HCGS Highcom Global Security Inc (CE)

Item 8. Financial Statements

The information required by Item 8 and an index thereto commences on page 15, which pages follow this page.

INDEX

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

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

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

Supplemental Schedule of Noncash Investing and Financing Activities

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.

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 believes it is a leader in advanced ballistic armor manufacturing. With a 32,865 square foot manufacturing and distribution facility located in Columbus, OH.

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, 2018, approximately 45% of the Company’s revenue was provided by two customers, one representing approximately 35% and the other approximately 10%.

For the year ended December 31, 2018, approximately 69% of our accounts receivable was made up of two customers. One representing 51% and the second 18%.

Foreign Sales

For the year ended December 31, 2018, the Company generated sales from foreign customers in the amount of $771,890 representing approximately 10% of total sales. Sales to Uganda were 6%, Canada and Mexico represented approximately 4%,

Principles of Consolidation

These consolidated financial statements include the assets and liabilities of HighCom Global Security, Inc. and its subsidiaries as of December 31, 2018 and 2017.

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.

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 to recognize bad debts. When an account was deemed uncollectible, it is 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, 2018.

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. During the years ended December 31, 2018 and 2017, management identified no such impairments.

Revenue Recognition

Based on management’s assessment of the revenue recognition criteria, we usually recognize revenue from sales of our products to customers upon shipment. Recognition is not contingent upon resale of the products by a distributor to their customer if in fact our customer was a distributor.

Revenue is recognized net of any distributor discount. Discounts usually involve special pricing arrangements and incentives used to stimulate distributor growth.

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 $76,363 and $97,476 for the years ended December 31, 2018 and 2017 respectively.

Advertising

Advertising, marketing and promotion costs were expensed as incurred. Advertising costs of $61,742 and $97,622 were incurred during the years ended December 31, 2018 and 2017, 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. As of December 31, 2018 and 2017 the Company had no uncertain tax positions.

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. Inputs used in 2018 were Volatility 155%, Risk Free Interest rate 2.91 %, Expected Dividend 0%, Expected Term 10 Years.

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, 2018, there were 54,500,000 vested common stock options outstanding, which were included in the calculation of net income (loss) per share-diluted. In addition, at December 31, 2018 the Company had 41,801,793 remaining warrants outstanding issued in connection with convertible promissory notes and stock sales that were also included because they were 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.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. We have adopted this update. The guidance’s adoption had no impact on our source of revenue from the sale of armor and related products or have a material impact on our 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. The Company is planning to enter a lease in 2019 , therefore ASU 2016-02 will impact us in future years.

(2) Inventory

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

(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 equipment, furniture, molds and the test range. 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, 2018 and December 31, 2017:

(4) Intangible Assets, Net

Intangible Assets are comprised of the following at December 31, 2018 and December 31, 2017:

(5) Notes Payable

Notes payable at December 31, 2018 and 2017 there was no outstanding debt.

Line of Credit

The Company has a $250,000 line of credit with a bank. At December 31, 2018 there was no outstanding balance. No draws were taken during 2018. In 2019 this line of credit was increased to $500,000. As of March 22, 2019, the Company has drawn $250,000 from its line of credit to address short term cash flow needs.

(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

At December 31, 2018, 386,014,460 shares were issued and outstanding. During 2018 8,859,712 shares were issued to board members and executives of the company. 377,154,748 shares were issued and outstanding at December 31, 2017. In December 2017, the Company issued 10,178,570 common shares in a cashless exercise of 18,750,000 options. On February 26, 2019, the Company filed Articles of Amendment to increase the number of authorized Common Shares to 600,000,000.

Stock Compensation

The Company periodically offers options to purchase stock in the company to vendors and employees and board members. There were 25,500,000 options granted during 2018 to board members for various 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.

There were no net cash proceeds from the exercise of stock options during the year ended December 31, 2018. At December 31, 2018 and December 31, 2017, 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, 2018:

The total grant date fair value of options vested during the twelve months ended December 31, 2018 and 2017 was $183,584 and $138,740 respectively.

The following table represents stock warrant activity as of and for the twelve months ended December 31, 2018:

(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 based on 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, it considers 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 it determines that the Company would be able to realize our deferred tax assets in the future in excess of their net recorded amount, it 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.

During the year ended December 31, 2018, the Company incurred income, which created a decrease in its deferred tax asset with a corresponding income tax expense of $68,955.

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 can determine a reasonable estimate, it must record a provisional estimate in the financial statements.

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, 2018 and 2017:

As of December 31, 2018, the Company had net operating loss early forwards of approximately $13,500,000. The federal net operating loss carry forwards will not expire as a result of the Tax Act legislation, and state net operating loss early forwards that will expire in 2026 through 2037.

The components of deferred tax assets and liabilities as of December 31, 2018, and 2017 is as follows:

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, 2018 and 2017: