The information required
by Item 8 and an index thereto commences on page 29, which pages follow this page.
September 2015, the Company issued 3,000,000
common shares in satisfaction of $30,000 of convertible debt.
November 2015, the Company issued 5,570,321
common shares in satisfaction of $55,953 of convertible debt
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
Notes
to Consolidated Financial Statements
(1) Organization, Basis of Presentation,
and Summary of Significant Accounting Policies
Organization and Basis of Presentation
BlastGard International, Inc. (the “Company”)
was incorporated on September 26, 2003 as BlastGard Technologies, Inc. (“BTI”) in the State of Florida, to design and
market proprietary blast mitigation materials. The Company created, designs, develops and markets proprietary blast mitigation
materials. The Company’s patented BlastWrap
®
technology effectively mitigates blast effects and suppresses
post-blast fires. The Company sub-contracts the manufacturing of products to licensed and qualified production facilities.
The Company went public through a shell merger
on January 31, 2004. On March 21, 2004, the Company changed its name to BlastGard International, Inc. On March 4, 2011, the Company
completed the acquisition of HighCom Securities, Inc. and subsidiaries. These financial statements include the assets, liabilities
and activity of the following:
BlastGard International, Inc.
BlastGard
®
International, Inc. is a Colorado corporation that has developed and designed proprietary blast mitigation materials. The Company
operates from offices in Clearwater, Florida and uses contract manufacturers in various locations for production.
BlastGard Technologies Inc. is a dormant Florida
corporation.
HighCom Securities, Inc.
HighCom Securities,
Inc. (HighCom), is a global provider of security equipment and a leader in advanced ballistic armor manufacturing. The Company
has a manufacturing facility in Columbus, Ohio for production and has moved the corporate offices to Clearwater, Florida as of
May 1, 2011.
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. Blastgard
International, Inc. primarily provides for corporate administration, and only has incidental sales of an immaterial amount. HighCom
sales represent in excess of 98% of total sales. 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, 2016, approximately
49% of the Company’s revenue was provided by two customers, one representing approximately 29% and the other approximately
20%.
For the year ended December 31, 2016, 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%.
Principles of Consolidation
These consolidated financial statements include
the assets and liabilities of BlastGard International, Inc. and its subsidiaries as of December 31, 2016 and 2015.
All material intercompany transactions have
been eliminated.
Use of Estimates
The preparation of financial statements in
accordance with generally accepted accounting principles required management to make estimates and assumptions that affected the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considered all highly liquid debt
instruments with original maturities of three months or less when acquired to be cash equivalents.
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 allowance method for recognizing bad debts. When an account was deemed uncollectible, it was written off against
the allowance. The Company generally does not require collateral for its accounts receivable. Management deems all accounts receivable
to be collectable at December 31, 2016.
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.
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 $52,586 and $43,189 as of December 31, 2016 and 2015.
Advertising
Advertising, marketing and promotion costs
were expensed as incurred. Advertising costs of $64,742 and $71,877 were incurred during the years ended December 31, 2016 and
2015, 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.
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, 2016, there were 46,125,000 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, 2016 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 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 defe1Ted 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.
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, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
648,702
|
|
|
$
|
489,303
|
|
Work in process
|
|
|
240,849
|
|
|
|
7,303
|
|
Finished Goods
|
|
|
1,041,532
|
|
|
|
709,616
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
1,931,083
|
|
|
$
|
1,206,222
|
|
(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, 2016 and December 31, 2015:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Equipment
|
|
$
|
429,417
|
|
|
$
|
353,880
|
|
Furniture
|
|
|
104,802
|
|
|
|
102,564
|
|
Moulds
|
|
|
45,060
|
|
|
|
45,060
|
|
Test Range
|
|
|
110,802
|
|
|
|
110,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690,081
|
|
|
|
612,306
|
|
Less accumulated depreciation
|
|
|
(501,079
|
)
|
|
|
(441,199
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
189,002
|
|
|
$
|
171,107
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2016 and 2015
|
|
$
|
59,880
|
|
|
$
|
36,846
|
|
Depreciation expense
for the next five years ended December 31,
|
|
|
|
|
2017
|
|
$
|
58,795
|
|
2018
|
|
|
47,959
|
|
2019
|
|
|
40,789
|
|
2020
|
|
|
28,952
|
|
2021
|
|
|
9,028
|
|
|
|
|
|
|
|
|
$
|
185,523
|
|
(4) Intangible Assets, Net
Intangible Assets are comprised of the following
at December 31, 2016 and December 31, 2015:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Patents and Trademarks
|
|
$
|
161,278
|
|
|
$
|
161,278
|
|
Websites
|
|
|
80,000
|
|
|
|
80,000
|
|
Lists
|
|
|
500,000
|
|
|
|
500,000
|
|
Research and Development
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
796,278
|
|
|
|
796,278
|
|
Less accumulated amortization
|
|
|
(664,151
|
)
|
|
|
(647,899
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
132,127
|
|
|
$
|
148,379
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2016 and 2015
|
|
$
|
16,252
|
|
|
$
|
16,252
|
|
Amortization expense
for the next five years ended December 31,
|
|
|
|
|
2017
|
|
$
|
16,252
|
|
2018
|
|
|
16,252
|
|
2019
|
|
|
16,252
|
|
2020
|
|
|
16,252
|
|
2021
|
|
|
12,585
|
|
|
|
|
|
|
|
|
$
|
77,593
|
|
(5) Notes Payable
Notes payable at December 31, 2016 and 2015
as detailed below, is summarized as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Convertible promissory notes – accrued expenses
|
|
|
-
|
|
|
|
391,025
|
|
Revolving credit
|
|
|
-
|
|
|
|
190,232
|
|
Acquisition debt
|
|
|
30,000
|
|
|
|
30,000
|
|
Note payable – equipment
|
|
|
11,752
|
|
|
|
-
|
|
Note payable - individual
|
|
|
200,000
|
|
|
|
-
|
|
|
|
|
241,752
|
|
|
|
611,257
|
|
Less current maturities
|
|
|
(241,752
|
)
|
|
|
(311,257
|
)
|
|
|
$
|
-
|
|
|
$
|
300,000
|
|
Conversion of Accrued Expenses.
On March 8, 2011, BlastGard’s Board of
Directors ratified, adopted and approved that James F. Gordon’s accrued salary of $160,000 (20 months at $8,000 per month
covering May-December 2009, January-October 2010 and January-February 2011); Michael J. Gordon’s accrued salary of $160,000
(20 months at $8,000 per month covering May-December 2009, January-October 2010 and January-February 2011); and Morse & Morse,
PLLC’s accrued legal bill of $67,025 be converted into a Convertible Non-Interest Bearing Demand Note, convertible into Common
Shares of BlastGard at $.05 per share at the noteholder(s) discretion. On May 3, 2011, BlastGard’s Board of Directors ratified,
adopted and approved $100,000 in additional compensation to Michael J. Gordon as CEO, of which $50,000 could be converted into
a Convertible Non-Interest Bearing Demand Note, convertible into Common Shares of BlastGard at $.05 per share at the noteholder(s)
discretion and $50,000 issued in Common Stock at $.05 per share. On November 11, 2013, the Board of Directors approved the lowering
the conversion price for $.05 per share to $.01 per share on these notes.
These notes were paid off in January 2016 through
a conversion of $300,000 into 30,000,000 shares of Common Stock, and the balance being paid in cash.
The 2011 convertible promissory notes consisted
of the following at December 31, 2016 and 2015:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Convertible promissory note, $210,000, issued January 31, 2011, due on September 30, 2011, 6% interest rate
|
|
$
|
-
|
|
|
$
|
180,000
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note, $160,000, issued January 31, 2011, due on January 31, 2012, 6% interest rate
|
|
|
-
|
|
|
|
144,000
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note, $67,025, issued January 31, 2011, due on September 30, 2011, 6% interest rate
|
|
|
-
|
|
|
|
67,025
|
|
|
|
|
-
|
|
|
|
391,025
|
|
Less: current maturities
|
|
|
-
|
|
|
|
(91,025
|
)
|
|
|
$
|
-
|
|
|
$
|
300,000
|
|
Revolving Credit Facilities
The Company also acquired various revolving
credit facilities in the acquisition of HighCom Security, Inc. HighCom had been paying interest only on the loans. These loans
were paid in full during 2016, and the credit lines were closed. The revolving credit facilities consisted of the following at
December 31, 2016 and 2015:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Line of credit from Regions Bank, $100,000, interest only at 8% annually, due on demand
|
|
$
|
-
|
|
|
$
|
53,649
|
|
|
|
|
|
|
|
|
|
|
Revolving credit card facility with Wells Fargo Bank, $150,000, interest only at 7.5% annually, due on demand, unsecured
|
|
|
-
|
|
|
|
136,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
190,232
|
|
Less: current maturities
|
|
|
-
|
|
|
|
(190,232
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Acquisition Debt
On March 4, 2011, the Company issued a note
payable in association with the purchase of HighCom Security 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, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Acquisition note for the purchase of Acer product designs, original amount $30,000, no interest
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
30,000
|
|
Less: current maturities
|
|
|
(30,000
|
)
|
|
|
(30,000
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Note payable – Related Party
During the year ended December 31, 2016, the
Company’s CEO, Michael Gordon incurred expenses on behalf of, and made advances to the Company in order to provide the Company
with funds to carry on its operations. These advances are pursuant to Mr. Gordon obtaining a personal demand promissory note at
a rate of 5.54% per annum. During 2016, Mr. Gordon advanced approximately $703,200 to the Company. As of December 31, 2016, all
amounts due for these expenses and advances on behalf of the Company have been fully paid back.
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 September 8, 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 is
payable no sooner than 90 days and no later than 120 days from issuance. This note was paid in full on December 23, 2016.
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 – American Express
The Company utilizes an American Express credit
card to facilitate short term cash flow demands.
Off Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Canadian corporation has the right to nominate
and appoint at least 50% of the Board Members.
In 2013, in connection with 8464091 Canada
Inc. acquiring a majority control of the Company’s Common Stock from a former affiliated third party, the Company agreed
that the Canadian corporation has the right to nominate and appoint to the Board at least 50% of the Board members. Pursuant to
this right, 8464091 Canada has nominated and the Board has appointed to the Board four members, which include, Paul Sparkes, Craig
Campbell, Andrew Griffith and David Frum. Subsequently in September 2016, Craig Campbell, for personal reasons, resigned from the
board. Also, the Canadian corporation has the right to participate in future financings up to its pro rata share of Common Stock
of the Company.
(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
The Company has issued various shares of common
stock as described below pursuant to debt conversions. No commissions were paid in connection with these conversions and exemption
from registration is claimed under Section 3(a)(9) of the Securities Act of 1933, as amended.
In September 2015, the Company issued 3,000,000
common shares in a debt conversion in the amount of $30,000.
In November 2015, the Company issued 5,570,321
common shares in a debt conversion in the amount of $55,953.
In January 2016, the Company issued 30,000,000
common shares in a debt conversion in the amount of $300,000.
366,976,178 shares were issued and outstanding
at December 31, 2016.
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 3
rd
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, 2016. At December 31, 2016 and December 31, 2015, there was no unrecognized
compensation cost related to share-based payments which was expected to be recognized in the future
The following table represents stock option
activity as of and for the twelve months ended December 31, 2016:
|
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Aggregate Intrinsic Value
|
|
Options Outstanding - January 1, 2016
|
|
|
|
66,750,000
|
|
|
$
|
0.01.
|
|
|
|
8.9 years
|
|
|
|
-
|
|
Granted
|
|
|
|
-
|
|
|
$
|
0.01
|
|
|
|
5.0 years
|
|
|
|
-
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
|
(6,250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding – December 31, 2016
|
|
|
|
60,500,000
|
|
|
$
|
0.01
|
|
|
|
6.3 years
|
|
|
$
|
-
|
|
Outstanding Exercisable – January 1, 2016
|
|
|
|
38,000,000
|
|
|
$
|
0.02
|
|
|
|
7.9 years
|
|
|
$
|
-
|
|
Outstanding Exercisable – December 31, 2016
|
|
|
|
46,125,000
|
|
|
$
|
0.01
|
|
|
|
6.4 years
|
|
|
$
|
-
|
|
The total grant date fair value
of options vested during the twelve months ended December 31, 2016 and 2015 was $138,740 and $357,987 respectively.
The following table represents stock
warrant activity as of and for the twelve months ended December 31, 2016:
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual Life
|
|
|
Aggregate
Intrinsic
Value
|
|
Warrants Outstanding - January 1, 2016
|
|
|
41,801,793
|
|
|
$
|
0.009.
|
|
|
|
3.9 years
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/expired/cancelled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding – December 31, 2016
|
|
|
41,801,793
|
|
|
$
|
0.009
|
|
|
|
3.9 years
|
|
|
$
|
-
|
|
Outstanding Exercisable – January 1, 2016
|
|
|
41,801,793
|
|
|
$
|
0.009
|
|
|
|
3.9 years
|
|
|
$
|
-
|
|
Outstanding Exercisable – December 31, 2016
|
|
|
41,801,793
|
|
|
$
|
0.009
|
|
|
|
3.9 years
|
|
|
$
|
-
|
|
Derivative Liability
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.
During 2011, the Company entered into certain
convertible debt agreements with warrants attached. Because the warrant values exceeded the note values after the beneficial conversion
feature discount, the warrants have been bifurcated out and recorded separately. The initial value was the fair value less the
fair value of the debt discount. The difference between the amortized fair value and the revalued fair value at each reporting
period is recorded as a derivative liability. During 2016, the Company settled all convertible debt as well as all derivative liabilities.
The Company used the following Black-Scholes
assumptions in arriving at the fair value of the warrants as of December 31, 2016 and 2015.
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Expected Life in Years
|
|
|
0
|
|
|
|
2.9
|
|
Risk-free Interest Rates
|
|
|
0.00
|
%
|
|
|
1.76
|
%
|
Volatility
|
|
|
0.00
|
%
|
|
|
281.15
|
%
|
Dividend Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The Derivative Liability consists of the following as of December
31, 2016 and December 31, 2015:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Fair Value of embedded warrants
|
|
$
|
-
|
|
|
$
|
357,449
|
|
Unamortized discount
|
|
|
-
|
|
|
|
(336,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
20,742
|
|
(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.
Historically, the Company has maintained full
valuation allowances on its deferred tax assets. As of December 31, 2015, there was a $5,489,600 valuation allowance recorded against
its deferred tax assets which were primarily related to domestic net operating loss carryforwards.
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.
The income tax benefit (provision) consists
of the following for the years ending December 31, 2016 and 2015:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(296,566
|
)
|
|
$
|
(354,726
|
)
|
State
|
|
|
(31,663
|
)
|
|
|
(37,872
|
)
|
|
|
|
(328,229
|
)
|
|
|
(392,598
|
)
|
|
|
|
|
|
|
|
|
|
Deferred - continuing operations
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(20,496
|
)
|
|
|
18,433
|
|
State
|
|
|
(2,188
|
)
|
|
|
1,968
|
|
|
|
|
(350,913
|
)
|
|
|
(372,197
|
)
|
Valuation allowance
|
|
|
5,489,600
|
|
|
|
372,197
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (provision)
|
|
$
|
5,138,687
|
|
|
$
|
-
|
|
The Company has previously recognized an income
tax benefit for its operating losses generated since inception through December 31 2015 based on uncertainties concerning its ability
to generate taxable income in future periods. Based on current events management has re-assessed the valuation allowance and the
recognition of the deferred tax assets attributable to the net operating losses and other assets. Based on the Company’s
profitability over the last three years, the Company has determined that the valuation allowance should be fully reversed for the
year ended December 31, 2016, and record a deferred tax asset.
As of December 31, 2016, the Company had net
operating loss carry forwards of approximately $13,100,000. The net operating loss carry forwards will expire in 2026 through 2036
and state net operating loss carry forwards that will expire in 2026 through 2036.
The components of deferred tax assets and liabilities
as of December 31, 2016, and 2015 is as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
NOL and contribution carry forwards
|
|
$
|
4,927,373
|
|
|
$
|
5,255,601
|
|
Meals and entertainment
|
|
|
1,329
|
|
|
|
-
|
|
Share based compensation
|
|
|
672,873
|
|
|
|
620,665
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
5,601,575
|
|
|
|
5,876,266
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(156,868
|
)
|
|
|
(132,368
|
)
|
Goodwill
|
|
|
(306,020
|
)
|
|
|
(254,298
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(462,888
|
)
|
|
|
(386,666
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset - net before valuation allowance
|
|
|
5,138,687
|
|
|
|
5,489,600
|
|
Less valuation allowance
|
|
|
-
|
|
|
|
(5,489,600
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset - net
|
|
$
|
5,138,687
|
|
|
$
|
-
|
|
The Company reversed the valuation allowance
in full in the period ending December 31, 2016.
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, 2016 and 2015:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
Expected provision at US statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State income tax net of federal benefit
|
|
|
3.63
|
%
|
|
|
3.63
|
%
|
Other items effecting timing differences
|
|
|
-2.43
|
%
|
|
|
2.06
|
%
|
Valuation allowance
|
|
|
0.00
|
%
|
|
|
-39.69
|
%
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
35.20
|
%
|
|
|
0.00
|
%
|
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, 2016, the tax returns for the Company
for the years ending 2013 through 2015 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, 2016, 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. BlastGard
entered into a lease agreement in January 1, 2009 for office space in Clearwater Florida, which was expanded to two offices in
2011 to accommodate HighCom Security. In 2012, BlastGard moved into a larger office space. Rental payment under the new lease is
$398 per month on a month to month basis.
HighCom leases office and manufacturing space
in Columbus, Ohio. In February 2011, the Company entered into a six-month lease agreement for approximately 11,200 square feet
of office and warehouse space in Columbus, OH. In June 2012, the Company entered into a one-year lease agreement for approximately
16,200 square feet of office and warehouse space in Columbus, OH. In June 2013, the Company 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, the Company 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.
HighCom rented approximately 900 square feet
of office space in Aurora, CO on a short-term lease which expired on May 31, 2014 at a rental of $518 per month. On January 1,
2015, HighCom secured similar office space in Centennial, CO for one year at a rental of $525 per month, which was renewed January
2016. Rental payment under the new lease is at $525 per month on a month to month basis.
Rent expense for 2016 and 2015 was approximately
$130,000 and $95,000, respectively.
Prior Litigation Matter
Verde Partners Family Limited Partnership
On April 2, 2009, the Company entered into
a Settlement Agreement to settle our outstanding civil litigation. The Company will pay the sum of $125,000 over 18 months. The
first monthly payment was paid within 30 days after the Defendants deliver to the Company’s counsel an original executed
version of the Agreement and a promissory note in the amount of the remaining principal balance to bear interest in the amount
of 6% per annum. Upon Verde’s receipt of the payment and promissory note, the parties shall jointly dismiss with prejudice
all litigation between them, including the Pinellas County action and the Federal action. The company and Verde also entered into
a license agreement whereby BlastGard obtains a fully paid up non-exclusive license for the 2 Verde patents for the remaining life
of those patents in exchange for the Company paying Verde a 2% royalty for the life of the patents (which expired in the 2
nd
quarter of 2012), on the sales price received by BlastGard for BlastGard’s portion of all blast mitigation products sold
by the company (the royalty was not on any third-party’s portion of any product containing blast mitigation products sold
by BlastGard). The parties also agreed not to file any complaints with any state, federal or international agency or disciplinary
body regarding any of the other parties or any person affiliated with any of the other parties or otherwise makes negative statements
about them (in other words, a broad non-disparagement clause). The company and Verde also signed mutual general releases (excepting
the obligations above) and a covenant not to sue. At December 31, 2016, the Company was in arrears on the final twelve monthly
payments on the settlement.
(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.
(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
when acquired in March 2011. The vendor has conceded the full amount as settled, resulting in a gain on settlement of debt in the
amount of $300,200.
(12) Subsequent Events
The Company has evaluated all subsequent events
through the filing date of this form 10K for appropriate accounting and disclosures, and there are no subsequent event disclosures
required other than the following:
January 2017, the Company paid of the November
4, 2016 demand promissory note in the amount of $200,000.