News Column

GUARDIAN 8 HOLDINGS - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

May 14, 2014

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 three months ended March 31, 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 three 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. Subsequent to the quarter end, 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. Since 2006, Mr. Clough has served as a board member of CUI Global, Inc., a public company trading on NASDAQ. In addition, Mr. Clough has served as CUI Global's President and Chief Executive Officer since September of 2007 at which time Mr. Clough stepped down as Executive Vice President of Corporate Development. Mr. Clough received his Juris Doctorate, cum laude, from the University of California, Hastings College of the Law in 1990. He is certified to practice law in state and federal courts in California, Illinois, Hawaii and before the United States Supreme Court.

The Company also initiated development efforts on the new consumer product, which is targeted for release in 2015. During the first three months of 2014, the Company expensed $15,000 for these development efforts.

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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.

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 $5,045 in revenues for the three months ended March 31, 2014. There were no revenues for the three months ended March 31, 2013.

Fair Value of Financial Instruments

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 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.

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Principles of consolidation

For the three months ended March 31, 2014 and 2013, the Company was consolidated with its wholly-owned subsidiary, Guardian 8 Corporation. All material intercompany transactions and accounts have been eliminated.

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 March 31, 2014 and 2013, there were cash equivalents of $119,086 and $305,649 respectively.

Inventory

During the first quarter of 2014, the Company accepted the delivery of 1,396 units of its ProV2 from its contract manufacturer. These deliveries were part of the Company's initial purchase orders totaling 11,800 units. The terms for the purchase of the product require 50% prepayment at the time of order, and the remaining 50% is paid prior to shipment to the United States. As of 3/31/2014, the Company had prepaid its contract manufacturer approximately $600,000 toward the purchase of an additional 10,000 units to be delivered in 2014. We believe this inventory will be adequate to fulfill orders for the next 12 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 $28,790 and $46,312 for the three months ended March 31, 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:

Tooling 10 years Equipment 2 years Leasehold improvements Life of lease Furniture and fixtures 5 years



Recent Developments

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.

We issued four additional notes payable to related parties, including our CEO, during the month of September 2013, totaling $375,000. These notes are unsecured, all bear 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.

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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 is unsecured, bears interest at a rate of 12% per annum, and includes a three-year warrant for 100,000 shares of common stock, exercisable at $0.40 per share.

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. The balance in prepaid loan costs was $143,302 as of December 31, 2013.

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.

On January 17, 2014, the Company entered into a revolving line of credit agreement with Cornerstone Bank, N.A. The agreement provides for an aggregate of up to $700,000 at any time outstanding pursuant to a revolving line of credit and matures on January 16, 2015. The agreement is secured by inventory, work in process, accounts receivable, letter of credit, and was personally guaranteed by the Company's Chief Executive Officer/President. Borrowings bear interest at 6% per annum, with monthly interest payments to be paid by the Company.

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 were to default 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.

On April 28, 2014, the Company increased the borrowing capacity of this line of credit to $900,000. The terms of the note remain the same.

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 are unsecured, bear interest at 12% per annum, and are payable on July 15, 2014. All notes also included a three-year warrant to purchase shares of the Company's common stock for $0.50 per share for each of $1.00 of principal included in the note.

During the three months ended March 31, 2014, the Company issued 150,000 shares of its common stock, with an aggregate value of $76,500 for compensation. The Company also issued 527,039 shares of its common stock, with an aggregate value of $233,040 for services.

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Results of Operations for Guardian 8 Corporation for the three months ended March 31, 2014 and 2013. Three Months Three Months Ended March 31, Ended March 31, Increase/ 2014 2013 (Decrease) Revenues $ 5,045 $ - $ 5,045 Cost of sales 3,879 - 3,879 Gross Profit 1,166 - 1,166 Operating Expenses 1,012,201 571,464 587,480 Net (loss) from operations (1,011,035 ) (571,464 ) 586,314 Interest expense (193,650 ) (8,400 ) (38,507 ) Net (loss) $ (1,204,685 )$ (579,864 )$ 624,821 Net (loss) per share $ (0.03 ) $ (0.02 ) $ (0.01 ) Weighted average shares outstanding 40,375,964 32,026,224



During the three months ended March 31, 2014, we had revenues of $5,045 and cost of sales of $3,879 due to shipment of our production units. We did not have and revenue or cost of sales in the three months ended March 31, 2014 and 2013.

We generated net losses of $1,204,685 and $579,864 for the three months ended March 31, 2014 and 2013, respectively. Our losses include research and development costs related to our ProV2 and new consumer device of $28,790 and $46,312 for the three months ended March 31, 2014 and 2013, respectively, as well as general and administrative expenses of $983,411 and $525,152 for the three months ended March 31, 2014 and 2013, respectively.

We anticipate continued losses from operations until such time as we generate sufficient revenues to through the sale of our device to cover both our cost of manufacturing, and sales, general and administrative expenditures.

Satisfaction of our cash obligations for the next 12 months.

Since inception, we have financed cash flow requirements through the issuance of common stock for cash and services, as well as both convertible and non-convertible term notes, and bank financing. From June of 2009 through March 31, 2014, we raised $3,024,485 through the sale of our common stock, $113,625 from the exercise of 371,250 warrants in conjunction with notes payable, $700,000 from a revolving bank line of credit agreement, and an additional $2,328,433 through the issuance of notes payable, net of $10,000 of principle payments, and the exercise of warrants through a $35,000 reduction in notes payable. As of March 31, 2014, our cash balance was $119,086. Our plan for satisfying our cash requirements for the next twelve months is through the funds from additional offerings of our common stock, sales of additional convertible notes or other debt instruments, third party financings, additional bank financing of $200,000 and revenue generated through the sales of our products and training services. We may not generate sufficient amounts of revenues to meet our working capital requirements. Consequently, we intend to make appropriate plans to ensure sources of additional capital in the future to fund growth and expansion through additional equity or debt financing or credit facilities.

As we continue to expand operational activities, we may continue to experience net negative cash flows from operations, pending receipt of revenues from our product sales, and will be required to obtain additional financing to fund operations through common stock offerings and debt borrowings, giving consideration to loans and working diligently to move sales ahead to the extent necessary to provide working capital.

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We anticipate incurring operating losses over the next twelve months. Our lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development. Such risks include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks we must, among other things, implement and successfully execute our business and marketing strategy, continue to develop and upgrade technology and products, respond to competitive developments, and continue to attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.

As a result of our cash requirements and our lack of significant revenues, we anticipate continuing to issue common stock in exchange for loans and/or equity financing, which may have a substantial dilutive impact on our existing stockholders.

Summary of any product research and development that we will perform for the term of our plan of operation.

We expense all costs of research and development as incurred. There are research and development costs included in other general and administrative expenses of $28,790 and $46,312 for the three months ended March 31, 2014 and 2013, respectively, which included approximately $15,000 toward our new consumer device. We anticipate expending up to $500,000 on additional significant product research and development for our consumer device, the next program pending on our product road map.

In addition to investments in research and development expenditures, we have also retained the services of a patent attorney to assist us with the filing and protection of key utility applications, as well as future technologies to be incorporated in next generation products for the commercial security and consumer markets. Costs associated with the filing of intellectual property has been capitalized and will be amortized over the 20-year life of the patents when issued.

Changes in the number of employees.

We have nine full-time employees, C. Stephen Cochennet, Chief Executive Officer, Paul Hughes, Chief Operations Officer, Jose Rojas, Vice President of Customer Support, our lead manufacturing engineer, a sales manager, a customer service representative, two direct sales people, and one administrative support person for Guardian 8 Corporation. We utilize the services of several contract personnel, engineers and other professionals on an as needed basis. We are currently managed by C. Stephen Cochennet, Kathleen Hanrahan and Paul Hughes with the assistance of our board of directors. We look to Mr. Cochennet, Ms. Hanrahan and Mr. Hughes for entrepreneurial, organizational and management skills. We plan to continue to use consultants, legal and patent attorneys, design and mechanical engineers, engineers and accountants as necessary. We intend to continue hiring sales and operations employees in 2014 to facilitate go to market activities. A portion of any employee compensation likely would include direct stock grants, or the right to acquire common stock in the company, which would dilute the ownership interest of holders of existing shares of our common stock.

Expected purchase or sale of plant and significant equipment.

We anticipate investing significant resources in the purchase of a plant and equipment in the near future; as we will begin to scale production operations throughout 2014.

Liquidity and Capital Resources

Working capital is summarized and compared as follows:

March 31, 2014 March 31, 2013 Current assets $ 1,334,475$ 344,676 Current liabilities 2,630,208 648,271 (Deficit) $ (1,295,733 )$ (303,595 ) 26



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Changes in cash flows are summarized as follows:

We had a net loss of $1,204,685 for the three months ended March 31, 2014. This loss was offset by non-cash items such as stock issued for services of $233,040, stock issued for compensation of $76,500, depreciation and amortization of 21,985, and the amortization of discount on notes payable of $146,743. We had cash used by the increase in accounts receivable of $674, deposits on inventory of $377,142, the increase in inventory of $373,211, the decrease in accounts payable and accrued expenses of $24,143, and the decrease in deferred revenue of $332. We had cash provided due to the decrease in prepaid expenses of $70,155, increase in accrued interest of $40,957, and the increase in accrued payroll taxes of $4,244.

We did not have any investing activities during the three months ended March 31, 2014.

We had cash provided by financing activities of $1,200,000 for the three months ended March 31, 2014. This included proceeds from notes payable to related parties of $475,000 proceeds from notes payable to unrelated parties of $25,000 and proceeds from a line of credit with a bank of $700,000.

We had a net loss of $579,864 for the three months ended March 31, 2013. This included non-cash items such as stock issued for services of $58,500, stock issued for compensation of $91,464, and depreciation and amortization of $2,825. We had cash used by an increase in deposits on inventory of $43,136 and an increase in inventory of $700. We had cash provided due to the decrease in prepaid expenses of $29,367, increase in accounts payable and accrued expenses of $24,615, an increase in customer deposits of $1,308, an increase in accrued interest of $8,400 and an increase in accrued payroll and payroll taxes of $79,873.

We had cash used by investing activities of $20,687 for the three months ended March 31, 2013, due to the purchase of property and equipment, and the Company's website.

We had cash provided by financing activities of $552,879 for the three months ended March 31, 2013. This included proceeds from the sale of common stock of $302,879 and proceeds from notes payable to related parties of $250,000.

As a result, we are in immediate need for additional working capital and are forced to seek additional equity or debt financing to meet our ongoing working capital needs. As we expand our activities, we may, and most likely will, continue to experience net negative cash flows from operations, pending receipt of revenues from product sales. Additionally we anticipate obtaining additional financing to fund operations through common stock offerings, to the extent available, or to obtain additional financing through either convertible or non-convertible notes payable, to the extent necessary to augment our working capital. We are also evaluating additional sources of inventory financing that may be available once orders for our product are received.

We anticipate that we will incur operating losses in the next twelve months. Our lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets. Such risks for us include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks, we must, among other things, obtain a customer base, implement and successfully execute our business and marketing strategy, continually develop and upgrade our product, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.

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