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EX-32.1 - HighCom Global Security, Inc.ex32-1.htm
EX-31.1 - HighCom Global Security, Inc.ex31-1.htm
EX-21.1 - HighCom Global Security, Inc.ex21-1.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, 2017

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from: ______________ to ______________

 

Commission file number: 000-36387

 

HIGHCOM GLOBAL SECURITY, 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.)

 

2901 E 4th Avenue, Unit J, Columbus, OH   43219
(Address of principal executive offices)   (Zip Code)

 

Issuer’s telephone number: (614) 500-3065

 

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 [  ] No [X]

 

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

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ].

 

Indicate by check mark whether the Registrant has submitted electronically and posted on it corporate Web site, if any, every Interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

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 [  ]

 

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 [  ] No [X]

 

As of June 30, 2017, the number of shares held by non-affiliates was approximately 119,044,950 shares. The approximate market value based on the last sale (i.e. $.0211 per share as of June 30, 2017) of the Company’s Common Stock was approximately $2,511,848.

 

The number of shares outstanding of the issuer’s Common Stock, $.001 par value, as of March 13, 2018, was 377,154,748 shares.

 

 

 

   

 

 

TABLE OF CONTENTS

 

    Page
  Part I  
     
Item 1 Business 3
Item 1A Risk Factors 18
Item 1B Unresolved Staff Comments 22
Item 2 Description of Property 22
Item 3 Legal Proceedings 22
Item 4 Mine Safety Disclosure 22
     
  Part II  
     
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 22
Item 6 Selected Financial Data. 23
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operation 23
Item 7A Quantitative and Qualitative Disclosures about Market Risk 26
Item 8 Financial Statements and Supplementary Data 26
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 46
Item 9A Controls and Procedures 46
Item 9B Other Information 47
     
  Part III  
     
Item 10 Directors and Executive Officers and Corporate Governance. 48
Item 11 Executive Compensation 55
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 61
Item 13 Certain Relationships and Related Transactions, and Director Independence. 62
Item 14 Principal Accounting Fees and Services 64
     
  Part IV  
     
Item 15 Exhibits, Financial Statement Schedules 65
Signatures 76

 

 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

 

Overview

 

HighCom Global Security, Inc. (the “Company”) went public through a shell merger on January 31, 2004, in which the Company acquired BlastGard Technologies, Inc. On March 21, 2004, the Company changed its name to BlastGard International, Inc. On March 4, 2011, the Company completed the acquisition of HighCom Armor Solutions, Inc. and subsidiaries. On June 28, 2017, the Company changed its name to HighCom Global Security, Inc. These consolidated financial statements include the assets, liabilities and activities of the following:

 

BlastGard Technologies Inc., a 100% wholly-owned subsidiary of the Company, was a dormant Florida corporation from 2005 through June 2017 when the Company’s tangible and intangible assets relating to BlastWrap technology were transferred back into BlastGard Technologies, Inc. (“BlastGard” or “BTI”). BTI was incorporated on September 26, 2003 in the State of Florida, to design and market proprietary blast mitigation materials. We have developed and have been marketing BlastWrap products to protect people and property against explosive forces. BTI’s patented BlastWrap® technology effectively mitigates blast effects and suppresses post-blast fires. BTI sub-contracts the manufacturing of products to licensed and qualified production facilities.

 

 3 

 

 

HighCom Armor Solutions, Inc. (HighCom Armor) is a 98.2% owned subsidiary of the Company. Founded in 1997 and originally based in San Francisco, HighCom Armor Solutions, Inc., a California corporation, is a global provider of security equipment. HighCom Armor is a leader in advanced ballistic armor manufacturing. With a 32,865 square foot manufacturing and distribution facility located in Columbus, Ohio, HighCom Armor 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. HighCom Armor 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. HighCom Armor’s corporate office and manufacturing facility are located in Columbus, Ohio.

 

Business Segments

 

Although the Company accounts for its operations in three separate corporations, all of its business operations are associated with security for individuals and property. HighCom Global Security, Inc. primarily provides for corporate administration. HighCom Armor sales represent in excess of 99% of total sales and BTI has incidental sales of an immaterial amount. The Company has determined that all business operations should be aggregated together and not reported as separate operating segments.

 

HighCom Armor Solutions, Inc.

 

HighCom Armor Certifications

 

HighCom Armor has already 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”). We 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.

 

In July 2014, HighCom Armor became the first company in the world to achieve BA 9000 certification. Several years ago, the National Institute of Justice (“NIJ”) assembled a collaborative team to address the issue of body armor safety and the needs of criminal justice agencies. NIJ decided to increase the amount of testing needed for body armor to meet their standards, including 1) more extensive and frequent testing; 2) environmental testing; and 3) implementation of BA 9000, a body armor quality management standard. BA 9000, released in January 2012, is an extension of ISO 9001. BA 9000 extends to manufacturers of body armor vests for federal, state, local, and tribal law enforcement and corrections bodies. Manufacturers who wish to become BA 9000 certified must comply with additional requirements beyond ISO 9001 that are specific to ballistics-resistant body armor manufacturing and testing, such as:

 

  Provide procedures for communicating with the Compliance Testing Program (CTP).
     
  Provide unique identification for each piece of the body armor to ensure accountability.
     
  Work areas must be managed in order to reduce negative effects on body armor.
     
  Product testing must be done at CTP approved labs, which need to be ISO 17025 compliant.

 

Given the equipment and ballistic protection solutions provided by HighCom Armor, 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. In addition to this, the Company is also registered 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.

 

 4 

 

 

Management believes that we have an opportunity to combine the armor technology of HighCom Armor 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.  In 2015, HighCom Armor completed several new NIJ 0101.06 certifications. Our new hard armor products include: our new 4S17M economical Level IV stand alone in multi curve shapes; our new 3S11 lightweight all PE plate; our new 3S11M lightweight all PE multi curve plate; and our new AR1000 lightweight steel advanced plate. In 2016, we launched a new lightweight Level IV plate; a new multi-hit Level IV plate; a new series of ultra-lightweight helmet solutions; as well as several new soft armor solutions. We also designed a Rifle Special Threat Plate for special operators in SWAT and high-risk task forces. In 2017, we introduced 5 new hard armor models including a Level III++, multi-curve, hard armor ballistic plate and 1 new Level IIIa elite, lightweight, high performance soft armor panel. HighCom Armor now has 11 hard armor NIJ 0101.06 certified ballistic plate models as well as 5 soft armor NIJ 0101.06 certified panel solutions. 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 also have several protective gear products under development.

 

In addition to several new NIJ certifications secured in 2016 and 2017, the National Tactical Officers Association (NTOA) tested several of our products. The mission of the NTOA is to enhance the performance and professional status of law enforcement personnel by providing a credible and proven training resource as well as a forum for the development of tactics and information exchange. HighCom Armor has 9 vest and plate products that are “Member Tested and Approved” by NTOA. HighCom Armor can now use the NTOA logo to attest that our products were tested and approved by NTOA. This further validates and highlights HighCom Armor as the leader in quality, customer service and pricing.

 

The Company also increased its 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 Armor’s presence in the personal protection equipment market and we are currently participating in numerous bids exceeding 30 million dollars. Management believes that we will experience significant increase in our overall sales on a quarter by quarter basis as we develop these relationships, although no assurances can be given in this regard.

 

U.S. Department/U.S. Defense Department

 

In March 2011, the Company secured export privileges from the U.S. State Department which dramatically improves HighCom Armor’s ability to sell and market its products.

 

BlastGard has completed registration with 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 Armor also completed their ISO certification which had been revoked 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 Armor secured ISO certification. One of the most important aspects of our business philosophy is an unparalleled commitment to quality control. HighCom Armor is BA 9000 and ISO 9001:2008 certified organization, providing only the highest quality products to protect the lives of the men and women who proudly serve our country both locally and across the world. HighCom Armor actually became the first company in the world to achieve BA 9000 certification, a new National Institute of Justice (NIJ) body armor quality management standard. BA 9000 is a body armor quality management systems standard that is an extension of ISO 9001 which provides greater confidence that the armor is being produced consistently.

 

 5 

 

 

Product Description

 

HighCom Armor 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 Armor caters to local law enforcement agencies, correctional facilities and municipal authorities. Given the equipment and ballistic protection solutions provided by HighCom Armor, 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 Armor 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:

 

  Striker ballistic helmets
     
  Guardian hard armor plates
     
  Trooper soft armor vests
     
  Bellfire ballistic shields
     
  Civilian Armor System ballistic panels
     
  Stingray ballistic blanket

 

Manufactured products versus products supplied by third party vendors.

 

HighCom Armor manufactures ballistic plates, soft armor vests, ballistic shields and constructs ballistic helmets. Our HighCom Armor products carry our brand name or a private label.

 

PLATES

 

Level IV – NIJ 05

 

HighCom Armor 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 400 plates have been shot internally at HighCom Armor’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.

 

 6 

 

 

HighCom Armor has fourteen 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 Armor has a Level III NIJ Polyethylene based plate solution with a production capacity of 10,000 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 Armor sample defeated six rounds of explosive materials in a single plate. We have conducted impact drop tests and x-rays after shoot tests. This product needs additional testing and evaluation to solidify the results. We have spent $300,000 on SAPI development thus far applying the many lessons garnered during the past several years of research and development.

 

NIJ 06 Specification &Compliant Products

 

HighCom Armor currently has five certified Level IV plates, six Level III plates, four Level IIIA vests and one Level II vest. There are additional 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. Our new hard armor products include: our new 4S17M economical Level IV stand alone in multi curve shapes; our new 3S11 lightweight all PE plate; our new 3S11M lightweight all PE multi curve plate; and our new AR1000 lightweight steel advanced plate. In 2016, we launched a new lightweight Level IV plate; a new multi-hit Level IV plate; a new series of ultra-lightweight helmet solutions; as well as several new soft armor solutions. We also designed a Rifle Special Threat Plate for special operators in SWAT and high-risk task forces. In 2017, we introduced 5 new hard armor models including a Level III++, multi-curve, hard armor ballistic plate and 1 new Level IIIa elite, lightweight, high performance soft armor panel. HighCom Armor now has 11 hard armor NIJ 0101.06 certified ballistic plate models as well as 5 soft armor NIJ 0101.06 certified panel solutions. Built to exceed industry standards at affordable prices, these inserts are designed according to the NIJ ratings for Level III, offering law enforcement and military personnel different options for up armor requirements whether concerned about armor piercing threats or high-powered rifle threats. NIJ introduced the Ballistic Resistance of Body Armor NIJ Standard-0101.06 to more effectively defend against increased velocities of ammunition calibers and provide improved performance against the threats law enforcement faces in today’s world.

 

SHIELDS

 

HighCom Armor produces a Level IIIA and a Level III ballistic shield that are 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 Armor has a ballistic shield production capacity of approximately 800-1,000 units per month.

 

CIVILIAN ARMOR SYSTEMS

 

Launched in December 2013 after 18 months in development; HighCom Armor is now offering a full line of Civilian Armor System (C.A.S.) products. Our civilian armor insert panels provide personal and professional defense against ballistic threats. HighCom Armor inserts are designed, developed, and manufactured using state of the art processes and equipment to ensure high quality and high performance when deployed by operators throughout numerous tactical and urban situations. Our inserts are both internally and independently tested in accordance with the strictest criteria in adherence to the NIJ 0108.01 standard. We also perform additional testing against V50 and special threats.

 

 7 

 

 

SOFT ARMOR

 

HighCom Armor 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 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 Armor is working towards achieving a proprietary uni-directional material that a third party will lay up for us in tape form (100% Polyethylene). Based on previous research and testing conducted, management believes that we can produce a Level III 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.

 

Research and Development

 

During fiscal 2017 and 2016, HighCom Armor spent $97,476 and $52,586, respectively 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, they have defined five overall market trends that will affect global body armor demand between now and 2020. 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. These trends will affect both the military and the paramilitary, or law enforcement, markets in countries throughout the world.

 

Next Generation Military Body Armor Programs

 

Many countries are developing next generation body armor systems to replace the body armor systems and components currently worn by the military ground forces in their country. Specific examples include the US Army’s Soldier Protection Systems (SPS), the UK’s Future Infantry Soldier Technology (FIST) program, France’s FELIN program, Germany’s Future Soldier System, Russia’s Future Soldier System, and the Israeli Advanced Soldier. As these programs move from development into Low Rate Initial Production (LRIP), and then into Full Rate Production (FRP), military body armor procurement in these countries will experience an uptick in demand. These next generation body armor programs are currently in development and will primarily affect demand in the 2017 to 2020 timeframe. It is vital that these development programs are successfully executed in the next one to two years and that funding is allocated to support procurement in their respective country of origin.

 

 8 

 

 

The Next Generation Ripple Effect

 

As the United States and other leading countries develop and procure next generation body armor systems, other countries who are not developing their own next generation systems will seek to spiral in next generation technology developed by other countries. These countries tend to adapt US or European body armor technology or import US or European body armor components. These countries may also have the opportunity to procure body armor that incorporates military body armor technology that is currently restricted from export, but may become excluded from export restrictions in the future.

 

Vector Strategy labels this trend “The Next Generation Ripple Effect”. Our use of the word “ripple” denotes that this trend will occur 2 to 3 years after next generation systems are being procured in countries that organically developed those systems.

 

Warrior Cop

 

“Warrior Cop” refers to the increasing integration of tactical, SWAT, and special operations within the law enforcement environment. This has also been referred to as the trend towards “police militarization”. This trend will increase demand for body armor with higher protection levels and lower areal densities, and designs that provide more mobility and comfort, including helmets. “Warrior Cop” will affect body armor procurement in the United States, and in European countries with significant law enforcement organizations. Countries with a more paramilitary style of civilian law enforcement will be less affected by this trend.

 

Armored 1st Responders

 

In the United States and European countries, there is an increasing trend to provide body armor to first responders, such as EMS/EMT personnel and firefighters. This trend has been stimulated by the need to upgrade the capabilities of personnel who have to respond to casualties in the midst of a terrorist attack, mass shooting event, or other situation where the responder may encounter gunfire. Many body armor suppliers are offering specific ballistic vest designs as an upgrade to the normal vests that EMS/EMT and first responders typically wear. This demand driver will primarily affect body armor markets in the United States and western European countries. Vector Strategy believes that the global body armor market is just beginning to experience increased demand due to “Armored 1st Responders”.

 

Material and Technology Improvements

 

The market is experiencing the release of several fiber and Uni-Directional (UD) products that offer performance improvements, as well as hard plate material technologies that optimize weight, price, and protection. Major body armor manufacturers and material suppliers are co-branding new body armor components that incorporate these improvements. In addition, the soft body armor and helmet markets are both trending towards the hybrid use of fibers in their material solutions. These, and other near-term material and technology improvements will drive demand in both the military and law enforcement market segments, as globally, end users will seek to replace older body armor components with new solutions that offer lighter weight, better protection, and more comfort.

 

According to the July 2014 IBISWorld Industry Report on Body Armor Manufacturing in the US, “the Body Armor Manufacturing industry is expected to continue to decline over the next five years. The industry is highly reliant on demand from the US federal government and its decision to deploy troops in hostile environments. However, US troops continue to withdraw from Iraq and Afghanistan, thereby weakening demand for body armor from the federal government. Furthermore, federal funding for defense is expected to decrease over the next five years, while government consumption and investment is put toward other security devices. Recovery is expected to begin in the middle of the next five-year period due to developments in body armor products and growth in law enforcement agency markets. The industry is also developing better fitting armor for women and more efficient protective equipment in general. In addition, law enforcement agencies are looking to reduce injuries to officers on the job by purchasing more body armor. Overall, the industry is expected to decline at an average annual rate of 1.6% over the five years through 2019, to $676.7 million. International trade is also expected to play a larger role for the industry. High-value added US manufactured goods will remain in demand in foreign markets such as Canada. Consequently, the value of exports is projected to rise an annualized 4.3% to $48.2 million over the five years to 2019. Additionally, imports are forecast to grow at an average annual rate of 3.5% to about $19.0 million over the five-year period, accounting for a mere 2.9% of domestic demand.”

 

 9 

 

 

HIGHCOM ARMOR’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 Armor 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 Armor are:

 

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

 

The channels of distribution for HighCom Armor are distributors, direct sales, and the Government Services Administration (GSA). Since HighCom Armor 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

 

 10 

 

 

How Do We Market Ourselves

 

Armor products - personal armor plates, ballistic shields and soft armor vests – have been designed, developed and certified by HighCom Armor. 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 Armor products are distributed under non-exclusive supplier arrangements. Our HighCom Armor marketing strategy includes the following:

 

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

 

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 is 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 Armor has in the past granted limited exclusivity to certain agents either on project specific basis – or a specific country basis. On occasion, HighCom Armor may contract directly with a foreign government to supply products on behalf of local agent. HighCom Armor would then receive payment direct from government agency and pay a commission to local agent.

 

EXPORT COMPLIANCE POLICY

 

HighCom Armor 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 Armor must be cognizant and comply with all export laws.

 

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HighCom Armor 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 Armor 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 Armor employees associated with activities that are subject to U.S. export controls take extra precautions to ensure that no violations occur. It is HighCom Armor management’s policy that under no circumstances will exports made on behalf of its customers be made contrary to U.S. export laws and regulations. Special care is taken to prevent transactions with entities involved in the proliferation of weapons of mass destruction.

 

Violations of the Export Administration Regulations could result in significant penalties for HighCom Armor 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 Armor’s export privileges meaning it could no longer forward products to international customers. Criminal penalties may also be imposed on HighCom Armor and on the individuals involved. For willful violations of the export regulations, HighCom Armor 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 Armor and the individuals involved. Civil penalties can reach $500,000 per violation; criminal penalties can reach $1,000,000 per violation. HighCom Armor 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 Armor.

 

HighCom Armor 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 Armor. 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 Armor.

 

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, 2017, the Company has nineteen 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.

 

HighCom Armor Sales

 

In 2017 and 2016, HighCom Armor accounted for approximately 99%, of the Company’s consolidated sales. It is anticipated that this trend will continue in the future.

 

BlastGard Technologies, Inc.

 

BlastGard - Overview

 

Through BlastGard® Technologies, Inc., our wholly-owned Florida corporation, 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.

 

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.

 

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  For blasts that produce fireballs or intense hot gases at higher pressures, BlastGard® Technology has the ability, through testing, to cool the blast zone rapidly, thereby reducing structural damage.
     
  In detonation of high explosives, where at least half of the energy released is in the shock wave, attenuation occurs even more rapidly, and in doing so substantially reduces explosion phenomena.

 

Key BlastWrap® Features

 

  Lightweight, flexible, durable and environment safe
     
  Requires no wires, electricity, detection devices and contains no sensors
     
  Customizable and easy to retrofit
     
  Materials are low in cost and are widely available
     
  Extremely adaptable, without losing effectiveness
     
  Compact structure
     
  Easily produced
     
  Can be constructed with additional environmental or specific blast conditions (e.g. weather or moisture barriers or dust free layers)
     
  Can be produced with armor (Kevlar, Spectra, etc.) for ballistic or fragment situations
     
  Irreversibly dissipates energy from blast
     
  Eliminates need for dispensing of agents in blast mitigation process
     
  Neither contains nor creates hazardous fragments
     
  Environmentally friendly, non-toxic core materials

 

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.

 

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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. 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 March 18, 2008, our patent-pending application (No. 11/042,318) for our explosive effect mitigated containers (i.e. BlastGard MTR and MBR”) was issued as U.S. Patent No. 7,343,843.

 

BlastWrap® Testing

 

BlastWrap® prototypes have been evaluated in different test series, which have ranged from semi-quantitative screenings to third-party instrumented trials. We have consistently observed blast effect reductions of at least 50% in virtually every activity in which BlastWrap® has been involved. These tests have indicated that impulse (momentum transfer) and peak pressure are reduced by nearly 50%. Impulse is the most destructive explosive-related hazard for structures and vehicles. We have also conducted further development design and testing of a series of products for blast mitigation protection of rapid deployment barriers, walls, revetments and bunkers (including overhead protection from inbound mortars) for the United States military.

 

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. No further testing has been planned at this time. 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. In the 4th quarter of 2016, the designation and certification was extended for another five years to our BlastWrap product.

 

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.

 

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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.

 

Manufacturing and Product Line

 

We are currently manufacturing our core product, BlastWrap®, for sale in various forms. 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.

 

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”).

 

Since our Company’s acquisition of our subsidiary, HighCom Armor, we have devoted substantially all of our resources toward the development of HighCom Armor’s business. For fiscal 2017 and 2016, our BlastWrap® product sales totaled approximately $83,405 and $121,394 respectively.

 

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.

 

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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 2017 and 2016, we spent $0 and $940 respectively on research and development of BlastWrap® products.

 

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.highcomglobal.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 there can be no assurances that our operations will be profitable. Prior to 2014, we had been operating at a loss since inception and we have an accumulated deficit of approximately $9 million. At December 31, 2017, we have shareholder equity of approximately $9,584,078 as compared to shareholder equity of approximately $9,666,530 at December 31, 2016. Although we have operated at a profit for three of the last four years since 2014, we can provide no assurances that our future operations will be profitable. Accordingly, investors who own shares of our Common Stock could lose their entire investment.

 

Although we had a working capital surplus of approximately $2,000,000 at December 31, 2017, there can be no assurances that we will be able to meet our obligations as they become due and payable. At December 31, 2017, we had a working capital surplus of approximately $2,000,000. While Management is projecting increased sales in 2018 as compared to the comparable period of the prior year and the expectation is that we will be able to meet our obligations as they become due and payable, we can provide no assurances that we will be successful in this regard.

 

Controlling Interest. As set forth in Item 12, one corporation has beneficial control over common stock and warrants representing 58% of the Company. We cannot predict what changes will be instituted by our controlling stockholder in the Company’s management and/or directors and in the direction of the Company.

 

Business and Operational Risks

 

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

 

  We must comply with all laws and regulations surrounding U.S. export controls.
     
  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.
     
  We may incur additional costs or material shortages due to new NIJ certification and testing standards.
     
  If internal controls over financial reporting are ineffective, our business and future prospects may suffer.

 

HighCom Armor faces intense competition that could result in our losing or failing to gain market share and suffering reduced revenue.

 

HighCom Armor 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 Armor’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 Armor 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.

 

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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 personal body armor industry is highly competitive. Our 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. 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.

 

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 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 are primarily dependent upon the sales activities of HighCom Armor. Currently, the Company is devoting primarily all of its manpower and capital resources to the operations of HighCom Armor, which accounts for substantially all of our sales activities. If our parent corporation, HighCom Global, chooses to devote resources toward the development of sales in its traditional BlastWrap business, these sales activities may not be successful. We can provide no assurances that our operations will be able to operate profitably in the future.

 

Dependence on outside manufacturers and suppliers could disrupt our business if they fail to meet our expectations. Currently, we rely on outside manufacturers and suppliers for some 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. 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.

 

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.

 

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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 OTC-QB Venture® marketplace under the symbol “HCGS.” 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 HighCom Armor or its competitors;
     
  actual or anticipated variations in quarterly operating results;
     
  changes in financial estimates by securities analysts;
     
  changes in the market’s perception of us or the nature of our business; and
     
  sales of our common stock.

 

Future sales of common stock into the public market place will increase the public float and may adversely affect the market price. As of March 1, 2018, we had outstanding 377,154,748 shares of common stock, including an estimated 119,044,950 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.

 

 21 

 

 

The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“the Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Act is uncertain and our business and financial condition could be adversely affected. The impact of the Act on holders of our common stock is also uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.

 

Item 1.B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Description of Property

 

We do not own any real estate properties. The corporate location for HighCom Global and its subsidiaries HighCom Armor and BlastGard is Columbus, OH. HighCom Armor secured the lease for both the office and the manufacturing plant in Columbus, Ohio. In February 2011, HighCom Armor entered into a six-month lease agreement for approximately 11,200 square feet of office and warehouse space in Columbus, OH. In June 2012, HighCom Armor entered into a one-year lease agreement for approximately 16,200 square feet of office and warehouse space in Columbus, OH. In June 2013, HighCom Armor entered into a three-year lease agreement for approximately 24,160 square feet of office and warehouse space in Columbus, OH. Rental payment under the new lease was $6,967 per month through August 2016. In October 2015, HighCom Armor entered into a three-year lease agreement for approximately 32,155 square feet of office and warehouse space in Columbus, OH. Rental payment under the new lease was $9,863 per month on a month to month basis through June 2016 and is now $9,734 per month through October 2018. One satellite office is maintained in Colorado for additional sales support.

 

Rent expense for 2017 and 2016 was approximately $129,783 and $130,000, respectively.

 

Item 3. Legal Proceedings

 

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

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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 currently trades on the OTC-QB Venture® marketplace under the symbol “HCGS.” 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, 2016  $0.013   $0.006 
June 30, 2016  $0.015   $0.008 
September 30, 2016  $0.016   $0.004 
December 31, 2016  $0.011   $0.006 
           
March 31, 2017  $0.013   $0.013 
June 30, 2017  $0.024   $0.021 
September 30, 2017  $0.021   $0.020 
December 31, 2017  $0.022   $0.014 

 

 22 

 

 

The quotations reflect inter-dealer prices, without retail markup, markdown or commission.

 

Holders

 

As of March 13, 2018, there were approximately 280 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.

 

Sales of Unregistered Securities

 

From January 1, 2016 to December 31, 2017, we had no sales or issuances of unregistered common stock, except as follows:

 

In January 2016, the Company issued 30,000,000 shares of common stock as a conversion of debt in the amount of $300,000. Exemption from registration is claimed under Section 3(a)(9) of the Securities Act as an exchange of securities of the same issuer with no commissions being paid.

 

In December 2017, the Company issued 10,178,570 shares of common stock for the cashless exercise of options valued at $97,500; and options totaling 8,571,430 were canceled in payment thereof. Exemption from registration is claimed under Section 4(2) of the Securities Act of 1933, as amended. No commissions were paid in connection with the exercise of these options.

 

Item 6. Selected Financial Data

 

Not applicable.

 

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

 

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

 

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

 

 23 

 

 

Overview

 

Substantially all our sales are from the operations of our subsidiary, HighCom Armor. HighCom Armor 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 Armor caters to local law enforcement agencies, correctional facilities and municipal authorities. Given the equipment and ballistic protection solutions provided by HighCom Armor, 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 Armor 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.

 

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.

 

  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 share 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.

 

 24 

 

 

  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.

 

Results of Operations

 

Year Ended December 31, 2017 vs. 2016

 

For the year ended December 31, 2017, we achieved revenues of $6,217,072 as compared to $7,929,344 for the comparable period of the prior year, a decrease of $1,712,272. Our gross profit for fiscal 2017 was $2,164,940 as compared to $2,898,884 for the comparable period of the prior year, a decrease of $733,944. Management is anticipating increased sales and gross profits for 2018. We have a backlog or firm orders for the first quarter of approximately $500,000. Our gross profit percentage for 2017 and 2016 was approximately 36% for each year.

 

For the year ended December 31, 2017, our operating expenses were $2,839,397 as compared to $2,224,188 for the comparable period of the prior year, an increase of approximately $615,209. This increase is due to the decision by the Board to grow the company, the investment in soft armor (Topline) and additional management.

 

Our operating loss for the year ended December 31, 2017 was ($674,457) as compared to an operating income of $674,696 for the comparable period of the prior year. Our plant expansion in late 2015 resulted in additional personnel costs in 2017, along with an increase in our R&D costs, ISO certification and consultant fees.

 

For 2017, the Company had a gain from non-operating activities of $218,528 as compared a gain from non-operating activity of the comparable period of the prior year of $279,594. The differences between 2017 and 2016 relate to gains on the settlement of debt of $224,402 and $300,200 respectively, coupled with a decrease in interest expense from $20,606 for 2016 to $5,874 for 2017.

 

Our net loss for the year ended December 31, 2017 was ($2,119,139) as compared to a net income of $6,071,222 for the comparable period of the prior year. The primary reason for this substantial difference in net income is the reversal of a deferred income tax valuation allowance of approximately $5.1 million in 2016, and a remeasurement of the value of the deferred tax asset created by this reversal in the amount of approximately $1.8m in 2017. The reversal of this allowance in 2016 was a result of the Company’s evaluation of its continued profitability over the past three years, and the likelihood that the Company will be able to utilize its historical net operating losses in the future. The remeasurement of the deferred tax asset was a result of the Tax Cuts and Jobs Act of 2017, which reduced the corporate tax rate from 35% to 21%.

 

 25 

 

 

Liquidity and Capital Resources

 

At December 31, 2017, we had current assets of $3,004,238 as compared to current liabilities of $1,109,288, resulting in a working capital surplus of $1,894,950. During 2017, net cash provided by operating activities was $492,995. Our 2017 net loss of ($2,119,139) included an income tax provision of $1,662,882, and a gain on settlement of debt of $224,402. Amortization and depreciation expense was $103,031. During 2017, net cash used by financing activities was $211,752. During 2017, net cash used in investing activities was $25,703.

 

At December 31, 2017, the Company had a working capital surplus of $1,894,950. Management is anticipating increases in sales and gross profits for 2018. We have a backlog or firm orders for the first quarter of approximately $500,000. Management believes that cash flow from operations will enable the Company to meet its operating expenses as they become due and payable during 2018, although no assurances can be given in this regard. See “Risk Factors.”

 

During 2017, we benefited from financial resources being provided from operations rather than from additional borrowings. We anticipate that our 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 through equity and debt financing as needed. 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, 2017, 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, 2017, and 2016.

 

Off Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements.

 

Exercise of Warrants/Reduction of Debt

 

In January 2016, the Company issued 30,000,000 shares of common stock as a conversion of debt in the amount of $300,000. Exemption from registration is claimed under Section 3(a)(9) of the Securities Act as an exchange of securities of the same issuer with no commissions being paid.

 

In December 2017, the Company issued 10,178,570 shares of common stock for the cashless exercise of options valued at $97,500; and options totaling 8,571,430 were canceled in payment thereof. Exemption from registration is claimed under Section 4(2) of the Securities Act of 1933, as amended. No commissions were paid in connection with the exercise of these options.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

The information required by Item 7A is not required to be provided by issuers that satisfy the definition of “smaller reporting company” under SEC rules.

 

Item 8. Financial Statements

 

The information required by Item 8 and an index thereto commences on page 28, which pages follow this page.

 

 26 

 

 

INDEX

 

  Page
   
Reports of Independent Registered Public Accounting Firm 28
   
Consolidated Balance Sheets at December 31, 2017 and 2016 29
   
Consolidated Statements of Operations for the years ended December 31, 2017 and 2016 30
   
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017 and 2016 31
   
Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016 32
   
Notes to the Consolidated Financial Statements 33

 

 27 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and the Board of Directors of HighCom Global Security, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of HighCom Global Security, Inc. (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2017 and 2016, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the year ended December 31, 2017 and 2016, in conformity with U.S. generally accepted accounting principles.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Green & Company CPAs

 

Tampa, FL 33618

March 30, 2018

 

We have served as the Company’s auditor since 2015

 

13907 N Dale Mabry Hwy, Suite 102   Tampa, FL 33618   813.606.4388

 

 28 

 

 

HighCom Global Security, Inc.

Consolidated Balance Sheets

 

   December 31, 2017   December 31, 2016 
         
Assets          
Current assets          
Cash  $525,871   $270,331 
Accounts receivable, net   751,258    943,043 
Inventory   1,699,770    1,931,083 
Prepaid and other current assets   27,339    8,750 
Total current assets   3,004,238    3,153,237 
           
Property & equipment, net   152,441    189,002 
Deferred tax asset – net   3,475,805    5,138,687 
Intangible property, net   91,360    132,127 
Goodwill   2,061,649    2,061,649 
Deposits   10,254    10,254 
           
Total Assets  $8,795,747   $10,684,956 
           
Liabilities and Stockholders’ Equity          
Current liabilities          
Accounts payable  $940,395   $645,225 
Accrued expenses   164,235    119,582 
Customer deposits and deferred revenue   4,658    11,867 
Current portion notes payable – includes related parties   -    241,752 
Total current liabilities   1,109,288    1,018,426 
           
Contingent liability   -    - 
Total liabilities   1,109,288    1,018,426 
           
Stockholders’ Equity          
Preferred Stock, 1,000 shares authorized; $.001 par value; 0 and 0 issued and outstanding   -    - 
Common Stock, $.001 par value, 500,000,000 shares authorized; 377,154,748 and 366,976,178 shares issued and outstanding at December 31, 2017 and 2016   377,155    366,976 
Additional paid-in capital   18,349,683    18,221,122 
Minority interest   35,347    35,019 
Accumulated deficit   (11,075,726)   (8,956,587)
Total stockholders’ equity   7,686,459    9,666,530 
           
Total Liabilities and Stockholders’ Equity  $8,795,747   $10,684,956 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 29 

 

 

HighCom Global Security, Inc.

Consolidated Statements of Operations

 

   For the Years Ended 
   December 31, 
   2017   2016 
         
Revenues  $6,217,072   $7,929,344 
Direct costs   4,052,132    5,030,460 
Gross Profit   2,164,940    2,898,884 
           
Operating expenses:          
General and administrative   2,500,150    1,956,730 
Research and Development   97,476    52,586 
Stock based compensation   138,740    138,740 
Amortization and depreciation   103,031    76,132 
Total operating expenses   2,839,397    2,224,188 
           
Operating income (loss)   (674,457)   674,696 
           
Non-operating activity          
Gains on settlement of debt   224,402    300,200 
Interest expense   (5,874)   (20,606)
Total other income (expense)   218,528    279,594 
           
Income (loss) before minority interest and income taxes   (455,929)   954,290 
           
Minority interest loss   (328)   (21,755)
Income tax benefit (provision)   (1,662,882)   5,138,687 
Net income (loss)  $(2,119,139)  $6,071,222 
           
Earnings (loss) per share:          
Basic  $(0.01)  $0.017 
Dilutive  $(0.01)  $0.017 
           
Weighted average shares outstanding          
Basic   367,004,064    364,926,998 
Dilutive   367,004,064    364,926,998 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 30 

 

 

HighCom Global Security, Inc.

Consolidated Statements of Stockholders’ Equity

For the Years Ended December 31, 2017 and 2016

 

           Additional           Stock- 
   Common   Paid in   Minority   Accumulated   Holders’ 
   Shares   Par   Capital   Interest   Deficit   Equity 
                         
Balance at December 31, 2015   336,976,178   $336,976   $17,791,640   $13,264   $(15,027,809)  $3,114,071 
                               
Stock issued as satisfaction of debt   30,000,000    30,000    270,000              300,000 
                               
Options issued for services             138,740              138,740 
                               
Settlement of derivative liability             20,742              20,742 
                               
Net Income                  21,755    6,071,222    6,092,977 
                               
Balances at December 31, 2016   366,976,178   $366,976   $18,221,122   $35,019   $(8,956,587)  $9,666,530 
                               
Options issued for services             138,740              138,740 
                               
Exercise of options   10,178,570    10,179    (10,179)             - 
                               
Net Income (Loss)                  328    (2,119,139)   (2,118,811)
                               
Balances at December 31, 2017   377,154,748   $377,155   $18,349,683   $35,347   $(11,075,726)  $7,686,459 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 31 

 

 

HighCom Global Security, Inc.

Consolidated Statement of Cash Flows

 

   For the Year Ended 
   December 31, 
   2017   2016 
         
Cash Flows from Operating Activities:          
Net income (loss)  $(2,119,139)  $6,071,222 
Adjustment to reconcile Net Income to net cash provided by operations:          
Minority interest gain (loss)   328    21,755 
Income tax provision   1,662,882    - 
Reversal of deferred income tax valuation allowance   -    (5,138,687)
Depreciation and amortization   103,031    76,132 
Stock based compensation   138,740    138,740 
Inventory reserve   100,000    - 
Gain on settlement of debt   (224,402)   (300,200)
Changes in assets and liabilities:          
           
Accounts receivable   191,815    37,899 
Inventory   131,313    (724,861)
Other operating assets   -    11,250 
Prepaid expenses   (18,589)   - 
Accounts payable and accruals   534,225    184,162 
Customer deposits   (7,209)   (69,052)
Net Cash Provided by Operating Activities   492,995    308,360 
           
Cash Flows from Investing Activities:          
Purchase of property and equipment   (25,703)   (35,468)
Net Cash Used by Investing Activities   (25,703)   (35,468)
           
Cash Flows from Financing Activities:          
Proceeds from issuance of note payable   -    1,130,771 
Repayments of notes payable   (211,752)   (1,242,583)
Net Cash Used by Financing Activities   (211,752)   (111,812)
           
Net increase in Cash   255,540    161,080 
           
Cash at beginning of period   270,331    109,251 
Cash at end of period  $525,871   $270,331 
           
Supplemental cash flow information:          
Interest paid  $5,874   $20,606 
Taxes paid  $-   $- 

 

Supplemental Schedule of Noncash Investing and Financing Activities

 

January 2016, the Company issued 30,000,000 common shares in satisfaction of $300,000 of convertible debt

January 2016, the Company financed the acquisition of equipment through a promissory note in the amount of $42,307

December 2017, the Company issued 10,178,570 common shares upon the cashless exercise of 18,750,000 stock options.

December 2017, the Company determined to record a reserve against the value of inventory of $100,000.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 32 

 

 

HighCom Global Security, Inc.

Notes to Consolidated Financial Statements

 

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

 

Organization and Basis of Presentation

 

HighCom Global Security, Inc. (the “Company”) went public through a shell merger on January 31, 2004, in which the Company acquired BlastGard Technologies, Inc. On March 21, 2004, the Company changed its name to BlastGard International, Inc. On March 4, 2011, the Company completed the acquisition of HighCom Armor Solutions, Inc. and subsidiaries. On June 28, 2017, the Company changed its name to HighCom Global Security, Inc. These consolidated financial statements include the assets, liabilities and activities of the following:

 

BlastGard Technologies Inc., a 100% wholly-owned subsidiary of the Company, was a dormant Florida corporation from 2005 through June 2017 when the Company’s tangible and intangible assets relating to BlastWrap technology were transferred back into BlastGard Technologies, Inc. (“BlastGard” or “BTI”). BTI was incorporated on September 26, 2003 in the State of Florida, to design and market proprietary blast mitigation materials

 

HighCom Armor Solutions, Inc. (HighCom Armor) is a 98.2% owned subsidiary of the Company. Founded in 1997 and originally based in San Francisco, HighCom Armor Solutions, Inc., a California corporation, is a global provider of security equipment. HighCom Armor is a leader in advanced ballistic armor manufacturing. With a 32,865 square foot manufacturing and distribution facility located in Columbus, Ohio, HighCom Armor 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. HighCom Armor 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. HighCom Armor’s corporate office and manufacturing facility are located in Columbus, Ohio.

 

Business Segments

 

Although the Company accounts for its operations in two separate corporations, all of its business operations are associated with Security for individuals and property. HighCom Global Security, Inc. primarily provides for corporate administration. HighCom Armor sales represent in excess of 99% of total sales and BlastGard Technologies, Inc. has only incidental sales of an immaterial amount. Therefore, the Company has determined that all business operations should be aggregated together and not reported as separate operating segments.

 

Concentrations – Major Customers and Major Vendors

 

For the year ended December 31, 2017, approximately 47% of the Company’s revenue was provided by two customers, one representing approximately 31% and the other approximately 16%.

 

For the year ended December 31, 2017, approximately 82% of cost of sales was provided by five vendors, with the largest supplier representing approximately 31% of cost of sales. The next largest supplier provided approximately 20% of cost of sales, with the last three making up this customer group being at 11%, 10% and 10%.

 

Foreign Sales

 

For the year ended December 31, 2017, the Company generated sales from foreign customers in the amount of $381,670, representing approximately 6% of total sales. Sales to three customers in Canada represented approximately 4%, with the balance coming from a single customer in each of the United Arab Emirates, Colombia, Mexico and New Zealand.

 

Principles of Consolidation

 

These consolidated financial statements include the assets and liabilities of HighCom Global Security, Inc. and its subsidiaries as of December 31, 2017 and 2016.

 

All material intercompany transactions have been eliminated.

 

 33 

 

 

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.

 

Financial Instruments

 

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

 

Fair Value Measurement

 

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

 

Level 1: Quotes market prices in active markets for identical assets or liabilities.

 

Level 2: Observable market-based inputs or unobservable inputs that were corroborated by market data.

 

Level 3: Unobservable inputs that were not corroborated by market data.

 

Accounts Receivable

 

Accounts receivable consisted of amounts due from customers based in the United States and abroad. The Company considered accounts more than 30 days old to be past due. The Company used the direct write off method to recognize bad debts. When an account was deemed uncollectible, it was written off as a bad debt. The Company generally does not require collateral for its accounts receivable. Management deems all accounts receivable to be collectable at December 31, 2017.

 

Inventory

 

Inventory was stated at the lower of cost (first-in, first-out) or market. Market was generally considered to be net realizable value. Inventory consisted of materials used to manufacture the Company’s product and finished goods ready for sale.

 

Property and Equipment

 

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

 

 34 

 

 

Impairment of Long-Lived Assets

 

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

 

Debt Issue Costs

 

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

 

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.

 

Research and Development

 

Research and development costs were expensed as incurred. Research and development costs totaled $97,476 and $52,586 for the years ended December 31, 2017 and 2016 respectively.

 

Advertising

 

Advertising, marketing and promotion costs were expensed as incurred. Advertising costs of $97,622 and $64,742 were incurred during the years ended December 31, 2017 and 2016, respectively.

 

Shipping and Freight Costs

 

The Company includes shipping costs in cost of goods sold.

 

Income Taxes

 

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the consolidated financial statements and the tax basis of assets and liabilities by using estimated tax rates for the year in which the differences are expected to reverse.

 

The Company recognizes deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. If we determine that the Company would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

 

 35 

 

 

The Company reports uncertain tax positions in accordance with guidance provided by ASC-740-10, Accounting for Uncertainty in Income Taxes.

 

Stock-based Compensation

 

We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant, using assumptions for volatility, expected term, risk-free interest rate and dividend yield. We have used one grouping for the assumptions as our option grants were primarily basic with similar characteristics. The expected term of options granted has been derived based upon our history of actual exercise behavior and represents the period of time that options granted were expected to be outstanding. Historical data was also used to estimate option exercises and employee terminations. Estimated volatility was based upon our historical market price at consistent points in a period equal to the expected life of the options. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant and the dividend yield was based on the historical dividend yield. Compensation expense for stock-based compensation is recognized over the vesting period.

 

Income (Loss) per Common Share

 

Basic net 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, 2017, there were 35,500,000 vested common stock options outstanding, which were not included in the calculation of net income (loss) per share-diluted because they were anti-dilutive. In addition, at December 31, 2017 the Company had 41,801,793 remaining warrants outstanding issued in connection with convertible promissory notes and stock sales that were also not included because they were anti-dilutive.

 

Recent Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We believe that the impact of recently issued standards that are not yet effective may have an impact on our results of operations and financial position.

 

ASU Update 2014-09 Revenue from Contracts with Customers (Topic 606) issued May 28, 2014 by FASB and IASB converged guidance on recognizing revenue in contracts with customers on an effective date after December 31, 2017 will be evaluated as to impact and implemented accordingly.

 

ASU Update 2014-15 Presentation of Financial Statements-Going Concern (Sub Topic 205-40) issued August 27, 2014 by FASB defines managements responsibility to evaluate whether there is a substantial doubt about an organizations ability to continue as a going concern. The additional disclosure required is effective after December 31, 2016 and will continue to be evaluated as to impact and implemented accordingly.

 

In July 2015, the FASB issued ASU 2015-11, Inventory, which simplifies the measurement principle of inventories valued under the First-In, First-Out (“FIFO”) or weighted average methods from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-1 1 is effective for reporting periods beginning after December 15, 2016 including interim periods within those annual periods. We do not expect the standard to have a material impact on our Consolidated Financial Statements.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets and liabilities be classified as non-current on the consolidated balance sheet. ASU 2015-17 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an interim or annual reporting period. Upon adoption, ASU 2015-17 may be applied either prospectively or retrospectively. We do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.

 

 36 

 

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, to improve financial reporting about leasing transactions. This ASU will require organizations that lease assets (“lessees”) to recognize a lease liability and a right-of-use asset on its balance sheet for all leases with terms of more than twelve months. A lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset represents the lessee’s right to use, or control use of, a specified asset for the lease term. The amendments in this ASU simplify the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. This ASU leaves the accounting for the organizations that own the assets leased to the lessee (“lessor”) largely unchanged except for targeted improvements to align it with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.

 

The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the potential impact of ASU 2016-02 on its Consolidated Financial Statements.

 

(2) Inventory

 

Our inventory is made up of raw materials, work in progress and finished goods. Our inventory is maintained at our manufacturing facilities.

 

   December 31, 2017   December 31, 2016 
         
Raw materials  $805,029   $648,702 
Work in process   222,336    240,849 
Finished Goods   672,405    1,041,532 
           
TOTAL  $1,699,770   $1,931,083 

 

(3) Property and Equipment, Net

 

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed by applying principally the straight-line method to the estimated useful lives of the related assets. Useful lives range from 3 to 7 years for machinery, equipment, furniture and fixtures. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. When property or equipment is retired or otherwise disposed of, the net book value of the asset is removed from the Company’s balance sheet and the net gain or loss is included in the determination of operating income. Property and equipment acquired as part of a business acquisition are valued at fair value.

 

Property and equipment are comprised of the following at December 31, 2017 and December 31, 2016:

 

   December 31, 2017   December 31, 2016 
Equipment  $453,397   $429,417 
Furniture   106,525    104,802 
Moulds   45,060    45,060 
Test Range   110,802    110,802 
           
    715,784    690,081 
Less accumulated depreciation   (563,343)   (501,079)
           
Property and equipment, net  $152,441   $189,002 
           
Depreciation expense for the years ended December 31, 2017 and 2016  $62,264   $59,880 

 

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Depreciation expense for the next five years ended December 31,    
2018  $53,100 
2019   45,929 
2020   34,093 
2021   14,169 
2022   5,150 
      
   $152,441 

 

(4) Intangible Assets, Net

 

Intangible Assets are comprised of the following at December 31, 2017 and December 31, 2016:

 

   December 31, 2017   December 31, 2016 
Patents and Trademarks  $145,749   $161,278 
Websites   80,000    80,000 
Lists   500,000    500,000 
Research and Development   -    55,000 
           
    725,749    796,278 
Less accumulated amortization   (634,389)   (664,151)
           
Intangible assets, net  $91,360   $132,127 
           
Amortization expense for the years ended December 31, 2017 and 2016  $40,767   $16,252 

 

Amortization expense for the next five years ended December 31,    
2018  $9,716 
2019   9,716 
2020   9,716 
2021   9,716 
2022   9,716 
      
   $48,580 

 

(5) Notes Payable

 

Notes payable at December 31, 2017 and 2016 as detailed below, is summarized as follows:

 

   December 31, 2017   December 31, 2016 
         
Acquisition debt                -    30,000 
Note payable – equipment   -    11,752 
Note payable - individual   -    200,000
    -    241,752 
Less current maturities   -    (241,752)
   $-   $- 

 

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Acquisition Debt

 

On March 4, 2011, the Company issued a note payable in association with the purchase of HighCom Armor Solutions, Inc. and on March 31, 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, 2016 and 2015:

 

   December 31, 2017   December 31, 2016 
         
Acquisition note for the purchase of Acer product designs, original amount $30,000, no interest                 -    30,000 
           
    -    30,000 
Less: current maturities   -    (30,000)
   $-   $- 

 

Note payable - Equipment

 

The Company financed the acquisition of certain equipment through a promissory note. The note is payable in monthly installments of $2,350, is non-interest bearing, and has a maturity date of May 17, 2017. The note is secured by equipment. As of December 31, 2016, the balance of this note was $11,752. Interest has not been imputed on this balance as management has deemed it to be immaterial.

 

Notes payable – Individuals

 

On November 4, 2016, the Company issued a demand promissory note to an individual in the amount of $200,000 at a rate of 18% per annum. Principal and accrued interest are payable no sooner than 60 days and no later than 90 days from issuance. This note was paid in full on January 7, 2017.

 

Credit card payable – MasterCard

 

The Company utilizes an MasterCard credit card to facilitate short term cash flow demands.

 

Off Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements.

 

(6) Shareholders’ Equity

 

Preferred stock

 

The Company was authorized to issue 1,000 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. None of our shares of preferred stock are outstanding.

 

Common stock issuances

 

In January 2016, the Company issued 30,000,000 common shares in a debt conversion in the amount of $300,000.

 

 39 

 

 

In December 2017, the Company issued 10,178,570 common shares in a cashless exercise of 18,750,000 options.

 

377,154,748 shares were issued and outstanding at December 31, 2017.

 

Stock Compensation

 

The Company periodically offered options to purchase stock in the company to vendors and employees. There were 25,000,000 options granted during the 3rd quarter of 2015 to three key employees and 1,500,000 options granted during the 3rd quarter of 2015 to a board member for consultant services.

 

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. Options generally become fully vested after one year from the date of grant and expire five years from the date of grant. During the years ended December 31, 2013 and 2012 there were 0 and 0 options granted, respectively and 0 and 1,450,000 expired un-exercised, respectively. On March 25, 2014, the Board of Directors approved granting all four directors 500,000 shares exercisable at $.02 per share. The options are for 5 years and are fully-vested, non-statutory stock options. The options to purchase 500,000 shares of the Corporation’s Common Stock, effective March 25, 2014, at an exercise price of $0.01 per share were granted to the following persons: Michael J. Gordon, Paul W. Henry, Solomon Mayer and Keith Brill. The options to purchase 750,000 shares of the Corporation’s Common Stock, effective March 10, 2015, at an exercise price of $0.01 per share were granted to the following persons: Michael J. Gordon, Paul W. Henry, Solomon Mayer and Keith Brill.

 

There were no net cash proceeds from the exercise of stock options during the year ended December 31, 2017. At December 31, 2017, there was approximately $46,000 of unrecognized compensation cost related to share-based payments which is expected to be recognized in the future

 

The following table represents stock option activity as of and for the twelve months ended December 31, 2017:

 

   Number of Shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life   Aggregate Intrinsic Value 
Options Outstanding - January 1, 2017   60,500,000   $0.01    8.9 years                  - 
Granted   -   $0.01    5.0 years    - 
Exercised   (18,750,000)   -           
Forfeited/expired/cancelled   (2,500,000)               
Options Outstanding – December 31, 2017   39,250,000   $0.01    6.3 years   $- 
Outstanding Exercisable – January 1, 2017   46,125,000   $0.02    7.9 years   $- 
Outstanding Exercisable – December 31, 2017   35,500,000   $0.01    6.4 years   $- 

 

The total grant date fair value of options vested during the twelve months ended December 31, 2017 and 2016 was $138,740 and $138,740 respectively.

 

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The following table represents stock warrant activity as of and for the twelve months ended December 31, 2017:

 

   Number
of Shares
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual Life
   Aggregate
Intrinsic
Value
 
Warrants Outstanding - January 1, 2017   41,801,793   $0.009    3.9 years   $                - 
Granted   -                
Exercised   -    -           
Forfeited/expired/cancelled   -                
Warrants Outstanding – December 31, 2017   41,801,793   $0.009    3.9 years   $- 
Outstanding Exercisable – January 1, 2017   41,801,793   $0.009    3.9 years   $- 
Outstanding Exercisable – December 31, 2017   41,801,793   $0.009    3.9 years   $- 

 

(7) Income Taxes

 

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the consolidated financial statements and the tax basis of assets and liabilities by using estimated tax rates for the year in which the differences are expected to reverse.

 

The Company recognizes deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. If we determine that the Company would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

 

In assessing the realizability of its deferred tax assets, management evaluated whether it is more likely than not that some portion, or all of its deferred tax assets, will be realized. The realization of its deferred tax assets relates directly to the Company’s ability to generate taxable income. The valuation allowance is then adjusted accordingly.

 

As of December 31, 2016, based on all the available evidence, management determined that it is more likely than not its deferred tax assets will be fully realized. Accordingly, the valuation allowance was reversed in full and $5,138,687 was recognized as a deferred tax asset at December 31, 2016 with a corresponding income tax benefit also being recognized for the year ended December 31, 2016. During the year ended December 31, 2017, the Company incurred a net loss, which created an increase in its deferred tax asset with a corresponding income tax benefit in the amount of $171,689.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“the Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. We have calculated our best estimate of the impact of the Act in our year end income tax provision in accordance with our understanding of the Act and guidance available as of the date of this filing and as a result have recorded $1,834,571 as additional income tax provision in the fourth quarter of 2017, the period in which the legislation was enacted. The amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was a provision of $1,834,571.

 

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

 

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In connection with our initial analysis of the impact of the Tax Act, we have recorded a provisional income tax provision of $1,834,571 for the revaluation of our net deferred tax asset.

 

The income tax benefit (provision) consists of the following for the years ending December 31, 2017 and 2016:

 

   December 31, 2017   December 31, 2016 
         
Current          
Federal  $159,786   $(296,566)
State   17,060    (31,663)
    176,846    (328,229)
           
Deferred - continuing operations          
Federal   (4,659)   (20,496)
State   (498)   (2,188)
    171,689    (350,913)
Tax Cuts and Jobs Act of 2017 effect   (1,834,571)   - 
Valuation allowance   -    5,489,600 
           
Income tax benefit (provision)  $(1,662,882)  $5,138,687 

 

As of December 31, 2017, the Company had net operating loss carry forwards of approximately $13,500,000. The federal net operating loss carry forwards will not expire as a result of the Act legislation, and state net operating loss carry forwards that will expire in 2026 through 2037.

 

The components of deferred tax assets and liabilities as of December 31, 2017, and 2016 is as follows:

 

   December 31, 2017   December 31, 2016 
         
Deferred tax assets:          
NOL and contribution carry forwards  $3,340,868   $4,927,373 
Meals and entertainment   870    1,329 
Share based compensation   474,588    672,873 
           
Total deferred tax assets   3,816,326    5,601,575 
           
Deferred tax liabilities:          
Property and equipment   (106,369)   (156,868)
Goodwill   (234,152)   (306,020)
           
Total deferred tax liabilities   (340,521)   (462,888)
           
Deferred tax asset - net before valuation allowance   3,475,805    5,138,687 
Less valuation allowance   -    - 
           
Deferred tax asset - net  $3,475,805   $5,138,687 

 

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A reconciliation of the federal and state statutory income tax rates to the Company’s effective income tax rate applicable to income before income tax benefit from continuing operations is as follows for the years ended December 31, 2017 and 2016:

 

   December 31, 2017   December 31, 2016 
         
Continuing operations          
Federal income tax at US statutory rate   (34.00)%   34.00%
State income tax net of federal benefit   (3.63)%   3.63%
Other items effecting timing differences   1.17%   2.43%
Tax cut and jobs act of 2017 effect   400.93%   0.00%
Valuation allowance   0.00%   (591.11)%
           
Effective income tax rate   364.47%   (551.05)%

 

The Company files income tax returns on a consolidated basis in the United States federal jurisdiction and the State of Florida. As of December 31, 2017, the tax returns for the Company for the years ending 2013 through 2016 remain open to examination by the Internal Revenue Service and Florida Department of Revenue. The Company and its subsidiaries are not currently under examination for any period.

 

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.

 

(8) 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, 2017, the Company had no funds in excess of the FDIC insurance limits.

 

(9) 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.

 

Office Lease

 

We do not own any real estate properties. The corporate location for both HighCom Global and HighCom Armor is Columbus, OH. HighCom Armor secured the lease for both the office and the manufacturing plant in Columbus, Ohio. In February 2011, HighCom Armor entered into a six-month lease agreement for approximately 11,200 square feet of office and warehouse space in Columbus, OH. In June 2012, HighCom Armor entered into a one-year lease agreement for approximately 16,200 square feet of office and warehouse space in Columbus, OH. In June 2013, HighCom Armor entered into a three-year lease agreement for approximately 24,160 square feet of office and warehouse space in Columbus, OH. Rental payment under the new lease was $6,967 per month through August 2016. In October 2015, HighCom Armor entered into a three-year lease agreement for approximately 32,155 square feet of office and warehouse space in Columbus, OH. Rental payment under the new lease was $9,863 per month on a month to month basis through June 2016 and is now $9,734 per month through October 2018. Two satellite offices are maintained in Florida and Colorado for additional sales support.

 

Rent expense for 2017 and 2016 was approximately $129,783 and $130,000, respectively.

 

Prior Litigation Matter

 

Verde Partners Family Limited Partnership

 

On April 2, 2009, the Company entered into a Settlement Agreement to settle outstanding civil litigation. The civil action was pending in the Federal Court in Tampa, Florida. The Company has received an opinion of Florida counsel that any and all sums which may have been due and payable under this Settlement Agreement including principal and interest are now “time barred” under applicable statutes of limitation. The opinion of counsel based upon the foregoing is that the debt can be removed from the financial statements. Consequentially, the Company has recognized in other income, a gain on settlement of debt in the amount $122,077.

 

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(10) Material Agreements and Transactions

 

On November 11, 2013, the Board of Directors approved the following transactions: (i) the issuance of 2,000,000 shares to corporate counsel; and pursuant to his position as chairman of the Company’s advisory board an option to purchase 2,000,000 shares of Common Stock which vested on January 1, 2014 and an option to purchase 2,000,000 shares which will vest on January 1, 2015, exercisable at $.009 per share so long as Mr. Keifner is still serving as chairman of the Company’s advisory board on the vesting date. In his capacity, Mr. Kiefner will serve as a lasison between the Company and its principal shareholder, to attend meetings of the Company’s board of directors, to meet with the Company’s officers on a regular basis and provide corporate counsel; (ii) lowering the conversion price from $.05 per share to $.01 per share of certain notes described in Note 5 in the Notes to Financial Statements; and (iii) granting options to purchase an aggregate of 25,000,000 shares of Common Stock to Michael J. Gordon, Michael L. Bundy and Chad Wright with options exercisable at $.01 per share from the vesting date through the expiration date of said options. These options have cliff vesting where they are exercisable over a period of time, but they can become immediately vested in the event certain revenue goals are achieved. In the event the Company achieves $10 million in sales in a calendar year, 25% of the total options will automatically vest. An additional 25% will vest when the Company achieves $20 million in sales in a calendar year and 50% of the total options granted will automatically vest when the Company achieves $30 million in sales in a calendar year.

 

On November 14, 2016, the Company entered into a Consulting Agreement with Resilience Capital Inc. (“Resilience”) for Resilience to provide strategic advice as to the business of BlastGard and its subsidiary. Services will include:

 

  a) Assist in the evaluation of the Company’s businesses and prospects;
     
  b) Review and critique of the Company’s long-term business plan;
     
  c) Evaluate the Company’s debt capacity and alternative capital structures;
     
  d) Assisting the Company in the preparation of cash requirements, cash forecasts and financial projections;
     
  e) Assessing and analyzing potential acquisitions of, or mergers with, other entities or all or portions of their businesses;
     
  f) Providing advice on the formulation and, if requested, execution of the overall strategy and alternatives for the various potential sale opportunities;
     
  g) Advise on marketing and sales strategies, include a review and assessment of the effectiveness of the Company’s distribution arrangements;
     
  h) Assessing the Company’s product mix and recommending changes;
     
  i) Assisting in negotiations with lenders, key customers, suppliers and distributors, and strategic partners;
     
  j) Evaluate the Company’s manufacturing and distribution operations; and
     
  k) Such other duties and responsibilities, both financial and operational, assigned to it by the Company’s board of directors and accepted by the Consultant from time to time.

 

Resilience has agreed to provide the services of Craig Campbell, a former director of the Company, to serve as the engagement manager and, in such capacity, supervise the services provided to the Company. Mr. Campbell is the President and principal owner of Resilience.

 

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Pursuant to the Agreement, the Company will pay Resilience an annual fee of $250,000, payable in equal monthly installments. The term of the Agreement is one year and shall automatically renew for successive one-year period until either party provides at least 60 days’ prior written notice of termination to the other party. In the event the agreement is terminated prior to the first anniversary date, the Company will be obligated to pay Resilience two monthly installments of its advisory fee.

 

On January 16, 2018, the Company and Resilience agreed to terminate the Consulting Agreement.

 

(11) Gain on settlement of debt

 

During the quarter ended March 31, 2016, the Company negotiated the settlement of an account payable to a single vendor for invoices from 2010 that were on the books of HighCom Armor when acquired in March 2011. The vendor conceded the full amount as settled, resulting in a gain on settlement of debt in the amount of $300,200.

 

The Company has recorded in other income, a gain on settlement of debt for the nine months ended September 30, 2017 in the amount of $102,325. This amount includes $30,000 recorded as Acquisition Note Payable from a transaction originating in 2010, $67,593 recorded in Accounts Payable from a transaction originating in 2011, and $4,732 representing a 50% negotiated settlement of an amount included in Accounts Payable. The Company evaluated the two transactions from 2010 and 2011 pursuant to the Florida Statute of Limitations applicable to the circumstances of each and has concluded that these amounts are time-barred in Florida and should be taken into income.

 

The Company has recorded in other income, a gain on settlement of debt for the twelve months ended December 31, 2017 in the amount of $122,077. This amount includes $20,157 in accrued interest recorded as Prior Litigation Matter from a transaction originating in 2009. The Company evaluated the transaction from 2011 pursuant to the Florida Statute of Limitations applicable to the circumstances and has concluded that this amount is time-barred in Florida and should be taken into income.

 

(12) Change in Directors and Management

 

On June 28, 2017, an Annual Meeting of Shareholders was held as described under Item 5.07 of the Form 8-K and in a definitive Proxy Statement which was filed with the Securities and Exchange Commission. Paul Sparkes was re-elected to the Board of Directors and continues to serve as Chairman of the Board. Craig Campbell, Curt Cronin, Andrew Blott and Bill Buckley were also elected to the Board as anticipated by the Proxy Statement.

 

On June 29, 2017, the Board of Directors elected Craig Campbell as Chief Executive Officer, Francis Michaud as Chief Financial Officer, and Greg Sullivan as Chief Commercial Officer. Their biographical information is set forth in the definitive Proxy Statement filed with the Securities and Exchange Commission on May 31, 2017 and incorporated by reference herein. The Proxy Statement also describes the compensation that is paid to an affiliate of Mr. Campbell, namely, Resilience Capital, Inc. Resilience was to receive an annual fee of $250,000 payable in equal monthly installments. The agreement was terminated on January 16, 2018. The other executive officers named abovewere compensated by Resilience as well

 

On December 29, 2017, the Company announced that Michael J. Gordon, formerly a director and Chief Executive Officer of the Company and currently the Chief Executive Officer of the Company’s subsidiaries, namely HighCom Armor Solutions, Inc. and BlastGard Technologies, Inc. retired effective December 31, 2017. Michael Bundy, who is currently acting as the President and Chief Operating Officer of HighCom Armor has become the interim Chief Executive Officer. Also, Greg Sullivan, Chief Commercial Officer of the Company, resigned earlier in the month from his position with HighCom Global.

 

On January 16, 2018, the Company announced that Craig Campbell, an executive officer and director of the Company, submitted his resignation to the board effective Tuesday, January 16, 2018. Francis Michaud, who is presently serving as Chief Financial Officer of the Company, was elected to the board of directors to fill the vacancy left by Mr. Campbell and he was appointed to serve as Chief Executive Officer.

 

On March 27, 2018, Bill Buckley, Chair of the Audit Committee and a Director of the Company, submitted his resignation effective the same day.

 

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(13) 2017 Annual Meeting

 

The Annual Meeting of Shareholders held on June 28, 2017 also approved of the following amendments: 1) to file an amendment to the Company’s Articles of lncorporation to change the name of the corporation from BlastGard International, Inc. to HighCom Global Security, Inc.”; 2) approval to grant the Board of Directors discretionary authority to amend the Company’s Articles of lncorporation (the “RS Amendment”) to effectuate a Reverse Stock split of the Company’s Common Stock, $.001 par value, by a ratio of no more than one-for-100 with such ratio to be determined by the sole discretion of the Board (the “Reverse Split”), with a decrease in the number of authorized shares of Common Stock to l00,000,000 and with such Reverse split and change in authorized number of common shares to be effective at such time and date, if at all, as determined by the Board in its sole discretion (the “Reverse Split Proposal”); 3) to file an Amendment to the Articles of Incorporation to permit the Company to hold meetings by action without a meeting in accordance with Section 7-107-104 (1)(b) of Title 7 of the Colorado Revised Statutes in order to permit the shareholders holding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all of the shares entitled to vote thereon were present and voted consent to such action in writing; 4) approval to transfer all the Company’s tangible and intangible assets, which exclude any HighCom assets, from HighCom Global Security, Inc. to its wholly-owned Florida subsidiary, BlastGard Technologies, Inc.; 5) approval to file an amendment to its Articles of Incorporation in the State of California to change HighCom Security, Inc’s name to “HighCom Armor Solutions, Inc.”; and 6) approval to ratify, adopt and approve a 2017 Employee Benefit and Consulting Services Compensation Plan covering a maximum of up to 10,000,000 post-split shares of Common Stock, which Plan will not be established until the discretionary stock split is approved by the Board.

 

(14) Subsequent Events

 

The Company has evaluated all subsequent events through the filing date of this form 10-K for appropriate accounting and disclosures, and there are no subsequent event disclosures required.

 

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

 

Not applicable

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

In connection with the preparation of this annual report, an evaluation was carried out by the Registrant’s management, with the participation of the principal executive officer and the principal financial officer, of the effectiveness of the Registrant’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of December 31, 2017. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

 

Based on that evaluation, the Registrant’s management concluded, as of the end of the period covered by this report, that the Registrant’s disclosure controls and procedures were ineffective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the Commission’s rules and forms, and that such information was not accumulated and communicated to management, including the principal executive officer and the principal financial officer, to allow timely decisions regarding required disclosures. The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: inadequate segregation of duties consistent with control objectives and management is dominated by a single individual/small group without adequate compensating controls.

 

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Management’s Report on Internal Control over Financial Reporting

 

Management believes that the material weaknesses set forth above did not have an effect on our financial results. The management of the Registrant is responsible for establishing and maintaining adequate internal control over financial reporting. The Registrant’s internal control over financial reporting is a process, under the supervision of the principal executive officer and the principal financial officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Registrant’s financial statements for external purposes in accordance with United States generally accepted accounting principles (GAAP). Internal control over financial reporting includes those policies and procedures that:

 

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

 

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

 

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

 

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

 

The Registrant’s management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was ineffective as of December 31, 2017.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the fourth quarter of the fiscal year ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

On March 27, 2018, Bill Buckley, Chair of the Audit Committee and a Director of the Company, submitted his resignation effective the same day.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

The Company has a Board of Directors which is currently comprised of five members. Each director holds office until the next annual meeting of shareholders or until a successor is elected or appointed. The members of our Board of Directors and our executive officers and their respective age and position are as follows:

 

Name   Age   Position with Registrant  

Director or Officer

of

Registrant Since

             
Michael L. Bundy   38   CEO & President of HighCom Armor   March 2011
Chad Aaron Wright   36   VP Operations of HighCom Armor   September 2015
Francis Michaud   41   CEO & CFO of HighCom Global / Director   June 2017
Paul Sparkes (1) (2)   54   Chairman of the Board   August 2015
Bill Buckley (2) (3)   69   Director   June 2017
Andrew Blott (2)   45   Director   June 2017
Curt Cronin (2)   41   Director   June 2017

 

  (1) Mr. Sparkes is not an executive officer of the Company.
     
  (2) Independent Director
     
  (3) Bill Buckley resigned his position as a member of the board of Directors and Chair of the Audit Committee on March 27, 2018.

 

Biographies of Executive Officers

 

Michael L. Bundy – In March 2011, Michael L. Bundy was retained as the Chief Operating Officer for HighCom Global and is currently interim CEO and President of HighCom Armor. Mr. Bundy has served as both a Director of Operations and Vice President for HighCom Armor in San Francisco from January 2006 through October 2010, where he was responsible for the daily management of operations and logistics. Mr. Bundy has been tasked with overseeing the operational and compliance processes for the combined companies. From March 2000 through January 2005, Mr. Bundy was the President and Managing Member of Castle Logistics, LLC. Castle provided full service transportation intermediary and freight brokerage services for both small and large businesses. Through Castle, Mr. Bundy played a strategic role in helping to develop and implement supply chain management processes and policies to help support the delivery of both raw/finished goods for a number of large publicly traded companies such as; Wal-Mart, Home Depot, Target, K-Mart, Lowes, Sears, Coors Brewing, Pepsi Bottling Group, and several others. Mr. Bundy is currently in the process of earning his BS in Business Management and looks forward to completing his MBA in Organizational leadership, both through Colorado State University. Mr. Bundy also holds several unique and critical certifications with regards to his new position with our company, these include; “TIA Certified Transportation Broker”, “Certified RABQSA Quality Lead Auditor”, and most importantly, he has been recognized by the International Import Export Institute as a “Certified U.S. Export Compliance Officer as 2010”.

 

Chad Aaron Wright - On September 1, 2015, the Board of Directors elected Chad Wright as Vice President of Operations - Manufacturing and Distribution. Mr. Wright oversees our manufacturing and distribution operations in Columbus Ohio as well as our research and development programs. Mr. Wright has earned a tremendous reputation in the industry over the past decade working for some of the most successful armor experts and companies in business today. From 2002 to 2008, Mr. Wright worked for Composix Company located in Newark OH, producing specialized vehicle parts and fuel tanks for military equipment. In 2004, Mr. Wright became the General Production Manager, overseeing day to day operations in production areas, in addition to setting up internal QMS, inventory, ISO implementation, shipping & receiving, logistics of freight and machinery, inventory management, etc. as well as overseeing all testing and evaluation of contracted equipment at off-site testing facilities. Mr. Wright’s R&D team designed, developed, and tested multiple armor applications for vehicle, body armor and various other armor applications. In 2008 and 2009, Mr. Wright worked for Tencate Advanced Armor. As their ballistics lab manager, Mr. Wright’s duties were working with the QC, testing various lot samples from in house production of ballistic fabrics, in addition to R&D projects to develop armor systems and test plans. In 2009, Mr. Wright joined HighCom Armor Armor, where Mr. Wright performed similar R&D and Ballistic Lab duties. Mr. Wright specifically helped establish an R&D area to effectively carry out corporate tasks that would comply to the ISO 9001 standards. In 2011, Mr. Wright took over as General Plant/Production Manager where he established HighCom Armor’s Columbus Production Facility and is currently Vice President of Manufacturing. Mr. Wright oversees all operations within the Columbus facility, including but not limited to: production, shipping & receiving, order fulfilment, R&D, ballistic lab, quality control, employees, purchasing, NIJ documentation, third party lab testing, FIT Audits, ballistic data reports, compliant model build sheets, cost control on materials and facility, effective lean production methods, and maintaining our ISO/BA9000 certification as a manufacturer of high quality, cost effective protective armor that meets and exceeds industry standards.

 

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Francis Michaud – In June 2017, Francis Michaud was retained as CFO of HighCom Global. In January 2018, Francis Michaud assumed the role of CEO as well and was appointed to fill a vacancy on the board of directors. Mr. Michaud is a bilingual finance executive with proven track record of achievements in demanding environments and financially challenging times. Mr. Michaud demonstrated continuous success in delivering results, building high impact teams, building strategic alliances with cross-functional leaders, and streamlining/standardizing processes to enhance productivity and profitability. Mr. Michaud began his career in public accounting with Deloitte and Touche LLP in performing audit, compliance, and special engagements in a wide variety of industries, including: Real Estate, Financial Institutions, Healthcare, Service Industry, Manufacturing, Retail, Education, IT, Automotive, Non-For-Profit. Subsequently, Mr. Michaud transitioned to positions in the regulatory environment of investment and mutual fund dealers. His prior experience also includes a number of senior roles in finance at Home Depot Canada including rebuilding and managing the Internal Audit Department, managing the Financial Planning and Analysis Department before joining the Merchandising Finance Team. Most recently CFO and VP of Corporate Administration at Total Security Management and CFO of Resilience Capital. Mr. Michaud holds the designation of Charter Public Accountant / Certified General Accountant and a B.Comm (honors) degree from Queens University School of Business.

 

Paul Sparkes - In August 2015, Paul Sparkes was appointed to fill a vacancy on the board of directors and agreed to serve as the Company’s non-executive chairman of the board of directors. Mr. Paul Sparkes is an accomplished Canadian business leader with over twenty years’ experience in media, finance, capital markets and Canada’s political arena, which diversified experience particularly qualifies him for service on the Company’s board. Most recently Sparkes was Executive Vice Chair, Director and co-founder of Difference Capital Financial, a TSX-listed specialty finance company that invests in media, technology, health care and U.S. real estate. He is currently a corporate director, advisor and deal maker for growth companies in the media, technology and entertainment sectors. Previously, Sparkes was Executive Vice President, Corporate Affairs for CTVglobemedia (now Bellmedia), where he had oversight for corporate matters including strategy, regulatory, public and government affairs, communications, corporate social responsibility, as well as all sponsorship for CTVglobemedia Inc., and its divisions, including 27 conventional TV stations, 29 specialty and pay TV channels, 34 radio stations, The Globe and Mail, and Canada’s Olympic Broadcast Media Consortium. Over the course of his decade long tenure at CTVglobemedia, Sparkes led the development and implementation of successful public affairs strategies and major campaigns in support of corporate, board and regulatory priorities over transitions including changes in shareholders, ownership structure as well as corporate acquisitions and divestitures.

 

Mr. Sparkes served as the chief spokesperson for the company appearing before federal parliamentary committees, hearings before the Canadian Radio-Television and Telecommunications Commission, press conferences and media interviews with national and international television, radio and print outlets including CTV, CBC, The Globe and Mail, National Post, The New York Times, Marketing Magazine and Variety. He was successful in promoting the most trusted and most recognized media brands in Canada, including CTV News. While administering large budgets and managing diverse creative teams of people, Sparkes led the successful initiative to secure retransmission consent rights for private broadcasters, a regulatory change that generated significant returns for shareholders and changed the media industry landscape in Canada. He has been recognized as among the 100 Top Lobbyists in Canada.

 

Prior to joining Bell Globemedia in 2001 as Group Vice-President, Public Affairs, Mr. Sparkes held senior positions in the public service, including with the Government of Canada and the Government of Newfoundland and Labrador. From 1996 to 2001, he served in the Office of the Prime Minister as Director of Operations, and Special Assistant for Atlantic Canada. Mr. Sparkes also served as Executive Assistant to two Premiers of Newfoundland and Labrador.

 

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Mr. Sparkes sits on several public and private boards, including Thunderbird Films and Bluedrop Performance Learning Inc., Sparkes is the Chair of the Board and Founding Member of the Smiling Land Foundation. As a past member of the OneXOne board, Mr. Sparkes led the implementation of the First Nations School Breakfast Program providing healthy food for Aboriginal children in remote communities. He also served eight years on the board of the Animal Planet Digital Channel and four years as President of the CHUM Charitable Foundation and is a past board member of the Canadian Venture Capital & Private Equity Association and the National Arts Center Foundation. Educated in Quebec and Newfoundland, Sparkes holds a Bachelor of Arts in Political Science from Memorial University.

 

Bill Buckley - In June 2017, Bill Buckley was elected at the annual shareholder meeting to fill a vacancy on the board of directors. Mr. Buckley served as the Chief Executive Officer of ShawCor Ltd. from June 30, 2005 to May 1, 2014. He served as the President of ShawCor Ltd. from June 30, 2005 to September 3, 2013. He served as an Executive Vice President of Shawcor Ltd., from 1996 to July 1, 2005 and its Chief Operating Officer from December 2000 to July 1, 2005. He served as the President of Bredero Shaw Division of Shawcor Ltd. from August 2004 to April 2005. Mr. Buckley joined ShawCor in 1994 following 23 years with a leading international electrical/electronics components manufacturer, including five years as President of the Canadian and Australian operations. He has an excellent record of growth and expansion of ShawCor’s non-pipe coating operations. He served as the Chairman of Electro-Federation Canada. He serves as a Member of the Supervisory Board at Sercel Holding S.A. He served as a Director of ShawCor Ltd. since August 4, 2005 until May 12, 2015. Mr. Buckley served as a Director of Hammond Power Solutions Inc. He has an ICD.D certification. Mr. Buckley holds a degree in Mechanical Engineering from the University of Toronto and an MBA from York University and has completed the AMP program at the Harvard Business School.

 

Andrew Blott - In June 2017, Andrew Blott was elected at the annual shareholder meeting to fill a vacancy on the board. Mr. Blott founded Quantum Capital in 2004 and led the firm’s investment in Apache Industrial Services, Don Best Sports, Skyway Canada Limited and RailCrew Express. Prior to founding Quantum, Mr. Blott was financial advisor to Borealis Capital to value, structure and underwrite Canada’s first and second “Public-to-Private-Partnership (P3)” healthcare initiatives. Previously, Mr. Blott spent ten years on Wall Street originating and structuring Leverage Buyouts, Mergers & Acquisitions and Leverage Finance transactions at firms including Credit Suisse First Boston, Salomon Smith Barney, Banc of America Securities and CIBC World Markets. Mr. Blott has completed over 30 leveraged buyouts and follow-on financings, merger, acquisitions and divestitures. His transaction experience also involved negotiating with well-known large-cap companies, such as, Phillip Morris, Nabisco and United Parcel Service to effect leverage buyouts. Mr. Blott is a Director of Apache Industrial Services, a leading provider of multi-craft industrial services to the North American process and industrial infrastructure markets; Skyway Canada Limited, an industry leading Canadian scaffolding services provider; SIR Corp, a leading Canadian casual dining restaurant chain with multiple brands including Jack Astor’s; Lone Star Texas Grill, a Texas themed Canadian restaurant chain; and RailCrew Xpress, an industry leading provider of logistics services to the US Class One railways. Mr. Blott holds officer positions and is Chairman of the Audit Committees of Apache Industrial Services, Skyway Canada, RailCrew Xpress and Lone Star Texas Grill. Mr. Blott also serves on the Real Estate Committee, Compensation Committee and Audit Committees of SIR Corp. He has been a member of the Maple Leaf Chapter of Young Presidents Organization since 2008.

 

Curt Cronin - In June 2017, Curt Cronin was elected at the annual shareholder meeting to fill a vacancy on the board of directors. Mr. Cronin is an expert on Leading High-Performance Teams, Former Navy SEAL. Over his 16-year-long career as a Navy SEAL, Curt Cronin deployed thirteen times and spent more than four years overseas. In that time, living and working in an environment where milliseconds made the difference between life and death and winning and losing, he honed his talent as a catalyst for transformation and rose to eventually lead the nation’s premier SEAL assault force. As a SEAL leader, he maximized his team’s effectiveness by forging unique and unlikely alliances. He transformed an offensive unit of Navy SEALs into a defensive Presidential protection unit in the midst of combat and single-handedly created the model for multi-disciplinary counter-terrorism operations out of a widely disparate patchwork of organizations as part of an Embassy team in the Middle East. Curt’s experiences as a SEAL reinforced his fundamental belief that the competitive edge for any organization in the information age is neither technology nor information, but the unparalleled power of an aligned team.

 

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Corporate Governance

 

Our business, property and affairs are managed by, or under the direction of, our Board, in accordance with the General Corporation Law of the State of Colorado and our By-Laws. Members of the Board are kept informed of our business through discussions with the Chief Executive Officer and other key members of management, by reviewing materials provided to them by management.

 

We continue to review our corporate governance policies and practices by comparing our policies and practices with those suggested by various groups or authorities active in evaluating or setting best practices for corporate governance of public companies. Based on this review, we have adopted, and will continue to adopt, changes that the Board believes are the appropriate corporate governance policies and practices for our Company. We have adopted changes and will continue to adopt changes, as appropriate, to comply with the Sarbanes-Oxley Act of 2002 and subsequent rule changes made by the SEC and any applicable securities exchange.

 

Director Qualifications and Diversity

 

The board seeks independent directors who represent a diversity of backgrounds and experiences that will enhance the quality of the board’s deliberations and decisions. Candidates shall have substantial experience with one or more publicly traded companies or shall have achieved a high level of distinction in their chosen fields. The board is particularly interested in maintaining a mix that includes individuals who are active or retired executive officers and senior executives, particularly those with experience in the defense, sales and marketing and capital market industries.

 

In evaluating nominations to the Board of Directors, our Board also looks for certain personal attributes, such as integrity, ability and willingness to apply sound and independent business judgment, comprehensive understanding of a director’s role in corporate governance, availability for meetings and consultation on Company matters, and the willingness to assume and carry out fiduciary responsibilities. Qualified candidates for membership on the Board will be considered without regard to race, color, religion, sex, ancestry, national origin or disability.

 

Risk Oversight

 

Enterprise risks are identified and prioritized by management and each prioritized risk is assigned to a board committee or the full board for oversight as follows:

 

  Full Board - Risks and exposures associated with corporate governance, and management and director succession planning, strategic, financial and execution risks and other current matters that may present material risk to our operations, plans, prospects or reputation.