Registration No. 333-121455
U.S. Securities and Exchange Commission
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 4 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BLASTGARD INTERNATIONAL, INC.
(Name of small business issuer as specified in its charter)
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| Colorado | | 2899 | | 84-1506325 |
(State or jurisdiction of incorporation or organization | | (Primary Standard Industrial Classification Code Number) | | I.R.S. Employer Identification No. |
12900 Automobile Blvd., Suite D, Clearwater, Florida 33762
(Address and telephone number of principal executive offices)
12900 Automobile Blvd., Suite D, Clearwater, Florida 33762
(Address of principal place of business or intended principal place of business)
Michael J. Gordon, 12900 Automobile Blvd., Suite D, Clearwater, FL 33762 (727) 592-9400
(Name, address and telephone number of agent for service)
Copies to:
Troy Young, Esq.
Futro & Associates, P.C.
1401 Seventeenth Street, Suite 1150
Denver, Colorado 80202
phone (303) 295-3360
facsimile: (303) 295-1563
Approximate date of proposed sale to the public: From time to time after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ¨
CALCULATION OF REGISTRATION FEE
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Title of each Class of Securities
to be Registered | | Amount to be
Registered | | Proposed Maximum
Offering Price
Per Share (n1) | | Proposed Maximum
Aggregate
Offering Price (1) | | Amount of
Registration
Fee |
Common Stock, $.001 par (n2) | | 958,201 | | $1.93 | | $1,849,327.93 | | $217.67 |
Common Stock, $.001 par (n3) | | 556,170 | | $2.09 | | $1,162,395.30 | | $136.81 |
Common Stock, $.001 par (n4) | | 146,969 | | $3.00 | | $440,907.00 | | $51.89 |
Common Stock, $.001 par (n5) | | 1,420,000 | | $1.93 | | $2,740,600.00 | | $322.57 |
Common Stock, $.001 par (n6) | | 680,000 | | $3.91 | | $2,658,800.0 | | $312.94 |
Common Stock, $.001 par (n7) | | 100,000 | | $3.00 | | $300,000.00 | | $35.31 |
Common Stock, $.001 par (n8) | | 150,000 | | $5.00 | | $750,000.00 | | $88.28 |
Total | | 4,011,340 | | | | $9,902,030.23 | | $1,165.47(n9) |
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| (n1) | In accordance with Rule 457(c), the aggregate offering price of shares of common stock of BlastGard International, Inc. is estimated solely for purposes of calculating the registration fees payable pursuant hereto, as determined in accordance with Rule 457(c), using the average of the high and low sales price reported by the OTC Bulletin Board for the Common Stock on December 13, 2004 (which was $1.93 per share) with respect to shares registered on December 20, 2004 and on January 5, 2005 (which was $3.91 per share) with respect to shares registered pursuant to the Pre-Effective Amendment No. 1, and, with respect to shares of common stock issuable upon exercise of outstanding warrants or conversion of outstanding notes, the higher of (1) such average sales price or (2) the exercise price of such warrants or the conversion price of such notes. |
| (n2) | Represents outstanding shares of common stock held by certain selling securityholders. |
| (n3) | Represents shares of common stock issuable upon the exercise of common stock purchase warrants held by certain selling securityholders at an exercise price of $2.09 per share. |
| (n4) | Represents shares of common stock issuable upon the exercise of common stock purchase warrants held by certain selling securityholders at an exercise price of $3.00 per share. |
| (n5) | Represents up to 1,420,000 shares of common stock issuable upon conversion of principal and interest on secured convertible notes held by certain selling securityholders. Pursuant to the agreement with the note holders, the number of shares being registered represents 150% of the number of shares of common stock issuable upon conversion in full of the principal of the notes at a conversion price of $1.50 per share. |
| (n6) | Represents outstanding shares of common stock held by Argyll Equities LLC. |
| (n7) | Represents shares of common stock issuable upon the exercise of common stock purchase warrants held by Argyll Equities LLC at an exercise price of $3.00 per share. |
| (n8) | Represents shares of common stock issuable upon the exercise of common stock purchase warrants held by Basic Investors, Inc. at an exercise price of $5.00 per share. |
The company hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the company shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said section 8(a), may determine.
PROSPECTUS
BLASTGARD INTERNATIONAL, INC.
The Resale of Up to 4,011,340 Shares of Common Stock
The selling price of the shares will be determined by market factors at the time of their resale.
This prospectus relates to the resale by the selling securityholders of up to 4,011,340 shares of common stock. The selling securityholders may sell the stock from time to time in the over-the-counter market at the prevailing market price or in negotiated transactions.
We will receive no proceeds from the sale of the shares by the selling shareholders. However, we have received proceeds from the sale of shares that are presently outstanding. In addition, we may receive additional proceeds from the exercise of warrants held by selling securityholders.
Our common stock is quoted on the over-the-counter Electronic Bulletin Board under the symbol BLGA.
Investing in the common stock involves a high degree of risk. You should invest in the common stock only if you can afford to lose your entire investment. See “Risk Factors” beginning on page 3 of this prospectus.
Please read this prospectus carefully. It describes our company, finances, products and services. Federal and state securities laws require that we include in this prospectus all the important information that you will need to make an investment decision.
You should rely only on the information contained in this prospectus to make your investment decision. We have not authorized anyone to provide you with different information. The selling shareholders are not offering these securities in any state where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front page of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2005
The following table of contents has been designed to help you find important information contained in this prospectus. We encourage you to read the entire prospectus.
TABLE OF CONTENTS
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider before investing in the common stock. You should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and related notes.
Unless the context otherwise requires, the terms “we,” “our,” “us,” “Company” and “BlastGard” refer to BlastGard International, Inc., a Colorado corporation. Our principal offices are located at 12900 Automobile Blvd., Suite D, Clearwater, Florida 33762. Our telephone number is (727) 592-9400. The address of our website is www.blastgardintl.com. Information contained on our website is not a part of this prospectus.
The Offering
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Securities Offered | | Up to 4,011,340 shares of Common Stock. |
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Offering Price | | The shares being registered hereunder are being offered by the selling securityholders from time to time at the then current market price. |
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Dividend Policy | | BlastGard International, Inc. does not anticipate paying dividends on its Common Stock in the foreseeable future. |
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Use of Proceeds | | The shares offered herein are being sold by the selling securityholders and as such, BlastGard International, Inc. will not receive any of the proceeds of the offering (see, “Use of Proceeds” section). |
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Material Risk Factors | | This offering involves a high degree of risk, elements of which include possible lack of profitability, competition, death or incapacity of management and inadequate insurance coverage. There is a risk to investors due to the speculative nature of this investment, historical losses from operations, a shortage of capital, lack of dividends, dilution factors, control by present shareholders and economic conditions in general. There is a material risk that we may have insufficient funding to engage in any or all of the proposed activities. |
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| | | BlastGard International, Inc. is considered a development stage company, and our principal operations have not yet produced significant revenues. |
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus and documents incorporated by reference contain forward-looking statements. Forward-looking statements relate to our future operations. They estimate the occurrence of future events and are not based on historical facts. Forward-looking statements may be identified by terms such as:
This list is not comprehensive. Similar terms, variations of those terms, and the negative of those terms may also identify forward-looking statements.
The risk factors discussed in this prospectus are cautionary statements. They identify some of the factors that could cause actual results to be significantly different from those predicted in the forward-looking statements. The forward-looking statements were compiled by BlastGard International, Inc. based upon assumptions it considered reasonable. These assumptions are subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. Therefore, forecasted and actual results will likely vary, and these variations may be material.
There can be no assurance that the statements, estimates, and projections contained in this prospectus will be achieved. Thus, we make no representation or warranty as to their accuracy or completeness. In addition, we cannot guarantee that any forecast in this prospectus will be achieved.
These forward-looking statements were compiled as of the date of this prospectus. We do not intend to update these statements, except as required by law. Therefore, you should evaluate them by considering any changes that may have occurred after the date these forward-looking statements appear.
We cannot guarantee the assumptions relating to the forward-looking statements will prove to be accurate. Therefore, while these forward-looking statements contain our best good faith estimates as of the date of this prospectus, we urge you and your advisors to review these forward-looking statements, to consider the assumptions upon which they are based, and to ascertain their reasonableness.
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RISK FACTORS
An investment in our common stock involves major risks. Before you invest in our common stock, you should be aware that there are various risks, including those described below. You should carefully consider these risk factors together with all of the other information included in this prospectus before you decide to purchase shares of our common stock.
Purchase of our stock is a highly speculative you could lose your entire investment. We have been operating at a loss since inception, and you cannot assume that our plans will either materialize or prove successful. In the event our plans are unsuccessful, you may lose all or a substantial part of your investment. The purchase of our stock must be considered a highly speculative investment.
We have incurred substantial losses from inception and we have never generate substantial revenues; failure to achieve profitability in the future would cause the market price for our common stock to decline significantly. We have generated net losses from inception, we have an accumulated deficit of approximately $2.5 million as of December 31, 2004, and we have never generated more than nominal revenues. If we don’t achieve profitability, the market price for our common stock could decline significantly.
If we do not generate adequate revenues in 2005, we will need to raise capital to continue our operations. We estimate that we will require $1.5 million to carry out our business plan during calendar 2005, and we had $1.8 million in cash on hand at the beginning of 2005. However, unless we generate adequate revenues from operation (we have had none to date) during 2005, we will likely require additional financing to carry out our business plans next year, and such financing may not be available at that time.
If we are unable to compete effectively with our competitors, we will not be successful generating revenues or attaining profits.The blast mitigation industry is highly competitive. Our ability to generate revenues and profitability is directly related to our ability to compete with our competitors. Currently, we believe that we have a competitive advantage because of our unique technology, our product performance, product mix and price. Our beliefs are based only on our research and development testing and we currently have only two completed and finished products. We face competition in our markets from competing technologies and direct competition from additional companies that may enter this market with greater financial resources than we have. If we are unable to compete effectively, we will not be successful in generating revenues or attaining profits.
We have not yet formed a sales and marketing department, which may hinder our ability to generate revenues. Our primary sales focus is to distribute our products through strategic partners, direct sales and through information and education. We have entered into agreements with several strategic partners and we have been working with them but have not yet generated any sales from these arrangements. We plan to develop our own sales and marketing department beginning in July 2005. Until that department is organized, our sources of sales opportunities will be limited.
Loss of key personnel could cause a major disruption in our day-to-day operations and we could lose our relationships with third-parties with whom we do business.Our future success depends in a significant part upon the continued service of certain key management personnel. Competition for such personnel is intense, and to be successful we must retain our key managerial personnel. The loss of key personnel or the inability to hire or retain qualified replacement personnel could have cause a major disruption in our day-to-day operations and we could lose our relationships with third-parties with whom we do business, which could adversely affect our financial condition and results of operations.
If future market acceptance of our products is poor, we will not be able to generate adequate sales to achieve profitable operations. Our future is dependent upon the success of the current and future generations of one or more of the products we propose to sell. We have three products available for sale as of January 2005 and three additional products are scheduled for testing during the first quarter of 2005. As of the date of this prospectus, there have been no sales of any of our products. If future market acceptance of our products is poor, we will not be able to generate adequate sales to achieve profitable operations.
Dependence on outside manufacturers and suppliers could disrupt our business if they fail to meet our expectations. Currently, we intend to rely on outside suppliers for our products. We have entered into preliminary agreements with several outside suppliers and with a contract manufacturer for the manufacture of our products. In the
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event that any of our suppliers or manufacturers should become too expensive or suffer from quality control problems or financial difficulties, we would have to find alternative sources (we believe that there are adequate sources available), which could disrupt our business.
We need to hire qualified sales and marketing personnel or else our ability to generate sales and revenue will be limited. The successful implementation of our business plan is dependent on successfully recruiting, training, and retaining qualified personnel in several key positions. Failure to attract qualified personnel could result in failure to meet our operating projections.
Our products may be subject to technological obsolescence, which would adversely affect our business by increasing our research and development costs and reducing our ability to generate sales. Considerable research is underway into blast mitigation. Discovery of another new technology could replace or result in lower than anticipated demand our products and could materially adversely effect our operations.
We may not be able to successfully use or defend our intellectual property rights, which would prevent us from developing an advantage over our competitors. We rely on a combination of patent applications, trademarks, copyright and trade secret laws, and confidentiality procedures to protect our intellectual property rights, which we believe will give us a competitive advantage over our competitors. However, we have not been granted any patents and we may never be granted any patents if our applications are denied. Even if a patent is issued, use of our technology may infringe upon patents issued to third-parties, which would subject us to the cost of defending the patent and possibly requiring us to stock using the technology or to license it from a third party. If a third party infringes on a patent issued to us, we will bear the cost of enforcing the patent. If we are not able to successfully use or defend our intellectual property rights, we may not be able to develop an advantage over our competitors.
We do not expect to be able to pay cash dividends in the foreseeable future, so you should not make an investment in our stock if you require dividend income. The payment of cash dividends, if any, in the future rests within the discretion of its Board of Directors and will depend, among other things, upon our earnings, our capital requirements and our financial condition, as well as other relevant factors. We have not paid or declared any cash dividends upon our Common Stock since our inception and by reason of our present financial status and our contemplated future financial requirements does not contemplate or anticipate making any cash distributions upon our Common Stock in the foreseeable future.
If we are unable to obtain insurance to indemnify our officers and directors against the cost of legal actions brought against them due to there service to our company, we will be required to bear the full cost of any future actions and we may have difficulty in recruiting new officers and directors. Our by-laws provide that our company must indemnify any person made or threatened to be made a party to any legal action or proceeding by reason of the fact that the person was a director or officer of the Company. We currently do not have officer and director liability insurance, so if any such action is instigated against any of our officers or directors, our company will be required to bear the full cost of providing indemnification, which could materially affect our financial position. Also, without officer and director liability insurance we may have difficulty in recruiting new officers and directors who would be willing to work without the security of insurance.
We have a limited market for our common stock which causes the market price to be volatile and to usually decline when there is more selling than buying on any given day. Our common stock currently trades on the over the counter bulletin board under the symbol “BLGA.” However, at most times in the past, our common stock has been thinly traded and as a result the market price usually declines when there is more selling than buying on any given day. As a result, the market price has been volatile, and the market price may decline immediately if you decide to place an order to sell your shares.
The market price of our common stock is highly volatile and several factors that are beyond our control, including our common stock being historically thinly traded, could adversely affect its market price. Our common stock has been historically thinly traded and the market price has been highly volatile. During the 52 week period preceding the date of this prospectus, the closing bid price of our common stock has been quoted on the Over the Counter Bulletin Board from as low as $.80 to as high as $7.00. These quotations reflect interdealer prices without retail markup, markdown, or commission and may not represent actual transactions. For these and other reasons, our stock price is
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subject to significant volatility and will likely be adversely affected if our revenues or earnings in any quarter fail to meet the investment community’s expectations. Additionally, the market price of our common stock could be subject to significant fluctuations in response to:
| | • | | announcements of new products or sales offered by BlastGard or its competitors; |
| | • | | actual or anticipated variations in quarterly operating results; |
| | • | | changes in financial estimates by securities analysts; |
| | • | | changes in the market’s perception of us or the nature of our business; and |
| | • | | sales of our common stock. |
Future sales of common stock into the public market place will increase the public float and may adversely affect the market price. Approximately 13 million shares of common stock are available for sale by management personnel and others under Rule 144 of the Securities Act of 1933, as amended. In general, under Rule 144, a person who has held stock for one year may, under certain circumstances, sell within any three-month period a number of shares which is not greater than one percent of the then outstanding shares of common stock (as of the date of this prospectus, one percent of the total number of shares outstanding equals 218,566 shares). Under certain circumstances, the sale of shares which have been held for two years by a person who is not affiliated with us is also permitted without limitation under Rule 144(k). Future sales of common stock will increase the public float and may have an adverse effect on the market price of the common stock, which in turn could adversely affect our ability to obtain future funding as well as create a potential market overhang.
“Penny Stock” regulations may adversely affect your ability to resell your stock in market transactions. The SEC has adopted penny stock regulations which apply to securities traded over-the-counter. These regulations generally define penny stock to be any equity security that has a market price of less than $5.00 per share or an equity security of an issuer with net tangible assets of less than $5,000,000 as indicated in audited financial statements, if the corporation has been in continuous operations for less than three years.Subject to certain limited exceptions, the rules for any transaction involving a penny stock require the delivery, prior to the transaction, of a risk disclosure document prepared by the SEC that contains certain information describing the nature and level of risk associated with investments in the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Monthly account statements must be sent by the broker-dealer disclosing the estimated market value of each penny stock held in the account or indicating that the estimated market value cannot be determined because of the unavailability of firm quotes. In addition, the rules impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and institutional accredited investors (generally institutions with assets in excess of $5,000,000). These practices require that, prior to the purchase, the broker-dealer determined that transactions in penny stocks were suitable for the purchaser and obtained the purchaser’s written consent to the transaction.
Our common stock is currently subject to the penny stock regulations. Compliance with the penny stock regulations by broker-dealers will likely result in price fluctuations and the lack of a liquid market for the common stock, and may make it difficult for you to resell your stock in market transactions.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the selling securityholders. Any net proceeds from the exercise of warrants are intended to be used for general corporate purposes.
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DESCRIPTION OF BUSINESS
General
BlastGard International, Inc., a Colorado corporation, operates through its wholly-owned subsidiary, BlastGard Technologies, Inc., a Florida corporation established in September 2003. BlastGard International, Inc. acquired BlastGard Technologies, Inc. effective January 31, 2004, in a transaction that was accounted for as a reverse acquisition, which is a capital transaction and not a business combination.
We are considered a development stage company, and our principal operations have not yet produced significant revenues.
We have developed and designed proprietary blast mitigation materials. Patent-pending BlastWrap™ has been designed to mitigate blasts and suppress flash fires resulting from explosions, regardless of the material or compound causing the explosion. We believe that this technology can be used to create new finished products or designed to retrofit existing products. While the need for this technology has always been present, the security and safety concerns resulting from the September 11th terrorist acts make the timing of BlastGard’s emergence even more important.
Company History
BlastGard International, Inc. was incorporated as IDMedical.com, Inc. in June 1999 under the laws of the State of Colorado for the purpose of developing and storing personal medical histories on the Internet. The online medical records business was unsuccessful, and in February 2002, IDMedical.com, Inc. acquired a technology provider, as described below.
In February 2002, IDMedical.com, Inc. acquired 100 percent of the issued and outstanding common stock of ToolTrust Corporation, a Nevada corporation, from the shareholders of ToolTrust, in a share exchange pursuant to an Agreement and Plan of Reorganization dated October 19, 2001 (the “Reorganization”). At the time of the Reorganization, ClearDialog Communications, Inc. (“ClearDialog”) and LocalToolbox Corporation (“LocalToolbox”) were wholly-owned subsidiaries of ToolTrust.
In May 2002, IDMedical.com, Inc. entered into share exchange agreements with certain former shareholders of ClearDialog and LocalToolbox, who were parties to the Reorganization. Pursuant to the share exchanges, the former shareholders are deemed to have reacquired their shares of ClearDialog and LocalToolbox in exchange for the return of shares of IDMedical.com, Inc. common stock. As a result of the transactions, ToolTrust no longer owned ClearDialog and LocalToolbox.
IDMedical.com, Inc. formed a subsidiary, IDMedical, Inc., as part of the Reorganization for the purpose of attempting to salvage the online medical records business, but was unsuccessful in its efforts to do so. The IDMedical, Inc. subsidiary is no longer in business.
In September 2002, IDMedical.com, Inc. changed its name to Opus Media Group, Inc. During 2002, the ToolTrust Corporation subsidiary was unsuccessfully in its efforts to pursue a joint venture music label with recording artist Michael J. Jackson. Due in large part to the perceived negative public scrutiny surrounding Mr. Jackson, the company was unable to raise the necessary funds to launch the music label. The ToolTrust Corporation subsidiary is no longer in business. In September 2003, the name was changed again to Opus Resource Group, Inc. In February 2003, Opus Resource Group, Inc. (“Opus”) entered into an agreement with BlastGard, Inc., pursuant to which Opus issued 66,667 shares (adjusted to reflect stock splits) of restricted stock to BlastGard, Inc. in exchange for the right to distribute and sell BlastGard, Inc. products in China. BlastGard, Inc. held licenses from a third-party named The Verde Partners Limited Partnership (“Verde”) to use two patents for a technology intended to mitigate blasts and suppress flash fires resulting from explosions. After the date of the agreement with Opus, BlastGard, Inc.’s license agreement to utilize patents owned by Verde was not renewed because management of BlastGard, Inc. and Verde could not agree on the value of the Verde technology. Opus never distributed or sold any BlastGard, Inc. products. As a result, Opus and BlastGard, Inc. mutually agreed to rescind their agreement and the 66,667 shares of common stock issued to BlastGard, Inc. were returned to Opus and cancelled in January 2004.
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There has been no continuing dispute with Verde regarding the non-renewal of the license, and there has been no continuing relationship with Verde or its principals.
In September 2003, James F. Gordon, John L. Waddell, Jr. and Michael J. Gordon formed a new company called BlastGard Technologies, Inc. (“BTI”) for the purpose of pursuing a new technology that was created by James F. Gordon and John H. Waddell, Jr. for use in the blast mitigation solutions industry. These individuals chose to use the “BlastGard” name solely because of their personal affinity for the name. BTI is a development stage company that was created to develop, design, manufacture, and market proprietary blast mitigation materials. In September 2003, BTI had granted a license to BlastGard, Inc. to pern it BlastGard Inc. to manufacture and sell products utilizing BTI’s new technology, but BlastGard, Inc. failed to secure adequate funds to perform under the agreement and the agreement was cancelled in December 2003.
BTI is in the blast mitigation solutions industry, as was BlastGard, Inc., but BlastGard, Inc. is not a predecessor to BTI. BlastGard, Inc. was formed in 2000 by Verde, a third-party called C&L Trust, and James F. Gordon (who held a 33% minority interest). In 2002, John H. Waddell, Jr. and Michael J. Gordon were added as officers and directors of BlastGard, Inc. BlastGard, Inc. attempted to commercialize a 12 year old technology that was different from BTI’s new technology, but BlastGard, Inc. was never successful. BlastGard, Inc. had no material business and no material assets. Neither BTI nor BTI’s founders, namely James F. Gordon, John L. Waddell, Jr. and Michael J. Gordon, ever acquired any assets from BlastGard, Inc. or acquired or continued any business, in any manner, from BlastGard, Inc. BlastGard, Inc. ceased all activities in 2003, was formally dissolved in 2004 and is no longer in business.
On January 31, 2004, pursuant to an Agreement and Plan of Reorganization (“Reorganization Agreement”), Opus Resource Group, Inc. acquired 100% of the issued and outstanding common stock of BlastGard Technologies, Inc. (“BTI”), a Florida corporation, from BTI’s shareholders, in exchange for an aggregate of 18,200,000 (adjusted to reflect a subsequent stock split) shares of Opus common stock. The reorganization was a reverse acquisition which resulted in the former shareholders of BTI (including John L. Waddell, Jr.; James F. Gordon; and Michael J. Gordon) having a controlling interest in Opus, and BTI became a wholly-owned subsidiary of Opus. On March 31, 2004, Opus changed its name to BlastGard International, Inc.
In July 2003 Opus had loaned $245,000 to BlastGard, Inc. to be used to make license payments to Verde. By February 2004, BlastGard, Inc. had no resources to repay the $250,000 loan. Because Opus had just acquired BlastGard Technologies, Inc. and because our new management team had a personal affinity for the name “BlastGard,” Opus acquired from BlastGard, Inc. all of the intellectual property relating to the BlastGard name (i.e., the trademark, copyright material, artwork, logo design, and web site domain name), and in exchange Opus forgave $45,000 in debt owned to Opus by BlastGard, Inc. The $45,000 value was arbitrarily determined by management and agreed upon by BlastGard, Inc. BlastGard, Inc. ceased all activities in 2003, was formally dissolved in 2004 and is no longer in business. We wrote-off the remaining $200,000 as bad debt when BlastGard, Inc. was dissolved.
We intend to focus exclusively on the business plan of BTI. BTI’s patent-pending BlastWrap™ technology is designed to mitigate blasts and suppress fires resulting from explosions. BTI acquired a patent application for BlastWrap™, in January 2004, from co-inventors John L. Waddell, Jr., our COO and President, and James F. Gordon, our CEO, who assigned the patent application to BTI in consideration of the consummation of the Reorganization Agreement. For accounting purposes, we assigned no monetary value to the patent application that was assigned to BTI. Our current management team was the management team of BTI prior to the reorganization.
Introduction
An explosion results from the rapid conversion of chemical energy into rapidly expanding high-pressure gases. The rapidly expanding gases compress the surrounding air much like a piston and create a shock wave that travels ahead of the explosive gases. The “overpressure” (pressure above ambient) in a shock wave acts to “pre-condition” the air as it passes through to make the following accelerated gas “piston” more damaging. This high intensity, short duration overpressure wave transfers impulse (momentum) stresses, damages or destroys structures in its path. Impulse follows the shock wave but lingers and decays with time. The negative phase is a partial vacuum that “whips” lighter structures to magnify damage. A shock wave can be likened to an initial hard punch, while the impulse is more like a powerful bulldozer. Any reduction in the effective power of the shock wave will increase the target’s capability to withstand the destructive impulse.
Blast Solutions
Blast management solutions generally fall into one of two categories: hardening or mitigation. Hardening is a method of blast mitigation by which an object is placed around an explosive material to contain the blast, and is generally accomplished through the use of armor, mass or both. Armor is used primarily for its ballistic properties, with enhanced protection levels achieved by increasing mass (thickness and/or weight). Hardening solutions include steel armor plate, various synthetic fibers (Kevlar™, Spectra™, etc.) and fiber-reinforced composites. Most blast containment systems employ hardening.
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Although some energy is absorbed through deformation, hardening systems have the negative effect of reflecting blast, which by the laws of physics actually magnifies blast effect up to eight times. This is because the shock waves reflecting off a solid surface add to the incident one, which creates a destructive synergism of much greater gas density, temperature, pressure, and overpressure duration—which all contribute to impulse (the “piston”). Reflected energy is a significant problem, particularly in confined spaces. Hardening, which essentially is trying to overmatch or resist a blast, has been widely practiced throughout the years even though it is limited in its capabilities.
Mitigation (or attenuation) of blast effects is the dissipation of blast energy so that acoustic and shock waves, peak overpressure, reflected peak overpressure, impulse and afterburn (the rapid burning of combustible materials in the “hot zone”, including soot, occurring so fast that it adds to blast effect from the original explosive) are reduced. This reduction is accomplished through both physical and chemical processes that are triggered when a blast occurs. The remaining energy is transmitted at a slower, more sustainable level. The amount of reflected energy is significantly reduced with mitigation. Unlike hardening systems, the performance of our products is not related directly to material thickness and therefore we believe our products have a greater range of uses producing the same or better effectiveness against blast effects.
BlastWrap™ Background
BlastWrap™ is a concept for assemblies (not a chemical compound) from which blast protection products are built to save lives and reduce damage to valuable assets from explosions. BlastWrap™ is designed to not only substantially reduce blast impulse and pressure (including reflected pressure and impulse), but quenches fireballs and suppresses post-blast fires. Lethal fragments may be captured by adding anti-ballistic armor layers on the product surface away from a blast.
Our BlastGard® technology is designed to mitigate blast and rapid combustion phenomena through numerous mechanisms. The relative contribution of each mechanism depends upon the intensity and nature of the impinging hazard. Shock wave attenuation, for example, is dominant in mitigating mechanical explosions. Our products attempt to emulate unconfined conditions and accelerate attenuating processes that occur in free air. Thus BlastWrap™ does not try to resist blasts (which physically intensify blast phenomena); it mitigates them. BlastWrap™ can be used as part of confining assemblies (containers and blast walls). In effect, BlastWrap™ is a ‘virtual vent’.
BlastWrap™ Technology Components
Our BlastWrap™ products are made from two flexible films arranged one over the other and joined by a plurality of seams filled with attenuating filler material (volcanic glass bead or other suitable two-phase materials), configurable (designed for each application) with an extinguishing coating. Together, this combination of materials is designed to mitigate a blast while at the same time eliminate fireballs or flame fronts produced by the blast.
We believe that this system is unique because it:
| | 2. | Quenches fireballs and post blast fires |
| | 3. | Reduce blast impulse and pressure |
| | 4. | Does not dispense chemical extinguishants |
| | 5. | Uses neither alarms, sensors, nor an activation system |
| | 6. | Is nontoxic and ecologically friendly |
Our BlastGard® Technology extracts heat, decelerates both blast wind and shock waves, and quenches the hot gases in all blasts and fireballs. BlastWrap™ does not interact with the explosive elements, and is therefore not altered by them. However, after a single intense detonation, BlastWrap™ must be replaced.
| | • | | For blasts that produce fireballs or intense hot gases at higher pressures, BlastGard® Technology has the ability, through testing, to cool the blast zone rapidly, thereby reducing structural damage. |
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| | • | | In detonation of high explosives, where at least half of the energy released is in the shock wave, attenuation occurs even more rapidly, and in doing so substantially reduces explosion phenomena. |
Key BlastWrap™ Features
| | • | | Lightweight, flexible, durable and environment safe |
| | • | | Requires no wires, electricity, detection devices and contains no sensors |
| | • | | Customizable and easy to retrofit |
| | • | | Materials are low in cost and are widely available |
| | • | | Extremely adaptable, without losing effectiveness |
| | • | | Can be constructed with additional environmental or specific blast conditions (e.g. weather or moisture barriers or dust free layers) |
| | • | | Can be produced with armor (Kevlar, Spectra, etc) for ballistic or fragment situations |
| | • | | Irreversibly dissipates energy from blast |
| | • | | Eliminates need for dispensing of agents in blast mitigation process |
| | • | | Neither contains nor creates hazardous fragments |
| | • | | Environmentally friendly, non-toxic core materials |
Key BlastWrap™ Benefits
BlastWrap™ is light in weight. It can be used to protect against outdoor explosions. Because of the Montreal protocols banning production of Halon extinguishing agents, BlastWrap™ technology offers a light weight and environmentally acceptable blast suppression means available for most applications; and, it can even be adapted to function underwater.
BlastWrap™ products are inherent sound absorbers and thermal insulators, and are typically fire-tolerant. Any or all of these qualities are readily enhanced by bonding to common materials, thereby further extending the wide range of applications which BlastWrap™ can fulfill through a single product.
The performance of BlastWrap™ proprietary technology is independent of scenario and environment, which means that it does not matter where the physical location is, how the basic product form is used or the environment in which the event takes place. The basic product form can be used as a stand-alone material (as linings, curtain barriers, or as structural panels), or can be laminated or otherwise affixed to a wide range of product forms such as insulation (thermal and acoustic), ballistic armor such as KEVLAR™ (a Dupont trademark), decorative stone, or packaging materials. BlastWrap™ products can thus provide blast and fire protection in flooring, wall, and roof constructions, in packaging, in storage cabinets and other containment structures, and aboard all types of vehicles, ships, and aircraft.
Intellectual Property Rights
Explosive devices are increasingly being used in asymmetric warfare to cause destruction to property and loss of life. These explosive devices sometimes can be disrupted, but often there is insufficient warning of an attack. Our BlastWrap™ products were created around this core concept. The BlastWrap™ patent application was filed with the U.S. Patent and Trademark Office on July 31, 2003.
We also filed an application for this technology under the Patent Cooperation Treaty (PCT). Under the PCT, we will have patent protection in most industrialized countries during the review process. A substantial number of countries have been added to the list of PCT members, including almost all of the former Soviet republics and China; thus the new claims will be protected in more than 40 countries while the application is pending.
BlastWrap™ Testing
BlastWrap™ prototypes have been evaluated in different test series, which have ranged from semi-quantitative screenings to third-party instrumented trials. We have consistently observed blast effect reductions of at least 50% in
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virtually every activity in which BlastWrap™ has been involved. These tests have indicated that impulse (momentum transfer) and peak pressure are reduced by nearly 50%. Impulse is the most destructive explosive-related hazard for structures and vehicles.
Significance of Test Results
No BlastWrap™ tests have been in small-scale. Every test series has involved standard products or test facilities simulating service conditions—munitions containers, air cargo containers, steel vessels comparable in size to commercial aircraft fuel tanks and large secondary storage units, and vehicles, all with charge weights reflecting actual hazards. Management believes that the test results provide evidence that BlastWrap™ can protect vehicles, structures, and ships against very intense blasts. Tests have also shown that certain design features (such as deflectors), combined with additional BlastWrap™ panels, can accomplish protection against larger blasts.
Applications
Our BlastGard® Technology works indoors or out, vented or un-vented, wet or dry, clean or dirty, damaged or intact, and against strong or weak blasts from solid explosives or flammable fluids. It is a lightweight, space-efficient custom-engineered technology that can be produced with additional layers for insulation, fragment/ballistic protection, environmental protection or impact and cushioning barriers. Significantly, no new or high-cost fabrication technologies or materials are required to produce BlastWrap™. In addition, because of the Montreal protocol’s ban of Halon extinguishing agents, we believe that our BlastGard® Technology is the only blast and fire suppression means available for most applications, including adaptation for underwater use. It is an inherently effective sound absorber and thermal insulator.
Because BlastWrap™ is customizable and offers protection against explosions of all types, its potential for application cuts across a wide range of industries and government agencies. Some potential applications for BlastGard® Technology include:
| | • | | Transport and storage units containing chemicals and other explosive compounds. |
| | • | | External wall linings to protect buildings, such as Embassies and other high value locations, against vehicle bombs and placed explosives. |
| | • | | Aboard naval vessels and merchant ships to minimize damage from breaching blasts emanating from mines, cruise missiles, and torpedoes. |
| | • | | Fireball and explosion-suppressing fuel tank jackets for natural and compressed natural gas, propane, fuel cells, fuel tanks and other “green fuel” vehicle systems. |
| | • | | Dividers to suppress fireballs and fuel mist explosions from accidents aboard both aircraft and ships, in process facilities, and on offshore platforms. |
| | • | | Separators and partitions in explosives manufacturing and handling facilities, such as a load/assembly/pack (LAP) depots, fireworks plants, and propellant manufacturing sites. |
| | • | | Pallets and buffers between stacks of palletized munitions and ordnance. |
| | • | | Lining of portable and fixed magazines. |
| | • | | Missile launch boxes for military vehicles and naval vessels. |
| | • | | Cabinets and containers for handling fuses, small rockets, and explosive devices. |
| | • | | Internal walls of commercial buildings that house, research or produce explosive materials. An example would be chemical or energy companies. |
| | • | | Quick-erect blast protection barriers and revetments. |
| | • | | Blast protection shields, armors, and structures with “stealth” (“low-observable”) camouflage properties. |
| | • | | Blast/fire protection linings for commercial and military aircraft and air cargo containers. |
| | • | | Blast and ballistic-protected modular buildings (barracks, accommodations for offshore facilities, field stations, tactical shelters and command facilities, monitoring stations for law enforcement). |
| | • | | Underwater blast isolation units for offshore facility abandonment’s, coastal construction, and naval vessels. |
| | • | | Neutral buoyancy jackets for deep water drilling risers, and Sub Sea manifold protection. |
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| | • | | Composite blast/fire protection structures and materials (blast walls, blast mitigation billboards, relief vents, reinforcement of masonry buildings) for hydrocarbon, process, mining, missile launch, and manufacturing facilities, and for building demolitions. |
| | • | | Explosives storage and shipping containers, portable magazines, and explosive disposal kits. |
| | • | | Mine blast protection kits for vehicles. |
| | • | | Safety shields and specialty protection for entertainment industry location sets (Hollywood sound stages, vehicles, on-location structures). |
| | • | | Personnel and vehicle protective armor. |
| | • | | Mine (coal, mineral extraction and processing) safety. |
13 Product Lines Identified For BlastWrap™ - Two Completed and Finished Products
Our core product, BlastWrap, is a finished product that we are currently manufacturing for R&D testing by third-parties. The primary application for BlastWrap is to further customize it for different applications and uses.
Our BlastGard® Technology can be customized to fit the need of an industry or a specific customer. We have examined the various markets susceptible to explosions, and have developed finished products to market to businesses and agencies at risk. While designing finished products engineered with BlastWrap™, we have taken into account that some products must be portable, while others will remain at a fixed location. Some products have been designed to contain identified explosive agents, while others are designed to mitigate unidentified explosive threats.
All products can be designed to conform to the United States Bureau of Alcohol, Tobacco and Firearm’s requirements for explosive materials. These requirements outline the design parameters for any container based upon the explosive material to be housed, as follows:
| | • | | Type 1: Boxes for permanent storage of high, low explosives and blasting agents. |
| | • | | Type 2: Boxes for portable storage of high, low explosives and blasting agents. |
| | • | | Type 3: Boxes for temporary storage of high, low explosives and blasting agents. |
| | • | | Type 4: Boxes for only low explosives, blasting agents and electric blasting caps. |
| | • | | Type 5: Boxes for only electric blasting caps. |
With these standards in mind, we have developed the following product lines to address the needs of the customers and targeted markets:
| | 3. | Explosive Storage Unit (ESU) |
| | 7. | Lining – Automotive / Distributed Power |
| | 12. | Vehicle IED and land mine protection |
| | 13. | Over-head protection from mortar attack for temporary accommodation units |
1. First Responder
This product is a man-portable barrier assembly used by first responders (police, bomb squads, fire departments, etc) to a suspicious device report. The lightweight panels can be set up in minutes to protect people and the surrounding area from blast pressure, fragments and fireball effects in case of detonation. The basic unit design of this product has several variant designs each using a different wall material. The heaviest (steel), will be the lowest cost, and the lightest will use special anti-ballistic materials. An extension of this design will then be ported into a new Explosive Ordnance Disposal (EOD) barricade design as an extension of this product.
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2. Bomb Squad Assistant
The In-Situ Detonation box, or Bomb Squad Assistant, is a single-design and less sophisticated product intended to provide outside covering for the First Responder unit, providing either additional protection or for in-situ detonation of improvised explosive devices (IED’s) when desirable or necessary.
3. Explosive Storage Units – ESU
The explosives storage units (ESU) designed for Lockheed Martin Missiles and Space Company allows them to safely store highly detonable materials in a container, which prevents sympathetic detonation and afterburn. The ESU’s were approved by the Department of Defense (DOD). We designed these ESU’s at our expense for Lockheed’s evaluation and testing. We do not have a development or supply contract with Lockheed. Additional customized uses of this product are foreseen in the research, such as munitions development/handling and DOD contract markets. Since the DOD has already approved this specialized design, future designs will incorporate these best practices creating a shorter product development timeline for future finished products.
4. BlastMag-2
Autoliv, Inc., with nearly 4 billion in sales, is a worldwide leader in automotive safety, a pioneer in both seat belts and airbags, and a technology leader with the widest product offering for automotive safety products. All the leading automobile manufacturers in the world are Autoliv customers. Autoliv invented the world’s first side-impact airbag, the Inflatable Curtain for head protection in side impacts and the Anti-Whiplash Seat. Airbag deployment uses a small charge of the explosive zirconium potassium perchlorate (ZPP) in its airbag initiator devices. Autoliv contacted BlastGard® to design an explosive box for its production facilities that would mitigate blast damage and prevent sympathetic detonation of ZPP charges, which have done at our expense for Autoliv’s evaluation and testing. We do not have a development or supply contract with the Autoliv. Explosive boxes such as those designed for Autoliv have numerous applications in similar plants worldwide as well as product variants for many other industries.
5. BlastMag-3
Portable magazines come in numerous sizes but the basic design remains the same, and they are all designed to be Type 3 compliant. Portable magazines are used in a variety of industries including but not limited to the military, law enforcement, mining, fireworks, research facilities, and munitions manufacturing/handling.
6. BlastMag-5
Plastic ready boxes, which are Type 5 compliant, are the most prolific of all products to be used by both military/law enforcement and commercial customers. The ready boxes are typically used to carry blasting caps, detonation cord and other less threatening explosives in smaller quantities. Obvious military/law enforcement uses as well as industries such as munitions manufacturing, handling, fireworks, mining and others use similar, less safe boxes on a regular basis.
7. Lining – Automotive / Distributed Power
Auto fuel tank linings using BlastWrap™ can be used to protect conventional fuel powered vehicles and more importantly new fuel cell automobiles. The risks of fuel cell technology are discussed in the Automobile Industry section herein.
8. Lining – LD3 Container
LD3 Cargo Containers are used primarily on twin aisle/wide body aircraft such as the B747. Luggage or cargo containers are manufactured by a hand-full of well-established companies throughout the world. The market is extremely competitive with a very low margin. We believe that BlastWrap™ will be an attractive solution to both cost and safety concerns highlighted in recent years concerning air and cargo safety.
9. Lining – Aircraft
Working in conjunction with aircraft and shipping manufacturers, we are designing products and component assemblies to be used in the cargo holds of long haul trans-oceanic aircraft and vessels. Due to the heightened security surrounding trans-oceanic, long haul service, we are diligently working to demonstrate the effectiveness of our product.
10. Weapons Container
The Weapons Container is a specialty design, which was specifically created for The US Military and UK Military use. We designed these Weapons containers at our expense for evaluation and testing by the US and UK Military. We do not have a development or supply contract with an military agency. This product is the first of a line of products to be developed for the special needs of all military personnel.
11. Trash Receptacle
We have two models of mitigated trash receptacle (MTR) containers that have been designed to mitigate blast energy and fireballs and capture bomb fragments.
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12. Vehicle IED and Mine Protection
Vehicles such as military Humvees can be “up-armored” for IED and land mine protection using to BlastWrap lined panels.
13. Over-Head Protection From Mortar Attack For Temporary Accommodation Units
This design is a covering for roofs and perimeter walls of barracks and other structures that is designed to mitigate blast energy and fireballs and capture bomb fragments.
We have developed working prototypes of customized BlastWrap products for each of the 13 product lines described above. All of our prototypes have been and continue to be tested and evaluated by third-parties and potential customers. All prototypes may require further modifications based on test-results and feed-back. However, we have two products that we consider to be completed and finished products, the First Responder and the BlastGard MTR (mitigated trash receptacle), which we are manufacturing and marketing as of March 1, 2005.
Manufacturing
We have three distinct production arrangements:
| | • | | Serial Production – items that can be produced in quantity in an assembly-line fashion. |
| | • | | Contract Manufacturing – items that will require special design or customized features requiring separate and special manufacturing processes. |
| | • | | OEM (Original Equipment Manufacturer) Production – items that are licensed out to OEM producers for their industry enabling OEM purchasers greater control over design, quality and production requirements. |
Serial Production
Manufacturing will be sub-contracted to a BlastGard® licensed and qualified production facility, ideally in proximity to the customer. This will facilitate our customer interaction in design, quality and distribution to affect the greatest level of satisfaction and usefulness of the BlastWrap™ product. BlastWrap™ products to be constructed with Serial Production include:
First Responder- Once an approved and tested design is finalized, serial production can commence at sub-contracted production facilities in proximity to each of the customers.
Bomb Squad Assistant - The base unit of this product is of simple design and will be produced at sub-contracted production facilities.
BlastWrap™ Mag-5 - The basic unit design of this product will take existing ready boxes and retrofit them with BlastWrap™ protection. These products can be produced at existing fabricators trained and licensed to use BlastGard® Technology or can be sub-contracted to existing BlastGard® sub-contract production facilities.
BlastWrap Mag-3- Even though the sizes of a magazine will vary based on each customer’s needs, the basic design remains the same and can be produced at an existing magazine fabrication facility (which receives training and licensing from BlastGard®) or at a BlastGard® sub-contracted production facility near the customer.
Contract Manufacturing
Our Production/Engineering team in BlastGard’s Technology Center will design these items. The manufacturing and assembly of the custom designed product will be subcontracted. This will be at our discretion to ensure quality and adherence to customized design requirements. BlastWrap™ products to be constructed with Contract Manufacturing include:
| | • | | Explosive Storage Units (ESU) - ESUs will be fabricated at a sub-contracted facility with oversight by our engineers due to the nature of the highly customized and regulated design parameters required by the DOD and other regulating entities. In addition, designs may require testing, which will need to be administered by our personnel. |
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| | • | | BlastWrap Mag-2 - Design and production of this product will take place at BlastGard’s preferred sub-contractor due to complex design requirements and the need for BlastGard® personnel to test product designs. |
OEM production (Original Equipment Manufacturer)
OEM production requires licensing agreements with contractors for a specific industry product. There will be several licensing agreements issued on a limited non-exclusive basis in order to provide end-users with an appropriate number of OEM producers. Once qualified and licensed by BlastGard®, OEM producers will be directed to produce and maintain quality standards per end user requirements. BlastWrap™ products to be manufactured with OEM Production include:
Lining – Automotive/Distributed Power (Royalty) - Once design and testing has been completed by our engineering and design team, we will work closely with the auto manufacturers or their already well-established OEM parts manufacturers to fabricate auto fuel tanks with BlastWrap™ protection. We will receive per unit royalties from the manufactures of this product, oversee training and work with end users on design requirements.
Lining - LD3 Container(LD3 Container- Royalty) - We will design and train container manufacturers in the fabrication and installation of BlastWrap™ components. We will receive a per-unit royalty for the use of its patented technology and design.
Lining - Aircraft (B747- 400- Royalty)- Once design and testing has been completed by our engineering and design team, we will work closely with the certified and widely dispersed air frame sub-contractors to integrate the use of BlastWrap™ into their internal systems, such as fuel tanks, cargo holds, cabin, fuselage, etc. Aircraft manufactures, similar to auto manufactures, typically require several suppliers of each part. Therefore the license agreement for air frame sub-contractors will need to be limited and non-exclusive providing us royalties on a per-unit basis as well as continued design, manufacturing, and installation consulting.
Weapons Container - Once the design and testing of each product is complete, we will license and train personnel on the fabrication of the various products within the line. The Contractor chosen will manufacture this product line in-house for each of their munitions manufacturing and handling needs. The contractor will pay a per unit royalty to us for use of its design and patented product. In return, we will be retained on a consulting and design basis as part of the license agreement.
Current manufacturing arrangements for First Responder and the BlastGard MTR (mitigated trash receptacle)
We have two products that we consider to be completed and finished products, the First Responder and the BlastGard MTR (mitigated trash receptacle). which we are manufacturing and marketing as of March 1, 2005.
Centerpoint Manufacturing, Inc., located in Mobile, Alabama manufactures the BlastGard MTR receptacles and Pro-Form Packaging, Inc., located in Dunellen. New Jersey manufactures the BlastWrap and receptacle lid and then ships to Centerpoint Manufacturing for installation. We entered into a five year exclusive alliance agreement with Centerpoint Manufacturing in October 2004 for the joint development of reinforced, blast mitigate trash receptacles. We are not contractually bound to use Pro-Form Packaging, Inc. to the manufacture of the receptacle lids, and we believe that there are alternative manufacturers in the United States.
Futura Composites, B.V., located in Heerhugowaard, Holland, manufactures the First Responder. We are not contractually bound to use Futura Composites, B.V., and we believe that there are alternative manufacturers in the United States.
Quality Assurance
Sub-contractors and OEM producers will be trained, qualified and licensed by BlastGard®. We will ensure through continuous review of qualified producers and sub-contractors, and through end user/customer surveys, that design and quality standards are being maintained to specification. The licensing agreement will stipulate that we will have the right to withhold future contracts until mutually agreed upon standards of quality are achieved. End-users and customers will be partnered in agreeing to and setting quality standards for end products.
Purchasing
We rely on various suppliers to furnish the raw materials and components used in the manufacturing of our products. Management believes that there are numerous alternative suppliers for all of the key raw material and component needs.
Marketing Analysis
Overall Market
The market for blast solutions includes commercial industries (accidental explosions of chemicals, terrorist threats, demilitarization, etc.), militaries (munitions and ballistics storage and transportation), and governments and municipalities (bomb explosions and threats). We have examined each of these markets to identify areas and industries within each that will benefit most from BlastGard® Technology.
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We have divided the Commercial Market into nine viable sectors as follows:
1. Energetic Materials (blasting agents, propellants, explosives)/Explosive Manufacturers/Pyrotechnic Manufacturers
‘Energetic materials’ is a term used to encompass a wide range of materials that release intense heat during decomposition or combustion reactions.
Manufacturers of such devices are in need of protection against hazardous explosive situations.
While energetic manufacturers are a focus for BlastGard® Technology, the related industries are also target markets. For all groups, both regulatory and insurance factors require strict storage and handling measures that all involve confinement or separation, BlastWrap™ products being specifically conceived for such roles. The propellant, pyrotechnic, and explosive manufacturing groups are viewed as prime markets for BlastGard®.
2. Oil and Gas/Petrol Chemical/Chemical/Process Industries
To combat the unique explosions associated with oil, gas and chemical companies, BlastWrap™ can be updated and deployed to clients in these sectors to address the problems involving explosive materials specific to the oil and gas industry with a convenient structural and/or architectural technology that would suppress explosions and minimize post-blast fire hazards with the following features:
| | • | | Are always active and require no maintenance |
| | • | | Comprised of flexible film formed by plurality of seams and filled with attenuating fillers that slow and cool impinging flame fronts |
| | • | | Act as ‘virtual blast vents’ without requiring actual wall penetration |
| | • | | Light structure at less than .8 pounds per square foot of a 1” thickness |
3. Manufacturing of munitions
The full range of our products, from wall protection, barriers, and partitions to containers, can be used to enhance the safety and productivity of facilities that manufacture explosives, propellants, munitions and pyrotechics. A number of specialty units are being designed to meet the needs of this market segment, such as the Weapons Container. Additionally, BlastWrap™ is easily retrofitted into existing containers and storage magazines.
4. Commercial Transport
Throughout the world, commercial companies ship explosive materials via air, train, bus or sea vessel. As determined by the National Highway Transportation Safety Administration (NHTSA), roughly 10% of goods shipped (in terms of tonnage) are classified as hazardous, meaning they can cause damage to other materials being transported, the transport container and supporting personnel. Such shipped products not only require insurance but also risk loss of money and injury.
We believe that BlastGard® offers the ability to convert these standardized shipping containers into explosives storage units complying with the technical requirements of the US Bureau of Alcohol, Tobacco, & Firearms Type 2 magazines. This would be accomplished through universally available containers for which numerous trailers, lift systems, stacking provisions, and international standards exist.
While actively searching for and detecting explosives is a right step in the protection of our ports, it is clear that it cannot be the only step. BlastWrap™ provides a solution that is not dependent on identifying the threat ahead of time, and therefore we believe a significant opportunity is present.
5. Commercial Aviation
Testing conducted in the UK by The Defence Evaluation Research Agency (DERA, an agency in the Ministry of Defence) under the auspices of the UK Civil Aviation Authority (CAA) have shown that BlastGard performs better than any other system tested in blast effect mitigation. We provided prototypes at our expense for CAA’s evaluation and testing. We do not have a development or supply contract with the CAA. The major difference in technical approach
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between the US Government’s Federal Aviation Administration (FAA) and the CAA is that the FAA decided early in the process that ‘hardening’ (to allow zero venting from a blast) of the aircraft’s baggage containers and/or fuselage was the technical solution they wanted to pursue. That assumption is in essence, the ‘Achilles heel’ of the FAA approach. Not only is the weight and cost penalties of this approach significant, the degree of blast management is also the least proficient of those systems tested. BlastWrap™ deals with all of the blast effects - the incident and reflected shocks, the Mach Stem shocks, the blast impulse, the blast flame front and blast after-burn. With BlastWrap™ the blast energy is actively dissipated rather than passively contained.
The bottom line is that BlastWrap™ is not armor; armor gets blown away in strong blasts. BlastWrap™ reduces the ability of an explosion to damage structures, and it quenches heat. Rapid cooling is critical, as any spilled flammable fluids or escaping gas will re-ignite if heat is present. BlastWrap™ has been proven to suppress propane/air fireballs and explosions, and reduce blast pressure by more than 50 percent. The Defense Department recently acknowledged that rooms and containers lined substantially with BlastWrap™ reduce the net equivalent charge weight of explosives and propellants by 50 percent, based on extensive tests.
There are numerous applications within the commercial aviation market for our BlastGard Technology, from lining the interior of an aircraft to providing an on-board ‘detonation center’ (e.g. outfitting a bathroom with BlastWrap™ in the event a bomb, such as a shoe bomb, were to make its way onto a plane). While we will continue to pursue these various applications of the technology, we believe the best and most direct approach for sales within this market will be to create LD3 air cargo containers lined with BlastWrap™.
There are an estimated 600,000 containers in service in the fleet today. There are approximately 40,000 units sold each year and each unit has an average useful life of 5 years. The total number of units in service will continue to rise over the next 10 years.
We are working with an LD3 container manufacturer to develop a low-cost highly effective solution for ‘semi-hardened’ blast mitigation LD3 containers. Blast mitigating LD3 containers do not yet exist. Over the last 10 years, the FAA, along with Galaxy and TelAir, have attempted to build hardened (a container that would contain the blast within the walls) LD3 containers, but they have not been commercially viable due to extremely high costs and excess weight considerations.
The new containers we propose would differ from the FAA containers in the following ways:
| | • | | They are designed to mitigate blast in strategic places wher the aircraft is vulnerable |
| | • | | They suffocate/kill post-blast fires and afterburn, eliminating hot gases |
| | • | | They are light-weight, weighing approximately 225 pounds |
| | • | | They are affordable, with an expected retail price less than $7,500. |
6. Research Facilities/Laboratories
Both universities and research facilities work with explosive elements on a daily basis, from conducting tests to exploring new materials and compounds. Such installations are in need of mitigation protection in storage and to prevent sympathetic detonation or damage to property or persons. These products can reduce potential damage for personnel and property during the use and storage of the explosive elements.
While a large market, due to the specific requirements and needs of each facility/laboratory, we believe sales opportunities within the first two years are limited, as sales personnel and resources would need to be dedicated to this market space.
7. Automotive & Distributed Power Generation
World manufacturing capacity for cars and trucks is now more than 70 million vehicles per year. Ford Motor Corporation announced that the automaker would have a fuel cell-powered vehicle on the market by 2004. Daimler-Chrysler had announced similar plans previously. Other carmakers are well advanced in preparation to produce fuel cell powered cars and trucks.
As to the future, we believe that the number of post-collisions fires will surely increase as alternative fuel vehicles are introduced in greater numbers, particularly the fuel cell vehicles. The fuel cell vehicle is typically powered
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by liquefied petroleum gas (LPG), liquefied natural gas (LNG), compressed natural gas (CNG), ethanol, methanol, electric battery, or dimethyl ether (DME). Fuel cell engines are looked upon positively as they are essentially a ‘zero-pollution engine’, and their efficiency is virtually twice as great as the other alternative fuel concepts. In 1998, there were approximately 274,000 LPG-using vehicles and nearly 140,000 of the other types (Oil & Gas Journal, July 12, 1999).
Despite their positive factors, the proponents of fuel cell vehicles have so far not seriously comprehended nor provided protection for the increased fire hazard posed by ‘alternative fuels’. Several alternative fuels introduce a new potential hazard, namely explosions. We believe that the automobile industry will soon realize that implementing effective and active blast fire safety measures to limit probable life and financial loss, is smart business. Providing higher levels of safety for life and property can only result in greater consumer confidence and higher corporate profits.
Unlike diesel and gasoline, which cannot explode, commercially viable fuels for fuel cells can. At least for the remainder of this decade, fuel cells will use either hydrogen or methanol. Hydrogen must be produced from methanol in order for methanol to be used (this conversion will take place in a subsystem aboard the vehicle), thus substantial quantities of hydrogen will be present on all fuel-cell vehicles.
Common to all of the alternative fuels is the fact that they will require much larger fuel capacities than gasoline or diesel, in order to provide the same amount of energy (gasoline and diesel have much more energy per pound). Larger fuel tanks on vehicles mean that more tank and piping will be vulnerable to rupture in accidents, and larger sized components make tanks intrinsically weaker. In an accident (or rupture of a connection, etc., in a pressurized fuel system), fuel will be atomized and will be mixed in a relatively confined location where hot ignition sources will be present. This is the ideal environment for explosions and fireballs to develop. These hazards are not only present in the vehicle, but also in the fuel distribution infrastructure. Thus service stations, storing and dispensing the fuels, along with tanker trucks hauling the fuels, will each pose hazards on roads and in built-up communities. Design and construction details are crucial to the safe operation of high-pressure and/or cryogenic fluid systems, so numerous leak/fire/explosion events with widespread use of alternative fuel power generation are inevitable.
We believe that BlastWrap™ products for fuel tank systems can prevent most major post-crash fires for vehicles. Major explosions are more likely to be infrequent, even for vehicles using hydrogen as a fuel. However, fireballs and explosions involving natural gas (whether compressed or liquefied), propane, hydrogen and fuel cells will increase in number every year, and certainly could easily exceed the annual number of fatal fire incidents that involved Ford Pintos and GM pickup trucks, which were manufactured with vulnerable side tanks.
Whether for a car, fuel tanker-trailer, gas station facility, warship, ocean going tanker, aircraft, commercial building or product in a residential home, BlastWrap™ can be employed to protect against fireballs and explosions. Because of BlastGard’s structure, it also provides inherent crush and impact resistance. These capabilities will be tailored to provide complete tank systems, which serve both in their primary role of storing flammable fluids, and in preventing accidents or hostile action from causing major disasters. The basic BlastWrap™ assembly is simply adapted for the distinctly different service requirements. If the fuel ignites, the fireball then gets snuffed almost instantaneously, keeping the area cool. If there is a fuel spill outside that ignites (such as from another vehicle), BlastWrap™ tanks will insulate and protect the internal fuel from outside fire.
While we believe significant market opportunity exists, we also recognize that significant barriers to entry also exist. Furthermore, we cannot predict with any certainty when fuel cells will be deployed on a large-scale commercial basis. We do however believe this will be an important market to watch over the next five years. Alignment with a strategic partner will be required.
8. Entertainment
We believe that BlastWrap™ offers a unique ability to protect actors, stunt people, sets, and valuable equipment against blast effects. One specialty firm that creates explosions and fireballs for movies informed BlastGard® that roughly 1 stunt person is hurt each day in incidents involving explosives and pyrotechnics. The former California State Fire Marshal informed BlastGard® management that studios wished to conduct larger explosions on sound stages near Hollywood to keep production costs down, but are not able to do so because of severe constraints on charge sizes. With competition to create ever-greater blast effects in movie and TV spectaculars, we believe that BlastGard® can capitalize on this opportunity by allowing industry players the ability to safely perform such events on Hollywood back-lots.
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BlastGard® Technology can be used to create an assortment of props and structures, either as integral walls or worked into the landscape or sound stage. Most “Hollywood” explosions use black powder and gasoline in various combinations, with some additives or special-purpose materials such as detonating cord. The low explosive power of these materials would make BlastWrap’s protection role, including protection of cameras, simpler.
BlastGard® Technology may also provide blast protection of vehicles. Vehicle flipping or vehicle destruction is fairly commonplace in films, and the charges used in connection with these stunts are comparatively small. BlastWrap™ can protect stunt personnel and can be concealed or disguised, thereby enabling dramatic destruction sequences without injuring the performers.
As attractive as this market maybe, it is not part of our initial marketing strategy. Total sales, in terms of quantity, are unlikely to be large. However, we will respond to inquiries from the entertainment industry, and are aware of the promotional value for BlastWrap™ products that are used in connection with “blockbuster” movies.
9. Mining
Mining is a potentially significant market for our products. In this industry, large quantities of detonators are used, requiring suitable storage. High explosives are used in some fields, especially in metallurgical ores, which have harder formations.
The greater mining industry opportunity is in the mines themselves, where BlastWrap™ can be used as it would be in the oil industry: stopping and suppressing dust and gas explosions before significant injury and damage can develop. For example, methane gas is a very real and challenging hazard in coalmines. The cutting machinery and electrical power components can easily ignite flammable dusts and dust/gas mixtures, leading to disasters.
Mining will not be an initial target market for us. Estimated profit margins would be low when compared to the potential of other industries.
Military Market
It is understood in the defense industry that keeping up with cutting edge technology is crucial for the protection of military personnel. We are seeking the opportunity to showcase BlastGard® Technology to the military high command.
BlastWrap™ does not distinguish between accidents and hostile action; it always functions when there is blast pressure or when a fireball is generated.
We believe that using BlastWrap™ in buildings, onboard ships, or in vehicles, barracks, and command posts can efficiently achieve effective blast mitigation at a low cost. In addition, BlastWrap™ can be used in a variety of manners within each of these categories. From lining compartments in research and testing facilities to encasing engines to insulating launch installations, we believe that BlastWrap™ will provide protection across a variety of platforms.
Other BlastWrap™ uses would include munitions manufacturing, handling, (load/assembly/pack facilities) and storage (a very broad range from large depots to small magazines), explosives / munitions transport (again a wide array of small caliber ammunition to large rockets and missiles), military structures (wide range), military vehicles (land mine protection), shields/revetments and broad demilitarization efforts. Although this market is huge, it is difficult to assess since typical military mind-set has been to accept the dangers of Q-D (quantity/distance offsets) in transport and use, and even in storage when in any conflict.
We have divided the Military Market into the following sectors:
1. Military Logistics
In times of both war and peace, military institutions require a substantial sealift capability to transport potentially explosive and hazardous materials.
As an example of the amount of munitions carried on a single ship, the average US-flag ship carried an average 23,390 tons of dry cargo per ship in the Gulf War—the equivalent of 1,772 containers using the above 13.2 tons/container
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number. Thus, the loss of any of the sealift ships mentioned above would result in the loss of a month’s worth (or more) of munitions for the group conducting the shipping. BlastGard® Technology can be used to protect these sealifts from sympathetic detonation within, offensive attacks from the enemy or friendly fire mistakes.
2. Defense/Storage of On-Base Munitions
The US Department of Defense (DOD) components are all major prospective markets for BlastWrap™. Additionally, demilitarization (“demil”—the destruction of excess or spent munitions) is a major activity at numerous bases, munitions facilities, and test ranges. Most important to our marketing plan is to take advantage of the numerous, substantial opportunities created by base closures and “dense-packing” of munitions, people, and high-value assets.
Our products make munitions storage a large potential market because munitions stored within BlastWrap™ lined spaces would be shifted from the type 1.1 (mass-detonating) category, which triggers the requirement for maximum separation, to the type 1.2 (non-mass-detonating) or 1.4 (insensitive) categories. The 1.2 and 1.3 categories require much less stringent storage requirements.
3. Military Vehicles
Our products offer a means of protecting vehicles against ground mine blasts, regardless of vehicle type or size, from small mini-pickups to heavy tractor-trailer combinations, both armored and “soft-skinned”.
Since World War 2, the majority of vehicle losses have been due to ground mines. Since the Arab-Israeli War of 1973, more than 90% of vehicles lost have been due to mines.
The trend in all modern armies is toward smaller and lighter vehicles, with thinner armor or none at all. This trend reflects the worldwide conflict situation, where hostilities involve guerilla or other dismounted forces widely scattered in friendly terrain (the 1990-1 Persian Gulf campaign was the last major clash of heavy armored forces). These smaller vehicles, such as the HMMV “Hummer”, are almost always destroyed by modern mines. Truck cabs of all sizes are also destroyed by almost every type of anti-vehicle mine, not just damaged. Since these vehicles are predominant in “peace-keeping” forces and rapid deployment groups, the fatality and major injury percentage is very high compared with tanks.
We believe that BlastWrap™ offers the capability of mitigating all seven mechanisms for achieving a vehicle “kill”. These mechanisms include total vehicle destruction (major disintegration, internal explosion, fire), incapacitating the crew (“g”-force accelerations that cause serious injury), loss of mobility (destroying wheels, tracks, and/or drive train), loss of vehicle control (steering damage or severe vehicle deformation), and immobilizing through fuel loss (fuel tank or fuel line rupture). There are numerous locations for BlastWrap™ products that would provide the necessary protection, including exterior panel attachments, substitutions for existing vehicle “skins”, and behind-armor panels to mitigate internal blast effect and suppress internal fires.
4. Defense/Combat Systems
An additional area of focus for us is in the Defense market is major DOD system developments and upgrades. This includes the Air force’s production of combat aircraft, the Navy’s combat fleet and the Army’s ‘Future Combat System’ family of air-transportable vehicles. While the DOD presents a viable market for the use of blast mitigation products that offer substantial system survivability, reduced weight, and other advantages, the organization’s purchase cycles are too uncertain and invariably prolonged, and the cost of participation for a contractor is very high.
We are quite interested in participating in aircraft and vehicle programs when its efforts and materials are paid as a subcontractor, and/or when there is tangible marketing value that can be clearly defined if we are involved in such programs. One such area is in retrofits and replacement programs for the Army’s medium and heavy truck fleets (dominated by Oshkosh and Stewart & Stevenson).
We have limited influence within this market.
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5. Naval Vessels
Newer warships primarily use gas turbine engines, which use the same fuel as jet aircraft. These engines are confined in a noise/heat reducing enclosure. Most of the remaining types use diesel engines, as do most military GE LM2500 Marine Gas Turbine Engine vehicles and trucks.
Diesel or kerosene-type fuels’ vapors can generate explosive pressure in confined spaces. This is less of a problem in ground combat vehicles (where pool fires are more of a threat), but is a serious problem aboard a ship. Both accidents and hostile action can generate a fuel mist in a confined space, which can then ignite the flammable mix. The most likely severe hazard scenario is a fireball involving a fuel mist.
BlastWrap™ in locations distributed around a shipboard or a vehicle engine compartment can suppress fireballs and minimize heating of metal surfaces by a flash fire. Without BlastWrap™, fireballs and flash fires created in fuel mists would rapidly incapacitate personnel in the compartment. If the compartment is open to outside air (through a hull rupture, missile entrance, or to another compartment), any Halon fire extinguishants, if used, will rapidly escape and the compartment fire will rapidly become uncontrollable.
While BlastGard® Technology can be effectively applied on board and throughout naval ships, this target market will not be pursued during our initial marketing push.
Government/ Municipal Market
We have divided the Government/Municipal Market into the following sectors:
1. Law Enforcement/Security
The most common types of improvised explosive devises (IED) encountered by fire/rescue and law enforcement personnel in the US are pipe bombs, Molotov cocktails and other improvised explosive/incendiary devices. The most common explosive materials used in these devices are flammable liquids and black powder.
In a 1999 the National Institute of Justice conducted a survey to determine what technologies are needed by State and local law enforcement agencies to combat terrorism. Participants in the interviews and group discussions noted more than 100 unmet technology needs. Of those, the second most common need among all law enforcement agencies was the means to detect, analyze, disarm and disable explosives. The fourteenth most requested technology was a containment vessel and vehicle for explosive devices. It was requested that these devices be capable of containing the fragments of the device for investigative purposes and be affordable. One bomb technician noted that his agency’s containment vessels cost in excess of $100,000 each and as a result, too few were available. The study showed, that technology needs expressed were remarkably similar across the country with minor regional differences and that affordability appeared to be an overriding concern of all law enforcement agencies.
Recognizing an immediate need and the ability to provide a cost effective solution, we have developed theFirst Responder. The First Responder is a new and effective transportable blast management and mitigation unit that can be used to handle hazardous situations by law enforcement, fire/rescue and bomb squads. The BlastWrap™ First Responder is an IED box produced with lightweight materials and can be folded into a size stored easily in the trunk of a law enforcement vehicle or locker compartment on a fire rescue vehicle. BlastWrap™ First Responder boxes have been designed in conjunction with the NYPD Bomb Squad and the LA County Sheriff’s Dept. We believe that The First Responder will be an effective means to mitigate blast and fire effects at a fraction of the cost of existing or competing technologies and devices.
2. Government Buildings/Structures (Embassies)
The explosion, that ripped through the Alfred P. Murrah Federal Building in Oklahoma City on April 19, 1995 killed 168 people, injured more than 500 others and damaged more than 300 buildings. While the probability of becoming the victim of a terrorist attack has changed recently, it still remains low, but the cost of such an attack continues to skyrocket. According toThe Sentinel (Vol. 1, No. 3, Third Quarter 1993), a publication of the Industrial Risk Insurers, explosion has the highest average dollar loss of all hazardous events. Therefore, another cost factor entering today’s construction and building operation economy is blast mitigation costs. With the recent evens of September 11th,
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insurance costs have risen dramatically as the threat of terrorism becomes a reality. We believe that BlastWrap™ may help companies reduce these costs and related liabilities from unexpected explosions.
3. Research Facilities and Laboratories
Research facilities deal with a large amount of explosive and hazardous materials. Both universities and government facilities work with explosive elements on a daily basis, from conducting tests to exploring new materials and compounds. Such installations are in need of mitigation protection in storage and to prevent sympathetic detonation or damage to property or persons. BlastWrap™ is ideally suited for these environments. These products can reduce potential damage for personnel and property during the use and storage of the explosive elements.
Marketing Strategy
We believe that we are positioned to fill the expansive needs associated with blast and fire mitigation across numerous industries throughout the world. We have only begun to address the many uses and designs in which BlastWrap™ can be effectively applied.
We believe that our BlastGard® Technology can provide blast mitigation solutions for numerous industries across various market segments. However, we recognize that some industries will have significant barriers to entry and/or long lead times or conversely, provide an immediate revenue source. Having limited resources, we have researched each target market, ranked each market and divided the markets into two groups; markets that will require a strategic partnership to penetrate and markets we will sell directly to. We have developed a three-pronged approach to market our BlastGard® Technology.
The three-pronged approach will maximize market penetration while minimizing cost. Our approach is to:
| | • | | DevelopStrategic Partners in existing well-defined markets. |
| | • | | Initiate aDirect SalesApproach. We intend to hire four market focused sales representatives to work with the top four markets, which e currently consider to be (1) military, (2) aviation industry, (3) oil and gas industry and (4) homeland defense. In addition, we will retain commercial representatives who will be licensed to sell BlastGard® Technology to specific markets. |
| | • | | Inform and Educate. Our marketing team, through the Director of Marketing, will seek to create awareness of BlastGard® Technology in the public, commercial and private sectors. |
Competition
The market for blast containment and mitigation is not well defined. Competitors range from niche architectural and engineering firms that provide specialized design and construction techniques for buildings to fire systems manufacturers. We have identified the top nine established companies that offer blast mitigation solutions, each of which may be a potential competitor in one or more of the various markets that we are pursuing. Each of these companies has been in business longer, and has substantially greater resources, than BlastGard:
| | • | | General Plastics Manufacturing |
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Governmental Regulation
We are not aware of any existing or probable governmental regulations that would affect our business, except to the extend that we voluntarily design products to meet various governmental guidelines. For example, our products can be designed to conform to the United States Bureau of Alcohol, Tobacco and Firearm’s requirements for the containment of explosive materials.
Research and Development
In 2003, we did not spend anything on research and development related activities. In 2004, we spent approximately $151,000 on research and development related activities. To date our products or prototypes of our products have been provided by us at no charge to potential customers for their own evaluation and testing done at their expense.
Employees
As of December 31, 2004, we had 4 full time employees. Additional sales and marketing personnel may be hired in the future as our sales efforts require such additional personnel.
DESCRIPTION OF PROPERTY
We do not own any real estate properties. We are located in a 6,000 square foot facility at 12900 Automobile Blvd., Suite D, Clearwater, Florida. We pay a base monthly rent of approximately $700, which includes rent, common area maintenance, insurance and real estate taxes. Management believes that these facilities are adequate for our current and anticipated needs. We pay rent pursuant to a sublease from Michael J. Gordon, an officer and director, which expires on May 31, 2005. Management believes that the rent rate is at or below market cost for similar space and that the facilities are adequate for our current and anticipated needs.
LEGAL PROCEEDINGS
On May 25, 2004, we entered into an agreement with Prisma Capital Markets, LLC, appointing Prisma as an exclusive distributor of our products in Kuwait. Prisma also agreed to arrange for, and pay the costs and expenses related to, the testing and demonstration of our products in Kuwait, in exchange for 300,000 shares of restricted common stock of our company. We also granted Prisma warrants entitling Prisma to purchase up to 4,401,720 shares of Common Stock of our company at an exercise price of $2.062 per share, which would be exercisable only upon Prisma’s meeting various sales goals totaling $30,000,000 in sales.
In July 2004, we notified Prisma that the agreement was cancelled due to Prisma’s failure to arrange for the testing of our products in Kuwait, and demanded the return of the certificates representing the common stock and the warrants.
In February 2005, we filed a lawsuit against Prisma in the Supreme Court of the State of New York, County of New York, for breach of contract, and demanded the return of the securities issued to Prisma and $100,000 in actual damages. Prisma did not respond to the summons and we filed a motion to have a default judgement entered against Prisma. Prisma filed a cross-motion objecting to our motion for a default judgment. A hearing was held on May 18, 2005 and the court denied our motion and permitted Prisma to file an answer. We are preparing to commence discovery.
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MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
There is a limited public market for our Common Stock. Our Common Stock has been quoted on the OTC Bulletin Board under the symbol “BLGA” since March 29, 2004 (on some internet-based services such as http://finance.yahoo.com, stock quotes can be accessed using the symbol BLGA.OB). Prior to that date, the symbol was “OPUR.” The following table sets forth the range of high and low bid prices for our Common Stock for each quarterly period indicated.
| | | | | | |
Quarter Ended
| | High
Bid
| | Low
Bid
|
December 31, 2004 | | $ | 5.00 | | $ | 1.61 |
September 30, 2004 | | $ | 4.25 | | $ | 1.30 |
June 30, 2004 | | $ | 7.00 | | $ | 3.30 |
March 31, 2004 | | $ | 6.00 | | $ | 0.80 |
| | |
December 31, 2003 | | $ | 1.25 | | $ | 0.05 |
September 30, 2003 | | $ | 3.75 | | $ | 0.75 |
June 30, 2003 | | $ | 1.50 | | $ | 0.75 |
March 31, 2003 | | $ | 2.25 | | $ | 0.75 |
Appropriate adjustments have been made to the prices in the table to reflect a 1:5 reverse split of the outstanding common stock that occurred on March 31, 2004 and a 1:15 reverse split of the outstanding common stock that occurred on September 29, 2003.
The source of this information is the OTC Bulletin Board and other quotation services. The quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions.
Holders
As of December 31, 2004, there were approximately 156 holders of record of our common stock (this number does not include beneficial owners who hold shares at broker/dealers in “street-name”).
Dividends
To date, we have not paid any dividends on its common stock and do not expect to declare or pay any dividends on such common stock in the foreseeable future. Payment of any dividends will be dependent upon future earnings, if any, our financial condition, and other factors as deemed relevant by our Board of Directors.
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MANAGEMENT’S PLAN OF OPERATION
Statements contained herein that are not historical facts are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, the forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected. We caution investors that any forward-looking statements made by us are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements. Such risks and uncertainties include, without limitation: well-established competitors who have substantially greater financial resources and longer operating histories, regulatory delays or denials, ability to compete as a start-up company in a highly competitive market, and access to sources of capital.
The following discussion and analysis should be read in conjunction with our financial statements and notes thereto included elsewhere in this Prospectus. Except for the historical information contained herein, the discussion in this Prospectus contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. Our actual results could differ materially from those discussed here.
Introduction
On January 31, 2004, pursuant to an Agreement and Plan of Reorganization (“Reorganization Agreement”), we acquired 100% of the issued and outstanding common stock of BlastGard Technologies, Inc. (“BTI”), a Florida corporation, from BTI’s shareholders, in exchange for an aggregate of 18,200,000 (adjusted to reflect subsequent stock split) shares of our common stock. BTI is a development stage company that was created to develop, design, manufacture, and market proprietary blast mitigation materials. BTI’s patent-pending BlastWrap™ technology is designed to effectively mitigate blasts and suppress fires resulting from explosions. As a result of the Reorganization Agreement, a change in control and change in management of the Company occurred and BTI became a wholly-owned subsidiary of the Company. The Reorganization Agreement also provided that the Company hold a shareholders meeting to (i) change the name of the corporation to BlastGard International, Inc., and (ii) approve a reverse split of the outstanding common stock on a 5:1 basis. A Special Shareholder meeting was held on March 12, 2004, and both proposals were approved. The name change and the reverse split of the outstanding common stock became effective on March 31, 2004.
We intend to focus exclusively on the business plan of BTI. BTI was formed on September 26, 2003, and is a development stage company. Our current management team, James F. Gordon, John H. Waddell, Jr., and Michael Gordon, were the founders of BTI. BTI acquired a patent application for BlastWrap™, in January 2004, from co-inventors John L. Waddell, Jr., our COO and President, and James F. Gordon, our CEO, who assigned the patent application to BTI in consideration of the consummation of the Reorganization Agreement. For accounting purposes, we assigned no monetary value to the patent application that was assigned to BTI.
Financial Results
Pursuant to the Reorganization Agreement, BTI became a wholly-owned subsidiary of our Company. However, for accounting purposes, the acquisition was treated as a recapitalization of BTI, with our Company the legal surviving entity.
We are considered a development stage company and have recorded only nominal revenues from inception to date. At December 31, 2004, we had an accumulated deficit of approximately $2.5 million and cash on hand of approximately $1.8 million.
Sources of Funds
To date, we have relied on management’s ability to raise capital through equity private placement financings to fund our operations. During the year ended December 31, 2004, we raised capital through the following private placement transactions:
| A. | In February 2004, we raised $200,000 by selling 200,000 (as adjusted to reflect the 1:5 reverse split of the outstanding common stock that occurred on March 31, 2004) shares of common stock to five investors. |
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| B. | During the quarter ending June 30, 2004, we raised $944,050 by selling 629,367 shares of restricted common stock (at $1.50 per share) to 34 accredited investors. |
| C. | During the quarter ending September 30, 2004, we raised $193,250 by selling 128,834 shares of restricted common stock (at $1.50 per share) to twelve accredited investors. |
| D. | In December 2004, we raised $1,420,000 from five investors in a convertible debt financing, and issued to the investors secured convertible notes and common stock purchase warrants. |
The notes each bear an interest rate of 8% per annum, with a default interest rate of 15% per annum. Aggregate monthly payments of 1.2% of the principal amount are due commencing November 1, 2005 through April 30, 2006, then aggregate monthly payments of 3% of the principal amount are due commencing May 1, 2006 through October 31, 2006, and then aggregate monthly payments of 6% of the principal amount are due commencing November 1, 2006 through October 31, 2007. Payments will be applied first to accrued interest and then to principal. The balance of the unpaid principal and any unpaid interest is due on October 31, 2007.
The individual note holders have the right, at their option, to convert the principal amount of the note, together with all accrued interest thereon in accordance with the provisions of and upon satisfaction of the conditions contained in the note, into fully paid and non-assessable shares of our common stock at a conversion price of $1.50 per share, subject to adjustment in certain circumstances if the notes are then outstanding, such as a stock split, combination or dividend; or in the event we issue shares of common stock for consideration of less than the exercise price. In addition, if, by March 16, 2006, the notes are still outstanding, the exercise price will be reduce by one-third unless we report gross revenues of at least $15 million or net profits of at least $1 million for the year ended December 31, 2005.
We can require the holders to convert the notes into shares of common stock if a registration statement for the resale of the underlying shares is effective and the common stock has traded above $2.50 per shares for ten consecutive days. The amount that the holders can be required to convert is limited to the aggregate dollar volume traded over the past seven trading days (pro-rated among all holders), but no holder is required to convert an amount that result in the holder becoming the beneficial owner of more than 4.99% of the outstanding common stock on the date of conversion.
The notes are secured by all of the assets of BlastGard International, Inc, and its wholly-owed subsidiary, BlastGard Technologies, Inc., until the notes have been fully paid or fully converted into common stock.
Also in connection with this sale, we issued the note holders two types of warrants to acquire shares of our common stock. We issued to the investors “Class A” Common Stock Purchase Warrants which entitle the investors to acquire an aggregate of 473,336 shares of our common stock at an exercise price of $2.09 per share (i.e., 110% of the closing bid price on the day before the Closing Date), are exercisable for a period of five years and contain a “cashless exercise” provision that applies only in the event that a registration statement for the resale of the shares is not effective.
We issued to the investors “Class B” Common Stock Purchase Warrants entitling them to acquire an aggregate of 141,999 shares of our common stock at an exercise price of $3.00 per share, are exercisable for a period of three years and contain a “cashless exercise” provision that applies only in the event that a registration statement for the resale of the shares is not effective.
Andrew Garrett, Inc., acted as placement agent in this transaction. The placement agent was paid a cash fee of $99,400, which represents 7% of the gross proceeds, and is also entitled to a 5% fee upon exercise of warrants by the investors, if any. We also issued the placement agent a warrant to acquire an aggregate of 82,834 shares of our common stock at an exercise price of $2.09 per share, and a warrant to acquire 4,970 shares of our common stock at
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an exercise price of $3.00 per share. The placement agent’s warrants are exercisable for a period of five years and contain a “cashless exercise” provision that applies only in the event that a registration statement for the resale of the shares is not effective.
| E. | In December 2004, we raised $1,020,000 from one investor by selling 680,000 shares of restricted common stock (at $1.50 per share) to one investor, and we also issued to the investor a “Class B” common stock purchase warrant to acquire 100,000 shares of common stock at an exercise price of $3.00 per share (the other terms of the warrant are described above). |
Basic Investors, Inc., acted as placement agent in this transaction. The placement agent was paid a cash fee of $132,600, which represents 13% of the gross proceeds.
For all of the transactions described above, we agreed to file a registration statement to register all of the shares of common stock issued, and the shares of common stock underlying the convertible notes and the warrants for resale by the holders.
Business Prospects
Although we are a development stage company and have recorded only nominal revenues to date, we believe that BlastWrap is a unique technology that will be desirable to end-users who will find it to be more effective, more flexible and lower-priced than the products currently offered by other competitors that offering blast solutions.
BlastWrap has been and continues to be tested and evaluated by many potential customers, including the following:
| | • | | ŸUS Army Test Center – Aberdeen |
| | • | | ŸArmor Systems International |
| | • | | ŸNYPD, Atlanta and LACS Bomb Squads |
| | • | | ŸBoeing Phantom Works – “FCS” |
| | • | | ŸUS Marines HMMWV Retrofit |
| | • | | Georgia Tech Applied Research Corp. - New Tactical Wheeled Vehicle Design |
| | • | | ŸLockheed Martin Corporation |
| | • | | ŸSandia National Laboratory |
The process of evaluating and testing can be time consuming and costly, but each of the potential customers have done so at their own expense. We have received positive feedback from everyone who has been evaluating and testing BlastWrap, and reasonably expect to generate sales within the next 12 months.
Plan of Operation
With approximately $1.8 million in cash on hand at January 1, 2005, we have developed a budget to utilize this cash to fund our operations for the next 15 months.
Our monthly cash needs are budgeted to average approximately $120,000 per month, with the following approximate breakdown:
| | | |
salaries and benefits | | $ | 60,000 |
consulting and professional fees | | $ | 28,000 |
office overhead | | $ | 3,000 |
travel | | $ | 9,000 |
research and development | | $ | 20,000 |
| | |
|
|
total | | $ | 120,000 |
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We do not anticipate making any significant purchases of assets such as plant or equipment.
We anticipate that we may need to hire up to four additional sales and marketing personnel in the next 12 months, if our sales efforts justify such additional personnel.
We plan to continue our research and development efforts over the next 12 months. Our core product, BlastWrap, is a finished product that we are currently manufacturing for R&D testing by third-parties. The primary application for BlastWrap is to further customize it for different applications and uses. We have two products that we consider to be completed and finished products, the First Responder and the BlastGard MTR (mitigated trash receptacle), which we are manufacturing and marketing as of March 1, 2005.
We intend to continue to work to improve our existing prototypes for each of the 13 product lines described in the Description of Business section, until they can be released as finished and marketable products. We also intend to research new applications and markets and to develop new prototypes for them. Most R&D costs that we will incur will relate to the development and testing of prototypes.
Additional Information Regarding Outstanding Convertible Notes Payable
As described above in greater detail, in December 2004, we raised $1,420,000 from five investors in a convertible debt financing, and issued to the investors secured convertible notes and common stock purchase warrants.
The balance sheet at December 31, 2004, includes $34,080 of the notes under current liabilities (as a current maturities on convertible notes payable), and the balance of $1,385,920 of the notes as long-term debt (as convertible notes payable, less current maturities).
The individual note holders have the right, at their option, to convert the principal amount of the note, together with all accrued interest thereon in accordance with the provisions of and upon satisfaction of the conditions contained in the note, into fully paid and non-assessable shares of our common stock at a conversion price of $1.50 per share, subject to adjustment in certain circumstances if the notes are then outstanding, such as a stock split, combination or dividend; or in the event we issue shares of common stock for consideration of less than the exercise price.
Each note provides that if, by March 16, 2006, the notes are still outstanding, the exercise price will be reduce by one-third (from $1.50 to $1.00, unless further adjusted) unless we report gross revenues of at least $15 million or net profits of at least $1 million for the year ended December 31, 2005. In the event that we do not meet these revenue or profit targets and the notes have not been converted prior to March 16, 2006, then if the note holders then elect to convert the notes at the lower exercise price, we will have to issue 50% more shares than we would have issued at a $1.50 exercise price. The issuance of additional shares would increase the number of shares outstanding and would dilute the proportionate ownership interests of existing shareholders, as well as have the potential to adversely affect the market price of the common stock if the additional shares are sold into the market.
27
DIRECTORS AND EXECUTIVE OFFICERS
The Company has a Board of Directors which is currently comprised of three members. Each director holds office until the next annual meeting of shareholders or until a successor is elected or appointed. The members of our Board of Directors and our executive officers and their respective age and position are as follows:
| | | | | | |
Name
| | Age
| | Position with Registrant
| | Director of Registrant Since
|
James F. Gordon | | 61 | | CEO, Chairman & Director | | January 2004 |
| | | |
John L. Waddell, Jr. | | 62 | | President, Chief Operating Officer and Director | | January 2004 |
| | | |
Michael J. Gordon | | 46 | | CFO, VP – Corporate Administration and Director | | January 2004 |
| | | |
Kevin J. Sharpe | | 44 | | VP – Engineering & Product Development | | N/A |
James F. Gordon – Chairman, CEO and Board member since January 2004. As co-inventor of BlastWrap™, Mr. Gordon is responsible for the overall policies, management development and the Company’s future expansion and promotion of BlastWrap™ products. Mr. Gordon has 25 years of sales and marketing experience as a licensed real estate broker and appraiser. He co-founded and was Vice President of Sea Gull Ltd. Builders, a successful land development and construction company. For sixteen years, Mr. Gordon designed and constructed executive single-family homes. He later focused on the design, construction and sale of Medical Condo office buildings, and is considered by the New Jersey Courts as an expert in zoning and land development issues. From December 2000 to January 2004, Mr. Gordon was CEO of BlastGard, Inc. (an entity not related to our company, that had a license to a different blast mitigation technology that was different that the technology owned by our company). From 1995 to 2003, he was the President of Purple’s Inc. an award winning, 275 seat 1920’s Art Deco restaurant that he and his wife Bonnie, designed and built in 1995. Mr. Gordon received his Bachelor of Science Degree from Monmouth University, West Long Branch, New Jersey. Mr. Gordon is also a U.S. Army veteran
John L. Waddell, Jr. –President, COO and Board member since January 2004. As co-inventor of BlastWrap™, Mr. Waddell has over 35 years experience as a corporate executive in various domestic and international management positions including two large multi-national corporations, United States Steel Corporation and Mannesmann AG of Germany. From March 2002 to January 2004, Mr. Waddell was President, COO and Board member of BlastGard, Inc. (an entity not related to our company, that had a license to a different blast mitigation technology that was different that the technology owned by our company). From December 2001 to March 2002, Mr. Waddell was Vice President – Operations of MegaWorld, Incorporated, a telecommunications service provider. From February 2000 to December 2001, Mr. Waddell was Vice President- Operations for JoyVer, Inc., based in Houston, TX, pursuing funding for development of blast effect mitigation business. From 1983 to 1998, as the President & CEO of Mannesmann Oilfield Tubulars Corporation and subsequently as one of the founders, President & CEO of Peregrine Energy, Inc., Mr. Waddell hired personnel, set policies and procedures, directed sales and orchestrated the design and installation of efficient data management systems. Mr. Waddell brings skills in manufacturing, planning and operational and executive management to BlastGard International, Inc. Mr. Waddell has a Bachelor of Arts in Economics from Duke University, Durham, North Carolina.
Michael J. Gordon – Chief Financial Officer, Vice President - Corporate Administration and Board member since January 2004. From January 2003 to January 2004, Mr. Gordon devoted a majority of his time in the development and marketing of BlastGard, Inc. (an entity not related to our company, that had a license to a different blast mitigation technology that was different that the technology owned by our company). From April 1998 through December 2002, Mr. Gordon was Vice President and a Board member of BBJ Environmental Solutions, which conducts research on the causes of, and develops solutions to, biologically related indoor air quality problems, including research in bio-defense and emerging infectious diseases, such as Anthrax. From August 1987 through December 1997, Mr. Gordon was employed by Phoenix Information Systems Corp., where he was responsible for overseeing administrative operations, the filing of all SEC reports and documents, company news releases and public relations. Before joining Phoenix,
28
Mr. Gordon served as Director of Legacies and Planned Giving for the American Cancer Society. Mr. Gordon received his Bachelor of Science degree from the State University of New York in 1980.
Kevin J. Sharpe- Vice President – Engineering & Product Development since February 2004. Mr. Sharpe has over 20 years experience in explosive engineering, structural response to blast loading and ballistic impact, explosives and munitions design and ordnance disposal. From 1993 through January 2004, Mr. Sharpe was Technical Leader/Project Manager for Dstl/DERA (Defence Science and Technology Laboratory (an agency of the UK Ministry of Defence)/Defence Evaluation and Research Agency), where he conducted research into Special Projects. From 1981 through 1993, Mr. Sharpe was a research scientist at Atomic Weapons Establishment in Essex, England, conducting research into blast mitigation systems, training UK and US military in use and deployment of blast mitigation and particulate entrapment systems, designing and development of advanced explosive systems, planning and conducting military training courses and exercises, and conducting explosive trials and testing. With Security Clearance of Top Secret Strap 2 and Secret Atomic Principle, Mr. Sharpe developed special purpose tools and techniques to meet military user aspirations, such as training special forces troops; training EOD/IEDD end users; developing protection systems for aircraft; conducting cockpit voice recorder research; support for US air accident investigations; membership of Emergency Response teams; developed explosive welding techniques for aircraft component fabrication; designed and developed novel explosive compositions for target specific applications; membership of the Institute of Explosive Engineers (IEE); membership of the Institute of Accident Investigators and Bomb Technicians; presentation on aircraft hardening to ISASI; presentation to ISASI on aircraft health monitoring and explosion location; annual presentations on blast mitigation and protection to the Group of Experts in Mitigation Systems (GEMS - a symposium set up to monitor advances in blast mitigation technology by the UK security services); and published numerous classified reports on Special Projects, Aircraft Hardening, EOD and IEDD etc. Born in London, England, Mr. Sharpe received his Higher National Certificate in Mechanical Engineering and Applied Physics from Anglia Higher Education College, Cambridge Explosive Engineering.
Family Relationships
James F. Gordon (an officer and director), Michael J. Gordon (an officer and director) are brothers.
Audit Committee and Audit Committee Financial Expert Disclosure
The Company does not have a separately-designated standing audit committee at this time because it is not required to do so. Accordingly, the Company does not have an audit committee financial expert.
Code of Ethics
On August 4, 2004, the Board of Directors established a written code of ethics that applies to our senior executive and financial officers. A copy of the code of ethics is posted on our website at www.blastgardintl.com and or may be obtained by any person, without charge, who sends a written request to BlastGard International. Inc., c/o Investor Relations, 12900 Automobile Blvd., Suite D, Clearwater, Florida 33762.
29
OWNERSHIP OF SECURITIES BY BENEFICIAL OWNER AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of our common stock as of December 31, 2004 by all persons known by us to be beneficial owners of more than 5% of its common stock and all of our officers and directors, both individually and as a group. Unless otherwise indicated, all shares are directly beneficially owned and investing power is held by the persons named.
| | | | | |
Name and Address of Beneficial
Owner (n1)
| | Amount and Nature of Beneficial
Ownership (n1)
| | Percentage Outstanding (n2)
| |
James F. Gordon (n3) | | 5,023,400 | | 22.6 | % |
John L. Waddell, Jr. (n4) | | 5,350,400 | | 24.0 | % |
Michael J. Gordon (n5) | | 2,411,700 | | 10.9 | % |
Kevin J. Sharpe (n6) | | 400,000 | | 1.8 | % |
Includes all of our officers and Directors as a group (4 persons) | | 13,185,500 | | 56.7 | % |
| (n1) | Unless otherwise indicated, all shares are directly beneficially owned and investing power is held by the persons named. The address of each person is c/o BlastGard International, Inc. at 12900 Automobile Blvd., Suite D, Clearwater, FL 33762. |
| (n2) | Based upon 21,856,625 shares of Common Stock outstanding as of December 31, 2004, plus the amount of shares each person or group has the right to acquire within 60 days under options, warrants, rights, conversion privileges, or similar obligations. |
| (n3) | James F. Gordon is an officer and director of our Company. Includes options to purchase 400,000 shares of our common stock. |
| (n4) | John L. Waddell, Jr. is an officer and director of our Company. Includes options to purchase 400,000 shares of our common stock. |
| (n5) | Michael J. Gordon is an officer and director of our Company. Includes options to purchase 200,000 shares of our common stock. |
| (n6) | Kevin J. Sharpe is an officer of our Company. Includes options to purchase 400,000 shares of our common stock. |
Equity Compensation Plan Information
We do not currently have a formal Employee Benefit and Consulting Services Compensation Plan in effect. However, during the current fiscal year, we granted options to acquire shares of restricted common stock that were not pursuant to a formal equity compensation plan (and not approved by shareholders): we granted an aggregate of 1,960,000 options to four officers and an aggregate of 167,000 options to five consultants; the exercise price of all options granted was $2.00 per share.
30
EXECUTIVE COMPENSATION
From September 26, 2003 (Inception) through December 31, 2003, no executive officer had salaries and bonuses of $100,000 or more.
All of our executive officers received employment contracts in 2004. The following table reflects certain compensation paid to our Executive Officers during the year ended December 31, 2004.
| | | | | | | | |
| | | | | Annual Compensation
|
(a)
| | (b)
| | (c)
| | (d)
| | (e)
|
Name And Principal Position
| | Year
| | Salary($)
| | Bonus($)
| | Other Annual
Compensation
($)
|
James F Gordon, CEO | | 2004 | | 175,000 | | -0- | | -0- |
| | | 2003 | | -0- | | -0- | | -0- |
John L Waddell, Jr., President, COO | | 2004 | | 150,000 | | -0- | | -0- |
Kevin J. Sharpe, VP | | 2004 | | 125,000 | | -0- | | -0- |
Michael J. Gordon, CFO, VP | | 2004 | | 125,000 | | -0- | | -0- |
| | | | | | | | | | |
| | | | | Long Term Compensation
|
| | | | | Awards
| | Payouts
|
(a)
| | (b)
| | (f)
| | (g)
| | (h)
| | (i)
|
Name And Principal Position
| | Year
| | Restricted Stock Award(s) ($)
| | Number Of Options / Warrants
| | LTIP Payouts ($)
| | All Other
Compensation ($)
|
James F Gordon, CEO | | 2004 | | -0- | | 580,000 | | -0- | | -0- |
| | | 2003 | | -0- | | -0- | | -0- | | -0- |
John L Waddell, Jr., President, COO | | 2004 | | -0- | | 580,000 | | -0- | | -0- |
Kevin J. Sharpe, VP | | 2004 | | -0- | | 525,000 | | -0- | | -0- |
Michael J. Gordon, CFO, VP | | 2004 | | -0- | | 300,000 | | -0- | | -0- |
OPTION/SAR GRANTS
We have not grant any stock appreciation rights.
31
The information provided in the table below provides information with respect to individual grants of our stock options during the year ended December 31, 2004 to the executive officers named in the summary compensation table above.
Individual Grants
| | | | | | | | |
(a)
| | (b)
| | (c)
| | (d)
| | (e)
|
Name
| | Options
Granted
(#)
| | % of Total
Options/
Granted to
Employees
in Fiscal
Year (1)
| | Exercise
Price
($/Sh)
| | ExpiraTion
Date
|
James F. Gordon, CEO | | 580,000 | | 28.0 | | 2.00 | | 12/31/07 |
John L. Waddell, Jr., President, COO | | 580,000 | | 28.0 | | 2.00 | | 12/31/07 |
Kevin J. Sharpe, VP | | 525,000 | | 25.0 | | 2.00 | | 12/31/07 |
Michael J. Gordon, CFO, VP | | 300,000 | | 14.0 | | 2.00 | | 12/31/07 |
| (1) | The percentage of total options granted to our employees in 2004 (as of December 31, 2004) is based upon options granted to officers, directors and employees totaling 2,060,000. |
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
The information provided in the table below provides information with respect to each exercise of stock options (if any) during most recent fiscal year ended December 31, 2004 by the persons named in the Summary Compensation Table and the fiscal year end value of unexercised options.
| | | | | | | | | |
(a)
| | (b)
| | (c)
| | (d)
| | (e)
|
Name
| | Shares
Acquired
on
Exercise (#)
| | Value
Realized
($)(n1)
| | Number of
Securities
Underlying
Unexercised
Options/SARs at
FY-End (#)
Exercisable/
Unexercisable
| | Value of Unexercised
In-the-Money
Options/SARs at
FY-End($)
Exercisable/
Unexercisable(n1)
|
James F. Gordon, CEO | | -0- | | N/A | | 200,000/380,000 | | $ | 440,000/$836,000 |
John L. Waddell, Jr., President, COO | | -0- | | N/A | | 200,000/380,000 | | $ | 440,000/$836,000 |
Kevin J. Sharpe, VP | | -0- | | N/A | | 200,000/325,000 | | $ | 440,000/$715,000 |
Michael J. Gordon, CFO, VP | | -0- | | N/A | | 100,000/200,000 | | $ | 220,000/$440,000 |
| (n1) | The aggregate dollar values in columns (c) and (e) are calculated by determining the difference between the fair market value of the common stock underlying the options and the exercise price of the options at exercise or fiscal year end, respectively. |
32
LONG-TERM INCENTIVE PLANS (“LTIP”) - AWARDS IN LAST FISCAL YEAR
This table has been omitted, as no executive officers named in the Summary Compensation Table above received any awards pursuant to any LTIP during the fiscal year ended December 31, 2004.
COMPENSATION OF DIRECTORS
No compensation was paid to our Directors for any service provided as a Director during the year ended December 31, 2004. There are no other formal or informal understandings or arrangements relating to compensation; however, Directors may be reimbursed for all reasonable expenses incurred by them in conducting our business. These expenses would include out-of-pocket expenses for such items as travel, telephone, and postage.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
All four executive officers have written employment agreements.
The agreement with James F. Gordon provides for a term that commenced January 31, 2004 and ends December 31, 2007, an annual salary of $175,000 per year, and options to purchase 580,000 shares of common stock at $2.00 per share that expire December 31, 2007 and vest as follows: 200,000 on June 30, 2004, 200,000 on January 1, 2005 and 180,000 on January 1, 2006. James Gordon is also entitled to a two percent (2%) net profit bonus each year based on BlastGard’s fiscal year December 31 financials.
The agreement with John L. Waddell, Jr. provides for a term that commenced January 31, 2004 and ends December 31, 2007, an annual salary of $150,000 per year, and options to purchase 580,000 shares of common stock at $2.00 per share that expire December 31, 2007 and vest as follows: 200,000 on June 30, 2004, 200,000 on January 1, 2005 and 180,000 on January 1, 2006. Mr. Waddell is also entitled to a two percent (2%) net profit bonus each year based on BlastGard’s fiscal year December 31 financials.
The agreement with Michael J. Gordon provides for a term that commenced January 31, 2004 and ends December 31, 2007, an annual salary of $125,000 per year, and options to purchase 300,000 shares of common stock at $2.00 per share that expire December 31, 2007 and vest as follows: 100,000 on June 30, 2004, 100,000 on January 1, 2005 and 100,000 on January 1, 2006. Michael Gordon is also entitled to a one percent (1%) net profit bonus each year based on BlastGard’s fiscal year December 31 financials.
The agreement with Kevin J. Sharpe provides for a term that commenced February 1, 2004 and ends December 31, 2007, an annual salary of $125,000 per year, and options to purchase 525,000 shares of common stock at $2.00 per share that expire December 31, 2007 and vest as follows: 200,000 on June 30, 2004, 200,000 on January 1, 2005 and 125,000 on January 1, 2006. Mr. Sharpe is also entitled to a one percent (1%) net profit bonus each year based on BlastGard’s fiscal year December 31 financials.
Each agreement provides for severance pay in the event of termination without cause equal to the greater of twelve months of salary or the balance due from the date of termination until the expiration date of the contract.
Our Board of Directors has complete discretion as to the appropriateness of (a) key-man life insurance, (b) obtaining officer and director liability insurance, (c) employment contracts with and compensation of executive officers and directors, (d) indemnification contracts, and (e) incentive plan to award executive officers and key employees.
Our Board of Directors is responsible for reviewing and determining the annual salary and other compensation of the executive officers and key employees of the Company. Our goals are to align compensation with business objectives and performance and to enable us to attract, retain and reward executive officers and other key employees who contribute to our long-term success. We intend to provide base salaries to our executive officers and key employees sufficient to
33
provide motivation to achieve certain operating goals. Although salaries are not specifically tied into performance, incentive bonuses may be available to certain executive officers and key employees. In the future, executive compensation may include without limitation cash bonuses, stock option grants and stock reward grants.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the paragraphs to follow describe transactions between BlastGard International, Inc. and its officers, directors and affiliated persons. Those transactions that occurred prior to January 31, 2004, which resulted in the issuance of shares in BlastGard Technologies, Inc.’s common stock, were later exchanged into shares of BlastGard International, Inc.’s common stock.
The numbers of shares and the prices per share listed for the transactions described below have been adjusted to reflect a 1:5 reverse split of the outstanding common stock that occurred on March 31, 2004 and a 1:15 reverse split of the outstanding common stock that occurred on September 29, 2003.
During the last two fiscal years, we entered into the following transactions in which our current or former officers and directors had a material interest:
On March 25, 2003, Joseph R. King was issued 40,000 shares of the Company’s restricted common stock as compensation for services rendered. The shares were valued at $36,000 (market value at that time).
On March 25, 2003, we entered into an agreement with BlastGard, Inc. (BlastGard Technologies, Inc. is not the same entity as BlastGard, Inc.) pursuant to which the Company issued 66,667 shares of restricted stock to BlastGard, Inc. in exchange for the right to distribute and sell BlastGard, Inc.’s products in China. The shares were valued at $60,000 (market value at the time). James Gordon was an officer and director of BlastGard, Inc. and Michael Gordon was an officer of BlastGard, Inc. at the time of the transaction. James and Michael Gordon are brothers of Robert Gordon, who was an officer and director of the Company at that time. Because BlastGard, Inc. did not retain its licensing agreement to utilize patents owned by a third-party, BlastGard, Inc. could not perform under the agreement with the Company, so the Company and BlastGard, Inc. mutually agreed to rescind the agreement and the 66,667 shares of common stock issued to BlastGard, Inc. were returned to the Company and cancelled in January 2004.
On January 9, 2004, we issued an aggregate of 40,400 shares to Robert P. Gordon, an officer and director of the Company at that time, as follows: 26,000 shares were issued in settlement of $13,000 in accrued salary and 14,400 shares were issued in settlement of $7,200 in accrued rent expense.
On January 9, 2004, we issued an aggregate of 66,000 shares to Paul W. Henry, a director of the Company at that time, in settlement of $33,000 in accrued consulting fees.
On January 31, 2004, we acquired 100% of the issued and outstanding common stock of BlastGard Technologies, Inc., a Florida corporation (“BTI”), from the nine shareholders of BTI in exchange for an aggregate of 18,200,000 shares of our Company’s common stock pursuant to an Agreement and Plan of Reorganization. This transaction was a recapitalization that was accounted for as the sale of the shares of BTI for the net liabilities of the public company of $606,412. The following person, all of whom were BTI shareholders prior to the reorganization, acquired an interest in our Company:
| | • | | James F. Gordon acquired 4,950,400 shares of common stock of the Company and became an officer and director of the Company. |
| | • | | Michael J. Gordon acquired 2,475,200 shares of common stock of the Company and became an officer and director of the Company. |
| | • | | John Waddell, Jr. acquired 4,950,400 shares of common stock of the Company and became an officer and director of the Company |
| | • | | Robert P. Gordon acquired 1,037,400 shares of common stock of the Company and resigned as an officer and director of the Company. |
| | • | | Paul W. Henry acquired 127,400 shares of common stock of the Company and resigned as a director of the Company. |
34
SELLING SECURITYHOLDERS
The following table provides certain information with respect to the selling shareholders’ beneficial ownership of our common stock as of February 28, 2005, and as adjusted to give effect to the sale of all of the shares offered hereby. To the best of our knowledge, none of the selling shareholders currently is an affiliate of ours, and none of them has had a material relationship with us during the past three years. Except as noted below, none of the selling shareholders are or were affiliated with registered broker-dealers. See “Plan of Distribution.” The selling shareholders possess sole voting and investment power with respect to the securities shown.
| | | | | | | | | | |
NAME OF EACH
SELLING STOCKHOLDER
| | SHARES BENEFICIALLY OWNED PRIOR TO OFFERING
| | MAXIMUM SHARES OFFERED IN OFFERING
| | SHARES OWNED AFTER OFFERING
| | % SHARES BENEFICIALLY OWNED BEFORE / AFTER
|
Daniel Katz | | 25,000 | | 25,000 | | -0- | | * | | -0- |
Fred Shapss | | 25,000 | | 25,000 | | -0- | | * | | -0- |
Alan Cornell | | 25,000 | | 25,000 | | -0- | | * | | -0- |
Ronald I. Shapss IRA | | 25,000 | | 25,000 | | -0- | | * | | -0- |
Ronald I. Shapss | | 50,000 | | 50,000 | | -0- | | * | | -0- |
Nicholas M. Strelchuk | | 50,000 | | 50,000 | | -0- | | * | | -0- |
C. Gale Alderman | | 30,000 | | 30,000 | | -0- | | * | | -0- |
BB Securities Co. (n1) | | 15,000 | | 15,000 | | -0- | | * | | -0- |
Andrew Budkofsky | | 6,667 | | 6,667 | | -0- | | * | | -0- |
Coralinn J. Ciampa | | 10,000 | | 10,000 | | -0- | | * | | -0- |
Jennifer L. Cohen | | 2,000 | | 2,000 | | -0- | | * | | -0- |
Marc A. Cohen | | 5,000 | | 5,000 | | -0- | | * | | -0- |
Joseph D. Crowley | | 10,000 | | 10,000 | | -0- | | * | | -0- |
William Curtis | | 5,000 | | 5,000 | | -0- | | * | | -0- |
David E. D’Anna | | 50,000 | | 50,000 | | -0- | | * | | -0- |
John P. Daly | | 10,000 | | 10,000 | | -0- | | * | | -0- |
David C. Imboden | | 35,000 | | 35,000 | | -0- | | * | | -0- |
Leo J. Dolan | | 4,000 | | 4,000 | | -0- | | * | | -0- |
Michael N. Dorfman | | 5,000 | | 5,000 | | -0- | | * | | -0- |
Jeffrey A. Gardner | | 5,500 | | 5,500 | | -0- | | * | | -0- |
Robert A. Gillon, Sr. Trust DTD 9/5/90 | | 30,000 | | 30,000 | | -0- | | * | | -0- |
Robert Grosser | | 5,000 | | 5,000 | | -0- | | * | | -0- |
Jack M. Heald | | 3,000 | | 3,000 | | -0- | | * | | -0- |
Adele H. Hepburn | | 15,000 | | 15,000 | | -0- | | * | | -0- |
Austin B. Hepburn | | 5,000 | | 5,000 | | -0- | | * | | -0- |
Keystone Nittany Ventures, LLC (n2) | | 20,000 | | 20,000 | | -0- | | * | | -0- |
Peter Leibowitz | | 10,000 | | 10,000 | | -0- | | * | | -0- |
James & Diane Macfarlane | | 25,000 | | 25,000 | | -0- | | * | | -0- |
James B. Maines & James Maines JTWROS | | 45,000 | | 45,000 | | -0- | | * | | -0- |
Peter J. McGuire | | 20,000 | | 20,000 | | -0- | | * | | -0- |
F. Stanton Moyer | | 20,000 | | 20,000 | | -0- | | * | | -0- |
Elizabeth L. Nelson | | 7,000 | | 7,000 | | -0- | | * | | -0- |
Michael J. O’Brien Sr. | | 60,000 | | 60,000 | | -0- | | * | | -0- |
Robert G. Padrick, Trustee FBO | | 4,900 | | 4,900 | | -0- | | * | | -0- |
Kellie Nicole Padrick | | | | | | | | | | |
35
| | | | | | | | | | | |
NAME OF EACH
SELLING STOCKHOLDER
| | SHARES BENEFICIALLY OWNED PRIOR TO OFFERING
| | MAXIMUM SHARES OFFERED IN OFFERING
| | SHARES OWNED AFTER OFFERING
| | % SHARES BENEFICIALLY OWNED BEFORE / AFTER
|
Robert G. Padrick, Trustee FBO | | 9,800 | | 9,800 | | -0- | | * | | | -0- |
Robert G. Padrick P/S/P | | | | | | | | | | | |
Robert G. Padrick | | 5,000 | | 5,000 | | -0- | | * | | | -0- |
Neil L. Parker | | 1,667 | | 1,667 | | -0- | | * | | | -0- |
William Recktenwald, DMD, PC | | 20,000 | | 20,000 | | -0- | | * | | | -0- |
Lee R. Roper | | 10,000 | | 10,000 | | -0- | | * | | | -0- |
John S. Rupp | | 5,000 | | 5,000 | | -0- | | * | | | -0- |
Jeff & Meryl Schwartz | | 17,000 | | 17,000 | | -0- | | * | | | -0- |
Ronald Shapss TTEE R Shapss MPP/PS, FBO R Shapss | | 40,000 | | 40,000 | | -0- | | * | | | -0- |
Jay Silberman | | 50,000 | | 50,000 | | -0- | | * | | | -0- |
Gertrude T. Stevens | | 50,000 | | 50,000 | | -0- | | * | | | -0- |
William L. Van Alen, Jr. | | 15,000 | | 15,000 | | -0- | | * | | | -0- |
Donald J. Zelenka | | 10,000 | | 10,000 | | -0- | | * | | | -0- |
John W. Ponton, Jr. | | 5,000 | | 5,000 | | -0- | | * | | | -0- |
James P. MacCain | | 3,000 | | 3,000 | | -0- | | * | | | -0- |
David Blackburn | | 10,000 | | 10,000 | | -0- | | * | | | -0- |
Peter Grahm | | 20,000 | | 20,000 | | -0- | | * | | | -0- |
Gay Vela | | 6,667 | | 6,667 | | -0- | | * | | | -0- |
Frank Gallo | | 17,000 | | 17,000 | | -0- | | * | | | -0- |
Alpha Capital Aktiengesellschaft (n3) | | 1,433,333 | | 1,433,333 | | -0- | | 6.19 | % | | -0- |
Genesis Microcap (n4) | | 286,667 | | 286,667 | | -0- | | 1.30 | % | | -0- |
Steven Gold | | 143,334 | | 143,334 | | -0- | | * | | | -0- |
Asher Brand | | 28,667 | | 28,667 | | -0- | | * | | | -0- |
TRW Holdings PTY Limited (n5) | | 143,334 | | 143,334 | | -0- | | * | | | -0- |
Mathew Sullivan (n6) | | 4,390 | | 4,390 | | -0- | | * | | | -0- |
Jamie Mitchell (n6) | | 4,390 | | 4,390 | | -0- | | * | | | -0- |
Revan R. Schwartz (n6) | | 8,781 | | 8,781 | | -0- | | * | | | -0- |
Joel Gold (n6) | | 26,341 | | 26,341 | | -0- | | * | | | -0- |
Andrew G. Sycoff (n6) | | 43,902 | | 43,902 | | -0- | | * | | | -0- |
Argyll Equities, LLC (n7) | | 780,000 | | 780,000 | | -0- | | 3.57 | % | | -0- |
Basic Investors, Inc. (n8) | | 300,000 | | 150,000 | | 150,000 | | 1.37 | % | | * |
| * | Represents less than one percent of the total number of shares outstanding. The percentage beneficially owned prior to the offering is based upon the number of share outstanding before the offering (21,737,625 shares), plus the number of shares issuable upon conversion of any convertible promissory notes or warrants by the named selling securityholder. The percentage beneficially owned after the offering is based upon the number of shares outstanding assuming the issuance of all shares underlying the convertible promissory notes and warrants (24,110,764 shares). |
| (n1) | Dale Ashcroft, Kathleen Ashcroft, Jay Leary, R. Marshall and George Myers have shared voting and investment control over the securities held by BB Securities Co. |
| (n2) | Jerry Rukin has sole voting and investment control over the securities held by Keystone Nittany Ventures, LLC. |
| (n3) | Konrad Ackerman and Rainer Posch have shared voting and investment control over the securities held by Alpha Capital Aktiengesellschaft. |
36
| (n4) | Wilhelm Ungar has sole voting and investment control over the securities held by Genesis Microcap. |
| (n5) | Gerry McGowan has sole voting and investment control over the securities held by TRW Holdings PTY Limited. |
| (n6) | These individuals are affiliated with Andrew Garrett, Inc., a broker-dealer who received warrants as compensation for acting as a placement agent in a private placement offering. In February 2005, Andrew Garrett, Inc. redistributed its warrants to these five individuals who are employees of Andrew Garrett, Inc. These individuals acquired the securities in the ordinary course of business and had no agreements or understandings, directly or indirectly, with any person to distribute the securities at the time of their acquisition. |
| (n7) | Jim Miceli has sole voting and investment control over the securities held by Argyll Equities, LLC. |
| (n8) | Thomas Laundrie has sole voting and investment control over the securities held by Basic Investors, Inc. Basic Investors, Inc. is a broker-dealer who received warrants as compensation for acting as a placement agent in a private placement offering. |
We are registering the shares for resale by the selling securityholders in accordance with registration rights granted to the selling securityholders. We will pay the registration and filing fees, printing expenses, listing fees, blue sky fees, if any, and fees and disbursements of our counsel in connection with this offering, but the selling securityholders will pay any underwriting discounts, selling commissions and similar expenses relating to the sale of the shares, as well as the fees and expenses of their counsel. In addition, we have agreed to indemnify the selling securityholders and certain affiliated parties, against certain liabilities, including liabilities under the Securities Act, in connection with the offering. Certain selling securityholders have agreed to indemnify us against certain losses. Insofar as indemnification for liabilities under the Securities Act may be permitted to our directors or officers, or persons controlling our Company, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
We will file a prospectus supplement to name any successors to any named selling securityholder who are able to use the prospectus to resell the securities.
All of the shares being registered for resale by the selling securityholders were acquired from the Company in private placement transactions, which are summarized below.
Outstanding Common Stock
Between February 1 and February 28, 2004, we sold 200,000 shares of common stock at $1.00 per share to six accredited investors. Aggregate proceeds from the sale of the common stock was $200,000. In connection with the offering, we agreed to use its best efforts to file a registration statement to register the shares of common stock for resale by the investors.
Between April 1 and September 30, 2004, we sold 758,201 shares of common stock at $1.50 per share to forty-six accredited investors. Aggregate proceeds from the sale of the common stock was $1,137,300.50. In connection with the offering, we agreed to use its best efforts to file a registration statement to register the shares of common stock for resale by the investors.
In December 2004, we sold 680,000 shares of common stock at $1.50 per share to one accredited investor. Aggregate proceeds from the sale of the common stock was $1,020,000, less a placement fee of $132,600 that we paid to Basic Investors, Inc., for net proceeds to $887,400. In connection with the offering, we agreed to use its best efforts to file a registration statement to register the shares of common stock for resale by the investor.
Securities Convertible into Common Stock
Effective December 2, 2004, we entered into a series of simultaneous transactions with five investors whereby we agreed to borrow an aggregate principal amount of $1,420,000 and to issue to the investors secured convertible notes and common stock purchase warrants.
37
The notes each bear an interest rate of 8% per annum, with a default interest rate of 15% per annum. Aggregate monthly payments of 1.2% of the principal amount are due commencing November 1, 2005 through April 30, 2006, then aggregate monthly payments of 3% of the principal amount are due commencing May 1, 2006 through October 31, 2006, and then aggregate monthly payments of 6% of the principal amount are due commencing November 1, 2006 through October 31, 2007. Payments will be applied first to accrued interest and then to principal. The balance of the unpaid principal and any unpaid interest is due on October 31, 2007.
The individual note holders have the right, at their option, to convert the principal amount of the note, together with all accrued interest thereon in accordance with the provisions of and upon satisfaction of the conditions contained in the note, into fully paid and non-assessable shares of our common stock at a conversion price of $1.50 per share, subject to adjustment in certain circumstances if the notes are then outstanding, such as a stock split, combination or dividend; or in the event we issue shares of common stock for consideration of less than the exercise price. In addition, if, by March 16, 2006, the notes are still outstanding, the exercise price will be reduce by one-third unless we report gross revenues of at least $15 million or net profits of at least $1 million for the year ended December 31, 2005.
We can require the holders to convert the notes into shares of common stock if a registration statement for the resale of the underlying shares is effective and the common stock has traded above $2.50 per shares for ten consecutive days. The amount that the holders can be required to convert is limited to the aggregate dollar volume traded over the past seven trading days (pro-rated among all holders), but no holder is required to convert an amount that result in the holder becoming the beneficial owner of more than 4.99% of the outstanding common stock on the date of conversion.
The notes are secured by all of the assets of BlastGard International, Inc, and its wholly-owed subsidiary, BlastGard Technologies, Inc., until the notes have been fully paid or fully converted into common stock.
Also in connection with this sale, we issued the note holders two types of warrants to acquire shares of our common stock, which are classified as “Class A” and “Class B” Common Stock Purchase Warrants. The only differences between the “Class A” and the “Class B” Common Stock Purchase Warrants are the exercise prices and the expiration dates, as described below.
We issued to the investors “Class A” Common Stock Purchase Warrants which entitle the investors to acquire an aggregate of 473,336 shares of our common stock at an exercise price of $2.09 per share (i.e., 110% of the closing bid price on the day before the Closing Date), are exercisable for a period of five years and contain a “cashless exercise” provision that applies only in the event that a registration statement for the resale of the shares is not effective.
We issued to the investors “Class B” Common Stock Purchase Warrants entitling them to acquire an aggregate of 141,999 shares of our common stock at an exercise price of $3.00 per share, are exercisable for a period of three years and contain a “cashless exercise” provision that applies only in the event that a registration statement for the resale of the shares is not effective.
The following table sets forth, with respect to each investor, the amount due under the convertible promissory note and the number of shares issuable upon exercise of warrants:
| | | | | | | |
INVESTOR
| | PRINCIPAL AMOUNT CONVERTIBLE NOTE
| | NUMBER OF SHARES ISSUABLE UPON EXERCISE OF WARRANTS:
|
| | | CLASS A
| | CLASS B
|
Alpha Capital Aktiengesellschaft | | $ | 1,000,000 | | 333,334 | | 99,999 |
Genesis Microcap | | $ | 200,000 | | 66,667 | | 20,000 |
Steven Gold | | $ | 100,000 | | 33,334 | | 10,000 |
Asher Brand | | $ | 20,000 | | 6,667 | | 2,000 |
TRW Holdings PTY Limited | | $ | 100,000 | | 33,334 | | 10,000 |
TOTAL | | $ | 1,420,000 | | 473,336 | | 141,999 |
38
Andrew Garrett, Inc., acted as placement agent in this transaction. The placement agent was paid a cash fee of $99,400, which represents 7% of the gross proceeds, and is also entitled to a 5% fee upon exercise of warrants by the investors, if any. We also issued the placement agent a warrant to acquire an aggregate of 82,834 shares of our common stock at an exercise price of $2.09 per share, and a warrant to acquire 4,970 shares of our common stock at an exercise price of $3.00 per share. The placement agent’s warrants are exercisable for a period of five years and contain a “cashless exercise” provision that applies only in the event that a registration statement for the resale of the shares is not effective.
The Company has agreed to file a registration statement to register for resale by the investors up to 150% of the number of shares of common stock issuable to the investors upon conversion of the notes and exercise of the warrants, as well as to register for resale by the placement agent the shares of common stock issuable upon exercise of the placement agent’s warrants.
In connection with the private placement of 680,000 shares of common stock to one accredited investor in December 2004 (described above) we also issued to the investor a “Class B” common stock warrant to purchase 100,000 shares of common stock at $3.00 per share. Basic Investors, Inc. acted as placement agent in the transaction. As compensation, we issued to Basic Investors, Inc. a warrant to acquire 150,000 shares of common stock, exercisable for five years, at an exercise price of $5.00 per share, payable in cash or on a “cashless exercise” basis. We also agreed to register for resale the shares of common stock issuable upon exercise of the investor’s warrant and the placement agent’s warrant.
PLAN OF DISTRIBUTION
Each selling shareholder is free to offer and sell his or her common shares at such times, in such manner and at such prices as he or she may determine. The types of transactions in which the common shares are sold may include transactions in the over-the-counter market (including block transactions), negotiated transactions, the settlement of short sales of common shares or a combination of such methods of sale. The sales will be at market prices prevailing at the time of sale or at negotiated prices. Such transactions may or may not involve brokers or dealers. The selling shareholders have advised us that they have not entered into agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their shares. The selling shareholders do not have an underwriter or coordinating broker acting in connection with the proposed sale of the common shares.
The selling shareholders may sell their shares directly to purchasers or to or through broker-dealers, which may act as agents or principals. These broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling shareholders. They may also receive compensation from the purchasers of common shares for whom such broker-dealers may act as agents or to whom they sell as principal, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions). Each selling shareholder and any broker-dealer that assists in the sale of the common stock may be deemed to be an underwriter within the meaning of Section 2(a)(11) of the Securities Act. Any commissions received by such broker-dealers and any profit on the resale of the common shares sold by them while acting as principals might be deemed to be underwriting discounts or commissions.
The selling shareholders have agreed to comply with applicable securities laws. Each of the selling shareholders and any securities broker-dealer or others who may be deemed to be statutory underwriters will be subject to the prospectus delivery requirements under the Securities Act. The offer and sale by the selling shareholders may be a “distribution” under Regulation M, in which case the selling stockholder, any “affiliated purchasers”, and any broker-dealer or other person who participates in such distribution may be subject to Rule 102 of Regulation M until their participation in that distribution is completed. Rule 102 makes it unlawful for any person who is participating in a distribution to bid for or purchase stock of the same class of securities that are the subject of the distribution. A “distribution” is defined in Rule 102 as an offering of securities “that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods”. In addition Rule 101 under Regulation M prohibits any “stabilizing bid” or “stabilizing purchase” by a selling shareholder in connection with a distribution for the purpose of pegging, fixing or stabilizing the price of the common stock in connection with this offering.
Selling shareholders also may resell all or a portion of the common shares in open market transactions in reliance upon Rule 144 under the Securities Act, provided they meet the criteria and conform to the requirements of such Rule.
39
We are responsible for all costs, expenses and fees incurred in registering the shares offered hereby. The selling shareholders are responsible for brokerage commissions, if any, attributable to the sale of such securities. We will not receive any of the proceeds from the sale of any of the shares by the selling shareholders.
We have also agreed to indemnify the selling shareholders against certain liabilities, including liabilities under the Securities Act.
DESCRIPTION OF SECURITIES
General
BlastGard International, Inc. is authorized to issue up to 100,000,000 shares of its common stock, $.001 par value, and 1,000 shares of Preferred Stock, $.001 par value per share. As of December 31, 2004, there were 21,856,625 shares of common stock issued and outstanding, and no shares of preferred stock were issued and outstanding.
Common Stock
The holders of the common stock are entitled to one vote per share on each matter submitted to a vote at any meeting of shareholders. Shares of common stock do not carry cumulative voting rights and, therefore, a majority of the outstanding shares of common stock will be able to elect the entire Board of Directors and, if they do so, minority shareholders would not be able to elect any members to the Board of Directors.
Shareholders have no preemptive rights to acquire additional shares of common stock or other securities. The common stock is not subject to redemption and carries no subscription or conversion rights. In the event of liquidation of our company, the shares of common stock are entitled to share equally in corporate assets after satisfaction of all liabilities.
The outstanding shares of common stock are fully paid and non-assessable.
Preferred Stock
Our Articles of Incorporation authorize us to issue 1,000 shares of preferred stock, $.001 par value per share. The preferred stock may be divided into and issued in one or more series as may be determined by resolution of the board of directors. The board of directors is authorized, without any further action by the shareholders, to determine dividend rates, liquidation preferences, redemption provisions, sinking fund provisions, conversion rights, voting rights, and other rights, preferences, privileges and restrictions of any wholly unissued series of preferred stock and the number of shares constituting any such series. In addition, such preferred stock could have other rights, including voting and economic rights senior to the common stock so that the issuance of such preferred stock could adversely affect the market value of the common stock. The creation of one or more series of preferred stock also may have the effect of delaying, deferring or preventing a change in control of our company without any action by shareholders.
INDEMNIFICATION DISCLOSURE FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the company pursuant to the Colorado Business Corporation Act or the provisions of the Company’s Articles of Incorporation, as amended, or Bylaws, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for the indemnification against such liabilities (other than the payment by the company of expenses incurred or paid by a director, officer or controlling person of the company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is
40
against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
EXPERTS
The consolidated financial statements of BlastGard International, Inc. as of, and for the years ended, December 31, 2004 and 2003, appearing in this prospectus and registration statement, have been audited by Cordovano and Honeck, LLP, an independent registered public accounting firm, as stated in their report thereon, and are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the securities offered by the prospectus is being passed upon for us by the law firm of Futro & Associates, P.C., 1401 - 17th Street, Suite 1150, Denver, CO 80202. The law firm and its members own 100,000 shares of restricted common stock.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
At your request, we will provide you, without charge, a copy of any exhibits to its registration statement. If you want more information, write or call us at:
BlastGard International, Inc.
12900 Automobile Blvd., Suite D
Clearwater, FL 33762
Attn: Investor Relations
Telephone: (727) 592-9400
Our fiscal year ends on December 31. We are a reporting company and file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any reports, statements or other information we file at the SEC’s public reference room in Washington, D.C. You can receive copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Our SEC filings are also available to the public on the SEC Internet site at http://www.sec.gov.
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that, which is contained in this prospectus. Each selling stockholder named herein will be offering to sell shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.
41
INDEX TO FINANCIAL STATEMENTS
BLASTGARD INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Financial Statements (audited)
December 31, 2004 and 2003
F-1
To the Board of Directors and Shareholders:
Blastgard International, Inc. (formerly OPUS Resource Group, Inc.)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the balance sheet of Blastgard International, Inc. (formerly OPUS Resource Group, Inc.) (a development stage company) as of December 31, 2004, and the related statements of operations, changes in shareholders’ equity and cash flows for the year ended December 31, 2004, from September 26, 2003 (inception) through December 31, 2003 and from September 26, 2003 (inception) through December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Blastgard International, Inc. as of December 31, 2004, and the results of its operations and its cash flows for the year ended December 31, 2004, from September 26, 2003 (inception) through December 31, 2003 and from September 26, 2003 (inception) through December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, on January 31, 2004, the Company entered into an Agreement and Plan of Reorganization with Blastgard Technologies, Inc.
/s/ Cordovano and Honeck, LLP
Cordovano and Honeck, LLP
Denver, Colorado
February 17, 2005
F-2
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Balance Sheet
December 31, 2004
| | | | |
| Assets | | | | |
Cash | | $ | 1,821,288 | |
Property and equipment, net (Note 3) | | | 39,959 | |
Other assets: | | | | |
Debt issue costs (Note 4) | | | 156,477 | |
Deferred costs | | | 4,485 | |
| | |
|
|
|
| | | $ | 2,022,209 | |
| | |
|
|
|
| Liabilities and Shareholders’ Equity | | | | |
Liabilities: | | | | |
Accounts payable | | $ | 14,365 | |
Accrued liabilities | | | 8,000 | |
Accrued interest payable (Note 4) | | | 9,467 | |
Convertible notes payable, net of unamortized discount of $323,201 (Note 4) | | | 1,096,799 | |
| | |
|
|
|
Total liabilities | | | 1,128,631 | |
| | |
|
|
|
Shareholders’ equity (Note 5): | | | | |
Preferred stock, $.001 par value; 1,000 shares authorized, -0- shares issued and outstanding | | | — | |
Common stock, $.001 par value; 100,000,000 shares authorized, 21,856,625 shares issued and outstanding | | | 21,857 | |
Additional paid-in capital | | | 3,402,130 | |
Deficit accumulated during development stage | | | (2,530,409 | ) |
| | |
|
|
|
Total shareholder’s equity | | | 893,578 | |
| | |
|
|
|
| | | $ | 2,022,209 | |
| | |
|
|
|
See accompanying notes to financial statements
F-3
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Statements of Operations
| | | | | | | | | | | | |
| | | Year Ended
December 31,
2004
| | | September 26,
2003
(Inception)
Through
December 31,
2003
| | | September 26,
2003
(Inception)
Through
December 31,
2004
| |
Revenues: | | | | | | | | | | | | |
Sales | | $ | 595 | | | $ | — | | | $ | 595 | |
Licensing fees | | | — | | | | 5,000 | | | | 5,000 | |
| | |
|
|
| |
|
|
| |
|
|
|
Total revenues | | | 595 | | | | 5,000 | | | | 5,595 | |
| | |
|
|
| |
|
|
| |
|
|
|
Operating expenses: | | | | | | | | | | | | |
Stock-based compensation (Notes 2 and 5): | | | | | | | | | | | | |
Officers and directors | | | — | | | | 12,500 | | | | 12,500 | |
Consulting services | | | 1,199,750 | | | | — | | | | 1,199,750 | |
Granted stock options | | | 17,212 | | | | — | | | | 17,212 | |
General and administrative | | | 1,150,785 | | | | 4,155 | | | | 1,154,940 | |
Research and development | | | 148,426 | | | | — | | | | 148,426 | |
Contract settlement fee (Note 5) | | | 16,000 | | | | — | | | | 16,000 | |
Depreciation and amortization | | | 3,802 | | | | — | | | | 3,802 | |
Gain on settlement of liabilities (Note 4) | | | (123,965 | ) | | | — | | | | (123,965 | ) |
Loss on disposal of assets | | | 1,834 | | | | — | | | | 1,834 | |
| | |
|
|
| |
|
|
| |
|
|
|
Total operating expenses | | | 2,413,844 | | | | 16,655 | | | | 2,430,499 | |
| | |
|
|
| |
|
|
| |
|
|
|
Operating loss | | | (2,413,249 | ) | | | (11,655 | ) | | | (2,424,904 | ) |
| | | |
Interest income | | | 3,072 | | | | — | | | | 3,072 | |
Interest expense: | | | | | | | | | | | | |
Amortized debt issue costs (Note 4) | | | (4,602 | ) | | | — | | | | (4,602 | ) |
Amortized debt discount (Note 4) | | | (9,506 | ) | | | — | | | | (9,506 | ) |
Other (Note 4) | | | (94,469 | ) | | | — | | | | (94,469 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Loss before income taxes | | | (2,518,754 | ) | | | (11,655 | ) | | | (2,530,409 | ) |
| | | |
Income tax provision (Note 6) | | | — | | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
|
Net loss | | $ | (2,518,754 | ) | | $ | (11,655 | ) | | | (2,530,409 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Basic and diluted loss per share | | $ | (0.12 | ) | | $ | (0.00 | ) | | | | |
| | |
|
|
| |
|
|
| | | | |
Basic and diluted weighted average common shares outstanding | | | 20,231,443 | | | | 12,376,000 | | | | | |
| | |
|
|
| |
|
|
| | | | |
See accompanying notes to financial statements
F-4
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Statement of Changes in Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Additional Paid-In Capital
| | | Deficit
Accumulated
During
Development
Stage
| | | Total
| |
| | | Common Stock
| | Outstanding
Common
Stock
Options
| | | Outstanding
Common
Stock
Warrants
| | | Other
Additional
Paid-In
Capital
| | | |
| | | Shares
| | Par Value
| | | | | |
Balance at September 26, 2003 (inception) | | — | | $ | — | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | |
September 2003, stock issued to officers in exchange for services (Note 2) | | 12,376,000 | | | 12,376 | | | — | | | | — | | | | 124 | | | | — | | | | 12,500 | |
Net loss, period ended December 31, 2003 | | — | | | — | | | — | | | | — | | | | — | | | | (11,655 | ) | | | (11,655 | ) |
| | |
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| | | 12,376,000 | | | 12,376 | | | — | | | | — | | | | 124 | | | | (11,655 | ) | | | 845 | |
| | | | | | | |
January 2004, sale of common stock (Note 5) | | 5,824,000 | | | 5,824 | | | — | | | | — | | | | (5,504 | ) | | | — | | | | 320 | |
January 2004, stock issued in recapitalization with OPUS Resource Group (Note 1) | | 879,424 | | | 879 | | | 223,308 | | | | 293,250 | | | | (1,123,849 | ) | | | — | | | | (606,412 | ) |
| | |
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
January 31, 2004, following recapitalization | | 19,079,424 | | | 19,079 | | | 223,308 | | | | 293,250 | | | | (1,129,229 | ) | | | (11,655 | ) | | | (605,247 | ) |
| | | | | | | |
February 2004, sale of common stock (Note 5) | | 200,000 | | | 200 | | | — | | | | — | | | | 199,800 | | | | — | | | | 200,000 | |
February 2004, granted stock options (Note 5) | | — | | | — | | | 9,400 | | | | — | | | | — | | | | — | | | | 9,400 | |
March 2004, expired stock options and warrants (Note 5) | | — | | | — | | | (180,808 | ) | | | (49,999 | ) | | | 230,807 | | | | — | | | | — | |
March 2004, stock issued in exchange for consulting services (Note 5) | | 704,000 | | | 704 | | | — | | | | — | | | | 703,296 | | | | — | | | | 704,000 | |
March 2004, stock issued as payment for contract settlement fee (Note 5) | | 16,000 | | | 16 | | | — | | | | — | | | | 15,984 | | | | — | | | | 16,000 | |
April 2004, granted stock options (Note 5) | | — | | | — | | | 3,446 | | | | — | | | | — | | | | — | | | | 3,446 | |
April through September 2004, sale of common stock (Note 5) | | 758,201 | | | 759 | | | — | | | | — | | | | 1,136,542 | | | | — | | | | 1,137,301 | |
May 2004, stock issued in exchange for consulting services (Note 5) | | 300,000 | | | 300 | | | — | | | | — | | | | 449,700 | | | | — | | | | 450,000 | |
August 2004, stock issued in exchange for debt extinguishment (Note 4) | | 119,000 | | | 119 | | | — | | | | — | | | | 178,381 | | | | — | | | | 178,500 | |
October 2004, granted stock warrants (Note 5) | | — | | | — | | | — | | | | 45,750 | | | | — | | | | — | | | | 45,750 | |
December 2004, sale of common stock, net of offering costs of $132,600 (Note 5) | | 680,000 | | | 680 | | | — | | | | — | | | | 886,720 | | | | — | | | | 887,400 | |
December 2004, granted stock warrants (Note 5) | | — | | | — | | | — | | | | 381,416 | | | | — | | | | — | | | | 381,416 | |
Vesting of stock options (Note 5) | | — | | | — | | | 4,366 | | | | — | | | | — | | | | — | | | | 4,366 | |
Net loss, year ended December 31, 2004 | | — | | | — | | | — | | | | — | | | | — | | | | (2,518,754 | ) | | | (2,518,754 | ) |
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Balance at December 31, 2004 | | 21,856,625 | | $ | 21,857 | | $ | 59,712 | | | $ | 670,417 | | | $ | 2,672,001 | | | $ | (2,530,409 | ) | | $ | 893,578 | |
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See accompanying notes to financial statements
F-5
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Statements of Cash Flows
| | | | | | | | | | | | |
| | | Year Ended
December 31,
2004
| | | September 26,
2003
(Inception)
Through
December 31,
2003
| | | September 26,
2003
(Inception)
Through
December 31,
2004
| |
Cash flows from operating activities: | | | | | | | | | | | | |
Net loss | | $ | (2,518,754 | ) | | $ | (11,655 | ) | | $ | (2,530,409 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 17,910 | | | | — | | | | 17,910 | |
Stock-based compensation (Note 5) | | | 1,216,962 | | | | 12,500 | | | | 1,229,462 | |
Stock warrants granted for debt issue costs (Note 5) | | | (48,709 | ) | | | — | | | | (48,709 | ) |
Discount on convertible notes payable (Note 4) | | | (332,707 | ) | | | — | | | | (332,707 | ) |
Gain on settlement of liabilities | | | (123,965 | ) | | | — | | | | (123,965 | ) |
Loss on disposal of assets | | | 1,834 | | | | — | | | | 1,834 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts payable and accruals | | | 119,467 | | | | 4,000 | | | | 123,467 | |
Indebtedness to related party | | | (470 | ) | | | 470 | | | | — | |
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Net cash provided by (used in) operating activities | | | (1,668,432 | ) | | | 5,315 | | | | (1,663,117 | ) |
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Cash flows from investing activities: | | | | | | | | | | | | |
Payments for deferred costs | | | — | | | | (4,485 | ) | | | (4,485 | ) |
Purchases of property and equipment | | | (43,761 | ) | | | — | | | | (43,761 | ) |
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Net cash used in investing activities | | | (43,761 | ) | | | (4,485 | ) | | | (48,246 | ) |
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Cash flows from financing activities: | | | | | | | | | | | | |
Proceeds from the sale of common stock (Note 5) | | | 2,357,621 | | | | — | | | | 2,357,621 | |
Proceeds from issuance of convertible debt (Note 4) | | | 1,420,000 | | | | — | | | | 1,420,000 | |
Stock offering costs | | | (132,600 | ) | | | — | | | | (132,600 | ) |
Payments for debt issue costs | | | (112,370 | ) | | | — | | | | (112,370 | ) |
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Net cash provided by financing activities | | | 3,532,651 | | | | — | | | | 3,532,651 | |
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Net change in cash | | | 1,820,458 | | | | 830 | | | | 1,821,288 | |
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Cash, beginning of period | | | 830 | | | | — | | | | — | |
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Cash, end of period | | $ | 1,821,288 | | | $ | 830 | | | $ | 1,821,288 | |
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Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | | | |
Interest | | $ | 11,072 | | | $ | — | | | $ | 11,072 | |
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Income taxes | | $ | — | | | $ | — | | | $ | — | |
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Noncash investing and financing transactions: | | | | | | | | | | | | |
Common stock issued in exchange for debt extinguishment (Note 4) | | $ | 178,500 | | | $ | — | | | $ | 178,500 | |
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See accompanying notes to financial statements
F-6
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
(1) Organization, Basis of Presentation, and Summary of Significant Accounting Policies
Organization and Basis of Presentation
Blastgard International, Inc. (the “Company”) was incorporated on September 26, 2003 as Blastgard Technologies, Inc. (“BTI”) in the State of Florida, to design and market proprietary blast mitigation materials. The Company has applied for a patent related to its BlastWrap® technology, which the Company plans to market as an effective method to mitigate blasts and suppress flash fires resulting from explosions. The Company intends to sub-contract the manufacturing of products to licensed and qualified production facilities.
On January 31, 2004, Opus Resource Group, Inc. (“OPUS”), a Colorado corporation, entered into an Agreement and Plan of Reorganization (the “Agreement”) with BTI. Under the terms of the Agreement, OPUS agreed to acquire all of the issued and outstanding common stock of BTI in exchange for 18,200,000 shares of its common stock. Following the acquisition, the former shareholders of BTI held approximately 94.4 percent of the Company’s outstanding common stock, resulting in a change of control. In addition, BTI became a wholly-owned subsidiary of OPUS. However, for accounting purposes, the acquisition has been treated as a recapitalization of BTI, with OPUS the legal surviving entity. Since OPUS had minimal assets and no operations, the recapitalization has been accounted for as the sale of 879,424 shares of BTI common stock for the net liabilities of OPUS. Therefore, the historical financial information prior to the date of the recapitalization, is the financial information of BTI.
On March 31, 2004, OPUS changed its name to Blastgard International, Inc.
Development Stage
The Company is in the development stage in accordance with Statements of Financial Accounting Standards (SFAS) No. 7 “Accounting and Reporting by Development Stage Enterprises”. As of December 31, 2004, the Company has devoted substantially all of its efforts to financial planning, raising capital and developing markets.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect 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 considers all highly liquid debt instruments with original maturities of three months or less when acquired to be cash equivalents. The Company had no cash equivalents at December 31, 2004.
Property and Equipment
Property and equipment are stated at cost. Depreciation is 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 are capitalized, while repairs and maintenance costs are expensed as incurred.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Statement No. 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted future cash flows estimated to be generated by those assets are less than the assets’ carrying
F-7
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
amount. If such assets are impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are 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 are 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 is not materially different from that calculated under the effective interest method.
Deferred Costs
Patent and trademark application costs are capitalized as deferred costs. If a patent or trademark application is denied or expires, the costs incurred are charged to operations in the year the application is denied or expires. Amortization commences once a patent or trademark is granted.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are 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 are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes.
Stock-based Compensation
The Company accounts for compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”.Under APB 25, compensation expense of fixed stock options is based on the difference, if any, on the date of the grant between the deemed fair value of the Company’s stock and the exercise price of the option. Compensation expense is recognized on the date of grant or on the straight-line basis over the option-vesting period. The Company accounts for stock issued to nonemployees in accordance with the provisions of SFAS 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.
Pro forma information regarding the results of operations is determined as if the Company had accounted for its employee stock options using the fair-value method. The fair value of each option grant is estimated on the date of grant using the Black-Scholes method. Pro forma disclosures have been included in Note 5.
Loss per common share
The Company reports net loss per share using a dual presentation of basic and diluted loss per share. Basic net loss per share excludes the impact of common stock equivalents. Diluted net loss per share utilizes the average market price per share when applying the treasury stock method in determining common stock equivalents. As of December 31, 2004, there were 1,943,925 vested common stock options outstanding, which were excluded from the calculation of net loss per share-diluted because they were antidilutive. Also excluded from the calculation of net loss per share-diluted were 1,016,955 outstanding common stock warrants, which would also be antidilutive.
F-8
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
New accounting pronouncements
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29.” This Statement eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect application of SFAS No. 153 to have a material affect on its financial statements.
In December 2004, the FASB issued a revision to SFAS No. 123, “Share-Based Payment.” This Statement supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance. It establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement No. 123 as originally issued and EITF Issue No. 96-18. This Statement is effective for public entities that file as small business issuers as of the beginning of the first fiscal period that begins after December 15, 2005. The Company has not yet determined the impact of SFAS No. 123 (revised) on its financial statements.
(2) Related Party Transactions
During the year ended December 31, 2004, officers paid expenses on behalf of the Company totaling $49,173 and advanced the Company an additional $27,000. The Company repaid the officers in full prior to December 31, 2004.
As part of the recapitalization, the Company assumed a liability to a former officer totaling $1,441 for expenses paid on behalf of the Company. The obligation was liquidated prior to December 31, 2004.
As part of the recapitalization, the Company assumed a liability for accrued interest owed to a shareholder. The accrued interest liability, totaling $1,072, was repaid prior to December 31, 2004.
On September 26, 2003, the Company issued 12,376,000 shares of its common stock to its officers and directors in exchange for administrative services. The Company’s common stock had no market value on the transaction date. Therefore, the transaction was valued in good faith by the Board of Directors at $12,500, or $.001 per share.
On September 29, 2003, the Company signed a License Agreement with Blastgard, Inc. (“BGI”), an affiliated corporation, permitting BGI to manufacture and distribute products using the Company’s technology. BGI paid the Company a $5,000 non-refundable license fee as part of the agreement. Under the terms of the agreement, BGI was required to demonstrate, by December 15, 2003, that it had secured adequate funds to perform under the agreement; but because BGI failed to do so, the agreement was terminated on December 30, 2003.
(3) Property and Equipment
Property and equipment consisted of the following at December 31, 2004:
| | | | |
Equipment | | $ | 36,264 | |
Furniture | | | 7,497 | |
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| | | | 43,761 | |
Less accumulated depreciation | | | (3,802 | ) |
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| | | $ | 39,959 | |
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F-9
Depreciation expense totaled $3,802 and $-0-, respectively, for the year ended December 31, 2004 and from September 26, 2003 (inception) through December 31, 2003.
(4) 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.
Each note carries an interest rate of 8% per annum, with a default interest rate of 15% per annum. Aggregate monthly payments of 1.2% of the principal amount are due commencing November 1, 2005 through April 30, 2006, then aggregate monthly payments of 3% of the principal amount are due commencing May 1, 2006 through October 31, 2006, and then aggregate monthly payments of 6% of the principal amount are due commencing November 1, 2006 through October 31, 2007. Payments will be applied first to accrued interest and then to principal. The balance of the unpaid principal and any unpaid interest is due on October 31, 2007. As of December 31, 2004, accrued interest payable on the notes totaled $9,467.
The individual note holders have the right, at their option, to convert the principal amount of the note, together with all accrued interest thereon in accordance with the provisions of and upon satisfaction of the conditions contained in the note, into fully paid and non-assessable shares of the Company’s common stock at a conversion price of $1.50 per share, subject to adjustment in certain circumstances if the notes are then outstanding, such as a stock split, combination or dividend; or in the event the Company issues shares of common stock for consideration of less than the exercise price. In addition, if, by March 16, 2006, the notes are still outstanding, the exercise price will be reduce by one-third unless the Company reports gross revenues of at least $15 million or net profits of at least $1 million.
The Company can require the holders to convert the notes into shares of common stock if a registration statement for the resale of the underlying shares is effective and the common stock has traded above $2.50 per shares for ten consecutive days. The amount that the holders can be required to convert is limited to the aggregate dollar volume traded over the past seven trading days (pro-rated among all holders), but no holder is required to convert an amount that results in the holder becoming the beneficial owner of more than 4.99% of the outstanding common stock on the date of conversion.
The notes are secured by all of the Company’s assets until the notes have been fully paid or fully converted into common stock.
F-10
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
The Company’s convertible promissory notes payable consist of the following at December 31, 2004:
| | | |
$1,000,000 convertible promissory note issued December 2, 2004, due on October 31, 2007, 8% annual interest rate, net of unamortized discount of $227,606 | | $ | 772,394 |
$200,000 convertible promissory note issued December 2, 2004, due on October 31, 2007, 8% annual interest rate, net of unamortized discount of $45,521 | | | 154,479 |
$100,000 convertible promissory note issued December 2, 2004, due on October 31, 2007, 8% annual interest rate, net of unamortized discount of $22,761 | | | 77,239 |
$100,000 convertible promissory note issued December 2, 2004, due on October 31, 2007, 8% annual interest rate, net of unamortized discount of $22,761 | | | 77,239 |
$20,000 convertible promissory note issued December 2, 2004, due on October 31, 2007, 8% annual interest rate, net of unamortized discount of $4,552 | | | 15,448 |
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| | | $ | 1,096,799 |
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Common stock warrants
In connection with the convertible promissory notes, the Company issued note holders warrants to purchase shares of its common stock. The Company issued “Class A” common stock purchase warrants, which entitle the holders to acquire an aggregate of 473,336 shares of our common stock at an exercise price of $2.09 per share, are exercisable for a period of five years and contain a “cashless exercise” provision that applies only in the event that a registration statement for the resale of the shares is not effective.
The Company also issued “Class B” common stock purchase warrants entitling the holders to purchase an aggregate of 141,999 shares of the Company’s common stock at an exercise price of $3.00 per share, are exercisable for a period of three years and contain a “cashless exercise” provision that applies only in the event that a registration statement for the resale of the shares is not effective.
The fair value for the warrants granted in association with the convertible debt was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| | | |
Risk-free interest rate | | 2.00 | % |
Dividend yield | | 0.00 | % |
Volatility factor | | 56.36 | % |
Weighted average expected life | | 3 to 5 years | |
The weighted average exercise price and weighted average fair value of these warrants were $2.30 and $.54, respectively. The fair value of all 615,335 warrants granted in association with the issuance of the convertible debt totaled $332,707.
The warrants are detachable and are valued separately from the convertible notes payable. Therefore, the fair value of the warrants, $332,707, was charged to additional paid-in capital with a corresponding discount on the
F-11
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
convertible notes payable. The discount will be amortized over the life of the debt. As the discount is amortized, the outstanding principal balance of the notes will approach their face value of $1,420,000. Amortization resulting from the discount is charged to interest expense, resulting in effective interest rate of approximately 16% on the convertible notes. Amortization on the debt discount totaled $9,506 at December 31, 2004.
Debt issue costs
The Company paid its debt placement agent and its attorney a total of $112,370 in connection with the issuance of the convertible promissory notes. In addition, the Company issued the placement agent Class A warrants to purchase an aggregate of 82,834 shares of the Company’s common stock at an exercise price of $2.09 per share, and Class B warrants to purchase 4,970 shares of the Company’s common stock at an exercise price of $3.00 per share. The placement agent’s warrants are exercisable for a period of five years and contain a “cashless exercise” provision that applies only in the event that a registration statement for the resale of the shares is not effective.
The fair value for the warrants issued in association with the convertible debt was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
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Risk-free interest rate | | 2.00 | % |
Dividend yield | | 0.00 | % |
Volatility factor | | 56.36 | % |
Weighted average expected life | | 3 to 5 years | |
The weighted average exercise price and weighted average fair value of these warrants were $2.14 and $.60, respectively. The fair value of the 87,804 warrants granted to the debt placement agent totaled $48,709, which, when added to the $112,370 paid to the placement agent and attorney, resulted in total debt issue costs of $161,079. Amortization resulting from the debt issue costs is charged to interest expense. Amortization on the debt issue costs totaled $4,602 at December 31, 2004.
Debt Settlement
On August 24, 2004, the Company settled, as payment in full, a past-due promissory note assumed in the recapitalization. Under the original terms of the note, the Company agreed to pay the principal amount of $250,000, plus interest at the rate of 10% per annum. Accrued interest through the settlement date was $25,000. Pursuant to the original loan agreement, the Company also had agreed to issue 3,334 shares of common stock and guaranteed that the shares would have a market value of at least $125,000 as of June 30, 2004. The Company did not issue the 3,334 shares required under the original loan agreement; however, the $125,000 associated with the shares was capitalized as debt issue costs and amortized to interest expense over the term of the note, with all $125,000 charged to interest expense as of June 30, 2004.
In full payment of the promissory note and in settlement of any and all obligations the Company had under the original loan agreement, the Company paid to the lender $100,000 in cash, issued 119,000 shares of its restricted common stock, and delivered to the lender 50,000 shares that were already outstanding in the name of Robert P. Gordon, a former officer and former director of the Company. The 50,000 shares from Robert P. Gordon were issued from the 100,000 shares held in escrow for the benefit of the Company to pay any contingent or undisclosed liabilities, pursuant to the January 31, 2004 recapitalization.
The 119,000 common shares issued by the Company were valued at $1.50 per share, or $178,500, based on contemporaneous common stock sales to unrelated third-party investors. The consideration paid by the Company to settle the debt totaled $278,500 ($100,000 in cash and $178,500 in stock). The value of the outstanding debt totaled $400,000 ($250,000 in principal, $25,000 in accrued interest, and $125,000 in debt issue costs). As a result, the Company recorded a $121,500 gain on the debt settlement, which is included in the accompanying condensed financial statements as “Gain on settlement of liabilities”.
F-12
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
(5) Shareholders’ Equity
Reverse stock split
On March 12, 2004, the Company’s Board of Directors declared a 1 for 5 reverse split of its $.001 par value common stock for shareholders of record on March 31, 2004. The stock split reduced the number of common shares outstanding from 99,916,903 to 19,983,424 on March 31, 2004. Shares issued prior to March 31, 2004 have been retroactively restated to reflect the impact of the reverse split.
Common stock
During January 2004, prior to the recapitalization, BTI sold 5,824,000 shares of its common stock to unrelated, third-party investors for $320.
During February 2004, the Company sold 200,000 shares of its common stock to unrelated, third-party investors for $200,000, or $1.00 per share.
On March 30, 2004, the Company issued 704,000 shares of its common stock in exchange for business consulting services. The common stock was valued by the Board of Directors at $1.00 per share based on contemporaneous sales of stock to unrelated third-party investors. Stock-based compensation expense of $704,000 was recognized in the accompanying financial statements for the year ended December 31, 2004.
On March 31, 2004, the Company issued 16,000 shares of its common stock to settle a disputed contract. The common stock was valued at $1.00 per share based on contemporaneous sales of stock to unrelated third-party investors. The $16,000 fee is included in the accompanying financial statements as “Contract settlement fee”.
From April through September 2004, the Company sold 758,201 shares of its common stock to unrelated, third-party investors for $1,137,301, or $1.50 per share.
On May 26, 2004, the Company issued 300,000 shares of its common stock in exchange for business consulting services. The common stock was valued at $1.50 per share based on contemporaneous sales of stock to unrelated third-party investors. Stock-based compensation expense of $450,000 was recognized in the accompanying financial statements for the year ended December 31, 2004. In January 2005, the Company cancelled this transaction and entered into litigation in an attempt to recover the outstanding shares. However, as of the date of this report, the shares are still issued and outstanding.
On August 24, 2004, the Company issued 119,000 shares of its common stock in exchange for the payment of a promissory note (see Note 4). The common stock was valued at $1.50 per share on the transaction date based on contemporaneous sales of stock to unrelated third-party investors
During December 2004, the Company sold 680,000 shares of its common stock to an unrelated, third-party investor for $1,020,000, or $1.50 per share. In addition, the Company granted the investor Class B warrants to purchase 100,000 shares of the Company’s common stock at an exercise price of $3.00 per share. The investor’s warrants are exercisable for a period of three years and contain a “cashless exercise” provision that applies only in the event that a registration statement for the resale of the shares is not effective.
Options granted to non-employees, accounted for under the fair value method
On February 17, 2004, the Company granted a consultant options to purchase an aggregate of 40,000 shares of the Company’s common stock at an exercise price of $2.00 per share. Half of the options vested on the date of grant and the remaining 20,000 options vest on January 1, 2005. The options expire on December 31, 2007.
F-13
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
On February 17, 2004 the quoted market price of the stock was $.75 per share. The Company valued the options at $.47 per share, or $18,800, in accordance with SFAS 123. Accordingly, $9,400 was recorded as stock-based compensation in the accompanying condensed financial statements for the 20,000 options that vested on the grant date.
During April and May 2004, the Company granted three consultants options to purchase an aggregate of 27,000 shares of the Company’s common stock at an exercise price of $2.00 per share. The Company subsequently terminated one consultant’s agreement and cancelled 11,250 options. The options vest at a rate of 1,500 per month over a period of 18 months. The options expire on December 31, 2008. The quoted market price of the stock was $1.50 per share on the date of grant. The Company valued the options at $.92 per share, or $24,813, in accordance with SFAS 123. Accordingly, $7,812 was recorded as stock-based compensation in the accompanying condensed financial statements for the options that had vested as of December 31, 2004.
On October 6, 2004, the Company granted a consultant options to purchase an aggregate of 150,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The options vested on the date of grant. The options expire on October 5, 2009. On October 6, 2004 the quoted market price of the stock was $1.50 per share. The Company valued the options at $.305 per share, or $45,750, in accordance with SFAS 123, which was recorded as stock-based compensation in the accompanying financial statements for the year ended December 31, 2004.
The fair value of the options was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| | | |
Risk-free interest rate | | 2.00 | % |
Dividend yield | | 0.00 | % |
Volatility factor | | 56.63 | % |
Weighted average expected life | | 3 years | |
Options granted to employees, accounted for under the intrinsic value method
On January 31, 2004 and February 23, 2004, the Company granted its officers options to purchase an aggregate of 1,860,000 shares of the Company’s common stock at an exercise price of $2.00 per share. The options vest as follows:
| | | | |
| | | Number of Options
| | Date Vested
|
| | | 40,000 | | February 23, 2004 |
| | | 600,000 | | June 1, 2004 |
| | | 630,000 | | January 1, 2005 |
| | | 590,000 | | January 1, 2006 |
| | |
| | |
| | | 1,860,000 | | |
| | |
| | |
The options expire on December 31, 2007. The exercise prices of all stock options granted were greater than the quoted market prices of the underlying common stock on the respective grant dates.
On January 31, 2004 and February 23, 2004, the market value of the stock was $1.07 and $.56 per share, respectively. The options granted on January 31, 2004 were valued at $.726 per share, or $1,277,760 and the February 23, 2004 options were valued at $.326 per share, or $32,600. Had compensation expense been recorded based on the fair value at the grant date, and charged to expense over vesting periods, consistent with
F-14
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
the provisions of SFAS 123, the Company’s net loss and net loss per share would have increased to the pro forma amounts indicated below:
| | | | | | | | |
| | | Year Ended
December 31,
2004
| | | September 26,
2003
(Inception)
Through
December 31,
2003
| |
Net loss, as reported | | $ | (2,518,754 | ) | | $ | (11,655 | ) |
Decrease due to: | | | | | | | | |
Employee stock options | | | (448,640 | ) | | | — | |
| | |
|
|
| |
|
|
|
Pro forma net loss | | $ | (2,967,394 | ) | | $ | (11,655 | ) |
| | |
|
|
| |
|
|
|
As reported: | | | | | | | | |
Net loss per share - basic and diluted | | $ | (0.12 | ) | | $ | (0.00 | ) |
| | |
|
|
| |
|
|
|
Pro Forma: | | | | | | | | |
Net loss per share - basic and diluted | | $ | (0.15 | ) | | $ | (0.00 | ) |
| | |
|
|
| |
|
|
|
The following schedule discloses the calculation of the pro forma compensation expense on employee stock options:
| | | | | | | | | | |
Date of Grant
| | Number of
Options
Granted
| | Total Fair Value
| | Options Vested
Through
December 31, 2004
| | Fair Value
Incurred Through
December 31, 2004
|
2/23/2004 | | 100,000 | | $ | 32,600 | | 40,000 | | $ | 13,040 |
1/31/2004 | | 300,000 | | | 217,800 | | 100,000 | | | 72,600 |
1/31/2004 | | 300,000 | | | 217,800 | | 100,000 | | | 72,600 |
1/31/2004 | | 580,000 | | | 421,080 | | 200,000 | | | 145,200 |
1/31/2004 | | 580,000 | | | 421,080 | | 200,000 | | | 145,200 |
| | |
| |
|
| |
| |
|
|
| | | 1,860,000 | | $ | 1,310,360 | | 640,000 | | $ | 448,640 |
| | |
| |
|
| |
| |
|
|
Following is a schedule of changes in common stock options and warrants from September 26, 2003 (inception) through December 31, 2004:
F-15
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
| | | | | | |
Description
| | Options
| | | Warrants
| |
Outstanding at September 26, 2003 (inception) | | — | | | — | |
Granted | | — | | | — | |
Exercised | | — | | | — | |
Expired/cancelled | | — | | | — | |
| | |
|
| |
|
|
Outstanding at December 31, 2003 | | — | | | — | |
| | |
Acquired through recapitalization | | 131,420 | | | 90,000 | |
Granted | | 1,927,000 | | | 953,139 | |
Exercised | | — | | | — | |
Expired/cancelled | | (114,495 | ) | | (20,000 | ) |
| | |
|
| |
|
|
Outstanding at December 31, 2004 | | 1,943,925 | | | 1,023,139 | |
| | |
|
| |
|
|
Preferred stock
The Company is 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.
(6) Income Taxes
A reconciliation of U.S. statutory federal income tax rate to the effective rate follows:
| | | | | | |
| | | Year Ended
December 31,
2004
| | | September 26,
2003
(Inception)
Through
December 31,
2003
| |
U.S. statutory federal rate, graduated | | 34.00 | % | | 15.00 | % |
State income tax rate, net of federal | | 3.63 | % | | 4.68 | % |
Permanent book-to-tax differences | | -0.10 | % | | 0.00 | % |
Net operating loss (NOL) for which no tax benefit is currently available | | -37.53 | % | | -19.68 | % |
| | |
|
| |
|
|
| | | 0.00 | % | | 0.00 | % |
| | |
|
| |
|
|
At December 31, 2004, deferred tax assets consisted of a net tax asset of $947,481, due to operating loss carryforwards of $2,523,449, which was fully allowed for, in the valuation allowance of $947,481. The valuation allowance offsets the net deferred tax asset for which it is more likely than not that the deferred tax assets will not be realized. The change in the valuation allowance for the year ended December 31, 2004 and the period ended December 31, 2003 totaled $945,188 and $2,293, respectively. The current tax benefit also totaled $945,188 and $2,293 for the year ended December 31, 2004 and the period ended December 31, 2003, respectively. The net operating loss carryforward expires through the year 2024.
F-16
BLASTGARD INTERNATIONAL, INC.
(formerly OPUS Resource Group, Inc.)
(A Development Stage Company)
Notes to Financial Statements
The valuation allowance will be evaluated at the end of each year, considering positive and negative evidence about whether the deferred tax asset will be realized. At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax assets is no longer impaired and the allowance is no longer required.
Should the Company undergo an ownership change as defined in Section 382 of the Internal Revenue Code, the Company’s tax net operating loss carryforwards generated prior to the ownership change will be subject to an annual limitation, which could reduce or defer the utilization of these losses.
(7) 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”). The loss that would have resulted from that risk totaled $1,737,136 at December 31, 2004, for the excess of the deposit liabilities reported by the financial institution over the amount that would have been covered by FDIC. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk to cash.
F-17
BLASTGARD INTERNATIONAL, INC.
(A Development Stage Company)
Condensed Balance Sheet
(Unaudited)
March 31, 2005
| | | | |
| Assets | | | | |
Cash | | $ | 1,428,126 | |
Accounts receivable, net | | | 259 | |
Property and equipment, net | | | 73,604 | |
Other assets: | | | | |
Debt issue costs (Note 4) | | | 142,670 | |
Deferred costs | | | 4,485 | |
Deposits | | | 1,850 | |
| | |
|
|
|
| | | $ | 1,650,994 | |
| | |
|
|
|
| Liabilities and Shareholders’ Equity | | | | |
Liabilities: | | | | |
Indebtedness to related parties (Note 2) | | $ | 764 | |
Accounts payable | | | 14,000 | |
Accrued liabilities | | | 1,500 | |
Accrued interest payable (Note 4) | | | 37,867 | |
Convertible notes payable, net of unamortized discount of $294,683 (Note 4) | | | 1,125,317 | |
| | |
|
|
|
Total liabilities | | | 1,179,448 | |
| | |
|
|
|
Shareholders’ equity (Note 5): | | | | |
Preferred stock, $.001 par value; 1,000 shares authorized, -0- shares issued and outstanding | | | — | |
Common stock, $.001 par value; 100,000,000 shares authorized, 21,856,625 shares issued and outstanding | | | 21,857 | |
Additional paid-in capital | | | 3,458,442 | |
Deficit accumulated during development stage | | | (3,008,753 | ) |
| | |
|
|
|
Total shareholder’s equity | | | 471,546 | |
| | |
|
|
|
| | | $ | 1,650,994 | |
| | |
|
|
|
See accompanying notes to condensed financial statements
F-18
BLASTGARD INTERNATIONAL, INC.
(A Development Stage Company)
Condensed Statements of Operations
(Unaudited)
| | | | | | | | | | | | |
| | | Three Months Ended March 31,
| | | September 26,
2003
(Inception)
Through
March 31, 2005
| |
| | | 2005
| | | 2004
| | |
Revenues: | | | | | | | | | | | | |
Sales | | $ | 259 | | | $ | — | | | $ | 854 | |
Licensing fees | | | — | | | | — | | | | 5,000 | |
| | |
|
|
| |
|
|
| |
|
|
|
Total revenues | | | 259 | | | | — | | | | 5,854 | |
| | |
|
|
| |
|
|
| |
|
|
|
Operating expenses: | | | | | | | | | | | | |
Stock-based compensation (Note 5): | | | | | | | | | | | | |
Officers and directors | | | — | | | | — | | | | 12,500 | |
Consulting services | | | — | | | | 704,000 | | | | 1,199,750 | |
Granted stock options | | | 56,312 | | | | 9,400 | | | | 73,524 | |
General and administrative | | | 323,327 | | | | 203,624 | | | | 1,478,267 | |
Research and development | | | 32,859 | | | | — | | | | 181,285 | |
Contract settlement fee | | | — | | | | 16,000 | | | | 16,000 | |
Depreciation and amortization | | | 5,244 | | | | 641 | | | | 9,046 | |
Gain on settlement of liabilities | | | — | | | | — | | | | (123,965 | ) |
Loss on disposal of assets | | | — | | | | 1,834 | | | | 1,834 | |
| | |
|
|
| |
|
|
| |
|
|
|
Total operating expenses | | | 417,742 | | | | 935,499 | | | | 2,848,241 | |
| | |
|
|
| |
|
|
| |
|
|
|
Operating loss | | | (417,483 | ) | | | (935,499 | ) | | | (2,842,387 | ) |
Interest income | | | 9,864 | | | | — | | | | 12,936 | |
Interest expense (Note 4): | | | | | | | | | | | | |
Amortized debt issue costs | | | (13,807 | ) | | | — | | | | (18,409 | ) |
Amortized debt discount | | | (28,518 | ) | | | — | | | | (38,024 | ) |
Other | | | (28,400 | ) | | | (42,002 | ) | | | (122,869 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Loss before income taxes | | | (478,344 | ) | | | (977,501 | ) | | | (3,008,753 | ) |
Income tax provision (Note 3) | | | — | | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
|
Net loss | | $ | (478,344 | ) | | $ | (977,501 | ) | | | (3,008,753 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Basic and diluted loss per share | | $ | (0.02 | ) | | $ | (0.05 | ) | | | | |
| | |
|
|
| |
|
|
| | | | |
Basic and diluted weighted average common shares outstanding | | | 21,856,625 | | | | 19,452,714 | | | | | |
| | |
|
|
| |
|
|
| | | | |
See accompanying notes to condensed financial statements
F-19
BLASTGARD INTERNATIONAL, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | | |
| | | Three Months Ended
March 31,
| | | September 26,
2003
(Inception)
Through
March 31,
2005
| |
| | | 2005
| | | 2004
| | |
Net cash provided by (used in) operating activities | | $ | (354,273 | ) | | $ | (186,852 | ) | | $ | (2,017,390 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Cash flows from investing activities: | | | | | | | | | | | | |
Payments for deferred costs | | | — | | | | — | | | | (4,485 | ) |
Purchases of property and equipment | | | (38,889 | ) | | | (10,329 | ) | | | (82,650 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash used in investing activities | | | (38,889 | ) | | | (10,329 | ) | | | (87,135 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Cash flows from financing activities: | | | | | | | | | | | | |
Proceeds from the sale of common stock | | | — | | | | 200,320 | | | | 2,357,621 | |
Proceeds from issuance of convertible debt | | | — | | | | — | | | | 1,420,000 | |
Stock offering costs | | | — | | | | — | | | | (132,600 | ) |
Payments for debt issue costs | | | — | | | | — | | | | (112,370 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash provided by financing activities | | | — | | | | 200,320 | | | | 3,532,651 | |
| | |
|
|
| |
|
|
| |
|
|
|
Net change in cash | | | (393,162 | ) | | | 3,139 | | | | 1,428,126 | |
Cash, beginning of period | | | 1,821,288 | | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
|
Cash, end of period | | $ | 1,428,126 | | | $ | 3,139 | | | $ | 1,428,126 | |
| | |
|
|
| |
|
|
| |
|
|
|
Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | | | |
Interest | | $ | — | | | $ | — | | | $ | 11,072 | |
| | |
|
|
| |
|
|
| |
|
|
|
Income taxes | | $ | — | | | $ | — | | | $ | — | |
| | |
|
|
| |
|
|
| |
|
|
|
Noncash investing and financing transactions: | | | | | | | | | | | | |
Common stock issued in exchange for debt extinguishment | | $ | — | | | $ | — | | | $ | 178,500 | |
| | |
|
|
| |
|
|
| |
|
|
|
See accompanying notes to condensed financial statements
F-20
BLASTGARD INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
Note 1:Basis of presentation
The financial statements presented herein have been prepared by the Company in accordance with the accounting policies in its Form 10-KSB dated December 31, 2004, and should be read in conjunction with the notes thereto.
In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary to provide a fair presentation of operating results for the interim periods presented have been made. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the year.
The Company is in the development stage in accordance with Statements of Financial Accounting Standards (SFAS) No. 7 “Accounting and Reporting by Development Stage Enterprises”. As of March 31, 2005, the Company has devoted substantially all of its efforts to financial planning, raising capital and developing markets.
Financial data presented herein are unaudited.
Note 2:Related party transactions
During the three months ended March 31, 2005, officers paid expenses on behalf of the Company totaling $764, which were not repaid as of March 31, 2005. The balance owed the officers is included in the accompanying condensed financial statements as “Indebtedness to related parties”.
Note 3:Income taxes
The Company records its income taxes in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes”. The Company incurred net operating losses during all periods presented resulting in a deferred tax asset, which was fully allowed for; therefore, the net benefit and expense resulted in no income taxes.
F-21
Note 4:Notes payable
The Company’s convertible promissory notes payable consist of the following at March 31, 2005:
| | | |
$1,000,000 convertible promissory note issued December 2, 2004, due on October 31, 2007, 8% annual interest rate, net of unamortized discount of $207,523 | | $ | 792,477 |
$200,000 convertible promissory note issued December 2, 2004, due on October 31, 2007, 8% annual interest rate, net of unamortized discount of $41,505 | | | 158,495 |
$100,000 convertible promissory note issued December 2, 2004, due on October 31, 2007, 8% annual interest rate, net of unamortized discount of $20,752 | | | 79,248 |
$100,000 convertible promissory note issued December 2, 2004, due on October 31, 2007, 8% annual interest rate, net of unamortized discount of $20,752 | | | 79,248 |
$20,000 convertible promissory note issued December 2, 2004, due on October 31, 2007, 8% annual interest rate, net of unamortized discount of $4,151 | | | 15,849 |
| | |
|
|
| | | $ | 1,125,317 |
| | |
|
|
Accrued interest payable on the note totaled $37,867 at March 31, 2005.
The fair value of detachable warrants issued with the convertible notes was charged to additional paid-in capital with a corresponding discount on the convertible notes payable. The discount is amortized over the life of the debt. As the discount is amortized, the outstanding principal balance of the notes will approach their face value of $1,420,000. Amortization resulting from the discount is charged to interest expense, resulting in effective interest rate of approximately 16% on the convertible notes. Accumulated amortization and amortization expense on the debt discount totaled $38,024 and $28,518 as of and for the three months ended March 31, 2005, respectively.
The Company paid its debt placement agent and its attorney a total of $112,370 and issued detachable warrants in connection with the issuance of the convertible promissory notes. The fair value of the warrants totaled $48,709, which, when added to the $112,370 paid to the placement agent and attorney, resulted in total debt issue costs of $161,079. Amortization resulting from the debt issue costs is charged to interest expense. Accumulated amortization and amortization expense of the debt issue costs totaled $18,409 and $13,807 as of and for the three months ended March 31, 2005, respectively.
Note 5:Shareholders’ equity
Options granted to non-employees, accounted for under the fair value method
On March 22, 2005, the Company granted consultants options to purchase an aggregate of 125,000 shares of the Company’s common stock at an exercise price of $2.00 per share. All of the options vested on the date of grant. The options expire on March 31, 2009. The quoted market price of the stock was $1.53 per share on the grant date. The Company valued the options at $.322 per share, or $40,250, which is recorded as stock-based compensation in the accompanying condensed financial statements.
The fair value of the options was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| | | |
Risk-free interest rate | | 2.77 | % |
Dividend yield | | 0.00 | % |
Volatility factor | | 33.97 | % |
Weighted average expected life | | 4 years | |
F-22
An additional 22,250 stock options granted to non-employees in prior years, vested during the three months ended March 31, 2005. Compensation related to the vested options totaled $16,062 and has been recorded as stock-based compensation in the accompanying condensed financial statements
Options granted to employees, accounted for under the intrinsic value method
An additional 630,000 stock options granted to employees in prior years, vested during the three months ended March 31, 2005. Had compensation expense been recorded based on the fair value at the grant date, and charged to expense over vesting periods, the Company’s net loss and net loss per share would have increased to the pro forma amounts indicated below:
| | | | | | | | |
| | | Three Months Ended
March 31,
| |
| | | 2005
| | | 2004
| |
Net loss, as reported | | $ | (464,344 | ) | | $ | (977,501 | ) |
Decrease due to: | | | | | | | | |
Employee stock options | | | (445,380 | ) | | | — | |
| | |
|
|
| |
|
|
|
Pro forma net loss | | $ | (909,724 | ) | | $ | (977,501 | ) |
| | |
|
|
| |
|
|
|
As reported: | | | | | | | | |
Net loss per share - basic and diluted | | $ | (0.02 | ) | | $ | (0.05 | ) |
| | |
|
|
| |
|
|
|
Pro Forma: | | | | | | | | |
Net loss per share - basic and diluted | | $ | (0.04 | ) | | $ | (0.05 | ) |
| | |
|
|
| |
|
|
|
The following schedule discloses the calculation of the pro forma compensation expense on employee stock options:
| | | | | | | | | | |
Date of Grant
| | Number of
Options
Granted
| | Total Fair Value
| | Options Vested
Through
March 31, 2005
| | Fair Value
Incurred Through
March 31, 2005
|
2/23/2004 | | 100,000 | | $ | 32,600 | | 70,000 | | $ | 22,820 |
1/31/2004 | | 300,000 | | | 217,800 | | 200,000 | | | 145,200 |
1/31/2004 | | 300,000 | | | 217,800 | | 200,000 | | | 145,200 |
1/31/2004 | | 580,000 | | | 421,080 | | 400,000 | | | 290,400 |
1/31/2004 | | 580,000 | | | 421,080 | | 400,000 | | | 290,400 |
| | |
| |
|
| |
| |
|
|
| | | 1,860,000 | | $ | 1,310,360 | | 1,270,000 | | $ | 894,020 |
| | |
| |
|
| |
| |
|
|
$448,640 of the stock options’ total fair value ($894,020) would have been recognized during the year ended December 31, 2004.
F-23
Following is a schedule of changes in common stock options and warrants for the three months ended March 31, 2005:
| | | | | | | | | | | | | | |
| | | Awards Outstanding
| | | Exercise Price Per Share
| | Weighted
Average
Exercise
Price Per Share
| | Weighted
Average
Remaining Contractual Life
|
| | | Options
| | | Warrants
| | | | |
Outstanding at January 1, 2005 | | 1,943,925 | | | 1,023,139 | | | $ | .25 - $5.00 | | $ | 2.22 | | 3.39 years |
Granted | | 125,000 | | | — | | | $ | 2.00 | | $ | 2.00 | | 4 years |
Exercised | | — | | | — | | | | — | | $ | — | | N/A |
Expired | | (28,175 | ) | | (30,000 | ) | | $ | .25 - $1.50 | | $ | 1.05 | | N/A |
| | |
|
| |
|
| |
|
| | | | |
|
Outstanding at March 31, 2005 | | 2,040,750 | | | 993,139 | | | $ | .50 - $5.00 | | $ | 2.23 | | 3.21 years |
| | |
|
| |
|
| | | | | | | | |
Note 6: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”). The loss that would have resulted from that risk totaled $1,364,198 at March 31, 2005, for the excess of the deposit liabilities reported by the financial institution over the amount that would have been covered by FDIC. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk to cash.
Note 7:Litigation
The Company is involved in various legal actions and claims arising from the normal course of business. After taking into consideration legal counsel’s evaluation of such actions, management is of the opinion that their outcome will not have a significant effect on the Company’s financial statements.
F-24
To the Board of Directors and Shareholders:
OPUS Resource Group, Inc. (formerly OPUS Media Group, Inc.)
REPORT OF INDEPENDENT AUDITORS
We have audited the balance sheet of OPUS Resource Group, Inc. (formerly OPUS Media Group, Inc.) as of December 31, 2003, and the related statements of operations, changes in shareholders’ deficit and cash flows for the years ended December 31, 2003 and 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of OPUS Resource Group, Inc. as of December 31, 2003, and the results of its operations and its cash flows for the years ended December 31, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered significant operating losses since inception, which raises a substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 11 to the financial statements, on January 31, 2004, the Company entered into an Agreement and Plan of Reorganization with Blastgard Technologies, Inc.
Cordovano and Honeck, P.C.
Denver, Colorado
March 19, 2004
F-25
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Balance Sheet
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| | | December 31,
2003
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| Assets | | | | |
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Property and equipment, net of accumulated depreciation of $49,674 (Note 3) | | $ | 2,149 | |
Debt issue costs, net of $62,500 amortized to interest expense (Note 5) | | | 62,500 | |
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| | | $ | 64,649 | |
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| Liabilities and Shareholders’ Deficit | | | | |
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Current Liabilities: | | | | |
Bank overdraft | | $ | 9 | |
Accounts payable and accrued expenses | | | 345,917 | |
Indebtedness to related party (Note 2) | | | 21,641 | |
Note payable (Notes 5) | | | 375,000 | |
Accrued interest payable (Note 5) | | | 13,402 | |
Accrued interest payable to shareholder (Note 2) | | | 1,072 | |
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Total current liabilities | | | 757,041 | |
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Shareholders’ deficit (Note 6): | | | | |
Preferred stock, $.001 par value; 1,000 shares authorized, -0- shares issued and outstanding | | | — | |
Common stock, $.001 par value; 100,000,000 shares authorized, 3,542,937 shares issued and outstanding | | | 3,543 | |
Outstanding common stock options - 670,433 | | | 223,308 | |
Outstanding common stock warrants - 250,000 | | | 293,250 | |
Additional paid-in capital | | | 3,657,891 | |
Retained deficit | | | (4,870,384 | ) |
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Total shareholder’s deficit | | | (692,392 | ) |
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| | | $ | 64,649 | |
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See accompanying notes to financial statements
F-26
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Statements of Operations
| | | | | | | | |
| | | Years Ended December 31,
| |
| | | 2003
| | | 2002
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Revenue, net | | $ | — | | | $ | 358 | |
Operating expenses: | | | | | | | | |
Stock-based compensation (Notes 2 and 6): | | | | | | | | |
Officers and directors | | | 83,100 | | | | 54,375 | |
Consulting services | | | 90,000 | | | | 1,000,199 | |
Legal services | | | 5,000 | | | | 262,754 | |
Rent, related party (Note 2) | | | 7,200 | | | | — | |
Selling, general and administrive | | | 213,339 | | | | 209,899 | |
Marketing rights fees (Notes 6 and 10) | | | 60,000 | | | | — | |
Cost for rescission of Plan of Reorganization (Note 8) | | | — | | | | 150,000 | |
Loss on deposit following failed acquisition (Note 10) | | | 245,000 | | | | — | |
Record label inducement fee (Note 9) | | | — | | | | 400,000 | |
Depreciation and amortization | | | 10,447 | | | | 14,153 | |
Asset impairment charge (Note 4) | | | — | | | | 31,917 | |
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Total operating expenses | | | 714,086 | | | | 2,123,297 | |
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Operating loss | | | (714,086 | ) | | | (2,122,939 | ) |
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Non-operating income: | | | | | | | | |
Interest income | | | 20 | | | | 21 | |
Interest expense (Notes 5 and 10) | | | (79,152 | ) | | | (2,225 | ) |
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Loss before income taxes | | | (793,218 | ) | | | (2,125,143 | ) |
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Income tax provision (Note 7) | | | — | | | | — | |
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Net loss | | $ | (793,218 | ) | | $ | (2,125,143 | ) |
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Basic and diluted loss per share | | $ | (0.24 | ) | | $ | (1.34 | ) |
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Basic and diluted weighted average common shares outstanding | | | 3,255,298 | * | | | 1,590,177 | |
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| * | Restated for 1:15 reverse common stock split (see Note 6) |
See accompanying notes to financial statements
F-27
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Statement of Changes in Shareholders’ Deficit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred Stock
| | Common Stock
| | | Outstanding
Common
Stock Options
| | Outstanding
Common Stock
Warrants
| | Additional Paid-In Capital
| | | Deficit
Accumulated
During Development
Stage
| | | Total
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| | | Shares
| | Par Value
| | Shares
| | | Par Value
| | | | | | |
Balance at January 1, 2002 | | — | | $ | — | | 10,501,500 | | | $ | 10,501 | | | $ | 16,858 | | $ | 243,250 | | $ | 1,581,955 | | | $ | (1,952,023 | ) | | $ | (99,459 | ) |
January 2002, stock issued to attorney in exchange for services (Note 6) | | — | | | — | | 280,000 | | | | 280 | | | | — | | | — | | | 55,720 | | | | — | | | | 56,000 | |
January 2002, stock issued to consultant in exchange for services (Note 6) | | — | | | — | | 150,000 | | | | 150 | | | | — | | | — | | | 112,350 | | | | — | | | | 112,500 | |
February 2002, sale of common stock (Note 6) | | — | | | — | | 173,333 | | | | 174 | | | | — | | | — | | | 119,826 | | | | — | | | | 120,000 | |
February 2002, stock issued in Plan of Reorganization, net of rescinded shares (Note 8) | | — | | | — | | 10,000,000 | | | | 10,000 | | | | — | | | — | | | (10,000 | ) | | | — | | | | — | |
February 2002, options granted to purchase 9,137,500 shares of common stock (Note 6) | | — | | | — | | — | | | | — | | | | 205,000 | | | — | | | — | | | | — | | | | 205,000 | |
February 2002, warrants granted to purchase 1,500,003 shares of common stock (Note 6) | | — | | | — | | — | | | | — | | | | — | | | 50,000 | | | — | | | | — | | | | 50,000 | |
February 2002, stock issued to attorney in exchange for services (Note 6) | | — | | | — | | 251,000 | | | | 251 | | | | — | | | — | | | 32,379 | | | | — | | | | 32,630 | |
March 2002, stock issued to attorney in exchange for services (Note 6) | | — | | | — | | 400,000 | | | | 400 | | | | — | | | — | | | 51,600 | | | | — | | | | 52,000 | |
March 2002, stock issued to consultants in exchange for services (Note 6) | | — | | | — | | 2,675,000 | | | | 2,675 | | | | — | | | — | | | 371,825 | | | | — | | | | 374,500 | |
May 2002, sale of common stock (Note 6) | | — | | | — | | 1,000,000 | | | | 1,000 | | | | — | | | — | | | 499,000 | | | | — | | | | 500,000 | |
June 2002, stock issued to attorney in exchange for services (Note 6) | | — | | | — | | 439,897 | | | | 440 | | | | — | | | — | | | 41,350 | | | | — | | | | 41,790 | |
July 2002, stock issued to consultants in exchange for services (Note 6) | | — | | | — | | 3,250,000 | | | | 3,250 | | | | — | | | — | | | 240,500 | | | | — | | | | 243,750 | |
July 2002, stock issued to officers in exchange for services (Note 2) | | — | | | — | | 725,000 | | | | 725 | | | | — | | | — | | | 53,650 | | | | — | | | | 54,375 | |
July 2002, options granted to purchase 100,000 shares of common stock (Note 6) | | — | | | — | | — | | | | — | | | | 1,450 | | | — | | | — | | | | — | | | | 1,450 | |
July 2002, stock issued to attorney in exchange for services (Note 6) | | — | | | — | | 233,885 | | | | 234 | | | | — | | | — | | | 23,155 | | | | — | | | | 23,389 | |
August 2002, stock issued to attorney in exchange for services (Note 6) | | — | | | — | | 393,278 | | | | 393 | | | | — | | | — | | | 21,630 | | | | — | | | | 22,023 | |
September 2002, stock issued to attorney in exchange for services (Note 6) | | — | | | — | | 536,357 | | | | 536 | | | | — | | | — | | | 28,955 | | | | — | | | | 29,491 | |
October 2002, stock issued to attorney in exchange for services (Note 6) | | — | | | — | | 208,833 | | | | 209 | | | | — | | | — | | | 5,221 | | | | — | | | | 5,430 | |
November 2002, stock issued to consultant in exchange for services (Note 6) | | — | | | — | | 500,000 | | | | 500 | | | | — | | | — | | | 12,500 | | | | — | | | | 13,000 | |
Net loss | | — | | | — | | — | | | | — | | | | — | | | — | | | — | | | | (2,125,143 | ) | | | (2,125,143 | ) |
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Balance at December 31, 2002 | | — | | | — | | 31,718,083 | | | | 31,718 | | | | 223,308 | | | 293,250 | | | 3,241,616 | | | | (4,077,166 | ) | | | (287,274 | ) |
March 2003, stock issued in exchange for marketing rights (Note 6) | | — | | | — | | 5,000,000 | | | | 5,000 | | | | — | | | — | | | 55,000 | | | | — | | | | 60,000 | |
March 2003, stock issued to officers and directors in exchange for services (Note 2) | | — | | | — | | 6,000,000 | | | | 6,000 | | | | — | | | — | | | 66,000 | | | | — | | | | 72,000 | |
March 2003, stock issued to consultants in exchange for services (Note 6) | | — | | | — | | 5,000,000 | | | | 5,000 | | | | — | | | — | | | 55,000 | | | | — | | | | 60,000 | |
April 2003, stock issued to officers and directors in exchange for services (Note 2) | | — | | | — | | 925,000 | | | | 925 | | | | — | | | — | | | 10,175 | | | | — | | | | 11,100 | |
April 2003, stock issued to consultants in exchange for services (Note 6) | | — | | | — | | 2,500,000 | | | | 2,500 | | | | — | | | — | | | 27,500 | | | | — | | | | 30,000 | |
May 2003, stock issued to attorney in exchange for services (Note 6) | | — | | | — | | 500,000 | | | | 500 | | | | — | | | — | | | 4,500 | | | | — | | | | 5,000 | |
June 2003, stock issued as payment of a liability owed to a former acquisition candidate (Notes 6 and 8) | | — | | | — | | 1,500,000 | | | | 1,500 | | | | — | | | — | | | 148,500 | | | | — | | | | 150,000 | |
September 2003, reverse stock split (Note 6) | | — | | | — | | (49,600,146 | ) | | | (49,600 | ) | | | — | | | — | | | 49,600 | | | | — | | | | — | |
Net loss | | — | | | — | | — | | | | — | | | | — | | | — | | | — | | | | (793,218 | ) | | | (793,218 | ) |
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Balance at December 31, 2003 | | — | | $ | — | | 3,542,937 | | | $ | 3,543 | | | $ | 223,308 | | $ | 293,250 | | $ | 3,657,891 | | | $ | (4,870,384 | ) | | $ | (692,392 | ) |
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See accompanying notes to financial statements
F-28
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Statements of Cash Flows
| | | | | | | | |
| | | Years Ended December 31,
| |
| | | 2003
| | | 2002
| |
Cash flows from operating activities: | | | | | | | | |
Net loss | | $ | (793,218 | ) | | $ | (2,125,143 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 10,447 | | | | 14,153 | |
Stock-based compensation (Notes 2 and 6) | | | 178,100 | | | | 1,317,328 | |
Stock issued for marketing rights fees (Note 6) | | | 60,000 | | | | — | |
Asset impairment charge (Note 4) | | | — | | | | 31,917 | |
Loss on Blastgard deposit (Note 10) | | | 245,000 | | | | — | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts payable and accruals | | | 147,660 | | | | 40,953 | |
Indebtedness to related party | | | 21,641 | | | | — | |
Due to former merger candidate | | | — | | | | 150,000 | |
Unearned revenue | | | (164 | ) | | | (128 | ) |
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Net cash used in operating activities | | | (130,534 | ) | | | (570,920 | ) |
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Cash flows from investing activities: | | | | | | | | |
Blastgard deposit (Note 10) | | | (245,000 | ) | | | — | |
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Net cash used in investing activities | | | (245,000 | ) | | | — | |
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Cash flows from financing activities: | | | | | | | | |
Proceeds from the sale of common stock net of offering costs | | | — | | | | 620,000 | |
Payments on capital lease obligations | | | — | | | | (19,543 | ) |
Repayment of director loans | | | — | | | | (30,000 | ) |
Proceeds from shareholder loan | | | — | | | | 25,000 | |
Repayment of shareholder loan | | | — | | | | (25,000 | ) |
Proceeds from issuance of note payable (Note 5) | | | 375,000 | | | | — | |
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Net cash provided by financing activities | | | 375,000 | | | | 570,457 | |
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Net change in cash | | | (534 | ) | | | (463 | ) |
Cash, beginning of period | | | 534 | | | | 997 | |
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Cash, end of period | | $ | — | | | $ | 534 | |
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Supplemental disclosure of cash flow information: | | | | | | | | |
Cash paid for: | | | | | | | | |
Income taxes | | $ | — | | | $ | — | |
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Interest | | $ | 3,250 | | | $ | 2,225 | |
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Non-cash financing activities: | | | | | | | | |
Common stock issued in exchange for debt owed to former acquisition candidate (Note 8) | | $ | (150,000 | ) | | $ | — | |
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See accompanying notes to financial statements
F-29
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Notes to Financial Statements
| (1) | Organization, Basis of Presentation, and Summary of Significant Accounting Policies |
Organization and Basis of Presentation
OPUS Resource Group, Inc. (the “Company” or “OPUS”) was incorporated on June 17, 1999 to capitalize on the growing demand for online medical records systems through the systematic acquisition of paying members from targeted marketing groups which include corporations, organizations or associations. The Company entered into an Agreement and Plan of Reorganization in February 2002 in attempt to strengthen the Company’s operations; however, the parties rescinded the agreement in May 2002 (see Note 8). The Company subsequently abandoned its online medical records operations and entered into a Record Label Agreement (see Note 9) in May 2002. Following the termination of the Record Label Agreement, the Company signed a Memorandum of Understanding with Blastgard, Inc. during 2003 (see Note 10). The Company was unable to raise the capital needed to complete the Memorandum of Understanding and the deal was terminated in November 2003.
On January 31, 2004, the Company entered into an Agreement and Plan of Reorganization with Blastgard Technologies, Inc. (“BTI”), a Florida corporation and affiliate of Blastgard, Inc. (see Note 11). BTI is a development stage enterprise formed to design and market proprietary blast mitigation materials.
Management changed the manner in which it presents the Company’s operating results and cash flows during the year ended December 31, 2003. Management no longer considers the Company in the development stage as defined by the FASB Statement of Standards No. 7, “Accounting and Reporting by Development Stage Enterprises.” As a result, cumulative operating results and cash flow information are no longer presented in the accompanying financial statements. This change does not affect the Company’s operating results or financial position. Accordingly, no pro forma financial information is necessary. Historical information has been revised in conformity with current practice.
Inherent in the Company’s business are various risks and uncertainties, including its limited operating history, historical operating losses, and dependence upon strategic alliances. The Company’s future ability to continue as a going concern will be dependent upon its ability to develop and market its proprietary blast mitigation materials and the Company’s ability to develop and provide new products that meet customers’ changing requirements on a timely and cost-effective basis.
The Company plans to raise capital through the sale of its common stock. There can be no assurance, however, that additional financing will be available when needed or on terms acceptable to the Company. There can be no assurance that the Company will be able to continue as a going concern, obtain adequate capital through the sale of its stock, or achieve material revenues and profitable operations.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect 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.
F-30
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Notes to Financial Statements
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original maturities of three months or less when acquired to be cash equivalents. The Company had no cash equivalents at December 31, 2003.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, generally ranging from three to five years. Property and equipment under capital leases are stated at the present value of minimum lease payments and are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is shorter.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the provisions of SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted future cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are 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 are capitalized and amortized to interest expense using the effective interest method over the lives of the related debt.
Income Taxes
Income taxes are 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. The 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 are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes.
Revenue Recognition
The Company has recognized membership fees ratably over the period of the membership.
Sales and Marketing Costs
Marketing expense includes the costs of advertising and other general sales and marketing costs. The Company expenses the cost of advertising and promoting its services as incurred.
F-31
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Notes to Financial Statements
Financial Instruments
The carrying amounts of cash, accounts payable and other accrued liabilities approximate fair value due to the short-term maturity of the instruments.
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees” and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Under APB No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company’s stock and the exercise price. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123. SFAS 123 requires the fair value based method of accounting for stock issued to non-employees in exchange for services.
Companies that elect to use the method provided in APB 25 are required to disclose pro forma net income and pro forma earnings per share information that would have resulted from the use of the fair value based method. The Company has elected to continue to determine the value of stock-based compensation arrangements under the provisions of APB 25. Pro forma disclosures have been included in Note 5.
Loss per common share
The Company reports net loss per share using a dual presentation of basic and diluted loss per share. Basic net loss per share excludes the impact of common stock equivalents. Diluted net loss per share utilizes the average market price per share when applying the treasury stock method in determining common stock equivalents. As of December 31, 2003, there were 670,433 vested common stock options outstanding, which were excluded from the calculation of net loss per share-diluted because they were antidilutive. Also excluded from the calculation of net loss per share-diluted were 250,000 outstanding common stock warrants, which would also be antidilutive.
New accounting pronouncements
Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”. Interpretation 46 establishes accounting guidance for consolidation of variable interest entities that function to support the activities of the primary beneficiary. Interpretation 46 applies to any business enterprise, both public and private, that has a controlling interest, contractual relationship or other business relationship with a variable interest entity. The Company believes it has no investment in or contractual relationship or other business relationship with a variable interest entity and therefore the adoption did not have any impact on its financial position or results of operations. However, if the Company enters into any such arrangement with a variable interest entity in the future, its financial position or results of operations may be adversely impacted.
F-32
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Notes to Financial Statements
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
On April 30, 2003, the FASB issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. Statement 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to Statement 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. In addition, Statement 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. Statement 149 is effective for contracts entered into or modified after June 30, 2003. The Company does not believe the adoption of Statement 149 will have a material effect on its financial position, results of operations or cash flows.
Financial Instruments with Characteristics of Both Liabilities and Equity
On May 15, 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. Statement 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. Statement 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. The Company currently does not use such instruments. Statement 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments as of September 1, 2003. The Company has adopted Statement 150 and does not believe the effect of adopting this statement will have a material impact on its financial position, results of operations or cash flows.
(2) Related Party Transactions
On March 25, 2003, the Company issued 6,000,000 shares (400,000 post-split) of its common stock to officers and directors in exchange for operational and consulting services. The market value of the common stock on the transaction date was $.012 per share, resulting in stock-based compensation expense of $72,000 (see Note 6).
On April 14, 2003, the Company issued 925,000 shares (61,667 post-split) of its common stock to officers and directors in exchange for operational and consulting services. The market value of the common stock on the transaction date was $.012 per share, resulting in stock-based compensation expense of $11,100 (see Note 6).
As of December 31, 2003, the Company owed an officer $13,000 for accrued salaries, $7,200 for unpaid rent, and $1,441 for expenses paid on behalf of the Company. The balance of $21,641 is included in the accompanying condensed financial statements as “Indebtedness to related party”.
In May 2002, a shareholder loaned the Company $25,000 for working capital. The loan carries an interest rate of 10 percent and matures on May 31, 2003. The Company repaid the loan prior to December 31, 2002. Accrued interest on the loan totaled $1,072 and was unpaid as of December 31, 2003.
During the year ended December 31, 2002, the Company issued 725,000 shares (48,333 post-split) of its common stock to its officers in exchange for operational services. The market value of the common stock on the transaction date was $.075 per share. Stock-based compensation expense of $54,375 was recognized in the accompanying financial statements for the year ended December 31, 2002.
F-33
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Notes to Financial Statements
| (3) | Property and Equipment |
Property and equipment consisted of the following at December 31, 2003:
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Property and equipment under capital lease | | $ | 29,967 | |
Leasehold improvements | | | 2,802 | |
Furniture and equipment | | | 19,054 | |
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| | | | 51,823 | |
Less accumulated depreciation and amortization | | | (49,674 | ) |
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| | | $ | 2,149 | |
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Depreciation expense totaled $10,447 and $13,991 for the years ended December 31, 2003 and 2002.
The Company wrote-off the deferred costs related to its online medical records operations during the year ended December 31, 2002. Deferred costs consisted of the following at December 31, 2002:
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Patent | | $ | 29,457 | |
Service mark | | | 2,460 | |
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| | | | 31,917 | |
Less: | | | | |
Asset impairment charge (2002) | | | (31,917 | ) |
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| | | $ | — | |
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Asset impairment charge-Deferred Costs
Due to the Company’s continued losses since inception, termination of the online medical records operations, and uncertainty regarding the ultimate recovery of the Company’s intangible assets, the Company recorded an asset impairment charge against its patent costs and service mark totaling $31,917, or ($.001) per common share during the year ended December 31, 2002.
The Company’s promissory notes payable consist of the following:
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Promissory note payable, 10 percent interest rate, matures June 30, 2004 (see Note 10) | | $ | 250,000 |
Promissory note payable, 10 percent interest rate, matures October 21, 2003, unsecured (Default) | | | 25,000 |
Promissory note payable, 10 percent interest rate, matures March 31, 2004, unsecured | | | 100,000 |
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| | | $ | 375,000 |
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On June 30, 2003, the Company received proceeds of $250,000 in exchange for a promissory note. $245,000 of the proceeds was subsequently paid to Blastgard as an initial deposit (see Note 10). The
F-34
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Notes to Financial Statements
note carries a ten percent interest rate and matures once either the Company or Blastgard receive additional financing totaling $1 million or on June 30, 2004, which ever occurs first. In addition, the Company agreed to issue the note holder 250,000 shares (16,667 post-split) of its common stock as a payment for making the loan. However, if the Company’s common stock is trading at less than $.50 per share on June 30, 2004, the Company must pay the debt holder the difference between the stock price and $.50 per share. As a result, the Company capitalized debt issue costs totaling $125,000, of which $62,500 was amortized to interest expense as of December 31, 2003. The 250,000 shares (16,667 post-split) were not issued as of December 31, 2003.
All of the promissory notes mature within 12 months. The $25,000 promissory note is in default as of December 31, 2003; however, the note was repaid through the issuance of common stock in January 2004 (see Note 11).
Accrued interest payable on the notes totaled $13,402 at December 31, 2003.
Reverse stock split
On September 8, 2003, the Company’s Board of Directors declared a 1 for 15 reverse split of its $.001 par value common stock for shareholders of record on September 29, 2003. The stock split reduced the number of common shares outstanding from 53,143,083 to 3,542,937 on September 29, 2003.
Common stock
On March 25, 2003, the Company issued 5,000,000 shares (333,334 post-split) of its common stock in exchange for marketing and consulting services. The market value of the common stock on the transaction date was $.012 per share. Stock-based compensation expense of $60,000 was recognized in the accompanying financial statements for the year ended December 31, 2003.
On March 25, 2003, the Company issued 5,000,000 shares (333,334 post-split) of its common stock in exchange for marketing rights (see Note 10). The market value of the common stock on the transaction date was $.012 per share. Marketing rights fees of $60,000 were recognized in the accompanying financial statements for the year ended December 31, 2003.
On April 14, 2003, the Company issued 2,500,000 shares (166,667 post-split) of its common stock in exchange for marketing and consulting services. The market value of the common stock on the transaction date was $.012 per share. Stock-based compensation expense of $30,000 was recognized in the accompanying financial statements for the year ended December 31, 2003.
On May 16, 2003, the Company issued 500,000 shares (33,333 post-split) of its common stock in exchange for legal services. The market value of the common stock on the transaction date was $.01 per share. Stock-based compensation of $5,000 was recognized in the accompanying financial statements for the year ended December 31, 2003.
On June 6, 2003, the Company issued 1,500,000 shares (100,000 post-split) of its common stock as payment for a $150,000 liability owed to a former acquisition candidate.
F-35
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Notes to Financial Statements
During February 2002, the Company sold 173,333 shares (11,556 post-split) of its common stock for $120,000 ($.69 per share).
During May 2002, the Company sold 1,000,000 shares (66,667 post-split) of its common stock for $500,000 ($.50 per share).
During the year ended December 31, 2002, the Company issued 6,575,000 shares (438,333 post-split) of its common stock to unrelated third parties in exchange for marketing, public relations, and other consulting services. The market value of the common stock ranged from $.03 to $.75 per share. Stock-based compensation expense of $1,000,199 was recognized in the accompanying financial statements for the year ended December 31, 2002.
During the year ended December 31, 2002, the Company issued 2,743,250 shares (182,883 post-split) of its common stock to its attorney in exchange for legal services. The market value of the common stock ranged from $.03 to $.20 per share. Stock-based compensation expense of $262,754 was recognized in the accompanying financial statements for the year ended December 31, 2002.
Preferred stock
The Company is 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.
Stock options
The Company has adopted a non-qualified stock option and stock grant plan for the benefit of key personnel and others providing significant services. Options granted pursuant to the plan are exercisable at a price no less than the market value of the shares of common stock on the date of grant. According to the Company’s policy, options granted to non-employees are accounted for under the fair value method, while options granted to employees and directors are accounted for using the intrinsic method. The fair value of the Company’s common stock was determined based on its traded market value on the date of issuance.
Option/Warrant Pricing Model
The warrants granted by the Company have been accounted for as option awards due to the compensatory nature of the warrants.
The fair value of each option granted has been estimated as of the grant date using the Black-Scholes option pricing model. The following weighted-average assumptions were used for the year ended December 31, 2003: risk-free interest rate of 2.0 percent, expected volatility of 5.6 percent, expected life of two years, and no expected dividends. The following weighted-average assumptions were used for the year ended December 31, 2002: risk-free interest rate of 2.0 percent, expected volatility of 6.5 percent, expected life ranging from two to three years, and no expected dividends.
During the year ended December 31, 2002, the weighted average exercise price and fair value of options granted was $.65 and $.03, respectively, on the date of grant for options granted with an exercise price greater than the fair value of the stock. During the year ended December 31, 2003, the
F-36
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Notes to Financial Statements
weighted average exercise price and fair value of options granted was $.75 and $-0-, respectively, on the date of grant for options granted with an exercise price greater than the fair value of the stock. There were no options granted with exercise prices that equaled or were less than the fair value of the underlying stock on the date of grant.
The fair value of each warrant granted has been estimated as of the grant date using the Black-Scholes option pricing model. The following weighted-average assumptions were used for the year ended December 31, 2002: risk-free interest rate of 2.0 percent, expected volatility of 6.5 percent, expected life ranging from two to three years, and no expected dividends. During the year ended December 31, 2002, the weighted average exercise price and fair value of warrants granted was $1.17 and $.03, respectively, on the date of grant for options granted with an exercise price greater than the fair value of the stock. There were no warrants granted with exercise prices that equaled or were less than the fair value of the underlying stock on the date of grant. There were no warrants granted, exercised, or cancelled during the year ended December 31, 2003.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options and warrants, which have no vesting restrictions and are fully transferable. Option valuation models also require the input of highly subjective assumptions such as expected option life and expected stock price volatility. Because the Company’s stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, the Company believes that the existing option valuation models do not necessarily provide a reliable single measure of the fair value of its stock-based awards.
Options granted to non-employees, accounted for under the fair value method
On September 3, 2003, the Company entered into a consulting agreement with JMW Fund, LLC to provide consulting and advisory services to the Company. The Company granted the consultant fully vested options to purchase an aggregate of 200,000 shares (13,333 post-split) of the Company’s common stock. On September 3, 2003 the market value of the stock was $.011. The exercise prices on the options range from $.50 to $1.00 and expire on August 31, 2005. The Company determined that the options had no fair value in accordance with SFAS 123.
On March 22, 2002, the Company entered into agreements with thirteen unrelated third party consultants to provide consulting and advisory services to the Company. The Company granted certain of the consultants fully vested options to purchase an aggregate of 7,000,000 shares (466,667 post-split) of the Company’s common stock. On March 22, 2002 the market value of the stock was $.14. The exercise prices on the options range from $.25 to $1.50 and expire on May 31, 2005. The Company determined the fair value of the options in accordance with SFAS 123 to be $.03 per share and have recorded stock based compensation expense of $205,000.
Options granted to employees, accounted for under the fair value method (pro forma)
During the year ended December 31, 2002, employees of the Company were granted options to purchase 2,487,500 and 50,000 shares (165,833 and 3,333 post-split) of common stock on March 22, 2002 and July 23, 2002, respectively.
F-37
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Notes to Financial Statements
Had compensation expense been recorded based on the fair value at the grant date, and charged to expense over vesting periods, consistent with the provisions of SFAS 123, the Company’s net loss and net loss per share would have increased to the pro forma amounts indicated below:
| | | | | | | | |
| | | December 31,
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| | | 2003
| | | 2002
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Net loss, as reported | | $ | (855,718 | ) | | $ | (2,274,158 | ) |
Decrease due to: | | | | | | | | |
Employee stock options | | | — | | | | (110,200 | ) |
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Pro forma net loss | | $ | (855,718 | ) | | $ | (2,384,358 | ) |
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As reported: | | | | | | | | |
Net loss per share - basic and diluted | | $ | (0.26 | ) | | $ | (0.10 | ) |
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Pro Forma: | | | | | | | | |
Net loss per share - basic and diluted | | $ | (0.26 | ) | | $ | (0.10 | ) |
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Warrants
On February 5, 2002, the Company granted warrants to purchase 1,500,003 shares (100,000 post-split) of the Company’s common stock to former officers and directors of the Company at exercise prices ranging from $.50 to $2.00 per share (see Note 8). On February 5, 2002 the fair value of the stock was $.38 per share. The warrants expire on February 5, 2004. The Company determined the fair value of the warrants to be $.03 per share and has recognized stock-based compensation of $50,000.
Summary
Following is a summary of the Company’s stock option awards to purchase shares of common stock as of December 31, 2003, and the changes since inception:
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Description
| | Options
| | | Warrants
| |
Outstanding at January 1, 2002 | | 619,000 | | | 2,250,000 | |
Granted | | 9,537,500 | | | 1,500,003 | |
Exercised | | — | | | — | |
Canceled/expired | | (300,000 | ) | | — | |
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Outstanding at December 31, 2002 | | 9,856,500 | | | 3,750,003 | |
Granted | | 200,000 | | | — | |
Exercised | | — | | | — | |
Canceled/expired | | — | | | — | |
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Outstanding, prior to reverse stock split | | 10,056,500 | | | 3,750,003 | |
September 2003 reverse stock split | | (9,386,067 | ) | | (3,500,003 | ) |
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Outstanding at December 31, 2003 | | 670,433 | | | 250,000 | |
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F-38
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Notes to Financial Statements
A reconciliation of U.S. statutory federal income tax rate to the effective rate follows for the years ended December 31, 2003 and 2002 follows:
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| | | For the Years
Ended December 31,
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| | | 2003
| | | 2002
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U.S. statutory federal rate, graduated | | 34.00 | % | | 34.00 | % |
State income tax rate, net of federal | | 3.63 | % | | 3.63 | % |
Permanent book-to-tax differences | | 0.00 | % | | 0.00 | % |
Net operating loss (NOL) for which no tax benefit is currently available | | -37.63 | % | | -37.63 | % |
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| | | 0.00 | % | | 0.00 | % |
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At December 31, 2003, deferred tax assets consisted of a net tax asset of $1,880,270, due to operating loss carryforwards of $4,855,963, which was fully allowed for, in the valuation allowance of $1,880,270. The valuation allowance offsets the net deferred tax asset for which there is no assurance of recovery. The change in the valuation allowance for the years ended December 31, 2003 and 2002 totaled $322,007 and $780,876, respectively. The current tax benefit also totaled $322,007 and $780,876 for the years ended December 31, 2003 and 2002, respectively. The net operating loss carryforward expires through the year 2023.
The valuation allowance will be evaluated at the end of each year, considering positive and negative evidence about whether the deferred tax asset will be realized. At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax assets is no longer impaired and the allowance is no longer required.
Should the Company undergo an ownership change as defined in Section 382 of the Internal Revenue Code, the Company’s tax net operating loss carryforwards generated prior to the ownership change will be subject to an annual limitation, which could reduce or defer the utilization of these losses.
| (8) | ToolTrust Agreement and Plan of Reorganization and Subsequent Partial Rescission |
On February 5, 2002, the Company acquired 100 percent of the issued and outstanding common stock of ToolTrust Corporation, a private Nevada corporation, in exchange for an aggregate of 20,000,000 shares (1,333,333 post-split) of the Company’s common stock pursuant to an Agreement and Plan of Reorganization dated October 19, 2001 (the “Reorganization”). At the time of the Reorganization, ClearDialog Communications, Inc. (“ClearDialog”) and LocalToolbox Corporation (“LocalToolbox”) were wholly-owned subsidiaries of ToolTrust. In connection with the Reorganization, the Company formed IDMedical, Inc., a wholly-owned subsidiary to operate the on-line medical records business.
On May 9, 2002, the Company entered into share exchange agreements with certain former shareholders of ClearDialog and LocalToolbox wherein the former shareholders reacquired their shares of ClearDialog and LocalToolbox in exchange for approximately 9,300,000 shares (620,000 post-split) of the 20,000,000 shares (1,333,333 post-split) of the Company’s common stock to be issued pursuant to the Reorganization. As a result of the transactions, ToolTrust no longer had an interest in these entities. The Company granted to LocalToolbox a license to utilize the Company’s technology related to on-line medical records. The Company is also obligated to pay LocalToolBox a total of $150,000 in two $75,000 payments that were due on October 19, 2002 and April 19, 2003.
F-39
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Notes to Financial Statements
Payment of the settlement amount was secured by 1,500,000 shares (100,000 post-split) of the Company’s restricted common stock and the Company’s technology and pending patent application related to its online medical records business. During the year ended December 31, 2003, the Company issued 1,500,000 shares (100,000 post-split) of its common stock to LocalToolBox as payment for the $150,000.
Pursuant to an agreement dated May 9, 2002, Robert L. Evans, James K. Robbins and Garrett J. Girvan resigned their respective positions as officers and directors of the Company and its inactive subsidiaries IDMedical, Inc. and ToolTrust. Messrs. Evans, Robbins and Girvan continued as officers/directors of LocalToolbox and ClearDialog.
As part of the closing, the former officers and directors of the Company received warrants (pre-split) to purchase the Company’s common stock (see Note 6):
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Officer/Director
| | Warrants
|
Richard Schaller, Sr. | | 166,667 @ $0.50 per share 166,667 @ $1.00 per share 166,667 @ $2.00 per share |
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Richard Schaller, Jr. | | 166,667 @ $0.50 per share 166,667 @ $1.00 per share 166,667 @ $2.00 per share |
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Neil A. Cox | | 166,667 @ $0.50 per share 166,667 @ $1.00 per share 166,667 @ $2.00 per share |
None of the above warrants were exercised and all expired in February 2004.
| (9) | Record Label Agreement |
In May 2002, the Company sold 1,000,000 shares (66,667 post-split) of its restricted common stock to an individual for gross proceeds of $500,000. $400,000 of the proceeds were paid to MJJ Ventures, Inc. (“MJJ”) as an inducement fee pursuant to a Label Term Sheet Agreement (“Label Agreement”) dated May 11, 2002, between the Company’s subsidiary, ToolTrust Corporation (“ToolTrust”), and MJJ, as described below.
The Label Agreement contemplated that the Company and MJJ would form a California Limited Liability Company to operate a music label, tentatively called “Neverland Records”. The Label Agreement obligated the Company to pay MJJ a total of $3,800,000 as an inducement fee, which was non-refundable. Of this amount, the Company paid MJJ $400,000. The label Agreement also obligated the Company to have a minimum of $1,500,000 in funds for the initial year of operation of the music label. The Company was also required to provide a minimum of $2,000,000 per year to fund the overhead portion of the music label’s annual budget for the remaining six years of the term of the Label Agreement.
F-40
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Notes to Financial Statements
The Label Agreement contemplated the substantial involvement of Michael J. Jackson, and provided Mr. Jackson with discretion to grant or deny approval of any artist seeking to sign a recording agreement. Mr. Jackson also had final approval of all creative elements in connection with master recordings and videos. Ultimately, however, Mr. Jackson’s level of participation with the music label, if any, was to be determined at his sole discretion. MJJ could “opt-out” of the Label Agreement if the music label was unable to secure a distribution deal or the music label could not substantially satisfy any material goals set forth in its business plan. Mr. Jackson could opt-out for any reason after three years. In any such case, the Company was obligated to buy-out MJJ’s interest in the music label. All trademarks, label names, domain names, and logos associated with the music label were to remain the property of Mr. Jackson, and while the parties could negotiate the Company’s use of certain trademarks associated with the music label, there was no obligation for Mr. Jackson to grant such rights to the Company.
The parties subsequently agreed to terminate the Label Agreement.
| (10) | Memorandum of Understanding |
During the year ended December 31, 2003, the Company signed a Memorandum of Understanding (“MOU”) with Blastgard, Inc. (“Blastgard”), pursuant to which the Company issued five million shares (333,334 post-split) of its restricted common stock to Blastgard in exchange for the right to distribute and sell Blastgard products in China. Blastgard was a development stage company with plans to develop, design and manufacture products that mitigate blasts and suppress flash fires resulting from explosions.
In addition, under the terms of the MOU, the Company agreed to pay $5.5 million and issue 25 percent of the Company’s then issued and outstanding common stock in exchange for 51 percent of the issued and outstanding common stock of Blastgard. On June 30, 2003, the Company paid $245,000 to Blastgard as an initial deposit on the $5.5 million purchase price. Under the amended terms of the MOU, the Company had until November 1, 2003 to purchase the 51 percent interest in Blastgard.
The parties agreed to terminate the MOU in December 2003 and the Company recognized a $245,000 loss on the initial deposit.
Common stock
During January 2004, the Company issued 1,187,300 (post-split) shares of its common stock to settle past due debts to the Company’s creditors, as follows:
| | 1. | 323,800 shares as payment for the Company’s $25,000 note payable and $904 in related accrued interest; |
| | 2. | 202,000 shares as payment for $20,200 of the “Indebtedness to related party”; and |
| | 3. | 661,500 shares as payment for other account payables and accrued liabilities. |
Differences between the original amount and the settlement amount will be recorded as an adjustment to the net acquired assets of BTI, because it occurred within one year of the acquisition of BTI.
F-41
OPUS RESOURCE GROUP, INC.
(Formerly OPUS Media Group, Inc.)
Notes to Financial Statements
During January 2004, the Company cancelled 333,334 shares (5,000,000 pre-split) of its common stock that was originally issued as part of the Blastgard MOU.
Following the above stock transactions, the Company had 4,396,903 common shares issued and outstanding.
Agreement and Plan of Reorganization
On January 31, 2004, OPUS entered into an Agreement and Plan of Reorganization (the “Agreement”) with Blastgard Technologies, Inc. (“BTI”), a Florida corporation. Under the terms of the Agreement, OPUS agreed to acquire all of the issued and outstanding common stock of BTI in exchange for 91,000,000 (post-split) shares of OPUS’s common stock. The acquisition has been treated as a reverse acquisition whereby OPUS is considered the legal surviving entity. Costs of the transaction have been charged to the period.
F-42
PART II — INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation and Bylaws provided that the Company may indemnify a controlling person, officer or director from liability for acting in such capacities, to the full extent permitted by the law of the State of Colorado. The Articles of Incorporation further provide that, to the full extent permitted by the Colorado Business Corporation Act, as the same exists or may hereafter be amended, a director or officer of the Company shall not be liable to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director or officer.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance and distribution of the securities being registered, other than underwriting compensation, are:
| | | |
SEC filing fee for Registration Statement: | | $ | 1,165 |
Accounting Fees | | $ | 5,000 |
Legal Fees and Expenses | | $ | 15,000 |
Miscellaneous | | $ | 5,000 |
Total: | | $ | 26,165 |
All of the expenses above have been or will be paid by the Company.
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information regarding the issuance and sales of securities of the Company without registration within the past three fiscal years.
The numbers of shares and the prices per share listed for the transactions described below have been adjusted to reflect a 1:5 reverse split of the outstanding common stock that occurred on March 31, 2004 and a 1:15 reverse split of the outstanding common stock that occurred on September 29, 2003
1. In January 2002, the Company sold 2,311 shares of its restricted common stock to two accredited investors, with gross proceeds to the Company of $130,000. The Company believes this private placement was exempt from registration under Section 4(2) and Section 4(6) and/or Rule 506 of the Securities Act of 1933. The transaction did not involve a public offering, no sales commissions were paid, and a restrictive legend will be placed on each certificate evidencing the shares.
2. On February 5, 2002, the Company acquired 100% of the issued and outstanding common stock of ToolTrust Corporation, a privately-held corporation, from all 25 of ToolTrust’s shareholders (all of whom were sophisticated investors and ten of whom were accredited investors), in exchange for an aggregate of 266,667 shares of the Company’s common stock pursuant to an Agreement and Plan of Reorganization dated October 19, 2001. This transaction was a recapitalization and the shares issued in the exchange were valued at par value ($.001 per share). The investors were furnished with information concerning the Company, in accordance with Rule 502(b) of Regulation D of the Securities Act of 1933, as amended, including the Company’s financial statements and its most recent annual an quarterly reports, and each investor was given the opportunity to ask questions and receive answers from management of the Company. The transaction did not involve a public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares. The Company believes that these transactions were exempt from registration pursuant to Section 4(2) and/or Rule 506 of the Securities Act of 1933.
3. In May 2002, the Company sold 13,334 shares of its restricted common stock to one accredited investor, with gross proceeds to the Company of $500,000. The Company believes this private placement was exempt from registration under Section 4(2) and Section 4(6) and/or Rule 506 of the Securities Act of 1933. The transaction did not involve a
II-1
public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares.
4. In October 2002, the Company engaged SBI Securities, Inc., an accredited investor, to serve as a financial advisor to the Company for six months, and the Company issued 6,667 shares of its restricted common stock as consideration for services valued at $13,000. The Company believes this private placement was exempt from registration under Section 4(2) and Section 4(6) of the Securities Act of 1933. The transaction did not involve a public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares.
5. On March 25, 2003, the Company issued 40,000 shares of its restricted common stock to Joseph R. King, an officer and director of the Company at that time (and therefore an accredited investor), for past services rendered in those capacities. The market value of the common stock on the transaction date (as adjusted to reflect subsequent stock splits) was $.090 per share, resulting in stock-based compensation expense of $36,000. The Company believes this transaction was exempt from registration under Section 4(2) and 4(6) of the Securities Act of 1933. The transaction did not involve a public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares.
6. On March 25, 2003, the Company issued 106,667 shares of its restricted common stock to three persons in exchange for services (20,000 shares issued to Anthony Peterson for accounting services rendered, 20,000 shares issued to Richard Olson for business advisory services rendered, and 66,667 shares issued to David Hsia to provide business development and marketing services in Asia). The market value of the common stock on the transaction date (as adjusted to reflect subsequent stock splits) was $.090 per share, resulting in stock-based compensation expense of $96,000. The Company believes these transactions were exempt from registration under Section 4(2) of the Securities Act of 1933. All three individuals were accredited investors. The transactions did not involve a public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares.
7. On March 25, 2003, the Company issued 66,667 shares of its restricted common stock to BlastGard, Inc. in exchange for marketing rights. The market value of the common stock on the transaction date was (as adjusted to reflect subsequent stock splits) was $.090 per share, resulting in marketing rights fees expenses of $60,000. BlastGard, Inc. was a sophisticated investor and members of its management were accredited investors. BlastGard, Inc. was furnished with information concerning the Company, in accordance with Rule 502(b) of Regulation D of the Securities Act of 1933, as amended, including the Company’s financial statements and its most recent annual an quarterly reports, and was given the opportunity to ask questions and receive answers from management of the Company. The Company believes this transaction was exempt from registration under Section 4(2) of the Securities Act of 1933. The transaction did not involve a public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares. These shares were subsequently returned to the Company and cancelled in January 2004 because the agreement between the parties was cancelled.
8. In June 2003, the Company issued 20,000 shares of its restricted common stock to Localtoolbox Corporation pursuant to a settlement agreement dated May 9, 2002. Pursuant to the terms of the settlement, the shares were valued at $150,000. Localtoolbox Corporation was a sophisticated investor and members of its management were accredited investors. Localtoolbox Corporation was furnished with information concerning the Company, in accordance with Rule 502(b) of Regulation D of the Securities Act of 1933, as amended, including the Company’s financial statements and its most recent annual an quarterly reports, and was given the opportunity to ask questions and receive answers from management of the Company. The Company believes this transaction was exempt from registration under Section 4(2) of the Securities Act of 1933. The transaction did not involve a public offering, no sales commissions were paid, and a restrictive legend was placed on the certificate evidencing the shares.
9. In January 2004, the Company issued an aggregate of 237,460 shares of its restricted common stock to five persons in settlement of outstanding debt (149,050 shares issued in settlement of outstanding salary and consulting fees, and 88,410 shares issued in settlement of outstanding loans, expenses and interest). All five persons were accredited investors. Included in these were shares issued to Robert P. Gordon, an officer and director of the Company at that time (40,400 shares (valued at $.50 per share) were issued in settlement of $13,000 in accrued salary and $7,200 in accrued rent expense); Paul W. Henry, a director of the Company at that time (66,000 shares (valued at $.50 per share) were issued in settlement of $33,000 in accrued consulting fees); Anthony Peterson (30,800 shares (valued at $.50 per share)
II-2
were issued in settlement of $15,400 in accrued fees for accounting services); William Bossung (35,500 shares valued at $.40 per share) were issued in settlement of $10,500 in business advisory services and $3,700 in expenses); and Alliance Financial Networks, Inc. (64,760 shares (valued at $.40 per share) were issued in settlement of a $25,000 loan and $904 in accrued interest). All five persons were accredited investors. The Company believes these transactions were exempt from registration under Section 4(2) and Section 4(6) of the Securities Act of 1933. The transactions did not involve a public offering, no sales commissions were paid, and a restrictive legend was placed on the certificates evidencing the shares.
10. On January 31, 2004, the Company acquired 100% of the issued and outstanding common stock of BlastGard Technologies, Inc, a Florida corporation (“BTI”), from the nine shareholders of BTI in exchange for an aggregate of 18,200,000 shares of the Company’s common stock pursuant to an Agreement and Plan of Reorganization. This transaction was a recapitalization that was accounted for as the sale of the shares of BTI for the net liabilities of the public company of $606,412. All nine shareholders were accredited investors. The Company believes this private placement was exempt from registration under Section 4(2) and Section 4(6) of the Securities Act of 1933 and /or Rule 506 of Regulation D. The transaction did not involve a public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares.
11. In February 2004, the Company sold 200,000 shares of its restricted common stock to five accredited investors, with gross proceeds to the Company of $200,000. The Company believes this private placement was exempt from registration under Section 4(2) and Section 4(6) of the Securities Act of 1933. The transaction did not involve a public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares.
12. During the quarter ending June 30, 2004, the Company sold 629,367 shares of its restricted common stock to thirty four accredited investors, with gross proceeds to the Company of $944,050. We believe this private placement was exempt from registration under Section 4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506 of Regulation D. The transaction did not involve a public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares.
13. On May 25, 2004, the Company entered into an agreement with Prisma Capital Markets, LLC, appointing Prisma as an exclusive distributor of the Company’s products in Kuwait. Prisma also agreed to arrange for, and pay the costs and expenses related to, the testing and demonstration of the Company’s products in Kuwait, in exchange for 300,000 shares of restricted common stock of the Company. The shares were valued at $450,000, based upon contemporaneous private placement stock sales at $1.50 per share to third-party investors. The Company also granted Prisma warrants entitling Prisma to purchase up to 4,401,720 shares of Common Stock of the Company at an exercise price of $2.062 per share, which would be exercisable only upon Prisma’s meeting various sales goals totaling $30,000,000 in sales. Prisma was an accredited investor. The Company believes this transaction was exempt from registration under Section 4(2) and Section 4(6) of the Securities Act of 1933. The transaction did not involve a public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the securities. In February 2005, we filed a lawsuit against Prisma in the Supreme Court of the State of New York, County of New York, for breach of contract, and demanded the return of the securities issued to Prisma and $100,000 in actual damages. Prisma was served a summons on February 7, 2005; and because we have not received a response as of March 12, 2005, we can now file a motion to have a default judgement entered against Prisma.
14. During the quarter ending September 30, 2004, the Company sold 128,834 shares of its restricted common stock to twelve accredited investors, with gross proceeds to the Company of $193,250.50. We believe this private placement was exempt from registration under Section 4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506 of Regulation D. The transaction did not involve a public offering, no sales commissions were paid, and a restrictive legend was placed on each certificate evidencing the shares.
15. In December 2004, we raised $1,420,000 from five investors in a convertible debt financing, and issued to the investors secured convertible notes and common stock purchase warrants.
The notes each bear an interest rate of 8% per annum, with a default interest rate of 15% per annum. Aggregate monthly payments of 1.2% of the principal amount are due commencing November 1, 2005 through April 30, 2006, then aggregate monthly payments of 3% of the principal amount are due commencing May 1, 2006 through October 31, 2006,
II-3
and then aggregate monthly payments of 6% of the principal amount are due commencing November 1, 2006 through October 31, 2007. Payments will be applied first to accrued interest and then to principal. The balance of the unpaid principal and any unpaid interest is due on October 31, 2007.
The individual note holders have the right, at their option, to convert the principal amount of the note, together with all accrued interest thereon in accordance with the provisions of and upon satisfaction of the conditions contained in the note, into fully paid and non-assessable shares of our common stock at a conversion price of $1.50 per share, subject to adjustment in certain circumstances if the notes are then outstanding, such as a stock split, combination or dividend; or in the event we issue shares of common stock for consideration of less than the exercise price. In addition, if, by March 16, 2006, the notes are still outstanding, the exercise price will be reduce by one-third unless we report gross revenues of at least $15 million or net profits of at least $1 million.
We can require the holders to convert the notes into shares of common stock if a registration statement for the resale of the underlying shares is effective and the common stock has traded above $2.50 per shares for ten consecutive days. The amount that the holders can be required to convert is limited to the aggregate dollar volume traded over the past seven trading days (pro-rated among all holders), but no holder is required to convert an amount that result in the holder becoming the beneficial owner of more than 4.99% of the outstanding common stock on the date of conversion.
The notes are secured by all of the assets of BlastGard International, Inc, and its wholly-owed subsidiary, BlastGard Technologies, Inc., until the notes have been fully paid or fully converted into common stock.
Also in connection with this sale, we issued the note holders two types of warrants to acquire shares of our common stock. We issued to the investors “Class A” Common Stock Purchase Warrants which entitle the investors to acquire an aggregate of 473,336 shares of our common stock at an exercise price of $2.09 per share (i.e., 110% of the closing bid price on the day before the Closing Date), are exercisable for a period of five years and contain a “cashless exercise” provision that applies only in the event that a registration statement for the resale of the shares is not effective.
We issued to the investors “Class B” Common Stock Purchase Warrants entitling them to acquire an aggregate of 141,999 shares of our common stock at an exercise price of $3.00 per share, are exercisable for a period of three years and contain a “cashless exercise” provision that applies only in the event that a registration statement for the resale of the shares is not effective.
Andrew Garrett, Inc., acted as placement agent in this transaction. The placement agent was paid a cash fee of $99,400, which represents 7% of the gross proceeds, and is also entitled to a 5% fee upon exercise of warrants by the investors, if any. We also issued the placement agent a warrant to acquire an aggregate of 82,834 shares of our common stock at an exercise price of $2.09 per share, and a warrant to acquire 4,870 shares of our common stock at an exercise price of $3.00 per share. The placement agent’s warrants are exercisable for a period of five years and contain a “cashless exercise” provision that applies only in the event that a registration statement for the resale of the shares is not effective.
We believe this private placement was exempt from registration under Section 4(2) and Section 4(6) of the Securities Act of 1933 and/or Rule 506 of Regulation D. The transaction did not involve a public offering and a restrictive legend was placed on each convertible note and each warrant.
16. In December 2004, we raised $1,020,000 from one investor by selling 680,000 shares of restricted common stock (at $1.50 per share) to one investor, and we also issued to the investor a “Class B” common stock purchase warrant to acquire 100,000 shares of common stock at an exercise price of $3.00 per share (the other terms of the warrant are described above.).
Basic Investors, Inc., acted as placement agent in this transaction. The placement agent was paid a cash fee of $132,600, which represents 13% of the gross proceeds.
We also issued to Basic Investors, Inc. a warrant to acquire 150,000 shares of common stock, exercisable for five years, at an exercise price of $5.00 per share, payable in cash or on a “cashless exercise” basis. We also agreed to register for resale the shares of common stock issuable upon exercise of the investor’s warrant and the placement agent’s warrant.
II-4
LIST OF EXHIBITS
| | |
Exhibit No.
| | Description
|
| |
| 2.4 | | Agreement and Plan of Reorganization dated January 31, 2004, by and among the Registrant, BlastGard Technologies, Inc., (“BTI”) and the shareholders of BTI. (Incorporated by reference to Exhibit 2.4 to the Company’s current report on Form 8-K dated January 31, 2004.) |
| |
| 3.7 | | The Company’s Articles of Incorporation, as amended and currently in effect. (Incorporated by reference to Exhibit 3.7 to the Company’s quarterly report on Form 10-QSB dated March 31, 2004). |
| |
| 3.8 | | The Company’s Bylaws, as amended and currently in effect. (Incorporated by reference to Exhibit 3.8 to the Company’s quarterly report on Form 10-QSB dated March 31, 2004). |
| |
| 4.01 | | Subscription Agreement between the Company and the named investors dated December 2, 2004. (Incorporated by reference to exhibit 4.01 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.02 | | Form of Secured Convertible Note issued to the named investors. (Incorporated by reference to exhibit 4.02 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.03 | | Form of Class A Common Stock Purchase Warrant. (Incorporated by reference to exhibit 4.03 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.04 | | Form of Class B Common Stock Purchase Warrant. (Incorporated by reference to exhibit 4.04 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.05 | | Form of Common Stock Purchase Warrant issued to Andrew Garrett, Inc. (Placement Agent). (Incorporated by reference to exhibit 4.05 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.06 | | Security and Pledge Agreement between the Company and Barbara Mittman as collateral agent for the named investors dated December 2, 2004. (Incorporated by reference to exhibit 4.06 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.07 | | Security and Pledge Agreement between BlastGard Technologies, Inc. and Barbara Mittman as collateral agent for named investors dated December 2, 2004. (Incorporated by reference to exhibit 4.07 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.08 | | Collateral Agent Agreement among the Company, Barbara Mittman (the collateral agent) and the named investors dated December 2, 2004. (Incorporated by reference to exhibit 4.08 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.09 | | Guaranty Agreement between BlastGard Technologies, Inc. and Barbara Mittman as collateral agent for named investors dated December 2, 2004. (Incorporated by reference to exhibit 4.09 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 5.6 | | Legal opinion of Futro & Associates, P.C. (Incorporated by reference to Exhibit 5.6 of the registration statement on Form SB-2, pre-effective amendment no. 2 (File No. 333-121455).) |
| |
| 10.9 | | IDMedical.com, Inc. 2002 Stock Plan (Incorporated by reference to Exhibit 10.9 of the Company’s Registration Statement on Form S-8, SEC File No. 333-84002, filed March 8, 2002). |
| |
| 10.12 | | Amendment dated March 24, 2004, to the IDMedical.com, Inc. 2002 Stock Plan. (Incorporated by reference to Exhibit 10.12 of the Company’s Registration Statement on Form S-8, SEC File No. 333-113994 filed March 29, 2004.) |
II-5
| | |
| |
| 10.13 | | Employment Agreement with James F. Gordon dated January 31, 2004. (Incorporated by reference to Exhibit 10.13 to the Company’s quarterly report on Form 10-QSB dated March 31, 2004). |
| |
| 10.14 | | Employment Agreement with Michael J. Gordon dated January 31, 2004. (Incorporated by reference to Exhibit 10.14 to the Company’s quarterly report on Form 10-QSB dated March 31, 2004). |
| |
| 10.15 | | Employment Agreement with John L. Waddell, Jr. dated January 31, 2004. (Incorporated by reference to Exhibit 10.15 to the Company’s quarterly report on Form 10-QSB dated March 31, 2004). |
| |
| 10.16 | | Employment Agreement with Kevin J. Sharpe dated January 31, 2004. (Incorporated by reference to Exhibit 10.16 to the Company’s registration statement on Form SB-2, pre-effective amendment no.3 (File No. 333-121455).) |
| |
| 10.17 | | Alliance Agreement with Centerpoint Manufacturing, Inc. dated October 25, 2004. (Filed herewith.) |
| |
| 23.11 | | Consent of counsel, Futro & Associates, P.C. (Incorporated by reference to Exhibit 5.6.) |
| |
| 23.13 | | Consent of auditors, Cordovano & Honeck, LLP (Filed herewith.) |
II-6
UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and notwithstanding the forgoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospects filed with the commission pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and (iii) To include any additional or changed material information on the plan of distribution.
(2) For the purpose of determining any liability under the Securities Act, to treat each post-effective amendment as a new registration statement of the securities offered, and the offering of such securities at that time to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any of the securities that remain unsold at the termination of the offering.
(b) The undersigned Registrant, hereby requesting acceleration of the effective date of the registration statement under Rule 461 under the Securities Act, hereby undertakes to include the following:
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Securities Act”) may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of the expenses incurred or paid by a director, officer, or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
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SIGNATURES
In accordance with the Securities Act of 1933, the company certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Clearwater, State of Florida, on May 26, 2005.
| | |
| | | BLASTGARD INTERNATIONAL, INC. |
| |
| By: | | /s/ James F. Gordon |
| | | James F. Gordon, Chief Executive Officer |
| |
| By: | | /s/ Michael J. Gordon |
| | | Michael J. Gordon, Chief Financial Officer And Principal Accounting Officer |
In accordance with the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated:
| | | | |
Name
| | Title
| | Date
|
| | |
/s/ James F. Gordon
James F. Gordon | | Director | | May 26, 2005 |
| | |
/s/ Michael J. Gordon
Michael J. Gordon | | Director | | May 26, 2005 |
| | |
/s/ John L. Wadell, Jr.
John L. Wadell, Jr. | | Director | | May 26, 2005 |
II-8
EXHIBIT INDEX
| | |
Exhibit No.
| | Description
|
| |
| 2.4 | | Agreement and Plan of Reorganization dated January 31, 2004, by and among the Registrant, BlastGard Technologies, Inc., (“BTI”) and the shareholders of BTI. (Incorporated by reference to Exhibit 2.4 to the Company’s current report on Form 8-K dated January 31, 2004.) |
| |
| 3.7 | | The Company’s Articles of Incorporation, as amended and currently in effect. (Incorporated by reference to Exhibit 3.7 to the Company’s quarterly report on Form 10-QSB dated March 31, 2004). |
| |
| 3.8 | | The Company’s Bylaws, as amended and currently in effect. (Incorporated by reference to Exhibit 3.8 to the Company’s quarterly report on Form 10-QSB dated March 31, 2004). |
| |
| 4.01 | | Subscription Agreement between the Company and the named investors dated December 2, 2004. (Incorporated by reference to exhibit 4.01 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.02 | | Form of Secured Convertible Note issued to the named investors. (Incorporated by reference to exhibit 4.02 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.03 | | Form of Class A Common Stock Purchase Warrant. (Incorporated by reference to exhibit 4.03 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.04 | | Form of Class B Common Stock Purchase Warrant. (Incorporated by reference to exhibit 4.04 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.05 | | Form of Common Stock Purchase Warrant issued to Andrew Garrett, Inc. (Placement Agent). (Incorporated by reference to exhibit 4.05 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.06 | | Security and Pledge Agreement between the Company and Barbara Mittman as collateral agent for the named investors dated December 2, 2004. (Incorporated by reference to exhibit 4.06 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.07 | | Security and Pledge Agreement between BlastGard Technologies, Inc. and Barbara Mittman as collateral agent for named investors dated December 2, 2004. (Incorporated by reference to exhibit 4.07 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.08 | | Collateral Agent Agreement among the Company, Barbara Mittman (the collateral agent) and the named investors dated December 2, 2004. (Incorporated by reference to exhibit 4.08 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 4.09 | | Guaranty Agreement between BlastGard Technologies, Inc. and Barbara Mittman as collateral agent for named investors dated December 2, 2004. (Incorporated by reference to exhibit 4.09 of the current report on Form 8-K filed December 3, 2004.) |
| |
| 5.6 | | Legal opinion of Futro & Associates, P.C. (Incorporated by reference to Exhibit 5.6 of the registration statement on Form SB-2, pre-effective amendment no. 2 (File No. 333-121455).) |
| |
| 10.9 | | IDMedical.com, Inc. 2002 Stock Plan (Incorporated by reference to Exhibit 10.9 of the Company’s Registration Statement on Form S-8, SEC File No. 333-84002, filed March 8, 2002). |
| |
| 10.12 | | Amendment dated March 24, 2004, to the IDMedical.com, Inc. 2002 Stock Plan. (Incorporated by reference to Exhibit 10.12 of the Company’s Registration Statement on Form S-8, SEC File No. 333-113994 filed March 29, 2004.) |
| |
| 10.13 | | Employment Agreement with James F. Gordon dated January 31, 2004. (Incorporated by reference to Exhibit 10.13 to the Company’s quarterly report on Form 10-QSB dated March 31, 2004). |
| |
| 10.14 | | Employment Agreement with Michael J. Gordon dated January 31, 2004. (Incorporated by reference to Exhibit 10.14 to the Company’s quarterly report on Form 10-QSB dated March 31, 2004). |
| |
| 10.15 | | Employment Agreement with John L. Waddell, Jr. dated January 31, 2004. (Incorporated by reference to Exhibit 10.15 to the Company’s quarterly report on Form 10-QSB dated March 31, 2004). |
| |
| 10.16 | | Employment Agreement with Kevin J. Sharpe dated January 31, 2004. (Incorporated by reference to Exhibit 10.16 to the Company’s registration statement on Form SB-2, pre-effective amendment no. 3 (File No. 333-121455).) |
| |
| 10.17 | | Alliance Agreement with Centerpoint Manufacturing, Inc. dated October 25, 2004. (Filed herewith.) |
| |
| 23.11 | | Consent of counsel, Futro & Associates, P.C. (Incorporated by reference to Exhibit 5.6.) |
| |
| 23.13 | | Consent of auditors, Cordovano & Honeck, LLP (Filed herewith.) |
