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GRDH > SEC Filings for GRDH > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for GUARDIAN 8 HOLDINGS

Form 10-Q for GUARDIAN 8 HOLDINGS


14-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this report.

Overview

We were incorporated in Nevada on June 8, 2009 as Guardian 6 Corporation. In August of 2009, we changed our name to Guardian 8 Corporation. Our principle offices are located in Scottsdale, Arizona. We were a development stage company from our inception through June 30, 2013, engaged in the design and introduction of a new category of personal security devices, Enhanced Non-Lethal Devices (ENL). Our product, the Pro V2 incorporates a layered defensive approach to help security professionals and consumers protect themselves against personal attacks, while capturing critical images and audio recordings to defend against personal liability.

Effective November 30, 2010 we merged with Global Risk Management & Investigative Solutions ("Global Risk"), a public company, with its common stock registered with the United States Securities and Exchange Commission. We merged into a newly formed wholly owned subsidiary of Global Risk, with Guardian 8 Corporation being the surviving corporation. Post-merger, Global Risk changed its name to Guardian 8 Holdings.

For the six months ended June 30, 2014 and 2013, the Company was consolidated with its wholly-owned subsidiary, Guardian 8 Corporation. All material intercompany transactions and accounts have been eliminated. Beginning July 1, 2013 as product revenues became sustainable, the Company transitioned from reporting as a development stage Entity to an operating entity. As a result, the financial statements included in this filing have been presented accordingly.

Since inception, our team of engineers and executives has been focused on developing and patenting our first commercial product, (the Guardian 8 Pro V2) as well as the key functions that create market differentiation. We have also been formalizing marketing and manufacturing strategies as well as building customer distribution channels in preparation for our first product launch into the Private Security Market.

During the year ended December 31, 2013, the Company received its first production units assembled by its contract manufacturer and generated initial revenue totaling $43,619.

In 2013, key personnel were hired in the areas of Sales and Operations. These hires include an experienced Vice President of Customer Service, a lead manufacturing engineer, and a Sales Manager. We intend to expand our sales and marketing staff, as well as administrative support during the next few months enabling us to reach key customers and shorten the sales cycles.

During the first six months of 2014, the Company expanded its sales team to include regional representatives, as well as non-employee sales and training consultants. These individuals were trained, and are now working to develop relationships with the potential leads identified in the Company's database. enduring the second quarter of 2014, the Company added one additional sales rep who will focus in the Atlantic region of the United States.

The Company also added William Clough to its Board of Directors, effective April 9, 2014.

During the first six months of 2014, the Company also initiated development efforts on the new consumer product, which is targeted for release in 2015. During this period, the Company expensed $37,070 for these development efforts.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In consultation with our Board of Directors, we have identified several accounting principles that we believe are key to the understanding of our financial statements. These important accounting policies require management's most difficult, subjective judgments.


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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Net Loss Per Share

We adopted ASC 260, "Earnings Per Share" that requires the reporting of both basic and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. In accordance with ASC 260, any anti-dilutive effects on net income (loss) per share are excluded.

Going Concern

Our financial statements are prepared using generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Our ability to continue as a going concern is dependent upon our ability to locate sources of capital, and attain future profitable operations. Our management is currently initiating their business plan. The accompanying financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

Revenue Recognition

It is the Company's policy that revenues are recognized in accordance with ASC 605-10, "Revenue Recognition". The company therefore recognizes revenue from sales of product upon delivery to its customers where the amount is fixed or determinable, and collectability is probable. Cash payments received in advance are recorded as deferred revenue. Extended warranties are recorded as deferred revenue and amortized according to the number of months included in service. The Company recognized $19,012 and $3,124 in revenues for the six months ended June 30, 2014 and 2013, respectively.

Fair Value of Financial Instruments

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2014 and 2013. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, accounts payable and amounts due to related party. Fair values were assumed to approximate carrying values because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.

Income Taxes

The Company follows ASC subtopic 740-10, "Accounting for Income Taxes" for recording the provision for income taxes. ASC 740-10 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

Principles of consolidation

For the six months ended June 30, 2014 and 2013, the Company was consolidated with its wholly-owned subsidiary, Guardian 8 Corporation. All material intercompany transactions and accounts have been eliminated.


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Cash and cash equivalents

Cash and cash equivalents include all cash balances in non-interest bearing accounts and money-market accounts. The Company places its temporary cash investments with quality financial institutions. At times such investments may be in excess of Federal Deposit Insurance Corporation (FDIC) insurance limit. The Company does not believe it is exposed to any significant credit risk on cash and cash equivalents. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. As of June 30, 2014 and December 31, 2013, there were cash equivalents of $3,046,445 and $305,649 respectively.

Inventory

During the six months ended June 30, 2014, the Company accepted the delivery of 3,192 units of its ProV2 from its contract manufacturer. These deliveries were part of the Company's initial release of 10,000 production units. The terms for the purchase of the product required 50% prepayment at the time of order, and the remaining 50% to be paid prior to shipment to the United States. In addition, as of June 30, 2014, the Company had prepaid its contract manufacturer approximately $287,278 toward the purchase of these units, and had 2,000 units that were in transit as of June 30, 2014, and were subsequently received. We believe this inventory will be adequate to fulfill orders for the next twelve months.

Research and development costs

The Company expenses all costs of research and development as incurred. There are research and development costs included in other general and administrative expenses of $107,248 and $249,529 for the six months ended June 30, 2014 and 2013 respectively. The Company intends to continue investing in the development of future products, including a new consumer product anticipated for market launch in 2015.

Property and equipment

Property and equipment are stated at cost. Major improvements are charged to the asset accounts while replacements, maintenance and repairs which do not improve or extend the lives of respective assets are expensed.

The Company depreciates its property and equipment for the financial reporting purposes using the straight-line method based on the following useful lives of the assets:

                      Equipment              2 years
                      Tooling                10 years
                      Computer equipment     3 years

Leasehold improvements Life of lease Furniture and fixtures 5 years Warehouse equipment 10 years

Recent Developments

We completed the initial design of the first product under development in 2011. We tested these prototypes through a number of different venues and collected feedback and input on suggested design changes. As a result, during the 2012 and 2013 fiscal years, we incorporated significant upgrades and modified the initial design to improve reliability, durability and efficiencies. An initial run of 120 units of the new designed Pro V2 was produced in the second quarter enabling our Engineers to complete a comprehensive testing protocol to confirm tooling and the assembly processes performed by our contract manufacturer, and to enable our Sales Team to send initial units for customer review. In late June of 2013, the product was released by our Engineers for production and customer sales.

In March of 2012 we filed with the Depository Trust Company (DTC) for electronic clearing of our common stock, with the assistance of C. K. Cooper & Company and Legent Clearing. We received DTC approval for electronic clearing on May 7, 2012. Our board of directors intends to file a registration statement on Form S-1 to register 100% of the shares held by stockholders of record sometime in 2014. This is intended to make it easier and more efficient for our stockholders to trade our shares and brokerage firms to accept the shares for deposit.


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On April 20, 2012, we appointed Kathleen Hanrahan, a current member of our board of directors, to serve as our interim chief financial officer. Ms. Hanrahan has extended the term of her agreement until such time as the Company finds a suitable replacement or, by the end of 2015.

On February 7, 2013, we filed a Form 8-A to register our common stock under
Section 12(g) of the Exchange Act. Before this filing we were a voluntarily reporter under the Act and before November of 2010 were considered a "shell" company. Therefore, our stockholders have been unable to rely on Rule 144 of the Act for the public sale of our securities. Our stockholders will be able to rely on Rule 144 of the Act following the 90th day from filing of the Form 8-A described above.

During the year ended December 31, 2013, our CEO/president, C. Stephen Cochennet, along with two directors exchanged existing term notes along with accrued interest totaling $648,933 to three new unsecured notes, bearing interest at a rate of 12% per annum, which include a three-year warrant for every $1.00 of principal amount of each note, exercisable at $0.40 per share. All of the notes and related accrued interest were paid as of June 30, 2014.

We issued four additional notes payable to related parties, including our CEO, during the month of September 2013, totaling $375,000. These notes were unsecured, all bearing interest at a rate of 12% per annum, and include a three-year warrant for every $1.00 of principal amount of each note, exercisable at $0.40 per share. All of the notes payable and related accrued interest were paid as of June 30, 2014.

Also during the year ended December 31, 2013, we issued a note payable to a non-related party in the amount of $100,000. This note was unsecured, bearing interest at a rate of 12% per annum, and included a three-year warrant for 100,000 shares of common stock, exercisable at $0.40 per share. This note and related accrued interest were paid as of June 30, 2014.

The warrants issued with the note were valued using the Black-Scholes option pricing model and bifurcated out of the note proceeds and recorded as additional paid in capital in the amount of $284,914. The loan costs are being amortized over the life of the notes, which expire on April 30, 2014. As of June 30, 2014, all loan costs were fully amortized.

During the year ended December 31, 2013, we agreed to sell 5,173,750 shares of common stock for $2,069,500, less private placement fees of $312,515. We also issued 1,143,700 shares of common stock for compensation in the amount of $556,032, 1,039,819 shares of common stock in exchange for services in the amount of $421,016, 360,000 shares of common stock in exchange for $219,960, and had warrants to purchase 312,500 shares of common stock converted through the payment of $51,875 in cash, and a reduction of $35,000 in a related party note payable.

We entered into four employment and or consulting contracts, in which employees and consultants of the Company receive vested shares either at set times, or if the Company meets certain criteria in the respective time periods of their contract. As of December 31, 2013, 1,338,200 common shares vested per these contracts, for a total expense of $640,637. A total of 548,550 shares were owed but not issued as of December 31, 2013.

During the year ended December 31, 2013, revenue increased over the prior period, as additional production units became available for sale. We also attended the ASIS conference in September 2013 where we initiated our training program and accepted new test and evaluation commitments from industry leaders in the Security market. These trial units have not been recognized as revenue, but will be recorded as payment is received, or a purchase order documenting collectability is obtained.

On September 13, 2013, we received a Research Report (the "Report") prepared by Steven Ralston, CFA (the "Analyst") of Zacks Small-Cap Research. We assisted the Analyst in gathering information for the Report, however, the understanding between us and the Analyst calls for the Analyst to maintain full discretion to report his own opinion about our investment prospects and its desirability for both individual and institutional investors.

In May of 2013, we entered into a service agreement with Zacks Investment Research, Inc. for the distribution of the Zacks Small Cap Research Report and the use of Zacks Advanced Targeting Software, whereby Zacks has licensed us to use the web based software targeting programs owned by Zacks. We agreed to pay Zacks a fee of $18,000 over the twelve month term of the service agreement. Zacks Advanced Targeting Software is used for targeting Institutional Investors / Buy & Sell Side Contact Directories and accessing shareholder data and peer group holdings analysis.


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On January 17, 2014, the Company entered into a revolving line of credit agreement with Cornerstone Bank, N.A. The agreement provided for an aggregate of up to $700,000 (which was subsequently increased to $900,000 in April of 2014) at any time outstanding pursuant to a revolving line of credit and was to mature on January 16, 2015. The agreement was secured by inventory, work in process, accounts receivable, letter of credit, and was personally guaranteed by the Company's Chief Executive Officer/President. Borrowings carried an interest rate of 6% per annum, with monthly interest payments to be paid by the Company. The line of credit was fully paid as of June 30, 2014.

As part of the agreement, the Company entered into a Letter of Credit Rights Control Agreement with F&M Bank & Trust Company. Per this agreement, if the Company defaulted on the line of credit, F&M Bank & Trust Company would then be held liable from Cornerstone Bank, N.A. for the payment of the line of credit. In addition, the Company would then owe the amount disbursed to F&M Bank & Trust Company. This agreement ceased with the satisfactory payment of the debt outstanding.

During the three months ended March 31, 2014, the Company received three notes payable from related parties in the amount of $475,000, and one note payable from an unrelated party in the amount of $25,000. All of the notes were unsecured, bearing interest at 12% per annum, and were due on July 15, 2014. All notes also included a three-year warrant for each of $1.00 of principal included in the note. All of the notes and related accrued interest were paid in full as of June 30, 2014.

During the six months ended June 30, 2014, the Company issued 150,000 shares of its common stock, with an aggregate value of $76,500 for compensation. The Company also issued 892,289 shares of its common stock, with an aggregate value of $409,010 for services.

During the six months ended June 30, 2014, the Company issued $7,000,000 of convertible senior secured debentures. These debentures are all due on November 30, 2015, bear interest at a rate of 8%, and include one five-year warrant with a value of $0.60 per share for each dollar issued.

As part of these debentures, the company also incurred loan costs of $809,939. The loan costs are being amortized over an 18-month period ending November 30, 2015.

The Company issued the following convertible Senior Secured Debentures:

                                                      1st Closing             2nd Closing

1.   Date of issuance                                May 27, 2014            June 2, 2014

2.   Gross amount of debentures                       $5,250,000              $1,750,000

3.   Net cash received:
      Gross amount of debentures                      $5,250,000              $1,750,000
      Less
      Repay Cornerstone bank loan and interest         (901,510)                   -
      Conversion of short-term debt                        0                   (195,000)
      Commissions and fees                             (439,979)               (113,715)
      Attorney fees                                    (55,000)                 (5,370)
      Other fees                                        (5,000)                 (5,000)
      Amount held in escrow by third party              (7,000)                    -
     Net cash received                                $3,841,511              $1,430,915

4.   Term                                              18 Months               18 Months
                                                 Due November 30, 2015   Due November 30, 2015

5.   Interest rate                               8% from May 27, 2014    8% from June 2, 2014

6.   Interest payment dates                            Quarterly               Quarterly
                                                 Beginning May 1, 2015   Beginning May 1, 2015

7.   Class C warrants to debenture holders:
      Number issued                                    5,250,000               1,750,000
      Price per share                                    $0.60                   $0.60
      Term                                              5 years                 5 years
      See condition number 2

8.   Warrants to placement agents
      Number issued                                     420,000                 140,000
      Price per share                                    $0.50                   $0.50
      Term                                              5 years                 5 years

9.   Number of investors                                  10                      17


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The following conditions/terms apply to both closings:

1. Use of funds

The funds will be used for:

Repay short-term debt
Repay bank line of credit and interest
Sales and marketing expenses
Purchase additional inventory
International sales channel development
Research and development of a consumer ENL device Purchase of fixed assets
General corporate purposes

2. Conversion Rights

The debentures may be converted by each buyer commencing on the 91st day following closing and through maturity, either in whole or in part, up to the full principal amount and accrued interest thereunder into shares of common stock at $0.50 per share.

The Company may force conversion of the debentures into shares of common stock at $0.50 per share, either in whole or in part, if the closing sale price of shares of common stock during any ten consecutive trading days has been at or above $1.00 per share.

In the event the average closing price of the common stock for the ten trading days immediately preceding, but not including, the maturity date of the debentures is equal to or greater than $0.80, then on the maturity date, the buyers must convert all remaining principal due under the debentures.

The debentures contain provisions limiting the conversion to the extent that, as a result of such conversion, each buyer would beneficially own more than 4.99% (subject to waiver) in the aggregate of the issued and outstanding shares of the company's common stock, calculated immediately after giving effect to the issuance of shares of common stock upon conversion of the debentures.

In addition, upon conversion of the debentures, the number of Class C warrants issued to each buyer shall automatically double.

Right to Redeem Debenture. Beginning on the 91st day following the closing and so long as a registration statement covering all the registrable securities is effective, the company has the option of redeeming the principal, in whole or in part by paying the amount equal to 100% of the principal, together with accrued and unpaid interest by giving ten business days prior notice of redemption to the buyers.

Security of Debentures. The debentures are guaranteed, pursuant to "Secured Guaranty" and "Pledge and Security Agreement by Guardian 8 Corporation and secured interest in all of the assets of the company and Guardian 8 Corporation.

Registration Rights. The Company has agreed to file a "resale" registration statement with the Securities and Exchange Commission covering all shares of common stock underlying the debentures and Class C warrants within 90 days of the final closing, on or before August 31, 2014, and to maintain the effectiveness of the registration statement for five years, or until all securities have been sold or are otherwise able to be sold pursuant to Rule
144. The Registrant has agreed to use its reasonable best efforts to have the registration statement declared effective within 120 days of the filing date. The Company is obligated to pay to investors liquidated damages equal to 1.0% per month in cash for every thirty day period up to a maximum of six percent,
(i) that the registration statement has not been filed after the filing date,
(ii) following the effectiveness date that the registration statement has not been declared effective; and (iii) as otherwise set forth in the financing agreements.


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3. Events of Default.

Failure of Registrant to timely file the registration statements and have same declared effectively by the SEC within the time

periods set forth in the Agreement;

The suspension of the company's common stock from the OTC:QB for five consecutive days or for more than an aggregate of ten days in 365 days;

Failure to pay principal and interest when due;

An uncured breach of any material covenant, term or condition in any of the Debentures or related agreements;

A breach of any material representation or warranty made in any of the Debentures or related agreements: and

Any form of bankruptcy or insolvency proceeding is instituted against the companies.

4. Valuation of Warrants

The warrants issued with the debentures were valued using the Black-Scholes option pricing model and bifurcated out of the note proceeds and recorded as additional paid in capital in the amounts of $1,274,075 for the first closing and $424,691 for the second closing. A discount on the debenture was recorded in the same amount and is being amortized into interest expense over the eighteen month life of the debenture using the interest method.

As of June 30, 2014, $94,376 was amortized into interest expense and the remaining discounts were $1,604,390.

5. Debenture balances as of June 30, 2014

                                 1st Closing      2nd Closing         Total

              Gross debentures   $  5,250,000     $  1,750,000     $ 7,000,000
              Less discount         1,203,293          401,097       1,604,390

              Net Debentures     $  4,046,707     $  1,348,903     $ 5,395,610


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Results of Operations for Guardian 8 Corporation for the six months ended June 30, 2014 and 2013.

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