviation Corp. (DAC). For purposes of this Form 10-Q, our financial statements reflect the accounts and operations of LTAS as discontinued operations. Following the LTAS sale, we intend to refocus our efforts on our Argus One program and GTC's business. The DAC shares were converted into 10,000,000 share of Series D Convertible Preferred stock (the "Preferred Shares") of Drone Aviation Holding Corp. (DAHC) on June 3, 2014. The Preferred Shares are convertible on a one-for-one basis into common shares of DAHC and are recorded as an asset of the Company. The Preferred Shares were valued at $9,000,000 based upon the closing price of DAHC common stock on June 30, 2014. As a result of the sale of LTAS, WSGI received cash for working capital and shares in DAHC, which will allow WSGI to hopefully benefit in the future success of the LTAS business.
Our current principal office is located 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, 2014 and 2013
Revenues. Revenues for the three-months ended September 30, 2014 were $476,981 compared to $428,668 for the three-months ended September 30, 2013 reflecting an increase of $48,313 or 11.3%. The increase in revenues during the 2014 period resulted primarily from an increase in the volume of GTC website and Amazon/eBay stores sales.
Cost of Sales. The cost of sales for the three-months ended September 30, 2014 was $351,733 compared to $412,579 for the three- months ended September 30, 2013 reflecting a decrease of $60,846 or 14.7%. The decrease in cost of sales during the third quarter of 2014 is attributed to the greater GTC website and Amazon/eBay stores sales volume and higher margin product mix.
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 September 30, 2014 were $411,899 compared to $864,216 for the three-months ended September 30, 2013. The decrease of $452,317, or 52.3%, resulted primarily from decreased general and administrative expenses of $443,918 compared to the third quarter of 2013. The decrease in general and administrative expenses is primarily attributable to reductions in vested share-based compensation and accrued salaries of approximately $437,000 during the third quarter of 2014.
Loss From Operations. The loss from operations of $286,651 for the three-months ended September 30, 2014 compares to a loss from operations of $848,127 for the three-months ended September 30, 2013. The decreased loss of $561,476, or 66.2%, is primarily attributable to the increased GTC sales and reductions in compensation described above.
Net Other Income (Expense). Interest expense totaled $118,410 for the three-months ended September 30, 2014 compared to interest expense of $111,469 for the three-months ended September 30, 2013, an increase of $6,941, or 6.2%.
Net Loss from Continuing Operations. The net loss from continuing operations of $405,061 for the three-months ended September 30, 2014 compared to net loss from continuing operations of $959,596 for the three-months ended September 30, 2013, a decreased loss of $554,535, or 57.8%. This decreased loss reflects the increase in GTC sales and the decrease in compensation during the quarter ended 2014 described above.
Other Comprehensive Income (Expense). We received 10,000,000 shares of Drone Aviation Corp. common stock as part of the proceeds from the sale of LTAS on May 5, 2014. These shares were converted into 10,000,000 shares of Series D Convertible Preferred Stock of Drone Aviation Holding Corp. (the "DAHC Stock") on June 3, 2014, which are convertible into shares of DAHC common stock. We recorded the DAHC Stock as available-for-sale securities, although the shares are subject to a contractual 15-month lock-up provision, we will be able to sell a certain volume of shares in months 13 through 15. We have elected to value the DAHC Stock at fair value using the DAHC common stock closing price at the end of each reporting period. On September 30, 2014, the DAHC Stock held by the Company was valued at $3,720,000 and is recorded as an asset. We will record changes in fair value of the DAHC Stock as Other Comprehensive Income (Expense), which is reported separately from Net Loss as it represents income (expense) outside the control or influence of our operations.
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Comparison of Nine-Months Ended September 30, 2014 and 2013
Revenues. Revenues for the nine-months ended September 30, 2014 were $1,306,386 compared to $1,192,150 for the nine-months ended September 30, 2013 reflecting an increase of $114,236 or 9.6%. The increase in revenues during the 2014 period resulted primarily from increased sales volume from the GTC website and Amazon/eBay stores. Revenues during the nine-months ended September 30, 2013 included the sale of a BiB aerostat system by GTC for $302,703. Sales generated by GTC's website and Amazon/eBay stores during the nine-months ended September 30, 2014 increased $416,939 or 46.9% over the same period of 2013.
Cost of Sales. The cost of sales for the nine-months ended September 30, 2014 was $979,663 compared to $912,178 for the nine-months ended September 30, 2013 reflecting an increase of $67,485 or 7.4%. The increase in cost of sales during the nine-months ended September 30, 2014 is attributed to the higher GTC website and Amazon/eBay store sales volume.
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 nine-months ended September 30, 2014 were $1,936,787 compared to $2,009,297 for the nine-months ended September 30, 2013. The decrease of $72,510 or 3.6%, resulted primarily from decreased general and administrative expenses of $102,878, which reflects lower share-based compensation and accrued salaries during the nine-months ended September 30, 2014.
Loss From Operations. The loss from operations of $1,610,064 for the nine-months ended September 30, 2014 compares to a loss from operations of $1,729,325 for the nine-months ended September 30, 2013. The decreased loss of $119,261 or 6.9%, is primarily attributable to the lower share-based compensation awarded or vesting and salary expense during the nine-months ended 2014.
Net Other Income (Expense). Net other expense totaled $793,800 for the nine-months ended September 30, 2014 compared to net other expense of $613,004 for the same period ended September 30, 2013, an increased loss of $180,796 or 29.5%. Net other expense for the nine-months ended September 30, 2013 included $233,381 in losses from conversion agreement true-up, which are no longer being incurred in 2014. Net other expense for the nine-months ended September 30, 2014 included $443,183 in losses from sale of discontinued operations, which didn't incur in 2013.
Net Loss from Continuing Operations. The net loss from continuing operations of $2,403,864 for the nine-months ended September 30, 2014 compared to net loss from continuing operations of $2,342,329 during the nine-months ended September 30, 2013, an increased loss of $61,535 or 2.6%, reflects the increase in GTC sales volume, the reduction in vested share-based compensation and salary expense, and the discontinuation of the loss from conversion agreement true-up, described above offset by the loss on sale of discontinued operations.
Other Comprehensive Income (Expense). We received 10,000,000 shares of Drone Aviation Corp. common stock as part of the proceeds from the sale of LTAS on May 5, 2014. These shares were converted into 10,000,000 shares of Series D Convertible Preferred Stock of Drone Aviation Holding Corp. ( the "DAHC Stock") on June 3, 2014, which are convertible into shares of DAHC common stock. We recorded the DAHC Stock as available-for-sale securities, although the shares are subject to a contractual 15-month lock-up provision, we will be able to sell a certain volume of shares in months 13 through 15. We have elected to value the DAHC Stock at fair value using the DAHC common stock closing price at the end of each reporting period. On September 30, 2014, the DAHC Stock held by the Company was valued at $3,720,000 and is recorded as an asset. We will record changes in fair value of the DAHC Stock as Other Comprehensive Income (Expense), which is reported separately from Net Loss as it represents income (expense) outside the control or influence of our operations.
Liquidity and Capital Resources
Assets. Our cash balance was $5,021 at September 30, 2014 compared to $8,907 at December 31, 2013, reflecting a decrease of $3,886. Accounts receivable increased $34,036 at September 30, 2014 compared to September 30, 2013 reflecting a higher volume of credit sales from GTC's website. Total assets at September 30, 2014 excluding discontinued operations were $6,143,786 compared to $2,459,695 at December 31, 2013, reflecting an increase of $3,684,091 due principally to the fair value of the 10,000,000 shares of DAHC Stock. The DAHC Stock is subject to a 15-month lock-up provision, although we will be able to sell a certain volume of DAHC Stock in months 13 through 15. The Company has elected to record the DAHC Stock as available-for-sale securities and value them at fair value using the DAHC common stock's closing price at the end of each reporting period. On September 30, 2014, the DAHC Stock was valued at $3,720,000. Fair value adjustments are recorded as Other Comprehensive Income (Expense) in the Statements of Comprehensive Income and listed separately as a component of Stockholders' Deficit on the Consolidated Balance Sheets.
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Liabilities. At September 30, 2014, the Company had total current liabilities excluding the discontinued operations of $17,292,275 compared to $16,816,772 at December 31, 2013, an increase of $475,503 or 2.8%. This increase is primarily attributable to the increases in accrued interest capitalized in notes payable of $266,152 and other accrued liabilities of $196,507.
Cash Flows. Net cash used by operating activities in continuing operations during the nine-months ended September 30, 2014 was $493,886 compared to net cash used by operating activities of $577,423 for the same period in 2013, a decrease of $83,537, primarily reflecting a reduction in net loss.
Net cash provided by investing activities in continuing operations for the nine-month period ended September 30, 2014 included the cash proceeds from the sale of LTAS of $335,000 less $10,000 paid in attorney fees. There were no cash flows from investing activities from continuing operations for the nine-months ended September 30, 2013.
Net cash provided by financing activities in continuing operations was $165,000 and $20,000 during the nine-months of 2014 and 2013, respectively. During the nine-months ended September 30, 2014, we received $215,000 in proceeds from the sale of common stock and paid-off a $50,000 unsecured promissory note with accrued interest. During the nine-months ended September 30, 2013, we received $120,000 from the sale of common stock, $150,000 in proceeds from the issuance of two short-term unsecured promissory notes and paid $110,000 against the LTAS acquisition payable and $140,000 to the LTAS shareholder.
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.
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 $1,610,064 for the nine-months ended September 30, 2014. The Company also had a working capital deficit of $17,008,096 and total stockholders' deficit of $11,148,489, as well as an accumulated deficit of $154,823,252 at September 30, 2014. 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 UAS, the pursuit or continued development of strategic relationships and expansion of the Company's subsidiary's business. The Company's business plan, which if successfully implemented, will allow it to sell 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.
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 subsidiary's products to generate revenues from customers. While we have not sold any of our Argus One airships, we are already generating revenue from our subsidiary's 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 are currently in litigation with La Jolla Cove Investors and do not expect any future funding under those agreements. 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 the next several quarters, 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.
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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, 2013 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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