Blue Line Protection Group, Inc. - Quarter Report: 2014 September (Form 10-Q)

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission ("Commission").  While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto, which are included in the Company's December 31, 2013, Annual Report on Form 10-K previously filed with the Commission on April 9, 2014.

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Blue Line Protection Group, Inc.

Condensed Consolidated Balance Sheets

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

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Blue Line Protection Group, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

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

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Blue Line Protection Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

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

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 1 - Basis of presentation

The 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, 2013 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.

Note 2 - History and business of the company

The Company was originally organized 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 March 15, 2014, the Company agreed to acquire all of the issued and outstanding membership interests in Blue Line Protection Group, LLC, a Colorado limited liability company (“Blue Line LLC”).  The closing of the acquisition is to take place once the Company is provided with financial statements, audited as necessary and in proper form, which would be satisfactory for filing in an 8-K report with the Securities and Exchange Commission.  If the acquisition of Blue Line LLC does not occur by July 31, 2014, the agreement pertaining to the acquisition of Blue Line LLC will terminate.  As of July 31, 2014, the terms and conditions of the agreement were not satisfied and was resultantly been terminated.

On May 2, 2014, the Company changed its name to Blue Line Protection Group, Inc.

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 number capital of the Company concurrently increased to 1,400,000,000 shares of $0.001 par value 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.

Blue Line Protection Group, Inc. provides armed protection, financial solutions, 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, and others; financial services, such as handling transportation and storage of currency; training; and compliance services.  The Company serves marijuana dispensaries in Colorado, with operations in Washington and Nevada.

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

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 an accumulated deficit of ($2,535,407) as of September 30, 2014, and had net sales of $556,756 during the nine-month period ended September 30, 2014.  

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.  The Company is currently conducting a private placement of its common stock to raise proceeds to finance its plan of operation.  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 conditions raise substantial doubt about the Company's ability to continue as a going concern.  These financial statements do not include any adjustments that might arise from this uncertainty.

Note 4 -Accounting policies and procedures

Principles of consolidation

For the nine months ended September 30, 2014, the consolidated financial statements include the accounts of Blue Line Protection Group, Inc. (a Nevada corporation formerly known as The Engraving Masters, Inc.)(“BLPG”), Blue Line Colorado, BLPG, Inc. (a Nevada corporation)(“Blue Line Nevada”) and Blue Line Protection Group (Washington), Inc. (a Washington corporation)(“Blue Line Washington”).  All significant intercompany balances and transactions have been eliminated.   BLPG, Blue Line Colorado, Blue Line Nevada and Blue Line Washington are collectively referred herein to as the “Company.”

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.

Cash and cash equivalents

For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. The carrying value of these investments approximates fair value.

Accounts receivable

Accounts receivable are stated at the amount the Company expects to collect from outstanding balances and do not bear interest.  The Company provides for probable uncollectible amounts through an allowance for doubtful accounts, if an allowance is deemed necessary.  The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future.  On a periodic basis, management evaluates its accounts receivable and determines the requirement for an allowance for doubtful accounts based on its assessment of the current and collectible status of individual accounts with past due balances over 90 days.  Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 4 -Accounting policies and procedures (continued)

Notes receivable

Notes receivable are measured at historical cost and reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans.  Interest income on notes receivable is recognized using the interest method.  Interest income on impaired loans is recognized as cash is collected or on a cost-recovery basis.

Intangible assets

Management regularly reviews property, equipment, intangibles and other long-lived assets for possible impairment. This review occurs quarterly, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment, then management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. Management believes that the accounting estimate related to impairment of the Company’s property and equipment is a “critical accounting estimate” because: (1) it is highly susceptible to change from period to period because it requires management to estimate fair value, which is based on assumptions about cash flows and discount rates; and (2) the impact that recognizing an impairment would have on the assets reported on the Company’s balance sheet, as well as net income, could be material. Management’s assumptions about cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and are expected to continue to do so.

The Company capitalizes the costs associated with the development of the Company’s website pursuant to ASC Topic 350.  Other costs related to the maintenance of the website are expensed as incurred.  Amortization is provided over the estimated useful lives of 3 years using the straight-line method for financial statement purposes.   The Company will commence amortization once the economic benefits of the assets begin to be consumed.

The Company reviews the carrying value of intangible assets for impairment whenever events and circumstances indicate that the carrying value may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.  In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to the amount by which the carrying value exceeds the fair value.  The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors.  During the nine months ended September 30, 2014 and 2013, there was no impairment necessary.

Property and equipment

Property and equipment is recorded at cost and capitalized from the initial date of service.  Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred.  When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period.  Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes.  The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate.  The estimated useful lives for significant property and equipment categories are as follows:

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 4 -Accounting policies and procedures (continued)

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.  In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets.  The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors.  Based on this assessment there was no impairment as September 30, 2014 and 2013.  Depreciation expense for the nine months ended September 30, 2014 and 2013 totaled $17,485 and $0, respectively.

Long-Lived Assets

All property and equipment and other long-lived assets are reviewed when events or changes in circumstances indicate that the assets’ carrying value may not be recoverable. If such indicators are present, it is determined whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than their carrying amounts. No material impairments were recorded as of September 30, 2014 and 2013 as a result of the tests performed.

Revenue recognition

The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of its fees is probable.

Sales related to long-term contracts for services (such as programming, website development and maintenance) extending over several years are accounted for under the percentage-of-completion method of accounting.  Sales and earnings under these contracts are recorded based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method based budgeted milestones or tasks as designated per each contract. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable.

For all other sales of product or services the Company recognizes revenues based on the terms of the customer agreement.  The customer agreement takes the form of either a contract or a customer purchase order and each provides information with respect to the product or service being sold and the sales price.  If the customer agreement does not have specific delivery or customer acceptance terms, revenue is recognized on the date of the customer agreement, invoice or purchase order.

Cost of Sales

The Company’s cost of revenue primarily consists of items purchased by the Company specifically purposed for the benefit of the Company’s client.

Stock-based compensation

The Company records stock based compensation in accordance with the guidance in ASC Topic 505 and 718, which requires the Company to recognize expenses related to the fair value of its employee stock option awards.  This eliminates accounting for share-based compensation transactions using the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 4 -Accounting policies and procedures (continued)

Advertising and marketing costs

The Company expenses all costs of advertising as incurred.  During the nine-months ended September 30, 2014 and 2013, advertising and marketing costs were $179,885 and $0, respectively.

Loss per common share

Net loss per share is provided in accordance with ASC Subtopic 260-10. The Company presents basic loss per share (“EPS”) and diluted EPS on the face of statements of operations.  Basic EPS is computed by dividing reported losses by the weighted average shares outstanding.  Except where the result would be anti-dilutive to income from continuing operations, diluted earnings per share has been computed assuming the conversion of the convertible long-term debt and the elimination of the related interest expense, and the exercise of stock warrants. Loss per common share has been computed using the weighted average number of common shares outstanding during the year.

Fair Value of Financial Instruments

The carrying amounts reflected in the balance sheets for cash, accounts payable and accrued expenses approximate the respective fair values due to the short maturities of these items. The Company does not hold any investments that are available-for-sale.

As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The three levels of the fair value hierarchy are described below:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

Income Taxes

The Company follows FASB Codification Topic 740-10-25 (ASC 740-10-25) for recording the provision for income taxes.  Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled.  Deferred income tax expenses or benefits are based on the changes in the asset or liability each period.  If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.  Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.  Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate.  Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 4 -Accounting policies and procedures (continued)

Dividends

The Company has not yet adopted any policy regarding payment of dividends.  No dividends have been paid or declared since inception

Recent pronouncements

The Company has evaluated the recent accounting pronouncements through November 14, 2014, and believes that none of them will have a material effect on the Company’s financial position, results of operations or cash flows.

Note 5 - Notes receivable

The Company provides short-term, secured financing to clients, represented as notes receivable.  On May 15, 2014, the Company loaned $50,000 to a non-affiliated entity on a revolving basis at a rate of 18% per annum and due within one year from the date of issuance.  As of September 30, 2014, the principal balance of the loan is $50,000 and accrued interest thereupon was $3,378.

On May 30, 2014, the Company loaned $35,000 to a non-affiliated entity on a revolving basis at a rate of 18% per annum and due within one year from the date of issuance.  The loan was repaid, in full, as of June 30, 2014.

Note 6 - Fixed assets

Fixed assets consisted of the following at:

Depreciation expenses for the nine months ended September 30, 2014 and 2013 were $17,485 and $0, 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 in full on July 31, 2016.  Interest is paid monthly, in arrears, in the amount of $2,813 beginning August 31, 2014.  Through September 30, 2014, approximately $376,713 in capital improvements have been made to the property.  As of September 30, 2014, the Company has not yet placed the property into service and, accordingly, no depreciation expense has been recorded.

Note 7 - Debt and interest expense

Through September 30, 2014, a non-affiliated third-party loaned the Company an aggregate of $2,000 in cash.  The note bears no interest and is due upon demand.  

On February 21, 2014, the Company issued a Promissory Note to one non-affiliated person in the amount of $100,000.  The loan was due and payable on demand and bore no interest. In April 2014, the lender agreed to convert the entire principal balance of $100,000, into 1,076,923 shares of common stock.  As of September 30, 2014, the principal balance owed on this loan is $0.  See Note 8 - Stockholders’ Equity for additional information.

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 7 - Debt and interest expense (continued)

On February 21, 2014, the Company issued a Promissory Note to one non-affiliated entity in the amount of $25,000.  The loan was due and payable on demand and bore no interest. In April 2014, the lender agreed to convert the entire principal balance of $25,000, into 269,231 shares of common stock.  As of September 30, 2014, the principal balance owed on this loan is $0.  See Note 8 - Stockholders’ Equity for additional information.

On March 26, 2014, the Company issued a Promissory Note to one non-affiliated person in the amount of $25,000 for cash paid to purchase a vehicle on behalf of the Company.  The loan was due and payable on demand and bore no interest.  The loan was repaid in full.  As of September 30, 2014, the principal balance owed on this loan was $0.

During April 2014, the Company borrowed $16,008 from a non-affiliated person.  The loan is due and payable on demand and bears no interest.  As of September 30, 2014, the principal balance owed on this loan is $16,008.

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 in full on July 31, 2016.  Interest is paid monthly, in arrears, in the amount of $2,813 beginning August 31, 2014.  As of September 30, 2014, the principal balance is $675,000 and a total of $5,626 in interest payments have been made.

On July 31, 2014, the Company borrowed $98,150 from an entity materially 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, 2014, the principal balance owed on this loan is $98,150.

Through September 30, 2014, an officer and shareholder loaned the Company $194,988, 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 has repaid $25,000 and as of September 30, 2014, the principal balance owed on this loan is $169,988.

Note 8 - Stockholders’ equity

The Company was originally authorized to issue 100,000,000 shares of $0.001 par value common stock and 100,000,000 shares of $0.001 par value 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 $0.001 par value 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.

Through March 27, 2014, the Company sold an aggregate of 13,068,454 shares of its common stock for gross cash proceeds of $1,213,501.

On March 27, 2014, the Company purchased a vehicle from a non-affiliated entity with 323,078 shares of its common stock in lieu of cash.  The value of this transaction was $30,000.

On April 8, 2014, the Company issued a total of 1,076,923 shares of common stock for the conversion of a promissory note in the total amount of $100,000.

On April 8, 2014, the Company issued a total of 269,231 shares of common stock for the conversion of a promissory note in the total amount of $25,000.

On May 20, 2014, the Company issued 200,000 shares of common stock to a non-affiliated entity for services to be rendered, with a fair market value of $120,000.

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 8 - Stockholders’ equity (continued)

On June 11, 2014, the Company entered into a investment banking agreement, for which it issued 1,400,000 shares of its common stock with a fair market value of $938,000.  The stock was subscribed for; however, the certificates representing the shares were not issued through the period ended September 30, 2014 and, resultantly, are considered owed as a common stock payable of $1,400.

On September 15, 2014, the Company sold 1,562,500 shares of its common stock for $500,000.  As of September 30, 2014, the Company received $100,000 in payment of the shares and recorded subscriptions receivable for the remaining balance of $400,000.

As of September 30, 2014, there have been no other issuances of common stock.

Note 9 - Warrants and 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 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.

As of December 31, 2013, there were no warrants or options outstanding to acquire any additional shares of common stock.

On March 1, 2014, the Company issued stock options to an officer of the Company to purchase 4,806,900 shares of the Company’s common stock at an exercise price of $0.14 per share.  The options vest in three annual installments, with the first portion immediately vested.  The options carry a life of three years.  

On April 1, 2014, the Company issued stock options to an employee of the Company to purchase 300,000 shares of the Company’s common stock at an exercise price of $0.71 per share.  The options vest in three annual installments, with the first portion immediately vested.  The options carry a life of three years.  

On August 1, 2014, the Company issued stock options to an officer of the Company to purchase 4,500,000 shares of the Company’s common stock at an exercise price of $0.39 per share.  The options vest in three annual installments, with the first portion immediately vested.  The options carry a life of three years.  

On August 1, 2014, the Company issued stock options to an officer of the Company to purchase 1,200,000 shares of the Company’s common stock at an exercise price of $0.39 per share.  The options vest in three annual installments, with the first portion immediately vested.  The options carry a life of three years.  

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

Note 9 - Warrants and options (continued)

The following is a summary of the Company’s stock option activity:

The following tables summarize information about stock options outstanding and exercisable at September 30, 2014:

Total stock-based compensation expense in connection with options granted to employees recognized in the consolidated statement of operations for the nine-month periods ended September 30, 2014 and 2013 was $239,379 and $0, respectively.

Note 10 - Related party transactions

On July 31, 2014, the Company borrowed $98,150 from an entity materially 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, 2014, the principal balance owed on this loan is $98,150.

Through September 30, 2014, an officer and shareholder loaned the Company $194,988, 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 has repaid $25,000 and as of September 30, 2014, the principal balance owed on this loan is $169,988.

Note 11 - Subsequent Events

On November 12, 2014, the Board of Directors of the Company authorized an employee Stock Incentive Plan.

The Company’s management has reviewed all material events through the date of this report in accordance with ASC 855-10, and believes there are no further material subsequent events to report.

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

Forward-Looking Statements

This Quarterly Report contains forward-looking statements about Blue Line Protection Group, Inc.’s business, financial condition and prospects that reflect management’s assumptions and beliefs based on information currently available.  We can give no assurance that the expectations indicated by such forward-looking statements will be realized.  If any of our management’s assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, Blue Line Protection Group’s actual results may differ materially from those indicated by the forward-looking statements.

The key factors that are not within our control and that may have a direct bearing on operating results include, but are not limited to, acceptance of our services, our ability to expand our customer base, managements’ ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry.

There may be other risks and circumstances that management may be unable to predict.  When used in this Quarterly Report, words such as,  "believes,"  "expects," "intends,"  "plans,"  "anticipates,"  "estimates" and similar expressions are intended to identify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions.

Business History

We were originally incorporated in Nevada on September 11, 2006, under the name The Engraving Masters, Inc.  On March 14, 2014, we acquired Blue Line Protection Group, Inc., a Colorado corporation formed in February 2014 with the sole purpose to be a wholly-owned subsidiary of the Company (“Blue Line Inc.”).

On March 15, 2014, we agreed to acquire all of the issued and outstanding membership interests in Blue Line Protection Group, LLC, a Colorado corporation (“Blue Line LLC”).  Since August 2013, Blue Line, LLC has provided private security services to licensed marijuana growers and dispensaries.  The closing of the acquisition is to take place once the Company is provided with financial statements, audited as necessary and in proper form, which would be satisfactory for filing in an 8-K report with the Securities and Exchange Commission.  If the acquisition of Blue Line, LLC does not occur by July 31, 2014, the agreement pertaining to the acquisition of Blue Line, LLC will terminate.  As of the date of this report, the conditions of closing have not been satisfied, the acquisition has not been consummated and the agreement has been allowed to expire.

On May 2, 2014 our directors, pursuant to Nevada revised Statute 92A.280, amended our Articles of Incorporation to change our name from The Engraving Masters, Inc. to Blue Line Protection Group, Inc.  The amendment was filed with the Nevada Secretary of State on May 2, 2014.  

On May 6, 2014 our directors approved 14-for-1 forward stock split of our issued and outstanding common stock.  Additionally, the authorized number capital of the Company concurrently increased to 1,400,000,000 shares of $0.001 par value 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.

Overview of Operations

Blue Line Protection Group, Inc. provides armed protection, financial solutions, logistics, and compliance services for businesses engaged in the legal cannabis industry.  Blue Line provides on-site security, transportation and compliance verification services to marijuana businesses to ensure that they are operating according to local, state and federal regulations.  Blue Line helps keep the cannabis industry operating lawfully and transparently by acting as an independent, third-party risk mitigation provider to banking institutions looking to provide their services to marijuana businesses.  We do not grow, test or dispense cannabis products.  In general, we primarily target businesses involved in the growing and dispensing of cannabis for both medical and recreational uses, in jurisdictions were such is legal.  We serve marijuana dispensaries in Colorado, with a presence in the states of Alaska, California, Illinois, Nevada, Oregon and Washington, as well as the District of Columbia.

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Every day, we deploy professional teams of security experts to provide safe and responsible compliance, protection and transportation services for high-risk, high-value asset industries.  We set the standard of a top-tier asset protection and logistics company by focusing on four operational strategies we call SPEC:

Safety

Our first priority is the safety of the general public and our clientele.  Where there’s money, there’s the potential for crime, and many of our clients operate cash-based businesses.  Just as banks rely on armored services to transport their assets, our clientele need to rely on trained protection specialists to safely transport their cash and products.  Lawful business owners and their employees — untrained, unarmed and unarmored — put themselves and the general public at risk when they move their cash and products between their businesses and storage facilities.  Blue Line Protection Group minimizes the risk of felony criminal activity and creates a secure retail experience by protecting businesses on-site and securing their assets on the road.

Personnel

To ensure the safety of the general public and our lawful clientele, we need the best people on our team.  Blue Line Protection Group honors America’s veterans and their service to our country, and we look to ex-military and former law enforcement professionals to fill our ranks and become the first line of defense for our clients.  We continually train our staff in firearms use, emergency procedures and critical incident response tactics, ensuring that our security expertise remains the top in the industry.  Our clients deserve the best in asset protection, and we give it to them.

Education

Ensuring a safe, responsible and legitimate lawful retail industry involves more than just providing security services to businesses.  Blue Line Protection Group works side-by-side with retail establishments and helps them remain compliant with all pertinent laws.  We also provide crime prevention training to mitigate potential threats, and we assist business owners by proposing cost-cutting ideas and methods pertaining to product logistics and cash management that help their establishments operate more efficiently.  We believe that informed, responsible business owners enhance the retail experience for their customers and present fewer problems for industry regulators.

Communication

Building an industry from the ground up takes time and effort; building a secure, legitimate and responsible industry takes much more.  Blue Line Protection Group is on the front lines of lawful, cash-based retail establishments, and we realize that it’s in everybody’s best interest to help establish responsible and accountable business models and methods of operation.  We do this by working closely with industry leaders and state and federal government representatives, defining potential problems and establishing procedures to ensure that retail establishments remain in compliance with government regulators.  Communication between all interested parties is the key to ensure a healthy and responsible new industry.

As of November 14, 2014 we were providing a variety of armed protection, armored transportation, equipment leasing and federal compliance services to 55 locations involved in the regulated marijuana business.

Results of Operations

Due to the recent addition of new business operations and service lines, comparisons of operating results between the comparable periods ended September 30, 2014 and 2013 may not be materially reflective of our continuing and future operations.  Prior to January 1, 2014, our results of operations were immaterial.  As such, no comparison data will be presented in this management’s discussion regarding the three- and nine-month periods ended September 30, 2013.

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Revenue

We only recently began to generate sales from our wholly-owned Colorado subsidiary, Blue Line Inc., a provider of protection, compliance and financial services to the lawful cannabis industry.  We do not grow, test or dispense cannabis products.  We provide banking compliance, asset logistics, armed and armored escorts, security training and license compliance verification.  In general, we primarily target businesses involved in the growing and dispensing of cannabis for both medical and recreational uses, in jurisdictions were such is legal.

In the normal course of our business, the bulk of our sales are paid and rendered either immediately or on a monthly basis.  These sales are recognized as revenue at the time an invoice in generated and delivered to the client.  To date, we have no long-term, prepaid or guaranteed contracts.  

During the quarter ended September 30, 2014, we generated sales of $268,763 from our Blue Line Inc. operations.  During the quarter ended September 30, 2014, costs of sales totaled $261,713.  Costs of sales consist primarily of labor and fuel costs directly attributable to the provision of our services to clients.  As we continue to grow our core business, we expect labor and fuel costs to increase, at a minimum, proportionate to any increase we experience in revenues.  After accounting for costs of sales, we realized a gross profit of $7,050, during the three-months ended September 30, 2014.

In the nine-month period ended September 30, 2014, we generated sales of $556,756 from our Blue Line Inc. operations.  After considering costs of sales in the amount of $488,113, we realized a gross profit of $68,643, during the nine-months ended September 30, 2014.

We are actively engaged in expanding our presence into new jurisdictions and growing our service portfolio.  Our financial compliance packages are structured to take advantage of our core competencies, while vertically integrating higher gross margin service lines.  In the quarter ended September 30, 2014, we have begun to establish bases of operations and joint ventures in the states of Alaska, California, Illinois, Nevada, Oregon and Washington, as well as the District of Columbia.  Management is hopeful that these states will be accretive to earnings during the first quarter of fiscal 2015, although there can be no guarantee of such.

Costs and Operating Expenses

For the three- and nine-months ended September 30, 2014, the primary components of our operating expenses were, as follows:

Advertising.  During the three- and nine-months ended September 30, 2014, we recognized $57,073 and $179,885 in advertising expense, respectively, related primarily to public- and media-relations efforts.  We are a small company and expect to continue to invest in advertising and marketing to increase brand awareness.  

Depreciation.  Depreciation expense related to our furniture, equipment and armored vehicles were $9,145 and $17,485 during the three- and nine-months ended September 30, 2014, respectively.  Depreciation is directly correlated to capital expenditures.  As we seek to expand our geographic reach and service portfolio, we expect capital expenditures to increase, and, accordingly, expect depreciation expense to increase.

Executive Compensation.  Executive compensation paid to our corporate officers and directors was $175,374 during the quarter ended September 30, 2014.  In the nine-months ended September 30, 2014, executive compensation was $278,782, related primarily to the expensing of stock options granted to employees during the three- and nine-months ended September 30, 2014.  In order to preserve capital, while being able to attract and retain key executives and employees, we plan to continue to issue stock-based compensation in lieu of cash for the foreseeable future.  

General and Administrative.  In the course of our operations, we incur general and administrative expenses, which are essentially the cost of doing business, and encompass, without limitation, the following: business and operating licenses; taxes; general office expenses and supplies, such as postage, supplies and printing; repairs and maintenance; bank charges; occupancy costs; and other miscellaneous expenditures not otherwise classified.  During the three-months ended September 30, 2014, general and administrative expenses were $298,332.  In the nine-month period ended September 30, 2014, general and administrative expenses were $530,667.  We expect general and administrative expenses to increase in line with growth in our operations.  

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Professional Fees. During the three- and nine-month periods ended September 30, 2014, we incurred $109,900 and $1,145,538 in professional fees, respectively.  Approximately $938,000, or nearly 93%, of professional fees recognized is attributable to an investment banking agreement we entered into during the three-months ended September 30, 2014, for which we issued 1,400,000 shares of our common stock, in lieu of cash, at a fair market value of $0.67 per share.  We also expect amounts paid for legal representation and consulting expenses to increase substantially as we expand our operations into additional jurisdictions, which we believe will have an adverse effect on our operating results for the foreseeable future.  

Salaries and Wages.  The bulk of our salaries and wages expense is attributable to administrative, management and other salaried personnel.  Salaries and wages paid during the quarter ended September 30, 2014 was $111,624.  In the nine-month period ended September 30, 2014, salaries and wages amounted to $352,832.  Our ability to grow is tied directly to our ability to attract, hire and retain quality employees.  We expect our staffing levels to fluctuate substantially from month-to-month; therefore, it is difficult to forecast changes in salaries and wages from period to period.

Interest Income

During the quarter ended September 30, 2014, we originated short-term, fully-collateralized loans to existing, recurring clients.  We realized interest income of $2,382 and $3,620 during the three- and nine-months ended September 30, 2014, respectively, attributable to our lending activities.  As of September 30, 2014, we had aggregate notes receivable outstanding of $50,000.

Net Loss

Our net loss for the three-months ended September 30, 2014 was $752,016.  During the nine-months ended September 30, 2014, our net loss was $2,432,926.  We expect to continue to incur net losses for the foreseeable future and cannot assure you when we will be able to mitigate our losses or begin to achieve profitability. Our management believes that expansion of our operations are likely to continue to adversely affect our operating results and will lead to net losses for at least the next 12 months of operations.

Liquidity and Capital Resources

The following table provides summary financial information as of September 30, 2014 and for the nine-months ended September 30, 2014.

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Operating Activities.  Net cash used in operating activities was $313,833 for the nine-months ended September 30, 2014, the bulk of which was primarily attributable to expenditures related to our entry into the market for protection, compliance and financial services catering to the lawful cannabis industry.  Our management expects to continue to experience net cash outflows related to operating activities for at least the next fiscal quarter, related primarily to continuing operations, the introduction of new service offerings and expansion into new geographic markets.  

Investing Activities.  During the nine-months ended September 30, 2014, cash used in investing activities was $1,342,497.  We purchased $165,784 of furniture, equipment and armored vehicles for use in our operations.  We also provided $50,000 in short-term secured notes receivable.  Additionally, during the nine-months ended September 30, 2014 we purchased a commercial building for a total purchase price of $750,000, for which we paid a down payment of $75,000 and financed the remaining $675,000 in the form of a promissory note.  Through September 30, 2014, approximately $376,713 in capital improvements were made to the property.  The expansion into additional geographic territories is expected to require investment in equipment and vehicles, although the cost of such will vary materially and cannot be readily estimated by management.

Financing Activities.  To date, we have financed our operations through the issuance of stock and debt securities.  Net cash provided by financing activities for the nine-months ended September 30, 2014 was $1,729,714.  We obtained financing in the form of loans totaling $166,008, of which $25,000 was repaid in cash and $125,000 was repaid using shares of our common stock in lieu of cash, leaving a balance due as of September 30, 2014 of $16,008.  Related parties provided $293,138 of financing, of which $25,000 was repaid during the period. In addition to issuing debt securities, we received total cash proceeds of $1,313,462 for sales of our common stock.  We expect to use our cash to invest in our core businesses.

Changes in Cash. During the nine -months ended September 30, 2013, we experienced a net increase in cash on hand of $73,384.  As of September 30, 2014, we had $76,228 of cash on hand.

Factors Affecting Future Growth

We are a small company with very little historical data upon which to evaluate our future prospects.  However, we are actively engaged in the expansion of our current revenue streams, as well as exploring entry into new and developing markets.  We are experiencing significant changes to our corporate and operational structures and have been expanding our base of employees.  Over the next six months, we expect the number of full- and part-time employees to fluctuate substantially, though we are unable to predict the amount of such fluctuations.  Additionally, there can be no assurance that our continuing efforts will lead to profitability.  

We expect to require significant capital to continue to expand our operations and to complete the improvements to our office building, which will be a training and high-security vault facility, and the purchase of capital equipment.  Without sufficient cash flow from operations we will require additional cash resources, including the sale of equity or debt securities, to meet our planned capital expenditures and working capital requirements for the next 12 months.  The sale of additional equity securities will result in dilution to our stockholders.  The incurrence of indebtedness will result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations or modify our plans to grow the business.  Financing may not be available in amounts or on terms acceptable to us, if at all.  Any failure by us to raise additional funds on terms favorable to us, or at all, will limit our ability to expand our business operations and could harm our overall business prospects.

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There are no known trends, events or uncertainties that have had or that are reasonably expected to have a material impact on our revenues from continuing operations.  However, we may not adequately encapsulate unforeseen economic or industry specific factors that may be beyond our control.  These external forces may restrict growth and advertising spending by our clients, which could, in turn, adversely affect our operations.

We currently rent an approximately 2,000 square foot office at a rate of approximately $1,400 per month.  This lease is currently on a month-to-month basis and is cancellable at any time with prior written notice by either party.  

We currently do not own any significant plant or equipment that we would seek to sell in the near future.  

We do not have any firm commitments from any person to provide us with any additional capital.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and related notes. Our significant accounting policies are described in Note 2 to our consolidated financial statements included in our Annual Report on Form 10- K for the year ended December 31, 2013.  Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.

Management considers the following policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.

Principles of consolidation.  For the six months ended June 30, 2014, the consolidated financial statements include the accounts of Blue Line Protection Group, Inc. (a Nevada corporation formerly known as The Engraving Masters, Inc.), Blue Line Colorado, BLPG, Inc. (a Nevada corporation) and Blue Line Protection Group (Washington), Inc. (a Washington corporation).  All significant intercompany balances and transactions have been eliminated.   BLPG, Blue Line Colorado, Blue Line Nevada and Blue Line Washington are collectively referred herein to as the “Company.”

Accounts receivable.  Accounts receivable are stated at the amount we expect to collect from outstanding balances and do not bear interest.  We provide for probable uncollectible amounts through an allowance for doubtful accounts, if an allowance is deemed necessary.  The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future.  On a periodic basis, management evaluates its accounts receivable and determines the requirement for an allowance for doubtful accounts based on its assessment of the current and collectible status of individual accounts with past due balances over 90 days.  Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.

Notes receivable.  Notes receivable are measured at historical cost and reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans.  Interest income on notes receivable is recognized using the interest method.  Interest income on impaired loans is recognized as cash is collected or on a cost-recovery basis.

Property and equipment.  Property and equipment is recorded at cost and capitalized from the initial date of service.  Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred.  When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period.  Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes.  We use other depreciation methods (generally accelerated) for tax purposes where appropriate.  The estimated useful lives for significant property and equipment categories are as follows:

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The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.  In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets.  The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors.  Based on this assessment there was no impairment as September 30, 2014 and 2013.  Depreciation expense for the nine months ended September 30, 2014 and 2013 totaled $17,485 and $0, respectively.

Revenue recognition.  We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of its fees is probable.

Sales related to long-term contracts for services (such as programming, website development and maintenance) extending over several years are accounted for under the percentage-of-completion method of accounting.  Sales and earnings under these contracts are recorded based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method based budgeted milestones or tasks as designated per each contract. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable.

For all other sales of product or services we recognize revenues based on the terms of the customer agreement.  The customer agreement takes the form of either a contract or a customer purchase order and each provides information with respect to the product or service being sold and the sales price.  If the customer agreement does not have specific delivery or customer acceptance terms, revenue is recognized on the date of the customer agreement, invoice or purchase order.

Stock-based compensation.  We record stock based compensation in accordance with the guidance in ASC Topic 505 and 718, which requires us to recognize expenses related to the fair value of our employee stock option awards.  This eliminates accounting for share-based compensation transactions using the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method.  We recognize the cost of all share-based awards on a graded vesting basis over the vesting period of the award.

We account for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosure About Market Risks

This item is not required for smaller reporting companies.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms.  Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.  We evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. As a result of this evaluation, management concluded that our disclosure controls and procedures were ineffective for the period ended September 30, 2014 due to the following:

Lack of Functioning Audit Committee:  We do not have an Audit Committee; our board of directors currently acts as our Audit Committee.  We do not have an independent director and out current director is not considered a “Financial Expert,” within the meaning of Section 407 of the Sarbanes-Oxley Act.

Changes in internal controls over financial reporting  

There were no changes in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any material legal proceedings.

Item 1A. Risk Factors

Risks Related to Our Business

Federal regulation and enforcement may adversely affect the implementation of medical marijuana laws and regulations may negatively impact our revenues and profits.

As of November 14, 2014, 23 states and the District of Columbia allow its citizens to use marijuana for medicinal purposes.  Four states and Washington D.C. have legalized recreational marijuana use, as well.  Additionally, voters in the states of Colorado and Washington approved ballot measures in November 2013 to legalize cannabis for adult use.  The state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. The Obama administration has effectively stated that it is not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana.  However, there is no guarantee that the administration will not change its stated policy regarding the low-priority enforcement of federal laws.  Additionally, any new administration that follows could change this policy and decide to enforce the federal laws strongly.  Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us and its shareholders.  While we do not intend to harvest, distribute or sell cannabis, we may be irreparably harmed by a change in enforcement by the Federal or state governments.

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Marijuana remains illegal under federal law and we may be considered an accessory to the sale and distribution of it.

Marijuana remains illegal under federal law.  It is a schedule-I controlled substance.  Even in those jurisdictions in which the use of medical marijuana has been legalized at the state level, its prescription is a violation of federal law.  The United States Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Coop. and Gonzales v. Raich that it is the federal government that has the right to regulate and criminalize cannabis, even for medical purposes.  Therefore, federal law criminalizing the use of marijuana trumps state laws that legalize its use for medicinal purposes.  At present, the states are standing tall against the federal government, maintaining existing laws and passing new ones in this area.  This may be because the Obama administration has made a policy decision to allow states to implement these laws and not prosecute anyone operating in accordance with applicable state law.  However, we face another presidential election cycle in 2016, and a new administration could introduce a less favorable policy.  A change in the federal attitude towards enforcement could cripple the industry. While we are not insulated from economic risk if such a change were to occur, we believe that by virtue of the fact that we do not market, sell, or produce marijuana or marijuana related products, we and our investors should be insulated from federal prosecution or harassment.  However, the growers and sellers of medical marijuana are our primary customers, and if this industry were unable to operate, we would lose substantially all of our potential clients, which would have a negative impact on our business, operations and financial condition.

Laws and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our proposed operations.

Local, state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter our business plan.  In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations.  In addition, it is possible that regulations may be enacted in the future that will be directly applicable to our proposed business.  We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.  

Any change in the unwillingness of FDIC-insured banks to accept deposits from customers could harm our proposed operations.

As discussed above, the sale and use of marijuana is illegal under federal law.  There is a compelling argument that banks cannot accept for deposit funds from the drug trade and therefore cannot do business with our clients that traffic in marijuana, and clinic operators often have trouble finding a bank willing to accept their business.  The inability of potential clients in our target market to open accounts and otherwise use the service of banks provides the distinct opportunity for our services to exist.  However, U.S. Rep. Jared Polis (D-CO) has stated he will seek an amendment to banking regulations and laws in order to allow banks to transact business with state-authorized medical marijuana businesses.  In the event his legislation is successful, that banks decide to do business with medical marijuana retailers, or that state and federal banking regulators remove current prohibitions on banks handling funds generated from an activity that is illegal under federal law, our operations could be adversely affected.

We have a limited operating history and may not succeed.

We have a limited operating history and may not succeed.  We are subject to all risks inherent in a developing business enterprise.  Our likelihood of continued success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with offering services to a relatively new and emerging industry and the competitive and regulatory environment in which we operate.  You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages.  For example, unanticipated expenses, problems, and technical difficulties may occur and they may result in material delays in the operation of our business, in particular with respect to our services.  We may not successfully address these risks and uncertainties or successfully implement our operating strategies.  If we fail to do so, it could materially harm our business to the point of having to cease operations and could impair the value of our common stock to the point investors may lose their entire investment.   

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Pressures from competitors with more resources may limit our market share, profitability, and growth.

We face aggressive competition from numerous and varied competitors in all of our markets, making it difficult to maintain market share, remain profitable, and grow. Even if we are able to maintain or increase our market share for a particular service, revenue or profitability could decline due to pricing pressures or increased competition.

Our competitors may be able to more quickly develop or adapt to new or emerging technologies, better respond to changes in customer requirements or preferences, or devote greater resources to the development, promotion, and sale of their services.  In addition, we may face competition from solutions developed internally by our customers. To the extent we cannot compete effectively, our market share and, therefore, results of operations, could be materially adversely affected.

Our internal controls may be inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Our internal controls may be inadequate or ineffective, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public. Investors relying upon this misinformation may make an uninformed investment decision.

We are an “emerging growth company” under the JOBS Act of 2012, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards.  As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates.

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We will remain an “emerging growth company” for up to five years, although we will lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common stock that is held by non-affiliates exceeds $700 million.”

Even if we no longer qualify as an “emerging growth company”, we may still be subject to reduced reporting requirements so long as we are considered a “Smaller Reporting Company.”

Many of the exemptions available for emerging growth companies are also available to smaller reporting companies like us that have less than $75 million of worldwide common equity held by non-affiliates.  So, although we may no longer qualify as an emerging growth company, we may still be subject to reduced reporting requirements.

Our auditors have substantial doubt about our ability to continue as a going concern.

Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our auditor’s report reflects that our ability to continue as a going concern is dependent upon our ability to raise additional capital from the sale of common stock and, ultimately, the achievement of significant operating revenues. If we are unable to continue as a going concern, our stockholders will lose their investment.  We will be required to seek additional capital to fund future growth and expansion. No assurance can be given that such financing will be available or, if available, that it will be on commercially favorable terms. Moreover, favorable financing may be dilutive to our stockholders

The application of the “penny stock” rules to our Common Stock could limit the trading and liquidity of the Common Stock, adversely affect the market price of our Common Stock and increase your transaction costs to sell those shares.

As long as the trading price of our Common Stock is below $5.00 per share, the open-market trading of our Common Stock will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a “penny stock,” of a disclosure schedule explaining the “penny stock” market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our Common Stock, reducing the liquidity of an investment in our Common Stock and increasing the transaction costs for sales and purchases of our Common Stock as compared to other securities.

Our operating results may fluctuate significantly, and these fluctuations may cause our Common Stock price to fall.

Our quarterly operating results may fluctuate significantly in the future due to a variety of factors that could affect our revenues or our expenses in any particular quarter. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance.

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

On March 1, 2014, in connection with the employment of an officer and director, we issued options to purchase 4,806,900 shares of our common stock at an exercise price of $0.14 per share.  The options vest in three annual installments, with the first portion immediately vested.  The options carry a life of three years.  This transaction involved no general solicitation and was a private transaction between an issuer and an executive officer. Thus, we believe that the issuance of the stock options is exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.  

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Through March 27, 2014, we sold an aggregate of 13,068,034 shares of its common stock for gross cash proceeds of $1,213,462.  These sales of stock did not involve any public offering, general advertising or solicitation.  At the time of the issuance, the purchasers had fair access to and was in possession of all available material information about our company.  Additionally, the purchasers represented their intent to acquire securities for their own account and not with a view to further distribute the shares.  The shares bear a restrictive transfer legend.  On the basis of these facts, we claim that these issuances of stock qualifies for the exemption from registration contained in Rule 506, promulgated under Regulation D of the Securities Act of 1933, for sales of securities by an issuer to accredited investors, not involving a public offering.  

On March 27, 2014, we purchased a vehicle from a non-affiliated entity with 323,078 shares of common stock in lieu of cash.  The value of this transaction was $30,000.  This sale of stock did not involve any public offering, general advertising or solicitation.  At the time of the issuance, the purchaser had fair access to and was in possession of all available material information about our company.  Additionally, the purchaser represented their intent to acquire securities for its own account and not with a view to further distribute the shares.  The shares bear a restrictive transfer legend.  On the basis of these facts, we claim that this issuance of stock qualifies for the exemption from registration contained in Rule 506, promulgated under Regulation D of the Securities Act of 1933, for sales of securities by an issuer to an accredited investor, not involving a public offering.  

On April 1, 2014, we issued stock options to an employee to purchase 300,000 shares of our common stock at an exercise price of $0.71 per share.  The options vest in three annual installments, with the first portion immediately vested.  The options carry a life of three years.  This transaction involved no general solicitation and was a private transaction between an issuer and an employee.  Thus, we believe that the issuance of the stock options is exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.  

On April 8, 2014, we issued 1,076,923 shares of common stock for the conversion of a promissory note in the total amount of $100,000.  

Also on April 8, 2014, we issued 269,231 shares of common stock for the conversion of a promissory note in the total amount of $25,000.

On May 20, 2014, we issued 200,000 shares of common stock to a non-affiliated entity for services to be rendered, with a fair market value of $120,000.  

On June 11, 2014, we were obligated to issue 1,400,000 shares of our common stock to a non-affiliated entity pursuant to an investment banking agreement, with a fair market value of $938,000 on the date of the agreement.  As of June 30, 2014, certificates representing the shares were not issued and are considered owed as a common stock payable.

On September 15, 2014, the Company sold 1,562,500 shares of its common stock for $500,000.  As of September 30, 2014, the Company received $100,000 in payment of the shares and recorded subscriptions receivable for the remaining balance of $400,000.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

On November 12, 2014, our Board of Directors approved an employee 2014-2015 Stock Incentive Plan.  A copy of the Plan is attached to this Quarterly Report.  

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Item 6. Exhibits

*  Incorporated by reference herein filed as exhibits to the Company’s Registration Statement on Form 10 previously filed with the SEC on November 28, 2007, and subsequent amendments made thereto.

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SIGNATURES

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

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