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

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended: March 31, 2018
OR
   
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from:__________ to_________

 

Commission file number: 000-53756

 

 

HIGHCOM GLOBAL SECURITY, INC.

(Formerly known as BlastGard International, Inc.)

(Exact name of small business issuer as specified in it charter)

 

 

Colorado   84-1506325

(State or other jurisdiction
of incorporation or organization)

 

(IRS Employer
Identification No.)

 

2901 East 4th Avenue, Unit J, Columbus, Ohio 43219

(Address of principal executive offices)

 

(727) 592-9400

(issuer’s telephone number)

 

BlastGard International, Inc., 2451 McMullen Booth Road, Suite 212, Clearwater, Florida 33759-1362

(Former name, former address and former fiscal year, if changed since last report)

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the issuer 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 its corporate website, if any, every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T during the 12 preceding months (or such shorter period that the registrant was required to submit and post such file). Yes [X] No [  ]

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large Accelerated Filer [  ] Accelerated Filer [  ]  
  Accelerated Filer [  ] Smaller Reporting Company [X]  

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of May 14, 2018, the issuer had 377,154,748 shares of $.001 par value common stock outstanding.

 

Transitional Small Business Disclosure Format (Check one): Yes [  ] No [X]

 

 

 

 
 

 

HIGHCOM GLOBAL SECURITY, INC.

 

INDEX

 

    PAGE
     
PART 1 – FINANCIAL INFORMATION
     
Item 1. Financial Statements 3
     
  Consolidated balance sheets as of March 31, 2018 (unaudited) and December 31, 2017 3
     
  Consolidated statements of operations, for the three months ended March 31, 2018 and 2017 (unaudited) 4
     
  Consolidated statement of changes in stockholders’ equity for the three months ended March 31, 2018 (unaudited) and the year ended December 31, 2017 5
     
  Consolidated statements of cash flows for the three months ended March 31, 2018 and 2017 (unaudited) 6
     
  Notes to consolidated financial statements (unaudited) 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
     
Item 4. Controls and Procedures 20
     
PART I1 – OTHER INFORMATION
     
Item 1. Legal Proceedings. 21
     
Item 1A. Risk Factors 21
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 21
     
Item 6. Exhibits 22
     
Signatures 23

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HIGHCOM GLOBAL SECURITY, INC.

CONSOLIDATED BALANCE SHEETS

 

   March 31, 2018   December 31, 2017 
   (unaudited)     
Assets          
Current assets          
Cash  $273,965   $525,871 
Accounts receivable   717,481    751,258 
Inventory   1,815,852    1,699,770 
Prepaid and other current assets   19,839    27,339 
Total current assets   2,827,137    3,004,238 
           
Property & equipment, net   138,806    152,441 
Deferred tax asset - net   3,511,869    3,475,805 
Intangible property, net   88,931    91,360 
Goodwill   2,061,649    2,061,649 
Deposits   10,254    10,254 
Total Assets  $8,638,646   $8,795,747 
           
Liabilities and Stockholders’ Equity          
Current liabilities          
Accounts payable  $897,245   $940,395 
Accrued expenses   149,537    164,235 
Customer deposits and deferred revenue   15,491    4,658 
Total current liabilities   1,062,273    1,109,288 
           
Contingent liability   -    - 
Total liabilities   1,062,273    1,109,288 
           
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 shares issued and outstanding respectively   377,155    377,155 
Additional paid-in capital   18,349,683    18,349,683 
Non-controlling interest   35,619    35,347 
Accumulated deficit   (11,186,084)   (11,075,726)
Total stockholders’ equity   7,576,373    7,686,459 
           
Total Liabilities and Stockholders’ Equity  $8,638,646   $10,684,956 

 

See accompanying notes to consolidated financial statements

 

3
 

 

HIGHCOM GLOBAL SECURITY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   For the Three Months Ended March 31, 
   2018   2017 
         
Revenues  $1,352,605   $1,147,069 
Direct costs   881,663    644,886 
Gross Profit   470,942    502,183 
           
Operating expenses:          
           
General and administrative   564,012    532,677 
Research and Development   38,455    11,532 
Amortization and depreciation   16,064    32,381 
Total operating expenses   618,531    576,590 
           
Operating loss   (147,589)   (74,407)
           
Non-operating activity          
Other income   1,439    - 
Interest expenses   -    (5,874)
Total other income (expense)   1,439    (5,874)
Loss before non-controlling interest and income taxes   (146.150)   (80,281)
           
Non-controlling interest (gain) loss   (272)   308 
Income tax benefit (provision)   36,064    30,094 
           
Net loss  $(110,358)  $(49,879)
           
Earnings (loss) per share:          
Basic  $-   $- 
Dilutive  $-   $- 
           
Weighted average shares outstanding          
Basic   377,154,748    366,976,178 
Dilutive   377,154,748    366,976,178 

 

See accompanying notes to consolidated financial statements

 

4
 

 

HIGHCOM GLOBAL SECURITY, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND THE YEAR ENDED DECEMBER 31, 2017

(UNAUDITED)

 

           Additional   Non-       Stock- 
   Common   Paid in   controlling   Accumulated   Holders’ 
   Shares   Par   Capital   Interest   Deficit   Equity 
                         
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    (2,119139)   (2,118,811)
                               
Balances at December 31, 2017   377,154,748   $377,155   $18,349,683   $35,347   $(11,075,726)  $7,686,459 
                               
Net Income (Loss)                  272    (110,358)   (110,086)
                               
Balances at March 31, 2018   377,154,748   $377,155   $18,349,683   $35,619   $(11,186,084)  $7,576,373 

 

See accompanying notes to consolidated financial statements

 

5
 

 

HIGHCOM GLOBAL SECURITY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For the Three Months Ended March 31, 
   2018   2017 
Cash Flows from Operating Activities:          
Net income (loss)  $(110,358)  $(49,879)
Adjustment to reconcile Net Income to net cash (used) provided by operations:          
Non-controlling interest gain (loss)   272    (308)
Income tax benefit   (36,064)   (30,094)
Depreciation and amortization   16,064    32,381 
Changes in assets and liabilities:          
Accounts receivable   33,777    418,906 
Inventory   (116,082)   20,287 
Prepaid expenses   7,500    - 
Accounts payable and accruals   (57,848)   (134,609)
Customer deposits   10,833    283,736 
Net Cash (Used) Provided by Operating Activities   (251,906)   540,420 
           
Cash Flows from Investing Activities:          
Purchase of property and equipment   -    (4,478)
Net Cash Used by Investing Activities   -    (4,478)
           
Cash Flows from Financing Activities:          
Repayments of notes payable   -    (207,051)
Net Cash Used by Financing Activities   -    (207,051)
           
Net increase (decrease) in Cash   (251,906)   328,891 
Cash at beginning of period   525,871    270,331 
Cash at end of period  $273,965   $599,222 
Supplemental cash flow information:          
Interest paid  $-   $5,874 
Taxes paid  $-   $- 

 

See accompanying notes to consolidated financial statements

 

6
 

 

HIGHCOM GLOBAL SECURITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2018

 

(1) Basis of Presentation

 

The interim period financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such SEC rules and regulations. This report should be read in conjunction with our Form 10-K for our fiscal year ended December 31, 2017.

 

In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for a fair statement of the financial position at March 31, 2018 and the results of operations for the three months ended March 31, 2018 and 2017 and cash flows for the three months ended March 31, 2018 and 2017 have been made.

 

These consolidated financial statements include the assets and liabilities of HighCom Global Security, Inc. and its subsidiaries as of March 31, 2018 and December 31, 2017. All material intercompany transactions have been eliminated.

 

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 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.

 

7
 

 

Concentrations – Major Customers and Major Vendors

 

For the three months ended March 31, 2018, approximately 53% of the Company’s revenue was provided by three customers with the largest representing approximately 21%. The next two largest customers represented approximately 19 and 13%.

 

For the three months ended March 31, 2018, approximately 71% of inventory purchases was provided by three vendors, with the largest supplier representing approximately 39%, and the next two approximately 16% each. The next three largest suppliers provided less than 5% of purchases each.

 

For the three months ended March 31, 2017, approximately 40% of the Company’s revenue was provided by three customers with the largest representing approximately 16%. The next two largest customers represented approximately 13% and 11%.

 

For the three months ended March 31, 2017, approximately 70% of inventory purchases was provided by five vendors, with the largest supplier representing approximately 34% of purchases. The next three largest suppliers provided approximately 10% of purchases each, with the last one representing approximately 6% of purchases.

 

Foreign Sales

 

For the three months ended March 31, 2018, the Company generated sales from foreign customers in the amount of $97,673, representing approximately 7% of total sales. Sales to three customers in Canada represented less than 1%, with the balance coming from a single customer in each of the Mexico.

 

For the three months ended March 31, 2017, the Company generated sales from foreign customers in the amount of $106,527, representing approximately 9% of total sales. Sales to one customer in Mexico represented approximately 4% of total sales, and sales to one customer in New Zealand approximately 3%. Sales to two customers in Canada and one in United Arab Emirates represent the balance

 

Principles of Consolidation

 

These consolidated financial statements include the assets and liabilities of HighCom Global Security, Inc. and its subsidiaries as of March 31, 2018 and December 31, 2017, and its results of operations and cash flows for the periods presented.

 

All material intercompany balances and transactions have been eliminated for periods presented.

 

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.

 

8
 

 

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 March 31, 2018.

 

Inventory

 

Inventory was stated at the lower of cost (first-in, first-out) or 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 are 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.

 

Revenue Recognition

 

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance.

 

9
 

 

The guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

The five-step model requires that we;

 

  (i) identify the contract with the customer,
  (ii) identify the performance obligations in the contract,
  (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur,
  (iv) allocate the transaction price to the respective performance obligations in the contract, and
  (v) recognize revenue when (or as) we satisfy the performance obligation.

 

The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenue. The majority of our contracts have a single performance obligation as we provide various products that are substantially the same and are transferred with the same pattern to the customer. For contracts with multiple performance obligations, we allocate the total transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We use an observable price to determine the stand-alone selling price for separate performance obligations or a cost-plus margin approach when one is not available. 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 $38,455 and $11,532 for the three months ended March 31, 2018 and 2017 respectively.

 

Advertising

 

Advertising, marketing and promotion costs were expensed as incurred. Advertising costs of $10,090 and $8,002 were incurred during the three months ended March 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.

 

10
 

 

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 March 31, 2018, and 2017, there were 35,500,000 and 46,125,000 vested common stock options outstanding, which were not included in the calculation of net loss per share-diluted because they were anti-dilutive. In addition, at March 31, 2018 and 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. The ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers which supersedes current revenue recognition guidance, including most industry-specific guidance. The guidance provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. We adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. Under the modified retrospective method, the Company would recognize the cumulative effect of initially applying the standard as an adjustment to opening retained earnings at the date of initial application; however, we did not have any material adjustments as of the date of the adoption. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods.

 

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 became effective after December 31, 2016 and has been evaluated accordingly. This did not have a material impact on our Consolidated Financial Statements.

 

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. This did not have a material impact on our Consolidated Financial Statements.

 

11
 

 

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. This did not 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.

 

   March 31, 2018   December 31, 2017 
   (unaudited)     
         
Raw materials  $809,750   $805,029 
Work in process   252,325    222,336 
Finished Goods   753,777    672,405 
           
TOTAL  $1,815,852   $1,669,770 

 

(3) Property and Equipment, Net

 

Property and equipment are comprised of the following at March 31, 2018 and December 31, 2017

 

   March 31, 2018   December 31, 2017 
Equipment  $453,397   $453,397 
Furniture   106,525    106,525 
Moulds   45,060    45,060 
Test Range   110,802    110,802 
           
    715,784    715,784 
Less accumulated depreciation   (576,978)   (563,343)
           
Property and equipment, net  $138,806   $152,441 

 

12
 

 

Depreciation expense for the next five years ended March 31,

 

2019  $50,527 
2020   44,502 
2021   27,485 
2022   12,158 
2023   4,134 
      
   $138,806 

 

Depreciation expense for the three months ended March 31, 2018 and 2017 was $13,635 and $16,129, respectively.

 

(4) Intangible Assets, Net

 

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

 

   March 31, 2018   December 31, 2017 
Patents and Trademarks  $145,749   $145,749 
Websites   80,000    80,000 
Lists   500,000    500,000 
           
    725,749    725,749 
Less accumulated amortization   (636,818)   (634,389)
           
Intangible assets, net  $88,931   $91,360 

 

Amortization expense for the next five years ended March 31,

 

2019   $ 9,717  
2020     9,717  
2021     9,717  
2022     9,717  
2023     9,717  
         
    $ 48,585  

 

Amortization expense for the three months ended March 31, 2018 and 2017 was $2,429 and $16,252, respectively.

 

(5) Notes Payable

 

The Company does not have any notes payable at March 31, 2018 and December 31, 2017.

 

Credit card payable - Mastercard

 

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

 

Off Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements.

 

13
 

 

(6) Stockholders’ 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 preferred stock are outstanding.

 

Common stock issuances

 

377,154,748 shares were issued and outstanding at March 31, 2018 and December 31, 2017.

 

Stock Compensation

 

The Company periodically offered options to purchase stock in the company to vendors and employees. 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.

 

At March 31, 2018, 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 three months ended March 31, 2018:

 

   Number
of Shares
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Life
   Aggregate
Intrinsic
Value
 
Options Outstanding – December 31, 2017   39,250,000   $0.01    6.4 years                   - 
Granted   -    -         - 
Exercised   -    -           
Forfeited/expired/cancelled   -    -           
Options Outstanding – March 31, 2018   39,250,000   $0.01    6.3 years   $- 
Outstanding Exercisable – January 1, 2018   35,500,000   $0.01    6.4 years   $- 
Outstanding Exercisable – March 31, 2018   35,500,000   $0.01    6.4 years   $- 

 

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

 

   Number
of Shares
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual Life
   Aggregate
Intrinsic
Value
 
Warrants Outstanding – December 31, 2017   41,801,793   $0.009    2.9 years   $              - 
Granted   -                
Exercised   -    -           
Forfeited/expired/cancelled   -                
Warrants Outstanding – March 31, 2018   41,801,793   $0.009    2.9 years   $- 
Outstanding Exercisable – January 1, 2018   41,801,793   $0.009    2.9 years   $- 
Outstanding Exercisable – March 31, 2018   41,801,793   $0.009    2.9 years   $- 

 

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(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. As of December 31 2017, the Company had a deferred tax asset of $3,475,805. During the three months ended March 31, 2018, the Company incurred a net loss, which created an increase in its deferred tax asset with and a corresponding income tax benefit in the amount of $36,064.

 

(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 March 31, 2018, 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 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. A satellite office is maintained in Colorado for additional sales support.

 

Rent expense for the three months ended March 31, 2018 and 2017 was approximately $41,498 and $30,791, respectively.

 

(10) Change in Directors and Management

 

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

 

William Buckley has resigned as director of the Corporation effective March 27th, 2018. 

 

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(11) Subsequent Events

 

The Company has evaluated all subsequent events through the filing date of this form 10Q for appropriate accounting and disclosures, and there are no subsequent event disclosures required other than the following:

 

On April 5, 2018, the Company entered into an employment agreement with Francis Michaud. As Chief Executive Officer, Mr. Michaud is receiving gross monthly compensation of $13,333. He was also granted pursuant to his employment contract Non-Statutory Stock Options to purchase 10 million shares with vesting to occur over a period of four years, with 25% immediately vested.

 

On April 9, 2018, the Company approved a 2018 Stock Option Plan. Directors and a former director received Non-Statutory Stock Options to purchase an aggregate of 5,500,000 shares. Said options are immediately vested and are exercisable at an exercise price of $.011 per share. Of the 5,500,000 options, 1,500,000 options were granted to Paul Sparkes and the remaining options were granted in equal amounts (1,000,000 options) to the remaining three directors of the Corporation, including Francis Michaud and a former director, William Buckley.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Statements contained herein that are not historical facts are forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995. Although the Company believes 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. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and those 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 should be read in conjunction with the Company’s financial statements and notes thereto included elsewhere in this Form 10-Q and in our Form 10-K for the fiscal year ended December 31, 2017. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear herein. The Company’s actual results could differ materially from those discussed here.

 

The financial information furnished herein has not been audited by an independent accountant; however, in the opinion of management, all adjustments (only consisting of normal recurring accruals) necessary for a fair presentation of the results of operations for the period ended March 31, 2018, have been included.

 

Summary.

 

HighCom Global Security, Inc. is a leading provider of equipment and services for the security and defense industries. We acquire, manage and build industry leading businesses which provide specialized, mission-critical solutions that address the needs of our customers. The Company owns 100% of BlastGard Technologies, Inc. (“BTI”) which developed and has been marketing BlastWrap products to protect people and property against explosive forces. The Company owns 98.2% of HighCom Armor Solutions, Inc. (“HighCom Armor”) which provides a wide range of security and personal protective gear. Our protective gear includes shields, helmets, vests and plates which provide police and military with the protective gear they need to do their jobs.

 

We believe that the products of our operating subsidiaries have a certain synergy and that HighCom Global is poised to be a full-service provider for defensive and protective product needs. The term “the Company” shall include HighCom Global, BTI and HighCom Armor unless the context indicates otherwise.

 

17
 

 

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.

 

Founded in 1997 and originally based in San Francisco, HighCom Armor Solutions, Inc. 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.

 

Results of Operations

 

The following information represents our results of operations for the three months ended March 31, 2018 and 2017:

 

For the three months ended March 31, 2018, we recognized revenues of $1,352,605 as compared to $1,147,069 for the comparable period of the prior year. In future operation periods, the Company expects growth through the addition of new distributors and from increased demand for personal body armor for both domestic and international markets.

 

For the three months ended March 31, 2018, gross profit was $470,942 as compared to a gross profit of $502,183 for the comparable period of the prior year. The decreased margins are primarily due to a change in product mix.

 

For the three months ended March 31, 2018, the Company’s operating expenses were $618,531 as compared to $576,590 for the three months ended March 31, 2017. The increased operating expenses were due primarily to increases in general and administrative expenses associated with professional services.

 

For the three months ended March 31, 2018, the Company had only a small amount of other income and no interest expense, as compared to the comparable period for the prior year, where the Company had interest expense of $5,874.

 

For the three months ended March 31, 2018, the Company had a net loss of $110,358, which included an income tax benefit of $36,064, as compared to a net loss for the comparable period of the prior year of $49,879, which included an income tax benefit of $30,094.

 

Backlog of Sales

 

As of March 31, 2018, the Company had a backlog of sales of $565,516, all of which is expected to ship in the 2nd quarter of 2018. Management believes additional sales of the Company’s HighCom products will be secured during the balance of the second quarter and in future operating periods as the Company continues to bid on numerous sizeable contracts.

 

18
 

 

Various Security and Personal Protective Product Lines Identified

 

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:

 

  Ballistic helmets
     
  Ballistic soft body armor panels and vests
     
  Ballistic hard armor plates
     
  Ballistic shields
     
  Ballistic blankets

 

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.

 

Manufactured products versus products supplied by third party vendors.

 

HighCom Armor manufactures ballistic plates, ballistic shields, ballistic vests, and ballistic helmets, along with ballistic and bomb-mitigating blankets. HighCom Armor’s hard and soft armor products are made under our brand name or a private label. Our ballistic helmets are assembled at the HighCom Armor plant. Third party vendors such as Team Wendy and Ops-Core provide accessories to our ballistic helmets. For a complete description of the HighCom Armor product line, reference is made to our Form 10-K for the fiscal year ended December 31, 2017.

 

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Liquidity and Capital Resources.

 

At March 31, 2018, we had cash of $273,965, a positive working capital of $1,764,864, an accumulated deficit of $(11,186,084) and stockholders’ equity of $7,576,373.

 

For the three months ended March 31, 2018, net cash used by operating activities was $251,906 primarily due to a loss from operations and reductions in accounts payable and accrued expenses. During the three months ended March 31, 2018, we didn’t use any cash in our investing activities. During the three months ended March 31, 2018, we didn’t use any cash in our financing activities.

 

Since 2016, we benefited from financial resources being provided from operations rather than from additional borrowings. We anticipate that future liquidity requirements will arise to finance our operations, accounts receivable and inventories, and for the need to fund our growth from operations, and capital expenditures. The primary sources of funding for such requirements are expected to be cash generated from operations. If needed, the Company may also raise additional capital through equity and debt financing. 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.

 

We have no known demands or commitments and are not aware of any events or uncertainties as of March 31, 2018, that will result in or that are reasonably likely to materially increase or decrease our current liquidity.

 

Application of critical accounting policies

 

Management’s Discussion and Analysis of our Financial Condition and Results of Operations is based on the Company’s Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and corresponding disclosures at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we continue to evaluate our estimates which in large part are based on historical experience and on various assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our short-term money market investments. The Company does not have any financial instruments held for trading or other speculative purposes and does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure. The Company does not have any credit facilities with variable interest rates.

 

Item 4. Controls and Procedures

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective at the reasonable assurance level at the end of our most recent quarter. As part of the Company’s efforts to improve its controls and procedures, management is in the process of establishing an accounting department that will effectively address such matters as risk assessment, segregation of duties, and the reviewing and documentation of all processes. There were no changes in internal control during the quarter ended March 31, 2018.

 

20
 

 

PART II – OTHER INFORMATION

 

Item 1. 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 1A. Risk Factors

 

As a Smaller Reporting Company, as defined Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item 1A.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

  (a) For the three months ended March 31, 2018, we had no sales or issuances of unregistered securities,
     
  (b) Rule 463 of the Securities Act is not applicable to the Company.
     
  (c) In the three months ended March 31, 2018, there were no repurchases by the Company of its Common Stock.

 

Item 3. Defaults upon Senior Securities

 

N/A

 

Item 4. Mine Safety Disclosures

 

N/A

 

Item 5. Other Information.

 

N/A

 

21
 

 

Item 6. Exhibits

 

Except for the exhibits listed below, other required exhibits have been previously filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

Exhibit Number  

Description

3.1   Articles of Incorporation (Incorporated by reference to Company’s Form 10-QSB for the quarter ended March 31, 2004.)
     
3.2   Amendment to Articles of Incorporation (Incorporated by reference to Form 8-K dated August 2, 2011.)
     
3.3   By-Laws (Incorporated by reference to Company’s Form 10-QSB for the quarter ended March 31, 2004.)
     
31.1   Rule 13a-14(a) Certification – Principal Executive And Principal Financial and Accounting Officer*
     
32.1   Section 1350 Certification – Principal Executive And Principal Financial and Accounting Officer*
     
101.SCH   Document, XBRL Taxonomy Extension (*)
     
101.CAL   Calculation Linkbase, XBRL Taxonomy Extension Definition (*)
     
101.DEF   Linkbase, XBRL Taxonomy Extension Labels (*)
     
101.LAB   Linkbase, XBRL Taxonomy Extension (*)
     
101.PRE   Presentation Linkbase (*)

 

* Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  HIGHCOM GLOBAL SECURITY, INC.
     
Dated: May 11, 2018 By: /s/ Francis Michaud
   

Francis Michaud
Principal Executive and Principal Financial and Accounting Officer

 

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