0001144204-13-029515.txt : 20130515 0001144204-13-029515.hdr.sgml : 20130515 20130515161915 ACCESSION NUMBER: 0001144204-13-029515 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20130331 FILED AS OF DATE: 20130515 DATE AS OF CHANGE: 20130515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: World Surveillance Group Inc. CENTRAL INDEX KEY: 0000919742 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 880292161 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-32509 FILM NUMBER: 13847376 BUSINESS ADDRESS: STREET 1: 1400 STATE ROAD 405 STREET 2: BLDG M6-306A CITY: KENNEDY SPACE CENTER STATE: FL ZIP: 32815 BUSINESS PHONE: 321.452.3545 MAIL ADDRESS: STREET 1: 1400 STATE ROAD 405 STREET 2: BLDG M6-306A CITY: KENNEDY SPACE CENTER STATE: FL ZIP: 32815 FORMER COMPANY: FORMER CONFORMED NAME: Sanswire Corp. DATE OF NAME CHANGE: 20080925 FORMER COMPANY: FORMER CONFORMED NAME: GLOBETEL COMMUNICATIONS CORP DATE OF NAME CHANGE: 20020904 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN DIVERSIFIED GROUP INC DATE OF NAME CHANGE: 19950329 10-Q 1 v343811_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

(Mark one)

x QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE

ACT OF 1934

 

For the quarterly period ended March 31, 2013

or

¨ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT

 

For the transition period from ____________ to _____________

 

Commission file number 001-32509

 

WORLD SURVEILLANCE GROUP INC.

(Exact name of registrant as specified in its charter)

 

Delaware   88-0292161
(State or other jurisdiction   (IRS Employer Identification No.)
of incorporation or organization)    

 

State Road 405, Building M6-306A, Room 1400

Kennedy Space Center, Florida 32815

(Address of principal executive offices)

 

(321) 452-3545

(Issuer's telephone number)

 

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x                                       No  ¨      

 

Indicated by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer“ and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer    ¨     Accelerated filer    ¨     Non-accelerated filer   ¨     (Do not check if a smaller reporting company)    Smaller reporting company  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨  No  x

 

As of May 10, 2013, there were 609,070,863 shares of the registrant's Common Stock issued and outstanding.

 

 
 

 

WORLD SURVEILLANCE GROUP INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

  Page
   
PART I - FINANCIAL INFORMATION  
     
Item 1. Condensed Consolidated Financial Statements (Unaudited)  
     
  Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 (Audited) 3
     
  Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 4
     
  Condensed Consolidated Statements of Stockholders’ Deficit for the three months ended March 31, 2013 5
     
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 6
     
  Notes to Condensed Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
Item 4. Controls and Procedures 20
   
PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings

21

     
Item 1A. Risk Factors 22
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
     
Item 6. Exhibits 29
     
Signatures   31
     
Exhibit Index   32

 

2
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements.

 

WORLD SURVEILLANCE GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31,   December 31, 
   2013   2012 
   (unaudited)   (audited) 
ASSETS          
CURRENT ASSETS          
Cash  $161,854   $49,343 
Accounts receivable   558,379    8,977 
Accounts receivable from related party   17,200    48,220 
Inventories   188,058    0 
Prepaid expenses   40,488    46,134 
Deposits   1,418    50,000 
TOTAL CURRENT ASSETS   967,397    202,674 
           
PROPERTY AND EQUIPMENT          
Property and equipment, net of accumulated depreciation of $355,420 and $309,670, respectively   2,408,573    2,452,966 
           
OTHER NONCURRENT ASSETS          
Goodwill   479,585    0 
Deferred financing costs   37,905    43,074 
TOTAL NONCURRENT ASSETS   517,490    43,074 
TOTAL ASSETS  $3,893,460   $2,698,714 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
CURRENT LIABILITIES          
Accounts payable  $4,765,857   $4,781,075 
Notes payable   8,906,610    8,651,380 
Other accrued liabilities   2,637,416    2,132,085 
Deferred revenues   0    7,500 
Derivative liabilities   63    363 
TOTAL CURRENT LIABILITIES   16,309,946    15,572,403 
NONCURRENT LIABILITIES          
Convertible notes payable   282,000    287,000 
TOTAL NONCURRENT LIABILITIES   282,000    287,000 
TOTAL LIABILITIES   16,591,946    15,859,403 
           
  COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS' EQUITY (DEFICIT)          
Common stock, $0.00001 par value, 750,000,000 shares authorized; 603,770,863 shares and 546,887,530 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively.   6,038    5,469 
Additional paid-in capital   136,807,909    135,829,194 
Accumulated deficit   (149,512,433)   (148,995,352)
TOTAL STOCKHOLDERS' DEFICIT   (12,698,486)   (13,160,689)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT  $3,893,460   $2,698,714 

 

See accompanying notes to condensed consolidated financial statements

 

3
 

 

WORLD SURVEILLANCE GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

   Three Months Ended March 31, 
   2013   2012 
REVENUES          
Net sales  $526,177   $146,729 
Cost of sales   364,309    131,229 
Gross profit   161,868    15,500 
           
COSTS AND EXPENSES:          
General and administrative   384,916    1,074,894 
Professional fees   76,784    147,485 
Depreciation expense   45,750    45,750 
Research and development   136    76,250 
TOTAL EXPENSES   507,586    1,344,379 
LOSS FROM OPERATIONS   (345,718)   (1,328,879)
OTHER INCOME (EXPENSE)          
Change in fair value of derivative liabilities   300    50,733 
Loss on conversion of debt   (21,597)   0 
Interest expense, net   (150,066)   (113,751)
NET OTHER EXPENSE   (171,363)   (63,018)
NET LOSS  $(517,081)  $(1,391,897)
           
  PER COMMON SHARE DATA          
NET LOSS PER SHARE:          
Basic and Diluted  $(0.00)  $(0.00)
WEIGHTED AVERAGE SHARES:          
Basic and Diluted   489,871,669    383,375,304 

 

See accompanying notes to condensed consolidated financial statements

 

4
 

 

WORLD SURVEILLANCE GROUP INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2013

 

       ADDITIONAL       TOTAL 
   COMMON STOCK   PAID-IN   ACCUMULATED   STOCKHOLDERS' 
Description  SHARES   AMOUNT   CAPITAL   DEFICIT   DEFICIT 
BALANCE, DECEMBER 31, 2012   546,887,530   $5,469   $135,829,194   $(148,995,352)  $(13,160,689)
Shares issued as inducement for loans   2,000,000    20    34,380    0    34,400 
Shares issued for cash   3,250,000    33    64,967    0    65,000 
Shares issued for legal settlement   6,000,000    60    98,940    0    99,000 
Shares issued to services   3,750,000    38    74,962    0    75,000 
Shares issued for LTAS acquisition   25,000,000    250    672,250    0    672,500 
Shares issued for directors’ compensation   150,000    2    2,398    0    2,400 
Shares issued for convertible debt conversion   733,333    6    12,094    0    12,100 
Fair value of vested restricted shares issued as retention bonuses   16,000,000    160    4,496    0    4,656 
Fair value of vested options issued as share-based compensation and director’s fees   0    0    14,228    0    14,228 
Net loss   0    0    0    (517,081)   (517,081)
BALANCE, MARCH 31, 2013   603,770,863   $6,038   $136,807,909   $(149,512,433)  $(12,698,486)

 

See accompanying notes to condensed consolidated financial statements

 

5
 

 

WORLD SURVEILLANCE GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   Three Months Ended March 31, 
   2013   2012 
         
OPERATING ACTIVITIES:          
Net loss  $(517,081)  $(1,391,897)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation expense   45,750    45,750 
Share-based compensation   21,284    605,470 
Fair value of vested options   0    107,695 
Loss on conversion of convertible debt   21,597    0 
Change in fair value of derivative liabilities   (300)   (50,733)
Loan interest capitalized to debt   105,230    104,660 
Amortized deferred financing costs   5,169    3,446 
Shares issued as inducement for loans   34,400    0 
Change in operating assets and liabilities:          
Accounts receivable   (339,174)   (72,923)
Inventories   34,640    4,500 
Prepaid expenses   7,194    (25,705)
Deposits   50,000    0 
Accounts payable   72,291    (8,269)
Other accrued liabilities   205,661    231,842 
Deferred revenues   (7,500)   27,174 
NET CASH USED IN OPERATING ACTIVITIES   (260,839)   (418,990)
INVESTING ACTIVITIES:          
Cash acquired in acquisition   158,350    0 
NET CASH PROVIDED BY INVESTING ACTIVITIES   158,350    0 
FINANCING ACTIVITIES:          
Proceeds from debenture, net of deferred financing costs   0    437,973 
Proceeds from notes payable   150,000    0 
Proceeds from sale of common stock   65,000    0 
NET CASH PROVIDED BY FINANCING ACTIVITIES   215,000    437,973 
NET INCREASE IN CASH AND EQUIVALENTS   112,511    18,983 
CASH AND EQUIVALENTS, BEGINNING OF PERIOD   49,343    5,532 
CASH AND EQUIVALENTS, END OF PERIOD  $161,854   $24,515 
           
SUPPLEMENTAL INFORMATION:          
Interest paid  $0   $0 
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES          
Common stock issued for services   75,000    124,979 
Common stock issued for settlement   99,000    0 
Commons stock issued for acquisition   672,500    0 
LTAS acquisition payable   250,000    0 

 

See accompanying notes to condensed consolidated financial statements

 

6
 

 

WORLD SURVEILLANCE GROUP INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

 

DESCRIPTION OF BUSINESS

 

World Surveillance Group Inc. (the “Company”) designs, develops, markets, and sells, 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.  The Company’s 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. The Company’s 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.  

 

The Company’s wholly owned subsidiary Global Telesat Corp. (GTC), provides 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.

 

The Company’s wholly owned subsidiary Lighter Than Air Systems Corp. (LTAS), provides 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 ISR systems. The LTAS systems have been proven to fulfill critical requirements of the military and law enforcement in the U.S. and internationally.

 

BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements include the accounts of World Surveillance Group Inc. and its subsidiaries (“WSGI” or the “Company”) and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and reports and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X for scaled disclosures for smaller reporting companies. Accordingly, they do not include all, or include a condensed version of, the information and footnotes required by U.S. GAAP for complete financial statements. The Company believes, however, that the disclosures are adequate to make the information presented not misleading.  Therefore, the Company’s condensed consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations of the Company for the periods shown. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year or for any future period.  The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements. Actual results may differ from management’s estimates.

 

The consolidated balance sheet information as of December 31, 2012 was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) for the fiscal year ended December 31, 2012. These interim condensed consolidated financial statements should be read in conjunction with the Company’s most recently audited financial statements and the notes thereto included in such above referenced Annual Report on Form 10-K.

 

RECLASSIFICATIONS

 

Certain 2012 amounts have been reclassified to conform to the 2013 presentation.

 

7
 

 

GOING CONCERN

 

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.

 

REVENUE RECOGNITION

 

The Company recognizes revenue when all four of the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred and title has transferred or services have been rendered; 3) our price to the buyer is fixed or determinable; and 4) collectability is reasonably assured.

 

INCOME TAXES

 

The Company accounts for income taxes using the asset and liability approach. Under this approach, deferred income taxes are recognized based on the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as measured by current enacted tax rates. Valuation allowances are recorded to reduce the deferred tax assets to an amount that will more likely than not be realized.

 

U.S. GAAP requires that, in applying the liability method, the financial statement effects of an uncertain tax position be recognized based on the outcome that is more likely than not to occur.  Under this criterion the most likely resolution of an uncertain tax position should be analyzed based on technical merits and on the outcome that will likely be sustained under examination. There were no adjustments related to uncertain tax positions recognized during the three months ended March 31, 2013 and 2012, respectively.

 

FAIR VALUE MEASUREMENTS

 

U.S. GAAP includes a framework for measuring fair value, which also addresses disclosure requirements for fair value measurements. Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value, in this context, should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.

 

Under the measurement framework, a fair valuation hierarchy for disclosure of the inputs to valuation used to measure fair value has been established. This hierarchy prioritizes the inputs into three broad levels that reflect the degree of subjectivity necessary to determine fair value measurements, as follows.  Level 1 inputs are based on unadjusted quoted prices in active markets for identical assets or liabilities.  Level 2 inputs are based on quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly, through market corroboration, for substantially the full term of the asset or liability.  Level 3 inputs are unobservable inputs and reflect the Company’s estimates of assumptions that market participants would use to measure assets and liabilities at fair value.  The fair values are therefore determined using model-based techniques that include option pricing models and discounted cash flow models. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

8
 

 

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s financial instruments include cash, accounts payable, notes payable and derivative instruments. The carrying values for the current financial assets and liabilities approximate fair value due to their short maturity. The fair values of the Company’s derivative instruments are recorded in the condensed consolidated balance sheets.

 

USE OF ESTIMATES

 

The process of preparing financial statements in conformity with U.S. GAAP requires the use of estimates, judgments and assumptions regarding certain types of assets, liabilities, revenues, and expenses. These estimates, judgments and assumptions are evaluated on an ongoing basis. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable 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. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from the Company’s estimated amounts.

 

BASIC AND DILUTED NET LOSS PER COMMON SHARE

 

Basic and diluted net loss per common share has been computed by dividing the net loss by the weighted average number of shares of common stock outstanding during each period. Whenever losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would result in a diluted loss per share less than the basic loss per share and therefore would be anti-dilutive. If all outstanding options, warrants and convertible shares were converted or exercised at March 31, 2013, the shares outstanding would be 709,736,169.

 

 PROPERTY AND EQUIPMENT

 

Property and equipment are carried at cost less accumulated depreciation.  Depreciation is based on the estimated service lives of the depreciable assets and is calculated using the straight-line method.  Expenditures that increase the value or productive capacity of assets are capitalized. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from service.  When property and equipment are retired, sold or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.  Repairs and maintenance are expensed as incurred.

 

The estimated useful lives of property and equipment are generally as follows:

 

Appliques   15 – 25 years 
Machinery and equipment   3 – 12 years 
Office furniture and fixtures   3 – 10 years 
Computer hardware and software   3 – 7 years 

 

Assets held for sale are separately presented on the balance sheet and are no longer depreciated.

 

LONG LIVED ASSETS

 

The Company evaluates the fair value of long-lived assets on an annual basis or whenever events or changes in circumstances indicate that its carrying amounts may not be recoverable. Accordingly, any impairment of value is recognized when the carrying amount of a long-lived asset exceeds its fair value. The Company’s evaluations have not indicated any impairment of fair values.

 

DERIVATIVE FINANCIAL INSTRUMENTS

 

Derivative liabilities primarily relate to warrants to purchase common stock of the Company issued in conjunction with certain debt and equity financings. Each reporting period the Company determines the fair value of the stock warrants using the Black-Scholes option pricing model at the balance sheet date. Changes in the fair value of the stock warrants are recognized each period in current earnings.

 

9
 

 

SHARE-BASED COMPENSATION

 

The Company offers share-based compensation programs to its officers, directors and employees that consist of employee stock options, common stock and restricted stock awards. Common stock and restricted stock awards are issued at the closing price of the Company’s common stock on the date of grant. The Company recognizes compensation expense ratably over the vesting periods for restricted stock awards using the grant date fair value of the stock awarded. The Black-Scholes option pricing model is used to value stock options, and compensation expense is recognized ratably over the requisite service period. Stock options typically have contractual terms of three to seven years.  Share-based compensation for employees and non-employees is reflected in the appropriate functional expense category, principally the general administrative and research and development categories, as appropriate. Share-based compensation incurred during the three months ended March 31, 2013 and 2012 was $21,284 and $726,885, respectively.

 

NOTE 2. ACQUISITIONS

 

On March 28, 2013, the Company consummated a Stock Purchase Agreement (the “Agreement”) by and among the Company, Lighter Than Air Systems Corp. (“LTAS”), Felicia Hess (the “Shareholder”) and Kevin Hess (“KHess”) pursuant to which the Company acquired 100% of the outstanding shares of capital stock of LTAS, thereby making LTAS a wholly-owned subsidiary of the Company.

 

The purchase price paid by the Company for LTAS consisted of $250,000 in cash payable on or before the date that is 30 days after the closing of the acquisition (the “Closing”), 25,000,000 shares of the Company’s common stock valued at the acquisition date based on the market price of $0.0269 per share, and an earn-out based on varying percentages of the gross revenues based on the level of revenue from contracts with an identified group of potential customers.  No value was ascribed to the earn-out because future revenues, if any, cannot be reliably predicted. Pursuant to the Agreement and an Escrow Agreement, 7,500,000 shares of common stock out of the 25,000,000 shares issued by the Company have been placed in escrow for one year to satisfy possible indemnification claims of the Company.  Felicia Hess, the President of LTAS, has entered into an employment agreement to continue in her role as President of LTAS. The Agreement also includes restrictions on the sale of the Company’s securities issued as the purchase price by the Shareholder for a one-year period following the Closing.

 

The Shareholder has the right pursuant to the Agreement to nominate one member of the Company’s Board of Directors, and as a result, the size of the Company’s Board of Directors has been increased and Felicia Hess has been appointed as a Class I director as of March 28, 2013. Since Ms. Hess would not be an “independent” director pursuant to the rules of the Securities and Exchange Commission, it is not expected that she will be appointed to any committees.

 

In connection with the Closing, LTAS, the Shareholder and the Company also entered into an Option Agreement dated March 28, 2013 pursuant to which the Shareholder was granted an exclusive option to purchase the shares of LTAS held by WSGI on the occurrence of (i) a WSGI bankruptcy event, or (ii) a decrease in the daily volume of WSGI’s common stock to below 50,000 shares for 30 consecutive days, occurring within 18 months of the Closing at a purchase price equal to the fair market value of the LTAS stock at the time of such triggering event, as determined by an independent valuation firm.

 

The common stock of the Company issued as purchase price pursuant to the Agreement was issued as restricted securities under an exemption provided by Section 4(2) of the Securities Act of 1933, as amended. The Agreement, however, provides the Shareholder with certain piggyback registration rights.

 

LTAS provides 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 ISR systems. The LTAS systems have been proven to fulfill critical requirements of the military and law enforcement in the U.S. and internationally.

 

The Company’s Condensed Consolidated Balance Sheet at March 31, 2013 includes the accounts of LTAS. The operating results of LTAS for the three days ended March 31, 2013 are reflected in the Company’s Condensed Consolidated Statements of Operations.

 

The following table summarizes the original allocation of the LTAS acquisition purchase price, which has been accounted at the fair values of the assets acquired and liabilities assumed under the acquisition method of accounting:

 

   Original
Allocation
 
Current assets  $703,220 
Property and equipment   1,357 
Goodwill   479,585 
Current liabilities assumed   (261,662)
Total Purchase Price  $922,500 

 

10
 

 

NOTE 3.  RELATED PARTY TRANSACTIONS

 

The accounts receivable from related party at March 31, 2013 includes trade receivables from Global Telesat Communications, Ltd. (“GTCL”) of $17,200. GTCL is a related party based in the United Kingdom and controlled by a current officer of GTC. Total sales to GTCL for the periods ended March 31, 2013 and 2012 were $127,524 and $124,236, respectively, and account for 28% and 85% of GTC’s total sales for the respective periods. GTC began charging a 10% handling fee on all orders from GTCL in 2012.

 

NOTE 4.  PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   March 31,
2013
(Unaudited)
   December 31,
2012
 
Appliques  $2,755,732   $2,755,732 
Office furniture and fixtures   8,261    6,904 
    2,763,993    2,762,636 
Less: accumulated depreciation   (355,420)   (309,670)
   $2,408,573   $2,452,966 

 

NOTE 5. OTHER ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following:

 

   March 31,
2013
(Unaudited)
   December 31,
2012
 
Payroll liabilities  $1,709,333   $1,494,883 
Professional fees   0    10,000 
Accrued legal claims payable   235,540    334,540 
Accrued cash true-up from conversion   191,328    176,831 
Accrued interest on debenture   21,575    18,243 
GTC acquisition payable   75,000    75,000 
LTAS acquisition payable   250,000    0 
Other   154,640    22,588 
OTHER ACCRUED LIABILITIES  $2,637,416   $2,132,085 

 

NOTE 6. NOTES PAYABLE

 

Notes payable consisted of the following:

 

   March 31,
2013
(Unaudited)
   December 31,
2012
 
Unsecured promissory notes  $6,147,030   $5,997,030 
Accrued interest   2,759,580    2,654,350 
NOTES PAYABLE  $8,906,610   $8,651,380 

 

11
 

 

As of March 31, 2013 and December 31, 2012, notes payable included two unsecured promissory notes aggregating $5,997,030 with no stated interest rate or terms of repayment.  The Company has accrued interest at 7% per annum on both notes since their inception and includes the notes in current liabilities.

 

On February 1, 2013, the Company issued a $100,000 75-day unsecured 10% promissory note to an individual investor for funds received. On March 18, 2013, the Company issued a $50,000 60-day unsecured 12% promissory note to the same investor for funds received. The Company issued 2 million common shares to the investor as an inducement for the loans.

 

NOTE 7.  DERIVATIVE LIABILITIES

 

The Company accounts for derivative instruments at fair value. Gains and losses from changes in the fair value of derivatives are recognized in interest expense. The Company’s derivative instruments consist of stock warrants that contained anti-dilution provisions that were issued with certain debt and equity financings.

 

Warrants

 

In the past, the Company entered into financing agreements for convertible promissory notes and stock purchase agreements, which included Class A and Class B warrants. Both Class A and Class B warrants contained anti-dilution rights and are considered to be derivative liabilities under U.S. GAAP. During 2010 and 2011, the Company entered into new stock purchase agreements and issued an aggregate of 9,677,167 warrants under the 2010 and 2011 stock purchase agreements. Warrants issued under the 2010 and 2011 stock purchase agreements have no anti-dilution rights and are not considered to be derivative liabilities. All warrants have 3-year terms and are exercisable for a purchase price of $0.21 per share or, in the case of Class B warrants, $0.315 per share.

 

The following table summarizes certain information about the Company’s warrants to purchase common stock.

 

   Derivative Liabilities       Weighted
Average
 
   Warrants   Warrants   Other   Exercise 
   Class A   Class B   Warrants   Price 
                 
Outstanding at December 31, 2012   8,327,462    8,327,462    20,033,021   $0.234 
Warrants Granted   0    0    243,095    0.210 
Warrants Expired   (932,867)   (932,867)   0    0.263 
Outstanding at March 31, 2013   7,394,595    7,394,595    20,276,116   $0.232 

 

The value of the derivative liabilities have been measured at fair value based on quoted market prices and management’s subjective estimated volatility factors. There were no changes in the valuation techniques during the three months ended March 31, 2013.

 

The fair value of derivative liabilities was determined using the Black-Scholes option pricing model with the following assumptions:

 

   March 31,   December 31, 
   2013   2012 
Warrants:          
Risk-free interest rate   0.11% - 0.14%    0.16%
Expected volatility   104%   124% - 130% 
Expected life (in years)   0.42 - 0.50    0.50 - 0.75 
Expected dividend yield   0    0 
Fair value of warrants outstanding  $63   $363 

 

The warrants outstanding and exercisable at March 31, 2012 and December 31, 2011 had no intrinsic value. All warrants were fully exercisable and there was no unamortized cost to be recognized in future periods.

 

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NOTE 8. CONVERTIBLE NOTES PAYABLE

 

   March 31,
2013
(Unaudited)
   December 31,
2012
 
Secured Convertible Note Payable, principal due 2/1/15, interest payable monthly at 4.75%  $282,000   $287,000 
CONVERTIBLE NOTES PAYABLE  $282,000   $287,000 

 

On February 2, 2012, the Company closed on a Securities Purchase Agreement with a California-based institutional investor (the “Investor”) for an aggregate of $5.5 million. The $500,000 initial tranche was funded at the closing in connection with a Convertible Debenture due in February 2015 and an Equity Investment Agreement (the “EIA”). The Debenture is convertible by the Investor into shares of common stock beginning on the earlier to occur of (i) the effectiveness of the Registration Statement, but in no event prior to ninety-one (91) days following the Closing Date, or (ii) one hundred eighty one (181) days following the Closing Date subject to the terms and conditions of the conversion feature contained in the Debenture agreement.

 

The Debenture grants the Investor with a right of first refusal on future financings of the Company subject to certain terms and conditions and contains acceleration provisions requiring 120% of the principal amount, accrued and unpaid interest, to become immediately due and payable on certain events of default described therein.

 

Pursuant to the EIA, the Investor agreed to invest an additional $5.0 million in monthly tranches beginning on the effectiveness of a registration statement the Company filed with the Securities and Exchange Commission, but not prior to 91 days following the closing. The Investor also has the right to purchase an additional $5.0 million of the Company’s common stock at an exercise price of $0.21 per share for a period of three years.

 

The Company incurred customary closing costs including attorney’s fees, commissions and closing costs of $62,027, which are recorded as deferred financing costs to be amortized as additional interest expense on a straight-line basis over the 3-year term of the related Debenture and EIA.

 

NOTE 9. LITIGATION AND CONTINGENCIES

 

In the ordinary conduct of business, the Company is subject to periodic lawsuits, investigations and litigation claims, which are accounted for where appropriate. Management cannot predict with certainty the ultimate resolution of such lawsuits, investigations and claims asserted against the Company.  As of March 31, 2013, we had the following material contingencies:

 

Brio Capital

 

Brio Capital, the holder of a warrant, filed an action against us on February 25, 2011 in the New York Supreme Court, County of New York, for the issuance of approximately 6.2 million shares of common stock upon the exercise of certain warrants. The Court granted a non-final Summary Judgment Order on a portion of the action in favor of Brio in December 2011 requiring the Company, among other things, to issue 6.2 million shares of common stock. The Company has issued the shares required by the Court order. We also entered into a settlement agreement to pay $57,661 in legal fees as required by the Court order, which has been satisfied. The Company reached a settlement with Brio resolving all remaining matters. Under the terms of the settlement, the Company is required to issue a number of shares of common stock in twelve (12) monthly installments equal to $31,250 divided by the average of the closing prices of our common stock for the last three (3) trading days of the month immediately preceding the month in which the shares are due to be issued. Pursuant to the Court’s Section 3(a) (10) approval, the shares of common stock issued to Brio shall be freely tradeable upon issuance. All shares issued are subject to a leak-out provision contained in the settlement agreement.

 

Tsunami Communications v. GlobeTel

 

On March 3, 2006, Civil Action File No. 06A-02368-5 was filed in Superior Court for Gwinnett County, Georgia by Tsunami Communications and several of its former shareholders. We asserted affirmative defenses and a trial was held in November 2009. By Order of the Court entered on September 2, 2010, an Order was entered against GlobeTel and several other co-defendants for the breach by Sanswire Technologies, Inc. (“ST”) (a then unrelated party) of its asset purchase agreement with the plaintiff Tsunami based on a deemed de facto merger resulting from a subsequent asset purchase agreement between ST and GlobeTel.  As damages, we were ordered to issue 530,015 shares of common stock to former shareholders of Tsunami and pay $229,180 to a former Tsunami shareholder with respect to two outstanding promissory notes. Subsequent to the Order, the plaintiffs filed a Motion for Reconsideration asking the Court to both reconsider its decision to deny several of the plaintiffs’ claims and to substantially increase the award of damages and a Claim for Attorney’s Fees, which has been denied by the Court. We have issued the share portion of the Order. We reached a settlement with the plaintiffs resolving the cash portion of the Order. Under the terms of the settlement, we issued 3.75 million shares of common stock and are required to pay them $60,000 over a twelve-month period.

 

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The DeCarlo Group

 

A lawsuit was filed by the DeCarlo Group on November 24, 2010 in Miami-Dade County Courthouse for over $400,000 claimed in connection with CFO and accounting services allegedly rendered to the Company.  It is our position that the Company was overcharged in connection with the services rendered and that no amounts are due. DeCarlo has once again found a new attorney to represent him in this matter. We have filed a motion for sanctions and to dismiss and strike on the pleadings and intend to otherwise defend ourselves vigorously in this matter, but the outcome of the action cannot be predicted.

 

Siefert

 

A lawsuit was filed by Thomas Seifert, a former officer and director of the Company, on April 9, 2012 in the Circuit Court of the 17th Judicial Circuit in Broward County for $548,000 and 7.0 million shares of common stock for alleged unpaid compensation. We reached a settlement with the plaintiff resolving this lawsuit, without admitting or denying the allegations. Under the terms of the settlement, we were required to issue him 6.0 million shares of common stock, which shares are subject to a fourteen-month leak-out, and pay him $50,000 over a twelve-month period.

 

IRS

 

During 2010 and 2009, we, under our former name Sanswire Corp., incurred and reported to the Internal Revenue Service (“IRS”) payroll tax liabilities (and deposited the appropriate withholding amounts) during the normal course of business at each payroll cycle.  The Company has reported its payroll tax liabilities for all the tax periods in 2007 and 2008, however, it failed to deposit the appropriate withholding amounts for those periods. We recognized this issue and, accordingly, contacted the IRS to make arrangements to pay any taxes due. One such matter has been resolved with the IRS, and we currently estimate the amount involved in the second matter to be approximately $200,000.  We may be subject to additional penalties and interest from the IRS in connection with these payroll tax matters.   We are engaged in discussions with the IRS to settle this matter and filed an Offer in Compromise with the IRS, which was not accepted. We are continuing to cooperate with the IRS to resolve this matter.

 

The Company provides indemnification, to the extent permitted by law, to its’ officers, directors, employees and agents for liabilities arising from certain events or occurrences while the officer, director, employee, or agent is or was serving at the Company’s request in such capacity.

 

NOTE 10. COMMON STOCK TRANSACTIONS

 

During the three month period ended March 31, 2013, the Company issued the following shares of Common Stock:

 

SHARES   CONSIDERATION  VALUATION 
 2,000,000   Shares issued as inducement for loans  $34,400 
 3,250,000   Shares issued for cash   65,000 
 6,000,000   Shares issued for legal settlements   99,000 
 3,750,000   Shares issued for services   75,000 
 25,000,000   Shares issued for LTAS acquisition   672,500 
 150,000   Shares issued for directors’ compensation   2,400 
 733,333   Shares issued for convertible debt conversion   12,100 
 16,000,000   Shares issued for retention bonuses   4,656 
 56,883,333      $965,056 

  

The valuation amounts of the above common stock transactions are based on the amounts reflected in common stock and related additional paid-in capital for each transaction.

 

NOTE 11. SHARE-BASED COMPENSATION

 

The Company issues stock-based compensation that consists of common stock, restricted stock and stock options to its directors, officers, employees and consultants. All common stock and restricted stock awards are subject to the securities law restrictions of Rule 144 as promulgated under the Securities Act of 1933, as amended, unless covered by a registration statement.

 

14
 

 

Common Stock

 

The Company recognizes the cost of the common stock issued to directors, officers, and employees as compensation expense at the closing market price on the grant date. All common stock awards are fully vested on the date of grant, therefore there is no unrecognized compensation expense associated with these awards. During the quarter ended March 31, 2013, the Company awarded 150,000 shares for $2,400 for quarterly directors’ fees.

 

Restricted Stock

 

Awards of restricted stock are independent of stock option grants and are generally subject to forfeiture if employment terminates prior to vesting. Prior to vesting, ownership of the restricted stock cannot be transferred. The restricted stock has the same voting rights as the common stock. The Company recognizes the grant date fair value of restricted stock awards ratably over the vesting period as compensation expense based upon the stock’s closing market price on the grant date. Performance-based restricted stock that vested during the three months ended March 31, 2013 totaled $4,656. During the first quarter of 2013, the Company awarded 16 million shares to certain officers and employees as retention bonuses, which cliff vests on February 6, 2014. There is approximately $369,215 in unrecognized compensation relating to unvested restricted stock at March 31, 2013.

 

Stock Options

 

The Company has issued stock options at exercise prices equal to the Company’s common stock market price on the date of grant with contractual terms of three to seven years. Historically, the stock options were fully vested and expensed as compensation on the grant date. During 2010, the Company began issuing stock options with vesting schedules and such stock options are generally subject to forfeiture if employment terminates prior to vesting. During the first quarter of 2013, the Company awarded 2 million options that cliff vest on February 6, 2014 in retention bonuses and issued 250,000 fully-vested options totaling $4,000 as directors’ fees. Vested options during the 3-month period totaled $10,228. At March 31, 2013, there is approximately $102,543 in unrecognized compensation expense relating to unvested stock options.

 

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options. The principal assumptions utilized in valuing stock options include the expected stock price volatility based on the most recent historical period equal to the expected life of the option; an estimate of the expected option life based upon historical experience; no expected dividend yield; and the risk-free interest rate based upon on the yields of Treasury constant maturities for the remaining term of the option.

 

The following table summarizes information about stock options outstanding and exercisable at March 31, 2013:

 

    Options Outstanding and Exercisable 
Exercise prices   Number
outstanding
   Weighted average
remaining
contractual
terms
(years)
   Weighted
Average
Exercise
price
 
$.015    9,350,000    6.51   $.015 
$.016    250,000    6.93    .016 
$.023    22,316,667    6.62    .023 
$.045    4,444,444    1.10    .045 
$.070    1,500,000    0.86    .070 
$.075    10,250,000    4.00    .075 
$.080    1,500,000    1.02    .080 
$.090    11,338,889    0.80    .090 
$.094    1,300,000    0.52    .094 
      62,250,000    4.32   $.074 

 

The aggregate intrinsic value of the options outstanding and exercisable at March 31, 2013 was $201,960; there were 31,916,667 options in-the-money. The aggregate intrinsic value for the options is the difference between the prices of the underlying awards and quoted price of the Company’s common stock for options in-the-money.

 

15
 

 

NOTE 12. INCOME TAXES

 

The Company has federal and state net operating loss (NOL) carryforwards, which can be used to offset future earnings. Accordingly, no provision for income taxes is recorded in the condensed consolidated financial statements. A deferred tax asset for the future benefits of net operating losses and other differences is offset by a 100% valuation allowance due to the uncertainty of the Company's ability to utilize the losses. These net operating losses begin to expire in the year 2021.

 

The Company operated in multiple tax jurisdictions within the United States of America.  Although management does not believe that the Company is currently under examination in any major tax jurisdiction in which it operates other than the issues with the IRS as described in Note 10, the Company remains subject to examination in all of those tax jurisdictions until the applicable statute of limitations expire.  As of March 31, 2013, a summary of the tax years that remain subject to examination in the Company’s major tax jurisdictions are: United States – Federal and State – 2005 and forward.  The Company does not expect to have a material change to unrecognized tax positions within the next twelve months.

 

NOTE 13. PER SHARE INFORMATION:

 

Basic earnings per share (“Basic EPS”) of common stock is computed by dividing the net income by the weighted-average number of shares of common stock outstanding.  Diluted earnings per share of common stock (“Diluted EPS”) is computed by dividing the net income by the weighted-average number of shares of common stock, and dilutive common stock equivalents and convertible securities then outstanding. U.S. GAAP requires the presentation of both Basic EPS and Diluted EPS on the face of the Company’s Condensed Consolidated Statements of Operations.  Common stock equivalents totaling 31,916,667 shares were excluded from the computation of Diluted EPS for the three months ended March 31, 2013, as their effect on the computation of Diluted EPS would have been anti-dilutive.

 

   Three Months Ended March 31, 
   2013   2012 
Numerator:          
Net income (loss)  $(517,081)  $(1,391,897)
Denominator:          
Weighted-average common shares outstanding   489,871,669    383,375,304 
Dilutive effect of stock warrants and stock options   0    0 
Weighted-average common shares outstanding, assuming dilution   489,871,669    383,375,304 
           
Net loss per share:          
Basic and diluted  $(0.00)  $(0.00)

 

NOTE 14. SUBSEQUENT EVENTS

 

There were no subsequent events from the balance sheet date requiring disclosure.

 

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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 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.

 

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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.

 

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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, 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.

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.  Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.  Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2013.  Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2013, the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the first quarter of 2013, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

In the ordinary conduct of business, we are subject to periodic lawsuits, investigations and litigation claims, which we account for where appropriate. We cannot predict with certainty the ultimate resolution of such lawsuits, investigations and claims asserted against us.  As of March 31, 2013, we had the following material contingencies:

 

Brio Capital

 

Brio Capital, the holder of a warrant, filed an action against us on February 25, 2011 in the New York Supreme Court, County of New York, for the issuance of approximately 6.2 million shares of common stock upon the exercise of certain warrants. The Court granted a non-final Summary Judgment Order on a portion of the action in favor of Brio in December 2011 requiring the Company, among other things, to issue 6.2 million shares of common stock. The Company has issued the shares required by the Court order. We also entered into a settlement agreement to pay $57,661 in legal fees as required by the Court order, which has been satisfied. We reached a settlement with Brio resolving all remaining matters. Under the terms of the settlement, we are required to issue a number of shares of common stock in twelve (12) monthly installments equal to $31,250 divided by the average of the closing prices of our common stock for the last three (3) trading days of the month immediately preceding the month in which the shares are due to be issued. Pursuant to the Court’s Section 3(a) (10) approval, the shares of common stock issued to Brio shall be freely tradeable upon issuance. All shares issued are subject to a leak-out provision contained in the settlement agreement.

 

Tsunami Communications v. GlobeTel

 

On March 3, 2006, Civil Action File No. 06A-02368-5 was filed in Superior Court for Gwinnett County, Georgia by Tsunami Communications and several of its former shareholders. We asserted affirmative defenses and a trial was held in November 2009. By Order of the Court entered on September 2, 2010, an Order was entered against GlobeTel and several other co-defendants for the breach by Sanswire Technologies, Inc. (“ST”) (a then unrelated party) of its asset purchase agreement with the plaintiff Tsunami based on a deemed de facto merger resulting from a subsequent asset purchase agreement between ST and GlobeTel.  As damages, we were ordered to issue 530,015 shares of common stock to former shareholders of Tsunami and pay $229,180 to a former Tsunami shareholder with respect to two outstanding promissory notes. Subsequent to the Order, the plaintiffs filed a Motion for Reconsideration asking the Court to both reconsider its decision to deny several of the plaintiffs’ claims and to substantially increase the award of damages and a Claim for Attorney’s Fees, which has been denied by the Court. We have issued the share portion of the Order. We reached a settlement with the plaintiffs resolving the cash portion of the Order. Under the terms of the settlement, we issued 3.75 million shares of common stock and are required to pay them $60,000 over a twelve-month period.

 

The DeCarlo Group

 

A lawsuit was filed by the DeCarlo Group on November 24, 2010 in Miami-Dade County Courthouse for over $400,000 claimed in connection with CFO and accounting services allegedly rendered to the Company.  It is our position that the Company was overcharged in connection with the services rendered and that no amounts are due. DeCarlo has once again found a new attorney to represent him in this matter. We have filed a motion for sanctions and to dismiss and strike on the pleadings and intend to otherwise defend ourselves vigorously in this matter, but the outcome of the action cannot be predicted.

 

Siefert

 

A lawsuit was filed by Thomas Seifert, a former officer and director of the Company, on April 9, 2012 in the Circuit Court of the 17th Judicial Circuit in Broward County for $548,000 and 7.0 million shares of common stock for alleged unpaid compensation. We reached a settlement with the plaintiff resolving this lawsuit, without admitting or denying the allegations. Under the terms of the settlement, we were required to issue him 6.0 million shares of common stock, which shares are subject to a fourteen month leak-out, and pay him $50,000 over a twelve-month period.

 

IRS

 

During 2010 and 2009, we, under our former name Sanswire Corp., incurred and reported to the Internal Revenue Service (“IRS”) payroll tax liabilities (and deposited the appropriate withholding amounts) during the normal course of business at each payroll cycle.  The Company has reported its payroll tax liabilities for all the tax periods in 2007 and 2008, however, it failed to deposit the appropriate withholding amounts for those periods We recognized this issue and, accordingly, contacted the IRS to make arrangements to pay any taxes due. One such matter has been resolved with the IRS, and we currently estimate the amount involved in the second matter to be approximately $200,000.  We may be subject to additional penalties and interest from the IRS in connection with these payroll tax matters.   We are engaged in discussions with the IRS to settle this matter and filed an Offer in Compromise with the IRS, which was not accepted. We are continuing to cooperate with the IRS to resolve this matter.

 

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The Company provides indemnification, to the extent permitted by law, to its’ officers, directors, employees and agents for liabilities arising from certain events or occurrences while the officer, director, employee, or agent is or was serving at the Company’s request in such capacity.

 

Item 1A.  Risk Factors

 

Investing in or purchasing shares of our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase or invest in shares of our common stock. If any of the following risks are realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the price of our common stock would likely decline, and you could lose part or all of your investment in our common stock.

 

Risks Related to Our Business and Industry

 

We need to raise a significant amount of additional capital to continue our operations which capital may be costly and difficult to obtain, and if we are unable to raise additional capital, we would likely have to delay, curtail, scale back or terminate some or all of our operations, prematurely sell some or all of our assets, merge with or be acquired by another company, or possibly shut down our operations.

 

We need to raise significant additional capital in order to meet our cash requirements to fully implement our business plan and continue our operations during the next twelve months.  At March 31, 2013, we had $161,854 in cash and cash equivalents and negative working capital of $15,342,549, and for the three months ended March 31, 2013, we had a net loss of $517,081.  We expect to use the funds raised, if any, to expand and accelerate our research and development efforts, increase our manufacturing facilities, acquire complimentary technology, companies or personnel, hire additional sales and other personnel, implement additional corporate governance measures, attract independent board members and for other operating activities.  We will, as we deem necessary and prudent, continue to seek to raise additional capital through various financing alternatives, including the private or public sale of equity or debt securities, bank financing or corporate partnering arrangements.   Other than our agreement with La Jolla Cove Investors, funding under which has been and may continue to be negatively impacted by our stock price, we do not have any firm commitments for additional capital from third parties or from our officers, directors or shareholders.  Although our officers and directors or their affiliates have in the past provided us with or helped us obtain capital, they are not legally bound to do so.  We may not be able to raise additional capital on terms acceptable to us or at all.   In order to attract new investors and raise additional capital, we may be forced to provide rights and preferences to new investors that are not available to current stockholders and that may be adverse to existing investors.  If we do not receive adequate additional financing on terms satisfactory to us on a timely basis, or at all, we would not be able to meet our cash payment obligations or fully implement our business plan.  We would likely also have to delay, curtail, scale back or terminate some or all of our operations that could hurt our future performance, prematurely sell some or all of our assets on undesirable terms, merge with or be acquired by another company on unsatisfactory terms, or possibly shut down our operations.

 

We have a history of operating losses that we anticipate will continue for the foreseeable future.

 

We have a history of losses from operations and we anticipate that for the foreseeable future, we will continue to experience losses from operations.  Those losses have resulted principally from costs incurred in our research and development efforts, and from general and administrative costs associated with our business.  We had a net loss from operations of $345,718 for the three months ended March 31, 2013, $4,541,587 during 2012, and $4,339,911 during 2011.  Our accumulated deficit at March 31, 2013 was $149,512,433.  We expect to continue to incur net losses from operations for the next several quarters if not for all of 2013 as we continue to develop and seek to commercialize our products.

 

We have incurred substantial indebtedness and may be unable to service our debt.

 

Our indebtedness at March 31, 2013 was $16,591,883.  A portion of such indebtedness reflects judicial judgments against us that could result in liens being placed on our bank accounts or assets.   We are continuing to review our ability to reduce this debt level due to the age and/or settlement of certain payables but we may not be able to do so.  This level of indebtedness could, among other things:

  · make it difficult for us to make payments on this debt and other obligations;
  · make it difficult for us to obtain future financing;
  · require us to redirect significant amounts of cash from operations to servicing the debt;
  · require us to take measures such as the reduction in scale of our operations that might hurt our future performance in order to satisfy our debt obligations; and
  · make us more vulnerable to bankruptcy or an unwanted acquisition on terms unsatisfactory to us.

 

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Our independent auditors have issued a report stating that there is substantial doubt relating to our ability to continue as a going concern, which may impair our ability to raise additional financing.

 

The report of our independent auditors contained in our consolidated financial statements for the years ended December 31, 2012 and 2011 explains that we have incurred substantial operating losses and raises substantial doubt about our ability to continue as a going concern. Analysts and investors view reports of independent auditors questioning a company’s ability to continue as a going concern unfavorably. This report may make it difficult for us to raise additional debt or equity financing necessary to continue our business operations and the development of our airships. Potential investors should review this report before making a decision to invest in the Company.

 

We may pursue strategic transactions in the future, which could be difficult to implement, disrupt our business or change our business profile significantly.

 

We will continue to consider potential strategic transactions, which could involve acquisitions or dispositions of businesses or assets, joint ventures or investments in businesses, products or technologies that expand, complement or otherwise relate to our current or future business. We may also consider, from time to time, opportunities to engage in joint ventures or other business collaborations with third parties to address particular market segments. These activities create risks such as among others: (i) the need to integrate and manage the businesses and products acquired with our own business and products, (ii) additional demands on our resources, systems, procedures and controls, (iii) disruption of our ongoing business, and (iv) diversion of management’s attention from other business concerns. Moreover, these transactions could involve: (a) substantial investment of funds or financings by issuance of debt or equity securities; (b) substantial investment with respect to technology transfers and operational integration; and (c) the acquisition or disposition of product lines or businesses. Also, such activities could result in one-time charges and expenses and have the potential to either dilute the interests of existing shareholders or result in the issuance of, or assumption of debt. Such acquisitions, investments, joint ventures or other business collaborations may involve significant commitments of financial and other resources of our company. Any such activity may not be successful in generating revenue, income or other returns to us, and the resources committed to such activities will not be available to us for other purposes. Moreover, if we are unable to access capital markets on acceptable terms or at all, we may not be able to consummate acquisitions, or may have to do so on the basis of a less than optimal capital structure. Our inability: (i) to take advantage of growth opportunities for our business or for our products, or (ii) to address risks associated with acquisitions or investments in businesses, may negatively affect our operating results. Additionally, any impairment of goodwill or other intangible assets acquired in an acquisition or in an investment, or charges to earnings associated with any acquisition or investment activity, may materially reduce our earnings.   These future acquisitions or joint ventures may not result in their anticipated benefits and we may not be able to properly integrate acquired products, technologies or businesses, with our existing products and operations or combine personnel and cultures.  Failure to do so could deprive us of the intended benefits of those acquisitions.

 

Product development is a long, expensive and uncertain process.

 

The development of LTA aerostats, UAS and mast-based ISR systems is a costly, complex and time-consuming process, and the investment in product development often involves a long wait until a return, if any, is achieved on such investment.  We make and will continue to make significant investments in research and development relating to our aerostats, airships, mast-based ISR systems and our other businesses.  Investments in new technology and processes are inherently speculative. We have experienced numerous setbacks and delays in our research and development efforts and may encounter further obstacles in the course of the development of additional technologies and products.  We may not be able to overcome these obstacles or may have to expend significant additional funds and time. Technical obstacles and challenges we encounter in our research and development process may result in delays in or abandonment of product commercialization, may substantially increase the costs of development, and may negatively affect our results of operations.

 

Successful technical development of our products does not guarantee successful commercialization.

 

We may successfully complete the technical development for one or all of our product development programs, but still fail to develop a commercially successful product for a number of reasons, including among others the following:

 

  · failure to obtain the required regulatory approvals for their use;
  · prohibitive production costs;
  · competing products;
  · lack of innovation of the product;
  · ineffective distribution and marketing;
  · lack of sufficient cooperation from our partners; and
  · demonstrations of the products not aligning with or meeting customer needs.

 

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Although we have sold a set of our BiB aerostat systems and various mast-based ISR systems, we have not yet sold any of our Argus One airships in the commercial marketplace. Our success in the market for the products we develop will depend largely on our ability to prove our products’ capabilities.  Upon demonstration, our aerostats, airships and mast-based ISR systems may not have the capabilities they were designed to have or that we believed they would have.  Furthermore, even if we do successfully demonstrate our products’ capabilities, potential customers may be more comfortable doing business with a larger, more established, more proven company than us. Moreover, competing products may prevent us from gaining wide market acceptance of our products.  Significant revenue from new product investments may not be achieved for a number of years, if at all.

 

GTC has developed various custom designed commercial simplex satellite tracking devices that are capable of transmitting locational and other information from any location within the Globalstar satellite network. These devices were previously exclusively used by U.S. government customers and thus have satisfied stringent operational requirements for years. Users of these tracking products will be able to access their accounts online and view near-live location and status transmissions using GTC’s proprietary mapping web interface. Although GTC can sell to U.S. government customers without the need for any form of certification, GTC can not sell such tracking devices commercially without certification from Globalstar and the Federal Communications Commission for use in the U.S. and from comparable entities globally, like CE Mark. GTC has begun the process to apply for certification to sell these devices both in the U.S. and globally and GTC plans to have a worldwide target customer base with no cost basis on the monthly service plans sold with each device. Although, GTC believes the likelihood of obtaining these certifications is reasonably high due to its experience in producing these tracking devices for government customers combined with its knowledge and experience of the Globalstar network and their certification requirements, there is no guarantee that GTC will be, however, able to certify its tracking devices.  Moreover, in the past, the Company has dealt specifically with U.S. government customers but is now also focused on expanding this customer base and making maximum use of the free accounts to generate increased revenue.  We cannot assure you, however, that GTC will be successful doing so.

 

Our potential customers are likely to be government or government-related entities that are subject to appropriations by Congress and reduced funding for defense procurement and research and development programs would likely adversely impact our ability to generate revenues.

 

We anticipate that the majority of our revenue (for our aerostats, airships and GTC products other than various mast-based ISR systems and website and GTCTrack portal sales) at least in the foreseeable future will come from U.S. government and government-related entities, including both the Department of Defense and other departments and agencies.  Government programs that we may seek to participate in and contracts for aerostats, LTA UAS or the construction of satellite ground stations must compete with other programs for consideration during Congress’ budget and appropriations hearings, and may be affected by changes not only in political power and appointments but also general economic conditions and other factors beyond our control.  Reductions, extensions or terminations in a program that we are seeking to participate in or overall defense or other spending could adversely affect our ability to generate revenues and realize any profits.  We cannot predict whether potential changes in security, defense, communications and intelligence priorities will afford opportunities for our business in terms of research and development or product contracts, but any reduction in government spending on such programs could negatively impact our ability to generate revenues.

 

We may not qualify as a U.S. government contractor, and if we do, we will be subject to a number of procurement rules and regulations.

 

We have not yet attempted to register as a contractor with the U.S. Government (although our subsidiaries GTC and LTAS have done so and have done business with various departments of the Government) and if we apply and fail to so qualify, our ability to generate revenues could be severely affected.   As the parent company of GTC and LTAS, we are not, however, required to be qualified as a government contractor in order for GTC or LTAS to qualify for new government contracts. If we do so qualify, to do business with the U.S. government, we will be required to comply with and will be affected by laws and regulations relating to the award, administration and performance of U.S. contracts, as is GTC and LTAS.  Government contract laws and regulations affect how we will do business with our customers, and in some instances, will impose added costs on our business.  A violation of specific laws and regulations could result in the imposition of fines and penalties, the termination of any then existing contracts, or the inability to bid on future contracts.

 

Some of our products are subject to significant governmental regulation including FAA regulations that currently prohibit us from performing any untethered flight testing of our UAS in commercial airspace until we receive a clearance certification from the FAA or a FAA Certificate of Waiver or Authorization which are difficult and time-consuming to obtain, and such regulations could significantly increase our research and development costs and could limit our ability to generate revenues.

 

Some of our products are subject to regulation by the FAA, which currently does not allow any untethered flights by UAS in commercial airspace in the U.S. without prior FAA clearance certifications or a FAA Certificate of Waiver or Authorization (COA) that are difficult and time-consuming to obtain. Federal, state and local government entities must obtain an FAA COA before flying UAS in the Nation Air Space (NAS). In light of the recent law enacted regarding UAS, the status of regulations regarding the testing, operations and safety of UAS is in flux. Depending on the ultimate rules adopted by the FAA, the cost to test and fly our products and our ability to generate revenues may be significantly adversely affected.  International sales of our products may also be subject to U.S. laws, regulations and policies like the International Traffic in Arms Regulations (ITAR) and other export laws and regulations and may be subject to first obtaining licenses, clearances or authorizations from various regulatory entities.   If we are not allowed to export our products or the clearance process is burdensome, our ability to generate revenue would be adversely affected.  The failure to comply with any of these regulations could adversely affect our ability to conduct our business and generate revenues as well as increasing our operating costs.

 

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We compete with companies that have significantly more resources than us and already have received government contracts for the development of Aerostats and UAS.

 

A number of our competitors have received considerable funding from government or government-related sources to develop and build a mid- or high-altitude UAS and various aerostats.  Most of these organizations and many of our other competitors have greater financial, technical, manufacturing, marketing and sales resources and capabilities than we do.  Our products will compete both with not only other LTA tethered aerostats and UAS, but also with heavier-than-air fixed wing aircraft, manned aircraft, communications satellites and balloons.  We anticipate increasing competition as a result of defense industry consolidation, which has enabled companies to enhance their competitive position and ability to compete against us.  In addition, other companies may introduce competing aerostats, airships or solutions based on alternative technologies that may adversely affect our competitive position.  As a result, our products may become less or non-competitive or obsolete.  If we are not able to compete successfully against our current and future competitors, we may fail to generate revenues and our financial condition would be adversely affected.

 

We are subject to a number of lawsuits that could result in material judgments against us.

 

We are defendants in a number of litigation matters and are subject to various other claims and demands mostly related to the operation of the Company’s business by prior management.   These matters are likely to divert financial and management resources that would otherwise be used to benefit our operations.  We intend to aggressively defend ourselves in these proceedings but no assurances can be given that the results of these matters will be favorable to us. An adverse resolution or outcome of any of these lawsuits, claims or demands that cannot be predicted with certainty or potential settlements of such matters could adversely affect our business and financial condition, or could result in us having to issue freely tradable shares which could hurt our share price.  Any claims and litigation, even if fully reserved or insured for, could negatively impact our reputation among our customers and the public and make it more difficult for us to raise capital, secure contracts or to compete effectively.

 

If we fail to protect our intellectual property rights, we could lose our ability to compete in the marketplace.

 

Our intellectual property and proprietary rights are important to our performance, our ability to remain competitive and for the success of our products and our business. Patent protection can be limited and not all intellectual property is or can be patented. We rely on a combination of patent, trademark, copyright, and trade secret laws as well as confidentiality agreements and procedures, non-compete agreements and other contractual provisions to protect our intellectual property, other proprietary rights and our brand.  We have little protection when we must rely on trade secrets and nondisclosure agreements.  We filed a provisional patent application on our Argus One airship in February 2011. In February 2012 we filed both a U.S. utility patent application and a patent application under the Patent Cooperation Treaty for an airship design and method of controlling the airship based on our Argus One UAS. We also filed a provisional patent in August 2012 for the apparatus and method for transporting and deploying an aerostat. In May 2012, we filed a provisional patent and in May 2013, we filed a U.S. utility patent application for a self-powered releasable aerostat and for a method for releasing and controlling the aerostat. There is no assurance that a patent will issue from such applications. We intend to continue to expand the patent protection for our aerostats, airships and other products as we deem appropriate, but there can be no assurance that we will be able to secure any such patent protection.  Our intellectual property rights may be challenged, invalidated or circumvented by third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees or competitors. Furthermore, our competitors may independently develop technologies and products that are substantially equivalent or superior to our technologies and/or products, which could result in decreased revenues.  Moreover, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Litigation may be necessary to enforce our intellectual property rights which could result in substantial costs to us and substantial diversion of management attention. If we do not adequately protect our intellectual property, our competitors could use it to enhance their products.  Our inability to adequately protect our intellectual property rights could adversely affect our business and financial condition, and the value of our brand and other intangible assets.

 

Other companies may claim that we infringe their intellectual property, which could materially increase our costs and harm our ability to generate future revenue and profit.

 

We do not believe our aerostat or airship technologies infringe the proprietary rights of any third party, but claims of infringement are becoming increasingly common and third parties may assert infringement claims against us.  It may be difficult or impossible to identify, prior to receipt of notice from a third party, the trade secrets, patent position or other intellectual property rights of a third party, either in the United States or in foreign jurisdictions. Any such assertion may result in litigation or may require us to obtain a license for the intellectual property rights of third parties.  If we are required to obtain licenses to use any third party technology, we would have to pay royalties, which may significantly reduce any profit on our products.  In addition, any such litigation could be expensive and disruptive to our ability to generate revenue or enter into new market opportunities.  If any of our products were found to infringe other parties’ proprietary rights and we are unable to come to terms regarding a license with such parties, we may be forced to modify our products to make them non-infringing or to cease production of such products altogether.

 

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The nature of our business involves significant risks and uncertainties that may not be covered by insurance or indemnity.

 

We develop and sell products where insurance or indemnification may not be available, including:

 

  · Designing and developing products using advanced and unproven technologies and aerostats and airships in intelligence and homeland security applications that are intended to operate in high demand, high risk situations; and
  · Designing and developing products to collect, distribute and analyze various types of information.

 

Failure of certain of our products could result in loss of life or property damage.  Certain products may raise questions with respect to issues of civil liberties, intellectual property, trespass, conversion and similar concepts, which may raise new legal issues.  Indemnification to cover potential claims or liabilities resulting from a failure of technologies developed or deployed may be available in certain circumstances but not in others.  We are not able to maintain insurance to protect against all operational risks and uncertainties.   Substantial claims resulting from an accident, failure of our product, or liability arising from our products in excess of any indemnity or insurance coverage (or for which indemnity or insurance is not available or was not obtained) could harm our financial condition, cash flows, and operating results.  Any accident, even if fully covered or insured, could negatively affect our reputation among our customers and the public, and make it more difficult for us to compete effectively.

 

If we are unable to recruit and retain key management, technical and sales personnel, our business would be negatively affected.

 

 For our business to be successful, we need to attract and retain highly qualified technical, management and sales personnel.  As of March 31, 2013 we together with our subsidiaries employed seven employees and, prior to our acquisition of LTAS, we relied heavily on outside partners and contractors.  The failure to recruit additional key personnel when needed with specific qualifications and on acceptable terms might impede our ability to continue to develop, commercialize and sell our products.  To the extent the demand for skilled personnel exceeds supply, we could experience higher labor, recruiting and training costs in order to attract and retain such employees.  The loss of any members of our management team may also delay or impair achievement of our business objectives and result in business disruptions due to the time needed for their replacements to be recruited and become familiar with our business.  We face competition for qualified personnel from other companies with significantly more resources available to them and thus may not be able to attract the level of personnel needed for our business to succeed.

 

The control deficiencies in our internal control over financial reporting may until remedied cause errors in our financial statements or cause our filings with the SEC to not be timely.

 

We have identified control deficiencies in our internal control over financial reporting as of the evaluation done by management as of March 31, 2013, including those related to (i) an ineffective global control environment such that control deficiencies in various other components of internal control could lead the auditor to conclude that a significant deficiency or material weakness exists in the control environment, (ii) absent or inadequate segregation of duties within a significant account or process, (iii) inadequate documentation of the components of internal control, and (iv) inadequate design of information technology general and application controls that prevent the information system from providing complete and accurate information consistent with financial reporting objectives and current needs.  If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement or our filings may not be timely made with the SEC. Based on the work undertaken and performed by us, however, we believe the consolidated financial statements contained in our reports filed with the SEC are fairly stated in all material respects in accordance with GAAP for each of the periods presented.  We intend to implement additional corporate governance and control measures to strengthen our control environment as we are able, but we may not achieve our desired objectives. Moreover, no control environment, no matter how well designed and operated, can prevent or detect all errors or fraud.  We may identify material weaknesses and control deficiencies in our internal control over financial reporting in the future that may require remediation and could lead investors losing confidence in our reported financial information, which could lead to a decline in our stock price.

 

Risks Related To Ownership of Our Common Stock

 

Market volatility and fluctuations in our stock price and trading volume may cause sudden decreases in the value of an investment in our common stock.

 

The market for our common stock is illiquid and subject to wide fluctuations in response to a number of factors, including, but not limited to:

 

·limited numbers of buyers and sellers in the market;
·investors wanting to place large sale or buy orders in a particular day;

 

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·actual  or  anticipated  variations  in  our  results  of  operations;
·our ability or inability to generate new revenues;
·the development of our products; and
·increased competition or technological innovations or new products by competitors.

 

The market price of our common stock has historically been, and we expect it to continue to be, volatile.  The price of our common stock has ranged from between $0.01 to $0.32 since January 1, 2010.  In addition to the extremely volatile nature of the stock market, our stock price has been affected by our own public announcements regarding such things as financings and product development.  Furthermore, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance which include among others individual stockholder market transactions, stock market fluctuations, general economic, political and overall global market conditions, such as recessions, interest rates or international currency fluctuations, in addition to market conditions in our industry. Consequently, events both within and beyond our control may adversely affect the market price and liquidity of our common stock.

 

Sales of substantial amounts of our common stock in the public market could harm the market price of our common stock.

 

The sale of a substantial number of shares of our common stock by stockholders could adversely affect the market price of our shares.  As of March 21, 2013, we had 695 registered stockholders and many more beneficial holders, many of whom have held their shares for the required holding periods under Rule 144 promulgated pursuant to the Securities Act and thus would hold freely tradable shares.  The shares issued pursuant to conversions under our convertible debenture are freely tradable; 50 million shares were registered with the SEC and any additional shares will be freely tradable pursuant to Rule 144 promulgated pursuant to the Securities Act, and such selling stockholder is not subject to a lock-up agreement. The 22,588,332 shares of common stock issued to the selling stockholders in the private placements in May 2011, which were registered with the SEC, are also freely tradable and such selling stockholders are not subject to lock-up agreements. If such shares are sold, or if it is perceived they will be sold, the trading price of our common stock could decline. Because investors may be more reluctant to purchase shares of our common stock following substantial sales or issuances, the resale of these shares of common stock could impair our ability to raise capital in the near term.

 

There are a large number of shares underlying our convertible debenture and equity investment agreement and issuance of shares upon conversion of the convertible debenture and exercise of the rights in the equity investment agreement may cause immediate and substantial dilution to our existing stockholders.

 

There are a large number of shares that may be issued pursuant to our convertible debenture and equity investment agreement. The issuance of shares upon conversion of the convertible debenture and purchase of shares under the equity investment agreement may result in substantial dilution to the interests of other stockholders since the selling stockholder may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholder may not convert its convertible debenture if such conversion would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholder from converting some of their holdings and then converting the rest of their holdings. In this way, the selling stockholder could sell more than this limit while never holding more than this limit.

 

If we are required for any reason to repay our outstanding convertible debenture, we would be required to deplete our working capital, if available, or raise additional funds.  Our failure to repay the convertible debenture, if required, could result in legal action against us, which could require the sale of substantial assets or the curtailment of some or all of our operations.

 

In February 2012, we issued a convertible debenture that is due and payable, with 4 3/4% interest, three years from the date of issuance, unless sooner converted into shares of our common stock.  In addition, any event of default could require the early repayment of the convertible debenture at a price equal to 110% of the amount due under the debenture.  We anticipate that the full amount of the convertible debenture, together with accrued interest, will be converted into shares of our common stock, in accordance with the terms of the convertible debenture. If we were required to repay the convertible debenture for any reason, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the debenture, the debenture holder could commence legal action against us and foreclose on our assets to recover the amounts due. Any such action would likely require us to curtail some or all of our operations.

 

Future equity or convertible debenture financings will result in additional dilution of the ownership interest of our existing investors and may have an adverse impact on the price of our common stock.

 

We expect that we will need to raise additional capital in the future to continue our operations.  Historically the primary source of the additional capital we have raised has been equity and convertible debentures, and we expect that equity-related instruments will continue to be a source of additional capital. Any future equity or convertible debenture financings will dilute the ownership interest of our existing investors and may have an adverse impact on the price of our common stock.

 

27
 

 

In addition, the terms of various securities we have issued provide for anti-dilution adjustments to their exercise or conversion price in certain circumstances. Any dilutive issuances could trigger certain of these anti-dilution provisions that could negatively impact the price of our common stock.

 

We have authorized preferred stock that can be designated by our board of directors without shareholder approval.

 

We have authorized 10,000,000 shares of preferred stock.  The shares of preferred stock may be issued from time to time in one or more series, each of which shall have distinctive designation or title as shall be determined by our board of directors prior to the issuance of any shares thereof. The preferred stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as adopted by our board of directors. Because our board of directors is able to designate the powers and preferences of the preferred stock without the vote of the holders of our common stock, the holders of our common stock will have no control over what designations and preferences our preferred stock will have. As a result of this, our board of directors could designate one or more series of preferred stock with superior rights to the rights of the holders of our common stock.

 

Provisions in our charter documents and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our common stock and could entrench management.

 

Our restated certificate of incorporation and bylaws contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include:

 

  the ability of the board of directors to designate the terms of, and to issue new, series of preferred stock;
  advance notice requirements for nominations for election to the board of directors;
  the ability of the board of directors to fix the number of directors and fill any vacancies or newly created directorships;
  a classified board of directors;
  Limitations on the removal of directors;
  limitations on stockholders’ ability to call a special meeting of stockholders; and
  special voting requirements for the amendment of certain provisions of our bylaws.

 

We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together, certain provisions of our certificate of incorporation and bylaws, and certain provisions of Delaware law, may singularly and/or collectively make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

 

Since we have not paid dividends on our common stock, you may not receive income from your investment.

 

We have not paid dividends on our common stock and do not contemplate or anticipate paying any dividends on our common stock in the foreseeable future.  Earnings, if any, will be used to finance the development and expansion of our business.

 

Investors may face significant restrictions on the resale of our common stock due to federal regulations of penny stock.

 

Our common stock is subject to the requirements of Rule 15g-9, promulgated under the Exchange Act, as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the SEC defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. In addition, various state securities laws impose restrictions on transferring penny stocks.  Furthermore, certain brokers or on-line trading houses may not accept our common stock for brokerage accounts at their firms. Such requirements could severely limit the market liquidity of our securities and the ability of purchasers to sell our securities in the secondary market.  

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended March 31, 2013, we issued an aggregate of 56,883,333 shares of Common Stock for the acquisition of LTAS, conversion of debt (including the La Jolla Debenture), legal settlements, director fees, share-based compensation and for services rendered to us from consultants and partners. Of the aggregate shares issued, 16,150,000 shares, or 28% were issued to insiders and affiliates, as restricted securities under an exemption provided by Section 4(2) of the Securities Act of 1933 and/or Regulation D, Rule 506, promulgated under the Securities Act of 1933. Common Stock issuances (other than the shares issued to La Jolla pursuant to the Debenture, which were valued as set forth below) were valued at prices based on the closing market prices on the date the Board of Directors authorized the issuances.

 

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On February 2, 2012 (the “Closing Date”), we closed on a Securities Purchase Agreement (the “Agreement”) with an institutional investor relating to an aggregate $5.5 million financing, the initial investment of $500,000 of which was paid at closing, for the issuance by the Company of a 4 ¾% Secured Convertible Debenture (the “Debenture”) and an Equity Investment Agreement (the “EIA”) subject to the terms and conditions set forth therein (the “Financing”). Pursuant to the EIA, the investor has agreed to invest in the Company an aggregate of $5.0 million in minimum monthly tranches of $250,000 beginning on the date that is earlier to occur of (i) the effectiveness of the Registration Statement but in no event prior to 91 days after the Closing Date, or (ii) one hundred eighty (180) days following the Closing Date and on each successive thirty (30) day anniversary of such initial investment date; provided, however, that such minimum investment shall increase from $250,000 to $500,000 as long as the VWAP of the Company’s common stock, par value $0.00001 per share (the “Common Stock”) is above $0.09 for the period of ten (10) consecutive Trading Days prior to an investment date; and provided, further, however, that the investor shall invest an additional $500,000 on each investment date for each and every increase in the VWAP of the Company’s Common Stock of at least $0.02 above $0.09 for the period of ten (10) consecutive Trading Days prior to an investment date. Pursuant to the EIA, the investor also has a right to purchase up to an additional $5,000,000 of Common Stock of the Company, or an aggregate of 23,809,523 shares, at a purchase price equal to $0.21 as follows: on each investment date, the investor shall receive the right to purchase a number of shares of Common Stock equal to the amount invested on such investment date divided by $0.21. Under no circumstances will the Common Stock pursuant to this right be settled on a cashless exercise basis. 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.

 

The Debenture is in the principal amount of $500,000, has a three (3) year term, and has an interest rate of 4 ¾%. The Debenture is convertible by the investor into shares of Common Stock beginning on the earlier to occur of (i) the effectiveness of the Registration Statement, but in no event prior to ninety-one (91) days following the Closing Date, or (ii) one hundred eighty one (181) days following the Closing Date as follows: from time to time during each thirty (30) day period from the Closing, the investor may convert up to five percent (5%) of the face amount of the Debenture if the VWAP of the Company’s Common Stock is at or below $0.09 or up to ten percent (10%) if the VWAP of the Company’s Common Stock is above $0.09 and for every $0.02 increase in the VWAP of the Company’s Common Stock above $0.09, the investor can convert an additional ten percent (10%) of the Debenture. The number of shares of Common Stock into which the Debenture can be converted is equal to the dollar amount of the Debenture being converted divided by the quotient of the Conversion Price divided by 10, plus the Debenture amount being converted divided by the Conversion Price. The Conversion Price is equal to the lesser of (i) $0.35 or (ii) 75% of the average of the VWAP of the Company’s Common Stock during the thirty (30) Trading Days prior to the date of the Conversion Notice, subject to a floor price of $0.075 (subject to adjustment), which if triggered gives the Company the option to convert the portion of the Debenture at a conversion price of $0.075 per share plus pay a cash True-Up Payment on the difference in value of the Common Stock issued versus the Common Stock that would have been issued but for the Floor Price.

 

A commission will be paid in connection with the Financing as follows: a cash fee of 8% on the first $2 million of proceeds, 6% on the next $2 million, and 4% on any proceeds above $4 million, as well as warrants to purchase a number of shares equal to 10% multiplied by the proceeds. The warrants will have a three-year term, a purchase price of $0.21 and no cashless exercise feature. Such commissions are supposed to be paid as the proceeds of the Financing are received by the Company.

 

Other than 50 million shares of common stock issued upon the conversion of the Debenture, which shares were registered with the SEC, any additional shares of common stock issued pursuant to the Financing and the above securities were offered and issued in private placement transactions made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933 (the “Securities Act”) and/or Rule 506 promulgated under the Securities Act.  The investors are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act.  

 

Item 6.  Exhibits

 

Exhibits   Description  
       
10.1   Stock Purchase Agreement by and among World Surveillance Group Inc., Lighter Than Air Systems Corp., Felicia Hess and Kevin Hess dated March 28, 2013 (filed as an Exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April 1, 2013 and incorporated herein by reference).
10.2   Option Agreement by and among World Surveillance Group Inc., Lighter Than Air Systems Corp. and Felicia Hess dated March 28, 2013 (filed as an Exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April 1, 2013 and incorporated herein by reference).
10.3   Escrow Agreement by and among World Surveillance Group Inc., Felicia Hess and Fleming PLLC dated March 28, 2013 (filed as an Exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April 1, 2013 and incorporated herein by reference).
31.1*   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  

  

29
 

 

31.2*   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  
32.1*   Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  
32.2*   Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  
101.INS*   XBRL Instance Document**  
101.SCH*   XBRL Taxonomy Extension Schema Document**  
101.CAL*   XBRL Taxonomy Calculation Linkbase Document**  
101.PRE*   XBRL Taxonomy Presentation Linkbase Document**  
101.LAB*   XBRL Taxonomy Label Linkbase Document**  
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document**  

 

* Filed herewith.
+ Indicates management contract relating to compensatory plans or arrangements

 

** Pursuant to Rule 406T of Regulation S-T, these interactive data files shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 

30
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: May 14, 2013

 

  WORLD SURVEILLANCE GROUP INC.
   
  By: /s/ W. Jeffrey Sawyers
  Name: W. Jeffrey Sawyers
  Title: Chief Financial Officer and Treasurer
  (Principal Financial and Accounting Officer)

 

31
 

 

Index to Exhibits

 

Number   Description
     
10.1   Stock Purchase Agreement by and among World Surveillance Group Inc., Lighter Than Air Systems Corp., Felicia Hess and Kevin Hess dated March 28, 2013 (filed as an Exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April 1, 2013 and incorporated herein by reference).
10.2   Option Agreement by and among World Surveillance Group Inc., Lighter Than Air Systems Corp. and Felicia Hess dated March 28, 2013 (filed as an Exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April 1, 2013 and incorporated herein by reference).
10.3   Escrow Agreement by and among World Surveillance Group Inc., Felicia Hess and Fleming PLLC dated March 28, 2013 (filed as an Exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on April 1, 2013 and incorporated herein by reference).
31.1*   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*   Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*   Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*   XBRL Instance Document**
101.SCH*   XBRL Taxonomy Extension Schema Document**
101.CAL*   XBRL Taxonomy Calculation Linkbase Document**
101.PRE*   XBRL Taxonomy Presentation Linkbase Document**
101.LAB*   XBRL Taxonomy Label Linkbase Document**
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document**

 

* Filed herewith.
+ Indicates management contract relating to compensatory plans or arrangements

  

** Pursuant to Rule 406T of Regulation S-T, these interactive data files shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 

32

 

EX-31.1 2 v343811_ex31-1.htm EXHIBIT 31.1

 

EXHIBIT 31.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

I, Glenn D. Estrella, certify that:

 

1.    I have reviewed this Quarterly Report on Form 10-Q of World Surveillance Group Inc.;

 

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

 

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (other than as stated in our 2012 Annual Report on Form 10-K);

 

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 5.    I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: May 14, 2013 By: /s/ Glenn D. Estrella
    Glenn D. Estrella
    Chief Executive Officer, President and Director
    (Principal Executive Officer)

 

 

EX-31.2 3 v343811_ex31-2.htm EXHIBIT 31.2

 

EXHIBIT 31.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

I, W. Jeffrey Sawyers, certify that:

 

1.    I have reviewed this Quarterly Report on Form 10-Q of World Surveillance Group Inc.;

 

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

 

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (other than as stated in our 2012 Annual Report on Form 10-K);

 

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 5.    I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: May 14, 2013 By: /s/W. Jeffrey Sawyers
    W. Jeffrey Sawyers
    Chief Financial Officer and Treasurer
    (Principal Financial and Accounting Officer)

 

 
EX-32.1 4 v343811_ex32-1.htm EXHIBIT 32.1

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of World Surveillance Group Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Glenn D. Estrella, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

Date: May 14, 2013 By: /s/ Glenn D. Estrella
  Glenn D. Estrella
  Chief Executive Officer, President and Director
  (Principal Executive Officer)

 

 
EX-32.2 5 v343811_ex32-2.htm EXHIBIT 32.2

 

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of World Surveillance Group Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, W. Jeffrey Sawyers, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

Date: May 14, 2013 By: /s/ W. Jeffrey Sawyers
  W. Jeffrey Sawyers
  Chief Financial Officer and Treasurer
  (Principal Financial and Accounting Officer)

 

 

 

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Notes Payable (Detail) (USD $)
Mar. 31, 2013
Dec. 31, 2012
Debt Instrument [Line Items]    
Unsecured promissory notes $ 6,147,030 $ 5,997,030
Accrued interest 2,759,580 2,654,350
NOTES PAYABLE $ 8,906,610 $ 8,651,380
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Company Issued Shares of Common Stock (Detail) (USD $)
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Class of Stock [Line Items]    
Shares issued as inducement for loans $ 34,400 $ 0
Shares issued for cash 65,000  
Shares issued for services 75,000 124,979
Shares issued for LTAS acquisition 672,500 0
Shares issued for directors' compensation 2,400  
Shares issued for convertible debt conversion 12,100  
COMMON STOCK
   
Class of Stock [Line Items]    
Shares issued as inducement for loans (in shares) 2,000,000  
Shares issued as inducement for loans 20  
Shares issued for cash (in shares) 3,250,000  
Shares issued for cash 33  
Shares issued for legal settlements (in shares) 6,000,000  
Shares issued for services (in shares) 3,750,000  
Shares issued for services 38  
Shares issued for LTAS acquisition (in shares) 25,000,000  
Shares issued for LTAS acquisition 250  
Shares issued for directors' compensation (in shares) 150,000  
Shares issued for directors' compensation 2  
Shares issued for convertible debt conversion (in shares) 733,333  
Shares issued for convertible debt conversion 6  
Shares issued for retention bonuses (in shares) 16,000,000  
Stock issued during period (in shares) 56,883,333  
COMMON STOCK | Related Additional Paid In Capital
   
Class of Stock [Line Items]    
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Shares issued for cash 65,000  
Shares issued for legal settlements 99,000  
Shares issued for services 75,000  
Shares issued for LTAS acquisition 672,500  
Shares issued for directors' compensation 2,400  
Shares issued for convertible debt conversion 12,100  
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Stock issued during period $ 965,056  
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Convertible Note Payable - Additional Information (Detail) (USD $)
3 Months Ended 0 Months Ended
Mar. 31, 2013
Feb. 02, 2012
Note Purchase Agreement
Debt Instrument [Line Items]    
Securities purchase agreement, borrowing capacity   $ 5,500,000
Proceeds from notes payable   500,000
Debt instrument terms of conversion   The Debenture is convertible by the Investor into shares of common stock beginning on the earlier to occur of (i) the effectiveness of the Registration Statement, but in no event prior to ninety-one (91) days following the Closing Date, or (ii) one hundred eighty one (181) days following the Closing Date subject to the terms and conditions of the conversion feature contained in the Debenture agreement.
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Securities purchase agreement, borrowing capacity 5,000,000  
Investor right to purchase additional common stock 5,000,000  
Exercise price $ 0.21  
Deferred financing costs $ 62,027  
Deferred financing cost amortization period 3 years  
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Estimated Useful Lives of Property and Equipment (Detail)
3 Months Ended
Mar. 31, 2013
Appliques | Minimum
 
Property, Plant and Equipment [Line Items]  
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Property, Plant and Equipment [Line Items]  
Property and equipment, estimated useful life 25 years
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Property, Plant and Equipment [Line Items]  
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Property, Plant and Equipment [Line Items]  
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Office furniture and fixtures | Minimum
 
Property, Plant and Equipment [Line Items]  
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Property, Plant and Equipment [Line Items]  
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Computer hardware and software | Minimum
 
Property, Plant and Equipment [Line Items]  
Property and equipment, estimated useful life 3 years
Computer hardware and software | Maximum
 
Property, Plant and Equipment [Line Items]  
Property and equipment, estimated useful life 7 years
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OTHER ACCRUED LIABILITIES (Tables)
3 Months Ended
Mar. 31, 2013
Other Accrued Liabilities [Abstract]  
Accrued Liabilities

Accrued liabilities consisted of the following:

 

    March 31,
2013
(Unaudited)
    December 31,
2012
 
Payroll liabilities   $ 1,709,333     $ 1,494,883  
Professional fees     0       10,000  
Accrued legal claims payable     235,540       334,540  
Accrued cash true-up from conversion     191,328       176,831  
Accrued interest on debenture     21,575       18,243  
GTC acquisition payable     75,000       75,000  
LTAS acquisition payable     250,000       0  
Other     154,640       22,588  
OTHER ACCRUED LIABILITIES   $ 2,637,416     $ 2,132,085  
XML 18 R50.htm IDEA: XBRL DOCUMENT v2.4.0.6
Summary of Stock Options Outstanding and Exercisable (Detail) (USD $)
3 Months Ended
Mar. 31, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]  
Options exercisable at end of year, Shares 62,250,000
Options Outstanding and Exercisable, Weighted average remaining contractual terms (years) 4 years 3 months 26 days
Options Outstanding and Exercisable, weighted Average Exercise price $ 0.074
Exercise Price .015
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]  
Options Outstanding and Exercisable ,Exercise prices $ 0.015
Options exercisable at end of year, Shares 9,350,000
Options Outstanding and Exercisable, Weighted average remaining contractual terms (years) 6 years 6 months 4 days
Options Outstanding and Exercisable, weighted Average Exercise price $ 0.015
Exercise Price .016
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]  
Options Outstanding and Exercisable ,Exercise prices $ 0.016
Options exercisable at end of year, Shares 250,000
Options Outstanding and Exercisable, Weighted average remaining contractual terms (years) 6 years 11 months 5 days
Options Outstanding and Exercisable, weighted Average Exercise price $ 0.016
Exercise Price .023
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]  
Options Outstanding and Exercisable ,Exercise prices $ 0.023
Options exercisable at end of year, Shares 22,316,667
Options Outstanding and Exercisable, Weighted average remaining contractual terms (years) 6 years 7 months 13 days
Options Outstanding and Exercisable, weighted Average Exercise price $ 0.023
Exercise Price .045
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]  
Options Outstanding and Exercisable ,Exercise prices $ 0.045
Options exercisable at end of year, Shares 4,444,444
Options Outstanding and Exercisable, Weighted average remaining contractual terms (years) 1 year 1 month 6 days
Options Outstanding and Exercisable, weighted Average Exercise price $ 0.045
Exercise Price .070
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]  
Options Outstanding and Exercisable ,Exercise prices $ 0.070
Options exercisable at end of year, Shares 1,500,000
Options Outstanding and Exercisable, Weighted average remaining contractual terms (years) 10 months 10 days
Options Outstanding and Exercisable, weighted Average Exercise price $ 0.070
Exercise Price .075
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]  
Options Outstanding and Exercisable ,Exercise prices $ 0.075
Options exercisable at end of year, Shares 10,250,000
Options Outstanding and Exercisable, Weighted average remaining contractual terms (years) 4 years
Options Outstanding and Exercisable, weighted Average Exercise price $ 0.075
Exercise Price .080
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]  
Options Outstanding and Exercisable ,Exercise prices $ 0.080
Options exercisable at end of year, Shares 1,500,000
Options Outstanding and Exercisable, Weighted average remaining contractual terms (years) 1 year 7 days
Options Outstanding and Exercisable, weighted Average Exercise price $ 0.080
Exercise Price .090
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]  
Options Outstanding and Exercisable ,Exercise prices $ 0.090
Options exercisable at end of year, Shares 11,338,889
Options Outstanding and Exercisable, Weighted average remaining contractual terms (years) 9 months 18 days
Options Outstanding and Exercisable, weighted Average Exercise price $ 0.090
Exercise Price .094
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]  
Options Outstanding and Exercisable ,Exercise prices $ 0.094
Options exercisable at end of year, Shares 1,300,000
Options Outstanding and Exercisable, Weighted average remaining contractual terms (years) 6 months 7 days
Options Outstanding and Exercisable, weighted Average Exercise price $ 0.094
XML 19 R42.htm IDEA: XBRL DOCUMENT v2.4.0.6
Warrants to Purchase Common Stock (Detail) (USD $)
3 Months Ended
Mar. 31, 2013
Class of Warrant or Right Outstanding, Weighted Average Exercise Price [Roll Forward ]  
Outstanding at December 31, 2012 $ 0.234
Warrants issued $ 0.210
Warrants Expired $ 0.263
Outstanding at March 31, 2013 $ 0.232
Other Warrants
 
Class of Warrant or Right Outstanding [Roll Forward ]  
Outstanding at December 31, 2012 20,033,021
Warrants Granted 243,095
Warrants Expired 0
Outstanding at March 31, 2013 20,276,116
Derivative Liabilities | Warrants Class A
 
Class of Warrant or Right Outstanding [Roll Forward ]  
Outstanding at December 31, 2012 8,327,462
Warrants Granted 0
Warrants Expired (932,867)
Outstanding at March 31, 2013 7,394,595
Derivative Liabilities | Warrants Class B
 
Class of Warrant or Right Outstanding [Roll Forward ]  
Outstanding at December 31, 2012 8,327,462
Warrants Granted 0
Warrants Expired (932,867)
Outstanding at March 31, 2013 7,394,595
XML 20 R37.htm IDEA: XBRL DOCUMENT v2.4.0.6
Property and Equipment (Detail) (USD $)
Mar. 31, 2013
Dec. 31, 2012
Property, Plant and Equipment [Line Items]    
Property and equipment, gross $ 2,763,993 $ 2,762,636
Less: accumulated depreciation (355,420) (309,670)
PROPERTY AND EQUIPMENT, NET 2,408,573 2,452,966
Appliques
   
Property, Plant and Equipment [Line Items]    
Property and equipment, gross 2,755,732 2,755,732
Office furniture and fixtures
   
Property, Plant and Equipment [Line Items]    
Property and equipment, gross $ 8,261 $ 6,904
XML 21 R52.htm IDEA: XBRL DOCUMENT v2.4.0.6
Per Share Information - Additional Information (Detail)
3 Months Ended
Mar. 31, 2013
Schedule Of Earnings Per Share, Basic and Diluted, By Common Class [Line Items]  
Common stock equivalents excluded from computation of Diluted EPS 31,916,667
XML 22 R47.htm IDEA: XBRL DOCUMENT v2.4.0.6
Litigation and Contingencies - Additional Information (Detail) (USD $)
1 Months Ended 12 Months Ended 0 Months Ended 1 Months Ended 1 Months Ended
Mar. 31, 2013
Apr. 09, 2012
Siegel
Dec. 31, 2012
Siegel
Dec. 31, 2011
Brio Capital
Feb. 25, 2011
Brio Capital
Feb. 25, 2011
Brio Capital
Sep. 02, 2010
Tsunami Communications v. GlobeTel
Sep. 30, 2010
Tsunami Communications v. GlobeTel
Nov. 24, 2010
The DeCarlo Group
Sep. 30, 2010
GlobeTel Wireless Europe GmbH
Loss Contingencies [Line Items]                    
Shares issued for legal settlement (in shares)       6,200,000   6,200,000        
Settlement agreement consideration       $ 57,661     $ 229,180 $ 60,000   $ 3,750,000
Common stock issued upon court order             530,015      
Damages sought by plaintiff, value   548,000             400,000  
Damages sought by plaintiff, shares of common stock   7,000,000                
Required To Issue Common Stock     6,000,000              
Additioanl loss contingency settlement agreement consideration     50,000              
Expected payment for settlement of unpaid taxes with IRS 200,000                  
Litigation Settlement Monthly         $ 31,250          
XML 23 R9.htm IDEA: XBRL DOCUMENT v2.4.0.6
RELATED PARTY TRANSACTIONS
3 Months Ended
Mar. 31, 2013
Related Party Transactions [Abstract]  
RELATED PARTY TRANSACTIONS

NOTE 3.  RELATED PARTY TRANSACTIONS

 

The accounts receivable from related party at March 31, 2013 includes trade receivables from Global Telesat Communications, Ltd. (“GTCL”) of $17,200. GTCL is a related party based in the United Kingdom and controlled by a current officer of GTC. Total sales to GTCL for the periods ended March 31, 2013 and 2012 were $127,524 and $124,236, respectively, and account for 28% and 85% of GTC’s total sales for the respective periods. GTC began charging a 10% handling fee on all orders from GTCL in 2012.

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Fair Value of Derivative Liabilities Determined using Black-Scholes Option Pricing Model Assumptions (Detail) (USD $)
3 Months Ended 12 Months Ended
Mar. 31, 2013
Dec. 31, 2012
Fair Value Inputs, Liabilities, Quantitative Information [Line Items]    
Risk-free interest rate   0.16%
Expected volatility 104.00%  
Expected dividend yield 0.00% 0.00%
Fair value of warrants outstanding $ 63 $ 363
Minimum
   
Fair Value Inputs, Liabilities, Quantitative Information [Line Items]    
Risk-free interest rate 0.11%  
Expected volatility   124.00%
Expected life (in years) 5 months 1 day 6 months
Maximum
   
Fair Value Inputs, Liabilities, Quantitative Information [Line Items]    
Risk-free interest rate 0.14%  
Expected volatility   130.00%
Expected life (in years) 6 months 9 months
XML 26 R29.htm IDEA: XBRL DOCUMENT v2.4.0.6
COMMON STOCK TRANSACTIONS (Tables)
3 Months Ended
Mar. 31, 2013
Common Stock Transactions [Abstract]  
Common Stock Shares Issued

During the three month period ended March 31, 2013, the Company issued the following shares of Common Stock:

 

SHARES     CONSIDERATION   VALUATION  
  2,000,000     Shares issued as inducement for loans   $ 34,400  
  3,250,000     Shares issued for cash     65,000  
  6,000,000     Shares issued for legal settlements     99,000  
  3,750,000     Shares issued for services     75,000  
  25,000,000     Shares issued for LTAS acquisition     672,500  
  150,000     Shares issued for directors’ compensation     2,400  
  733,333     Shares issued for convertible debt conversion     12,100  
  16,000,000     Shares issued for retention bonuses     4,656  
  56,883,333         $ 965,056
XML 27 R28.htm IDEA: XBRL DOCUMENT v2.4.0.6
CONVERTIBLE NOTE PAYABLE (Tables)
3 Months Ended
Mar. 31, 2013
Convertible Notes Payable [Abstract]  
Convertible Notes Payable

 

    March 31,
2013
(Unaudited)
    December 31,
2012
 
Secured Convertible Note Payable, principal due 2/1/15, interest payable monthly at 4.75%   $ 282,000     $ 287,000  
CONVERTIBLE NOTES PAYABLE   $ 282,000     $ 287,000  
XML 28 R44.htm IDEA: XBRL DOCUMENT v2.4.0.6
Convertible Note Payable (Detail) (USD $)
Mar. 31, 2013
Dec. 31, 2012
Debt Instrument [Line Items]    
Convertible note payable $ 282,000 $ 287,000
Secured Convertible Note Payable, principal due 2/1/15, interest payable monthly at 4.75%
   
Debt Instrument [Line Items]    
Convertible note payable $ 282,000 $ 287,000
XML 29 R30.htm IDEA: XBRL DOCUMENT v2.4.0.6
SHARE-BASED COMPENSATION (Tables)
3 Months Ended
Mar. 31, 2013
Share-Based Compensation [Abstract]  
Stock Options Outstanding and Exercisable

The following table summarizes information about stock options outstanding and exercisable at March 31, 2013:

 

      Options Outstanding and Exercisable  
Exercise prices     Number
outstanding
    Weighted average
remaining
contractual
terms
(years)
    Weighted
Average
Exercise
price
 
$ .015       9,350,000       6.51     $ .015  
$ .016       250,000       6.93       .016  
$ .023       22,316,667       6.62       .023  
$ .045       4,444,444       1.10       .045  
$ .070       1,500,000       0.86       .070  
$ .075       10,250,000       4.00       .075  
$ .080       1,500,000       1.02       .080  
$ .090       11,338,889       0.80       .090  
$ .094       1,300,000       0.52       .094  
          62,250,000       4.32     $ .074  
XML 30 R31.htm IDEA: XBRL DOCUMENT v2.4.0.6
PER SHARE INFORMATION (Tables)
3 Months Ended
Mar. 31, 2013
Earnings Per Share [Abstract]  
Computation of Earnings Per Share Basic and Diluted

The computation of Diluted EPS for the three months ended March 31, 2013, as their effect on the computation of Diluted EPS would have been anti-dilutive.

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

 

2012

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(517,081

)

 

$

(1,391,897

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

489,871,669

 

 

 

383,375,304

 

Dilutive effect of stock warrants and stock options

 

 

0

 

 

 

0

 

Weighted-average common shares outstanding, assuming dilution

 

 

489,871,669

 

 

 

383,375,304

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.00

)

 

$

(0.00

)

XML 31 R8.htm IDEA: XBRL DOCUMENT v2.4.0.6
ACQUISITIONS
3 Months Ended
Mar. 31, 2013
Business Combination, Description [Abstract]  
ACQUISITIONS

NOTE 2. ACQUISITIONS

 

On March 28, 2013, the Company consummated a Stock Purchase Agreement (the “Agreement”) by and among the Company, Lighter Than Air Systems Corp. (“LTAS”), Felicia Hess (the “Shareholder”) and Kevin Hess (“KHess”) pursuant to which the Company acquired 100% of the outstanding shares of capital stock of LTAS, thereby making LTAS a wholly-owned subsidiary of the Company.

 

The purchase price paid by the Company for LTAS consisted of $250,000 in cash payable on or before the date that is 30 days after the closing of the acquisition (the “Closing”), 25,000,000 shares of the Company’s common stock valued at the acquisition date based on the market price of $0.0269 per share, and an earn-out based on varying percentages of the gross revenues based on the level of revenue from contracts with an identified group of potential customers.  No value was ascribed to the earn-out because future revenues, if any, cannot be reliably predicted. Pursuant to the Agreement and an Escrow Agreement, 7,500,000 shares of common stock out of the 25,000,000 shares issued by the Company have been placed in escrow for one year to satisfy possible indemnification claims of the Company.  Felicia Hess, the President of LTAS, has entered into an employment agreement to continue in her role as President of LTAS. The Agreement also includes restrictions on the sale of the Company’s securities issued as the purchase price by the Shareholder for a one-year period following the Closing.

 

The Shareholder has the right pursuant to the Agreement to nominate one member of the Company’s Board of Directors, and as a result, the size of the Company’s Board of Directors has been increased and Felicia Hess has been appointed as a Class I director as of March 28, 2013. Since Ms. Hess would not be an “independent” director pursuant to the rules of the Securities and Exchange Commission, it is not expected that she will be appointed to any committees.

 

In connection with the Closing, LTAS, the Shareholder and the Company also entered into an Option Agreement dated March 28, 2013 pursuant to which the Shareholder was granted an exclusive option to purchase the shares of LTAS held by WSGI on the occurrence of (i) a WSGI bankruptcy event, or (ii) a decrease in the daily volume of WSGI’s common stock to below 50,000 shares for 30 consecutive days, occurring within 18 months of the Closing at a purchase price equal to the fair market value of the LTAS stock at the time of such triggering event, as determined by an independent valuation firm.

 

The common stock of the Company issued as purchase price pursuant to the Agreement was issued as restricted securities under an exemption provided by Section 4(2) of the Securities Act of 1933, as amended. The Agreement, however, provides the Shareholder with certain piggyback registration rights.

 

LTAS provides 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 ISR systems. The LTAS systems have been proven to fulfill critical requirements of the military and law enforcement in the U.S. and internationally.

 

The Company’s Condensed Consolidated Balance Sheet at March 31, 2013 includes the accounts of LTAS. The operating results of LTAS for the three days ended March 31, 2013 are reflected in the Company’s Condensed Consolidated Statements of Operations.

 

The following table summarizes the original allocation of the LTAS acquisition purchase price, which has been accounted at the fair values of the assets acquired and liabilities assumed under the acquisition method of accounting:

 

    Original
Allocation
 
Current assets   $ 703,220  
Property and equipment     1,357  
Goodwill     479,585  
Current liabilities assumed     (261,662 )
Total Purchase Price   $ 922,500  
XML 32 R32.htm IDEA: XBRL DOCUMENT v2.4.0.6
Summary of Significant Accounting Principles - Additional Information (Detail) (USD $)
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Dec. 31, 2012
Summary Of Significant Accounting Policies [Line Items]      
Loss from operations $ 345,718 $ 1,328,879  
Net cash used in operating activity 260,839 418,990  
Working capital deficit 15,342,549    
Total stockholders' deficit 12,698,486   13,160,689
Accumulated deficit 149,512,433   148,995,352
Additional capital 3,000,000    
Shares outstanding if all potential number of shares were exercised 709,736,169    
Share based compensation expense 21,284 605,470  
La Jolla Cove Investors
     
Summary Of Significant Accounting Policies [Line Items]      
Additional capital $ 5,000,000    
Minimum
     
Summary Of Significant Accounting Policies [Line Items]      
Stock options, contractual term 3 years    
Maximum
     
Summary Of Significant Accounting Policies [Line Items]      
Stock options, contractual term 7 years    
XML 33 R40.htm IDEA: XBRL DOCUMENT v2.4.0.6
Notes Payable - Additional Information (Detail) (USD $)
Share data in Millions, unless otherwise specified
3 Months Ended 12 Months Ended
Mar. 31, 2013
Dec. 31, 2012
Debt Instrument [Line Items]    
Unsecured promissory notes 6,147,030 5,997,030
Notes payable 8,906,610 8,651,380
Individual Investor
   
Debt Instrument [Line Items]    
Number of common shares issued 2  
Short Term Note One | Individual Investor
   
Debt Instrument [Line Items]    
Notes payable 100,000  
Stated interest rates 10.00%  
Short Term Note Two | Individual Investor
   
Debt Instrument [Line Items]    
Notes payable 50,000  
Stated interest rates 12.00%  
Unsecured Debt
   
Debt Instrument [Line Items]    
Number of promissory notes 2 2
Promissory note interest rate per annum 7.00% 7.00%
XML 34 R53.htm IDEA: XBRL DOCUMENT v2.4.0.6
Computation of Earnings Per Share Basic and Diluted (Detail) (USD $)
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Numerator:    
Net income (loss) $ (517,081) $ (1,391,897)
Denominator:    
Dilutive effect of stock warrants and stock options 0 0
Net loss per share:    
Basic and diluted $ 0.00 $ 0.00
XML 35 R2.htm IDEA: XBRL DOCUMENT v2.4.0.6
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
Mar. 31, 2013
Dec. 31, 2012
CURRENT ASSETS    
Cash $ 161,854 $ 49,343
Accounts receivable 558,379 8,977
Accounts receivable from related party 17,200 48,220
Inventories 188,058 0
Prepaid expenses 40,488 46,134
Deposits 1,418 50,000
TOTAL CURRENT ASSETS 967,397 202,674
PROPERTY AND EQUIPMENT    
Property and equipment, net of accumulated depreciation of $355,420 and $309,670, respectively 2,408,573 2,452,966
OTHER NONCURRENT ASSETS    
Goodwill 479,585 0
Deferred financing costs 37,905 43,074
TOTAL NONCURRENT ASSETS 517,490 43,074
TOTAL ASSETS 3,893,460 2,698,714
CURRENT LIABILITIES    
Accounts payable 4,765,857 4,781,075
Notes payable 8,906,610 8,651,380
Other accrued liabilities 2,637,416 2,132,085
Deferred revenues 0 7,500
Derivative liabilities 63 363
TOTAL CURRENT LIABILITIES 16,309,946 15,572,403
NONCURRENT LIABILITIES    
Convertible notes payable 282,000 287,000
TOTAL NONCURRENT LIABILITIES 282,000 287,000
TOTAL LIABILITIES 16,591,946 15,859,403
COMMITMENTS AND CONTINGENCIES      
STOCKHOLDERS' EQUITY (DEFICIT)    
Common stock, $0.00001 par value, 750,000,000 shares authorized; 603,770,863 shares and 546,887,530 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively. 6,038 5,469
Additional paid-in capital 136,807,909 135,829,194
Accumulated deficit (149,512,433) (148,995,352)
TOTAL STOCKHOLDERS' DEFICIT (12,698,486) (13,160,689)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,893,460 $ 2,698,714
XML 36 R45.htm IDEA: XBRL DOCUMENT v2.4.0.6
Convertible Note Payable (Parenthetical) (Detail)
3 Months Ended
Mar. 31, 2013
Debt Instrument [Line Items]  
Convertible notes payable, principal due Feb. 01, 2015
Convertible notes payable, monthly interest rate 4.75%
XML 37 R6.htm IDEA: XBRL DOCUMENT v2.4.0.6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
OPERATING ACTIVITIES:    
Net loss $ (517,081) $ (1,391,897)
Adjustments to reconcile net loss to net cash used in operating activities:    
Depreciation expense 45,750 45,750
Share-based compensation 21,284 605,470
Fair value of vested options 0 107,695
Loss on conversion of convertible debt 21,597 0
Change in fair value of derivative liabilities (300) (50,733)
Loan interest capitalized to debt 105,230 104,660
Amortized deferred financing costs 5,169 3,446
Shares issued as inducement for loans 34,400 0
Change in operating assets and liabilities:    
Accounts receivable (339,174) (72,923)
Inventories 34,640 4,500
Prepaid expenses 7,194 (25,705)
Deposits 50,000 0
Accounts payable 72,291 (8,269)
Other accrued liabilities 205,661 231,842
Deferred revenues (7,500) 27,174
NET CASH USED IN OPERATING ACTIVITIES (260,839) (418,990)
INVESTING ACTIVITIES:    
Cash acquired in acquisition 158,350 0
NET CASH PROVIDED BY INVESTING ACTIVITIES 158,350 0
FINANCING ACTIVITIES:    
Proceeds from debenture, net of deferred financing costs 0 437,973
Proceeds from notes payable 150,000 0
Proceeds from sale of common stock 65,000 0
NET CASH PROVIDED BY FINANCING ACTIVITIES 215,000 437,973
NET INCREASE IN CASH AND EQUIVALENTS 112,511 18,983
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 49,343 5,532
CASH AND EQUIVALENTS, END OF PERIOD 161,854 24,515
SUPPLEMENTAL INFORMATION:    
Interest paid 0 0
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES    
Common stock issued for services 75,000 124,979
Common stock issued for settlement 99,000 0
Commons stock issued for acquisition 672,500 0
LTAS acquisition payable $ 250,000 $ 0
XML 38 R35.htm IDEA: XBRL DOCUMENT v2.4.0.6
Summary of Original Allocation of Lighter Than Air Systems Corp Acquisition Purchase Price (Detail) (USD $)
Mar. 31, 2013
Dec. 31, 2012
Mar. 28, 2013
Original Allocation
Business Acquisition [Line Items]      
Current assets     $ 703,220
Property and equipment     1,357
Goodwill 479,585 0 479,585
Current liabilities assumed     (261,662)
Total Purchase Price     $ 922,500
XML 39 R22.htm IDEA: XBRL DOCUMENT v2.4.0.6
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Tables)
3 Months Ended
Mar. 31, 2013
Summary Of Significant Accounting Principles [Abstract]  
Estimated Useful Lives of Property and Equpment

The estimated useful lives of property and equipment are generally as follows:

 

Appliques     15 – 25 years  
Machinery and equipment     3 – 12 years  
Office furniture and fixtures     3 – 10 years  
Computer hardware and software     3 – 7 years
XML 40 R36.htm IDEA: XBRL DOCUMENT v2.4.0.6
Related Party Transactions - Additional Information (Detail) (USD $)
3 Months Ended 12 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Dec. 31, 2012
Related Party Transaction [Line Items]      
Accounts receivable from related party $ 17,200   $ 48,220
Revenue from related parties $ 127,524 $ 124,236  
Revenue from related parties percentage 28.00% 85.00%  
Percentage of handling fees     10.00%
XML 41 R24.htm IDEA: XBRL DOCUMENT v2.4.0.6
PROPERTY AND EQUIPMENT (Tables)
3 Months Ended
Mar. 31, 2013
Property, Plant and Equipment [Abstract]  
Property and Equipment

Property and equipment consisted of the following:

 

    March 31,
2013
(Unaudited)
    December 31,
2012
 
Appliques   $ 2,755,732     $ 2,755,732  
Office furniture and fixtures     8,261       6,904  
      2,763,993       2,762,636  
Less: accumulated depreciation     (355,420 )     (309,670 )
    $ 2,408,573     $ 2,452,966  
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XML 43 R7.htm IDEA: XBRL DOCUMENT v2.4.0.6
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
3 Months Ended
Mar. 31, 2013
Summary Of Significant Accounting Principles [Abstract]  
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

 

DESCRIPTION OF BUSINESS

 

World Surveillance Group Inc. (the “Company”) designs, develops, markets, and sells, 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.  The Company’s 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. The Company’s 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.  

 

The Company’s wholly owned subsidiary Global Telesat Corp. (GTC), provides 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.

 

The Company’s wholly owned subsidiary Lighter Than Air Systems Corp. (LTAS), provides 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 ISR systems. The LTAS systems have been proven to fulfill critical requirements of the military and law enforcement in the U.S. and internationally.

 

BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements include the accounts of World Surveillance Group Inc. and its subsidiaries (“WSGI” or the “Company”) and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and reports and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X for scaled disclosures for smaller reporting companies. Accordingly, they do not include all, or include a condensed version of, the information and footnotes required by U.S. GAAP for complete financial statements. The Company believes, however, that the disclosures are adequate to make the information presented not misleading.  Therefore, the Company’s condensed consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations of the Company for the periods shown. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year or for any future period.  The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements. Actual results may differ from management’s estimates.

 

The consolidated balance sheet information as of December 31, 2012 was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) for the fiscal year ended December 31, 2012. These interim condensed consolidated financial statements should be read in conjunction with the Company’s most recently audited financial statements and the notes thereto included in such above referenced Annual Report on Form 10-K.

 

RECLASSIFICATIONS

 

Certain 2012 amounts have been reclassified to conform to the 2013 presentation.

 

GOING CONCERN

 

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.

 

REVENUE RECOGNITION

 

The Company recognizes revenue when all four of the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred and title has transferred or services have been rendered; 3) our price to the buyer is fixed or determinable; and 4) collectability is reasonably assured.

 

INCOME TAXES

 

The Company accounts for income taxes using the asset and liability approach. Under this approach, deferred income taxes are recognized based on the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as measured by current enacted tax rates. Valuation allowances are recorded to reduce the deferred tax assets to an amount that will more likely than not be realized.

 

U.S. GAAP requires that, in applying the liability method, the financial statement effects of an uncertain tax position be recognized based on the outcome that is more likely than not to occur.  Under this criterion the most likely resolution of an uncertain tax position should be analyzed based on technical merits and on the outcome that will likely be sustained under examination. There were no adjustments related to uncertain tax positions recognized during the three months ended March 31, 2013 and 2012, respectively.

 

FAIR VALUE MEASUREMENTS

 

U.S. GAAP includes a framework for measuring fair value, which also addresses disclosure requirements for fair value measurements. Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value, in this context, should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.

 

Under the measurement framework, a fair valuation hierarchy for disclosure of the inputs to valuation used to measure fair value has been established. This hierarchy prioritizes the inputs into three broad levels that reflect the degree of subjectivity necessary to determine fair value measurements, as follows.  Level 1 inputs are based on unadjusted quoted prices in active markets for identical assets or liabilities.  Level 2 inputs are based on quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly, through market corroboration, for substantially the full term of the asset or liability.  Level 3 inputs are unobservable inputs and reflect the Company’s estimates of assumptions that market participants would use to measure assets and liabilities at fair value.  The fair values are therefore determined using model-based techniques that include option pricing models and discounted cash flow models. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s financial instruments include cash, accounts payable, notes payable and derivative instruments. The carrying values for the current financial assets and liabilities approximate fair value due to their short maturity. The fair values of the Company’s derivative instruments are recorded in the condensed consolidated balance sheets.

 

USE OF ESTIMATES

 

The process of preparing financial statements in conformity with U.S. GAAP requires the use of estimates, judgments and assumptions regarding certain types of assets, liabilities, revenues, and expenses. These estimates, judgments and assumptions are evaluated on an ongoing basis. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable 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. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from the Company’s estimated amounts.

 

BASIC AND DILUTED NET LOSS PER COMMON SHARE

 

Basic and diluted net loss per common share has been computed by dividing the net loss by the weighted average number of shares of common stock outstanding during each period. Whenever losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would result in a diluted loss per share less than the basic loss per share and therefore would be anti-dilutive. If all outstanding options, warrants and convertible shares were converted or exercised at March 31, 2013, the shares outstanding would be 709,736,169.

 

 PROPERTY AND EQUIPMENT

 

Property and equipment are carried at cost less accumulated depreciation.  Depreciation is based on the estimated service lives of the depreciable assets and is calculated using the straight-line method.  Expenditures that increase the value or productive capacity of assets are capitalized. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from service.  When property and equipment are retired, sold or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.  Repairs and maintenance are expensed as incurred.

 

The estimated useful lives of property and equipment are generally as follows:

 

Appliques     15 – 25 years  
Machinery and equipment     3 – 12 years  
Office furniture and fixtures     3 – 10 years  
Computer hardware and software     3 – 7 years  

 

Assets held for sale are separately presented on the balance sheet and are no longer depreciated.

 

LONG LIVED ASSETS

 

The Company evaluates the fair value of long-lived assets on an annual basis or whenever events or changes in circumstances indicate that its carrying amounts may not be recoverable. Accordingly, any impairment of value is recognized when the carrying amount of a long-lived asset exceeds its fair value. The Company’s evaluations have not indicated any impairment of fair values.

 

DERIVATIVE FINANCIAL INSTRUMENTS

 

Derivative liabilities primarily relate to warrants to purchase common stock of the Company issued in conjunction with certain debt and equity financings. Each reporting period the Company determines the fair value of the stock warrants using the Black-Scholes option pricing model at the balance sheet date. Changes in the fair value of the stock warrants are recognized each period in current earnings.

 

SHARE-BASED COMPENSATION

 

The Company offers share-based compensation programs to its officers, directors and employees that consist of employee stock options, common stock and restricted stock awards. Common stock and restricted stock awards are issued at the closing price of the Company’s common stock on the date of grant. The Company recognizes compensation expense ratably over the vesting periods for restricted stock awards using the grant date fair value of the stock awarded. The Black-Scholes option pricing model is used to value stock options, and compensation expense is recognized ratably over the requisite service period. Stock options typically have contractual terms of three to seven years.  Share-based compensation for employees and non-employees is reflected in the appropriate functional expense category, principally the general administrative and research and development categories, as appropriate. Share-based compensation incurred during the three months ended March 31, 2013 and 2012 was $21,284 and $726,885, respectively.

XML 44 R3.htm IDEA: XBRL DOCUMENT v2.4.0.6
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Mar. 31, 2013
Dec. 31, 2012
Property and equipment, accumulated depreciation $ 355,420 $ 309,670
Common stock, par value $ 0.00001 $ 0.00001
Common stock, shares authorized 750,000,000 750,000,000
Common stock, shares issued 603,770,863 546,887,530
Common stock, shares outstanding 603,770,863 546,887,530
XML 45 R17.htm IDEA: XBRL DOCUMENT v2.4.0.6
SHARE-BASED COMPENSATION
3 Months Ended
Mar. 31, 2013
Share-Based Compensation [Abstract]  
Share-based compensation

NOTE 11. SHARE-BASED COMPENSATION

 

The Company issues stock-based compensation that consists of common stock, restricted stock and stock options to its directors, officers, employees and consultants. All common stock and restricted stock awards are subject to the securities law restrictions of Rule 144 as promulgated under the Securities Act of 1933, as amended, unless covered by a registration statement.

 

Common Stock

 

The Company recognizes the cost of the common stock issued to directors, officers, and employees as compensation expense at the closing market price on the grant date. All common stock awards are fully vested on the date of grant, therefore there is no unrecognized compensation expense associated with these awards. During the quarter ended March 31, 2013, the Company awarded 150,000 shares for $2,400 for quarterly directors’ fees.

 

Restricted Stock

 

Awards of restricted stock are independent of stock option grants and are generally subject to forfeiture if employment terminates prior to vesting. Prior to vesting, ownership of the restricted stock cannot be transferred. The restricted stock has the same voting rights as the common stock. The Company recognizes the grant date fair value of restricted stock awards ratably over the vesting period as compensation expense based upon the stock’s closing market price on the grant date. Performance-based restricted stock that vested during the three months ended March 31, 2013 totaled $4,656. During the first quarter of 2013, the Company awarded 16 million shares to certain officers and employees as retention bonuses, which cliff vests on February 6, 2014. There is approximately $369,215 in unrecognized compensation relating to unvested restricted stock at March 31, 2013.

 

Stock Options

 

The Company has issued stock options at exercise prices equal to the Company’s common stock market price on the date of grant with contractual terms of three to seven years. Historically, the stock options were fully vested and expensed as compensation on the grant date. During 2010, the Company began issuing stock options with vesting schedules and such stock options are generally subject to forfeiture if employment terminates prior to vesting. During the first quarter of 2013, the Company awarded 2 million options that cliff vest on February 6, 2014 in retention bonuses and issued 250,000 fully-vested options totaling $4,000 as directors’ fees. Vested options during the 3-month period totaled $10,228. At March 31, 2013, there is approximately $102,543 in unrecognized compensation expense relating to unvested stock options.

 

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options. The principal assumptions utilized in valuing stock options include the expected stock price volatility based on the most recent historical period equal to the expected life of the option; an estimate of the expected option life based upon historical experience; no expected dividend yield; and the risk-free interest rate based upon on the yields of Treasury constant maturities for the remaining term of the option.

 

The following table summarizes information about stock options outstanding and exercisable at March 31, 2013:

 

      Options Outstanding and Exercisable  
Exercise prices     Number
outstanding
    Weighted average
remaining
contractual
terms
(years)
    Weighted
Average
Exercise
price
 
$ .015       9,350,000       6.51     $ .015  
$ .016       250,000       6.93       .016  
$ .023       22,316,667       6.62       .023  
$ .045       4,444,444       1.10       .045  
$ .070       1,500,000       0.86       .070  
$ .075       10,250,000       4.00       .075  
$ .080       1,500,000       1.02       .080  
$ .090       11,338,889       0.80       .090  
$ .094       1,300,000       0.52       .094  
          62,250,000       4.32     $ .074  

 

The aggregate intrinsic value of the options outstanding and exercisable at March 31, 2013 was $201,960; there were 31,916,667 options in-the-money. The aggregate intrinsic value for the options is the difference between the prices of the underlying awards and quoted price of the Company’s common stock for options in-the-money.

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Document and Entity Information
3 Months Ended
Mar. 31, 2013
May 10, 2013
Document Information [Line Items]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2013  
Document Fiscal Year Focus 2013  
Document Fiscal Period Focus Q1  
Trading Symbol WSGI  
Entity Registrant Name World Surveillance Group Inc.  
Entity Central Index Key 0000919742  
Current Fiscal Year End Date --12-31  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   609,070,863

XML 48 R18.htm IDEA: XBRL DOCUMENT v2.4.0.6
INCOME TAXES
3 Months Ended
Mar. 31, 2013
Income Tax Disclosure [Abstract]  
INCOME TAXES

NOTE 12. INCOME TAXES

 

The Company has federal and state net operating loss (NOL) carryforwards, which can be used to offset future earnings. Accordingly, no provision for income taxes is recorded in the condensed consolidated financial statements. A deferred tax asset for the future benefits of net operating losses and other differences is offset by a 100% valuation allowance due to the uncertainty of the Company's ability to utilize the losses. These net operating losses begin to expire in the year 2021.

 

The Company operated in multiple tax jurisdictions within the United States of America.  Although management does not believe that the Company is currently under examination in any major tax jurisdiction in which it operates other than the issues with the IRS as described in Note 10, the Company remains subject to examination in all of those tax jurisdictions until the applicable statute of limitations expire.  As of March 31, 2013, a summary of the tax years that remain subject to examination in the Company’s major tax jurisdictions are: United States – Federal and State – 2005 and forward.  The Company does not expect to have a material change to unrecognized tax positions within the next twelve months.

XML 49 R4.htm IDEA: XBRL DOCUMENT v2.4.0.6
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
REVENUES    
Net sales $ 526,177 $ 146,729
Cost of sales 364,309 131,229
Gross profit 161,868 15,500
COSTS AND EXPENSES:    
General and administrative 384,916 1,074,894
Professional fees 76,784 147,485
Depreciation expense 45,750 45,750
Research and development 136 76,250
TOTAL EXPENSES 507,586 1,344,379
LOSS FROM OPERATIONS (345,718) (1,328,879)
OTHER INCOME (EXPENSE)    
Change in fair value of derivative liabilities 300 50,733
Loss on conversion of debt (21,597) 0
Interest expense, net (150,066) (113,751)
NET OTHER EXPENSE (171,363) (63,018)
NET LOSS $ (517,081) $ (1,391,897)
NET LOSS PER SHARE:    
Basic and Diluted $ 0.00 $ 0.00
WEIGHTED AVERAGE SHARES:    
Basic and Diluted 489,871,669 383,375,304
XML 50 R12.htm IDEA: XBRL DOCUMENT v2.4.0.6
NOTES PAYABLE
3 Months Ended
Mar. 31, 2013
Notes Payable [Abstract]  
NOTES PAYABLE

NOTE 6. NOTES PAYABLE

 

Notes payable consisted of the following:

 

    March 31,
2013
(Unaudited)
    December 31,
2012
 
Unsecured promissory notes   $ 6,147,030     $ 5,997,030  
Accrued interest     2,759,580       2,654,350  
NOTES PAYABLE   $ 8,906,610     $ 8,651,380  

 

As of March 31, 2013 and December 31, 2012, notes payable included two unsecured promissory notes aggregating $5,997,030 with no stated interest rate or terms of repayment.  The Company has accrued interest at 7% per annum on both notes since their inception and includes the notes in current liabilities.

 

On February 1, 2013, the Company issued a $100,000 75-day unsecured 10% promissory note to an individual investor for funds received. On March 18, 2013, the Company issued a $50,000 60-day unsecured 12% promissory note to the same investor for funds received. The Company issued 2 million common shares to the investor as an inducement for the loans.

XML 51 R11.htm IDEA: XBRL DOCUMENT v2.4.0.6
OTHER ACCRUED LIABILITIES
3 Months Ended
Mar. 31, 2013
Other Accrued Liabilities [Abstract]  
Other accrued liabilities

NOTE 5. OTHER ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following:

 

    March 31,
2013
(Unaudited)
    December 31,
2012
 
Payroll liabilities   $ 1,709,333     $ 1,494,883  
Professional fees     0       10,000  
Accrued legal claims payable     235,540       334,540  
Accrued cash true-up from conversion     191,328       176,831  
Accrued interest on debenture     21,575       18,243  
GTC acquisition payable     75,000       75,000  
LTAS acquisition payable     250,000       0  
Other     154,640       22,588  
OTHER ACCRUED LIABILITIES   $ 2,637,416     $ 2,132,085  
XML 52 R23.htm IDEA: XBRL DOCUMENT v2.4.0.6
ACQUISITIONS (Tables)
3 Months Ended
Mar. 31, 2013
Business Combination, Description [Abstract]  
Summary of Original and Revised Allocation of Global Telesat Corp Acquisition Purchase Price

The following table summarizes the original allocation of the LTAS acquisition purchase price, which has been accounted at the fair values of the assets acquired and liabilities assumed under the acquisition method of accounting:

 

    Original
Allocation
 
Current assets   $ 703,220  
Property and equipment     1,357  
Goodwill     479,585  
Current liabilities assumed     (261,662 )
Total Purchase Price   $ 922,500  
XML 53 R19.htm IDEA: XBRL DOCUMENT v2.4.0.6
PER SHARE INFORMATION
3 Months Ended
Mar. 31, 2013
Earnings Per Share [Abstract]  
PER SHARE INFORMATION

NOTE 13. PER SHARE INFORMATION:

 

Basic earnings per share (“Basic EPS”) of common stock is computed by dividing the net income by the weighted-average number of shares of common stock outstanding.  Diluted earnings per share of common stock (“Diluted EPS”) is computed by dividing the net income by the weighted-average number of shares of common stock, and dilutive common stock equivalents and convertible securities then outstanding. U.S. GAAP requires the presentation of both Basic EPS and Diluted EPS on the face of the Company’s Condensed Consolidated Statements of Operations.  Common stock equivalents totaling 31,916,667 shares were excluded from the computation of Diluted EPS for the three months ended March 31, 2013, as their effect on the computation of Diluted EPS would have been anti-dilutive.

 

    Three Months Ended March 31,  
    2013     2012  
Numerator:                
Net income (loss)   $ (517,081 )   $ (1,391,897 )
Denominator:                
Weighted-average common shares outstanding     489,871,669       383,375,304  
Dilutive effect of stock warrants and stock options     0       0  
Weighted-average common shares outstanding, assuming dilution     489,871,669       383,375,304  
                 
Net loss per share:                
Basic and diluted   $ (0.00 )   $ (0.00 )
XML 54 R15.htm IDEA: XBRL DOCUMENT v2.4.0.6
LITIGATION AND CONTINGENCIES
3 Months Ended
Mar. 31, 2013
Litigation and Contingencies [Abstract]  
LITIGATION AND CONTINGENCIES

NOTE 9. LITIGATION AND CONTINGENCIES

 

In the ordinary conduct of business, the Company is subject to periodic lawsuits, investigations and litigation claims, which are accounted for where appropriate. Management cannot predict with certainty the ultimate resolution of such lawsuits, investigations and claims asserted against the Company.  As of March 31, 2013, we had the following material contingencies:

 

Brio Capital

 

Brio Capital, the holder of a warrant, filed an action against us on February 25, 2011 in the New York Supreme Court, County of New York, for the issuance of approximately 6.2 million shares of common stock upon the exercise of certain warrants. The Court granted a non-final Summary Judgment Order on a portion of the action in favor of Brio in December 2011 requiring the Company, among other things, to issue 6.2 million shares of common stock. The Company has issued the shares required by the Court order. We also entered into a settlement agreement to pay $57,661 in legal fees as required by the Court order, which has been satisfied. The Company reached a settlement with Brio resolving all remaining matters. Under the terms of the settlement, the Company is required to issue a number of shares of common stock in twelve (12) monthly installments equal to $31,250 divided by the average of the closing prices of our common stock for the last three (3) trading days of the month immediately preceding the month in which the shares are due to be issued. Pursuant to the Court’s Section 3(a) (10) approval, the shares of common stock issued to Brio shall be freely tradeable upon issuance. All shares issued are subject to a leak-out provision contained in the settlement agreement.

 

Tsunami Communications v. GlobeTel

 

On March 3, 2006, Civil Action File No. 06A-02368-5 was filed in Superior Court for Gwinnett County, Georgia by Tsunami Communications and several of its former shareholders. We asserted affirmative defenses and a trial was held in November 2009. By Order of the Court entered on September 2, 2010, an Order was entered against GlobeTel and several other co-defendants for the breach by Sanswire Technologies, Inc. (“ST”) (a then unrelated party) of its asset purchase agreement with the plaintiff Tsunami based on a deemed de facto merger resulting from a subsequent asset purchase agreement between ST and GlobeTel.  As damages, we were ordered to issue 530,015 shares of common stock to former shareholders of Tsunami and pay $229,180 to a former Tsunami shareholder with respect to two outstanding promissory notes. Subsequent to the Order, the plaintiffs filed a Motion for Reconsideration asking the Court to both reconsider its decision to deny several of the plaintiffs’ claims and to substantially increase the award of damages and a Claim for Attorney’s Fees, which has been denied by the Court. We have issued the share portion of the Order. We reached a settlement with the plaintiffs resolving the cash portion of the Order. Under the terms of the settlement, we issued 3.75 million shares of common stock and are required to pay them $60,000 over a twelve-month period.

 

The DeCarlo Group

 

A lawsuit was filed by the DeCarlo Group on November 24, 2010 in Miami-Dade County Courthouse for over $400,000 claimed in connection with CFO and accounting services allegedly rendered to the Company.  It is our position that the Company was overcharged in connection with the services rendered and that no amounts are due. DeCarlo has once again found a new attorney to represent him in this matter. We have filed a motion for sanctions and to dismiss and strike on the pleadings and intend to otherwise defend ourselves vigorously in this matter, but the outcome of the action cannot be predicted.

 

Siefert

 

A lawsuit was filed by Thomas Seifert, a former officer and director of the Company, on April 9, 2012 in the Circuit Court of the 17th Judicial Circuit in Broward County for $548,000 and 7.0 million shares of common stock for alleged unpaid compensation. We reached a settlement with the plaintiff resolving this lawsuit, without admitting or denying the allegations. Under the terms of the settlement, we were required to issue him 6.0 million shares of common stock, which shares are subject to a fourteen-month leak-out, and pay him $50,000 over a twelve-month period.

 

IRS

 

During 2010 and 2009, we, under our former name Sanswire Corp., incurred and reported to the Internal Revenue Service (“IRS”) payroll tax liabilities (and deposited the appropriate withholding amounts) during the normal course of business at each payroll cycle.  The Company has reported its payroll tax liabilities for all the tax periods in 2007 and 2008, however, it failed to deposit the appropriate withholding amounts for those periods. We recognized this issue and, accordingly, contacted the IRS to make arrangements to pay any taxes due. One such matter has been resolved with the IRS, and we currently estimate the amount involved in the second matter to be approximately $200,000.  We may be subject to additional penalties and interest from the IRS in connection with these payroll tax matters.   We are engaged in discussions with the IRS to settle this matter and filed an Offer in Compromise with the IRS, which was not accepted. We are continuing to cooperate with the IRS to resolve this matter.

 

The Company provides indemnification, to the extent permitted by law, to its’ officers, directors, employees and agents for liabilities arising from certain events or occurrences while the officer, director, employee, or agent is or was serving at the Company’s request in such capacity.

XML 55 R13.htm IDEA: XBRL DOCUMENT v2.4.0.6
DERIVATIVE LIABILITIES
3 Months Ended
Mar. 31, 2013
Derivative Liabilities [Abstract]  
DERIVATIVE LIABILITIES

NOTE 7.  DERIVATIVE LIABILITIES

 

The Company accounts for derivative instruments at fair value. Gains and losses from changes in the fair value of derivatives are recognized in interest expense. The Company’s derivative instruments consist of stock warrants that contained anti-dilution provisions that were issued with certain debt and equity financings.

 

Warrants

 

In the past, the Company entered into financing agreements for convertible promissory notes and stock purchase agreements, which included Class A and Class B warrants. Both Class A and Class B warrants contained anti-dilution rights and are considered to be derivative liabilities under U.S. GAAP. During 2010 and 2011, the Company entered into new stock purchase agreements and issued an aggregate of 9,677,167 warrants under the 2010 and 2011 stock purchase agreements. Warrants issued under the 2010 and 2011 stock purchase agreements have no anti-dilution rights and are not considered to be derivative liabilities. All warrants have 3-year terms and are exercisable for a purchase price of $0.21 per share or, in the case of Class B warrants, $0.315 per share.

 

The following table summarizes certain information about the Company’s warrants to purchase common stock.

 

    Derivative Liabilities           Weighted
Average
 
    Warrants     Warrants     Other     Exercise  
    Class A     Class B     Warrants     Price  
                         
Outstanding at December 31, 2012     8,327,462       8,327,462       20,033,021     $ 0.234  
Warrants Granted     0       0       243,095       0.210  
Warrants Expired     (932,867 )     (932,867 )     0       0.263  
Outstanding at March 31, 2013     7,394,595       7,394,595       20,276,116     $ 0.232  

 

The value of the derivative liabilities have been measured at fair value based on quoted market prices and management’s subjective estimated volatility factors. There were no changes in the valuation techniques during the three months ended March 31, 2013.

 

The fair value of derivative liabilities was determined using the Black-Scholes option pricing model with the following assumptions:

 

    March 31,     December 31,  
    2013     2012  
Warrants:                
Risk-free interest rate     0.11% - 0.14%       0.16%
Expected volatility     104%     124% - 130%  
Expected life (in years)     0.42 - 0.50       0.50 - 0.75  
Expected dividend yield     0       0  
Fair value of warrants outstanding   $63     $363  

 

The warrants outstanding and exercisable at March 31, 2012 and December 31, 2011 had no intrinsic value. All warrants were fully exercisable and there was no unamortized cost to be recognized in future periods.

XML 56 R14.htm IDEA: XBRL DOCUMENT v2.4.0.6
CONVERTIBLE NOTES PAYABLE
3 Months Ended
Mar. 31, 2013
Convertible Notes Payable [Abstract]  
CONVERTIBLE NOTES PAYABLE

NOTE 8. CONVERTIBLE NOTES PAYABLE

 

    March 31,
2013
(Unaudited)
    December 31,
2012
 
Secured Convertible Note Payable, principal due 2/1/15, interest payable monthly at 4.75%   $ 282,000     $ 287,000  
CONVERTIBLE NOTES PAYABLE   $ 282,000     $ 287,000  

 

On February 2, 2012, the Company closed on a Securities Purchase Agreement with a California-based institutional investor (the “Investor”) for an aggregate of $5.5 million. The $500,000 initial tranche was funded at the closing in connection with a Convertible Debenture due in February 2015 and an Equity Investment Agreement (the “EIA”). The Debenture is convertible by the Investor into shares of common stock beginning on the earlier to occur of (i) the effectiveness of the Registration Statement, but in no event prior to ninety-one (91) days following the Closing Date, or (ii) one hundred eighty one (181) days following the Closing Date subject to the terms and conditions of the conversion feature contained in the Debenture agreement.

 

The Debenture grants the Investor with a right of first refusal on future financings of the Company subject to certain terms and conditions and contains acceleration provisions requiring 120% of the principal amount, accrued and unpaid interest, to become immediately due and payable on certain events of default described therein.

 

Pursuant to the EIA, the Investor agreed to invest an additional $5.0 million in monthly tranches beginning on the effectiveness of a registration statement the Company filed with the Securities and Exchange Commission, but not prior to 91 days following the closing. The Investor also has the right to purchase an additional $5.0 million of the Company’s common stock at an exercise price of $0.21 per share for a period of three years.

 

The Company incurred customary closing costs including attorney’s fees, commissions and closing costs of $62,027, which are recorded as deferred financing costs to be amortized as additional interest expense on a straight-line basis over the 3-year term of the related Debenture and EIA.

XML 57 R16.htm IDEA: XBRL DOCUMENT v2.4.0.6
COMMON STOCK TRANSACTIONS
3 Months Ended
Mar. 31, 2013
Common Stock Transactions [Abstract]  
COMMON STOCK TRANSACTIONS

NOTE 10. COMMON STOCK TRANSACTIONS

 

During the three month period ended March 31, 2013, the Company issued the following shares of Common Stock:

 

SHARES     CONSIDERATION   VALUATION  
  2,000,000     Shares issued as inducement for loans   $ 34,400  
  3,250,000     Shares issued for cash     65,000  
  6,000,000     Shares issued for legal settlements     99,000  
  3,750,000     Shares issued for services     75,000  
  25,000,000     Shares issued for LTAS acquisition     672,500  
  150,000     Shares issued for directors’ compensation     2,400  
  733,333     Shares issued for convertible debt conversion     12,100  
  16,000,000     Shares issued for retention bonuses     4,656  
  56,883,333         $ 965,056  

  

The valuation amounts of the above common stock transactions are based on the amounts reflected in common stock and related additional paid-in capital for each transaction.

XML 58 R34.htm IDEA: XBRL DOCUMENT v2.4.0.6
Acquisitions - Additional Information (Detail) (USD $)
1 Months Ended 3 Months Ended
Mar. 28, 2013
Mar. 31, 2013
Business Acquisition [Line Items]    
Percentage of equity interest acquired of Lighter Than Air Systems Corp. 100.00%  
Market price per share on acquisition $ 0.0269  
Lighter Than Air Systems Corp
   
Business Acquisition [Line Items]    
Business acquisition, contingent consideration, potential cash payment $ 250,000  
Business acquisition earn out equal revenue gross 25,000,000  
Shares placed in escrow for one year to satisfy possible indemnification claims 7,500,000  
Number of shares issued in connection with acquisition 25,000,000  
Business acquisition, description of acquired entity   (i) a WSGI bankruptcy event, or (ii) a decrease in the daily volume of WSGI's common stock to below 50,000 shares for 30 consecutive days, occurring within 18 months of the Closing at a purchase price equal to the fair market value of the LTAS stock at the time of such triggering event, as determined by an independent valuation firm.
XML 59 R51.htm IDEA: XBRL DOCUMENT v2.4.0.6
Income Taxes - Additional Information (Detail)
3 Months Ended
Mar. 31, 2013
Operating Loss Carryforwards [Line Items]  
Deferred tax assets, valuation allowance 100.00%
Operating Loss Carry Forwards Expiration Year 2021
XML 60 R21.htm IDEA: XBRL DOCUMENT v2.4.0.6
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Policies)
3 Months Ended
Mar. 31, 2013
Summary Of Significant Accounting Principles [Abstract]  
DESCRIPTION OF BUSINESS

DESCRIPTION OF BUSINESS

 

World Surveillance Group Inc. (the “Company”) designs, develops, markets, and sells, 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.  The Company’s 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. The Company’s 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.  

 

The Company’s wholly owned subsidiary Global Telesat Corp. (GTC), provides 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.

 

The Company’s wholly owned subsidiary Lighter Than Air Systems Corp. (LTAS), provides 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 ISR systems. The LTAS systems have been proven to fulfill critical requirements of the military and law enforcement in the U.S. and internationally.

BASIS OF PRESENTATION

BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements include the accounts of World Surveillance Group Inc. and its subsidiaries (“WSGI” or the “Company”) and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and reports and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X for scaled disclosures for smaller reporting companies. Accordingly, they do not include all, or include a condensed version of, the information and footnotes required by U.S. GAAP for complete financial statements. The Company believes, however, that the disclosures are adequate to make the information presented not misleading.  Therefore, the Company’s condensed consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations of the Company for the periods shown. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year or for any future period.  The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements. Actual results may differ from management’s estimates.

 

The consolidated balance sheet information as of December 31, 2012 was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) for the fiscal year ended December 31, 2012. These interim condensed consolidated financial statements should be read in conjunction with the Company’s most recently audited financial statements and the notes thereto included in such above referenced Annual Report on Form 10-K.

RECLASSIFICATIONS

RECLASSIFICATIONS

 

Certain 2012 amounts have been reclassified to conform to the 2013 presentation.

GOING CONCERN

GOING CONCERN

 

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.

REVENUE RECOGNITION

REVENUE RECOGNITION

 

The Company recognizes revenue when all four of the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred and title has transferred or services have been rendered; 3) our price to the buyer is fixed or determinable; and 4) collectability is reasonably assured.

INCOME TAXES

INCOME TAXES

 

The Company accounts for income taxes using the asset and liability approach. Under this approach, deferred income taxes are recognized based on the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, as measured by current enacted tax rates. Valuation allowances are recorded to reduce the deferred tax assets to an amount that will more likely than not be realized.

 

U.S. GAAP requires that, in applying the liability method, the financial statement effects of an uncertain tax position be recognized based on the outcome that is more likely than not to occur.  Under this criterion the most likely resolution of an uncertain tax position should be analyzed based on technical merits and on the outcome that will likely be sustained under examination. There were no adjustments related to uncertain tax positions recognized during the three months ended March 31, 2013 and 2012, respectively.

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

 

U.S. GAAP includes a framework for measuring fair value, which also addresses disclosure requirements for fair value measurements. Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value, in this context, should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.

 

Under the measurement framework, a fair valuation hierarchy for disclosure of the inputs to valuation used to measure fair value has been established. This hierarchy prioritizes the inputs into three broad levels that reflect the degree of subjectivity necessary to determine fair value measurements, as follows.  Level 1 inputs are based on unadjusted quoted prices in active markets for identical assets or liabilities.  Level 2 inputs are based on quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly, through market corroboration, for substantially the full term of the asset or liability.  Level 3 inputs are unobservable inputs and reflect the Company’s estimates of assumptions that market participants would use to measure assets and liabilities at fair value.  The fair values are therefore determined using model-based techniques that include option pricing models and discounted cash flow models. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s financial instruments include cash, accounts payable, notes payable and derivative instruments. The carrying values for the current financial assets and liabilities approximate fair value due to their short maturity. The fair values of the Company’s derivative instruments are recorded in the condensed consolidated balance sheets.

USE OF ESTIMATES

USE OF ESTIMATES

 

The process of preparing financial statements in conformity with U.S. GAAP requires the use of estimates, judgments and assumptions regarding certain types of assets, liabilities, revenues, and expenses. These estimates, judgments and assumptions are evaluated on an ongoing basis. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable 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. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from the Company’s estimated amounts.

BASIC AND DILUTED NET LOSS PER COMMON SHARE

BASIC AND DILUTED NET LOSS PER COMMON SHARE

 

Basic and diluted net loss per common share has been computed by dividing the net loss by the weighted average number of shares of common stock outstanding during each period. Whenever losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would result in a diluted loss per share less than the basic loss per share and therefore would be anti-dilutive. If all outstanding options, warrants and convertible shares were converted or exercised at March 31, 2013, the shares outstanding would be 709,736,169.

PROPERTY AND EQUIPMENT

PROPERTY AND EQUIPMENT

 

Property and equipment are carried at cost less accumulated depreciation.  Depreciation is based on the estimated service lives of the depreciable assets and is calculated using the straight-line method.  Expenditures that increase the value or productive capacity of assets are capitalized. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from service.  When property and equipment are retired, sold or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.  Repairs and maintenance are expensed as incurred.

 

The estimated useful lives of property and equipment are generally as follows:

 

Appliques

 

 

15 – 25 years

 

Machinery and equipment

 

 

3 – 12 years

 

Office furniture and fixtures

 

 

3 – 10 years

 

Computer hardware and software

 

 

3 – 7 years

 

 

Assets held for sale are separately presented on the balance sheet and are no longer depreciated.

LONG LIVED ASSETS

LONG LIVED ASSETS

 

The Company evaluates the fair value of long-lived assets on an annual basis or whenever events or changes in circumstances indicate that its carrying amounts may not be recoverable. Accordingly, any impairment of value is recognized when the carrying amount of a long-lived asset exceeds its fair value. The Company’s evaluations have not indicated any impairment of fair values.

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

 

Derivative liabilities primarily relate to warrants to purchase common stock of the Company issued in conjunction with certain debt and equity financings. Each reporting period the Company determines the fair value of the stock warrants using the Black-Scholes option pricing model at the balance sheet date. Changes in the fair value of the stock warrants are recognized each period in current earnings.

SHARE-BASED COMPENSATION

SHARE-BASED COMPENSATION

 

The Company offers share-based compensation programs to its officers, directors and employees that consist of employee stock options, common stock and restricted stock awards. Common stock and restricted stock awards are issued at the closing price of the Company’s common stock on the date of grant. The Company recognizes compensation expense ratably over the vesting periods for restricted stock awards using the grant date fair value of the stock awarded. The Black-Scholes option pricing model is used to value stock options, and compensation expense is recognized ratably over the requisite service period. Stock options typically have contractual terms of three to seven years.  Share-based compensation for employees and non-employees is reflected in the appropriate functional expense category, principally the general administrative and research and development categories, as appropriate. Share-based compensation incurred during the three months ended March 31, 2013 and 2012 was $21,284 and $726,885, respectively.

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NOTES PAYABLE (Tables)
3 Months Ended
Mar. 31, 2013
Notes Payable [Abstract]  
Notes Payable

Notes payable consisted of the following:

 

    March 31,
2013
(Unaudited)
    December 31,
2012
 
Unsecured promissory notes   $ 6,147,030     $ 5,997,030  
Accrued interest     2,759,580       2,654,350  
NOTES PAYABLE   $ 8,906,610     $ 8,651,380  
XML 62 R49.htm IDEA: XBRL DOCUMENT v2.4.0.6
Share Based Compensation - Additional Information (Detail) (USD $)
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Performance based restricted stock vested $ 4,656  
Fair value of vested options 0 107,695
Unrecognized compensation relating to performance-based restricted stock 369,215  
Unrecognized compensation expense related to unvested stock options 102,543  
Aggregate intrinsic value of options outstanding and exercisable 201,960  
Options in-the-money 62,250,000  
Restricted Stock
   
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Share based compensation arrangement by share based payment award options cliff vesting 16,000,000  
Share based compensation arrangement by share based payment award options vesting period Feb. 06, 2014  
Stock Options
   
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Share based compensation arrangement by share based payment award options cliff vesting 2,000,000  
Share based compensation arrangement by share based payment award options vesting period Feb. 06, 2014  
Fair value of restricted stock issued during period shares for retention bonuses 250,000  
Directors fees 4,000  
Share based compensation arrangement by share based payment award options vested in period 10,228  
Options in-the-money 31,916,667  
Director Fees
   
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Common shares awarded 150,000  
Common shares awarded amount $ 2,400  
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Derivative Liabilities - Additional Information (Detail) (USD $)
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Dec. 31, 2011
Class of Warrant or Right [Line Items]      
Warrants Granted 9,677,167    
Warrant and purchase rights term 3 years    
Warrant exercise price 0.21    
Aggregate intrinsic value of warrants outstanding and exercisable   $ 0 $ 0
Warrants Class B
     
Class of Warrant or Right [Line Items]      
Warrant exercise price 0.315    
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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (USD $)
Total
COMMON STOCK
ADDITIONAL PAID-IN CAPITAL
ACCUMULATED DEFICIT
Beginning Balance at Dec. 31, 2012 $ (13,160,689) $ 5,469 $ 135,829,194 $ (148,995,352)
Beginning Balance (in shares) at Dec. 31, 2012   546,887,530    
Shares issued as inducement for loans (in shares)   2,000,000    
Shares issued as inducement for loans 34,400 20 34,380 0
Shares issued for cash (in shares)   3,250,000    
Shares issued for cash 65,000 33 64,967 0
Shares issued for legal settlements (in shares)   6,000,000    
Shares issued for legal settlements 99,000 60 98,940 0
Shares issued to services (in shares)   3,750,000    
Shares issued for services 75,000 38 74,962 0
Shares issued for LTAS acquisition (in shares)   25,000,000    
Shares issued for LTAS acquisition 672,500 250 672,250 0
Shares issued for directors compensation (in shares)   150,000    
Shares issued for directors compensation 2,400 2 2,398 0
Shares issued for convertible debt conversion (in shares)   733,333    
Shares issued for convertible debt conversion 12,100 6 12,094 0
Fair value of vested restricted shares issued as retention bonuses (in shares)   16,000,000    
Fair value of vested restricted shares issued as retention bonuses 4,656 160 4,496 0
Fair value of vested options issued as share-based compensation and director's fees (in shares)   0    
Fair value of vested options issued as share-based compensation and director's fees 14,228 0 14,228 0
Net loss (517,081) 0 0 (517,081)
Ending Balance at Mar. 31, 2013 $ (12,698,486) $ 6,038 $ 136,807,909 $ (149,512,433)
Ending Balance (in shares) at Mar. 31, 2013   603,770,863    
XML 65 R10.htm IDEA: XBRL DOCUMENT v2.4.0.6
PROPERTY AND EQUIPMENT
3 Months Ended
Mar. 31, 2013
Property, Plant and Equipment [Abstract]  
PROPERTY AND EQUIPMENT

NOTE 4.  PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

    March 31,
2013
(Unaudited)
    December 31,
2012
 
Appliques   $ 2,755,732     $ 2,755,732  
Office furniture and fixtures     8,261       6,904  
      2,763,993       2,762,636  
Less: accumulated depreciation     (355,420 )     (309,670 )
    $ 2,408,573     $ 2,452,966  
XML 66 R27.htm IDEA: XBRL DOCUMENT v2.4.0.6
DERIVATIVE LIABILITIES (Tables)
3 Months Ended
Mar. 31, 2013
Derivative Liabilities [Abstract]  
Warrant to Purchase Common Stock

The following table summarizes certain information about the Company’s warrants to purchase common stock.

 

    Derivative Liabilities           Weighted
Average
 
    Warrants     Warrants     Other     Exercise  
    Class A     Class B     Warrants     Price  
                         
Outstanding at December 31, 2012     8,327,462       8,327,462       20,033,021     $ 0.234  
Warrants Granted     0       0       243,095       0.210  
Warrants Expired     (932,867 )     (932,867 )     0       0.263  
Outstanding at March 31, 2013     7,394,595       7,394,595       20,276,116     $ 0.232  
Fair Value of Derivative Liabilities Determined using Black-Scholes Option Pricing Model Assumptions

The fair value of derivative liabilities was determined using the Black-Scholes option pricing model with the following assumptions:

 

    March 31,     December 31,  
    2013     2012  
Warrants:                
Risk-free interest rate     0.11% - 0.14%       0.16%
Expected volatility     104%     124% - 130%  
Expected life (in years)     0.42 - 0.50       0.50 - 0.75  
Expected dividend yield     0       0  
Fair value of warrants outstanding   $63     $363  
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OTHER ACCRUED LIABILITIES (Detail) (USD $)
Mar. 31, 2013
Dec. 31, 2012
Schedule of Other Liabilities [Line Items]    
Payroll liabilities $ 1,709,333 $ 1,494,883
Professional fees 0 10,000
Accrued legal claims payable 235,540 334,540
Accrued cash true-up from conversion 191,328 176,831
Accrued interest on debenture 21,575 18,243
GTC acquisition payable 75,000 75,000
LTAS acquisition payable 250,000 0
Other 154,640 22,588
OTHER ACCRUED LIABILITIES $ 2,637,416 $ 2,132,085
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SUBSEQUENT EVENTS
3 Months Ended
Mar. 31, 2013
Subsequent Events [Abstract]  
SUBSEQUENT EVENTS

NOTE 14. SUBSEQUENT EVENTS

 

There were no subsequent events from the balance sheet date requiring disclosure.