UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


———————


FORM 10-Q


———————





(March One)




þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended: September 30, 2013ORo
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934For the transition period from: _____________ to _____________





Commission file number: 333-47924


———————




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.)




2451 McMullen Booth Road, Suite 212, Clearwater, Florida 33759-1362


(Address of principal executive offices)




(727) 592-9400


(issuer’s telephone number)





(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 þ  No o




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 þ  No o




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 o

Accelerated Filer oAccelerated Filer o

Smaller Reporting Company þ




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 oNo þ




State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 13, 2013 the issuer had 294,797,657 shares of $.001 par value common stock outstanding.




Transitional Small Business Disclosure Format (Check one):  Yes o   No þ





INDEX


PagePART 1 – FINANCIAL INFORMATIONItem 1.
Financial StatementsCondensed consolidated balance sheets, September 30, 2013 (unaudited) and December 31, 2012

3Condensed consolidated statements of operations, for the three and nine months ended September 30, 2013 and 2012 (unaudited)

4Condensed consolidated statements of cash flows for the nine months ended September 30, 2013 and 2012 (unaudited)

6Notes to condensed consolidated financial statements (unaudited)

7Item 2.
Management’s Plan of Operation.

12Quantitative and Qualitative Disclosures and MarketRisk

21Item 4.
Controls and Procedures

21PART 2 – OTHER INFORMATIONItem 1.
Legal Proceedings

22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

22Item 3.
Defaults upon Senior Securities

23Item 4.
Mine Safety Disclosures

23Item 5.
Other Information

23Item 6.
Exhibits

23Signatures

27




2




BlastGard International, Inc.Consolidated Balance SheetsSeptember 30,


December 31,2013


2012(unaudited)


(audited)AssetsCurrent assetsCash

$
47,645


$
356,426Accounts receivable, (net of allowance for doubtful accts)


29,675



19,600Inventory


756,080



392,819Prepaid and other current assets


8,319



8,319Net related party loans receivable from acquisition


122,316



122,316Total current assets


964,035



899,480Property & equipment, net of accumulateddepreciation of  ($347,167) and ($304,824), respectively


93,466



133,669Intangible property, net of accumulatedamortization of  ($546,152) and ($389,698), respectively


250,127



406,580Investments


112,833



112,832Goodwill


2,061,649



2,061,649Deposits


7,407



5,667Total Assets

$
3,489,517


$
3,619,877Liabilities and Stockholders' EquityCurrent liabilitiesAccounts payable

$
788,213


$
1,026,095Accrued expenses


55,895



252,495Customer deposits and deferred revenue


41,222



79,182Current portion notes payable


1,123,271



2,492,565Total current liabilities


2,008,601



3,850,337Contingent liability


1,170,081



1,170,081Derivative liability, net


-



339,874Total liabilities


3,178,682



5,360,292Stockholders' EquityPreferred Stock, 1,000 shares authorized;$.001 par value; 0 and 0 issued and outstanding


-



-Common Stock, $.001 par value,  500,000,000 sharesauthorized; 292,797,657 and 90,386,036 shares issued and outstanding, respectively


292,797



90,386Additional paid-in capital


16,314,003



14,694,710Minority interest


(25,170
)


(29,961
)Accumulated deficit


(16,270,795
)


(16,495,550
)Total stockholders' deficit


310,835



(1,740,415
)Total Liabilities and Stockholders' Equity

$
3,489,517


$
3,619,877





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


3





BlastGard International Inc.Consolidated Statements of Operations(unaudited)  For the Three Months Ended


For the Nine Months EndedSeptember 30,


September 30,2013



2012



2013



2012Revenues


$
220,097


$
1,802,770


$
1,442,118


$
2,793,476Direct costs



155,386



1213298



809,369



1,917,822Gross Profit



64,710



589,472



632,749



875,654Operating expenses:General and administrative



250,953



219,226



701,148



594,046Research and Development



6,135



9,840



13,110



50,301Amortization and depreciation



66,584



66,392



198,795



183,971Total operating expenses



323,672



295,458



913,053



828,318Operating income (loss)



(258,962
)


294,014



(280,304
)


47,336Non-operating activityOther income (expense)



(865
)


39,731



(865
)


47,049Gains (losses) on settlement of debt



175,066



-



306,318



248,754Gain (loss) on derivative liability



960,466



(157,052
)


1,274,298



1,564,761Interest expenses



(824,591
)


(211,748
)


(1,069,902
)


(706,636
)Interest income



-



-



1



2Total other income (expense)



310,076



(329,069
)


509,850



905,176Income(loss) before income taxes



51,114



(35,055
)


229,546



952,512Less minority interest income(loss)



356



7,423



(4,791
)


5,727Net Income(loss)


$
51,470


$
(42,478
)

$
224,755


$
946,785Earnings (loss) per share:Basic


$
0.00


$
0.00


$
0.001


$
0.01Dilutive


$
0.0001


$
0.00


$
0.0009


$
0.01Weighted average shares outstandingBasic



275,952,182



90,386,036



197,781,473



90,386,036Dilutive



358,719,247



90,386,036



241,287,238



143,347,120





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


4





BlastGard International Inc.Consolidated Statements of Cash Flows(unaudited)For the Nine Months EndedSeptember 30,2013



2012Cash Flows from Operating Activities:Net (loss) income

$
224,755


$
946,785Adjustment to reconcile Net Income to netcash provided by operations:Minority interest (gain) loss


4,791



5,727Depreciation and amortization


198,795



183,971Amortization of debt discount


22,380



265,254Gain on settlement of debt


(306,318)



-Gain on derivative


(339,874)



(1,564,761)Changes in assets and liabilities:Accounts receivable


(10,075)



(14,965)Note receivable


-



109,679Inventory


(363,261)



91,452Other operating assets


(1,740)



(9,819)Accounts payable and accruals


130,133



(27,892)Customer deposits


(37,960)



-Other liabilities


-



66,903Net Cash (Used) Provided by Operating Activities

(478,374)



52,334Cash Flows from Investing Activities:Purchase of property and equipment


(2,139)



(48,077)Payments for deferred costs


-



-Proceeds from sales of assets and intangibles

-



-Cash purchased


-



-Net Cash Used by Investing Activities


(2,139)



(48,077)Cash Flows from Financing Activities:Proceeds from warrant exercise


260,310



-Proceeds from issuance of note payable


421,667



-Repayments of notes payable


(510,245)



(71,488)Net Cash  Provided by Financing Activities


171,732



(71,488)Net increase/decrease in Cash


(308,781)



(67,231)Cash at beginning of period


356,426



253,221Cash at end of period

$
47,645


$
185,990Supplemental cash flow information:Interest paid

$
37,027


$
337,790Taxes paid

$
-


$
-Supplemental Schedule of Noncash Investing and Financing ActivitiesDebt converted to stock

$
1,561,394





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


5


BLASTGARD INTERNATIONAL, INC.


CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT FOR


THE YEAR ENDED DECEMBER 31, 2012 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2013




Additional








Stock-Common


Paid in


Minority


Accumulated


Holders'shares


Par


Capital


Interest


Deficit


DeficitBalance at December 31, 2011


90,386,036


$
90,386


$
14,694,710


$
(39,118
)

$
(17,540,517
)

$
(2,794,539
)Net income














9,157



1,044,967



1,054,124Balance at December 31, 2012


90,386,036


$
90,386


$
14,694,710


$
(29,961
)

$
(16,495,550
)

$
(1,740,415
)Stock issued for conversion of debt


173,488,279



173,488



1,387,906











1,561,394Stock issued for exercise of Warrants


28,923,342



28,923



231,387











260,310Net income














4,791



224,755



229,546Balance at September 30, 2013


292,797,657


$
292,797


$
16,314,003


$
(25,170
)

$
(16,270,795
)

$
310,835





6





BLASTGARD INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




(1)           Basis of Presentation




The consolidated balance sheet as of September 30, 2013, the consolidated statements of operations for the three months and nine months ended September 30, 2013 and 2012, and consolidated statements of cash flows for the nine months ended September 30, 2013 and 2012 have been prepared by us without audit.  In the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly in all material respects our financial position as of September 30, 2013 and results of operations for the three months and nine months ended September 30, 2013 and 2012, and cash flows for the nine months ended September 30, 2013 and 2012. The results of operations and cash flows for the periods indicated above are not necessarily indicative of the results to be expected for the full year.




This report should be read in conjunction with our Form 10-K for our fiscal year ended December 31, 2012. All material intercompany transactions have been eliminated.




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 patent-pending 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 31, 2004, the Company changed its name to BlastGard International, Inc. On March 4, 2011, the Company completed the acquisition of HighCom Securities, Inc. and subsidiaries.  The income of HighCom and subsidiaries is included from January 25, 2011, the date of the binding letter of intent.  These financial statements include the assets liabilities and activity of the following:




BlastGard International, Inc. BlastGard® International, Inc. is a Colorado corporation that has developed and designed proprietary blast mitigation materials.  The Company operates from offices in Clearwater, Florida and uses contract manufacturers in various locations for production.




BlastGard Technologies Inc. is a dormant Florida corporation.




HighCom Securities, Inc. HighCom Securities, Inc. (HighCom), originally located in San Francisco California, is a global provider of security equipment and a leader in advanced ballistic armor manufacturing.  The Company has a manufacturing facility in Columbus, Ohio for production and has moved the corporate offices to Clearwater, Florida as of May 1, 2011.




Going Concern




The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  As shown in the accompanying financial statements, the Company has incurred recurring losses and has used significant cash in support of its operating activities.  These factors, among others, may indicate that the Company will be unable to continue as a going concern.




The financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  The Company’s continuation as a going concern was dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitability.  The Company plans to generate the necessary cash flows with increased sales revenue over the next 12 months.  However, should the Company’s sales not provide sufficient cash flow; the Company has plans to raise additional working capital through debt and/or equity financings.    There was no assurance the Company will be successful in producing increased sales revenues or obtaining additional funding through debt and equity financings.




7




Accounting Policies




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. As of September 30, 2013, management believes an allowance for uncollectible accounts in the amount of $27,662 was adequate.




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.




8







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 method.




Revenue Recognition




Sales revenue was recognized upon the shipment of product to customers.  Allowances for sales returns, rebates and discounts were recorded as a component of net sales in the period the allowances were recognized.




Research and Development




Research and development costs were expensed as incurred.




Advertising




Advertising costs were expensed as incurred. Advertising costs of $4,401 and $4,585 were incurred during the nine months ended September 30, 2013 and 2012, respectively.




Shipping and Freight Costs




The Company includes shipping costs in cost of goods sold.





Income Taxes




Income taxes were provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the recorded book basis and the tax basis of assets and liabilities for financial and income tax reporting.  Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities were recovered or settled.  Deferred tax assets were also recognized for operating losses that were available to offset future taxable income and tax credits that were available to offset future federal income taxes, less the effect of any allowances considered necessary. The company use guidance provided by ASC-740-10, Accounting for Uncertainty in Income Taxes, for reporting uncertain tax provisions.




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.




9







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 September 30, 2013, there were 7,050,000 and vested common stock options outstanding, which were excluded from the calculation of net loss per share-diluted because they were anti-dilutive. In addition, September 30, 2013 the Company had 75,409,993 warrants outstanding issued in connection with convertible promissory notes and stock sales that were also excluded because they were anti-dilutive.




Recent Accounting Pronouncements




We have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term.  The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.  Reference is made to these recent accounting pronouncements as if they are set forth therein in their entirety.




(2)           Inventory





The Company’s manufacturing is sub-contracted to licensed and qualified production facilities.  Our inventory is made up of raw materials, work in progress and finished goods. Our inventory is maintained at


our manufacturing facilities.





September 30,


December 31,2013


2012(unaudited)Raw materials

$
107,232


$
216,201Work in process


24,111



39,354Finished Goods


624,737



137,264TOTAL

$
756,080


$
392,819




(3)
Property and Equipment, Net


Depreciation expense for the three and nine months ended September 30, 2013 was $14,190 and $42,343 respectively.




10




(4)
Intangible Assets, Net





Intangible Assets are comprised of the following at September 30, 2013 and December 31, 2012
 
 September 30,


December 31,2013


2012Patents and Trademarks

$
161,278


$
161,278Websites


80,000



80,000Lists


500,000



500,000Research and Development


55,000



55,000796,278



796,278Less accumulated amortization


(546,152
)


(389,698
)Intangible assets, net

$
250,126


$
406,580


Amortization expense for the three and nine months ended September 30, 2013 was $52,396 and $156,454 respectively.




(5)
Notes Payable




Convertible Promissory Notes




On December 2, 2004, the Company entered into agreements to borrow an aggregate principal amount of $1,420,000 and to issue to the investors secured convertible notes and common stock purchase warrants. The Company’s convertible promissory notes payable consist of the following at September 30, 2013 and December 31, 2012:




September 30, 2013

(unaudited)


December 31, 2012Convertible promissory note, $93,097 (1/4 of previous outstanding notes) issued December 2, 2004, due November 30, 2009, 8% interest rate

$
-


$
93,097Convertible promissory note, $50,000, issued December 2, 2004, due on November 30, 2009, 8% annual interest rate


17,325



17,325Convertible promissory note, $50,000, issued December 2, 2004, due on November 30, 2009, 8% interest rate


15,241



15,24132,566



125,663Less: current maturities


(32,566
)


(125,663
)$
-


$
-





At September 30, 2013, there were 0 warrants outstanding and exercisable associated with the 2004 debt. These warrants were valued at $0.




11




Background of Secured Financings of BlastGard and Conversion into Common Stock




Alpha Capital Anstalt, a secured debt holder which first loaned us money in December 2004, loaned us $160,000 in February 2011, an additional $300,000 in March 2011, an additional $300,000 in September 2011 and an additional $500,000 in November 2011 pursuant to secured convertible promissory notes. At December 31, 2012, the Company owed $1,210,000 in principal (exclusive of accrued interest of $206,314.71) to Alpha Capital Anstalt after reduction of principal of approximately $50,000 which was converted into Common Stock in 2012.





As of March 21, 2013, the Company had outstanding $1,267,707.07 in principal debt, including accrued interest thereon owed to Alpha Capital Anstalt, pursuant to secured promissory notes (collectively the “Company Debt”). Pursuant to an amendment and consent, all of the debt owed to Alpha Capital, which was previously past due and were the subject of security agreements, guarantee and other transaction documents, to the extent outstanding, have had their maturity date extended through June 14, 2013 and their conversion price lowered from $0.010 per share to $0.009 per share.




On April 4, 2013, Alpha Capital Anstalt, closed on an agreement dated March 21, 2013  (the “Purchase and Exchange Agreement”) with 8464081 Canada Inc. (the “Purchaser”) to sell to the Purchaser and its assignees the Company’s Debt in the principal amount, including accrued interest thereon, of $1,267,770.07 (which excludes $182,000 of the principal due on this note that was maintained by Alpha Capital) owned by it plus warrants to purchase 104,333,335 shares (exercisable at $0.01 per share). The agreements required that within three (3) months of March 21, 2013, that the Purchaser shall convert all the notes acquired by it at the current conversion price of $0.009 per share. Alpha Capital Anstalt (the “Seller”) has also committed to convert the $182,000 of principal retained by it into shares of the Company’s Common Stock at the same conversion price. Also, the agreement required the Purchaser to offer to purchase the other December 2004 Debt for a purchase price equal to the total amount of principal and interest due on each note with a 10% premium.




On April 23, 2013, the aforementioned secured note holders converted their debt in the principal amount of approximately $1.451 million including accrued interest thereon into 161,269,410 shares of common stock at a conversion price of $.009 per share. Of the 161,269,410 shares, 132,426,499 shares were issued to 8464081 Canada Inc., 20,222,222 shares were issued to Alpha Capital Anstalt and 8,620,689 shares were issued to Laurentian Bank Securities ITF Robocheyne Consulting Ltd. Exemption from registration is claimed under Section 3(a)(9) of the Securities Act of 1933, as amended.




At December 31, 2012, the Company had outstanding other secured indebtedness borrowed in December 2004 in the amount of $125,663. At September 30, 2013, this other secured indebtedness was reduced to $32,566 as a result of the conversion of principal and accrued interest into 12,218,869 shares of Common Stock at a conversion price of $.009 per share. As part of Alpha Capital Anstalt’s agreement with 8464081 Canada, 8464081 Canada is reportedly in the process of purchasing this other secured indebtedness which approximates $45,000, including accrued interest thereon, and, upon the completion of said purchase, such indebtedness will be converted into Common Stock at $.009 per share.





Our outstanding secured debt has mandatory redemption provisions. A large portion of the secured debt provides that in the event (i) the Company is prohibited from issuing Conversion Shares, (ii) upon the occurrence of any other Event of Default (as defined in the Transaction Documents), that continues beyond any applicable cure period, (iii) a Change in Control (as defined below) occurs, or (iv) upon the liquidation, dissolution or winding up of the Company or any Subsidiary, then at the Secured Debt Holder’s  election, the Company must pay to the Secured Debt Holder not later than ten (10) days after request by such Secured Debt Holder, a sum of money determined by multiplying up to the outstanding principal amount of the Note designated by the Secured Debt Holder, at the Secured Debt Holder’s election, the greater of (i) 120%, or (ii) a fraction the numerator of which is the highest closing price of the Common Stock for the thirty days preceding the date demand is made by Secured Debt Holder and the denominator of which is the lowest applicable conversion price during such thirty (30) day period, plus accrued but unpaid interest and any other amounts due under the Transaction Documents ("Mandatory Redemption Payment"). The Mandatory Redemption Payment must be received by the Secured Debt Holder on the same date as the Conversion Shares otherwise deliverable or within ten (10) days after request, whichever is sooner ("Mandatory Redemption Payment Date"). Upon receipt of the Mandatory Redemption Payment, the corresponding Note principal, interest and other amounts will be deemed paid and no longer outstanding.  The Secured Debt Holder may rescind the election to receive a Mandatory Redemption Payment at any time until such payment is actually received.  Liquidated damages calculated that have been paid or accrued for the ten day period prior to the actual receipt of the Mandatory Redemption Payment by such Secured Debt Holder shall be credited against the Mandatory Redemption Payment provided the balance of the Mandatory Redemption Payment is timely paid.  “Change in Control” is defined as  (i) the Company  becoming a Subsidiary of another entity (other than a corporation formed by the Company for purposes of reincorporation in another U.S. jurisdiction), (ii) the sale, lease or transfer of substantially all the assets of the Company or any Subsidiary, (iii) a majority of the members of the Company’s board of directors as of the Closing Date no longer serving as directors of the Company, except as a result of natural causes or as a result of hiring additional outside directors in order to meet appropriate stock exchange requirements, or (iv) Michael Gordon, the Chief Executive Officer of the Company is no longer serving as Chief Executive Officer unless prior written consent of the Secured Debt Holder had been obtained by the Company.  The foregoing notwithstanding, the Secured Debt Holder may demand and receive from the Company the amount stated above or any other greater amount which the Secured Debt Holder is entitled to receive or demand pursuant to the Transaction Documents.




12





In connection with the aforementioned loan transactions, we also issued to Alpha Capital Anstalt warrants to purchase 104,333,335 shares of the Company’s Common Stock, which warrants are currently exercisable at a reduced exercise price of $.009 per share, which exercise price is subject to adjustment pursuant to the provisions of the warrant. In the event a fundamental transaction occurs as defined in the warrants, which includes without limitation any person or group acquiring 50% of the aggregate Common Stock of the Company, then the holder of the warrants may have the right to have the warrants redeemed at a price equal to the Black-Scholes value of said warrants. These warrants were sold by Alpha Capital to 8464081 Canada.





Also, pursuant to the Purchase and Exchange Agreement by and among Alpha Capital Amstalt (the “Seller”), 8464081 Canada (the “Purchaser”) and the Company, the parties agreed to the following:





·
Purchaser has the right to nominate and appoint to the Board at least 50% of the Board members;





·
Purchaser has a right of first refusal to participate in future financings up to its pro rata share of Common Stock of the Company.





·
Purchaser undertakes to provide the Company with sufficient capital to allow the Company to conduct its business and remain a going concern until December 31, 2013, subject to further agreements between the Company and Purchaser.  All such funding will be provided through equity transactions and will not be funded via debt.




This transaction resulted in the Purchaser, namely, 8464081 Canada Inc., acquiring control of the Company through its acquisition of Warrants to purchase 104,333,335 shares of Common Stock exercisable at $.01 per share and its acquisition of secured debt in the principal amount of $1,267,770.07, which together with accrued interest thereon, was convertible at $.009 per share. The Purchaser paid Seller approximately $1.82 million to acquire control of the Company, including giving Seller a promissory note in the amount of $400,000, which note is due on August 31, 2013. The Purchaser and Seller also entered into a Pledge Agreement with respect to a portion of the securities of the Company that were the subject of the change of control.




Conversion of Accrued Expenses.




On March 8, 2011, BlastGard’s Board of Directors ratified, adopted and approved that James F. Gordon’s accrued salary of $160,000 (20 months at $8,000 per month covering May-December 2009, January-October 2010 and January-February 2011); Michael J. Gordon’s accrued salary of $160,000 (20 months at $8,000 per month covering May-December 2009, January-October 2010 and January-February 2011); and Morse & Morse, PLLC’s accrued legal bill of $67,025.30 be converted into a Convertible Non-Interest Bearing Demand Note, convertible into Common Shares of BlastGard at $.05 per share at the noteholder(s) discretion. On May 3, 2011, BlastGard’s Board of Directors ratified, adopted and approved $100,000 in additional compensation to Michael J. Gordon as CEO, of which $50,000 be converted into a Convertible Non-Interest Bearing Demand Note, convertible into Common Shares of BlastGard at $.05 per share at the noteholder(s) discretion and $50,000 issued in Common Stock at $.05 per share.




13




The 2011 convertible promissory notes consisted of the following at September 30, 2013 and December 31, 2012:




September 30, 2013

(unaudited)


December 31, 2012Convertible promissory note, $160,000, issued  February 3, 2011, due on August 31, 2011, 10% annual interest rate

$
-


$
110,000Convertible promissory note, $300,000, issued  March 3, 2011, due on March 3, 2012, 10% interest rate


-



300,000Convertible promissory note, $300,000, issued   June 17, 2011, due on June 17, 2012, 10% interest rate


-



300,000Convertible promissory note, $500,000, issued  November 10, 2011, due on February 10, 2013 10% interest, net of unamortized  discount of  $0 and $22,380, respectively


-



477,620Convertible promissory note, $210,000, issued  January 31, 2011, due on September 30, 2011, 6% interest rate


210,000



210,000Convertible promissory note, $160,000, issued  January 31, 2011, due on January 31, 2012,  6% interest rate


160,000



160,000Convertible promissory note, $67,025, issued  January 31, 2011, due on September 30, 2011, 6% interest rate


67,025



67,025437,025



1,624,645Less: current maturities


(437,025
)


(1,624,645
)$
-


$
-




September 30, 2013

(unaudited)


December 31, 2012Line of credit from Regions Bank, $100,000, interest only at 8% annually, due on demand

$
75,280


$
81,574Line of credit from Fifth Third Bank, $450,000, interest only at 6.2% annually, due on demand


-



428,716Revolving credit card facility with Wells Fargo Bank, $150,000, interest only at 7.5% annually, due on demand


145,401



146,796Three credit card accounts with major financial institutions varying monthly minimum payments including interest, due on demand


49,197



54,991269,878



712,257Less: current maturities


(269,878
)


(712,257
)$
-


$
-





14




(6)           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 September 30, 2013 and December 31, 2012;




September 30, 2013

(unaudited)


December 31, 2012Acquisition note for the purchase of Acer product designs, original amount $30,000, interest at 8%


30,000



30,00030,000



30,000Less: current maturities


(30,000
)


(30,000
)$
-


$
-




(7)
Related party loans




The Company received various short term loans from the Chief Executive Officer during the quarter ended September 30, 2013 to facilitate short term operating capital requirements.  The balance as of September 30, 2013 was $353,802.




The Company received a short term loan from a related party in the amount of $100,000 with interest stated at 6%.  This amount has been paid in full as of September 30, 2013




(8)
Shareholders’ Equity




Preferred stock





The Company is authorized to issue 1,000 shares of $.001 par value preferred stock, none of which are currently outstanding.  The Company may divide and issue the Preferred Shares in series.  Each Series, when issued, shall be designated to distinguish them from the shares of all other series. The relative rights and preferences of these series include preference of dividends, redemption terms and conditions, amount payable upon shares of voluntary or involuntary liquidation, terms and condition of conversion as well as voting powers.





Common stock issuances





292,797,657 shares were issued and outstanding at September 30, 2013.





Stock Compensation


The Company periodically offered options to purchase stock in the company to vendors and employees. No options were granted during the nine months ended September 30, 2013.





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, 2012 and 2011 there were 0 and 0 options granted, respectively and 1,450,000 and 900,000 expired un-exercised, respectively.




15




There were no net cash proceeds from the exercise of stock options during the nine months ended September 30, 2013.  At September 30, 2013 and December 31, 2012, there was no unrecognized compensation cost related to share-based payments which was expected to be recognized in the future.




The following table represents stock option activity for the periods indicated below:





Number

of Shares


Weighted

Average

Exercise

Price

Weighted

Average

Remaining

Contractual Life

Aggregate

Intrinsic

ValueOptions Outstanding - January 1, 2013

7,050,000


$
0.10

1.0years


-Granted

-


$
-Exercised

-



-Forfeited/expired/cancelled

-Options Outstanding – March 31, 2013

7,050,000


$
0.05

4.8 years

$
0Outstanding Exercisable – January 1, 2013

7,050,000


$
0.10

4.8 years

$Outstanding Exercisable – September 30, 2013

7,050,000


$
0.05

3.4 years

$
0




The total grant date fair value of options vested during the three months ended September 30, 2013 $0.





(9)         Line of Credit




The Company has a $100,000 credit line personally secured by the guaranty of the Company’s Chief Executive Officer. Of the $100,000, $75,280 was owed pursuant to the line of credit (inclusive of interest at 5%) at September 30, 2013 and the remaining $24,720 is available under such line. The Company’s Chief Executive Officer established a $220,000 personal line of credit with a bank, which he has made available to the Company to utilize. At September 30, 2013, the entire $220,000 was borrowed and advanced to the Company.  These loans are included current portion of notes payable.




(10)         Income Taxes




The Company realized net income in the current and  various prior periods presented.   Due to the deferred tax attributes of the derivatives and a deferred tax asset from prior periods, which was fully allowed for, no income tax benefit or expanse has been presented.  Any tax liability associated with the gain was offset by the deferred tax assets and changing in the valuation allowance on those tax assets.  The Company has existing net operating losses available to offset any potential tax expense for the current year.  The years of 2010, 2011 and 2012 are still open for audit by regulatory authorities.




(11)         Commitments and Contingencies




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 $350 per month on a month to month basis.




16





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 July 2013, the Company entered into a three year lease agreement for approximately 25,000 square feet of office and warehouse space in Columbus, OH. We believe that our HighCom facility is adequate for present requirements and suitable for the operations involved. Rent payment under the new 3-year lease is $6,967 per month.





HighCom rents approximately 900 square feet of office space in Aurora, CO on a short-term lease expiring on October 31, 2013 at a rental of $965 per month. On June 1, 2013, HighCom moved into new space in same office complex and entered into a new one year lease for 450 square feet of office space in Aurora, CO at a rental of $518 per month.





Rent expense for the nine months ended September 30, 2013 and 2012 was approximately $50,123 and $22,000 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, 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 make 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 September 30, 2013, the Company was in arrears on the final twelve monthly payments on the settlement.  These amounts are included in accrued expenses.





(12)           Contingent Liability





In March of 2011, the Company accomplished the acquisition of 100% of HighCom Security, Inc.  As part of the consideration given, the Company agreed to an earn-out consisting of up to $100,000 in cash and up to 35,000,000 shares of common stock based on a pro-rata basis if revenue were to reach certain goals.  BlastGard management believed that a portion of the revenue goals were very achievable and valued the contingent consideration at 68% of the market price at the time of the agreement.  The balance accrued as a contingent liability pursuant to this transaction as of September 30, 2013 and December 31, 2012 was $1,170,081 and $1,170,081respectively.





The earn-out calculations took into consideration multiple target dates for achievement of the revenue goals forecasted.  As of the date of this filing, the final earn-out date of July 25, 2013 has passed, and the final calculation relative to the cash and shares earned consists of $6,308 and a total of 11,076,953 shares, of which when issued will satisfy this obligation in full.  None of these items have been issued as of the date of this report.





17





(13)           Exercise of Warrants/Reduction of Debt





On August 23, 2013, 8464081 Canada Inc. exercised warrants to purchase 28,923,342 shares of the Company’s underlying Common Stock at a reduced exercise price of $0.009 per share due to anti-dilution provisions of said warrants. After this transaction, the Purchaser has warrants remaining to purchase 75,409,993 shares (exercisable at $0.009 per share).





The Company owed approximately $435,376.00 to Fifth Third Bank which was personally guaranteed by the former CEO of HighCom. Recently 8464081 Canada Inc. purchased the Company’s note from Fifth Third Bank and took an assignment of the civil judgment on the note entered into against both HighCom and its former CEO. The indebtedness has been reduced to a civil judgment by the bank in the Ohio state court system. The net proceeds of the warrant exercise described in the preceding paragraph were utilized to release the Company from its obligations under the note.





(14)
Subsequent Events





There are no subsequent events disclosed herein as of the filing date of this Form 10-Q, except as follows:




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 will vest 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 $.02 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.





Item 2.
Management’s Plan of Operation




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, 2012. 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 September 30, 2013, have been included.




Summary




BlastGard International, Inc. is in the business of providing protection for individuals and property.  We have developed and have been marketing BlastWrap products to protect people and property against explosive forces.  We have recently acquired a 98.2% new subsidiary (HighCom Security, Inc.) that provides a wide range of security and personal protective gear.  A description of each company can be found below and a description of our acquisition can be located under "Item 13" of our Form 10K for the fiscal year ended December 31, 2012. We believe that the products of the two companies have a certain synergy and that BlastGard International is poised to be a full service provider for defensive and protective product needs. The term "the Company" shall include BlastGard and HighCom unless the context indicates otherwise.




18




HighCom provides a wide range of security products and personal protective gear (including tactical armor) that are tailored and offer protection solutions to specific customer requirements.  HighCom caters to local law enforcement agencies, correctional facilities and municipal authorities.  Given the equipment and ballistic protection solutions provided by HighCom, compliance with the U.S. Department of Commerce, U.S. Department of State, U.S. Department of the Treasury and all other governmental agencies' regulations is a high priority. HighCom has sold its products in the defense and law enforcement sectors and is known for innovative technology, exceptional customer service and superior quality performance. We export our products throughout the world and have in the past sold products in Asia, Africa, Europe, Latin America and the Middle East. Many of our products are controlled for export purposes and we require end user details prior to all sales. Strict compliance with U.S. and International laws and regulations is mandatory.




As discussed under "Background of HighCom" under "Item 1"of our Form 10-K for the fiscal year ended December 31, 2012.  HighCom's sales revenues in 2008 were approximately $17 million. Revenues in 2009 suffered a large decrease largely attributable to a May 2009 fire in its Columbus, OH facility. This destructive fire caused significant disruption to HighCom operations which was forced to relocate to new premises to restart its manufacturing activities.  The combination of decreased spending in law enforcement and homeland security sectors experienced by the industry, the US financial crisis and the destructive effects of the factory fire, revenues decreased to $4 million.  In the second half of 2009, HighCom was able to reestablish its operations in OH and began to regain its market presence both with customers and vendors.  The result of which was the receipt of a $6 million contract award through an open bid process for the supply of hard armor plates and soft armor vests to United Nations Peacekeeping Forces.  This was the first UN contract won by HighCom as a prime contractor.  Shipments under this contract began in late 2009 with the majority of the contract revenues scheduled to be earned in 2010.  Reference is made to “Item 1” – Foreign Corrupt Practices Act of our Form 10K for the fiscal year ended December 31, 2010 for a discussion of material events that effected HighCom in fiscal 2010 and the first quarter of 2011.




In March 2011, BlastGard’s management team officially assumed operational control of HighCom.  Since this time we have accomplished a number of key compliance tasks and are currently in the process of finalizing manufacturing agreements with several key partners.  As stated in the paragraph above, BlastGard has received official communication from the U.S. State Department that HighCom’s export authority has been reinstated. In addition to this, BlastGard has completed registration through both the Directorate of Defense Trade Controls as well as the Bureau of Industry and Security ("BSI"). The purpose of these registrations is to allow BlastGard control over the export management and compliance program moving forward.  HighCom also completed their ISO certification which had been revoked under HighCom due to missed audits.  BlastGard management has been able to complete an internal audit and management review, in addition to meeting with BSI for the external audit review and in March 2012 HighCom secured ISO certification. Communication with the United Nations is ongoing. On February 6, 2012, the Company was notified by letter that the United Nation’s Vendor Review Committee (“VRC”) had recommended to immediately place on hold the registration status of HighCom Security. This VRC decision to place on hold our registration status was based on integrity/ethical issues surrounding the former CEO’s actions. Soon after this decision was made, we were notified that on February 21, 2012 the government dismissed all the charges against the former CEO. The Company has been in communication with the United Nations Procurement Division regarding this matter and on March 15, 2012, the Company was informed that the VRC had met regarding our request for re-instatement and that its recommendation is currently under consideration. BlastGard has also made significant personnel changes within HighCom and restructuring of operating locations and costs. Since the completion of our acquisition of HighCom, the Company has focused its employee time and capital resources primarily on the development of the business of HighCom. We expect future results of operations to show the benefits of these changes.  The results of operations for HighCom Security have been included on these statements from the date of acquisition, January 25, 2011.




Results of Operations




Our consolidated net revenues increased substantially as a direct result of our acquisition of HighCom Security in March 2011, which included a change in management. A majority of our sales are due to two of our major product categories: ballistic plates and ballistic helmets. Management instituted a number of action steps to realize future increase in sales, namely: a visible presence at industry tradeshows, cultivation of former customers, aggressive pricing, new in-house production facility, greater cost control over raw materials as well as a new marketing and sales program. We also secured our ISO 2012 certification. The International Organization for Standardization (“ISO”) is the world’s largest developer of voluntary International Standards. International Standards give state of the art specifications for products, services and good practice, helping to make industry more efficient and effective. Developed through global consensus, our ISO certification breaks down the barriers to international trade which is a major focus of our new sales strategy.




19




For the three months ended September 30, 2013 and 2012, we recognized sales of $220,097 and $1,802,770 and a gross profit of $64,710 and $589,472, respectively.  For the nine months ended September 30, 2013 and 2012, we recognized sales of $1,442,118 and $2,793,476 and a gross profit of $632,749 and $875,654, respectively.  Management believes that the 2013 decreases in sales for each reporting period is primarily the result of customers delaying anticipated orders to the fourth quarter of 2013..




For the three months ended September 30, 2013, our operating expenses were $323,672 as compared to $295,458 for the three months ended September 30, 2012. For the nine months ended September 30, 2013, our operating expenses were $913,053 as compared to $828,318 for the nine months ended September 30, 2012. The increased operating expenses were due to additional temporary personnel necessary to keep up with the demand for increased sales.




For the quarter ended September 30, 2013, total other income (expense) was $310,076.  This included a gain on derivative liability in the amount of $960,466, a gain of $175,066 from negotiated settlements on old accounts payable, offset by interest expense of $824,591. During the nine months ended September 30, 2013, total other income (expense) was $509,850.  This included a gain on derivative liability of $1,274,298, a gain of $306,318 from negotiated settlements on old accounts payable, offset by interest expense of $1,069,902.




Our net income (loss) for the three months ended September 30, 2013 and 2012 was $51,470 as compared to $(42,478), respectively. Our net income (loss) for the nine months ended September 30, 2013 and 2012 was $224,755 as compared to $946,785, respectively.




Sales Backlog




As of the filing date of this Form 10-Q, the Company was working on fulfilling anticipated sales orders of $1.2 million that are expected to ship in the 3rd quarter of 2013. The Company has hired temporary personnel to complete these orders and this will substantially increase our operating expenses in the third quarter.  Management is optimistic that additional sales will occur in the third quarter of 2013, although no assurances can be given in this regard.




Background of Secured Financings of BlastGard and Conversion into Common Stock




Alpha Capital Anstalt, a secured debt holder which first loaned us money in December 2004, loaned us $160,000 in February 2011, an additional $300,000 in March 2011, an additional $300,000 in June 2011 and an additional $500,000 in November 2011 pursuant to secured convertible promissory notes. At December 31, 2012, the Company owed $1,210,000 in principal (exclusive of accrued interest of $206,314.71) to Alpha Capital Anstalt after reduction of principal of approximately $50,000 which was converted into Common Stock in 2012.




As of March 21, 2013, the Company had outstanding $1,267,707.07 in principal debt, including accrued interest thereon owed to Alpha Capital Anstalt, pursuant to secured promissory notes (collectively the “Company Debt”). Pursuant to an amendment and consent, all of the debt owed to Alpha Capital, which was previously past due and were the subject of security agreements, guarantee and other transaction documents, to the extent outstanding, have had their maturity date extended through June 14, 2013 and their conversion price lowered from $0.010 per share to $0.009 per share.




On April 4, 2013, Alpha Capital Anstalt, closed on an agreement dated March 21, 2013  (the “Purchase and Exchange Agreement”) with 8464081 Canada Inc. (the “Purchaser”) to sell to the Purchaser and its assignees the Company’s Debt in the principal amount, including accrued interest thereon, of $1,267,770.07 (which excludes $182,000 of the principal due on this note that was maintained by Alpha Capital) owned by it plus warrants to purchase 104,333,335 shares (exercisable at $0.01 per share). The agreements required that within three (3) months of March 21, 2013, that the Purchaser shall convert all the notes acquired by it at the current conversion price of $0.009 per share. Alpha Capital Anstalt (the “Seller”) has also committed to convert the $182,000 of principal retained by it into shares of the Company’s Common Stock at the same conversion price. Also, the agreement required the Purchaser to offer to purchase the other December 2004 Debt for a purchase price equal to the total amount of principal and interest due on each note with a 10% premium.




On April 23, 2013, the aforementioned secured note holders converted their debt in the principal amount of approximately $1.451 million including accrued interest thereon into 161,269,410 shares of common stock at a conversion price of $.009 per share. Of the 161,269,410 shares, 132,426,499 shares were issued to 8464081 Canada Inc., 20,222,222 shares were issued to Alpha Capital Anstalt and 8,620,689 shares were issued to Laurentian Bank Securities ITF Robocheyne Consulting Ltd. Exemption from registration is claimed under Section 3(a)(9) of the Securities Act of 1933, as amended.




20




At December 31, 2012, the Company had outstanding other secured indebtedness borrowed in December 2004 in the amount of $125,663. At September 30, 2013, this other secured indebtedness was reduced to $32,566 as a result of the conversion of principal and accrued interest into 12,218,269 shares of Common Stock at a conversion price of $.009 per share. As part of Alpha Capital Anstalt’s agreement with 8464081 Canada, 8464081 Canada is reportedly in the process of purchasing this other secured indebtedness which approximates $45,000, including accrued interest thereon, and, upon the completion of said purchase, such indebtedness will be converted into Common Stock at $.009 per share.




Our outstanding secured debt has mandatory redemption provisions. A large portion of the secured debt provides that in the event (i) the Company is prohibited from issuing Conversion Shares, (ii) upon the occurrence of any other Event of Default (as defined in the Transaction Documents), that continues beyond any applicable cure period, (iii) a Change in Control (as defined below) occurs, or (iv) upon the liquidation, dissolution or winding up of the Company or any Subsidiary, then at the Secured Debt Holder’s  election, the Company must pay to the Secured Debt Holder not later than ten (10) days after request by such Secured Debt Holder, a sum of money determined by multiplying up to the outstanding principal amount of the Note designated by the Secured Debt Holder, at the Secured Debt Holder’s election, the greater of (i) 120%, or (ii) a fraction the numerator of which is the highest closing price of the Common Stock for the thirty days preceding the date demand is made by Secured Debt Holder and the denominator of which is the lowest applicable conversion price during such thirty (30) day period, plus accrued but unpaid interest and any other amounts due under the Transaction Documents ("Mandatory Redemption Payment"). The Mandatory Redemption Payment must be received by the Secured Debt Holder on the same date as the Conversion Shares otherwise deliverable or within ten (10) days after request, whichever is sooner ("Mandatory Redemption Payment Date"). Upon receipt of the Mandatory Redemption Payment, the corresponding Note principal, interest and other amounts will be deemed paid and no longer outstanding.  The Secured Debt Holder may rescind the election to receive a Mandatory Redemption Payment at any time until such payment is actually received.  Liquidated damages calculated that have been paid or accrued for the ten day period prior to the actual receipt of the Mandatory Redemption Payment by such Secured Debt Holder shall be credited against the Mandatory Redemption Payment provided the balance of the Mandatory Redemption Payment is timely paid.  “Change in Control” is defined as  (i) the Company  becoming a Subsidiary of another entity (other than a corporation formed by the Company for purposes of reincorporation in another U.S. jurisdiction), (ii) the sale, lease or transfer of substantially all the assets of the Company or any Subsidiary, (iii) a majority of the members of the Company’s board of directors as of the Closing Date no longer serving as directors of the Company, except as a result of natural causes or as a result of hiring additional outside directors in order to meet appropriate stock exchange requirements, or (iv) Michael Gordon, the Chief Executive Officer of the Company is no longer serving as Chief Executive Officer unless prior written consent of the Secured Debt Holder had been obtained by the Company.  The foregoing notwithstanding, the Secured Debt Holder may demand and receive from the Company the amount stated above or any other greater amount which the Secured Debt Holder is entitled to receive or demand pursuant to the Transaction Documents.




In connection with the aforementioned loan transactions, we also issued to Alpha Capital Anstalt warrants to purchase 104,333,335 shares of the Company’s Common Stock, which warrants are currently exercisable at an exercise price of $.01 per share, which exercise price is subject to adjustment pursuant to the provisions of the warrant. In the event a fundamental transaction occurs as defined in the warrants, which includes without limitation any person or group acquiring 50% of the aggregate Common Stock of the Company, then the holder of the warrants may have the right to have the warrants redeemed at a price equal to the Black-Scholes value of said warrants. These warrants were sold by Alpha Capital to 8464081 Canada.




Also, pursuant to the Purchase and Exchange Agreement by and among Alpha Capital Amstalt (the “Seller”), 8464081 Canada (the “Purchaser”) and the Company, the Purchaser and the Company agreed to the following:




·
Purchaser has the right to nominate and appoint to the Board at least 50% of the Board members;




·
Purchaser has a right of first refusal to participate in future financings up to its pro rata share of Common Stock of the Company.




·
Purchaser undertakes to provide the Company with sufficient capital to allow the Company to conduct its business and remain a going concern until December 31, 2013, subject to further agreements between the Company and Purchaser.  All such funding will be provided through equity transactions and will not be funded via debt.




21




This transaction resulted in the Purchaser, namely, 8464081 Canada Inc., acquiring control of the Company through its acquisition of Warrants to purchase 104,333,335 shares of Common Stock exercisable at $.01 per share and its acquisition of secured debt in the principal amount of $1,267,770.07, which together with accrued interest thereon, was convertible at $.009 per share. The Purchaser paid Seller approximately $1.82 million to acquire control of the Company, including giving Seller a promissory note in the amount of $400,000, which note is due on August 31, 2013. The Purchaser and Seller also entered into a Pledge Agreement with respect to a portion of the securities of the Company that were the subject of the change of control.




Various Product Lines Identified For BlastWrap®- We have Several Completed and Finished Products





HighCom provides a wide range of security products and personal protective gear (including tactical armor) that are tailored and offer protection solutions to specific customer requirements.  HighCom caters to local law enforcement agencies, correctional facilities and municipal authorities.  Given the equipment and ballistic protection solutions provided by HighCom, compliance with the U.S. Department of Commerce, U.S. Department of State, U.S. Department of the Treasury and all other governmental agencies' regulations is a high priority. HighCom has sold its products in the defense and law enforcement sectors and is known for innovative technology, exceptional customer service and superior quality performance.





Body armor is classified by the NIJ according to the level of protection it provides from various threats.  The classifications are as follows:





·
Type IIA body armor- minimal protection against smaller caliber handgun threats.


·
Type II body armor – provides protection against many handgun threats, including many common smaller caliber pistols with standard pressure ammunition, and against many revolvers.


·
Type IIIA body armor- provides a higher level of protection and will generally protect against most pistol calibers including many law enforcement ammunitions, and against many higher poared revolvers.


·
Type III and IV body armor – provides protection against rifle rounds and are generally only used in tactical situations.





Our Security Products include the following:





§
Ballistic helmets


§
Body armor and hard armor plates


§
Riot helmets and shields


§
Mounted patrol, vehicular crew, and general duty helmets


§
Metal detectors: walk-through and handheld


§
Explosive ordinance disposal equipment:  bomb suits & gear, hook & line kits, detectors and search mirrors, under vehicle surveillance systems


§
X-Ray screening systems:  luggage, parcel, freight and cargo scanners, mobile systems, transportation securities administration test objects





Manufactured products versus products supplied by third party vendors.





HighCom manufactures ballistic plates, ballistic shields and blankets. Hard armor plates are HighCom manufactured products which either carry our brand name or a private label. Our ballistic vests, ballistic helmets and EOD bomb suits and gear are currently manufactured and private labeled by third party vendors for us. Our soft arm vests are manufactured by one of two major suppliers and they either carry the supplier brand name or the HighCom brand name. Our UN soft armor vest is co-manufactured by us with a third party vendor. Our ballistic packs are also manufactured by one of two manufacturers. We distribute the following products made by other manufacturers: metal detectors, x-ray machines, EOD kits and detection devices.  In the future, we intend to manufacture PASGT (personal armored systems for ground troops) and ACH (advanced combat helmets) ballistic helmets as well as EOD suits.  For a complete description of the HighCom product line, reference is made to our Form 10-K for the fiscal year ended December 31, 2012.




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Liquidity and Capital Resources.




At September 30, 2013, we had cash of $47,645, working capital of $(1,044,566), an accumulated deficit of $(16,270,795) and shareholder equity of $310,835.




For the nine months ended September 30, 2013, net cash used by operating activities was $(478,374) primarily due to our net income of $224,755, offset by a gain on derivative liability, gain on negotiated settlement on accounts payable items, amortization and depreciation, and a large increase in our inventory. During the nine months ended September 30, 2013, we used cash in investing activities for purchase of assets of $(2,139) and we generated cash from financing activities of $421,667 from loans from related parties, and $260,310 from the exercise of warrants.




For the nine months ending September 30, 2012, net cash provided by operating activities was $52,334 primarily due to our net income of $946,785, offset by a gain on derivative liability, stock based compensation, amortization and an increase in our accounts payables and accruals. During the nine months ended September 30, 2012, we used cash in investing activities for payment of deferred costs and property of $(48,077) and we used cash from financing activities of $(71,488) for repayment of notes payable.




At September 30, 2013, we had cash of $47,645 and we owed approximately $1.1 million in principal (without discounts) and approximately $800,000 in payables and accruals. We anticipate that our future liquidity requirements will arise from the need to finance our accounts receivable and inventories, and from the need to fund our growth from operations, current debt obligations and capital expenditures. The primary sources of funding for such requirements are expected to be cash generated from operations and raising additional capital from the sale of equity and/or debt securities. However, we can provide no assurances that we will be able to generate sufficient cash flow from operations and/or obtain additional financing on terms satisfactory to us, if at all, to remain a going concern. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis and ultimately to attain profitability. The Company is attempting to obtain cash to finance its operations. We can provide no assurances that financing will be available to us on terms satisfactory to us, if at all, or that we will be able to continue as a going concern. In this respect, see “Note 1 – Going Concern” in our financial statements for additional information as to the possibility that we may not be able to continue as a “going concern.”




To date, we have relied on management’s ability to raise capital through equity private placement financings to fund our operations. We estimate that we will require between $1.0 million and $1.5 million in additional financing and cash flow from operations to support our operations and to meet our debt obligations as they become due and payable over the next 15 months of operations. We can provide no assurances that cash generated from operations will occur or additional financing will be obtained on terms satisfactory to us, if at all, or that additional debt conversions will occur.





Exercise of Warrants/Reduction of Debt





On August 23, 2013, 8464081 Canada Inc. exercised warrants to purchase 28,923,342 shares of the Company’s underlying Common Stock at a reduced exercise price of $0.009 per share due to anti-dilution provisions of said warrants. After this transaction, the Purchaser has warrants remaining to purchase 75,409,993 shares (exercisable at $0.009 per share).





The Company owed approximately $435,376.00 to Fifth Third Bank which was personally guaranteed by the former CEO of HighCom. Recently 8464081 Canada Inc. purchased the Company’s note from Fifth Third Bank and took an assignment of the civil judgment on the note entered into against both HighCom and its former CEO. The indebtedness has been reduced to a civil judgment by the bank in the Ohio state court system. The net proceeds of the warrant exercise described in the preceding paragraph were utilized to release the Company from its obligations under the note.





Purchase of HighCom Security Inc.





As previously reported, on January 25, 2011, BlastGard International, Inc. ("BlastGard") entered into a binding Letter of Intent (“LOI”) with HighCom Security, Inc. (“HighCom”) under which BlastGard will acquire 100% of the common stock of HighCom from the stockholders of HighCom, none of whom are affiliates of BlastGard. HighCom is a worldwide security equipment provider based in San Francisco, California. HighCom designs, manufactures and distributes a unique range of security products and personal protective gear. BlastGard and HighCom have agreed to consummate a Stock Purchase Agreement, subject to the approval of all necessary parties, agencies or regulatory organizations. As of the signing of the agreement, BlastGard immediately assumed the operations of HighCom and started to provide financing for the operations while a definitive agreement is drawn up over the next 90 days.




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As stated above, the LOI contemplated several closing conditions and the closing in escrow with a possible of rescission if the State Department does not reinstate HighCom’s export license. On March 4, 2011, among other changes the LOI was amended as follows: 1) the LOI constitutes the definitive stock purchase agreement; 2) BlastGard issued 9,820,666 shares of its Common Stock and promissory notes totaling $196,400 to Robert Rimberg as trustee for an Irrevocable Trust FBO and Yochi Cohen and his wife, Yocheved Cohen–Charash (the "Trust") in exchange for 1,150 shares of the outstanding 1,171 shares of HighCom Common Stock, equivalent to 98.2% of the outstanding shares; 3) the parties agree to waive all closing conditions, escrow provisions and right of rescission; and 4) BGI agreed for a period of 30 days to offer to purchase Ron Peled 21 shares of HighCom from him or his transferee at a cost of 179,934 shares of BGI Common Stock and in exchange for promissory notes totaling $3,600, with terms identical to those received by the Trust plus 1.8% of the Earn-out provisions contained in the LOI.





BlastGard also agreed to an earn-out consisting of up to $100,000 in cash and up to 35,000,000 shares of common stock based on a pro-rata basis if revenue were to reach certain goals.  BlastGard management believed that a portion of the revenue goals were very achievable and valued the contingent consideration at 68% of the market price at the time of the agreement.





As of the date of this filing, the final earn-out date of July 25, 2013 has passed, and the final calculation relative to the cash and shares earned consists of $6,308 and a total of 11,076,953 shares.  None of these items have been issued.





Recently Issued Accounting Pronouncements




During the past two years, the Financial Accounting Standards Board (“FASB”) issued a number of new pronouncements, which are described in Note 1, “Recent Accounting Pronouncements” of the Notes to Financial Statements contained in our latest annual report on Form 10-K filed with the Security and Exchange commission on April 14, 2011. Reference is made to these recent accounting pronouncements as if they are set forth therein in their entirety.




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 effective at the reasonable assurance level at the end of our most recent quarter. There have been no changes in the Company's disclosure controls and procedures or in other factors that could affect the disclosure controls subsequent to the date the Company completed its evaluation. Therefore, no corrective actions were taken.


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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 nine months ended September 30, 2013, we had no sales or issuances of unregistered securities, except as described under Notes Payable – Background of Secured Financings of BlastGard and Conversion into Common Stock and under Note 13 in the Notes to Consolidated Financial Statements.  The conversion of debt into Common Stock is exempt under Section 3(a)(9) of the Securities Act as an exchange of securities without the payment of commissions. The exercise of Warrants is exempt under Section 4(2) of the Securities Act of 1933, as amended.




(b)           Rule 463 of the Securities Act is not applicable to the Company.




(c)           In the nine months ended September 30, 2013, 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




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

Description11.1

Statement re: computation of earnings per share. See condensed consolidated statement of operations and notes thereto.31.1

Rule 13a-14(a) Certification – Chief Executive Officer and Chief Financial Officer *32.1

Section 1350 Certification – Chief Executive Officer and Chief Financial Officer *





*
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.




BLASTGARD INTERNATIONAL, INC.Dated: November 14, 2013
By:
/s/ Michael J. GordonMichael J. Gordon, Chief Executive and Chief FinancialOfficer




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