The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – History and organization of the company
The Company was originally organized on September 11, 2006 (Date of Inception) under the laws of the State of Nevada, as The Engraving Masters, Inc. The Company was authorized to issue up to 100,000,000 shares of its common stock and 100,000,000 shares of preferred stock, each with a par value of $0.001 per share.
On March 14, 2014, the Company acquired Blue Line Protection Group, Inc., a Colorado corporation formed in February 2014 ("Blue Line Colorado"), as a wholly-owned subsidiary of the Company. Blue Line Colorado provides protection, compliance and financial services to the lawful cannabis industry.
On May 2, 2014, the Company changed its name from The Engraving Masters, Inc. to Blue Line Protection Group, Inc. ("BLPG")
On May 6, 2014, the Company effected a forward stock split and a pro-rata increase in its authorized common stock on a basis of 14-to-1, whereby each shareholder received 14 newly issued shares of common stock for each 1 share held. Additionally, the authorized capital of the Company concurrently increased to 1,400,000,000 shares of common stock. All references to share and per share amounts in the condensed consolidated financial statements and accompanying notes thereto have been retroactively restated to reflect the forward stock split.
The Company provides armed protection, logistics, and compliance services for businesses engaged in the legal cannabis industry. The Company offers asset logistic services, such as armored transportation service; security services, including shipment protection, money escorts, security monitoring, asset vaulting, VIP and dignitary protection, financial services, such as handling transportation and storage of currency; training; and compliance services.
Note 2 – Basis of presentation
Interim financial statements
The unaudited interim financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2015 and notes thereto included in the Company's annual report on Form 10-K. The Company follows the same accounting policies in the preparation of interim reports.
Results of operations for the interim periods are not indicative of annual results.
Reclassification
Certain amounts from prior periods have been reclassified to conform to the current period presentation.
Concentrations
The Company had 5 major customers which generated approximately 63% (23%, 15%, 9%, 9% and 7%) of total revenue in the nine months ended September 30, 2016.
The Company had 5 major customers which generated approximately 59% (16%, 15%, 11%, 9% and 8%) of total revenue in the nine months ended September 30, 2015.
Note 3 – Going concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has a net loss of $(1,376,979) for the nine months ended September 30, 2016, accumulated deficit of $(5,912,808) and had a working capital deficit of $(2,246,892) as of September 30, 2016. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. The Company is significantly dependent upon its ability, and will continue to attempt, to secure additional equity and/or debt financing. There are no assurances that the Company will be successful and without sufficient financing it would be unlikely for the Company to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. These financial statements do not include any adjustments that might arise from this uncertainty.
Note 4 – Contingencies
Contingencies
On December 28, 2015 Patrick Deparini, the Company's former CFO resigned. Mr. Deparini purports his resignation was made pursuant to a termination clause for other than cause if he is required to undertake other responsibilities other then set forth in his employment agreement. Mr., Deparini claims through the date of his resignation he is owed a total of $154,000 in unreimbursed compensation, $575 in accrued authorized expenses and the remaining balance of his base salary as defined in the employment agreement in the amount of $179,000. As of December 31, 2015 the Company has accrued a total of $125,575 contingent liabilities. If litigation is commenced the Company will attempt a reasonable out-of-court settlement and if such efforts are not successful, will defend the litigation.
On November 6, 2015 Daniel Sullivan sent a wage claim demand. Mr. Sullivan purports to have had an Independent Contractor Agreement with the Company which provides he is entitled to certain compensation and to be reimbursed for Company expenses. The demand claims unpaid compensation in the amount of $8,055 and unreimbursed expenses in the amount of $154,409. The Company denies the agreement was ever signed. As of December 31, 2015 the Company accrued a total of $88,968 contingent liabilities. If litigation is commenced the Company will attempt a reasonable out-of-court settlement and if such efforts are not successful, will defend the litigation.
Mile High Real Estate Group, an entity owned by Mr. Sullivan, sent correspondence stating the Mr. Sullivan and/or Mile High Real Estate loaned the Company either directly or directly to contractors, material suppliers or utilities for operating and building remodeling in the amount of $98,150. Counsel for Mr. Sullivan stated that he was still compiling information. The Company is investigating whether Mr. Sullivan and/or Mile High Real Estate Group ever made the alleged loans. If the alleged loan was actually made, the Company will seek an out-of-court settlement. As of December 31, 2015 the Company accrued a total of $98,150.
On April 14, 2016, the Company entered into an agreement with an unrelated third party to provide the Company with investor relations services. Upon signing the agreement, the Company paid the investor relations consultant $75,000 and agreed to issue the consultant 1,500,000 shares of its restricted common stock. The agreement requires the Company to pay the consultant an additional $75,000 prior to June 14, 2016. The Company cancelled the agreement and is of the opinion that the shares are not owed to the consultant. As of September 30, 2016 there was no payable recorded.
Note 5 – Fixed assets and construction in progress
Machinery and equipment consisted of the following at:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Automotive vehicles
|
|
$
|
194,882
|
|
|
$
|
173,926
|
|
Furniture and equipment
|
|
|
53,314
|
|
|
|
46,068
|
|
Fixed assets, total
|
|
|
248,196
|
|
|
|
219,994
|
|
Total : accumulated depreciation
|
|
|
(103,139
|
)
|
|
|
(69,084
|
)
|
Fixed assets, net
|
|
$
|
145,057
|
|
|
$
|
150,910
|
|
Total depreciation expenses for the nine months ended September 30, 2016 and 2015 were $51,105 and $31,353, respectively.
On July 15, 2014, the Company purchased a commercial building for a total purchase price of $750,000, for which the Company paid a down payment of $75,000 and financed the remaining $675,000 in the form of a promissory note. The note bears interest at a rate of 5% per annum on the unpaid principal balance and is due on July 31, 2016. Interest is paid monthly, in arrears, in the amount of $2,813 beginning August 31, 2014. Through December 31, 2015, approximately $363,377 in capital improvements and $33,762 of capitalized expenses have been made to the property. As of September 30, 2016, the Company has completed the construction on the property and it was available and ready for use, accordingly. As of September 30, 2016 and December 31, 2015, the balance of construction in progress was $0 and $1,147,139, respectively. The net book value of the building and improvements was $1,568,857 as of September 30, 2016.
Note 6 – Notes payable
Notes payable to non-related parties
On July 15, 2014, the Company purchased a commercial building for $750,000, for which the Company made a down payment of $75,000 and financed the remaining $675,000 with a promissory note. The note bears interest at a rate of 5% per annum on the unpaid principal balance and is originally due in full on July 31, 2016. On June 30, 2016, the Company extended the maturity date to October 31, 2016. Interest is paid monthly, in arrears, in the amount of $2,813 beginning August 31, 2014. As of September 30, 2016 and December 31, 2015, the principal balance was $675,000 and a total of $74,609 and $49,292, respectively, in interest payments have been made.
During February 2015, the Company borrowed $50,000 from a non-affiliated person. The loan is due and payable on demand with interest at 10% per annum. As of September 30, 2016 and December 31, 2015, the principal balance owed on this loan was $50,000 and $50,000, respectively.
During April 2015, the Company borrowed $25,000 from a non-affiliated person. The loan is due and payable on demand with interest at 6% per year and has a 5% per month penalty upon default. As of September 30, 2016 and December 31, 2015, the principal balance owed on this loan was $25,000 and $25,000, respectively.
On February 23, 2016 the Company signed a Merchant Agreement with a lender. Under the agreement the Company received $193,550 in exchange for rights to all customer receipts until the lender is paid $264,000, which is collected at the rate of $1,397 per business day. The payments were secured by second position rights to all customer receipts until the loan has been paid in full. The Company paid $6,450 in fees in connection with this loan. During the nine months ended September 30, 2016, the Company made $212,318 repayment to the loan. The note was still outstanding as of September 30, 2016 with a balance of $51,682. The Company is amortizing the debt discount of$70,000 over the term of the loan. As of September 30, 2016 the unamortized discount was $13,796.
On January 5, 2016, the Company borrowed $10,000 from a non-affiliated person. The loan was due and payable on January 5, 2017 and bore interest at 5% per annum. The principal balance owed on this loan at September 30, 2016 was $10,000.
On April 1, 2016 the Company borrowed $144,000 from an unrelated third party. The loan bears interest at a rate of 24.25% per year and is due and payable on March 27, 2017. The Company paid $8,640 in fees in connection with this loan. During the nine months ended September 30, 2016, the Company made repayment of $65,113 to the loan. The note was still outstanding as of September 30, 2016 with a balance of $78,887. The Company is amortizing the debt discount of $8,640 over the term of the loan. As of September 30, 2016 the unamortized discount was $4,272.
On August 8, 2016 the Company signed a Merchant Agreement with a lender. Under the agreement we received $100,000 in exchange for rights to all customer receipts until the lender is paid $136,000, which is collected at the rate of $810 per business day. The payments were secured by second position rights to all customer receipts until the loan has been paid in full. The Company paid $2,000 in fees in connection with this loan. During the nine months ended September 30, 2016, the Company made $32,381 to the loan. The note was still outstanding as of September 30, 2016 with a balance of $103,619. The Company is amortizing the debt discount of $38,000 over the term of the loan. As of September 30, 2016 the unamortized discount was $29,430.
On September 21, 2016, the Company borrowed $100,000 from a non-affiliated person. The loan is due and payable on December 21, 2016 and bears interest at 60% per annum. The principal balance owed on this loan at September 30, 2016 was $100,000. The Company paid $5,000 in fees in connection with this loan which the Company is amortizing as debt issuance costs over the term of the loan. As of September 30, 2016 the unamortized discount was $4,505.
Convertible notes payable to non-related party
In January 2016 the Company borrowed $58,000 from an unrelated third party. The Company paid fees of $3,000 associated with this note which were recognized as a discount to the note. The Company is amortizing the debt discount of $3,000 over the term of the loan. For the nine months ended September 30, 2016, the Company recognized amortization expenses of $3,000.
The loan has a maturity date of November 1, 2016 and bears interest at the rate of 8% per year. If the loan is not paid when due, any unpaid loan amount will bear interest at 22% per year. The Lender is entitled, at its option, at any time after July 26, 2016 to convert all or any part of the outstanding and unpaid principal and accrued interest into shares of the Company's common stock at a price per share equal to 58% of the average of the three lowest trading prices for the 10 trading days immediately preceding the conversion date. The Company was funded on February 3, 2016, and the note is not convertible till 180 days after the issuance date, which is August 1, 2016. The Company repaid the loan in full on July 27, 2016 with the premium of $20,300.
In February 2016 the Company borrowed $110,000 from an unrelated third party. The Company paid fees of $7,250 associated with this note which were recognized as a discount to the note. The Company paid $7,250 in fees in connection with this loan. The Company is amortizing the debt discount of $7,250 over the term of the loan. For the nine months ended September 30, 2016, the Company recognized amortization expenses of $7,500.
The loan has a maturity date of November 11, 2016 and bears interest at the rate of 10% per year. If the loan is not paid when due, any unpaid amount will bear interest at 24% per year. The Lender is entitled, at its option, at any time after August 9, 2016 to convert all or any part of the outstanding and unpaid principal and accrued interest into shares of the Company's common stock at a price per share equal to 50% of the average of the five lowest trading prices for the 25 trading days immediately preceding the conversion date. The Company paid premium of $51,384 to postpone the lender's conversion right to August 25, 2016. The Company repaid the loan in full on August 23, 2016 and there's no outstanding balance as of September 30, 2016.
Note 7 – Notes payable – related parties
On July 31, 2014, the Company borrowed $98,150 from an entity controlled by an officer and shareholder of the Company. The loan is due and payable on demand and bears no interest. As of September 30, 2016 and December 31, 2015, the principal balance owed on this loan is $98,150 and $98,150, respectively.
As of December 31, 2014, a related party loaned the Company $10,000, in the form of cash and expenses paid on behalf of the Company. The loan is due and payable on demand and bears no interest. During the year ended December 31, 2015 the Company borrowed an additional $20,000 and as of September 30, 2016 and December 31, 2015, the principal balance owed on this loan was $30,000 and $30,000, respectively.
As of December 31, 2014, a related party loaned the Company $180,122, in the form of cash and expenses paid on behalf of the Company. The loan is due and payable on demand and bears no interest. The Company repaid $125,500 towards this note during 2015 and as of September 30, 2016 and December 31, 2015; the principal balance owed on this loan was $54,622 and $54,622, respectively.
During 2015, the Company borrowed $43,575 from its former CFO. As of December 31, 2015 $43,000 of the loan had been repaid. The note is non-interest bearing, and due on demand. As of September 30, 2016 and December 31, 2015 the principal amount owed on this loan was $575.
During October 2015, the Company borrowed $30,000 from an entity controlled by an officer of the Company. The loan is due and payable on demand and is non-interest bearing. During the nine months ended September 30, 2016, the Company repaid $135,000 and borrowed an additional $135,000 from the related party. As of September 30, 2016 and December 31, 2015, the principal balance owed on this loan was $30,000 and $30,000, respectively.
On July 7, 2016, the Company borrowed $73,000 from a related party. The loan was due and payable on July 7, 2017 and bore interest at 5% per annum. The principal balance owed on this loan at September 30, 2016 was $73,000.
On August 8, 2016, the Company entered into, an promissory note with Hypur Inc., a Nevada Corporation which is a related party pursuant to which the Company to borrow $52,000. The loan was due and payable on August 10, 2017 and bears interest at 18% per annum. The principal balance owed on this loan at September 30, 2016 was $52,000.
On September 20, 2016, the Company borrowed $47,500 from Hypur Inc., which is a related party. The loan is due and payable on December 20, 2016 and bears interest at 18% per annum. The principal balance owed on this loan at September 30, 2016 was $47,500.
Convertible notes payable to related party
In July 2015, the Company entered into an arrangement with a related party, whereby the Company could borrow up to $500,000 in Convertible Notes. The Convertible Note bears interest at a rate of 5% per annum and payable quarterly in arrears and matures twelve months from the date of issuance, and is convertible into shares of the Company's common stock at a per share conversion price equal to $0.025. Through December 31, 2015, the Company borrowed a total of $415,000. During the nine month ended September 30, 2016, we borrowed an additional $20,000 from related party convertible notes. As of September 30, 2016 and December 31, 2015, the principal balance owed on this Convertible Note is $435,000 and $415,000, respectively.
On September 1, 2016, the Company entered into, an convertible promissory note with Hypur Ventures, L.P., a Delaware limited partnership (the "Hypur Ventures") which is a related party pursuant to which the Company to borrow $75,000. The loan was due 180 days from the date of issuance and bears interest at 10% per annum. The note is convertible into common stock at a price of $.05 per share. The note is mandatory redeemable into common stock if the price per share is over $.50 per share during a 10 day period. The principal balance owed on this loan at September 30, 2016 was $75,000.
The Company evaluated the convertible note for possible embedded derivatives and concluded that none exist. However, the Company concluded a portion of the note should be allocated to additional paid-in capital as a beneficial conversion feature at the issuance date, since the conversion price on that date was lower than the fair market value of the underlying stock. Resultantly, a discount of $190,040 was attributed to the beneficial conversion feature of the note, which amount is being amortized through the maturity date of the note. As of September 30, 2016 and December 31, 2015, a total of $124,667 and $56,185, respectively has been amortized and recorded as interest expense, leaving a balance of $9,178 and $131,615 in discounts related to the beneficial conversion feature of this note. The carrying amount of the convertible note, net of the unamortized debt discount, was $500,822 and $283,385 as of September 30, 2016 and December 31, 2015, respectively.
Aggregate amortization of debt discounts was $124,677 and $131,615 for the nine months ended September 30, 2016 December 31, 2015, respectively.
Note 8 – Long term notes payable
On November 21, 2014, the Company purchased a vehicle for $20,827, net of discounts. The Company financed the $20,827 at an interest rate of 2.42% for five years, with a maturity date of December 5, 2019. As of September 30, 2016 and December 31, 2015, the total principal balance of the note is $13,826 and $16,898, respectively, of which $9,689 and $12,836 is considered a long-term liability and $4,136 and $4,062 is considered a current liability.
Note 9 – Stockholders' equity
The Company was originally authorized to issue 100,000,000 shares of common stock and 100,000,000 shares of preferred stock. On May 6, 2014, the Company effected a forward stock split and a pro-rata increase in its authorized common stock on a basis of 14-to-1, whereby each shareholder received 14 newly issued shares of common stock for each 1 share held. Additionally, the number of authorized shares increased to 1,400,000,000 shares of common stock. All references to share and per share amounts in the consolidated financial statements and these notes thereto have been retroactively restated to reflect the forward stock split.
On May 3, 2016, the Company entered into, an agreement with Hypur Ventures, L.P., a Delaware limited partnership (the "Hypur Ventures") which is a related party pursuant to which the Company sold to Hypur Ventures, in a private placement, 10,000,000 shares of the Company's preferred stock and 5,000,000 common stock warrants with a five year term and an exercise price of $0.10, at a purchase price of $0.05 per share for gross proceeds of $500,000. The shares of Preferred Stock are convertible into shares of the Company's common stock. The Preferred Stock shall have such other rights, preferences and privileges to be set forth in a certificate of designation to be filed with the Secretary of State. The Company evaluated the convertible preferred stock under FASB ASC 470-20-30 and determined it contained a beneficial conversion feature. The intrinsic value of the beneficial conversion feature was determined to be $114,229. The beneficial conversion feature was fully amortized and recorded as a deemed dividend.
Between July and August of 2016 Hypur Ventures purchased an additional 10,000,000 shares of the Company's preferred stock and 5,000,000 common stock warrants with a five year term and an exercise price of $0.10, at a purchase price of $0.05 per share for net proceeds of $445,000, net of legal fees of $55,000. The shares of Preferred Stock are convertible into shares of the Company's common stock. The Preferred Stock shall have such other rights, preferences and privileges to be set forth in a certificate of designation to be filed with the Secretary of State. The Company evaluated the convertible preferred stock under FASB ASC 470-20-30 and determined it does not contain a beneficial conversion feature. The intrinsic value of the beneficial conversion feature was determined to be $0.The Preferred Stock is convertible at any time at the election of Hypur Ventures. The Preferred Stock shall automatically convert to Common Stock if the closing price of the Company's Common Stock equals or exceeds $.50 per share over any consecutive twenty day trading period. The Preferred Stock terms include a one-time purchase price preference. No preferential dividends apply to the Preferred Stock. The Preferred Stock attributes include weighted average anti-dilution protection, rights to appoint one director, pre-emptive rights to purchase future offerings of securities by the Company, demand and piggy-back registration rights.
The Preferred Stock is convertible at any time at the election of Hypur Ventures. The Preferred Stock shall automatically convert to Common Stock if the closing price of the Company's Common Stock equals or exceeds $.50 per share over any consecutive twenty day trading period. The Preferred Stock terms include a one-time purchase price preference. No preferential dividends apply to the Preferred Stock. The Preferred Stock attributes include weighted average anti-dilution protection, rights to appoint one director, pre-emptive rights to purchase future offerings of securities by the Company, demand and piggy-back registration rights.
The Company has reserved thirty million shares of Common Stock that may be issued upon the conversion and/or exercise of the Preferred Stock and the Warrants. The Preferred Stock to Hypur Ventures will be subject to the terms and conditions of the Certificate of Designation, as well as further documentation to be drafted in accordance with the terms and conditions agreed upon between the Company and Hypur Ventures.
In February, the Company entered a consultant agreement for business advisory services. In August 2016 the Company issued 1,000,000 shares of common stock to a consultant for business advisory services valued at $28,000.
Note 10 – Options
All stock options have an exercise price equal to the fair market value of the common stock on the date of grant. The fair value of each option award is estimated using a Black-Scholes-Merton option valuation model. The Company has not paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model. Volatility is an estimate based on the calculated historical volatility of similar entities in industry, in size and in financial leverage, whose share prices are publicly available. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company has no historical experience with which to establish a basis for determining an expected life of these awards. Therefore, the Company only gave consideration to the contractual terms and did not consider the vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures significant to the expected life of the option award. The Company bases the risk-free interest rate used in the Black-Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term equal to the expected life of the award.
The following is a summary of the Company's stock option activity for the nine months ended September 30, 2016:
|
|
Number
Of Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
17,256,738
|
|
|
$
|
0.14
|
|
Exercised
|
|
|
-
|
|
|
$
|
0.00
|
|
Cancelled
|
|
|
(380,000
|
)
|
|
$
|
0.19
|
|
Outstanding at September 30, 2016
|
|
|
16,876,738
|
|
|
$
|
0.14
|
|
Options exercisable at December 31, 2015
|
|
|
8,150,896
|
|
|
$
|
0.19
|
|
Options exercisable at September 30, 2016
|
|
|
8,394,229
|
|
|
$
|
0.20
|
|
The following tables summarize information about stock options outstanding and exercisable at September 30, 2016 and December 31, 2015:
OPTIONS OUTSTANDING AND EXERCISABLE AT SEPTEMBER 30, 2016
|
|
Range of
Exercise Prices
|
|
Number of
Options
Outstanding
|
|
Weighted-Average
Remaining
Contractual
Life in Years
|
|
Weighted-
Average
Exercise Price
|
|
Number Exercisable
|
|
Weighted-
Average
Exercise Price
|
|
|
$
|
0.035 – 1.00
|
|
|
|
16,876,738
|
|
|
|
3.72
|
3
|
|
$
|
0.14
|
|
|
|
11,101,420
|
|
|
$
|
0.16
|
|
OPTIONS OUTSTANDING AND EXERCISABLE AT DECEMBER 31, 2015
|
|
Range of
Exercise Prices
|
|
Number of
Options
Outstanding
|
|
Weighted-Average
Remaining
Contractual
Life in Years
|
|
Weighted-
Average
Exercise Price
|
|
Number Exercisable
|
|
Weighted-
Average
Exercise Price
|
|
|
$
|
0.035 – 1.00
|
|
|
|
17,256,738
|
|
|
|
4.47
|
|
|
$
|
0.14
|
|
|
|
8,150,896
|
|
|
$
|
0.19
|
|
Total stock-based compensation expense in connection with options and modified awards recognized in the consolidated statement of operations for the nine months ended September 30, 2016 and 2015 was $57,006 and $250,528, respectively.
Note 11 – Subsequent Events
On October 27, 2016 the Company sold its building located at 5765 Logan Street, Denver, Colorado to an unrelated third party for $1,400,000. The Company repaid the mortgage on the building in the amount of $677,681. After the sale, the Company leased the building from the purchaser of the property. The lease is for an initial term of ten years, with the Company having the option to extend the term of the lease for two additional five year periods. The lease requires rental payments of $10,000 per month.