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EX-31.1 - CERTIFICATION PURSUANT TO - HighCom Global Security, Inc.ex_31-1.htm
EX-32.1 - CERTIFICATION PURSUANT TO - HighCom Global Security, Inc.ex_32-1.htm
EX-99.3 - BLASTGARD INTERNATIONAL REPORTS - HighCom Global Security, Inc.ex_99-3.htm
EX-21.1 - SUBSIDIARIES OF THE REGISTRANT - HighCom Global Security, Inc.ex_21-1.htm
EXCEL - IDEA: XBRL DOCUMENT - HighCom Global Security, Inc.Financial_Report.xls
EX-99.2 - ON FRIDAY, JANUARY 28, 2011, THE BOARD OF DIRECTORS OF BLASTGARD INTERNATIONAL, INC. APPROVED AMENDING SECTION 6 OF THE EMPLOYEE BENEFIT AND CONSULTING SERVICES COMPENSATION PLAN TO READ AS FOLLOWS: - HighCom Global Security, Inc.ex_99-2.htm
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, 2012
 
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 212, 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 o.

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. $.02 per share as of June 29, 2012) of the Company’s Common Stock was approximately $1,049,000.

The number of shares outstanding of the issuer’s Common Stock, $.001 par value, as of March 31, 2013 was 102,604,905 shares.
 
 
1

 

TABLE OF CONTENTS
 
   
Page
Part I
 
     
Item 1
Business
3
Item 1A
Risk Factors
23
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.
31
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operation
31
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
31
Item 8
Financial Statements and Supplementary Data
38
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
44
Item 9A
Controls and Procedures
45
Item 9B
Other Information
46
     
Part III
 
     
Item 10
Directors and Executive Officers and Corporate Governance.
47
Item 11
Executive Compensation
54
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
60
Item 13
Certain Relationships and Related Transactions, and Director Independence.
61
Item 14
Principal Accounting Fees and Services
64
     
Part IV
 
   
Item 15
Exhibits, Financial Statement Schedules
65
Signatures 
 
70
 
 
2

 

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. The Company owns 98.2% of HighCom Security, Inc. (“HighCom”) which 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 since 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 other governments and agencies worldwide. We have initiated numerous Research and Development projects according to National Institute of Justice’s (“NIJ”) body armor standards and testing. HighCom currently has 14 plates and vest solutions that qualify under the NIJ 0101.04 (Interim 2005) standard.. We are currently marketing all of our NIJ 0101.04 and 0101.06 products to open market customers in law enforcement and military channels.  We currently have 2 plates, 3SPS-5 and 4SAS-15 that qualify for NIJ 0101.06 with certifications in hand.  We also have 3 vest solutions for a concealable, tactical, and light tactical that are NIJ 0101.06 certified, which are manufactured by one of our partners. We currently have 3 additional products we are planning to develop in 2013 for NIJ 0101.06. These include a light weight and low cost Level III plate along with a steel core Level III stand alone and a light weight, high-end Level IV plate. We have already verified and validated the steel plate and are currently selling it built according to NIJ 0101.04. We also have begun initial testing to come up with a lighter weight, less expensive ballistic shield design. 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 investment in 2012 included the expansion of our manufacturing facility and equipment in addition to our latest project of completing construction of our in-house ballistics and material science laboratory.  The lab is a critical element for testing and evaluation as well as a major marketing point for many customers who in visiting the plant will also be invited to witness live ballistic testing of our products. The lab will also enable us to address another critical area of our quality controls - validating and verifying our raw materials for hardness tests, density, performance and yields. This way we can make sure the materials we purchase from our vendors conform to spec and that we can improve the weight and cost of our finished product while maintaining complete control over the intellectual property of new products.
 
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 we are currently participating in numerous bids totaling 15 million dollars. We are seeing a significant increase in our overall sales on a quarter by quarter basis as we develop these relationships.
 
 
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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.

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.  As of March 29, 2011 this order of denial had been lifted and HighCom’s export privileges have been 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.
 
 
 
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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 are currently in the process of finalizing 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 in March 2012 HighCom secured ISO certification. Communication with the United Nations is ongoing. On February 6, 2012, the Company was notified by letter that the United Nation’s Vendor Review Committee (“VRC”) had recommended to immediately place on hold the registration status of HighCom Security. This VRC decision to place on hold our registration status was based on integrity/ethical issues surrounding the former CEO’s actions. Soon after this decision was made, we were notified that on February 21, 2012 the government dismissed all the charges against the former CEO. The Company has been in communication with the United Nations Procurement Division regarding this matter and on March 15, 2012, the Company was informed that the VRC had met regarding our request for re-instatement and that its recommendation is currently under consideration. To date we have not been re-instated but we are in communication with the United Nations Procurement Division in an effort of securing re-instatement. BlastGard has also made significant personnel changes within HighCom and restructuring of operating locations and costs. 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. Our results of operations for 2012 demonstrate the benefits of these changes.  
 
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
 
 
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§  
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.

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.

 
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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.

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 2012 and 2011, HighCom spent $23,579 and $10,066, repectively on research and development efforts. Future research and development expenses will depend upon our liquidity and capital resources.

MARKET DEFINITION

Industry Description and Outlook

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.
 
 
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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
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:
 
 
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·  
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.

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.
 
 
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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.

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.
 
 
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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.
 
 
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Employees

As of December 31, 2012, the Company has three full-time employees. The Company also relies on temporary workers for its manufacturing facility. Additional sales and marketing personnel may be hired in the future as our sales efforts require such additional personnel.

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. Our Patented 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.
 
 
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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.
 
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
 
 
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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
 
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 November 27, 2012, BlastGard was notified by its patent counsel that its patent application for its BlastWrap material was issued as U.S. Patent No. 8,316,752 B2. 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.

 
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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. 
 
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.
 
 
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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.
 
 
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. In late 2011, BlastGard and Centerpoint reestablished its previous relationship and Centerpoint one again supplied BlastGard with the receptacles for its MTR sales. However, on December 31, 2012, Centerpoint closed its business and is in the process of selling its business to another manufacturer. In the meantime, BlastGard does not have a manufacturer to provide our receptacles. If Centerpoint is successful in selling its business to a new manufacturer, BlastGard intends to purchase its trash receptacles from the new manufacturer (assuming acceptable pricing). Otherwise, BlastGard will engage a fabricator to make trash receptacles for our MTR and MBR line. It is estimated that the process of utilizing a new fabricator and testing the new receptacles would take approximately six to nine months and cost approximately $50,000 to create and test our own line of trash receptacles.

 
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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.
 
 
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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:
 
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. 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.
 
·  
Centerpoint Manufacturing, Inc., located in Robertsdale, Alabama manufactures the BlastGard® MTR receptacles and 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. If Centerpoint is successful in selling its business to a new manufacturer, BlastGard intends to purchase its trash receptacles from the new manufacturer (assuming acceptable pricing). Otherwise, BlastGard will engage a fabricator to make trash receptacles for our MTR and MBR line. It is estimated that the process of utilizing a new fabricator and testing the new receptacles would take approximately six to nine months and cost approximately $50,000 to create and test our own line of trash receptacles.
 
·  
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®.
 
 
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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, 2011, which is incorporated herein by reference.

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 2012 and 2011, we spent approximately $26,012 and $30,670, 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, 2012. 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.”

 
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We had total liabilities at December 31, 2012 of approximately $5,360,000 and may not be able to meet our obligations as they become due. At December 31, 2012, we had total liabilities of $5,360,292. Of the $5,360,292, $1,278,590 represents accounts payable and accrued expenses, $2,492,565 represents the current portion of notes payable and $1,170,081 represents contingent liabilities. We can provide no assurances that we will be able to meet our obligations to our debt holders as they become due and payable.
 
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, 2012, we had convertible secured debt of approximately $1,569,000. (See “Item 7” regarding the Company’s expectation that the Secured Debt will be converted into Common Stock at a conversion price of $.009 per share on or before June 21, 2013.) 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.

 
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We expect to have a change in control.  As described under “Item 7” herein, a Canadian corporation recently purchased the outstanding Secured Debt of the Company as of March 21, 2013 in the principal amount of $1,267,707.07 (including accrued interest thereon) held by Alpha Capital Anstalt (which excludes $182,000 of Secured Debt which continues to be owned by Alpha).  As a result of this transaction, the expiration date of the Secured Debt was extended through June 14, 2013 and the conversion price of the Secured Debt was lowered to $.009 per share. The agreements provide for the Canadian corporation to convert the Secured Debt into Common Stock within three months. Likewise, Alpha Capital Anstalt has committed to convert the $182,000 of indebtedness into Common Stock at the new conversion price. The Canadian corporation is also obligated to offer to purchase the Secured Debt held by three other parties totaling approximately $154,000, of which one secured lender has already converted approximately $109,000 into over 12 million shares of the Company’s Common Stock. The Canadian corporation also purchased from Alpha Capital Anstalt, warrants to purchase 104,333,335 shares of Common Stock exercisable at $.01 per share. These transactions and the anticipated conversion into shares of the Company’s Common Stock on or before June 21, 2013 are expected to result in a change in control of the Company. See “Items 7 and 12” for additional information on the change of control. We cannot predict what changes will be instituted by the new controlling stockholder in the Company’s management and/or directors, although it is anticipated that Michael J. Gordon will continue to serve as Chief Executive Officer and a director of the Company.

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.  We have a history of operating losses since inception and have an accumulated deficit at December 31, 2012 of $16,495,550 and a total shareholder deficit of $1,740,415. For 2012, the Company achieved a net income of $1,044,967, largely from a gain on derivative liability totaling $1,774,584. During 2012, net cash was provided by operating activities of approximately $250,000 as a result of the Company’s improved operations in 2012 versus the comparable period of the prior year.  We can provide no assurances that our operations will continue to be profitable in 2013 and in future operating periods. If our operations do not continue to be profitable, we may have difficulty remaining a going concern, meeting obligations as they come due and as a result of the foregoing, investors in our common stock could lose their entire investment.

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.
 
 
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·  
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.

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:
 
 
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•   
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.

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 is devoting 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.
 
 
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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 secured 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.

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.

 
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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, 2013, 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

We do not own any real estate properties. 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. In 2012, BlastGard moved into a larger office space. Rental payment under the new lease is $350 per month on a month to month basis.

HighCom leases office and manufacturing space in Columbus, Ohio. In February 2011, the Company entered into a six month lease agreement for approximately 11,200 square feet of office and warehouse space in Columbus, OH. In June 2012, the Company entered into a one year lease agreement for approximately 16,200 square feet of office and warehouse space in Columbus, OH.  We believe that our HighCom facility is adequate for present requirements and suitable for the operations involved.

HighCom rents approximately 900 square feet of office space in Aurora, CO on a short-term lease expiring on October 31, 2013 at a rental of $965 per month.
 
 
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HighCom leased office space in San Francisco, CA until April 30, 2011 when the offices moved to Clearwater, FL. The Company was paying for office space in San Francisco, California at a monthly rate of $15,000. This office was closed in April 2011.

Rent expense for 2012 and 2011 was approximately $66,041 and $91,508, 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.

Prior Litigation Matter

Verde Partners Family Limited Partnership

On April 2, 2009, the Company entered into a Settlement Agreement to settle our outstanding civil litigation. The Company will pay the sum of $125,000 over 18 months. The first monthly payment was paid within 30 days after the Defendants deliver to the Company’s counsel an original executed version of the Agreement and a promissory note in the amount of the remaining principal balance to bear interest in the amount of 6% per annum. Upon Verde’s receipt of the payment and promissory note, the parties shall jointly dismiss with prejudice all litigation between them, including the Pinellas County action and the Federal action. The company and Verde also entered into a license agreement whereby BlastGard obtains a fully paid up non-exclusive license for the 2 Verde patents for the remaining life of those patents in exchange for the Company paying Verde a 2% royalty for the life of the patents (which expired in the 2nd quarter of 2012), on the sales price received by BlastGard for BlastGard’s portion of all blast mitigation products sold by the company (the royalty was not on any third-party’s portion of any product containing blast mitigation products sold by BlastGard). The parties also agreed not to file any complaints with any state, federal or international agency or disciplinary body regarding any of the other parties or any person affiliated with any of the other parties or otherwise makes negative statements about them (in other words, a broad non-disparagement clause). The company and Verde also signed mutual general releases (excepting the obligations above) and a covenant not to sue.  At December 31, 2012, the Company was in arrears on the final twelve monthly payments on the settlement.

Item 4.           Mine 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 (rounded to the nearest penny) for each quarterly period indicated, in the last two fiscal years.
 
Quarter Ended
High Sales
Low Sales
March 31, 2011
$0.07
$0.06
June 30, 2011
$0.08
$0.04
September 30, 2011
$0.04
$0.04
December 31, 2011
$0.01
$0.01
     
March 31, 2012
$0.03
$0.01
June 30, 2012
$0.02
$0.01
September 30, 2012
$0.02
$0.01
December 31, 2012
$0.03
$0.01
 
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 31, 2013, 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”.

Sales of Unregistered Securities

From January 1, 2011 to December 31, 2012, we had no sales or issuances of unregistered common stock.

Item 6.  Selected Financial Data

Not applicable.

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

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. BlastGard 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 boththe 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 in March 2012 HighCom secured ISO certification.  On February 6, 2012, the Company was notified by letter that the United Nation’s Vendor Review Committee (“VRC”) had recommended to immediately place on hold the registration status of HighCom Security. This VRC decision to place on hold our registration status was based on integrity/ethical issues surrounding the former HighCom CEO’s actions. Soon after this decision was made, we were notified that on February 21, 2012 the government dismissed all the charges against the former HighCom CEO. The Company has been in communication with the United Nations Procurement Division regarding this matter and on March 15, 2012, the Company was informed that the VRC had met regarding our request for re-instatement and that its recommendation is currently under consideration. BlastGard has also made significant personnel changes within HighCom and restructuring of operating locations and costs. 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. Our results of operations for 2012 show the benefits of these changes.  The results of operations for HighCom Security have been included in our statements since January 25, 2011.  For the year ended December 31, 2012, our results of operations will include revenues and expenses of HighCom Securities for the entire year.

 
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Results of Operations

Year Ended December 31, 2012 vs. 2011
 
Results of Operations
 
Our consolidated net revenues for 2012 increased substantially as a direct result of our acquisition of HighCom Security in March 2011 and a change in management of HighCom. Since the acquisition of HighCom, we have worked to rebuild the historical sales of HighCom. 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 2012, we had revenues of $3,496,433 as compared to revenues of $334,209 for the comparable period of the prior year. Our gross profit for 2012 was $1,133,208 as compared to $72,160 for the comparable period of the prior year. For fiscal 2012, all of our revenues, except for $223,000 of BlastWrap sales, in which the Company had a gross profit of approximately $29,000, were achieved through sales of HighCom products.

The increase in revenues and gross profit for 2012 were primarily the result of increased sales of our HighCom Security product line due to a higher demand from our third party customers for certain personal protective equipment products. The sales increase was achieved primarily due to sales in two of our major product categories, namely, ballistic plates and ballistic helmets. Management instituted a number of action steps over the past year to realize this increase in sales, namely: a visible presence at industry tradeshows, cultivation of former customers, aggressive pricing, new in-house production facility, greater cost control over raw materials which helped increase our gross margins as well as a new marketing and sales program. We also secured our ISO 2012 certification. The International Organization for Standardization (“ISO”) is the world’s largest developer of voluntary International Standards. International Standards give state of the art specifications for products, services and good practice, helping to make industry more efficient and effective. Developed through global consensus, our ISO certification breaks down the barriers to international trade which is a major focus of our new sales strategy.

For 2012, our operating expenses were $1,113,641 as compared to $1,790,804 for the comparable period of the prior year. The Company achieved over $600,000 in general and administrative savings as we streamlined HighCom’s operations. Also, in 2011 we incurred higher operating expenses and consulting fees relating to the acquisition of HighCom.

For 2012, our operating income was $19,567 as compared to an operating loss of $1,718,644. Our improved operating income for 2012 was achieved due to the reasons set forth two paragraphs above.

For 2012, our net income was $1,044,967 as compared to a net loss of $3,872,185 for the comparable period of the prior year. In 2012, our net income benefited from a gain on derivative liability of $1,774,584 and other income of $142,658, less interest expenses of $882,685. This resulted in 2012 total other income of $1,034,557 which benefited our 2012 net income. For 2011, we had total other expenses of $2,168,703 primarily as a result of interest expenses of $1,712,241 and a loss on derivative liability of $634,467, partially offset by a $248,754 gain on settlement of debt.

Sales Backlog

As of December 31, 2012, the Company had approximately $180,000 in backlog of sales orders believed to be firm and all of which were shipped in the first quarter of 2013. The Company had no backlog of sales orders as of December 31, 2011.

Liquidity and Capital Resources.

At December 31, 2012, we had current assets of $899,480 as compared to current liabilities of $3,850,337, resulting in a working capital deficit of $2,950,857. During fiscal 2012, net cash was provided by operating activities of $249,613. This was a direct result of our increased sales and profitability. Our 2012 net income of $1,044,967 included a derivative gain of $1,774,584 and an amortization of debt discount of $644,228 as well as depreciation amortization of $247,792. During 2012, net cash used by financing activities was $67,645 consisting of repayments of notes payable. During 2012, net cash used in investing activities was $78,763 primarily associated with the build out of our test range.

 
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At December 31, 2011, we had current assets of $985,991 as compared to current liabilities of $3,299,701, resulting in a working capital deficit of $2,967,907. 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 charge 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.

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, prior to 2012, we have a history of recurring losses, and as of December 31, 2012, we have a working capital deficit and a net capital deficiency. 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.

During 2011, we relied on management’s ability to raise capital through equity and debt private placement financings to fund our operations. In 2012, we managed our operations entirely through new sales, cash flow from operations and effective utilizing the cash proceeds from debt financing received in November 2011. In the past, we also relied on borrowings from our Chief Executive Officer/Chief Financial Officer who 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 $81,754 as of December 31, 2012. 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 anticipated exercise of outstanding warrants, the success of which cannot be assured. We estimate that we will require between $1.0 million and $1.5 million in additional financing from the exercise of outstanding warrants or from additional financing and cash flow from operations to support our operating needs 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.

We have no known demands or commitments and are not aware of any events or uncertainties as of December 31, 2012 that will result in or that are reasonably likely to materially increase or decrease our current liquidity.

Capital Resources.

We had no material commitments for capital expenditures as of December 31, 2012 and 2011.

Off Balance Sheet Arrangements.

We currently have no off-balance sheet arrangements.

 
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Acquisition of HighCom
 
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
 
Alpha Capital Anstalt, a secured debt holder which first loaned us money in December 2004, loaned us $160,000 in February 2011, 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.
 
 
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At December 31, 2012, we had convertible secured debt of approximately $1,569,000.   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 “Item 1.A.”

Recent Developments

As of March 21, 2013, the Company had outstanding December 2004 Debt in the principal amount (including accrued interest thereon) of $109,969.82 owed to Robocheyne Consulting Ltd, $24,243.75 owed to Steven Gold and $21,331.65 owed to TRW Holdings Pty Limited (collectively hereinafter referred to as the “December 2004 Debt”). As of March 21, 2013, the Company also had outstanding $1,267,707.07 in principal debt, including accrued interest thereon owed to Alpha Capital Anstalt, pursuant to secured promissory notes (collectively the “Company Debt”). Pursuant to an amendment and consent, all of the debt owed to Alpha Capital, which was previously past due and are the subject of security agreements, guarantee and other transaction documents, to the extent outstanding, have had their maturity date extended through June 14, 2013 and their conversion price lowered from $0.010 per share to $0.009 per share.
 
 
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 On April 4, 2013, Alpha Capital Anstalt, closed on an agreement (the “Purchase and Exchange Agreement”) with 8464081 Canada Inc. (the “Purchaser”) to sell to the Purchaser and its assignees the Company’s Debt in the principal amount, including accrued interest thereon, of $1,267,770.07 (which excludes $182,000 of the principal due on this note that will be maintained by Alpha Capital) owned by it plus warrants to purchase 104,333,335 shares (exercisable at $0.01 per share). The agreements require that within three (3) months of March 21, 2013, that the Purchaser shall convert all the notes acquired by it at the current conversion price of $0.009 per share. Alpha Capital Anstalt has also committed to convert the $182,000 of principal retained by it into shares of the Company’s Common Stock at the same conversion price. Also, the agreement requires the Purchaser to offer to purchase the December 2004 Debt for a purchase price equal to the total amount of principal and interest due on each note with a 10% premium. Prior to the April 4, 2013 closing, Robocheyne Consulting elected to convert their notes in the principal amount described above plus accrued interest into 12,218,869 shares of the Company’s Common Stock.
 
As a result of the foregoing transactions, the Company expects to have the aforementioned Secured Debt converted into shares of Common Stock on or before June 21, 2013. Such transaction should result in the Purchaser obtaining control of the Company. Also, pursuant to the Purchase and Exchange Agreement, the Purchaser and the Company agreed to the following:
 
·  
Purchaser has the right to nominate and appoint to the Board at least 50% of the Board members;
 
·  
Purchaser has a right of first refusal to participate in future financings up to its pro rata share of Common Stock of the Company.
 
·  
Purchaser undertakes to provide the Company with sufficient capital to allow the Company to conduct its business and remain a going concern until December 31, 2013, subject to further agreements between the Company and Purchaser. All such funding will be provided through equity transactions and will not be funded via debt.
 
As a result of the foregoing transactions, the Company expects to have the aforementioned Secured Debt converted into shares of Common Stock on or before June 21, 2013.  Such conversion should result in the Purchaser obtaining control in the Company. The Purchaser will also own warrants to purchase 104,333,335 shares exercisable at $.01 per share. It is management’s expectation that these warrants will be exercised and will provide up to approximately $1 million in financing to fund the Company’s liquidity and capital resource needs. Nevertheless, there can be no assurances given that the Purchaser will exercise the warrants. The Purchaser is expected to retain Michael J. Gordon as Chief Executive Officer and a director and to secure his services through an employment agreement. There may be changes to the members of the board of directors and additional officers retained by the Company. We can provide no assurances that qualified personnel will be hired as key executive officers and/or employees on terms satisfactory to us, if at all. Also, we can provide no assurances that independent and qualified directors will be retained by the Company on terms satisfactory to us, if at all. In the event a majority of the directors are replaced by the Company, the Company will be required to file a Schedule 14F-1. See “Item 12” for additional information on a change in control.
 
 
Critical Accounting Policies
 
We prepare our financial statements in conformity with GAAP, which requires management to make certain estimates and assumptions and apply judgments. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the financial statements are prepared and actual results could differ from our estimates and such differences could be material. We have identified below the critical accounting policies which are assumptions made by management about matters that are highly uncertain and that are of critical importance in the presentation of our financial position, results of operations and cash flows.    Due to the need to make estimates about the effect of matters that are inherently uncertain, materially different amounts could be reported under different conditions or using different assumptions.  On a regular basis, we review our critical accounting policies and how they are applied in the preparation our financial statements.
 
 
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·  
Use Of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

·  
Long-lived Assets.  Long-lived assets such as property, equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be recoverable. When required impairment losses on assets to be held and used are recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets. We did not recognize any impairment losses for any periods presented.

·  
Goodwill.  Goodwill represents the premium paid over the fair value of the net tangible and identifiable intangible assets we have acquired in our business combinations. We perform a goodwill impairment test on at least an annual basis. Application of the goodwill impairment test requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. We will conduct our annual goodwill impairment test as of December 31 of each year or more frequently if indicators of impairment exist. We periodically analyze whether any such indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a sustained significant decline in our sham price and market capitalization, a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower expected growth rates, adverse actions or assessments by a regulator, among others. We compare the fair value of its reporting unit to its respective carrying value, including related goodwill. Future changes in the industry could impact the results of future annual impairment tests. There can be no assurance that future tests of goodwill impairment will not result in impairment charges.

·  
Derivative Financial Instruments.  We review the terms of convertible debt issues to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
 
Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value. The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.
 
Item 8.          Financial Statements

The information required by Item 8 and an index thereto commences on page F-1, which pages follow this page.
 
 
38

 

INDEX

 
Page
   
Report of Independent Registered Public Accounting Firm
F-2
   
Report of Prior Registered Public Accounting Firm
F-3
   
Consolidated Balance Sheets at December 31, 2012 and 2011
F-4
   
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011
F-5
   
Consolidated Statements of Stockholders Deficit for the years ended December 31, 2012 and 2011
F-6
   
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011
F-7
   
Notes to the Consolidated Financial Statements
F-8
 
 
F - 1

 
 
DKM Certified Public Accountants
2451 N. McMullen Booth Road, Suite 308
Clearwater Florida 33759-1362
727.444.0931

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
BlastGard International, Inc.
Clearwater, Florida

We have audited the accompanying consolidated balance sheet of BlastGard International, Inc. (the "Company") for the year ended December 31, 2012 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.  The 2011 financial statements were audited by a predecessor independent registered public accounting firm that issued an unqualified opinion, with a going concern explanatory paragraph, on March 28, 2012.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are 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, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BlastGard International, Inc. as of December 31, 2012 and the results of its consolidated operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company has working capital deficiencies, an accumulated deficit, and significant loan defaults.  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 are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
DKM Certified Public Accountants
Clearwater, Florida
 April 15, 2013
 
 
F - 2

 

Peter Messineo
Certified Public Accountant
1982 Otter Way Palm Harbor FL 34685
peter@cpa-ezxl.com
T   727.421.6268   F   727.674.0511
 
 
 
F - 3

 

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 my audit.

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 financial statements were free of material misstatement.  The Company was not required to have, nor were we 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 provides 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. 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 financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 1 to the 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 2.  The 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 - 4

 

BlastGard International Inc.
Consolidated Balance Sheets
 
   
December 31,
   
December 31,
 
   
2012
   
2011
 
Assets
           
Current assets
           
Cash
  $ 356,426     $ 253,221  
Accounts receivable
    19,600       26,178  
Inventory
    392,819       523,557  
Prepaid and other current assets
    8,319       1,897  
Net related party loans receivable
    122,316       181,138  
Total current assets
    899,480       985,991  
 
               
Property & equipment, net of accumulated depreciation of  ($304,824) and ($259,268), respectively
    133,669       100,462  
Intangible property, net of accumulated amortization of  $389,698 and $187,462 respectively
    406,580       476,524  
Deferred patent costs
    -       209,896  
Investments
    112,832       112,832  
Goodwill
    2,061,649       2,061,649  
Deposits
    5,667       6,544  
Total Assets
  $ 3,619,877     $ 3,953,898  
                 
Liabilities and Stockholders' Equity
               
Current liabilities
               
Accounts payable
  $ 1,026,095     $ 1,034,237  
Accrued expenses
    252,495       444,979  
Customer deposits and deferred revenue
    79,182       -  
Current portion notes payable
    2,492,565       1,820,485  
Total current liabilities
    3,850,337       3,299,701  
                 
Contingent liability
    1,170,081       1,238,781  
Derivative liability, net
    339,874       1,709,955  
Notes payable, net of current portion
    -       500,000  
Total liabilities
    5,360,292       6,748,437  
                 
Stockholders' Equity
               
Preferred Stock:
               
 
               
Preferred Stock, 1,000 shares authorized; $100 par value; 0 and 0 issued and outstanding
    -       -  
Common Stock, $.001 par value,  500,000,000 shares authorized; 90,386,036 and 90,386,036 shares issued and outstanding, respectively
    90,386       90,386  
Additional paid-in capital
    14,694,710       14,694,710  
Minority interest
    (29,961 )     (39,118 )
Accumulated deficit
    (16,495,550 )     (17,540,517 )
Total stockholders' deficit
    (1,740,415 )     (2,794,539 )
Total Liabilities and Stockholders' Equity
  $ 3,619,877     $ 3,953,898  
                 
The accompanying notes are an integral part of these consolidated financial statements.
         

 
F - 5

 

BlastGard International Inc.
Consolidated Statements of Operations
 
   
For the Years Ended
 
   
December 31,
 
   
2012
   
2011
 
             
Revenues
  $ 3,496,433     $ 334,209  
Direct costs
    2,363,225       262,049  
Gross Profit
    1,133,208       72,160  
                 
Operating expenses:
               
General and administrative
    816,259       1,492,887  
Research and Development
    49,590       40,737  
Amortization and depreciation
    247,792       257,180  
Total operating expenses
    1,113,641       1,790,804  
                 
Operating income (loss)
    19,567       (1,718,644 )
                 
Non-operating activity
               
Other income (expense)
    142,658       (36,073 )
Gains on settlement of debt
    -       248,754  
Gain (loss) on derivative liability
    1,774,584       (634,467 )
 (Loss) on settlement of assets
    -       (34,676 )
Interest expense
    (882,685 )     (1,712,241 )
Total other income (expense)
    1,034,557       (2,168,703 )
                 
Income (loss) before income taxes
    1,054,124       (3,887,347 )
                 
Minority interest loss
    (9,157 )     (15,162 )
Provision for income taxes
    -       -  
Net income (loss)
  $ 1,044,967     $ (3,872,185 )
                 
Earnings (loss) per share:
               
Basic
  $ 0.012     $ (0.05 )
Dilutive
  $ 0.0042     $ (0.05 )
                 
Weighted average shares outstanding
               
Basic
    90,386,036       78,243,689  
Dilutive
    280,941,593       78,243,689  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
F - 6

 
 
BlastGard International Inc.
Consolidated Statements of Stockholders' Deficit
 
                 
Additional
               
Stock-
 
       
Common
       
Paid in
   
Minority
   
Accumulated
   
Holders'
 
   
Shares
     
Par
   
Capital
   
Interest
   
Deficit
   
Deficit
 
                                       
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 )
Minority Interest
                              9,157                  
Net income
                                      1,044,967       1,054,124  
Balance at December 31, 2012
    90,386,036       $ 90,386     $ 14, 694, 710     $ (29,961 )   $ (16,495,550 )   $ (1,740,415 )
 
The accompanying notes are an integral part of these consolidated financial statements.

 
F - 7

 
 
BlastGard International Inc.
Consolidated Statement of Cash Flows
 
   
For the Year Ended
 
   
December 31,
 
   
2012
   
2011
 
             
Cash Flows from Operating Activities:
           
Net income (loss)
  $ 1,044,967     $ (3,872,185 )
Adjustment to reconcile Net Income to net
               
cash provided by operations:
               
Minority interest gain (loss)
    9,157       (15,162 )
Depreciation and amortization
    247,792       257,180  
Amortization of debt discount
    644,228       1,558,942  
Gain on contingent liability
    (62,392 )     -  
Stock given for interest
    -       250,000  
Other stock comp
    -       327,944  
Gain on conversion of debt
    -       (248,754 )
Gain on disposal of equipment
    -       34,676  
Derivative (gain) loss
    (1,774,584 )     634,467  
Changes in assets and liabilities:
               
Accounts receivable
    6,578       59,273  
Note receivable
    -       229,416  
Inventory
    130,738       (29,548 )
Other operating assets
    72,059       80,285  
Accounts payable and accruals
    (121,444 )     (273,365 )
Related party loans
    52,514       (27,921 )
Net Cash (Used) Provided by Operating Activities
    249,613       (1,034,752 )
                 
Cash Flows from Investing Activities:
               
Purchase of property and equipment
    (78,763 )     (7,175 )
Payments for deferred costs
    -       (6,429 )
Proceeds from sales of assets and intangibles
    -       3,900  
Cash purchased
    -       834  
Net Cash Used by Investing Activities
    (78,763 )     (8,870 )
                 
Cash Flows from Financing Activities:
               
Proceeds from issuance of stock
    -       175,000  
Proceeds from issuance of note payable
    -       1,260,000  
Net proceeds from line of credit
    -       -  
Repayments of notes payable
    (67,645 )     (184,539 )
Net Cash  (Used) Provided by Financing Activities
    (67,645 )     1,250,461  
                 
Net increase in Cash
    103,205       206,839  
                 
Cash at beginning of period
    253,221       46,382  
Cash at end of period
  $ 356,426     $ 253,221  
                 
                 
Supplemental cash flow information:
               
Interest paid
  $ 94,547     $ 76,233  
Taxes paid
  $ -     $ -  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F - 8

 
 
 (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 patented 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 21, 2004, the Company changed its name to BlastGard International, Inc.  On March 4, 2011, the Company completed the acquisition of HighCom Securities, Inc. and subsidiaries.  The income of HighCom and subsidiaries is included from January 25, 2011, the date of the binding letter of intent.  These financial statements include the assets liabilities and activity of the following:
 
BlastGard International, Inc. BlastGard® International, Inc. is a Colorado corporation that has developed and designed proprietary blast mitigation materials.  The Company operates from offices in Clearwater, Florida and uses contract manufacturers in various locations for production.
 
BlastGard Technologies Inc. is a dormant Florida corporation.
 
HighCom Securities, Inc. HighCom Securities, Inc. (HighCom), originally located in San Francisco California, is a global provider of security equipment and a leader in advanced ballistic armor manufacturing.  The Company has a manufacturing facility in Columbus, Ohio for production and has moved the corporate offices to Clearwater, Florida as of May 1, 2011.
 
HighCom Online HighCom Online was a division offering an online outlet for HighCom Security products.  The Company operated out of the HighCom offices.  This division was closed as of December 31, 2011.
 
HC Ballistics, LLC HC Ballistics LLC was a joint venture with a related party to produce products for HighCom customers.  The Company operated out of HighCom offices and used a production facility in South Florida.  The agreement with the related party was terminated as of December 31, 2010.
 
 
Principles of Consolidation

These consolidated financial statements include the assets and liabilities of Blastgard International, Inc. and its subsidiaries as of December 31, 2012 and 2011.

All material intercompany transactions have been eliminated.

 
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 $356,426 and $253,221 cash and equivalents at December 31, 2012 and December 31, 2011, respectively.
 
 
F - 9

 

 
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.

Investments are considered Level 3. There has been no significant deterioration from year to year and therefore no adjustment is proposed to the valuation of investments as of December 31, 2012.

 
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 used 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. Interest at 1 – ½% is added to balance outstanding at the end of each 30 days.

As of December 31, 2012 and December 31, 2011, management believes an allowance for uncollectible accounts in the amount $27,662 and $24,355 respectively, was adequate.

 
Related Party Loans Receivable

Yochanan Cohen is a related party as was the founder of HighCom Security Inc. in 1997.

Inventory

Inventories are stated at the lower of cost or net realizable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include raw materials and direct labor and fixed and variable production overheads, taking into account the stage of completion and the normal capacity of production facilities. The cost of inventories is determined using the first-in, first-out (FIFO) method. Inventory is reduced for the estimated losses due to obsolescence. This reduction is determined for groups of products based on purchases in the recent past and/or expected future demand.
 
 
F - 10

 

Property and Equipment and Intangible Assets

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.  Depreciation expense for the years ended December 31, 2012 and 2011 was $45,556 and $74,360, respectively.

Intangible property assets are stated at their fair value acquisition cost. Amortization of intellectual property assets is calculated by the straight line method over their specific life (15 years).  Historical costs are reviewed and evaluated for their net realizable value of the assets.  Amortization expense for the years ended December 31, 2012 and 2011 was $202,236 and $182,820, respectively.

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.  Based upon its most recent analysis, the Company believes that no impairment of property and equipment existed at December 31, 2012 and 2011.

 
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.  Debt issuance costs totaled $ 644,228 and $ 1,558,942 at December 31, 2012 and 2011, respectively.

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

The Company recognizes revenue when it is realized or realizable and earned.  The Company considers revenue realized or realizable and earned when all of the following criteria are met:

(i)  
persuasive evidence of an arrangement exists,
 
(ii)  
the product has been shipped or the services have been rendered to the customer,
 
(iii)  
the sales price is fixed or determinable, and
 
(iv)  
collectability is reasonably assured.
 
The Company’s product and return policy allows for merchandise purchased directly from the Company to be returned after obtaining a Return Authorization Number during the 30 day period following date of shipment by the Company for a refund of the purchase price.
 
 
F - 11

 

 
Research and Development

Research and development costs were expensed as incurred.  Research and development costs totaled $49,590 and $40,737 as of December 31, 2012 and 2011.

 
Advertising

Advertising costs were expensed as incurred. Advertising costs of $425 and $29 were incurred during the years ended December 31, 2012 and 2011, respectively.

 
Shipping and Freight Costs

The Company includes shipping costs in cost of goods sold.

 
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.

Stock-based Compensation

 
The Company uses 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. The Company accounts for non-employee share-based awards in accordance with ASC 505-50 “Equity-based Payments to Non-Employees”.

Income (Loss) per Common Share

Basic net income (loss) per share excludes the impact of common stock equivalents.  Diluted net income (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 and December 31, 2012, there were  7,050,000 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 and December 31, 2012 the Company had 104,333,335 warrants outstanding issued in connection with convertible promissory notes and stock sales.  The warrants were considered anti-dilutive for the year ended December 31, 2012.
 
Recently Issued Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.
 
 
F - 12

 

In July 2012, the FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.  This newly issued accounting standard simplifies how an entity tests indefinite-lived intangible assets by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test.  The more likely than not threshold is defined as having a likelihood of more than 50 percent.  This ASU is effective for annual and interim impairment tests for fiscal years beginning after September 15, 2012. As the objective is to reduce the cost and complexity of impairment testing, adoption of this standard did not impact our financial position or results of operations.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). This newly issued accounting standard requires an entity to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions executed under a master netting or similar arrangement and was issued to enable users of financial statements to understand the effects or potential effects of those arrangements on its financial position. This ASU is required to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. As this accounting standard only requires enhanced disclosure, the adoption of this standard is not expected to have an impact our financial position or results of operations.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles-Goodwill and Other (ASC Topic 350) – Testing Goodwill for Impairment.” ASU No. 2011-08 amends the impairment test for goodwill by allowing companies to first assess qualitative factors to determine if it is more likely than not that goodwill might be impaired and whether it is necessary to perform the current two-step goodwill impairment test. The changes to the ASC as a result of this update are effective prospectively for interim and annual periods beginning after December 15, 2011. Adoption of this guidance did not impact our financial position or results of operations.

May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (level 3) inputs. This ASU is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011. The adoption of this standard did not have a material impact on our financial position or results of operations.

Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification™ (“ASC”) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company.  Management has reviewed the aforementioned rules and releases and believes any effect will not have a material impact on the Company’s present or future financial statements.

(2)  
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 a history of operating losses since inception and has an accumulated deficit of $1,740,415. For 2012, the Company achieved net income of $1,044,967 largely from a gain on derivative liability totaling $1,774,584. During 2012, net cash was provided by operating activities of approximately $250,000 as a result of improved operations in 2012 versus the comparable period of the prior year. The Company can provide no assurances that their operations will continue to be profitable. These factors, among others, may indicate that the Company will be unable to continue as a going concern.

 
F - 13

 
 
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 was 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 was no assurance the Company will be successful in producing increased sales revenues or obtaining additional funding through debt and equity financings.

(3)  
Property and Equipment

Property and equipment consisted of the following at December 31:

   
2012
   
2011
 
             
Equipment
  $ 191,748     $ 143,973  
Furniture
    91,334       91,034  
Moulds
    45,060       45,060  
Test Range
    110,351       79,663  
                 
Gross property
    438,493       359,730  
Less accumulated depreciation
    (304,824 )     (259,268 )
                 
    $ 133,669     $ 100,462  
                 

Depreciation expense totaled $45,556 and $74,360, respectively, for the years ended December 31, 2012 and 2011.

(4)
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, 2012 and 2011:
 
   
December 31, 2012
   
December 31, 2011
 
             
Convertible promissory note, $93,097 (1/4 of previous outstanding notes) issued December 2, 2004, due November 30, 2009, 8% interest
  $ 93,097     $ 93,097  
 
               
Convertible promissory note, $50,000, issued December 2, 2004, due on November 30, 2009, 8% annual interest rate
    17,325       17,325  
                 
Convertible promissory note, $50,000, issued December 2, 2004, due on November 30, 2009, 8% annual interest rate
    15,241       15,241  
                 
      125.663       125,663  
Less: current maturities
    (125,663 )     (125,663 )
    $ -     $ -  
                 
 
 
F - 14

 
 
At December 31, 2012, there were no warrants outstanding and exercisable associated with the 2004 debt. These warrants were valued at $0.  All convertible promissory notes are presently considered to be in default.
 
New Financing
 
Alpha Capital Aktiengesellschaft, a holder of 2004 Debt, loaned us $160,000 in February 2011, 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. With respect to the November 2011 financing transaction, all outstanding loans had the conversion price of the notes lowered to $.01 per share and the exercise price of all outstanding warrants extended to seven years, exercisable at $.01 per share. A finder’s fee of 4,000,000 shares was issued by the Company.

At December 31, 2012, the Company had convertible secured debt of $1,210,000. 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.
 
 
F - 15

 

In connection with the aforementioned loan transactions, the Company 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 over a seven year period 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-month 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.
 
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 Noteholder(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.
 
The 2011 convertible promissory notes consisted of the following at December 31, 2012 and December 31, 2011:
 
 
F - 16

 
 
   
December 31, 2012
   
December 31, 2011
 
             
Convertible promissory note, $160,000, issued  February 3, 2011, due on March 21, 2012, 10% annual interest rate, net of unamortized discount of $0 and $0, respectively
  $ 110,000     $ 110,000  
                 
Convertible promissory note, $300,000, issued  March 3, 2011, due on March 3, 2012, 10% interest, net of unamortized  discount of $0 and $80,984, respectively
    300,000       219,016  
                 
Convertible promissory note, $300,000, issued   June 17, 2011, due on June 17, 2012, 10% interest, net of unamortized  discount of $0 and $28,934, respectively
    300,000       271,066  
                 
Convertible promissory note, $500,000, issued  November 10, 2011, due on February 10, 2013 10% interest, net of unamortized  discount of  $22,380 and $222,162, respectively
        477,620           277,838  
                 
Convertible promissory note, $210,000, issued  January 31, 2011, due on September 30, 2011, 6% annual interest rate, net of unamortized discount of $0 and $24,331, respectively
    210,000       185,669  
                 
Convertible promissory note, $160,000, issued  January 31, 2011, due on January 31, 2012,  6% annual interest rate, net of unamortized discount of $0 and $37,699, respectively
    160,000       122,301  
                 
Convertible promissory note, $67,025, issued  January 31, 2011, due on September 30, 2011, 6% annual interest rate, net of unamortized  discount of $0 and $10,192
    67,025       56,833  
      1,624,645       1,242,723  
Less: current maturities
    (1,624,645 )     (742,723 )
    $ -     $ 500,000  
 
The Company issued 104,333,335 warrants with the convertible debt.  These warrants are exercisable at $0.01 and expire in 2018.  Due to changes in the terms, the warrants are re-valued, using the Black-Scholes method each quarter.  At December 31, 2012 the warrants were valued at approximately $1,875,606 and created a derivative liability in that amount.  This liability is included in accrued liabilities on the balance sheet, net of the unamortized warrant discount of $1,535,732 for a net amount of $339,874.   All convertible promissory notes are presently considered to be in default.
 
 
F - 17

 
 
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, 2012 and 2011:
 
   
December 31, 2012
   
December 31, 2011
 
             
Line of credit from Regions Bank, $100,000, interest only at 5% annually, due on demand, $18,246 credit is available at December 31, 2012 ( Note 7)
  $ 81,754     $ 88,968  
                 
Line of credit from Fifth Third Bank, $450,000, interest only at 6.2% annually, due on demand  **
    428,716       434,011  
                 
Revolving credit card facility with Wells Fargo Bank, $150,000, interest only at 7.5% annually, due on demand  **
    146,796       148,376  
                 
Revolving credit card facility with California Bank & Trust (non-assumable), $50,000, interest only at 5%, due on demand  **
    -       49,750  
                 
Three credit card accounts with major financial institutions varying monthly minimum payments including interest, due on demand
    54,991       38,887  
                 
      712,257       759,992  
Less: current maturities
    (712,257 )     (759,992 )
    $ -     $ -  
 
**     These notes were called when HighCom was purchased and are considered in default.  No additional credit is available.
 
Acquisition debt
 
On March 4, 2011, the Company issued a note payable in association with the purchase of HighCom Security Inc. and on March 21, 2011, the Company issued a note payable in association with the purchase of Acer product designs.  These acquisition notes have the following balances at December 31, 2012 and December 31, 2011;

     
December 31, 2012
   
December 31, 2011
 
               
HighCom Security acquisition note, original balance, $194,600, paid down to $$107,674. This loan has zero balance net of receivables due from seller
    $ -     $ -  
                   
Acquisition note for the purchase of Acer product designs, original amount $30,000, interest at 8%, due 12/31/2011.
      30,000       30,000  
                   
        30,000       30,000  
Less: current maturities
      (30,000 )     30,000  
      $ -     $ -  

 
F - 18

 
 
The Company issued a note in the amount of $196,400 as part of the acquisition of HighCom Security, Inc. to the former majority shareholder.  As of June 30, 2011, the Company has stopped making payments on this note and has applied the unpaid balance of $156,400 against receivables due from the former shareholder that were also acquired in the purchase transaction.
 
(5)
Detachable common stock warrants issued with convertible and subordinated convertible promissory notes
 
The company has issued warrants with convertible promissory notes, the sale of stock and consulting agreements throughout the years. For the year ended December 31, 2010 there was approximately 16,750,000 warrants, valued at approximately $485,000, outstanding.  During the year ended December 31, 2011 all outstanding warrants from the December 31, 2010 expired and approximately 104,333,000 warrants, valued at approximately $3,016,000, were issued as part of promissory notes made during the year ended December 31, 2011.
 
To value the warrants issued the Company used the Black-Scholes model. The assumptions used to value the warrants in the Black-Scholes model for the year ended December 31, 2012 are shown in the table below.

Risk-free interest rate
1.450%
Dividend yield
0.00%
Volatility factor
338.1%
Weighted average expected life
 5.9 years 

(6)
Shareholders’ Equity

 
Preferred stock

The Company was authorized to issue 1,000,000 shares of $.001 par value preferred stock.  The Company may divide and issue the Preferred Shares in series.  Each Series, when issued, shall be designated to distinguish them from the shares of all other series. The relative rights and preferences of these series include preference of dividends, redemption terms and conditions, amount payable upon shares of voluntary or involuntary liquidation, terms and condition of conversion as well as voting powers.

Common stock issuances
 
In January 2011, an unrelated party received 4,166,667 shares of common stock in exchange for an investment of $125,000.
 
In March 2011 BlastGard issued 9,820,666 shares of common stock valued at $491,000 to Rimberg Trust in exchange for the acquisition of HighCom Security.
 
In 2011 Phoenix Alliance Corp., a related party received 5,000,000 shares of common stock in exchange for an investment of $150,000.
 
A total of 7,000,000 shares of common stock valued at $150,000 were issued during 2011 for services.
 
In June 2011, BlastGard converted $234,377 of convertible notes and interest into 7,812,561 shares of common stock.
 
 
F - 19

 
 
In August 2011 BlastGard issued 500,000 shares of common stock valued at $25,000 to the stock holders of Acer Defense as in exchange for the acquisition of Acer Defense products.
 
There were no shares issued during the year ended December 31, 2012.
 
 
Stock Compensation

The Company periodically offered options to purchase stock in the company to vendors and employees. No options were granted during the year ended December 31, 2012.  The Board’s policy with respect to options is to grant options at the fair market value of the stock on the date of grant.
 
There were no net cash proceeds from the exercise of stock options for the twelve months ended December 31, 2012 or 2011.  At December 31, 2012, there was no unrecognized compensation cost related to share-based payments which was expected to be recognized in the future.
 
The following table represents stock option activity as of and for the twelve months ended December 31, 2012:
 
 
  
Number
of Shares
   
Weighted
Average
Exercise
Price
  
Weighted
Average
Remaining
Contractual Life
  
Aggregate
Intrinsic
Value
Options Outstanding - January 1, 2012
  
8,500,000
   
$
0.10
  
1.0 years
  
   
Granted
  
-
   
$
0.03
  
5.0 years
  
   
Exercised
  
-
     
-
  
 
  
   
Forfeited/expired/cancelled
  
(1,450,000
)
   
0.10
   
  
   
 
  
         
  
 
  
   
Options Outstanding – December 31, 2012
  
7,050,000
   
$
0.048
  
4.8 years
  
$
-
 
  
         
  
 
  
   
Outstanding Exercisable – January 1, 2012
  
8,500,000
   
$
0.10
  
1.0 years
  
$
 
Outstanding Exercisable – December 31, 2012
  
7,050,000
   
$
0.048
  
4.8 years
  
$
-
 
The total grant date fair value of options vested during the twelve months ended December 31, 2012 and 2011 was $0 and $327,944, respectively.

(7)      Related Party Transactions

The Company has a $100,000 credit line, which was secured by a personal guarantee of its Chief Executive Officer. Currently, $81,754 was owed pursuant to the line of credit (inclusive of interest at 5%).  Credit available at December 31, 2012 was $18,246.

(8)      Income Taxes
 
 
F - 20

 

A reconciliation of U.S. statutory federal income tax rate to the effective rate follows:

   
December 31, 2012
 
December 31, 2011
U.S. statutory federal rate, graduated
    34.00 %     34.00 %
State income tax rate, net of Federal
    3.6 %     3.6 %
Permanent book-tax differences
    0 %     (0.03 %)
Net operating loss (NOL) for which no tax benefit was available.
    -37.6 %     -37.57 %
             
                 
Net tax rate
    0.00 %     0.00 %
 
At December 31, 2012, deferred tax assets consisted of a net tax asset of approximately $6,091,000, due to operating loss carry forwards of approximately $16,188,000, which was fully allowed for, in the valuation allowance of $6,091,000.  The valuation allowance offsets the net deferred tax asset for which it was more likely than not that the deferred tax assets will not be realized.  The change in the valuation allowance for the years ended December 31, 2012 and 2011 totaled approximately $(393,000) and $1,334,000 respectively.  The current tax benefit also totaled $(393,000) and $1,334,000 for the years ended December 31, 2012 and 2011, respectively.  The net operating loss carry forwards expire through the year 2031.
 
The valuation allowance will be evaluated at the end of each year, considering positive and negative evidence about whether the deferred tax asset will be realized.  At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax assets was no longer impaired and the allowance was no longer required.
 
Should the Company undergo an ownership change as defined in Section 382 of the Internal Revenue Code, the Company’s tax net operating loss carry forwards generated prior to the ownership change will be subject to an annual limitation, which could reduce or defer the utilization of these losses.
 
(9)      Concentration of Credit Risk for Cash

The Company has concentrated its credit risk for cash by maintaining deposits in a financial institution, which may at times exceed the amounts covered by insurance provided by the United States Federal Deposit Insurance Corporation (“FDIC”).  At December 31, 2012, the Company had no funds in excess of the FDIC insurance limits.

(10)    Commitments and Contingencies

From time to time the Company may be a party to litigation matters involving claims against the Company.  Management believes that there are no current matters that would have a material effect on the Company’s financial position or results of operations.
 
 
F - 21

 

Office Lease
 
The Company entered into a lease agreement in January 1, 2009 for office space in Clearwater Florida.  Rental payments under the lease were $300 per month on a month to month basis.  In May 2011, the Company leased additional office space in Clearwater on a month to month basis for $300 per month. During February and March 2011, the Company was also paying for office space in San Francisco, California at monthly rate of $15,000. This office was closed in April 2011.  In February 2011, the Company entered into a six month lease agreement for approximately 11,200 square feet of office and warehouse space in Columbus, OH, which lease is currently on a month-to-month basis.  In June 2012, the Company entered into a one year lease agreement for approximately 16,200 square feet of office and warehouse space in Columbus, OH.  In May 2011, the Company entered into a month to month lease for approximately 300 square feet of office space in Aurora, CO for $965 per month.

Prior Litigation Matter

Verde Partners Family Limited Partnership

On April 2, 2009, the Company entered into a Settlement Agreement to settle our outstanding civil litigation. The Company will pay the sum of $125,000 over 18 months. The first monthly payment was paid within 30 days after the Defendants deliver to the Company’s counsel an original executed version of the Agreement and a promissory note in the amount of the remaining principal balance to bear interest in the amount of 6% per annum. Upon Verde’s receipt of the payment and promissory note, the parties shall jointly dismiss with prejudice all litigation between them, including the Pinellas County action and the Federal action. The company and Verde also entered into a license agreement whereby BlastGard obtains a fully paid up non-exclusive license for the 2 Verde patents for the remaining life of those patents in exchange for the Company paying Verde a 2% royalty for the life of the patents (which expired in the 2nd quarter of 2012), on the sales price received by BlastGard for BlastGard’s portion of all blast mitigation products sold by the company (the royalty was not on any third-party’s portion of any product containing blast mitigation products sold by BlastGard). The parties also agreed not to file any complaints with any state, federal or international agency or disciplinary body regarding any of the other parties or any person affiliated with any of the other parties or otherwise makes negative statements about them (in other words, a broad non-disparagement clause). The company and Verde also signed mutual general releases (excepting the obligations above) and a covenant not to sue.  At December 31, 2012, the Company was in arrears on the final twelve monthly payments on the settlement

(11)         Acquisition of HighCom Security, Inc.
 
On January 25, 2011, the Company purchased 98.2% of the outstanding stock in HighCom Security, Inc. (HighCom) for cash, stock common and preferred stock to be paid out at certain milestones.  As of the signing of the agreement, Blastgard International, Inc. immediately assumed the operations of HighCom and started to provide financing for the operations while a definitive agreement is drawn up over the next 90 days.
 
HighCom is a worldwide security equipment provider based in San Francisco, California. HighCom designs, manufactures and distributes a unique range of security products and personal protective gear. BlastGard issued a note payable in the amount of $196,400 and 9,820,000 shares of common stock as initial consideration and promised up to another $98,200 in cash and 34,370,000 shares of common stock based on a pro-rata basis if revenue reaches certain goals.  Blastgard management believes that the revenues goals are very achievable and have valued the contingent consideration at 68% of the market price at the time of the agreement. On March 4, 2011, the transaction closed.
 
Blastgard International, Inc. accounted for the assets, liabilities and ownership interests in accordance with the provisions of ASC 805, Business Combinations for acquisitions occurring in years beginning after December 15, 2008.  As such, the recorded assets and liabilities acquired were recorded at fair value and any difference in the net asset values and the consideration given was recorded as a gain on acquisition or as goodwill. The actual values as of the date of agreement are as follows:
 
 
F - 22

 
 
       
 Cash
  $ 278  
 Accounts receivable
    85,109  
 Contract performance bonds
    50,500  
 Refundable taxes
    -  
 Inventory
    229,132  
 Prepaid expenses
    6,035  
 Fixed assets
    206,159  
 Investments
    112,764  
 Deposits
    31,891  
 Due from seller
    303,356  
 Related party loans
    107,198  
 Customer lists
    500,000  
 Website
    80,000  
 Goodwill
    2,653,118  
    $ 4,365,540  
         
 Accounts payable
  $ 1,282,234  
 Accrued expenses
    382,819  
 Short-term loans
    45,209  
 Bank line of credit
    454,835  
 Credit card line 1
    150,726  
 Credit card line 2
    49,750  
 Credit card line 3
    24,922  
 Credit card line 4
    9,514  
 Credit card line 5
    47,910  
 Credit card line 6
    1,896  
 Due to Blastgard
    3,500  
 Loan from related party
    10,000  
 Minority interest
    (23,956 )
 Acquisition note
    196,400  
 Contingent liability
    1,238,781  
 Stock given at closing
    491,000  
 Total liabilities assumed and consideration given
  $ 4,365,540  
      -  
 
Goodwill was subsequently reduced for changes in the valuation of inventory and liabilities acquired.

(12)    Subsequent Events

As of March 21, 2013, the Company had outstanding December 2004 Debt in the principal amount (including accrued interest thereon) of $109,969.82 owed to Robocheyne Consulting Ltd, $24,243.75 owed to Steven Gold and $21,331.65 owed to TRW Holdings Pty Limited (collectively hereinafter referred to as the “December 2004 Debt”). As of March 21, 2013, the Company also had outstanding $1,267,707.07 in principal debt, including accrued interest thereon owed to Alpha Capital Anstalt, pursuant to secured promissory notes (collectively the “Company Debt”). Pursuant to an amendment and consent, all of the debt owed to Alpha Capital, which was previously past due and are the subject of security agreements, guarantee and other transaction documents, to the extent outstanding, have had their maturity date extended through June 14, 2013 and their conversion price lowered from $0.010 per share to $0.009 per share.
 
 
F - 23

 
 
 On April 4, 2013, Alpha Capital Anstalt, closed on an agreement (the “Purchase and Exchange Agreement”) with 8464081 Canada Inc. (the “Purchaser”) to sell to the Purchaser and its assignees the Company’s Debt in the principal amount, including accrued interest thereon, of $1,267,770.07 (which excludes $182,000 of the principal due on this note that will be maintained by Alpha Capital) owned by it plus warrants to purchase 104,333,335 shares (exercisable at $0.01 per share). The agreements require that within three (3) months of March 21, 2013, that the Purchaser shall convert all the notes acquired by it at the current conversion price of $0.009 per share. Alpha Capital Anstalt has also committed to convert the $182,000 of principal retained by it into shares of the Company’s Common Stock at the same conversion price. Also, the agreement requires the Purchaser to offer to purchase the December 2004 Debt for a purchase price equal to the total amount of principal and interest due on each note with a 10% premium. Prior to the April 4, 2013 closing, Robocheyne Consulting elected to convert their notes in the principal amount described above plus accrued interest into 12,218,869 shares of the Company’s Common Stock.
 
As a result of the foregoing transactions, the Company expects to have the aforementioned Secured Debt converted into shares of Common Stock on or before June 21, 2013. Such transaction should result in the Purchaser obtaining control of the Company. Also, pursuant to the Purchase and Exchange Agreement, the Purchaser and the Company agreed to the following:
 
 
·         Purchaser has the right to nominate and appoint to the Board at least 50% of the Board members;
 
 
·         Purchaser has a right of first refusal to participate in future financings up to its pro rata share of Common Stock of the Company.
 
 
·         Purchaser undertakes to provide the Company with sufficient capital to allow the Company to conduct its business and remain a going concern until December 31, 2013, subject to further agreements between the Company and Purchaser. All such funding will be provided through equity transactions and will not be funded via debt.

The Company has performed an evaluation of events occurring subsequent to the period end through the issuance date of this report. Based on our evaluation no other events have occurred that need to be disclosed.

 
F - 24

 
 
Item 9.           Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
(1) Previous Independent Accountants

a.
On December 17, 2012, the Company was informed that our registered independent public accountant, Peter Messineo, CPA, of Palm Harbor Florida (“PM”) declined to stand for re-election. PM has merged his firm into the registered firm of Drake and Klein CPAs PA, as stated in (2) below.

b.
PM's report on the financial statements for the years ended December 31, 2011 and 2010 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to audit scope or accounting, except that the report contained an explanatory paragraph stating that there was substantial doubt about the Company’s ability to continue as a going concern.

c.
Our Board of Directors participated in and approved the decision to change independent accountants. Through the period covered by the financial audit for the years ended December 31, 2011 and 2010 and including its review of financial statements of the quarterly periods through September 30, 2012 there have been no disagreements with PM on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PM would have caused them to make reference thereto in their report on the financial statements. Through the interim period December 17, 2012 (the date of decline to stand for re-election of the former accountant), there have been no disagreements with PM on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PM would have caused them to make reference thereto in their report on the financial statements.

d.
We have authorized PM to respond fully to the inquiries of the successor accountant

e.
During the years ended December 31, 2011 and 2010 and the interim period through December 17, 2012, there have been no reportable events with us as set forth in Item 304(a)(1)(iv) of Regulation S K.