Blue Line Protection Group, Inc. - Quarter Report: 2015 June (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, 2014, Annual Report on Form 10-K previously filed with the Commission on April 15, 2015.

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Blue Line Protection Group, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

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

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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, 2014 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

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.

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 incurred a net loss of ($1,022,015) during the six months ended June 30, 2015, and had negative working capital at June 30, 2015.  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 - 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.  During the six months ended June 30, 2015 and 2014, interest income earned was $2,911 and $1,238, respectively.  As of June 30, 2015, the principal balance of the loan is $16,434 and accrued interest thereupon was $227.

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 5 - Fixed assets

Fixed assets consisted of the following at:

Depreciation expenses for the six months ended June 30, 2015 and 2014 were $20,795 and $8,340, 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 June 30, 2015, approximately $348,553 in capital improvements have been made to the property.  As of June 30, 2015, the Company has not yet placed the property into service and, accordingly, no depreciation expense has been recorded.

Note 6 - Debt and interest expense

Through June 30, 2015, 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.  Beginning January 1, 2015, the Company began accruing implied interest on the unpaid principal balance at a rate of 6% per annum.  As of June 30, 2015 and 2014, accrued interest payable was $59 and $0, respectively.  During the three month periods ended June 30, 2015 and 2014, interest expense was $29 and $0, respectively.  As of June 30, 2015, the principal balance owed on this loan is $2,000.

On February 6, 2015, the Company borrowed $50,000 in cash from one non-affiliated person.  The loan was due and payable on April 6, 2015 and bears interest at a rate of 10% per annum.  As of June 30, 2015 and 2014, accrued interest payable was $1,973 and $0, respectively.  During the three month periods ended June 30, 2015 and 2014, interest expense was $1,247 and $0, respectively.  As of June 30, 2015, the principal balance owed on this loan is $50,000.  In connection with the note, the Company is obligated to issue 100,000 shares of its common stock to the holder, for which a discount of $14,286 is attributed to the note, which was amortized over its life and recorded as interest expense.  As of June 30, 2015 and 2014, $14,286 of the discount has been amortized and recorded as interest expense, leaving a balance of $0 in discounts related to this note.  

On April 17, 2015, the Company borrowed $25,000 in cash from one non-affiliated person.  The loan was due and payable on May 1, 2015 and bears interest at a rate of 6% per annum.  The note is past due and is subject to default interest of an additional 5% per month.  As of June 30, 2015 and 2014, accrued interest payable was $510 and $0, respectively.  During the three month periods ended June 30, 2015 and 2014, interest expense was $510 and $0, respectively.  As of June 30, 2015, the principal balance owed on this loan is $25,000.  

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 7 - Notes payable - Related Party

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.  The Company is accruing implied interest on the unpaid principal balance at a rate of 6% per annum.  As of June 30, 2015 and 2014, accrued interest payable was $2,904 and $0, respectively.  During the three month periods ended June 30, 2015 and 2014, interest expense was $1,468 and $0, respectively.  As of June 30, 2015, the principal balance owed on this loan is $98,150.

On March 5, 2015, the Company borrowed $30,000 from an entity materially controlled by a shareholder of the Company.  The loan is due and payable on demand and bears no interest.  The Company is accruing implied interest on the unpaid principal balance at a rate of 6% per annum.  As of June 30, 2015 and 2014, accrued interest payable was $681 and $0, respectively.  During the three month periods ended June 30, 2015 and 2014, interest expense was $449 and $0, respectively.  As of June 30, 2015, the principal balance owed on this loan is $30,000.

Through March 31, 2015, a shareholder and former employee loaned the Company an aggregate of $286,446, 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 $231,825 and through June 30, 2015, the principal balance owed on this loan is $54,621.   The Company is accruing implied interest on the unpaid principal balance at a rate of 6% per annum.  As of June 30, 2015 and 2014, accrued interest payable was $1,616 and $0, respectively.  During the three month periods ended June 30, 2015 and 2014, interest expense was $817 and $0, respectively.

On June 25, 2015, the Company borrowed $20,000 from a former officer, director and shareholder of the Company.  The loan is due and payable on demand and bears no interest.  As of June 30, 2015, the principal balance owed on this loan is $20,000.  

Through June 30, 2015, the Company borrowed $44,000 from an officer and shareholder of the Company.  The loan is due and payable on demand and bears no interest.  The Company has repaid $43,000 and as of June 30, 2015, the principal balance owed on this loan is $1,000.  

Note 8 - Long Term Notes Payable

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 June 30, 2015, the principal balance is $675,000.  During the three months ended June 30, 2015 and 2014 and a total of $8,438 and $0 in interest payments have been made.

On November 21, 2014, the Company purchased a vehicle for a purchase price of $20,827, net of discounts.  The Company financed the entire amount of $20,827 at an interest rate of 2.42% for five years, with a maturity date of December 5, 2019.  As of June 30, 2015, the total principal balance of the note is $18,534, of which $14,799 is considered a long-term liability and the current portion of $3,735 is considered a current liability.

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 9 - Stockholders’ equity and share-based compensation

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.  As of June 30, 2015, the Company had 126,575,282 shares of common stock issued and outstanding and no shares of preferred stock issued or outstanding.

On March 16, 2015, the Company sold 400,000 shares of its common stock for gross cash proceeds of $50,000 to a non-related entity.

Restricted Stock Units

The Company measures all employee share-based payment awards using a fair-value method.  The Company has a policy of issuing new shares to satisfy stock option exercises and issuance of stock awards.  A summary of the Company’s Restricted Stock Unit (RSU) activity and related information for 2015 and 2014, is as follows:

On April 24, 2015, the Company issued 1,000,000 shares of its common stock as Restricted Stock Units to a director of a subsidiary company as compensation. The fair market value of the common stock on the date of issuance was $0.17 per share.  The first portion of 25%, or 250,000 shares, vested immediately upon issuance.  The remaining 750,000 shares vest in equal performance-based installments.  The Company recognized compensation expense related to this issuance of $42,500 during the three-month period ended June 30, 2015.

On May 1, 2015, the Company issued an aggregate of 1,550,000 shares of its common stock as Restricted Stock Units to employees as incentive compensation.  The fair market value of the common stock on the date of issuance was $0.16 per share.  The RSUs vest in three equal annual installments, with the first portion of 602,777 shares immediately vested, upon which the Company recognized compensation expense in the amount of $13,778 during the three-month period ended June 30, 2015.

On May 1, 2015, the Company issued 500,000 shares of its common stock as Restricted Stock Units to an employee as incentive compensation.  The fair market value of the common stock on the date of issuance was $0.16 per share. The shares were vested immediately upon issuance and recognized compensation expense in the amount of $80,000 during the three-month period ended June 30, 2015.

On May 1, 2015, the Company issued 2,000,000 shares of its common stock as Restricted Stock Units to an employee as incentive compensation for performance.  The fair market value of the common stock on the date of issuance was $0.16 per share.  As of June 30, 2015, the shares were not issued and are considered to be a common stock payable in the amount of $320,000.  The Company recognized compensation expense in the amount of $320,000 during the three-month period ended June 30, 2015.

Total stock-based compensation expense in connection with restricted stock units granted to employees recognized in the consolidated statement of operations for the six-month periods ended June 30, 2015 and 2014 was $456,278 and $0, respectively.

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 9 - Stockholders’ equity and share-based compensation (continued)

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, which requires the input of certain highly subjective assumptions including expected term, risk free interest rate, stock price volatility and dividend yield.  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.  Expected term represents the estimated time from the date of the grant until the date of exercise and is based on the simplified method provided in the Securities Exchange Commission’s Staff Accounting Bulletin No. 107, which calculates the expected term as the midpoint between the vesting date and the end of the contractual term of the option.  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 underlying assumptions used in our Black-Scholes pricing model for these options include:

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

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

The following tables summarize information about stock options outstanding and exercisable at June 30, 2015:

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Blue Line Protection Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 9 - Stockholders’ equity and share-based compensation (continued)

Total stock-based compensation expense in connection with options granted to employees recognized in the consolidated statement of operations for the six-month periods ended June 30, 2015 and 2014 was $206,344 and $64,005, respectively.

We have employment agreements, whereby certain employees will receive incentive stock options to purchase the common stock of the Company if performance milestones are achieved.  Such option compensation will be earned for any fiscal year only if employee remains employed on the last day of such year.  The maximum aggregate amount of options that may be issued is 550,000 per fiscal year.  The exercise price of any options issued to any employee shall be equal to the closing trading price of the Company’s stock on the last business day of the recently completed fiscal year in which the options were earned.  All options granted shall (i) have a three-year term from the date of issuance and (ii) vest immediately upon issuance.

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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.

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.

Our services cover the following categories:

Banking Compliance

The banking system in the U.S. is, in most states, federally mandated.  Possession or distribution of marijuana violates federal law, and banks that provide support for those activities face the risk of prosecution and assorted sanctions.  Currently, almost all payments for the sales of cannabis are made in cash, due the inability of sellers to obtain merchant processing accounts.  As a result, processing money from marijuana sales puts federally insured banks at risk of drug racketeering charges, so they've refused to open accounts for marijuana-related businesses.

Marijuana businesses that can't use banks may have too much cash they can't safely put away, leaving them vulnerable to criminals.  Jurisdictions that allow cannabis sales want a channel to receive taxes.  

In February 2014, The Obama administration gave banks a road map for conducting transactions with cannabis sellers operating within state regulations, so these companies can stash away savings, make payroll and pay taxes like a traditional place of business.  The move was designed to let financial institutions serve such businesses while ensuring that they know their customers' legitimacy and remain obligated to report possible criminal activity.  However, there remains nothing expressly protecting banks that work with state-legal, state-licensed marijuana businesses from prosecution.  We are unaware of any bank, in any state, allowing bank accounts for cannabis-related businesses for fear of prosecution and losing their FDIC status and insurance.

We have created a means for the banks to validate compliance with the Federal Mandate.  Currently only a security company could match the compliance requirements as only we can vertically integrate the source of funds through the Federally required 12 steps, summarised as from grow, to sale, (to those of approved age or license), to purchaser, to funds received, to where the funds were held, to vault, to third party validation, to tax, to profits, to access to the banking system etc.  We are uniquely positioned, through a number of partnership and cooperation agreements, to provide banking solutions to our clients.

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Compliance

Laws concerning business procedures and practices are changing across the nation. It’s hard to keep up with all the changes, and business owners have to balance their day-to-day operations with remaining compliant with and responsive to regulatory agencies.  Blue Line Protection Group provides daily on-site compliance verification to ensure that local business owners are operating lawful and inspection-ready establishments.  Our security experts, trained in crime prevention through environmental design (CPTED) techniques, can provide crucial advice about enhancing the interior and exterior security of your establishment.

Blue Line Protection Group communicates regularly with local and national government representatives to ensure that we remain the top-tier security and protection group in the nation.  Retail establishments aren’t the only ones who have to remain compliant with the pertinent laws - we do, as well.

We have agreed a joint venture with one of the largest PEO HR companies in America out of Phoenix Arizona.  They will handle all payments to employees of the companies we serve.  They will also handle background checks on all employees. BL will receive a percentage of every contract.

With the addition of our compliance module clients can be confident they will not lose their license for some small or large error by their staff that might put their cannabis license in jeopardy.  Their license being, in most instances, their most valuable asset.  We are relieving them of several burdens they are ill suited to comply with.  (Most licensees were formally acting outside the law prior to the recent legislation and have little to no compliance experience).  

Protection

Fundamental to the legal cannabis industry is the protection of product and cash throughout the distribution channel.  Growers ship product from their cultivation facilities to independent laboratories where it is tested for compliance with state-mandated parameters.  From the labs, the product is then delivered to the retail dispensaries, where it is sold to the public.  

Due to the current banking and regulatory environments, payments between each step in the distribution network are made in cash: from the customer back to the grower.  Therefore, these businesses are forced into having to transport bags of money between growers and dispensaries and their own vaults or storage facilities.

The risk of theft of cash and product is present at every stage, even when they are not in transit.  Accordingly, all cannabis businesses require security measures to prevent theft, mitigate risk to employees and maintain regulatory compliance.

We began our security and protection operations in the State of Colorado in February 2014. We offer a fully integrated approach to managing the movement of cannabis and cash from growers through dispensaries via armed and armored transport, money processing, vaulting and related credit.  Money processing services generally include counting, sorting and wrapping currency.  We are focused on encompassing all compliance needs on behalf of our clients, as mandated by the State and Federal authorities for the protection, transport and sale of cannabis.  

Training

Over 90% of our security personnel have established military or police background.  We ensure our employees are prepared to offer clients, their staff and customers a safe and secure environment.  All members of the Company's armored transportation team and security operators are required to undertake our mandatory, rigorous 40-hour introductory compliance and training curriculum.  In addition to internal training, we also offer other businesses, houses of worship and the general public a wide variety of safety, security and personal defense courses and firearms training.  

Accounting and Bookkeeping

The Company was originally established in an effort to physically safeguard cash and product for marijuana businesses.  During March 2015, the Company formed a wholly-owned subsidiary, Blue Line Advisory Services, Inc. (“BLAS”), to provide a complete accounting solution for the legal marijuana industry.  

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Accounting is a critical component of every business, from simply knowing how much money a business has to analyzing financial trends.  For legal marijuana companies, tracking cash from seed to bank is essential from both operational and regulatory compliance standpoints.  Through its staff and network of independent CPA's and professionals, BLAS offers, without limitation, the following services:

·

Bank activity reconciliation

·

Daily point-of-sale system validation

·

Payables and receivables organization and resolution

·

Payroll and time sheet entry, correction and validation

·

Federal and state payroll withholding and unemployment tax deposits and reporting

·

Monthly sales tax deposits and quarterly sales tax returns and state franchise tax deposits

·

Reconciliation of whole-chart accounts

·

Periodic financial reporting

·

Federal and state tax preparation and audit defense

Management’s Discussion and Analysis

Revenue

Our revenues are derived substantially from our armed and armored security services.  In addition, we also provide banking compliance, asset logistics, security training, license compliance verification and accounting and bookkeeping services.  In general, we primarily target businesses involved in the growing and dispensing of cannabis for both medical and recreational uses, in jurisdictions where such is legal.  We do not grow, test or dispense cannabis products.  

In the normal course of our business, the bulk of our sales are paid and rendered either immediately or on a bi-weekly basis.  These sales are recognized as revenue at the time an invoice in generated and delivered to the client.  

During the three months ended June 30, 2015, we generated net revenue of $780,150.  In the three month period ended June 30, 2014, we realized net revenue in the amount of $237,331.  The approximately $542,819, or 229%, increase in revenues year-over-year is primarily attributable to greater market penetration experienced during the most recent quarter ended June 30, 2015.  

In the six month period ended June 30, 2015, net revenue was $1,300,381, compared to $287,993 of net revenue generated during the six months ended June 30, 2014.

Revenue has increased steadily quarter-over-quarter, which management attributes to exceptional customer service from our security and transport teams, word-of-mouth and increased brand awareness.  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.  Management expects to continue to realize increased revenues for the remainder of fiscal year 2015 to due to the following factors:

1.

In March 2015, BLPG, Inc. was granted licenses to conduct security and investigation operations in the State of Nevada. The market has not yet opened for business, thus we are unable to predict when, if at all, we will begin to service and realize revenues in Nevada.  Management has prepared budgets in preparation for entry into the State and is hopeful to establish a presence by the end of 2015.  

2.

Our accounting and bookkeeping division - Blue Line Advisory Services - has begun to contribute incrementally to revenues in most recent quarter ended June 30, 2015.  Nearly all of BLAS revenues were generated from clients in the State of Colorado.  During the three months ended June 30, 2015, we established a base of operations in Nevada and have begun to connect with medical marijuana participants in the region.  We expect BLAS’s contribution to revenues to be more significant during Q3 and Q4 of 2015, especially when Nevada’s nascent medical marijuana industry begins to operate.

Levels of competition, changes in the regulatory and banking environment and our ability to generate new sales leads impact our revenues.  There can be no assurance that we will continue to experience similar, if any, revenue growth in future periods, sustain current revenue levels or that we any of our growth and expansion efforts will come to fruition.  

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Costs of Sales and Gross Profit

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.  Over our relatively short history, cost of labor has fluctuated primarily due to turnover, levels of overtime and our ability to retain sufficient staffing levels to meet client demand.  Our ability to service current clients, as well as grow our core business, is dependent upon our ability to manage labor levels and costs, of which there can be no guarantee.  

Gross margin for the three- and six-months ended June 30, 2015 and 2014 was as follows:

The increase in gross margins during the comparable periods is primarily attributable primarily to a greater employee utilization rate.  Our profit margins have historically fluctuated significantly from quarter-to-quarter, and it is difficult for management to forecast with any certainty.  However, we believe gross margins will trend downward during the third and fourth quarters of 2015 due to a variety of factors, including continued increased competition for clients and qualified employees, as well as potential increases in the cost of fuel.  

Costs and Operating Expenses

For the three- and six-month periods ended June 30, 2015 and 2014, the primary components of our operating expenses were, as follows (all figures in dollars, except for percentage change):

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Advertising.  We significantly reduced our marketing and advertising spend beginning in the third quarter of 2014, and have instead focused primarily on media relationships.  Going forward, management believes advertising expenditures may increase through the remainder of fiscal year 2015; however, there are no specific plans so we cannot predict the extent to which advertising expenses could increase.

Depreciation.  Depreciation expense is directly correlated to capital expenditures, more specifically to our furniture, equipment and armored vehicles.  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 consists of salaries paid to or accrued on behalf of our corporate officers and directors.  The addition of executive management during the third quarter of 2014 contributed to the marked increase in the three- and six-month periods ended June 30, 2015 from the comparable periods ended June 30, 2014.  

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.  Decreases in the second quarter of 2015 compared to the same period in 2014 were primarily attributable to decreases in office expenses and travel related expenditures.  General and administrative expenses were higher during the six months ended June 30, 2015 compared to the same period ended June 30, 2014 due mainly to increases insurance and taxes offsetting other declines.

Professional Fees.  We incur costs related to maintaining our status as a public reporting company, as well as legal fees paid in relation to researching expansion opportunities and protecting our corporate properties.  Declines in professional fees during the three and six months periods ended June 30, 2015 and 2014 are primarily attributable to the cessation of short-term consulting agreements entered into during the second quarter of 2014.  While we expect amounts paid for legal representation and consulting expenses to increase as we expand our operations into additional jurisdiction, we do not foresee expenditures similar to those incurred in 2014.

Salaries and Wages.  Salaries and wages expense is attributable to administrative, management and other salaried personnel not directly involved in the servicing of our clientele.  Our ability to grow is tied directly to our ability to attract, hire and retain quality employees.  We expect our staffing levels to fluctuate slightly from month-to-month.

Stock-based Compensation.  From time to time, we issue incentive stock-based compensation to employees and contractors in the form of stock options and grants.  The significant increases in the three- and six-month periods reported hereby are attributable to the amortization of options and grants issued to our employees and executives.

Other Income and Expenses

In the quarter ended June 30, 2015, we incur interest expense related to interest charged on our Denver, Colorado building and vehicle loans, as well as implied interest on notes payable.  We anticipate continuing to incur interest expense related to capital equipment financing for the foreseeable future.

We continue to realize interest income attributable to our lending short-term, fully-collateralized loans to existing, recurring clients.  We have one remaining note receivable, which is scheduled to be fully-repaid during the third quarter of 2015.

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Net Loss

For the three- and six-month periods ended June 30, 2015 and 2014, our net losses were, as follows (all figures in dollars, except for percentage change):

We expect to continue to incur net losses for at least the next two quarters of 2015 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 tables present selected financial information and statistics as of June 30, 2015 and 2014:

Operating Activities.  The material decrease in net cash used in operating activities during the six-months ended June 30, 2015 compared to the same period in 2014 was primarily attributable to significant cost cutting and cash management efforts.  Management’s goal is to be cash flow neutral from operations by the end of fiscal 2015, of which there can be no guarantee.

Investing Activities.  Cash provided by investing activities in the six month period ended June 30, 2015 is related primarily to the collection of principal on outstanding notes receivable.  In the comparable period ended June 30, 2014, we used cash for capital expenditures, including furniture, equipment and vehicles.  The expansion of our Colorado operations, as well as into additional geographic territories, is expected to require additional capital investment, 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.  The majority of funds was raised in the six months ended June 30, 2014.  We expect to require, and are in the process of seeking, a capital injection to continue to shore up our balance sheet and pursue our expansion plans.  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.  We do not have any firm commitments from any person to provide us with any additional capital.

We have historically been dependent upon our ability, and will continue to attempt, to secure additional equity and/or debt financing.  There are no assurances that we will be successful and without sufficient financing it would be unlikely for us to continue as a going concern.

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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.  We continue to expect the number of full- and part-time employees to fluctuate substantially, though we are unable to predict the amount of such fluctuations.  

Since 2014, we have worked with banks and financial industry professionals to develop a proprietary means for the banking industry to validate compliance with Federal Mandate.  Our management believes that only a security company with the relationships and experience like Blue Line is able to ensure that clients we validate will remain fully compliant with all of the various Cole Memo, FinCEN, banking, Patriot Act and BSA guidelines.  We are able to vertically integrate the source of funds through the Federally required 12 steps, summarised as from grow, to sale, (to those of approved age or license), to purchaser, to funds received, to where the funds were held, to vault, to third party validation, to tax, to profits, to access to the banking system etc.

We began to provide on-site compliance services to ensure that legal marijuana businesses are operating according to local, state and federal guidelines.  Blue Line investigative personnel, using our proprietary systems, produce compliance assessment reports to banks, based on on-site audits and investigations of the businesses, their operation procedures, and customer and product sales tracking methods. Our management expects these compliance services will provide us with a new revenue stream and, in combination with our traditional security and transport services, offer significant value to our clients and partners.

In March 2015, BLPG NV, was granted licenses to provide our suite of protection, transportation and compliance services within the State of Nevada.  Our operations and compliance consultants plan to help Nevada marijuana businesses develop transparent relationships with banks, offering the industry-leading independent, third-party compliance solution to financial institutions that need to comply with federal guidelines, including Cole Memo and FinCEN requirements.  We are working toward establishing operations in Nevada and are hopeful to establish a presence by the end of 2015.  We are unable to predict when, if at all, we will begin to service and realize revenues from security, transport and compliance services in Nevada.  

Also in 2015, we formed Blue Line Advisory Services, a wholly-owned subsidiary, with the goal of providing accounting and bookkeeping services to the legal marijuana industry via our network of employees and independent professionals.  We have established BLAS offices in Colorado and Nevada.  Although BLAS was incrementally accretive to earnings in the second quarter of 2015, BLAS expects to increase its marketing expenditures and hire additional professional staff, which may reduce its net margin in the next two quarters of operations.

There are no other known trends, events or uncertainties that have had or that are reasonably expected to have a material impact on our revenues from continuing operations.  There can be no assurance that our continuing efforts will lead to profitability.  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.

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, 2014.  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.

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Principles of consolidation.  For the periods ended June 30, 2015 and 2014, the consolidated financial statements include the accounts of Blue Line Protection Group, Inc. (formerly The Engraving Masters, Inc.), Blue Line Advisory Services, Inc. (a Nevada corporation; “BLAS”), Blue Line Capital, Inc. (a Colorado corporation; “Blue Line Capital”), Blue Line Protection Group (California), Inc. (a California corporation; “Blue Line California”), Blue Line Colorado, Blue Line Protection Group Illinois, Inc. (an Illinois corporation; “Blue Line Illinois”), BLPG, Inc. (a Nevada corporation; “Blue Line Nevada”), Blue Line Protection Group (Washington), Inc. (a Washington corporation; “Blue Line Washington”).  All significant intercompany balances and transactions have been eliminated.   BLPG and its subsidiaries 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.

Revenue recognition.  As all of our Revenue is generated from service offerings, Revenue recognition is the same for each of our revenue streams. 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.

Cost of Sales.  The Company’s cost of revenue primarily consists of direct labor and other direct contract expenses and other costs attributable to serving the Company’s client base.  Direct labor consists of salary and wages. Other direct contract expenses include costs directly attributable to client engagements, such as costs of hardware and supplies and costs of subcontractors.  

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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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.

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 June 30, 2015, 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

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

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

None.

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

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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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