LIGHTER THAN AIR SYSTEMS CORP.
See accompanying notes to financial statements.
LIGHTER THAN AIR SYSTEMS CORP.
See accompanying notes to financial statements.
LIGHTER THAN AIR SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2013 AND 2012
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
DESCRIPTION OF BUSINESS
Lighter Than Air Systems Corp. (LTAS) (the “Company”), 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 financial statements of Lighter Than Air Systems Corp. were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
World Surveillance Group, Inc. acquired all of the outstanding common stock of LTAS on March 28, 2013. This transaction (the “Acquisition”) resulted in a change in control, and has been accounted for as a business combination. As a result of the Acquisition, the financial information for the periods after the Acquisition is a different carrying value than for the period before the Acquisition. The difference affects the amounts at which certain assets and liabilities are carried in the balance sheets and the amounts of certain revenues and expenses that are recognized in the statements of operations, which as a result are not comparable.
The Company is referred to as the "Successor" for all periods subsequent to the Acquisition. All references to "Predecessor" refer to LTAS which operated under a different ownership and capital structure for the period prior to the Acquisition.
ORGANIZATION
On March 28, 2013, World Surveillance Group Inc (“WSGI”) consummated a Stock Purchase Agreement (the “Agreement”) by and among WSGI, Lighter Than Air Systems Corp. (“LTAS”), Felicia Hess (the “Shareholder”) and Kevin Hess (“KHess”) pursuant to which WSGI acquired 100% of the outstanding shares of capital stock of LTAS, thereby making LTAS a wholly-owned subsidiary of the WSGI.
The purchase price paid by the WSGI 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 WSGI’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 WSGI have been placed in escrow for one year to satisfy possible indemnification claims of the LTAS. 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 WSGI’s securities issued as the purchase price by the Shareholder for a one-year period following the Closing.
In connection with the Closing, LTAS, the Shareholder and the WSGI 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 value of the LTAS stock at the time of such triggering event.
The WSGI common stock issued as purchase price pursuant to the Agreement issued as restricted securities under an exemption provided by Section 4(2) of the Securities Act of 1933, as amended.
On December 31, 2013, the WSGI entered into a First Amendment to the Agreement (the “First Amendment”) by and among the WSGI, Lighter Than Air Systems Corp. (“LTAS”), Felicia Hess (the “Shareholder”) and Kevin Hess (“KHess”), which amended and restated various terms and conditions of the Agreement and revised the purchase price from 25 million shares plus $250,000 cash payment to 45 million shares and no cash payment due the selling shareholder and deleted the earn-out payment provisions in their entirety.
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 adjusted pursuant to the First Amendment to the Agreement:
| | | Original Allocation | | | Allocation Adjustments | | | Amended Allocation | |
| Current assets | | $ | 703,220 | | | $ | 7,195 | | | $ | 710,415 | |
| Property and equipment | | | 1,357 | | | | 2,556 | | | | 3,913 | |
| Goodwill | | | 479,585 | | | | 328,239 | | | | 807,824 | |
| Due to selling shareholder | | | 0 | | | | (350,000 | ) | | | (350,000 | ) |
| Current liabilities assumed | | | (261,662 | ) | | | 12,010 | | | | (249,652 | ) |
| Total Purchase Price | | $ | 922,500 | | | $ | 0 | | | $ | 922,500 | |
In connection with the acquisition, the assets and liabilities of LTAS were recorded at their respective fair values adjustments including goodwill of $807,824 have been pushed down to separate financial statements of the Company and new basis of accounting is established base on the purchase transaction.
REVENUE RECOGNITION
The Company recognizes revenue when all of the following criteria are met: 1) delivery has occurred and title has transferred or services have been rendered; 2) our price to the buyer is fixed or determinable; and 3) collectability is reasonably assured. Deferred revenues primarily result from advance deposits from customers for jobs or work orders not yet completed. Upon shipment of the completed job or work order, the Company will recognize revenue.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts. Management reviews the accounts receivable for potential uncollectible accounts and provides an allowance for bad debts when considered necessary. Accounts receivable are written off when management determines that they become uncollectible. No allowance was considered necessary at December 31, 2013 or 2012.
INVENTORIES
Inventories are stated at the lower of costs, determined on a first-in, first-out basis, or market, which represents management’s best estimate of market value.
INCOME TAXES
Prior to the acquisition of the Company by World Surveillance Group Inc on March 28, 2013, the Company accounted for income taxes as an S corporation. As an S Corporation, the Company does not pay any income tax. Instead the taxation of income earned by, and the allocation of losses incurred by the Company, are passed through to its shareholders, who report the income and deductions on their own individual income tax returns.
Subsequent to the acquisition of the Company by World Surveillance Group Inc, the Company changed its tax status to a C corporation, after which its taxable income or loss were reflected in World Surveillance Group Inc ‘s consolidated tax returns.
PROPERTY AND EQUIPMENT
Property and equipment are carried at historical 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 the property and equipment, 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:
| · | Machinery and equipment | 3 – 10 years |
| · | Office furniture and fixtures | 3 – 10 years |
| · | Computer hardware and software | 3 – 5 years |
| · | Transportation vehicles | 3 – 5 years |
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 2. RELATED PARTY TRANSACTIONS
The accounts payable due to related party at December 31, 2013 and 2012, includes allocated rent charges, aerostat envelopes, and labor charges due Aerial Products Corp (“APC”) of $50,691 and 116,371, respectively. APC is a related party, controlled by a current employee of the Company. APC shares the manufacturing facilities with LTAS and provides aerostat envelopes and manufacturing labor to LTAS. Total charges from APC to LTAS during the period ended December 31, 2013 were $28,589
The Company made payments of $16,055 in 2012 to Aerial Products Corp. (“APC”), an affiliated company, owned and controlled by a current employee of the Company.
At the end of 2012, the Company received an advance deposit of $50,000 from Global Telesat Corp (“GTC”), a wholly-owned subsidiary of World Surveillance Group for the purchase of two aerostat systems
NOTE 3. DUE TO PARENT
The due to parent liability at December 31, 2013 of $206,874 consists of $96,874 in accrued salary to Felicia Hess which was converted to options in World Surveillance Group, Inc. (WSGI) and $110,000 related to a re-allocation of a portion of the original purchase price paid to Felicia Hess.
NOTE 4. INVENTORIES
Inventories consisted of the following:
| | | December 31, 2013 | | | December 31, 2012 | |
| Raw materials | | $ | 12,775 | | | $ | 5,000 | |
| Work in progress | | | 51,000 | | | | 10,326 | |
| Finished goods | | | 11,536 | | | | 0 | |
| | | | 75,311 | | | | 15,326 | |
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| | | December 31, 2013 | | | December 31, 2012 | |
| Machinery and equipment | | $ | 1,100 | | | $ | 1,100 | |
| Office furniture and fixtures | | | 5,461 | | | | 5,461 | |
| | | | 6,561 | | | | 6,561 | |
| Less: accumulated depreciation | | | (4,563 | ) | | | (2,648) | ) |
| | | $ | 1,998 | | | $ | 3,913 | |
NOTE 6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
| | | December 31, 2013 | | | December 31, 2012 | |
| Payroll liabilities | | $ | 17,926 | | | $ | 31,330 | |
| ACCRUED LIABILITIES | | $ | 17,926 | | | $ | 31,330 | |
NOTE 7. PREPAID EXPENSES
Prepaid expenses consisted of the following:
| | | December 31, 2013 | | | December 31, 2012 | |
| Prepaid insurance | | $ | 1,186 | | | $ | 3,477 | |
| Prepaid deposit on inventory purchases | | | 0 | | | | 31,500 | |
| PREPAID EXPENSES | | $ | 1,186 | | | $ | 34,977 | |
NOTE 8. COMMITMENTS
Lease Commitments
APC, a related party, currently leases the shared office and manufacturing facility under a 3-year lease agreement, which can be cancelled without penalty after the thirteenth month of the lease term. During 2013 and 2012, APC allocated $22,470 and $19,260, respectively, in rent expense to LTAS based upon estimated square footage occupied. The Company has no other long-term contracts or commitments.
NOTE 9. LITIGATION AND CONTINGENCIES
In the ordinary conduct of business, the Company may be subject to periodic lawsuits, investigations and litigation claims, which the Company will accrue for where appropriate and can be reasonably estimated. The Company cannot predict with certainty the ultimate resolution of such lawsuits, investigations and claims asserted against it.
NOTE 10. SUBSEQUENT EVENTS
The Company has evaluated its subsequent events through August 12, 2014, the date the financial statements were available to be issued.
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