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EX-32.1 - HighCom Global Security, Inc.ex32_1.htm
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EXCEL - IDEA: XBRL DOCUMENT - HighCom Global Security, Inc.Financial_Report.xls

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
 
x  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the fiscal year ended December 31, 2011
   
o  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
   
For the transition period from:  ______________ to __________
  
Commission file number: 000-53756

 
BLASTGARD® INTERNATIONAL, INC.
 
 
(Name of small business issuer as specified in its charter)
 
Colorado
 
84-1506325
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

2451 McMullen Booth Road, Suite 242, Clearwater, FL
 
33759
(Address of principal executive offices)
 
(Zip Code)

Issuer’s telephone number: (727) 592-9400

Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

Check whether the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o

Indicate by check mark whether the 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 it 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 o

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K o
 
 
 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined by Rule 12b-2 of the Exchange Act: 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 o No x

As of June 30, 2012, the number of shares held by non-affiliates was approximately 52,495,000 shares.  The approximate market value based on the last sale (i.e. $.08 per share as of June 30, 2011) of the Company’s Common Stock was approximately $4,199,600.

The number of shares outstanding of the issuer’s Common Stock, $.001 par value, as of March 2, 2012 was 90,386,036 shares.
 
 
2

 
 
TABLE OF CONTENTS
 
   
Page
Part I
 
     
Item 1
Business
4
Item 1A
Risk Factors
24
Item 1B
Unresolved Staff Comments
29
Item 2
Properties
29
Item 3
Legal Proceedings
30
Item 4
Mine Safety Disclosure
30
     
Part II
 
   
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
31
Item 6
Selected Financial Data.
34
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operation
34
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
34
Item 8
Financial Statements and Supplementary Data
39
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
39
Item 9A
Controls and Procedures
39
Item 9B
Other Information
40
     
Part III
 
     
Item 10
Directors and Executive Officers and Corporate Governance.
41
Item 11
Executive Compensation
47
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
53
Item 13
Certain Relationships and Related Transactions, and Director Independence.
54
Item 14
Principal Accounting Fees and Services
58
     
Part IV
 
   
Item 15
Exhibits, Financial Statement Schedules
61
Signatures 
 
62
 
 
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PART I

CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANY’S ACTUAL RESULTS TO
DIFFER FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS

Readers of this document and any document incorporated by reference herein are advised that this document and documents incorporated by reference into this document contain both statements of historical facts and forward looking statements.  Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially for those indicated by the forward looking statements.  Examples of forward looking statements include, but are not limited to (i) projections of revenues, income or loss, earning or loss per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of the plans and objectives of the Company or its management or Board of Directors, including the introduction of new products, or estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about the Company or its business.

This document and any documents incorporated by reference herein also identify important factors which could cause actual results to differ materially from those indicated by forward looking statements.  These risks and uncertainties include price competition, the decisions of customers, the actions of competitors, the effects of government regulation, possible delays in the introduction of new products and services, customer acceptance of products and services, the Company’s ability to secure debt and/or equity financing on reasonable terms, and other factors which are described herein and/or in documents incorporated by reference herein.

The cautionary statements made above and elsewhere by the Company should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company.  Forward looking statements are beyond the ability of the Company to control and in many cases the Company cannot predict what factors would cause results to differ materially from those indicated by the forward looking statements.

Item 1. Business

BlastGard International, Inc. is in the business of providing protection for individuals and property.  We have developed and have been marketing BlastWrap products to protect people and property against explosive forces. We have recently acquired a 98.2% new subsidiary HighCom Security, Inc. (“HighCom”) that provides a wide range of security and personal protective gear.  A description of each company can be found below and a description of our acquisition can be located under "Item 13." We believe that the products of the two companies have a certain synergy and that BlastGard International is poised to be a full service provider for defensive and protective product needs. The term "the Company" shall include BlastGard and HighCom unless the context indicates otherwise.

Recent Developments

HighCom has implemented an in-depth ethics and compliance management and monitoring program that is tied to our International Standard Organization (“ISO”) certified quality processes. These policies and procedures outline each step within the compliance process and how they relate to, and should be acted upon, to ensure compliance with all local, state, federal, and international laws and regulations.  Most importantly they address processes and policies that are related to compliance with the Federal Acquisition Regulation (“FAR”), Defense Federal Acquisition Regulation (“DFAR”), International Traffic in Arms Regulations (“ITAR”), Office of Foreign Assets Control (“OFAC”), Export Administration Regulations (“EAR”). Arms Export Control Act (“AECA”), Export Administration Act (“EAA”), Automated Export System (“AES”), and Office of Federal Activities (“OFA”).  This is in addition to United Nations (“UN”) specific contract terms and performance standard policies and strict ethics and compliance standards. We have also completed training internally and externally with regards to the Foreign Corrupt Practices Act (“FCPA”) and other foreign business regulations that help our employees recognize red flags and potential risk situations. Our COO has also completed a six month course through the International Import Export Institute and has been recognized as a certified U.S. Export Control Officer. 
 
 
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Given the equipment and ballistic protection solutions provided by HighCom, compliance with the U.S. Department of Commerce, U.S. Department of State, U.S. Department of the Treasury and all other governmental agencies' regulations is a high priority. HighCom received official communication from the U.S. State Department that HighCom’s export authority has been reinstated. In addition to this, the Company also completed registration through the Directorate of Defense Trade Controls as well as the Bureau of Industry and Security ("BSI"). The purpose of these registrations is to allow the Company control over the export management and compliance program moving forward.  HighCom also completed their ISO certification which had been revoked under HighCom due to missed audits. The Company has also made significant personnel changes within HighCom and restructuring of operating locations and costs, resulting in significant reductions to HighCom’s operating expenses in the second half of 2011.

With the acquisition of HighCom by BlastGard, we feel this is a unique opportunity to combine the armor technology of HighCom with the blast mitigating technology of BlastGard and provide a combination of advancements in product technologies while focusing on USA made products for the United States Military and Allied government and agencies worldwide. We have initiated numerous Research and Development projects according to National Institute of Justice (“NIJ”) body armor standards and testing. HighCom has created two new stand alone ballistic plates: 1) Guardian 3SFS-0 Level III Stand Alone Steel ballistic plate, according to NIJ 0101.04, INTERIM2005; and 2) NIJ 06 Guardian 4SAS-12 Level IV Stand Alone ballistic plate NIJ Certified 0101.06 NEW NIJ06. Utilizing USA made steel, we have lowered the cost of our new steel plate while improving our processing, resulting in a higher performance product. We also received NIJ new certification on our 4SAS-15 plate (NIJ 06 Level IV plate). Another area of development is the creation of new, lighter weight ballistic shield. We anticipate completing initial testing on our new material by the end of March 2012.  we will have a new shield to test. We also are now doing all production in house to control costs and more effectively manage quality, compliance as well as our ability to provide quicker turnaround response times to immediate orders. We recently passed our ballistic tests for oven processed plates. We did this to find an alternative to using an autoclave, which is more expensive to operate. This will allow us to handle R&D and production in house using an oven.

Another recent development by the Company was increasing our product liability insurance from the industry standard $1,000,000 to $10,000,000. Our goal is focused on the safety of the military and law enforcement personnel who employ our products in the field. We also value the relationships we are establishing with our distributors, re-sellers, and partners. This increase in our coverage demonstrates our commitment and support to both our clients and their customers on a global basis.

We have recently entered into a number of agency agreements to market our product line in Mexico and the Middle East and North Africa (“MENA”) region. We have also attended numerous tradeshows in an effort to re-establish HighCom’s presence in the personal protection equipment market and are currently participating in numerous bids totaling millions of dollars. We are seeing a significant increase in our overall sales on a quarter by quarter basis as we develop these relationships.


HighCom Security, Inc.

HighCom Overview

Founded in 1997 and originally based in San Francisco, HighCom Security, Inc., a California corporation, is a global provider of security equipment. HighCom is a leader in advanced ballistic armor manufacturing. With an 11,300 square foot manufacturing and distribution facility located in Columbus, Ohio, HighCom is well positioned for large scale and time sensitive global supply needs. We design, manufacture and/or distribute a range of security products and personal protective gear. Our logistics network is now managed from our corporate headquarters in Clearwater, Florida. HighCom serves a wide range of customers throughout the world. Our North American customer base includes the Department of Defense and the Department of Homeland Security. We cater to local law enforcement agencies, correctional facilities and municipal authorities, as well as large corporations. We export our products throughout the world and have in the past sold products in Asia, Africa, Europe, Latin America and the Middle East. Many of our products are controlled for export purposes and we require end user details prior to all sales. Strict compliance with U.S. and International laws and regulations is mandatory.
 
 
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Background of HighCom

HighCom was founded by Yochanan Cohen ("YC") in 1997 to market and sell a range of security and law enforcement products. HighCom’s underlying philosophy was to sell only products providing protection to the public and law enforcement and security personnel.  YC’s leveraged his military and law enforcement background to launch HighCom’s operation.  YC was a combat officer in the Israel Defense Forces and later joined the Ministry of Foreign Affairs of Israel where he served in various protective security positions in foreign embassies and consulates.  He also served in the V.I.P protection unit which was tasked with the protection of heads of state and senior government officials. In its early years, HighCom was focused on two operations – the sale of security and law enforcement products (products operations) in the domestic USA market and the provision of protective services (services operation) to various local San Francisco, CA community centers, schools and religious institutions.  The “products” sold during this early period were primarily security metal detectors and baggage x-ray screening machines, in addition to CCTV monitoring systems.  These products were manufactured by brand name manufacturers and resold by HighCom on a non-exclusive distribution basis.  The ‘services” provided included the provision of protective security guards to institutions either on a contractual basis or an hourly basis as required.  Included in the services operations was the short term rental of metals detectors and baggage x.ray screening machines for local corporate or governmental events. In 2005 the services operations were sold off to its senior manager through a separate company.  HighCom did not retain any ownership interest in this new company.  HighCom was then totally focused on the sale and distribution of its current range of products.  HighCom’s annual revenues increased from $3 million in 2003 to $10 million in 2005 primarily from the increase in domestic homeland security spending as well as US Defense Dept expenditures to support its operations in Iraq. Through an open bid process, HighCom was awarded contracts, both on a prime and subprime basis to supply U.S. and Coalition supported operations in Iraq and Afghanistan with a range of tactical gear including military uniforms and general equipment to the Iraqi Defense Forces.  As a sub-contractor, HighCom was also awarded contracts to supply protective ballistic helmets to the United Nations Peacekeeping forces.  In 2006, HighCom revenues reached $28 million with the continued supply of helmets to the United Nations Forces in addition to the sale of personal protective armor plates on a sub-contractor basis to a number of leading U.S. armor companies for final supply to the Iraqi Defense Forces.  Armor plate sales totaled approximately $24 million in 2006. With increasing market pricing pressure in 2007, particularly in the armor industry, HighCom made the decision to switch from a distributor to a domestic manufacturer of personal protective armor plates.  Sales in 2007 decreased to approximately $7 million as HighCom focused on establishing domestic manufacturing operations based in Columbus, OH. In 2008 with its manufacturing operations in full operation, sales revenues increased to $17 million with approximately $12 million coming from the sale of personal armor plates.  As a result of its investment in its own manufacturing capacity, HighCom became a market leader in competitively priced high performance ballistic plates uniquely suited to market requirements.  In 2008, HighCom opened a 70,000 sq. ft. leased manufacturing facility in Columbus, OH in association with its manufacturing partner as well the construction of an in-house ballistic testing range.  In association with its own manufacturing operations and testing facilities, HighCom was able to dedicate funds to its internal research and development activities.  These research and development efforts lead to a more extensive product line including a range of National Institute of Justice ("NIJ") certified ballistic armor products.  These products included both personal armor plates and ballistic armor shields. In the mid 1970's, NIJ began testing and developing body armor and performance standards for ballistic resistance. Recognition and acceptance of the NIJ standards has grown worldwide making it the performance benchmark for ballistic-resistant body armor. Revenues in 2009 suffered a large decrease largely attributable to a May 2009 fire in its Columbus, OH facility. This destructive fire caused significant disruption to HighCom operations which was forced to relocate to new premises to restart its manufacturing activities.  The combination of decreased spending in law enforcement and homeland security sectors experienced by the industry, the US financial crisis and the destructive effects of the factory fire, revenues decreased to $4 million.  In the second half of 2009, HighCom was able to re-establish its operations in OH and began to regain its market presence both with customers and vendors.  The result of which was the receipt of a $6 million contract award through an open bid process for the supply of hard armor plates and soft armor vests to United Nations Peacekeeping Forces.  This was the first UN contract won by HighCom as a prime contractor.  Shipments under this contract began in late 2009 with the majority of the contract revenues scheduled to be earned in 2010. 

 
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Foreign Corrupt Practices Act (FCPA)
 
On January 19, 2010, the U.S. Department of Justice ("DOJ") unsealed indictments of 22 individuals from both the law enforcement and defense supply industry, one of whom was HighCom’s then Chief Executive Officer, Yochanan Cohen, as an individual for allegedly violating 18 U.S.C. § 371 and 18 U.S.C. § 78dd-2, United States v. Yochanan R. Cohen, Criminal Case No. Cr-09-343.  (Note: On February 24, 2012, the United States District Court of Columbia, upon consideration of the government’s motion to dismiss, ordered the dismissal (with prejudice) of the indictment and superseding indictments against 22 defendants.)  HighCom was not a party to this indictment. HighCom has always taken, and continues to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad.  Following this indictment, Mr. Cohen stepped down from his daily responsibilities as CEO of HighCom.  As a result of this indictment, although not a named party to the indictment, in March 2010, HighCom was placed under a policy of denial by the U.S. State Department.  This resulted in a suspension of HighCom’s ability to export certain armor products under U.S. Government Regulations.  This effectively ended HighCom’s export capacity and significantly impacted its operations and ability to deliver product to its customers and in particular fulfill its shipment obligations under the U.N. contract awarded in late 2009.  HighCom was suspended by the US Dept of Defense and added to its Excluded Party List. This severely restricted its ability to sell product in the US defense sector. To regain its export privileges under US State Department regulations, Mr .Cohen, as CEO and majority shareholder, was required to resign as an executive corporate officer and director and fully divest his equity interest in HighCom. On January 25, 2011, Mr. Cohen entered into a binding Letter of Intent to sell his equity interest to BlastGard International Inc. and closing occurred on March 4, 2011.

Concurrent with Mr. Cohen’s resignation both as a director and officer of HighCom and the sale of his equity interest to BlastGard, BlastGard filed with the US State Department to have the policy of denial lifted in order to regain HighCom’s ability to export certain armor products again.  We were delighted to report that as of March 29, 2011 this order of denial had been lifted and has had its export privileges reinstated.  HighCom also successfully applied to the US Defense Dept to be removed from the Excluded Party List (“EPLS”). The successful reinstatement of HighCom’s export authority and its removal from the EPLS has dramatically improved HighCom’s ability to sell and market its products.  BlastGard has also been reinstated as a vendor for potential bids under the United Nations and has already completed several small orders since its reinstatement. However, on February 6, 2012, the United Nations notified the Company that the UN Secretariat Review Committee met on January 27, 2012 to review the vendor registration status of HighCom Security, Inc. The Committee noted the indictment of HighCom’s former CEO on four counts. Based on those charges, and in accordance with the UN’s policy with regards to ethics and compliance issues, placed an immediate hold on the registration status of HighCom, pending the UN’s internal review. The Company requested that the UN reconsider their decision as HighCom is under new ownership and management and that since their decision the United States District Court of Columbia dismissed all charges against the former CEO. A final decision is still pending the UN’s internal review.
 
 
In March 2011, BlastGard’s management team officially assumed operational control of HighCom.  Since this time we have accomplished a number of key compliance tasks, including manufacturing agreements with several key partners.  BlastGard has received official communication from the U.S. State Department that HighCom’s export authority has been reinstated. In addition to this, BlastGard has completed registration through the Directorate of Defense Trade Controls as well as the Bureau of Industry and Security. The purpose of these registrations is to allow BlastGard control over the export management and compliance program moving forward.  HighCom also completed their ISO certification which had been revoked under HighCom due to missed audits.  BlastGard management has also been able to complete an internal audit and management review, in addition to meeting with BSI for the external audit review; and as of March 18, 2011, HighCom has been recommended for continuing ISO certification.  BlastGard has also made significant personnel changes within HighCom and restructuring of operating locations and costs which has resulted in a 30% reduction in HighCom’s operating expenses in the second half of 2011.

 
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PRODUCT DESCRIPTION

HighCom provides a wide range of security products and personal protective gear (including tactical armor) that are tailored and offer protection solutions to specific customer requirements.  HighCom caters to local law enforcement agencies, correctional facilities and municipal authorities.  Given the equipment and ballistic protection solutions provided by HighCom, compliance with the U.S. Department of Commerce, U.S. Department of State, U.S. Department of the Treasury and all other governmental agencies' regulations is a high priority. HighCom has sold its products in the defense and law enforcement sectors and is known for innovative technology, exceptional customer service and superior quality performance.

Body armor is classified by the NIJ according to the level of protection it provides from various threats.  The classifications are as follows:

·
Type IIA body armor- minimal protection against smaller caliber handgun threats.
·
Type II body armor – provides protection against many handgun threats, including many common smaller caliber pistols with standard pressure ammunition, and against many revolvers.
·
Type IIIA body armor- provides a higher level of protection and will generally protect against most pistol calibers including many law enforcement ammunitions, and against many higher powered revolvers.
·
Type III and IV body armor – provides protection against rifle rounds and are generally only used in tactical situations.

Our Security Products include the following:

§  
Ballistic helmets
§  
Body armor and hard armor plates
§  
Riot helmets and shields
§  
Mounted patrol, vehicular crew, and general duty helmets
§  
Uniforms, Apparel and Duty Gear
§  
Metal detectors:  walk-through and handheld
§  
Explosive ordinance disposal equipment:  bomb suits & gear, hook & line kits, detectors and search mirrors, under vehicle surveillance systems
§  
Range & training equipment:  robots and targets
§  
Safety equipment:  gas masks, respirators, chemical detectors, medical equipment & supplies
§  
X-Ray screening systems:  luggage, parcel, freight and cargo scanners, mobile systems, transportation securities administration test objects
§  
Dry storage systems for ordnance and heavy equipment
§  
Outdoor equipment:  gear, flashlights, GPS systems
§  
Vision and optics:  binoculars, goggles, night vision equipment
§  
Communication systems
§  
Emergency lighting and warning systems

Manufactured products versus products supplied by third party vendors.

HighCom manufactures ballistic plates, ballistic shields and blankets. Hard armor plates are HighCom manufactured products which either carry our brand name or a private label. Our ballistic vests, ballistic helmets and EOD bomb suits and gear are currently manufactured and private labeled by third party vendors for us. Our soft arm vests are manufactured by one of two major suppliers and they either carry the supplier brand name or the HighCom brand name. Our UN soft armor vest is co-manufactured by us with a third party vendor. Our ballistic packs are also manufactured by one of two manufacturers. We distribute the following products made by other manufacturers: metal detectors, x-ray machines, EOD kits and detection devices, law enforcement gear, uniforms and other clothing, optics and communications.  In the future, we intend to manufacture PASGT (personal armored systems for ground troops) and ACH (advanced combat helmets) ballistic helmets as well as EOD suits.

 
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PLATES

Level IV – NIJ 05
HighCom currently maintains some of the largest capability for manufacturing Level IV ceramic plates.  An important, strategic move we have employed is to partner with numerous companies to further leverage available equipment to increase production capacity.  An example of this is utilizing press consolidation capacity to produce high pressure backings for plates.

The Level IV NIJ 05 plate has a very high margin of safety. Approximately 300 plates have been shot internally at HighCom's ballistic lab and shooting range as well as at independent and other commercial labs.  During these tests, no penetration has occurred when tested in accordance with the NIJ standard.  Another important performance feature of this plate is that when used in conjunction with a Level IIIA Vest, this plate has established the ability to defeat six rounds, in accordance with Level III NIJ 05.

HighCom has nine different certifications of its Level IV plate utilizing different suppliers of ceramics and backing materials.  We have deferred risk of material supply by securing qualified vendors to provide the necessary materials.

Level III – NIJ 05
HighCom has a Level III NIJ Polyethylene based plate solution with a production capacity of 5,500-6,000 units per month.

SAPI
The SAPI Plate (Small Arms Protective Insert) is used as an insert in military carriers.  Due to the rate of ballistic performance and success we have established in the tests conducted thus far, we were able to achieve SAPI level performance with a weight of 100g less than the specification.  Further, the HighCom sample defeated six rounds of explosive materials in a single plate. We have conducted impact drop tests and x-rays after shoot tests.  This product needs additional testing and evaluation to solidify the results. We have spent $300,000 on SAPI development thus far applying the many lessons garnered during the past several years of research and development.

NIJ 06 Specification &Compliant Products
HighCom currently has one certified Level III plate and one Level IIIA vest.  One vest is approved and one has passed the Level II test criteria.  There are different manufacturers producing these two different vests.  The Level IV plate has passed the NIJ testing and is in process to receive the final certification documents.  Our current situation with vests is that we have several vest models in the development stage:  3 Level IIIA and 3 Level II.  Additionally, 2 models of both Level IV and Level III plates are ready to process but on hold due to budgetary constraints.  We have a ceramic based Level III plate, which is in addition to the SAPI, also on hold for the same reason.  There are tests in the pipeline along with a considerable number of options, solutions and directions for continued development of hard armor plates for certification under NIJ 0101.06 standards.

SHIELDS
HighCom produces a Level IIIA ballistic shield that is among the most advanced in the market.  This is due to the fact that the electrical connections are routed internally through the composite itself.  Similar products offered in the marketplace will have external electrical connections.  HighCom has a ballistic shield production capacity of approximately 800-1,000 units per month.

BLANKETS
We can produce ballistic blankets at any level to whatever size is needed by the end user.  Production capability is approximately 500-800 units per month.

SOFT ARMOR
HighCom has five certified soft armor products with a production capacity of 2,000 units per month.  We were able to process a composite of proprietary material with a third party supplier wherein ceramic materials are incorporated within the flexible composite.  This alone increases ballistic stability, stab protection and provides further avenues towards lighter solutions.  These lighter solutions in turn combine composite material into soft armor material.  Research and testing at this stage is very preliminary with only basic testing conducted.  However, results thus far strongly indicate to us that additional research in the vein has great potential for advantageous positioning in the soft armor sector of our industry.  Additionally, we have cause to believe that analyzing bullet energy combining impact systems with both hard and soft ballistic systems will provide a superior product in this industry.


 
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EOD
HighCom intends to subcontract orders to produce Explosive Ordinance Disposal suits ("EOD") to our specifications to either a U.S. manufacturer or one of four foreign manufacturers. The current EOD production market is dominated by Med-Eng Systems, Inc., who holds about 80% of the market share.

HighCom’s helmet for our EOD suit is vastly superior to the ones currently on the market.  Not only have we increased the field of vision to 180 degrees, but, by using more advanced materials, we have made our helmet lighter and more mass efficient resulting in a better fit.  By approaching certain laboratories, we will be able to implement the feedback from actual end users’ wish list into our suit in a very short period of time.

We estimate that the U.S. Military acquire approximately 1,000 suits annually.  The global market will yield a higher number with an estimated budget of approximately $40-50 million for just the bomb suit.  This is a very small niche in the ballistics industry.  Most countries do not buy these products in volume.  Therefore, pricing is not generally the deciding, or even pivotal, factor in purchase criteria.

The major expense in design, research and development of the EOD product line is conducting the tests, as explosive testing is expensive.  There are a very limited number of labs capable of performing this type of testing.  This is simultaneously an advantage and disadvantage.  Management believes that Med-Eng has received generous funding for their testing from the Canadian Government.  This enabled Med-Eng to write in the testing specifications in the buyer’s purchase description/bid package and yielded a large share of the market to them.   We believe by approaching the U.S. Government entities, they will not only procure our suit but perform the necessary testing on new product designs, thus creating an increase in HighCom’s market share.

Even without the solid vision of continued future development of this suit, it, in its current state, can compete in the market and HighCom could establish a stronghold quickly.  Our EOD suit has the potential to be the only “Made in USA” suit.  It has many advanced ballistic solutions, an ergonomic design and cutting edge helmet structure with expansive vision.  Future research and development includes a/c systems, better hard armor design, design of overpressure attenuating systems, design of multi-function suits, increase helmet stability.  There is great importance on marketing EOD that will result in a cumulative snowball effect on all of HighCom’s products.  As an example, IABTI, an independent association formed for countering the criminal use of explosives, has multifarious needs for a variety of EOD products.  By simply displaying our products with them, HighCom's EOD product line would quickly become common knowledge among the end users in over 300 countries.

HELMETS
HighCom is working towards achieving a proprietary uni-directional material that a third party will lay up for us in tape form (100% Polypropylene). Based on previous research and testing conducted, management believes that we can produce a Level IIIA helmet. We have yet to finish accomplishing the entire process.  We will need to validate the date, produce an aluminum mold as well as the prototype once the material is completed by a third party. Management believes that this helmet will be an excellent “Made in USA” product that can be marketed internationally at a very competitive price point.  This helmet has potential to be produced as a riot helmet with an impact system.  This potentially would allow us to replace the existing riot helmets and possibly adjust the ballistic requirements accordingly (Level II or 9mm only).

Research and Development

During fiscal 2011 and 2010, HighCom spent $40,737 and $945 on research and development efforts. Future research and development expenses will depend upon our liquidity and capital resources.

MARKET DEFINITION

Industry Description and Outlook

 
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There are over 17,000 law enforcement agencies in the U.S. with over 750,000 police officers. The law enforcement market is scattered across the country and is typically serviced by distributors which provide products such as body armor, uniforms, guns, and other items.

According to a Vector Strategy report on U.S. military body armor trends, $6 Billion dollars worth of body armor will be procured between 2009 and 2015. Body armor has a life cycle of five years.  This combined with an average 10% attrition rate in law enforcement, means that approximately 30% of body armor purchases are turned over each year.

HIGHCOM’S MARKETING AND SALES STRATEGY
 
Strategy
 
Our objective is to be a global leader in the businesses of safety, security, and defense protection. We continually seek to enhance our existing products and to introduce new products to expand our market share or enter into new markets.  Historically, the largest portion of our HighCom business resulted from the sale of ballistic plates, vests and helmets. We plan on expanding our business into multiple segments of the defense market. We are considering other products and services for other aspects of the safety, security and defense protection.  We sell our products and services through a variety of distribution channels. Depending upon the product or service, our customers include distributors; federal, state, and municipal law enforcement agencies and officers; government and military agencies; businesses; retailers; and consumers. More specifically, the major customers of HighCom are:

·  
Independent Distributors
·  
Department of Homeland Security
·  
Other Federal Government Agencies
·  
Local Police Departments
·  
Foreign entities
·  
United Nations

The channels of distribution for HighCom are distributors, direct sales, and the Government Services Administration (GSA).  Since HighCom is a GSA contract holder any federal government agency can buy from them without additional prior approval.

Target Market
The primary target markets are:
·  
U.S. Department of Defense
1.  
Army
2.  
Marines
3.  
Air Force
4.  
Navy
·  
Other government agencies
1.  
Homeland Security
2.  
State Dept
3.  
FBI
4.  
DEA
5.  
U.S. Marshalls
·  
Local law enforcement
1.  
Police
2.  
Highway patrol
3.  
City police
4.  
County Sheriffs
·  
Foreign governments
1.  
Military
2.  
Security

 
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3.  
Police
·  
United Nations peace keeping forces

How do we market ourselves
Armor products - personal armor plates, ballistic shields and certain soft armor vests – have been designed, developed and certified by HighCom.  NIJ certification is the barrier to entry/foundation to the US armor industry since without NIJ certification, marketability/sales opportunities to domestic law enforcement are limited. While export sales are possible without NIJ, NIJ certification is increasingly becoming required for export sales. All other HighCom products are distributed under non-exclusive supplier arrangements. Our HighCom marketing strategy includes the following:

·  
HighCom website
·  
Trade publications
·  
Defense industry news websites
·  
Trade Shows and Conferences
·  
GSA advantage and
·  
Bidding on federal government supply needs

Salespersons

The Company has two dedicated sales people to respond to sales inquires, to contact known potential customers, to general sales leads and to visit customer sites. These salespersons also submit bids through online public bid sources and the GSA System and make bids through an existing network of customers, resellers and commercial reps.

Bidding on Governmental Projects

Bidding on governmental (federal, state, local) contracts normally requires you to apply for status as an approved vendor. Once your application accepted – you are eligible to participate in bids. Vendor certifications have varied processes – some include/require submission of detailed financial data to qualify and be certified as a vendor. Our ISO certification is also a key factor in registration. Bids are submitted to a US agency – either through online sites, email or US Mail. For foreign sales – normally approached by agents (based in foreign companies) – who request quotes for supply of goods in their local markets. Agents generally operate on a non exclusive basis, but HighCom has in the past granted limited exclusivity to certain agents either on project specific basis – or a specific country basis. On occasion, HighCom may contract directly with a foreign government to supply products on behalf of local agent. HighCom would then receive payment direct from government agency and pay a commission to local agent.
 
EXPORT COMPLIANCE POLICY

HighCom is required to comply with all laws and regulations surrounding U.S. export controls. Recent events have focused the U.S. government's attention on the need for increased enforcement of such laws. Although the government has always enforced export laws and regulations, the level of intensity has risen in the past several years as concerns regarding national security and international terrorism have grown.

The United States government has various objectives when controlling exports. For instance, the U.S. has placed controls on the export of certain goods and technologies to prevent them from being used by the Armed Forces of other nations and thus threatening U.S. national security. The U.S. also uses export controls for purposes of economic sanctions against certain nations and groups hostile to the United States.

The U.S. government not only possesses a national security interest through its export controls but also has additional objectives. Export controls help protect items that may be in short supply domestically such as oil or gas. Additionally, the U.S. collects trade data that allows the government to track the trade balance, evaluate the effect of foreign trade on the domestic economy, and/or develop foreign policy decisions. The end result of all the U.S. government's regulations and laws is that HighCom must be cognizant and comply with all export laws.

 
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HighCom management is firmly committed to full and complete compliance with all U.S. export control laws, including among others, the Export Administration Regulations administered by the Bureau of Industry and Security of the U.S. Department of Commerce, the International Traffic in Arms Regulations administered by the Directorate of Defense Trade Controls at the U.S. Department of State, and the various sanctions and embargo regulations administered by the Office of Foreign Assets Controls (OFAC) at the U.S. Department of the Treasury. While HighCom has always been committed to compliance with all U.S. export control laws and regulations, our desire to ensure that no violations occur is heightened by the events of September 11, 2001. All HighCom employees associated with activities that are subject to U.S. export controls take extra precautions to ensure that no violations occur. It is HighCom management's policy that under no circumstances will exports made on behalf of its customers be made contrary to U.S. export laws and regulations. Special care is taken to prevent transactions with entities involved in the proliferation of weapons of mass destruction.

Violations of the Export Administration Regulations could result in significant penalties for HighCom and for those individuals involved in the violation. Civil penalties of up to $50,000 per violation may be imposed or up to $120,000 if the violation involves national security controls. Violations could also result in a denial of HighCom's export privileges meaning it could no longer forward products to international customers. Criminal penalties may also be imposed on HighCom and on the individuals involved. For willful violations of the export regulations, HighCom could be fined up to $1,000,000 per violation and individuals could be fined up to $250,000 per violation and imprisoned for up to 20 years.

Violations of the International Traffic in Arms Regulations can also result in serious civil and criminal penalties for HighCom and the individuals involved. Civil penalties can reach $500,000 per violation; criminal penalties can reach $1,000,000 per violation. HighCom and individuals can also be debarred from practicing before the Directorate of Defense Trade Controls, meaning the debarred party is ineligible to export defense articles from the U.S.

Violations of OFAC regulations can also be very expensive and even result in a denial of export privileges in addition to various civil and criminal penalties. The U.S. government takes export control violations very seriously and so does the management of HighCom.

HighCom has implemented an Export Compliance Program specifically designed to satisfy the requirements of the pertinent United States statutes, rules and regulations, such as the Export  Administration Act, Trading with the Enemies Act, Arms Export Control Act, International Emergency Economic Powers Act, the Export Administration Regulations, the Foreign Assets Control Regulations, the International Traffic in Arms Regulations, the Foreign Trade Statistics Regulations, the Alcohol, the Customs Regulations, and all other applicable statutes, rules and regulations governing the export and transportation of commodities by HighCom. The Export Compliance Program includes training on compliance issues, the preparation and utilization of the U.S. Export Control Compliance Manual, and the establishment of a system of internal reviews designed to identify any risks of non-compliance by HighCom.

OVERVIEW OF U.S. EXPORT REGULATIONS

The principal government agencies that regulate U.S. exports are the Department of Commerce, which regulates the export of "dual-use" items, and the Department of State, which regulates the export of defense or "munitions" items. "Dual-use" items are commercial items (i.e., commodities, software and technology) that can also be used in military applications, while "defense articles," "defense services," and related technical data are items specifically designed, modified or adapted for military uses and that have limited or no commercial application. This information is based on regulations published by these two, as well as other relevant U.S. government agencies, and is subject to change. This information will be updated periodically to reflect changes made to the pertinent laws and regulations.

The Bureau of Industry and Security ("BIS") is the agency within the U.S. Department of Commerce that is responsible for administering export controls of "dual-use" items. BIS publishes and administers the Export Administration Regulations ("EAR") (15 C.F.R. Part 730 et seq.) which describe export controls and contain a list of the commodities, software, and technology that are controlled for export by the Department of Commerce. This list is called the Commerce Control List, or "CCL", and is contained in Supplement No.1 to Part 774 of the EAR.

 
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The Directorate of Defense Trade Controls ("DDTC") is the agency within the U.S. Department of State that is responsible for administering controls on the temporary import, temporary export, and permanent export/re-export of "defense articles," "defense services," and related "technical data." The Department of State administers the International Traffic in Arms Regulations ("ITAR") which contain the United States Munitions List ("USML"). The USML details the commodities, software, and technical data that are controlled by the State Department.

Whether an export is controlled by the Commerce Department or the State Department depends on the proper classification of the product. All exports are controlled by only one agency though it may in some cases be difficult to determine the appropriate agency jurisdiction. In such cases, exporters may file a commodity jurisdiction ("CJ") request with DDTC to determine which agency has jurisdiction over the product, software, or technology. DDTC generally takes at least six months to respond to CJ requests, so their utility may be limited in a commercial context unless application is made sufficiently early.

Specific laws and regulations we are subject to include the following:

·  
Export Administration Act – 50 U.S.C. 2405
 
·  
Arms Export Control Act -22 USC 2778
 
·  
Export Administration Regulations – 15 CFR 730-774
 
·  
International Traffic in Arms Regulations – 22 CFR 120-130
 
·  
Foreign Corrupt Practices Act – 15 U.S.C. 78dd-1
 
Competition
 
We operate in intensely competitive markets that are characterized by competition from major domestic and international companies in our business and from a large number of competitive companies and alternative solutions in our security business. This intense competition could result in pricing pressures, lower sales, reduced margins, and lower market share. Any movement away from high-quality, domestic ballistic plates to lower priced or comparable foreign alternatives would adversely affect our business. Some of our competitors have greater financial, technical, marketing, distribution, and other resources and, in certain cases, may have lower cost structures than we possess and that may afford them competitive advantages. As a result, they may be able to devote greater resources to the promotion and sale of products, to negotiate lower prices on raw materials and components, to deliver competitive products at lower prices, and to introduce new products and respond to customer requirements more effectively and quickly than we can.
 
Competition is primarily based on quality of products, product innovation, price, consumer brand awareness, alternative solutions, and customer service and support. Pricing, product image, quality, and innovation are the dominant competitive factors in the industry. Our ability to compete successfully depends on a number of factors, both within and outside our control. These factors include the following:
 
     
 
our success in designing and introducing innovative new products and services;
     
 
our ability to predict the evolving requirements and desires of our customers;
     
 
the quality of our customer service;
     
 
product and service introductions by our competitors; and
     
 
foreign labor costs and currency fluctuations, which may cause a foreign competitor’s products to be priced significantly lower than our products.

We can provide no assurances that we will be able to successfully compete with our competitors in the future.

Employees

As of March 8, 2012, the Company has four employees, including three full-time employees. The Company also relies on temp workers for its manufacturing facility. Additional sales and marketing personnel may be hired in the future as our sales efforts require such additional personnel.

 
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BlastGard International, Inc.

BlastGard - Overview

BlastGard® International, Inc., a Colorado corporation, operates through its wholly-owned subsidiary, BlastGard Technologies, Inc., a Florida corporation established in September 2003. BlastGard® International, Inc. acquired BlastGard Technologies, Inc. effective January 31, 2004, in a transaction that was accounted for as a reverse acquisition, which is a capital transaction and not a business combination.
 
We have developed and designed proprietary blast mitigation materials. Patent-pending BlastWrap® has been designed to mitigate blasts and suppress flash fires resulting from explosions, regardless of the material or compound causing the explosion. We believe that this technology can be used to create new finished products or designed to retrofit existing products.
 
An explosion results from the rapid conversion of chemical energy into rapidly expanding high-pressure gases. The rapidly expanding gases compress the surrounding air much like a piston and create a shock wave that travels ahead of the explosive gases. The “overpressure” (pressure above ambient) in a shock wave acts to “pre-condition” the air as it passes through to make the following accelerated gas “piston” more damaging. This high intensity, short duration overpressure wave transfers impulse (momentum) stresses, damages or destroys structures in its path. Impulse follows the shock wave but lingers and decays with time. The negative phase is a partial vacuum that “whips” lighter structures to magnify damage. A shock wave can be likened to an initial hard punch, while the impulse is more like a powerful bulldozer. Any reduction in the effective power of the shock wave will increase the target’s capability to withstand the destructive impulse.
 
Blast Solutions
 
Blast management solutions generally fall into one of two categories: hardening or mitigation. Hardening is a method of blast mitigation by which an object is placed around an explosive material to contain the blast, and is generally accomplished through the use of armor, mass or both. Armor is used primarily for its ballistic properties, with enhanced protection levels achieved by increasing mass (thickness and/or weight). Hardening solutions include steel armor plate, various synthetic fibers such as Kevlar and Spectra and fiber-reinforced composites. Most blast containment systems employ hardening.
 
Although some energy is absorbed through deformation, hardening systems have the negative effect of reflecting blast, which by the laws of physics actually magnifies blast effect up to eight times. This is because the shock waves reflecting off a solid surface add to the incident waves creating a destructive synergism of much greater gas density, temperature, pressure, and overpressure duration— all contributing to impulse (the “piston”). Reflected energy is a significant problem, particularly in confined spaces. Hardening, which essentially is trying to overmatch or resist a blast, has been widely practiced throughout the years even though it is limited in its capabilities.
 
Mitigation or attenuation of blast effects is the dissipation of blast energy so that acoustic and shock waves, peak overpressure, reflected peak overpressure, impulse and afterburn (the rapid burning of combustible materials in the “hot zone”, including soot, occurring so fast that it adds to blast effect from the original explosive) are reduced. This reduction is accomplished through both physical and chemical processes that are triggered when a blast occurs. The remaining energy is transmitted at a slower, more sustainable level. The amount of reflected energy is significantly reduced with mitigation. Unlike hardening systems, the performance of our products is not related directly to material thickness and therefore we believe our products have a greater range of uses producing the same or better effectiveness against blast effects.
 
 BlastWrap® Background
 
BlastWrap® is a concept for assemblies (not a chemical compound) from which blast protection products are built to save lives and reduce damage to valuable assets from explosions. BlastWrap® is designed to not only substantially reduce blast impulse and pressure (including reflected pressure and impulse), but quenches fireballs and suppresses post-blast fires. Lethal fragments may be captured by adding anti-ballistic armor layers on the product surface away from a blast.
 
 
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Our BlastGard® technology is designed to mitigate blast and rapid combustion phenomena through numerous mechanisms. The relative contribution of each mechanism depends upon the intensity and nature of the impinging hazard. Shock wave attenuation, for example, is dominant in mitigating mechanical explosions. Our products attempt to emulate unconfined conditions and accelerate attenuating processes that occur in free air. Thus BlastWrap® does not try to resist blasts (which physically intensify blast phenomena); it mitigates them. BlastWrap® can be used as part of confining assemblies (containers and blast walls). In effect, BlastWrap® is a ‘virtual vent’.
 
BlastWrap® Technology Components
 
Our BlastWrap® products are made from two flexible films arranged one over the other and joined by a plurality of seams filled with attenuating filler material (volcanic glass bead or other suitable two-phase materials), configurable (designed for each application) with an extinguishing coating. Together, this combination of materials is designed to mitigate a blast while at the same time eliminate fireballs or flame fronts produced by the blast.
 
 
We believe that this system is unique because it:
1. Works 24 hours a day
2. Quenches fireballs and post blast fires
3. Reduces blast impulse and pressure
4. Does not dispense chemical extinguishants
5. Uses neither alarms, sensors, nor an activation system
6. Is nontoxic and ecologically friendly
 
Our BlastGard® Technology extracts heat, decelerates both blast wind and shock waves, and quenches the hot gases in all blasts and fireballs. BlastWrap® does not interact with the explosive elements, and is therefore not altered by them. However, after a single intense detonation, BlastWrap® must be replaced.
 
 
For blasts that produce fireballs or intense hot gases at higher pressures, BlastGard® Technology has the ability, through testing, to cool the blast zone rapidly, thereby reducing structural damage.
 
 
In detonation of high explosives, where at least half of the energy released is in the shock wave, attenuation occurs even more rapidly, and in doing so substantially reduces explosion phenomena.
 
Key BlastWrap® Features
 
Lightweight, flexible, durable and environment safe
 
 
Requires no wires, electricity, detection devices and contains no sensors
 
 
Customizable and easy to retrofit
 
 
Materials are low in cost and are widely available
 
 
Extremely adaptable, without losing effectiveness
 
 
Compact structure
 
 
Easily produced
 
 
Can be constructed with additional environmental or specific blast conditions (e.g. weather or moisture barriers or dust free layers)
 
 
Can be produced with armor (Kevlar, Spectra, etc) for ballistic or fragment situations
 
 
Irreversibly dissipates energy from blast
 
 
Eliminates need for dispensing of agents in blast mitigation process
 
 
Neither contains nor creates hazardous fragments
 
 
Environmentally friendly, non-toxic core materials
 
 
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Key BlastWrap® Benefits

 
BlastWrap® is light in weight. It can be used to protect against outdoor explosions. Because of the Montreal protocols banning production of Halon extinguishing agents, BlastWrap® technology offers a light weight and environmentally acceptable blast suppression means available for most applications; and, it can even be adapted to function underwater.
 

BlastWrap® products are inherent sound absorbers and thermal insulators, and are typically fire-tolerant. Any or all of these qualities are readily enhanced by bonding to common materials, thereby further extending the wide range of applications which BlastWrap® can fulfill through a single product.

The performance of BlastWrap® proprietary technology is independent of scenario and environment, which means that it does not matter where the physical location is, how the basic product form is used or the environment in which the event takes place. The basic product form can be used as a stand-alone material (as linings, curtain barriers, or as structural material), or can be laminated or otherwise affixed to a wide range of product forms such as insulation (thermal and acoustic), ballistic armor such as KEVLAR™ (a DuPont trademark), decorative stone, or packaging materials. BlastWrap® products can thus provide blast and fire protection in flooring, wall, and roof constructions, in packaging, in storage cabinets and other containment structures, and aboard all types of vehicles, ships, and aircraft.

Intellectual Property Rights

Explosive devices are increasingly being used in asymmetric warfare to cause destruction to property and loss of life. These explosive devices sometimes can be disrupted, but often there is insufficient warning of an attack. Our BlastWrap® products were created around this core concept. The BlastWrap® patent application was filed with the U.S. Patent and Trademark Office on July 31, 2003. The BlastWrap® patent application was filed with Argentina on March 12, 2004; with Kuwait on July 28, 2004, and with the European market, China, Japan, Singapore, New Zealand, Indonesia, Korea, India, Australia, Israel, and Canada on February 27, 2004 and we also filed an application for this technology under the Patent Cooperation Treaty on February 27, 2004. Under this treaty, we expect to have patent protection in most industrialized countries when the patent is issued in each individual country. A substantial number of countries have been added to the list of the treaty members, including almost all of the former Soviet republics and China; thus the new claims will be protected in more than 40 countries. A second patent application for “Blast mitigating container assemblies” was filed with the U.S. Patent and Trademark Office on April 29, 2004 and a new U.S. Continuation-In-Part patent application for “Blast mitigating container assemblies” on January 26, 2005. We also filed an application for this “Blast mitigating container assemblies” technology under the Patent Cooperation Treaty on January 26, 2006.
 
On October 13, 2009, BlastGard was notified by its patent counsel that its patent application for its BlastWrap material was granted from the Eurasian Patent Office. The terms of this patent will expire on February 27, 2024. The patent will be valid in all contracting states: Armenia (AM), Azerbaijan (AZ), Belarus (BY), Kirgizstan (KG), Kazakstan (KZ), Moldova (MD), Russia (RU), Tajikistan (TJ), and Turkmenistan (TM). In addition, we have been issued patents in Argentina, granted on September 17, 2007, and in Singapore, granted on August 31, 2007 for our “improved acoustic/shock wave attenuating assembly” (i.e. BlastWrap). On March 18, 2008, our patent-pending application (No. 11/042,318) for our explosive effect mitigated containers (i.e. BlastGard MTR and MBR”) was issued as U.S. Patent No. 7,343,843.

BlastWrap® Testing
 
BlastWrap® prototypes have been evaluated in different test series, which have ranged from semi-quantitative screenings to third-party instrumented trials. We have consistently observed blast effect reductions of at least 50% in virtually every activity in which BlastWrap® has been involved. These tests have indicated that impulse (momentum transfer) and peak pressure are reduced by nearly 50%. Impulse is the most destructive explosive-related hazard for structures and vehicles. We have also conducted further development design and testing of a series of products for blast mitigation protection of rapid deployment barriers, walls, revetments and bunkers (including overhead protection from inbound mortars) for the United States military. 
 
 
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Significance of Test Results
 
No BlastWrap® tests have been in small-scale. Every test series has involved standard products or test facilities simulating service conditions—munitions containers, air cargo containers, steel vessels comparable in size to commercial aircraft fuel tanks and large secondary storage units, and vehicles, all with charge weights reflecting actual hazards. Management believes that the test results provide evidence that BlastWrap® can protect vehicles, structures, and ships against very intense blasts. Tests have also shown that certain design features (such as deflectors), combined with additional BlastWrap® material, can accomplish protection against larger blasts.
 
Government Awards
 
BlastWrap®, and its BlastGard® Mitigating Trash Receptacles were designated as Qualified Anti-Terrorism Technologies and placed on the “Approved Products List for Homeland Security.” We were issued the “Designation” and “Certification” for our technology by the Department of Homeland Security under the Support Anti-Terrorism by Fostering Effective Technologies Act of 2002 (the SAFETY ACT) in July of 2006. In the 4th quarter of 2011, the designation and certification was extended for another five years to our BlastWrap product but excluded our BlastGard MTR receptacles until we provide new test data that conforms to new ASTM standards which are expected to be published in April 2012. The revisions allow the use of liners and lids which the original standards did not address. The lid and liner materials must be tested to certain ASTM plastic standards.

The SAFETY ACTDesignation” and “Certification” are intended to support effective technologies aimed at preventing, detecting, identifying, or deterring acts of terrorism, or limiting the harm that such acts might otherwise cause. The criteria technologies must meet to be awarded “Designation” and “Certification” status include: the availability of the technology for immediate deployment in public and private settings; the magnitude of risk exposure to the public if the technology is not deployed; the evaluation of scientific studies being feasibly conducted to assess the technology’s capability to substantially reduce risks of harm; and the technology’s effectiveness in facilitating the defense against acts of terrorism. BlastWrap is designed to mitigate the blast effects of an explosion by rapidly extinguishing the fireball, eliminating burns and post-blast fires, and reducing the subsequent overpressures by more than 50%, thus reducing damage to people and property.
 
The SAFETY ACT legislation was designed to encourage the development and rapid deployment of life-saving antiterrorism technologies by providing manufacturers or sellers with limited risk to legal liability. It was also designed to harness the nation’s scientific and technological resources to provide federal, state, and local officials with the technology and capabilities to protect the United States from terrorist acts. One area of focus for the Department of Homeland Security is catastrophic terrorist threats to the nation’s security that could result in large-scale loss of life and major economic impact. The SAFETY ACT fosters research of technologies to counter threats both by evolutionary improvements to current capabilities and development of revolutionary, new capabilities.
 
GSA Approved Product
 
General Services Administration enters into contracts with commercial firms to provide supplies and services at stated prices. This streamlined procurement vehicle is available to federal agencies and other organizations to obtain engineering and environmental services from pre-qualified vendors. GSA has completed federally mandated contracting requirements—competition, pricing, small business and other contracting evaluations—normally required prior to obtaining services. Some of BlastGard’s finished products are in the GSA System.

 
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Applications
 
Our BlastGard® Technology works indoors or out, vented or un-vented, wet or dry, clean or dirty, damaged or intact, and against strong or weak blasts from solid explosives or flammable fluids. It is a lightweight, space-efficient custom-engineered technology that can be produced with additional layers for insulation, fragment/ballistic protection, environmental protection or impact and cushioning barriers. Significantly, no new or high-cost fabrication technologies or materials are required to produce BlastWrap®. In addition, because of the Montreal protocol’s ban of Halon extinguishing agents, we believe that our BlastGard® Technology is the only blast and fire suppression means available for most applications, including adaptation for underwater use. It is an inherently effective sound absorber and thermal insulator.

Because BlastWrap® is customizable and offers protection against explosions of all types, its potential for application cuts across a wide range of industries and government agencies. Some potential applications for BlastGard® Technology include:
 
   Transport and storage units containing chemicals and other explosive compounds.
 
 
External wall linings to protect buildings, such as Embassies and other high value locations, against vehicle bombs and placed explosives.
 
 
Aboard naval vessels and merchant ships to minimize damage from breaching blasts emanating from mines, cruise missiles, and torpedoes.
 
 
Fireball and explosion-suppressing fuel tank jackets for natural and compressed natural gas, propane, fuel cells, fuel tanks and other “green fuel” vehicle systems.
 
 
Dividers to suppress fireballs and fuel mist explosions from accidents aboard both aircraft and ships, in  process facilities, and on offshore platforms.
 
 
Separators and partitions in explosives manufacturing and handling facilities, such as a load/assembly/pack depots, fireworks plants, and propellant manufacturing sites.
 
 
Pallets and buffers between stacks of palletized munitions and ordnance.
 
 
Lining of portable and fixed magazines.
 
 
Missile launch boxes for military vehicles and naval vessels.
 
 
Cabinets and containers for handling fuses, small rockets, and explosive devices.
 
 
Internal walls of commercial buildings that house, research or produce explosive materials. An example would be chemical or energy companies.
 
 
Quick-erect blast protection barriers and revetments.
 
 
Blast protection shields, armors, and structures with “stealth” (low-observable) camouflage properties.
 
 
Blast/fire protection linings for commercial and military aircraft and air cargo containers.
 
 
Blast and ballistic-protected modular buildings (barracks, accommodations for offshore facilities, field stations, tactical shelters and command facilities, monitoring stations for law enforcement).
 
 
Underwater blast isolation units for offshore facility abandonment’s, coastal construction, and naval vessels.
 
 
Neutral buoyancy jackets for deep water drilling risers, and Sub Sea manifold protection.
 
 
 
Composite blast/fire protection structures and materials (blast walls, blast mitigation billboards, relief vents, reinforcement of masonry buildings) for hydrocarbon, process, mining, missile launch, and manufacturing facilities, and for building demolitions.
 
 
 
Explosives storage and shipping containers, portable magazines, and explosive disposal kits.
 
 
 
Mine blast protection kits for vehicles.
 
 
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Safety shields and specialty protection for entertainment industry location sets such as in Hollywood, California sound stages, vehicles, on-location structures.
 
 
Personnel and vehicle protective armor.
 
 
Mining of coal, mineral extraction and processing safety.
 
We believe that BlastWrap® can be integrated into some of our HighCom products in the future.
 
Various Product Lines Identified For BlastWrap® - We have Several Completed and Finished Products
 
We are currently manufacturing our core product, BlastWrap®, for sale in various forms to non-affiliated third-parties. The primary application for BlastWrap® is as an intermediate good for numerous civilian and military applications and uses.
 
Our technology can be customized for specific industries and applications. We have examined the various markets where explosions occur, selected targeted applications and focused on development of products for those businesses and agencies at risk. While designing finished products engineered with BlastWrap®, we have taken into account that some products must be portable, while others will remain at a fixed location. Some products have been designed to contain identified explosive agents, while others are designed to mitigate unidentified explosive threats. With these standards in mind, we have developed or are developing the following product lines to address the needs of customers and targeted markets:
 
 
Mitigated Bomb Receptacles and MBR Gard Cart;
 
 
Blast Mitigated Unit Load Device (“BMULD”) – LD3 Container;
 
 
Insensitive Munitions (IM) Weapons Container;
 
 
Mitigated Trash Receptacle; and
 
 
BlastGard Barrier System (“BBS”).
 
MBR 300 and MBR Gard Cart
 
The BlastGard Mitigated-Bomb Receptacle (MBR 300) is intended to provide airport security personnel with an effective tool, if and when an explosive is discovered. The MBR 300 will dramatically contain and protect against all lethal threats posed by the detonation of an IED; namely, primary fragments, secondary fragments, mechanical effects (shock/blast pressure) and thermal effects (contact and radiation burn) from the fireball, after burn and resultant post-blast fires. If a suspect package or bomb is discovered, the airports will use the MBR 300 as a safe means of securing that package until the bomb squad arrives, or remove the suspicious device from the area, allowing airport operations to continue.
 
The BlastGard® MBR Gard Cart (Mobile Suspect Package Removal Unit), which houses BlastGard’s MBR 300, provides security personnel with an effective tool for safe removal of an explosive device after it is discovered. The MBR Gard Cart contains and protects against all lethal threats posed by the detonation of an improvised explosive device (IED) and also provides rapid removal of the threat using a Mobile Removal Unit Cart. When a suspect package or device is discovered, the airports now have a safe means of securing that package and removing it from public exposure until the bomb squad arrives. In this way, the MBR Gard Cart can help prevent long airport facility shut-down times presently experienced when a suspect package is discovered. The United States Transportation Security Administration has worked hard to secure U.S. airports against a range of threats that includes attacks against both aircraft and ground facilities. The largest and most visible investment made by the agency has been in enhancing the passenger screener force and in massively expanding the number of explosive detection systems (EDS) required to examine checked luggage for bombs. Effective security, therefore, includes not only deterrent and preventive measures but also efforts to mitigate casualties, damage, and disruption. Since deterrence and prevention are sometimes difficult to achieve given the nature of terrorism and the inherent vulnerabilities of public transportation, great emphasis is also placed upon the mitigation of casualties through design of facilities and upon effective, rapid response that ensures safety while minimizing disruption. We believe that the MBR 300 is an ideal incident / security management technology for airports when dealing with bomb threats and suspicious objects or packages, especially in passenger carryon baggage.
 
 
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Twin-Aisle (containerized) Aircraft – Blast Mitigated Unit Load Devices (BMULDs)
 
LD3 Cargo Containers are used primarily on twin aisle/wide body aircraft such as the B747. These luggage or cargo containers are manufactured by a few well-established companies throughout the world. The market is extremely competitive with low margins. In accordance with an agreement with Nordisk Aviation Products, we have combined our BlastWrap® blast-mitigating technology with Nordisk’s LD3 containers to create superior blast mitigating products for the air cargo and unit loading device (ULD) market called BlastGard BMULD. ULDs are pallets and containers used to load luggage, freight, and mail onto wide-body aircraft that facilitate the bundling of cargo into large units. The alliance has developed a new line of ULDs that include BlastWrap®. The introduction of this product line enables us to provide the airline industry an important new line of defense to increase airline safety of passengers and crewmembers. This revolutionary new container design incorporating BlastWrap® will prevent shock holing of the fuselage, effectively retaining the structural integrity of the aircraft; prevent post-blast fires and conflagration in the hold; and add little or only negligible weight to the ULD. There is no effort underway to market this product.
 
Insensitive Munitions (IM) Weapons Containers and New Product Development
 
Weapons containers require specialty design. We have developed several of these containers in the past for evaluation and testing by the United States, United Kingdom and other military clients but no finished products materialized. However, we are currently looking at acquiring weapon container products as follows: an explosive storage unit that meets the US Military requirement for Limited Arc Magazines; a novel lightweight armor that out performs Kevlar but can be made for $5-8 per pound depending on choice of materials; a lightweight thermal barrier that can withstand a 1500F direct flame for 6 hours; and a modular, flat packed, light weight and high performance wall that can be helicoptered into a operational theater and erected by a four man team in a few hours.
 
Trash Receptacles
 
We have four models of mitigated trash receptacles, the BlastGard® MTR 81, MTR 91, MTR 96 and MTR 101. These containers have been designed and proof tested to drastically mitigate blast pressures and thermal output and to capture bomb fragments.  Most of BlastGard’s sales historically have been of this product line.
 
On October 25, 2004, the Company had entered into an Alliance Agreement with Centerpoint Manufacturing whereas Centerpoint would provide the Company with proprietary reinforced trash receptacles and the Company would provide proprietary composite blast mitigation material technologies to offer an enhanced reinforced trash receptacle product. All of the costs related to the testing and development of the BlastGard MTR® and BlastGard MBR® series, totaling $262,404.60 and $62,808.63 respectively, were paid by the Company. The Alliance Agreement commenced on October 25, 2004 and was in full force and effect for five years. The Alliance Agreement automatically terminated on October 25, 2009 since neither party renewed the Agreement. Nevertheless, the Company continued to rely on Centerpoint as their vendor for blast resistant receptacles for the Company’s MTR and MBR line of products and Centerpoint continued to supply their receptacles to the Company. During the 5-year Alliance Agreement, the Company’s line of blast-mitigated products were marketed to third parties while Centerpoint continued to market the same blast resistant receptacle under their own name but without the blast-mitigating properties of BlastWrap. In May 2010, BlastGard notified Centerpoint that it intended to create a new blast resistant receptacle component for the Company to use in its BlastGard MTR® and BlastGard MBR® product line unless Centerpoint could reach agreement with BlastGard on continuing to use its existing receptacle. On May 18, 2010, BlastGard concluded that Centerpoint would not continue its relationship with BlastGard. However, in late 2011, BlastGard and Centerpoint reestablished its previous relationship and Centerpoint now supplies BlastGard with the receptacles for its MTR sales.
 
 
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BlastGard Barrier System (“BBS”) High-Capacity Wall System for Perimeter and Structure Protection
 
The BBS product is an innovative combination of three patented technologies, an HDPE cellular core, BlastWrap® and an aesthetically pleasing novel fascia system. BBS has extraordinary blast, ballistic, fragment, shaped charge jet and breaching resistance capabilities and it is beautiful, low cost, configurable and “stealthy”. The cellular core material, patented by the U.S. Army, has been used extensively by the U.S. military and commercial clients worldwide for building roads, for shoring up unstable roads, for extensive soil stabilization projects and for revetments and barriers. After the core is placed and filled, BlastWrap® is attached to the “threat side(s)” of the BBS structure, and finally, the fascia system encloses the entire structure, thereby creating an effective “stealth” characteristic for the entire BBS structure that is, the extreme capabilities of this system are not at all visually apparent. Clients with concerns about heavy blast, breaching, ballistic, fragment and shaped charge jet threats to their facilities can now effectively address all of those threats with our economical solution. Optional electronic security capabilities can also be integrated into the system.
 
In summary, we have developed either finished products or working prototypes of BlastWrap® products for each of the product lines described above. All of these products have been successfully tested and evaluated in-house, by third-parties and by interested clients and strategic partners. Prototypes may require further modifications based on the test results and client and partner feed-back. However, we have the following products that are completed and finished products, available for sale that we are currently manufacturing and marketing:
 
 
·
The core product, BlastWrap®;
 
 
·
BlastGard® MTR (mitigated trash receptacle);
 
 
·
BlastGard MBR 300 (mitigated bomb receptacle) and MBR Gard Cart;
 
 
·
BMULD (Blast Mitigated Unit Load Device - LD3 Container); and
 
 
·
BlastGard Barrier System (“BBS”) high-capacity wall system for perimeter and structure protection.
 
 
Manufacturing
 
We have three distinct production types:
 
·  
Serial Production – items that can be produced in quantity in an efficient, high-speed assembly line fashion.
 
·  
Contract Manufacturing – items that require special design or custom features requiring separate and special manufacturing processes.
 
·  
OEM (Original Equipment Manufacturer) Production – items that are licensed to OEM manufacturers enabling greater control over design, quality and production requirements specific to their industry.
 
Serial Production
 
Manufacturing is sub-contracted to a BlastGard-licensed and qualified production facility, ideally in close proximity to the customer. This method facilitates customer interaction in design, quality and distribution to affect the greatest level of satisfaction and usefulness of the BlastWrap® product.
 
Contract Manufacturing
 
Although the Production/Engineering team in BlastGard’s Technology Center will design these items, we will sub contract manufacturing and assembly. This will be at our discretion to ensure quality and adherence to custom design requirements.
 
Original Equipment Manufacturer Production
 
Original equipment manufacturer production requires licensing agreements with contractors for aspecific industry product. There will be several licensing agreements issued on a limited and non-exclusive basis to provide end-users with an appropriate number of well-located originalequipment manufacturer producers. Once qualified and licensed by BlastGard®, original equipment manufacturer producers will be directed to produce and maintain quality standards per end user requirements. BlastWrap® products to be manufactured with original equipment manufacturer production will likely include:

 
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Lining – Aircraft (B747- 400- Royalty)- Once design and testing has been completed by our engineering and design team, we will work closely with the certified and widely dispersed air frame sub-contractors to integrate the use of BlastWrap® into their internal systems, such as fuel tanks, cargo holds, cabin and fuselage. Aircraft manufactures, similar to auto manufactures, typically require several suppliers of each part. Therefore the license agreement for air frame sub-contractors will need to be limited and non-exclusive providing us royalties on a per-unit basis as well as continued design, manufacturing, and installation consulting.
 
 
Insensitive Munitions (IM) Weapons Containers – Once the design and testing of each product is complete, we will license and train personnel on the fabrication of the various products within the line. The Contractor chosen will manufacture this product line in-house for each specific munition /weapon system. The contractor is expected to pay a per unit royalty to us for use of the design and of the patented product. In return, we will be retained on a consulting and design basis as part of the license agreement.
 
Current manufacturing arrangements for finished products
 
Currently, we have several products that we consider to be completed and finished products. Manufacturing arrangements for those products follow:
 
·  
Pro-Form Packaging, Inc., located in Dunellen, New Jersey manufactures BlastWrap® and the MTR and MBR lids and ships to Centerpoint for installation.
 
·  
Centerpoint Manufacturing, Inc., located in Robertsdale, Alabama manufactures the BlastGard® MTR receptacles and will manufacture the BlastGard Mitigated Bomb Receptacles (MBR 300) as well. We entered into a five year exclusive alliance agreement with Centerpoint Manufacturing in October 2004 for the joint development of reinforced, blast mitigated trash receptacles which contract has since expired. Since late 2011, BlastGard and Centerpoint have re-established its previous relationship and Centerpoint now supplies BlastGard with the receptacles for its MTR sales. We are not contractually bound to use Pro-Form Packaging to manufacture the receptacle lids, and we believe that there are alternative manufacturers in the United States.
 
·  
Geo Products, LLC has a license for the manufacture of the patented (by the US Army Corps of engineers) HDPE cellular core sections in their plant in Houston, TX, which are used in the BlastGard Barrier system (“BBS”).  We are not contractually bound to use this product, and there are at least four different core systems we can use for BBS.  However, BlastGard has an exclusive worldwide license for this core product which is used for any blast-mitigated system with BlastWrap®.
 
 Purchasing
 
We rely on various suppliers to furnish the raw materials and components used in the manufacturing of our products. Management believes that there are numerous alternative suppliers for all of the key raw material and virtually all component needs.
 
Marketing Analysis
 
Overall Market
 
The market for blast solutions includes commercial industries (accidental explosions of chemicals, terrorist threats, demilitarization), militaries (weapons storage and transport, barriers, revetments and bunkers and vehicle protection), and governments and municipalities (bomb explosions and threats). We have examined each of these markets to identify areas and industries within each that will benefit most from BlastGard® Technology.  For a detailed discussion of our market analysis, reference is made to Item 1 of our Form 10-K for the fiscal year ended December 31, 2009, which is incorporated herein by reference.
 
 
23

 

Governmental Regulation
 
We are not aware of any existing or probable governmental regulations that would affect our business, except to the extent that we voluntarily design products to meet various governmental guidelines. For example, our products can be designed to conform to the United States Bureau of Alcohol, Tobacco and Firearm’s requirements for the containment of explosive materials.

 Research and Development
 
In 2011, 2010 and 2009, we spent approximately $30,670, $950 and $25,110, respectively, on research and development related activities of BlastGard. To date our products or prototypes of our products have been provided by us at no charge to potential customers for their own evaluation and testing done at their expense.

SEC Reports Available on Website

The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.  Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other SEC filings are available on the SEC’s website as well as our company website at www.blastgardintl.com.

Item 1.A   Risk Factors

An investment in our common stock involves major risks. Before you invest in our common stock, you should be aware that there are various risks, including those described below.  You should carefully consider these risk factors together with all of the other information included in this Form 10-K before you decide to purchase shares of our common stock.

Purchase of our stock is a highly speculative and you could lose your entire investment.  We have been operating at a loss since inception, and you cannot assume that our plans and business prospects described herein will either materialize or prove successful.  Accordingly, you may lose all or a substantial part of your investment.  The purchase of our stock must be considered a highly speculative investment.

We can provide no assurances we will be able to continue as a going concern or raise additional financing in the future. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  As shown in the accompanying financial statements, we have incurred recurring losses, and have negative working capital and a net capital deficiency at December 31, 2011.  These factors, among others, may indicate that we may be unable to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should we be unable to continue as a going concern.  Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis and ultimately to attain profitability. The Company will require from time-to-time additional financing to finance its operations through the sale of equity and/or debt borrowing.  We can provide no assurances that financing will be available to us on terms satisfactory to us, if at all, or that we will be able to continue as a going concern.  See “Notes to our Financial Statements.”
 
We had total liabilities at December 31, 2011 of $6,748,437and may not be able to meet our obligations as they become due. The majority of this debt was owed to our secured debt holders who have security interests in all our tangible and intangible assets. At December 31, 2011, we had convertible secured debt of $1,430,692 which continues to accrue interest at rates of 8% to 12%. In addition to the convertible debt, we owed approximately $90,000 on a credit line and approximately $600,000 in accrued salaries and accounts payables. We can provide no assurances that we will be able to meet our obligations to our secured lenders as they become due and payable.

 
24

 

Certain provisions of our secured debt may make it very difficult in the future to obtain additional financing or may cause a mandatory redemption of such securities.  At December 31, 2011, we had convertible secured debt of $1,430,692. The secured debt has mandatory redemption provisions. A large portion of the secured debt provides that in the event (i) the Company is prohibited from issuing Conversion Shares, (ii) upon the occurrence of any other Event of Default (as defined in the Transaction Documents), that continues beyond any applicable cure period, (iii) a Change in Control (as defined below) occurs, or (iv) upon the liquidation, dissolution or winding up of the Company or any Subsidiary, then at the Secured Debt Holder’s  election, the Company must pay to the Secured Debt Holder not later than ten (10) days after request by such Secured Debt Holder, a sum of money determined by multiplying up to the outstanding principal amount of the Note designated by the Secured Debt Holder, at the Secured Debt Holder’s election, the greater of (i) 120%, or (ii) a fraction the numerator of which is the highest closing price of the Common Stock for the thirty days preceding the date demand is made by Secured Debt Holder and the denominator of which is the lowest applicable conversion price during such thirty (30) day period, plus accrued but unpaid interest and any other amounts due under the Transaction Documents ("Mandatory Redemption Payment"). The Mandatory Redemption Payment must be received by the Secured Debt Holder on the same date as the Conversion Shares otherwise deliverable or within ten (10) days after request, whichever is sooner ("Mandatory Redemption Payment Date"). Upon receipt of the Mandatory Redemption Payment, the corresponding Note principal, interest and other amounts will be deemed paid and no longer outstanding.  The Secured Debt Holder may rescind the election to receive a Mandatory Redemption Payment at any time until such payment is actually received.  Liquidated damages calculated that have been paid or accrued for the ten day period prior to the actual receipt of the Mandatory Redemption Payment by such Secured Debt Holder shall be credited against the Mandatory Redemption Payment provided the balance of the Mandatory Redemption Payment is timely paid.  “Change in Control” is defined as  (i) the Company  becoming a Subsidiary of another entity (other than a corporation formed by the Company for purposes of reincorporation in another U.S. jurisdiction), (ii) the sale, lease or transfer of substantially all the assets of the Company or any Subsidiary, (iii) a majority of the members of the Company’s board of directors as of the Closing Date no longer serving as directors of the Company, except as a result of natural causes or as a result of hiring additional outside directors in order to meet appropriate stock exchange requirements, or (iv) Michael Gordon, the Chief Executive Officer of the Company is no longer serving as Chief Executive Officer unless prior written consent of the Secured Debt Holder had been obtained by the Company.  The foregoing notwithstanding, the Secured Debt Holder may demand and receive from the Company the amount stated above or any other greater amount which the Secured Debt Holder is entitled to receive or demand pursuant to the Transaction Documents.

In connection with the aforementioned loan transaction, we also issued to our Secured Debt Holder warrants to purchase 104,333,335 shares of the Company’s Common Stock, which warrants are currently exercisable at an exercise price of $.01 per share, which exercise price is subject to adjustment pursuant to the provisions of the warrant. In the event a fundamental transaction occurs as defined in the warrants, which includes without limitation any person or group acquiring 50% of the aggregate Common Stock of the Company, then the holder of the warrants may have the right to have the warrants redeemed at a price equal to the Black-Scholes value of said warrants.

The most recent subscription agreement dated in November 2011 pursuant to which the Secured Debt Holder advanced financing to the Company included a 12-months right of first refusal, a most favored nations provision which may result in additional securities being issued to the Secured Debt Holder and prohibitions against filing a registration statement with the Securities and Exchange Commission without the Secured Debt Holder’s consent. The aforementioned provisions that have been agreed to with our Secured Debt Holder may make it very difficult or impossible in the future to obtain additional financing for the Company to support its operations and remaining a going concern.
We have incurred substantial losses from inception and failure to achieve significant revenues and profitability in the future would cause the market price for our common stock to decline further.  We have generated net losses from inception. We have an accumulated retained deficit of $17,540,517 and a shareholders’ equity of $(2,794,539) as of December 31, 2011. If we don’t immediately achieve significant revenues and profitability in the near future, the market price for our common stock could decline further.
 
 
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Business and Operational Risks

The following are the major business and operational risks related to our new HighCom subsidiary:

 
·  
A substantial portion of our revenue is dependent on U.S. military business, and a decrease or delay in contract awards in such business could have a material adverse effect on us.
 
·  
We must comply with all laws and regulations surrounding U.S. export controls.
 
·  
Continued turmoil in the credit markets and the financial services industry may negatively impact our business, results of operations, financial condition or liquidity.
 
·  
Many of our customers have fluctuating budgets, which may cause fluctuations in our results of operations.
 
·  
Our business is subject to various laws and regulations favoring the U.S. government’s contractual position, and our failure to comply with such laws and regulations could harm operating results and prospects.
 
·  
We rely on certain vendors to supply us with ballistics materials, composites materials, and other key materials that if we were unable to obtain could adversely affect our business.
 
·  
Growth of operations may strain resources and if we fail to manage growth successfully, our business could be adversely affected.
 
·  
Increases in the prices paid for raw materials or labor costs may adversely affect profit margins.
 
·  
Our products are used in situations that are inherently risky. Accordingly, we may face product liability and exposure to other claims for which we may not be able to obtain adequate insurance.
 
·  
We are engaged in a highly competitive marketplace, which demands that producers continue to develop new products. Our business will be adversely affected if we are not able to continue to develop new and competitive products.
 
·  
We face continuous pricing pressure from our customers and our competitors. This will affect our margins and therefore our profitability and cash flow unless we can efficiently manage our manufacturing costs and market our products based on superior quality.
 
·  
We may have difficulty protecting our proprietary technology.
 
·  
If we are unable to successfully retain executive leadership and other key personnel, our ability to successfully develop and market our products and operate our business may be harmed.

·  
We have launched and expect to continue to launch strategic and operational initiatives which if not successful could adversely affect our business.

·  
HighCom has in the past relied on its credit facility for liquidity needs which is currently at its maximum. The available credit under this facility is linked to a borrowing base, and reductions in eligible receivables and inventory will reduce our ability to draw on the line. The terms of the facility include various covenants, and failure to meet these covenants could affect our ability to borrow. These factors could affect our liquidity.
 
 
·  
We may incur additional costs or material shortages due to new NIJ certification and testing standards.
 
·  
If internal control over financial reporting becomes ineffective, our business and future prospects may suffer.

HighCom faces intense competition that could result in our losing or failing to gain market share and suffering reduced revenue.
 
 
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HighCom operates in intensely competitive markets that are characterized by competition from major domestic and international companies in our business and from a large number of competitive companies and alternative solutions in our security business. This intense competition could result in pricing pressures, lower sales, reduced margins, and lower market share. Any movement away from high-quality, domestic ballistic plates to lower priced or comparable foreign alternatives would adversely affect our business. Some of HighCom's competitors have greater financial, technical, marketing, distribution, and other resources and, in certain cases, may have lower cost structures than we possess and that may afford them competitive advantages. As a result, they may be able to devote greater resources to the promotion and sale of products, to negotiate lower prices on raw materials and components, to deliver competitive products at lower prices, and to introduce new products and respond to customer requirements more effectively and quickly than HighCom can.

Competition is primarily based on quality of products, product innovation, price, consumer brand awareness, alternative solutions, and customer service and support. Pricing, product image, quality, and innovation are the dominant competitive factors in the industry. Our ability to compete successfully depends on a number of factors, both within and outside our control. These factors include the following:
 
     
 
our success in designing and introducing innovative new products and services;
     
 
our ability to predict the evolving requirements and desires of our customers;
     
 
the quality of our customer service;
     
 
product and service introductions by our competitors; and
     
 
foreign labor costs and currency fluctuations, which may cause a foreign competitor’s products to be priced significantly lower than our products.

We can provide no assurances that we will be able to successfully compete with our competitors in the future.

If we are unable to compete effectively with our competitors, we will not be successful generating revenues or attaining profits. The blast mitigation industry is highly competitive. BlastGard's ability to generate revenues and profitability is directly related to our ability to compete with our competitors. Currently, we believe that we have a competitive advantage because of our unique technology, our product performance, product mix and price. Our beliefs are based only on our research and development testing and we currently have only four completed and finished products. We face competition in our markets from competing technologies and direct competition from additional companies that may enter this market with greater financial resources than we have.  If we are unable to compete effectively, we will not be successful in generating revenues or attaining profits.

BlastGard has not yet hired sales and marketing personnel, which may hinder our ability to generate revenues. BlastGard's primary sales focus has been to distribute our products through strategic partners, direct sales and through information and education by our executive officers. Through our executive officers, we have in the past entered into agreements with several strategic partners and our officers worked with them to attempt to generate significant sales.  However, these efforts have not been successful. In the future, we may develop our own sales and marketing department in the event that management believes that such efforts would be meaningful and within our budget requirements. The failure to form a sales and marketing department and hire qualified sales personnel may adversely affect BlastGard's sales efforts and could cause us not to meet operating projections.
 
 
27

 

Loss of key personnel could cause a major disruption in our day-to-day operations and we could lose our relationships with third-parties with whom we do business. Our future success depends in a significant part upon the continued service of our executive officers as key management personnel.  Competition for such personnel may be intense, and to be successful we must retain our key managerial personnel.  The loss of key personnel or the inability to hire or retain qualified replacement personnel could have cause a major disruption in our day-to-day operations and we could lose our relationships with third-parties with whom we do business, which could adversely affect our financial condition and results of operations.

We can provide no assurances that HighCom sales will be restored to historical levels or that BlastGard will successfully achieve sales of its products.

Our new subsidiary, HighCom, has a history of significant sales, which are not present in
BlastGard. HighCom will attempt to restore sales to historical levels, although no assurances can be given in this regard.  Currently, the Company intends to devote primarily all of its manpower and capital resources to the operations of HighCom. If our parent corporation, BlastGard, chooses to devote resources toward the development of sales in its traditional Blastwrap business, these sales activities may not be successful. We can provide no assurances that our operations will be able to operate profitably in the future.

Dependence on outside manufacturers and suppliers could disrupt our business if they fail to meet our expectations.  Currently, we rely on outside manufacturers and suppliers for many of our products. In the event that any of our suppliers or manufacturers should become too expensive or suffer from quality control problems or financial difficulties, we would have to find alternative sources.

Possible technological obsolescence of our products. Our products may be subject to technological obsolescence, which would adversely affect our business by increasing our research and development costs and reducing our ability to generate sales.  Discovery of another new technology by third parties could replace or result in lower than anticipated demand for our products and could materially adversely affect our operations.

We may not be able to successfully use or defend our intellectual property rights, which would prevent us from developing an advantage over our competitors.  We rely on a combination of patent applications, trademarks, copyright and trade secret laws, and confidentiality procedures to protect our intellectual property rights, which we believe will give us a competitive advantage over our competitors. However, we have not been granted any patents and we may never be granted any patents if our applications are denied.  Even if a patent is issued, use of our technology may infringe upon patents issued to third-parties, which would subject us to the cost of defending the patent and possibly requiring us to stop using the technology or to license it from a third party.  If a third party infringes on a patent issued to us, we will bear the cost of enforcing the patent. If we are not able to successfully use or defend our intellectual property rights, we may not be able to develop an advantage over our competitors.

Product Liability Insurance.  Due to new financing during the fourth quarter of 2011, the Company has secured product liability insurance which had previously lapsed. We can provide no assurances that our operations will be able to operate profitably in the future in order to maintain product liability insurance.

We do not expect to be able to pay cash dividends in the foreseeable future, so you should not make an investment in our stock if you require dividend income. The payment of cash dividends, if any, in the future rests within the discretion of its Board of Directors and will depend, among other things, upon our earnings, our capital requirements and our financial condition, as well as other relevant factors. We have not paid or declared any cash dividends upon our Common Stock since our inception and by reason of our present financial status and our contemplated future financial requirements does not contemplate or anticipate making any cash distributions upon our Common Stock in the foreseeable future.

We have a limited market for our common stock which causes the market price to be volatile and to usually decline when there is more selling than buying on any given day.  Our common stock currently trades on the over the counter market under the symbol “BLGA.”  However, at most times in the past, our common stock has been thinly traded and as a result the market price usually declines when there is more selling than buying on any given day. As a result, the market price has been volatile, and the market price may decline immediately if you decide to place an order to sell your shares.
 
 
28

 

The market price of our common stock is highly volatile and several factors that are beyond our control, including our common stock being historically thinly traded, could adversely affect its market price.  Our common stock has been historically thinly traded and the market price has been highly volatile.  For these and other reasons, our stock price is subject to significant volatility and will likely be adversely affected if our revenues or earnings in any quarter fail to meet the investment community’s expectations. Additionally, the market price of our common stock could be subject to significant fluctuations in response to:

announcements of new products or sales offered by BlastGard® or its competitors;
actual or anticipated variations in quarterly operating results;
changes in financial estimates by securities analysts;
changes in the market’s perception of us or the nature of our business; and
sales of our common stock.

Future sales of common stock into the public market place will increase the public float and may adversely affect the market price.  As of March 2, 2012, we have outstanding 90,386,036 shares of common stock, including an estimated 52,495,000 outstanding shares held by non-affiliated persons. Holders of restrictive securities may also sell their restrictive shares pursuant to Rule 144. In general, under Rule 144 of the Securities Act of 1933, as amended, shares of our common stock beneficially owned by a person for at least six months (as defined in Rule 144) are eligible for resale under Rule 144, subject to the availability of current public information about us and, in the case of affiliated persons, subject to certain additional volume limitations, manner of sale provisions and notice provisions. Pursuant to Rule 144, non-affiliates may sell or otherwise transfer their restricted shares without compliance with current public information where the restricted securities have been held for at least one year pursuant to Rule 144(a). Future sales of common stock or the availability of common stock for sale may have an adverse effect on the market price of our thinly traded common stock, which in turn could adversely affect our ability to obtain future funding as well as create a potential market overhang.

“Penny Stock” regulations may adversely affect your ability to resell your stock in market transactions. The SEC has adopted penny stock regulations which apply to securities traded over-the-counter.  These regulations generally define penny stock to be any equity security that has a market price of less than $5.00 per share or an equity security of an issuer with net tangible assets of less than $5,000,000 as indicated in audited financial statements, if the corporation has been in continuous operations for less than three years.  Subject to certain limited exceptions, the rules for any transaction involving a penny stock require the delivery, prior to the transaction, of a risk disclosure document prepared by the SEC that contains certain information describing the nature and level of risk associated with investments in the penny stock market.  The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities.  Monthly account statements must be sent by the broker-dealer disclosing the estimated market value of each penny stock held in the account or indicating that the estimated market value cannot be determined because of the unavailability of firm quotes. In addition, the rules impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and institutional accredited investors (generally institutions with assets in excess of $5,000,000).  These practices require that, prior to the purchase, the broker-dealer determined that transactions in penny stocks were suitable for the purchaser and obtained the purchaser’s written consent to the transaction.

Our common stock is currently subject to the penny stock regulations.  Compliance with the penny stock regulations by broker-dealers will likely result in price fluctuations and the lack of a liquid market for the common stock, and may make it difficult for you to resell your stock in market transactions.

Item 1.B.  Unresolved Staff Comments

Not applicable.

Item 2. Description of Property
 
 
29

 

We do not own any real estate properties. The BlastGard entered into a lease agreement in January 1, 2009 for office space in Clearwater Florida, which was expanded to two offices in 2011 to accommodate HighCom Security. Rental payments under the lease were $300 per month on a month to month basis for each office space.

HighCom leases office and manufacturing space in Columbus, Ohio. The total space leased is approximately 11,000 square feet.  The lease expired on August 31, 2011 and we are on a month to month basis. We believe that our HighCom facility is adequate for present requirements and suitable for the operations involved.

HighCom rents office space in Aurora, CO on a short-term lease expiring on October 31, 2012.  Rental payments under the lease were $329 per month until November, when we added more office space for our sales staff.  The new rental amount is $965 per month.

HighCom leased office space in San Francisco, CA until April 30, 2011 when the offices moved to Clearwater, FL.  The rent in San Francisco was approximately $8,600 per month.

Rent expense for 2011 and 2010 was approximately $70,507 and $3,600 respectively.

Item 3.  Legal Proceedings

We are currently not subject to any threatened or pending legal proceedings. Nevertheless, we may from time to time become a party to various legal proceedings arising in the ordinary course of our business.

Item 4. Mining Safety Disclosures

Not applicable.

 
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PART II

Item 5.   Market for Common Stock and Related Shareholder Matters

There is a limited public market for our Common Stock. Our common stock has been quoted on the OTC Bulletin Board under the symbol “BLGA” since March 29, 2004 (on some internet-based services such as http://finance.yahoo.com, stock quotes can be accessed using the symbol BLGA.OB).The following table sets forth the range of high and low sales prices for our Common Stock for each quarterly period indicated, in the last two fiscal years.
 
 
Quarter Ended
 
High Sales
   
Low Sales
 
March 31, 2010
  $ 0.011     $ 0.0036  
June 30, 2010
  $ 0.01     $ 0.0036  
September 30, 2010
  $ 0.005     $ 0.0021  
December 31, 2010
  $ 0.0225     $ 0.004  
                 
March 31, 2011
  $ 0.065     $ 0.055  
June 30, 2011
  $ 0.08     $ 0.04  
September 30, 2011
  $ 0.035     $ 0.035  
December 31, 2011
  $ 0.012     $ 0.012  
 
The source of this information is the OTC Bulletin Board and other quotation services. The quotations reflect inter-dealer prices, without retail markup, markdown or commission.

Holders

As of March 2, 2012, there were approximately 263 holders of record of our common stock (this number does not include beneficial owners who hold shares at broker/dealers in “street-name”).

Dividends

To date, we have not paid any dividends on its common stock and do not expect to declare or pay any dividends on such common stock in the foreseeable future. Payment of any dividends will be dependent upon future earnings, if any, our financial condition, and other factors as deemed relevant by our Board of Directors.

Repurchases of equity securities

During the past three years, we did not repurchase any of our outstanding equity securities. except for the warrants repurchased from the June 2006 lenders as described under "Item 13.
 
 
31

 

Sales of Unregistered Securities

From January 1, 2011 to December 31, 2011, we had no sales or issuances of unregistered common stock, except we made sales or issuances of unregistered securities listed in the table below:

 
Date of Sale
   
Title of
Security
   
Number Sold
   
Consideration
Received and
Description of
Underwriting or
Other Discounts to
Market Price or
Convertible Security,
Afforded to
Purchasers
   
Exemption from
Registration
Claimed
   
If Option, Warrant
or Convertible
Security, terms of
exercise or
conversion
 
January  2011
 
Common Stock
 
4,166,667
 
$125,000 Equity Investment; no commissions paid
 
Rule 506, Section 4(2)
 
Equity conversion
At $.03 per share
 
 
 
January 2011
 
Common Stock
 
866,667
 
$25,000 Equity Investment; no commissions paid
 
Rule 506, Section 4(2)
 
Equity conversion
At $.03 per share
 
 
 
March
2011
 
Common Stock
 
9,820,666
 
$491,000 Equity Investment; HighCom acquisition
 
 
Rule 506, Section 4(2)
 
Equity conversion
At $.05 per share
 
April
2011
 
Common Stock
 
800,000
 
$24,000 Equity Investment; no commissions paid
 
Rule 506, Section 4(2)
 
Equity conversion
At $.03 per share
 
 
 
May
2011
 
Common Stock
 
1,000,000
 
$50,000 (bonus for services as officer)
 
Rule 506, Section 4(2)
 
Not applicable
 
 
 
 
May
2011
 
Common Stock
 
3,333,333
 
$100,000 (for services)
 
Rule 506, Section 4(2)
 
Equity conversion
At $.03 per share
 
 
June
2011
 
Common Stock
 
2,889,617
 
$86,689 Debt Conversion
 
Rule 506, Section 4(2)
 
Debt conversion
At $.03 per share
 
 
 
June
2011
 
Common Stock
 
4,782,915
 
$143,487 Debt Conversion
 
Rule 506, Section 4(2)
 
Debt conversion
At $.03 per share
 
 
 
June
2011
 
Common Stock
 
140,029
 
$4,201 Debt Conversion
 
Rule 506, Section 4(2)
 
Debt conversion
At $.03 per share
 
 
 
August
2011
 
Common Stock
 
500,000
 
$25,000 Equity Investment; Acquisition of Acer Defense
 
 
Rule 506, Section 4(2)
 
Equity conversion
At $.03 per share
 
 
 
September
2011
 
Common Stock
 
500,000
 
$15,000 (convertible note settlement fee)
 
Rule 506, Section 4(2)
 
Not applicable
 
 
 
 
September
2011
 
Common Stock
 
1,500,000
 
$45,000 (convertible note settlement fee)
 
Rule 506, Section 4(2)
 
Not applicable
 
 
 

September
2011
 
Common Stock
 
4,000,000
 
$40,000 (convertible note settlement fee)
 
Rule 506, Section 4(2)
 
Not applicable
 
 
 
 

 
32

 

From January 1, 2011 to December 31, 2011, we had no sales or issuances of unregistered promissory notes or common stock purchase warrants, except we made sales or issuances of unregistered securities listed in the table below:

 Date of Sale    
Title of
Security
   
Number Sold
    Consideration
Received and
Description of
Underwriting or
Other Discounts to
Market Price or
Convertible Security,
Afforded to
Purchasers
   
Exemption from
Registration
Claimed
   
If Option, Warrant
or Convertible
Security, terms of
exercise or
conversion
 
January  2011
 
Common Stock
Purchase
Warrants
 
6,250,00
 
Services rendered;
No commissions
paid
 
        Section 4(2)
 
Five year warrants
Exercisable at $.05 per share
 
 
 
 
                       
January
2011
 
Notes
 
$434,025
Principal
Amount
 
Accounts payable
Totaling $434,025
0owed to directors and
Legal counsel; no
commissions paid
 
        Section 4(2)
 
Notes payable on demand; convertible
at $.05 per share
 
 
 
 
February
2011
 
 
Notes (1)
 
 
$160,000
in principal
 
 
$160,000
 
 
       Section 4(2)
 
 
 
Notes due
August 31, 2011
which were later
extended to March 31, 2012
 
                       
March
2011
 
Notes (2)
 
$300,000
in principal
 
$300,000
 
      Section 4(2)
 
Notes due March 3,
2012
 
                       
                       
June
2011
 
Notes (3)
 
$300,000
in principal
 
$300,000
 
      Section 4(2)
 
Notes due June
2012
 
                       
November
2011
 
Notes (4)
 
$500,000
in principal
 
$500,000
 
      Section 4(2)
 
Notes due November
2012
 

 
33

 

(1)  
Notes were accompanied by Common Stock Purchase Warrants to purchase 8,000,000 shares of Common Stock originally exercisable at $.03 per share and currently exercisable at $.01 per share through November 2018.

(2)  
Notes were accompanied by Common Stock Purchase Warrants to purchase 9,000,000 shares of Common Stock originally exercisable at $.08 per share and currently exercisable at $.01 per share through November 2018.

(3)  
Notes were accompanied by Common Stock Purchase Warrants to purchase 12,335,000 shares of Common Stock originally exercisable at $.06 per share and currently exercisable at $.01 per share through November 2008.

(4)  
Notes were accompanied by Common Stock Purchase Warrants to purchase 75,000,000 shares of Common Stock, currently exercisable through November 2018.

Item 6.  Selected Financial Data

Not applicable.

Item 7. Management’s Discussion and Analysis or Plan of Operation

Statements contained herein that are not historical facts are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, the forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected. We caution investors that any forward-looking statements made by us are not guarantees of future performance and actual results may differ materially from those in the forward-looking statements. Such risks and uncertainties include, without limitation: well-established competitors who have substantially greater financial resources and longer operating histories, regulatory delays or denials, ability to compete as a start-up company in a highly competitive market, and access to sources of capital.

The following discussion and analysis should be read in conjunction with our financial statements and notes thereto included elsewhere in this Form 10-K.  Except for the historical information contained in this Form 10-K, the discussion in this Form 10-K contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-K should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-K. Our actual results could differ materially from those discussed here.

New Product Line

On January 25, 2011, we acquired 98.2% of the capital stock of HighCom pursuant to a transaction which is described under "Item 13" herein.  HighCom provides a wide range of security products and personal protective gear (including tactical armor) that are tailored and offer protection solutions to specific customer requirements. HighCom caters to local law enforcement agencies, correctional facilities and municipal authorities. Given the equipment and ballistic protection solutions provided by HighCom, compliance with the U.S. Department of Commerce, U.S. Department of State, U.S. Department of the Treasury and all other governmental agencies' regulations is a high priority. HighCom has sold its products in the defense and law enforcement sectors and is known for innovative technology, exceptional customer service and superior quality performance. We export our products throughout the world and have in the past sold products in Asia, Africa, Europe, Latin America and the Middle East. Many of our products are controlled for export purposes and we require end user details prior to all sales. Strict compliance with U.S. and International laws and regulations is mandatory.

 
34

 

As discussed under "Background of HighCom" under "Item 1," HighCom's sales revenues in 2008 were approximately $17 million. Revenues in 2009 suffered a large decrease largely attributable to a May 2009 fire in its Columbus, OH facility. This destructive fire caused significant disruption to HighCom operations which was forced to relocate to new premises to restart its manufacturing activities.  The combination of decreased spending in law enforcement and homeland security sectors experienced by the industry, the US financial crisis and the destructive effects of the factory fire, revenues decreased to $4 million.  In the second half of 2009, HighCom was able to reestablish its operations in OH and began to regain its market presence both with customers and vendors.  The result of which was the receipt of a $6 million contract award through an open bid process for the supply of hard armor plates and soft armor vests to United Nations Peacekeeping Forces.  This was the first UN contract won by HighCom as a prime contractor.  Shipments under this contract began in late 2009 with the majority of the contract revenues scheduled to be earned in 2010.  Reference is made to “Item 1” – Foreign Corrupt Practices Act for a discussion of material events that effected HighCom in fiscal 2010 and the first quarter of 2011.
 
In March 2011, BlastGard’s management team officially assumed operational control of HighCom.  Since this time we have accomplished a number of key compliance tasks and finalized manufacturing agreements with several key partners.  As stated in the paragraph above, BlastGard has received official communication from the U.S. State Department that HighCom’s export authority has been reinstated. In addition to this, BlastGard has completed registration through both the Directorate of Defense Trade Controls as well as the Bureau of Industry and Security ("BSI"). The purpose of these registrations is to allow BlastGard control over the export management and compliance program moving forward.  HighCom also completed their ISO certification which had been revoked under HighCom due to missed audits.  BlastGard management has been able to complete an internal audit and management review, in addition to meeting with BSI for the external audit review and HighCom has been recommended for continuing ISO certification which should be completed by the end of March 2012.  BlastGard has also made significant personnel changes within HighCom and restructuring of operating locations and costs. BlastGard achieved a 30% reduction in HighCom’s operating expenses in the second half of 2011.

Since the completion of our acquisition of HighCom, the Company has focused its employee time and capital resources primarily on the development of the business of HighCom. We expect future results of operations to show the benefits of these changes.  For the year ended December 31, 2011, our results of operations will include revenues and expenses of HighCom Securities from March 4, 2011.

Results of Operations

Year Ended December 31, 2011 vs. 2010

Since the acquisition of HighCom Security in January 1022, we have worked to rebuild the HighCom sales.  Our first sales in HighCom started in July 2011 and have increased each month.  Occasional sales of BlastWrap and receptacles have continued in BlastGard.  For fiscal 2011, we recognized sales of $334,209 and a gross profit of $72,160, as compared to sales of $87,994 and a gross profit of $23,033 for the comparable period of the prior year.

For fiscal 2011, our overall operating and non operating expenses, increased due to the acquisition of HighCom and increased financing costs.  We have worked to reduce operating costs in HighCom but we still had to recognize the costs of increased staff and facilities.  Financing cost increased due to interest and amortization of debt discount and a loss on derivative liability. See the pro forma results included in footnote 10 of the financial statements and “Recent Developments” under Item 7 following “Liquidity and Capital Resources.”

Our net loss for fiscal 2011 was $3,872,185 as compared to $467,613 for the comparable period of the prior year.
 
 
35

 
 
Liquidity and Capital Resources.

At December 31, 2011, we had cash of $253,221, accounts receivable of $26,178, a retained deficit of $(17,540,517) and shareholder equity of $(2,794,539). At December 31, 2011, we owed $2,429,454 in principle and interest on notes payable and $1,370,246 in payables and accruals.  Our 2006 Debt was retired in January 2011 pursuant to a settlement agreement described below. During 2011, net cash was used in operating activities of $(1,034,752). This resulted primarily from our net loss of $(3,872,185), partially reduced by a stock based compensation non-cash charges of $577,944 and an amortization of debt discount of $1,558.942.  During 2011, net cash was used in investing activities of $(8,879) and net cash provided by financing activities was $1,250,461.

At December 31, 2010, we had cash of $46,382, accounts receivable of $342, a retained deficit of $13,668,332 and shareholder equity of $(1,051,997). At December 31, 2010, we owed $322,743 in principle and interest pursuant to our December 2004 Debt and $355,000 in principal pursuant to our June 2006 Debt, which June 2006 Debt was retired in January 2011 pursuant to a settlement agreement described below. During 2010, net cash was used in operating activities of $(99,914). This resulted primarily from our net loss of $463,613, partially reduced by a stock based compensation non-cash charge of $50,000 and an increase in accounts payable and accruals of $307,622.  During 2010, net cash was used in investing activities of $24,423, primarily payments for deferred costs.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  As shown in the accompanying financial statements, we have incurred recurring losses, and have negative working capital and a net capital deficiency at December 31, 2011.  These factors, among others, may indicate that we may be unable to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should we be unable to continue as a going concern.  Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis and ultimately to attain profitability. The Company has a plan of financing to obtain cash to finance its operations through the sale of equity and debt borrowing.  We can provide no assurances that financing will be available to us on terms satisfactory to us, if at all, or that we will be able to continue as a going concern.  In this respect, see “Note 1 – Going Concern” in our financial statements for additional information as to the possibility that we may not be able to continue as a “going concern.”

On January 25, 2011, BlastGard settled the 2006 debt (subordinated convertible promissory notes) for $130,000 to pay off the debt and the accrued interest at a discount, eliminate all claims to equity and warrants by the Lenders and free up the unissued shares.

To date, we have relied on management’s ability to raise capital through equity and debt private placement financings to fund our operations. We also have relied on borrowings from our Chief Executive Officer/Chief Financial Officer who has loaned the Company approximately $11,000 during 2010 which was subsequently paid back and from our financial institution with a personal guaranty of our Chief Executive Officer/Chief Financial Officer, in the amount of approximately $91,000 as of December 31, 2011.  We anticipate that our current and future liquidity requirements will arise from the need to finance our operations, accounts receivable and inventories, and from the need to fund our growth from operations, current debt obligations and capital expenditures. The primary sources of funding for such requirements are expected to be cash generated from operations and raising additional capital from the sale of equity and/or debt securities. We estimate that we will require between $2.0 million and $2.5 million in additional financing and cash flow from operations to support our operations and to meet our debt obligations as they become due and payable over the next 15 months of operations. We can provide no assurances that cash generated from operations will occur or additional financing will be obtained on terms satisfactory to us, if at all, or that additional debt conversions will occur.
 
 
36

 

Recent Developments
 
On January 25, 2011, BlastGard International, Inc. ("BlastGard") entered into a binding Letter of Intent (“LOI”) with HighCom Security, Inc. (“HighCom”) under which BlastGard would acquire 100% of the common stock of HighCom.  Under the LOI, the HighCom stockholders were entitled to the following:  (a) 10,000,000 shares of common stock upon execution of the definitive stock purchase agreement by all parties; (b) 100 Preferred convertible into 10,000,000 shares of common stock at such time as the company achieves a gross revenue of $5 million dollars within 18 months of close; (c) 100 Preferred convertible into 10,000,000 shares of common stock at such time as the company achieves a gross revenue of $10 million dollars within 24 months of close; and lastly (d) 150 Preferred convertible into 15,000,000 shares of common stock at such time as the company achieves a gross revenue of $15 million dollars within 30 months of close. HighCom's shareholders shall be entitled to a pro rata delivery of earn-out shares in the event a milestone is not 100% achieved or in the event BlastGard does not raise the amount of Two Million Five Hundred Thousand Dollars ($2,500,000). At Closing, BGI shall deliver its promissory notes representing its promise to pay $200,000 to HighCom shareholders at the earlier of ninety days or upon receipt of audited financials from HighCom, unless HighCom fails to provide the requested material to the extent they exist with such audit to start within ten days or as soon as practicable. An additional payment of $100,000 will be released upon revenues of $2 million dollars being achieved by HighCom which shall be paid pro-rata and shall be calculated based on revenue achieved at the end of 8 months post close. All sales mentioned above refer to sales from products presently marketed by HighCom.
 
On March 4, 2011, among other changes the LOI was amended as follows: 1) the LOI constitutes the definitive stock purchase agreement; 2) BlastGard issued 9,820,666 shares of its Common Stock and promissory notes totaling $196,400 to Robert Rimberg as trustee for an Irrevocable Trust FBO and Yochi Cohen and his wife, Yocheved Cohen–Charash (the "Trust") in exchange for 1,150 shares of the outstanding 1,171 shares of HighCom Common Stock, equivalent to 98.2% of the outstanding shares; 3) the parties agree to waive all closing conditions, escrow provisions and right of rescission; and 4) BGI agreed for a period of 30 days to offer to purchase from a non-affiliated person 21 shares of HighCom from him or his transferee at a cost of 179,934 shares of BGI Common Stock and in exchange for promissory notes totaling $3,600, with terms identical to those received by the Trust plus 1.8% of the Earnout provisions contained in the LOI.  As of the filing date of this Form 10-K, these 21 shares of HighCom have not been purchased by us.
 
BlastGard also agreed to an earnout consisting of up to $100,000 in cash and up to 35,000,000 shares of common stock based on a pro-rata basis if revenue reaches certain goals.  BlastGard management believes that the revenues goals are, subject to available financing to remain as a going concern, very achievable and have valued the contingent consideration at 68% of the market price at the time of the agreement.
 
Starting on March 4, 2011, we have the revenues from the sale of HighCom products to help fund our operations.  The extent of the cash provided will be dependent on our ability to generate sales and control the administrative costs of HighCom.
 
Recent Financings
 
As reported in our Form 10-Q for September 30, 2010 filed on December 8, 2010, BlastGard reported that on November 30, 2010, the Company received funds in the amount of $165,000 as a down payment to be followed by additional financing on December 15, 2010; January 3, 2011; January 17, 2011; and February 1, 2011, in accordance with a schedule to be mutually agreed upon. The funds were a portion of a $500,000 commitment and were convertible to stock at $0.03 (16,666,667 shares) per share at the holder’s discretion. Subsequent disbursements on December 15, 2010; January 3, 2011 and January 17, 2011 never took place and a default notice was sent to TangoPoint Group. In addition, BlastGard was notified by certified mail that the sole member and managing member of TangoPoint Investments, LLC, one of the two entities representing themselves collectively as TangoPoint Group, did not authorize entering into an agreement with BlastGard. The sole member of TangoPoint Investments, LLC stated that because there was no operating agreement for TangoPoint Investments, LLC and no agreement amongst the members regarding the same, no one should conduct business in the name or act on behalf of TangoPoint Investments, LLC. On December 22, 2010, BlastGard, Mitch Silverman and TangoPoint Investments, LLC entered into an agreement stating that they have no financial or other obligations or liabilities to each other, that the parties are not involved in any business or business relationship with each other and providing for the benefit of each party a general release for the benefit of each party. The Company has offered TangoPoint Group, which now does not include TangoPoint Investments, LLC, a new agreement. The Company had verbally agreed to accept the balance of the initial $500,000 equity investment at $.03 per share ($335,000) from the new TangoPoint Group. On January 24, 2011, the new TangoPoint Group wired $125,000 to BlastGard, which was subsequently used to settle the 2006 debt described above, which also freed up the unissued shares needed for the conversion of the $125,000 investment. However, no final funding arrangements are in effect at the time of this filing.

 
37

 

Alpha Capital Aktiengesellschaft, a holder of 2004 Debt, loaned us $160,000 in February 2010 , an additional $300,000 in March 2011, an additional $300,000 in June 2011 and an additional $500,000 in November 2011 pursuant to secured convertible promissory notes convertible. See “Item 5.”

At December 31, 2011, we had convertible secured debt of $1,430,692. The secured debt has mandatory redemption provisions. A large portion of the secured debt provides that in the event (i) the Company is prohibited from issuing Conversion Shares, (ii) upon the occurrence of any other Event of Default (as defined in the Transaction Documents), that continues beyond any applicable cure period, (iii) a Change in Control (as defined below) occurs, or (iv) upon the liquidation, dissolution or winding up of the Company or any Subsidiary, then at the Secured Debt Holder’s  election, the Company must pay to the Secured Debt Holder not later than ten (10) days after request by such Secured Debt Holder, a sum of money determined by multiplying up to the outstanding principal amount of the Note designated by the Secured Debt Holder, at the Secured Debt Holder’s election, the greater of (i) 120%, or (ii) a fraction the numerator of which is the highest closing price of the Common Stock for the thirty days preceding the date demand is made by Secured Debt Holder and the denominator of which is the lowest applicable conversion price during such thirty (30) day period, plus accrued but unpaid interest and any other amounts due under the Transaction Documents ("Mandatory Redemption Payment"). The Mandatory Redemption Payment must be received by the Secured Debt Holder on the same date as the Conversion Shares otherwise deliverable or within ten (10) days after request, whichever is sooner ("Mandatory Redemption Payment Date"). Upon receipt of the Mandatory Redemption Payment, the corresponding Note principal, interest and other amounts will be deemed paid and no longer outstanding.  The Secured Debt Holder may rescind the election to receive a Mandatory Redemption Payment at any time until such payment is actually received.  Liquidated damages calculated that have been paid or accrued for the ten day period prior to the actual receipt of the Mandatory Redemption Payment by such Secured Debt Holder shall be credited against the Mandatory Redemption Payment provided the balance of the Mandatory Redemption Payment is timely paid.  “Change in Control” is defined as  (i) the Company  becoming a Subsidiary of another entity (other than a corporation formed by the Company for purposes of reincorporation in another U.S. jurisdiction), (ii) the sale, lease or transfer of substantially all the assets of the Company or any Subsidiary, (iii) a majority of the members of the Company’s board of directors as of the Closing Date no longer serving as directors of the Company, except as a result of natural causes or as a result of hiring additional outside directors in order to meet appropriate stock exchange requirements, or (iv) Michael Gordon, the Chief Executive Officer of the Company is no longer serving as Chief Executive Officer unless prior written consent of the Secured Debt Holder had been obtained by the Company.  The foregoing notwithstanding, the Secured Debt Holder may demand and receive from the Company the amount stated above or any other greater amount which the Secured Debt Holder is entitled to receive or demand pursuant to the Transaction Documents.

In connection with the aforementioned loan transactions, we also issued to our Secured Debt Holder warrants to purchase 104,333,335 shares of the Company’s Common Stock, which warrants are currently exercisable at an exercise price of $.01 per share, which exercise price is subject to adjustment pursuant to the provisions of the warrant. In the event a fundamental transaction occurs as defined in the warrants, which includes without limitation any person or group acquiring 50% of the aggregate Common Stock of the Company, then the holder of the warrants may have the right to have the warrants redeemed at a price equal to the Black-Scholes value of said warrants.

The most recent subscription agreement dated in November 2011 pursuant to which the Secured Debt Holder advanced financing to the Company included a 12-months right of first refusal, a most favored nations provision which may result in additional securities being issued to the Secured Debt Holder and prohibitions against filing a registration statement with the Securities and Exchange Commission without the Secured Debt Holder’s consent. The aforementioned provisions that have been agreed to with our Secured Debt Holder may make it very difficult or impossible in the future to obtain additional financing for the Company to support its operations and remaining a going concern.  See “Risk Factors.”

 
38

 

Recently Issued Accounting Pronouncements

We have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term.  The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.  Reference is made to these recent accounting pronouncements as if they are set forth therein in their entirety.

Item 8. Financial Statements

The information required by Item 8 and an index thereto commences on page F-1, which pages follow this page.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this annual report, an evaluation was carried out by the Registrant's management, with the participation of the principal executive officer and the principal financial officer, of the effectiveness of the Registrant's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act")) as of December 31, 2011. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

Based on that evaluation, the Registrant's management concluded, as of the end of the period covered by this report, that the Registrant's disclosure controls and procedures were effective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the Commission's rules and forms, and that such information was not accumulated and communicated to management, including the principal executive officer and the principal financial officer, to allow timely decisions regarding required disclosures.

Management's Report on Internal Control over Financial Reporting

The management of the Registrant is responsible for establishing and maintaining adequate internal control over financial reporting. The Registrant's internal control over financial reporting is a process, under the supervision of the principal executive officer and the principal financial officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Registrant's financial statements for external purposes in accordance with United States generally accepted accounting principles (GAAP). Internal control over financial reporting includes those policies and procedures that:

*         Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Registrant's assets;

*         Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the board of directors; and

 
39

 

*         Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Registrant's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

The Registrant's management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2011.

Changes in Internal Controls over Financial Reporting

During the year ended December 31, 2011 we purchased HIghCom Securities, Inc..  The purchased subsidiary had its own system of internal controls which need to conform to the parent’s.  Management has been implementing controls to assist with the consolidation of the various entities.  There have been and will be significant change in the internal control over financial reporting, while our Company evolves, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

Item 9B.  Other Information.

Not Applicable.
 
 
40

 
 
INDEX

   
Page
     
Report of Independent Registered Public Accounting Firm
F-1
     
Consolidated Balance Sheets at December 31, 2011 and December 31, 2010
F-2
     
Consolidated Statements of Operations for the years ended December 31, 2011  and December 31, 2010
F-3
     
Consolidated Statements of Stockholders Deficit for the years ended December 31, 2011 and December 31, 2010
F-4
     
Consolidated Statements of Cash Flows for the years ended December 31, 2011 and December 31, 2010
F-5
     
Notes to the Consolidated Financial Statements
F-6

 
 

 

Peter Messineo
Certified Public Accountant
1982 Otter Way Palm Harbor FL 34685
peter@pm-cpa.com
T   727.421.6268   F   727.674.0511

 
Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders:
BlastGard International, Inc.
 
I have audited the consolidated balance sheets of BlastGard International, Inc. and subsidiaries as of December 31, 2011 and 2010 and the related consolidated statements of operations, changes in stockholders’ deficit, and consolidated cash flows for the years then ended. These financial statements were the responsibility of the Company’s management.  My responsibility was to express an opinion on these financial statements based on our audits.

I conducted my audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that I plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements were free of material misstatement.  The Company was not required to have, nor was I engaged to perform, an audit of its internal control over financial reporting.  My audit included consideration of internal control over financial reporting as a basis for designing audit procedures that were appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, I express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  I believe that my audit provide a reasonable basis for my opinion.

In my opinion, the consolidated financial statements, referred to above, present fairly, in all material respects, the financial position of BlastGard International, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of its consolidated operations and its consolidated cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring losses and has used significant cash in support of its operating activities.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Further information and management’s plans in regard to this uncertainty were also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
Peter Messineo, CPA
Palm Harbor, Florida
March 28, 2012

 
F-1

 

BlastGard International Inc.
 
Consolidated Balance Sheets
 
             
   
December 31,
   
December 31,
 
   
2011
   
2010
 
Assets
           
Current assets
           
Cash
  $ 253,221     $ 46,382  
Accounts receivable, net
    26,178       342  
Inventory
    523,557       51,290  
Prepaid and other current assets
    1,897       -  
Net related party loans receivable from acquisition
    181,138       -  
Prepaid expenses
    -       -  
Total current assets
    985,991       98,014  
                 
Property & equipment, net of accumulated
               
depreciation of  $236,533 and $75,700, respectively
    100,462       64  
Intangible property, net of accumulated
               
amortization of  $500,000 and $4,642, respectively
    476,524       24,344  
Deferred patent costs
    209,896       203,535  
Investments
    112,832       -  
Goodwill
    2,061,649       -  
Deposits
    6,544       300  
Total Assets
  $ 3,953,898     $ 326,257  
                 
Liabilities and Stockholders' Deficit
               
Current liabilities
               
Accounts payable
  $ 1,034,237     $ 249,087  
Accrued expenses
    444,979       385,094  
Current portion notes payable
    1,820,485       729,652  
Loans and notes payable, related parties
    -       14,421  
Total current liabilities
    3,299,701       1,378,254  
                 
Contingent liability
    1,238,781       -  
Derivative liability, net
    1,709,955       -  
Notes payable, net of current portion
    500,000       -  
Total liabilities
    6,748,437       1,378,254  
                 
Stockholders' Deficit
               
Preferred Stock:
               
Preferred Stock, 1,000,000 shares authorized;
               
     $100 par value; 0 and 0 issued and outstanding
    -       -  
Common Stock, $.001 par value,  100,000,000 shares
               
   authorized; 90,386,036 and 56,086,142 shares
               
   issued and outstanding, respectively
    90,386       56,086  
Additional paid-in capital
    14,694,710       12,560,249  
Minority interest
    (39,118 )     -  
Accumulated deficit
    (17,540,517 )     (13,668,332 )
Total stockholders' deficit
    (2,794,539 )     (1,051,997 )
                 
Total Liabilities and Stockholders' Deficit
  $ 3,953,898     $ 326,257  
                 
The accompanying notes are an integral part of these financial statements.
         
 
 
F-2

 

BlastGard International Inc.
Consolidated Statement of Operations
 
 
   
For the Year Ended
 
   
December 31,
 
   
2011
   
2010
 
             
Revenues
  $ 334,209     $ 87,994  
Direct costs
    262,049       64,961  
                 
Gross Profit
    72,160       23,033  
                 
Operating expenses:
               
General and administrative
    1,492,887       397,210  
Research and Development
    40,737       945  
Amortization and depreciation
    257,180       2,189  
Total operating expenses
    1,790,804       400,344  
                 
Operating loss
    (1,718,644 )     (377,311 )
                 
Non-operating activity
               
Other income (expense)
    (36,073 )     (671 )
Gains (losses) on settlement of debt
    248,754       -  
Gain (loss) on derivative liability
    (634,467 )     -  
Gain (loss) on settlement of assets
    (34,676 )        
Interest expenses
    (1,712,241 )     (85,631 )
Total other income (expense)
    (2,168,703 )     (86,302 )
                 
Loss before income taxes and minority interests
    (3,887,347 )     (463,613 )
                 
Minority interest loss, net of tax
    (15,162 )        
Provision for income taxes
    -       -  
                 
Net loss
  $ (3,872,185 )   $ (463,613 )
                 
Earnings (loss) per share:
               
Basic
  $ (0.05 )   $ (0.01 )
Dilutive
  $ (0.05 )   $ (0.01 )
                 
Weighted average shares outstanding
               
Basic
    78,243,689       50,983,402  
Dilutive
    78,243,689       50,983,402  
                 
                 
The accompanying notes are an integral part of these financial statements.
 
 
 
F-3

 
 
BlastGard International Inc.
 
Consolidated Statement of Stockholders' Deficit
 
               
Additional
               
Stock-
 
    Common    
Paid in
   
Minority
   
Accumulated
   
Holders'
 
   
shares
   
Par
   
Capital
   
Interest
   
Deficit
   
Deficit
 
                                     
Balance at December 31, 2009
    50,086,142       50,086       12,351,249       -       (13,204,719 )     (803,384 )
                                                 
Board member compensation
    500,000       500       49,500                       50,000  
Sale of stock
    5,500,000       5,500       159,500                       165,000  
Net loss
                                    (463,613 )     (463,613 )
                                                 
Balance at December 31, 2010
    56,086,142       56,086       12,560,249       -       (13,668,332 )     (1,051,997 )
                                                 
Sale of stock
    5,833,334       5,833       169,167                       175,000  
Stock issued for acquisition of HighCom Security
    9,820,666       9,821       481,179                       491,000  
Stock issued for conversion of debt
    7,812,561       7,813       226,564                       234,377  
Stock issued for consulting
    10,333,333       10,333       239,667                       250,000  
Stock issued for Acer payable
    500,000       500       24,500                       25,000  
Options issued for compensation
                    327,944                       327,944  
Record discount on new loans
                    665,440                       665,440  
Reclassify minority interest
                            (23,956 )             (23,956 )
Net loss
                            (15,162 )     (3,872,185 )     (3,887,347 )
                                                 
Balance at December 31, 2011
    90,386,036     $ 90,386       14,694,710       (39,118 )     (17,540,517 )   $ (2,794,539 )
                                                 
The accompanying notes are an integral part of these financial statements.
 
 
 
F-4

 
 
BlastGard International Inc.
Consolidated Statement of Cash Flows
 
   
For the Year Ended
 
   
December 31,
 
   
2011
   
2010
 
             
Cash Flows from Operating Activities:
           
Net loss
  $ (3,872,185 )   $ (463,613 )
Adjustment to reconcile Net Income to net
               
  cash provided by operations:
               
Minority interest loss
    (15,162 )        
Depreciation and amortization
    257,180       2,189  
Amortization of debt discount
    1,558,942          
Discount on debt
               
Stock given for interest
    250,000          
Other stock comp
    327,944       50,000  
Gain on conversion of debt
    (248,754 )        
Gain on disposal of equipment
    34,676          
gain on derivative
    634,467          
Changes in assets and liabilities:
               
   Accounts receivable
    59,273       (342 )
Note receivable
    229,416       -  
   Inventory
    (29,548 )     15,836  
Other operating assets
    80,285       517  
   Accounts payable and accruals
    (273,365 )     307,622  
Related party loans
    (27,921 )     (12,123 )
Net Cash Used in Operating Activities
    (1,034,752 )     (99,914 )
                 
Cash Flows from Investing Activities:
               
   Purchase of property and equipment
    (7,175 )     -  
Payments for deferred costs
    (6,429 )     (24,423 )
Proceeds from sales of assets and intangibles
    3,900       -  
Cash purchased
    834       -  
Net Cash Used in Investing Activities
    (8,870 )     (24,423 )
                 
Cash Flows from Financing Activities:
               
   Proceeds from issuance of stock
    175,000       165,000  
   Proceeds from issuance of note payable
    1,260,000       -  
Net proceeds from line of credit
    -       3,980  
Repayments of notes payable
    (184,539 )     -  
Net Cash  Provided by Financing Activities
    1,250,461       168,980  
                 
Net increase in Cash
    206,839       44,643  
                 
Cash at beginning of period
    46,382       1,739  
                 
Cash at end of period
  $ 253,221     $ 46,382  
                 
                 
Supplemental cash flow information:
               
Interest paid
  $ 76,233     $ 22,960  
Taxes paid
  $ -     $ -  
                 
                 
The accompanying notes are an integral part of these financial statements.
         

 
F-5

 
BLASTGARD INTERNATIONAL, INC.
Notes to Consolidated Financial Statements

 
(1)
Organization, Basis of Presentation, and Summary of Significant Accounting Policies

 
Organization and Basis of Presentation

BlastGard International, Inc. (the “Company”) was incorporated on September 26, 2003 as BlastGard Technologies, Inc. (“BTI”) in the State of Florida, to design and market proprietary blast mitigation materials. The Company created, designs, develops and markets proprietary blast mitigation materials.  The Company’s patent-pending BlastWrap® technology effectively mitigates blast effects and suppresses post-blast fires.  The Company sub-contracts the manufacturing of products to licensed and qualified production facilities.

The Company went public through a shell merger on January 31, 2004.  On March 31, 2004, the Company changed its name to BlastGard International, Inc.

 
Principles of Consolidation

These consolidated financial statements include the assets and liabilities of BlastGard International, Inc. and its subsidiaries, HighCom Security Inc. and BlastGard Technologies, Inc. as of December 31, 2011 and 2010, after the date of acquisition.  All material intercompany transactions have been eliminated.

BlastGard Technologies Inc. was formed in 2003 as a Florida Corporation. The Company has been inactive during 2011 and 2010.

HighCom Security, Inc. (“HighCom”) was organized as a California corporation in 1997 and designs, manufactures and distributes a unique range of security products and personal protective gear, personal protective gear to distributors, local governments, military units and international organizations.  The Company has a sales office in Colorado, a manufacturing facility in Ohio and administrative offices in Clearwater Florida.  The company was purchased on January 25, 2011. Activity of HighCom is included as the date of the acquisition.

 
Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  As shown in the accompanying financial statements, the Company has incurred recurring losses and has used significant cash in support of its operating activities.  These factors, among others, may indicate that the Company may be unable to continue as a going concern.

The financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitability.  The Company plans to generate the necessary cash flows with increased sales revenue over the next 12 months.  However, should the Company’s sales not provide sufficient cash flow; the Company has plans to raise additional working capital through debt and/or equity financings.    There is no assurance the Company will be successful in producing increased sales revenues or obtaining additional funding through debt and equity financings.


 
 
F-6

 
BLASTGARD INTERNATIONAL, INC.
Notes to Consolidated Financial Statements

 
Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles required management to make estimates and assumptions that affected the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 
Cash and Cash Equivalents

The Company considered all highly liquid debt instruments with original maturities of three months or less when acquired to be cash equivalents.  The Company had no cash equivalents at December 31, 2011.

 
Financial Instruments

The carrying amounts of cash, receivables and current liabilities approximated fair value due to the short-term maturity of the instruments.  Debt obligations were carried at cost, which approximated fair value due to the prevailing market rate for similar instruments.

 
Fair Value Measurement
 
 
All financial and nonfinancial assets and liabilities were recognized or disclosed at fair value in the financial statements.  This value was evaluated on a recurring basis (at least annually).  Generally accepted accounting principles in the United States define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on a measurement date. The accounting principles also established a fair value hierarchy which required an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  Three levels of inputs were used to measure fair value.

Level 1: Quotes market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that were corroborated by market data.
Level 3: Unobservable inputs that were not corroborated by market data.

 
Accounts Receivable

Accounts receivable consisted of amounts due from customers (mostly government agencies) based in the United States and abroad.  The Company considered accounts more than 30 days old to be past due. The Company uses the allowance method for recognizing bad debts. When an account was deemed uncollectible, it was written off against the allowance. The Company generally does not require collateral for its accounts receivable. As of December 31, 2011 and 2010, management believes an allowance for uncollectible accounts in the amount of $28,228 and $3,873 was adequate, respectively.
 
 
 
F-7

 
BLASTGARD INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
 
Inventory

Inventory was stated at the lower of cost (first-in, first-out) or market.  Market was generally considered to be net realizable value.  Inventory consisted of materials used to manufacture the Company’s BlastWrap® product and finished goods ready for sale.  The breakdown of inventory at December 31, 2011 and 2010 was as follows:

   
2011
   
2010
 
             
Finished goods
  $ 33,824     $ 33,920  
Materials and supplies
    489,733       17,370  
                 
Total inventory
  $ 523,557     $ 51,290  

Property and Equipment

Property and equipment were stated at cost. Depreciation was calculated using the straight-line method over the estimated useful lives of the related assets, ranging from three to seven years.  Expenditures for additions and improvements were capitalized, while repairs and maintenance costs were expensed as incurred.  The cost and related accumulated depreciation of property and equipment sold or otherwise disposed of were removed from the accounts and any gain or loss was recorded in the year of disposal.

Impairment of Long-Lived Assets

The Company evaluates the carrying value of its long-lived assets at least annually.  Impairment losses were recorded on long-lived assets used in operations when indicators of impairment were present and the undiscounted future cash flows estimated to be generated by those assets were less than the assets’ carrying amount.   If such assets were impaired, the impairment to be recognized was measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of were reported at the lower of the carrying value or fair value, less costs to sell.

 
Debt Issue Costs

The costs related to the issuance of debt were capitalized and amortized to interest expense using the straight-line method over the lives of the related debt.  The straight-line method results in amortization that was not materially different from that calculated under the effective interest method.

Deferred Costs

Patent and trademark application costs were capitalized as deferred costs.  If a patent or trademark application was denied or expires, the costs incurred were charged to operations in the year the application was denied or expires.  Amortization commences once a patent or trademark was granted.

 
Revenue Recognition

Sales revenue was recognized upon the shipment of product to customers.  Allowances for sales returns, rebates and discounts were recorded as a component of net sales in the period the allowances were recognized.


 
 
F-8

 
BLASTGARD INTERNATIONAL, INC.
Notes to Consolidated Financial Statements

 
Research and Development

Research and development costs were expensed as incurred.

 
Advertising

Advertising costs were expensed as incurred. Advertising costs of $29 and $0 were incurred during the years ended December 31, 2011 and 2010, respectively.

 
Income Taxes

 
Income taxes were provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and the tax basis of assets and liabilities for financial and income tax reporting.  Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities were recovered or settled.  Deferred tax assets were also recognized for operating losses that were available to offset future taxable income and tax credits that were available to offset future federal income taxes, less the effect of any allowances considered necessary. The company use guidance provided by FIN 48, Accounting for Uncertainty in Income Taxes, for reporting uncertain tax provisions.

 
Stock-based Compensation

 
We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant, using assumptions for volatility, expected term, risk-free interest rate and dividend yield. We have used one grouping for the assumptions as our option grants were primarily basic with similar characteristics. The expected term of options granted has been derived based upon our history of actual exercise behavior and represents the period of time that options granted were expected to be outstanding. Historical data was also used to estimate option exercises and employee terminations. Estimated volatility was based upon our historical market price at consistent points in a period equal to the expected life of the options. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant and the dividend yield was based on the historical dividend yield.  Compensation expense for stock based compensation is recognized over the vesting period.
 
Loss per Common Share
 
Basic net loss per share excludes the impact of common stock equivalents.  Diluted net loss per share utilizes the average market price per share when applying the treasury stock method in determining common stock equivalents.  As of December 31, 2011, there were 8,550,000 vested common stock options outstanding, which were excluded from the calculation of net loss per share-diluted because they were anti-dilutive. In addition, at December 31, 2011 the Company had 104,333,335 warrants outstanding issued in connection with convertible promissory notes and stock sales that were also excluded because they were anti-dilutive.

Recent Accounting Pronouncements

 
We have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term.  The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.  Reference is made to these recent accounting pronouncements as if they are set forth therein in their entirety.

 
 
F-9

 
BLASTGARD INTERNATIONAL, INC.
Notes to Consolidated Financial Statements


(2)  
Property and Equipment

Property and equipment consisted of the following at December 31:

   
2011
   
2010
 
    Equipment
  $ 124,398     $ 60,707  
    Furniture
    15,057       15,057  
    Moulds
    45,060          
    Test
    79,665          
                 
    Gross property
    359,730       75,764  
    Less accumulated depreciation
    (259,268 )     (75,700 )
                 
    $ 100,462     $ 64  
                 
 
Depreciation expense totaled $74,360 and $256, respectively, for the years ended December 31, 2011 and 2010.


 
 
F-10

 
BLASTGARD INTERNATIONAL, INC.
Notes to Consolidated Financial Statements

 
(3)
Notes Payable
           
              Convertible Promissory Notes
 
On December 2, 2004, the Company entered into agreements to borrow an aggregate principal amount of $1,420,000 and to issue to the investors secured convertible notes and common stock purchase warrants. The Company’s convertible promissory notes payable consisted of the following at December 31, 2011 and 2010:
 
At December 31, 2011, all warrants associated with the above debt had expired.
 
   
December 31, 2011
   
December 31, 2010
 
$500,000 convertible promissory note issued
           
   December 2, 2004, due on November 30, 2009,
           
   8% annual interest rate, net of unamortized
           
   discount of $0
  $ -     $ 150,166  
                 
$93,097 convertible promissory note (1/4 of
               
   previous outstanding notes) issued December
               
   2, 2004, due November 30, 2009, 8% interest
               
   Net of unamortized discount of $0
    108,338       93,096  
                 
$50,000 convertible promissory note issued
               
   December 2, 2004, due on November 30, 2009,
               
   8% annual interest rate, net of unamortized
               
   discount of $0
    17,325       17,325  
                 
$50,000 convertible promissory note issued
               
   December 2, 2004, due on November 30, 2009,
               
   8% annual interest rate, net of unamortized
               
   discount of $0
    -       15,241  
                 
$10,000 convertible promissory note issued
               
   December 2, 2004, due on November 30, 2009,
               
   8% annual interest rate, net of unamortized
               
   discount of $0
    -       3,464  
                 
$500,000 convertible promissory note issued
               
November 10, 2011, due on February 10, 2013
               
12% annual interest rate, net of unamortized
               
discount $0
    500,000       -  
      125,663       279,292  
                 
Less: current maturities
    (125,663 )     (279,292 )
    $ 500,000     $ -  


 
 
F-11

 
BLASTGARD INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
              New Financing
 
Alpha Capital Aktiengesellschaft (“Alpha”), a holder of 2004 Debt, loaned the Company $160,000 on February 2011, $300,000 in March 2011 and an additional $300,000 in June 2011 pursuant to secured notes convertible at the lesser of the applicable conversion price or eighty percent of the conversion price of any convertible note issued by the Company to anyone prior to or on the one year anniversary of the Issue Date of the Note, subject to adjustment as described therein. The February 2011 notes had a conversion price of $.03 per share and the March 2011 notes had a conversion price of $.05 per share. The Notes are accompanied by the issuance of five year warrants to purchase 8,000,000 shares at an exercise price of $0.03 per share, five year warrants to purchase 9,000,000 shares at an exercise price of $0.08 per share and five year warrants to purchase 12,333,335 shares at an exercise price of $0.06 per share, respectively.  
 
Conversion of Accrued Expenses.
 
On March 8, 2011, BlastGard’s Board of Directors ratified, adopted and approved that James F. Gordon’s accrued salary of $160,000 (20 months at $8,000 per month covering May-December 2009, January-October 2010 and January-February 2011); Michael J. Gordon’s accrued salary of $160,000 (20 months at $8,000 per month covering May-December 2009, January-October 2010 and January-February 2011); and Morse & Morse, PLLC’s accrued legal bill of $67,025.30 be converted into a Convertible Non-Interest Bearing Demand Note, convertible into Common Shares of BlastGard at $.05 per share at the Note holder(s) discretion. On May 3, 2011, BlastGard’s Board of Directors ratified, adopted and approved $100,000 in additional compensation to Michael J. Gordon as CEO, of which $50,000 be converted into a Convertible Non-Interest Bearing Demand Note, convertible into Common Shares of BlastGard at $.05 per share at the Noteholder(s) discretion and $50,000 issued in Common Stock at $.05 per share.

 
 
F-12

 
BLASTGARD INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
 
The 2011 convertible promissory notes consisted of the following at September 30, 2011 and December 31, 2010:
 

   
December 31, 2011
   
December 31, 2010
 
$160,000 convertible promissory note issued
           
   February 3, 2011, due on August 3, 2011,
           
   6% annual interest rate, net of unamortized
           
   Discount of $30,055
  $ 79,945     $ -  
                 
$300,000 convertible promissory note issued
               
   March 3, 2011, due on March 3, 2012,
               
 6% interest, net of unamortized
               
   discount of $80,984
    219,016       -  
                 
$300,000 convertible promissory note issued
               
  June 16, 2011, due on June 17, 2012,
               
   6% annual interest rate, net of unamortized
               
   Discount of $28,934
    271,066       -  
                 
$210,000 convertible promissory note issued
               
   January 31, 2011, due on September 30, 2011,
               
   6% annual interest rate, net of unamortized
               
   Discount of $24,331
    185,669       -  
                 
$160,000 convertible promissory note issued
               
   January 31, 2011, due on 1/31/2012,
               
   6% annual interest rate, net of unamortized
               
   Discount of $37,699
    122,301       -  
                 
$67,025 convertible promissory note issued
               
   January 31, 2011, due on September 30, 2011,
               
   6% annual interest rate, net of unamortized
               
   Discount of $10,192
    56,833       -  
      934,830       -  
Less: current maturities
    (934,830 )     -  
    $ -     $ -  

 
 
F-13

 
BLASTGARD INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
 
The Company has a line of credit with a local bank.  The Company also acquired various revolving credit facilities in the acquisition of HighCom Security, Inc.  HighCom had been paying interest only on the loans.  Two of these loans are not transferable and all have been called by the lenders.  The revolving credit facilities consist of the following at December 31, 2011 and December 31, 2010:
 
   
December 31, 2011
   
December 31, 2010
 
             
$100,000 line of credit from Regions Bank,
          -  
 interest only at 8% annually, due on demand
  $ 88,968     $ 95,360  
                 
$450,000 line of credit from Fifth Third Bank,