Blue Line Protection Group, Inc. - Quarter Report: 2016 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from __________________ to _________________

 

Commission file number: 001-35902

 

(Exact name of registrant as specified in its charter)

Nevada	20-5543728
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
5765 Logan St. Denver, CO	80216
(Address of principal executive offices)	(Zip Code)
(800) 844-5576
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by a checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☐		Smaller reporting company	☑
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑ 

As of November 15, 2016, the registrant had 126,348,026 outstanding shares of common stock.

 

 

FORWARD-LOOKING STATEMENTS

 

The information in this report contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, ("the Exchange Act"), which are subject to the "safe harbor" created by those sections. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "should," "could," "predicts," "potential," "continue," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. All forward-looking statements in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors, uncertainties and risks that could affect our future results or operations. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statement set forth in this Form 10-Q. You should carefully consider these risk and uncertainties described and other information contained in the reports we file with or furnish to the SEC before making any investment decision with respect to our securities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART I

 

ITEM 1     FINANCIAL STATEMENTS

BLUE LINE PROTECTION GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
		September 30,				December 31,
		2016				2015
Assets
Current assets:
Cash and equivalents		$	-			$	16,211
Accounts receivable, net			119,770				51,251
Accrued receivables			46,157				73,995
Prepaid expenses and deposits			70,186				20,669
Total current assets			236,113				162,126
Fixed assets:
Machinery and equipment, net			145,057				150,910
Construction in progress			-				1,147,139
Building and building improvements, net			1,568,857				-
Land			60,975				-
Fixed assets of discontinued operations			2,782				2,782
Total fixed assets			1,777,671				1,300,831
Total assets			2,013,784			$	1,462,957
Liabilities and Stockholders' Equity
Current liabilities:
Cash overdraft		$	165,952			$	-
Accounts payable and accrued liabilities			376,885				332,169
Notes payable			373,028				75,000
Notes payable - related parties			385,846				213,347
Convertible notes payable - related parties, net of unamortized discount			500,822				283,385
Current portion of long-term debt			679,137				679,062
Current liabilities of discontinued operations			1,335				1,335
Total current liabilities			2,483,005				1,584,298
Long-term liabilities:
Long-term debt			9,689				12,836
Total long term liabilities			9,689				12,836
Total liabilities			2,492,694				1,597,134
Stockholders' deficit:
Preferred Stock, $0.001 par value, 100,000,000 shares authorized,
20,000,000 and nil shares issued and outstanding as of September 30, 2016 and
December 31, 2015, respectively			20,000				-
Common Stock, $0.001 par value, 1,400,000,000 shares authorized,
126,348,026 and 125,348,026 issued and outstanding as of
September 30, 2016 and December 31, 2015, respectively			126,348				125,348
Common Stock, owed but not issued, 12,923 shares and 12,923 shares
as of September 30, 2016 and December 31, 2015, respectively			13				13
Additional paid-in capital			5,287,537				4,276,291
Accumulated deficit			(5,912,808	)			(4,535,829	)
Total stockholders' deficit			(478,910	)			(134,177	)
Total liabilities and stockholders' deficit			2,013,784			$	1,462,957

 

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

 

 

BLUE LINE PROTECTION GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
		For the three months ended								For the nine months ended
		September 30,								September 30,
		2016				2015				2016				2015
Revenue, net		$	728,238			$	773,484			$	2,099,019			$	2,073,865
Cost of revenue			(620,259	)			(540,576	)			(1,793,254	)			(1,634,608	)
Gross profit			107,979				232,908				305,765				439,257
Expenses:
Advertising			1,933				3,000				9,156				3,314
Depreciation			24,724				10,558				51,105				31,353
General and administrative expenses			403,826				475,016				1,286,468				1,641,088
Total expenses			430,483				488,574				1,346,729				1,675,755
Operating loss			(322,504	)			(255,666	)			(1,040,964	)			(1,236,498	)
Other income (expenses):
Interest expense			(123,254	)			(14,524	)			(336,015	)			(40,019	)
Interest income			-				195				-				3,106
Forgiveness of long term debt			-				5,539				-				582
Total other income (expenses)			(123,254	)			(8,790	)			(336,015	)			(36,331	)
Net loss			(445,758	)			(264,456	)			(1,376,979	)			(1,272,829	)
Deemed dividend on Series A convertible preferred stock			-				-				(114,229	)			-
Net loss attributable to common stockholders		$	(445,758	)		$	(264,456	)		$	(1,491,208	)		$	(1,272,829	)
Net loss per share - basic		$	(0.00	)		$	(0.00	)		$	(0.01	)		$	(0.01	)
Net loss per share - fully-diluted		$	(0.00	)		$	(0.00	)		$	(0.01	)		$	(0.01	)
Weighted average number of
common shares outstanding - basic			126,348,026				126,575,282				126,231,238				125,204,110
Weighted average number of
common shares outstanding - fully diluted			126,348,026				131,299,521				126,231,238				131,833,740

 

 

 

 

 

 

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

 

 

BLUE LINE PROTECTION GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
		For the nine months ended
		September 30,
		2016				2015
Operating activities
Net loss		$	(1,376,979	)		$	(1,272,829	)
Adjustments to reconcile net loss to net cash used by operating activities
Depreciation			51,105				29,833
Stock-based compensation expense			85,006				468,490
Amortization of debt discount			210,406				32,535
Penalty interest			71,684				-
Forgiveness of notes payable			-				(2,000	)
Changes in operating assets and liabilities:
Increase in accounts receivable			(40,681	)			(84,244	)
Increase in deposits and prepaid expenses			(49,517	)			-
Increase in accounts payable and accrued liabilities			19,473				400,980
Decrease in long-term liabilities			-				(2,614	)
Net cash used by operating activities			(1,029,503	)			(429,849	)
Cash flows from investing activities
Receipt of payments from notes receivable			-				46,451
Purchase of fixed assets			(502,702	)			(29,963	)
Net cash provided (used) by investing activities			(502,702	)			16,488
Financing activities
Proceeds from notes payable - related party			307,500				87,425
Repayments from notes payable - related party			(135,000	)			-
Proceeds from convertible note - related party, net of original issue discount			95,000				250,000
Proceeds from notes payable			532,360				75,075
Repayment of notes payable			(309,812	)			(192,425	)
Proceeds from convertible note, net of original issue discount			157,750				-
Repayment of convertible note			(168,000	)			-
Penalty payment			(71,684	)			-
Payments on auto loan			(3,072	)			-
Sale of preferred stock, net of issuance costs			945,000				-
Sale of common stock			-				50,000
Cash overdraft			165,952				-
Net cash provided by financing activities			1,515,994				270,075
Net decrease in cash			(16,211	)			(143,286	)
Cash - beginning			16,211				211,922
Cash - ending		$	-			$	68,636
Supplemental disclosures:
Interest paid		$	27,400			$	-
Non-cash transactions:
Debt discount due to beneficial conversion feature		$	2,240			$	100,551
Interest capitalized as construction in progress		$	25,243			$	-
Forgiveness of accrued salary based on settlement		$	-			$	123,994
Deemed dividend beneficial conversion feature on convertible preferred stock		$	114,229			$	-

 

 

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

 

Blue Line Protection Group, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Note 1 – History and organization of the company

The Company was originally organized on September 11, 2006 (Date of Inception) under the laws of the State of Nevada, as The Engraving Masters, Inc.  The Company was authorized to issue up to 100,000,000 shares of its common stock and 100,000,000 shares of preferred stock, each with a par value of $0.001 per share.

On March 14, 2014, the Company acquired Blue Line Protection Group, Inc., a Colorado corporation formed in February 2014 ("Blue Line Colorado"), as a wholly-owned subsidiary of the Company.  Blue Line Colorado provides protection, compliance and financial services to the lawful cannabis industry.

On May 2, 2014, the Company changed its name from The Engraving Masters, Inc. to Blue Line Protection Group, Inc. ("BLPG")

On May 6, 2014, the Company effected a forward stock split and a pro-rata increase in its authorized common stock on a basis of 14-to-1, whereby each shareholder received 14 newly issued shares of common stock for each 1 share held.  Additionally, the authorized capital of the Company concurrently increased to 1,400,000,000 shares of common stock.  All references to share and per share amounts in the condensed consolidated financial statements and accompanying notes thereto have been retroactively restated to reflect the forward stock split.

The Company provides armed protection, logistics, and compliance services for businesses engaged in the legal cannabis industry.  The Company offers asset logistic services, such as armored transportation service; security services, including shipment protection, money escorts, security monitoring, asset vaulting, VIP and dignitary protection, financial services, such as handling transportation and storage of currency; training; and compliance services.

Note 2 – Basis of presentation

Interim financial statements

The unaudited interim financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein.  It is suggested that these interim financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2015 and notes thereto included in the Company's annual report on Form 10-K.  The Company follows the same accounting policies in the preparation of interim reports.

Results of operations for the interim periods are not indicative of annual results.

 

Reclassification

 

Certain amounts from prior periods have been reclassified to conform to the current period presentation.

 

 

Concentrations

The Company had 5 major customers which generated approximately 63% (23%, 15%, 9%, 9% and 7%) of total revenue in the nine months ended September 30, 2016.

 

The Company had 5 major customers which generated approximately 59% (16%, 15%, 11%, 9% and 8%) of total revenue in the nine months ended September 30, 2015.

 

Note 3 – Going concern

The accompanying financial statements have been prepared assuming the Company will continue as a going concern.  As shown in the accompanying financial statements, the Company has a net loss of $(1,376,979) for the nine months ended September 30, 2016, accumulated deficit of $(5,912,808) and had a working capital deficit of $(2,246,892) as of September 30, 2016. These conditions raise substantial doubt about the Company's ability to continue as a going concern.

In order to continue as a going concern, the Company will need, among other things, additional capital resources.  The Company is significantly dependent upon its ability, and will continue to attempt, to secure additional equity and/or debt financing.    There are no assurances that the Company will be successful and without sufficient financing it would be unlikely for the Company to continue as a going concern.

 

The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. These financial statements do not include any adjustments that might arise from this uncertainty.

 

Note 4 – Contingencies

 

Contingencies

On December 28, 2015 Patrick Deparini, the Company's former CFO resigned. Mr. Deparini purports his resignation was made pursuant to a termination clause for other than cause if he is required to undertake other responsibilities other then set forth in his employment agreement. Mr., Deparini claims through the date of his resignation he is owed a total of $154,000 in unreimbursed compensation, $575 in accrued authorized expenses and the remaining balance of his base salary as defined in the employment agreement in the amount of $179,000. As of December 31, 2015 the Company has accrued a total of $125,575 contingent liabilities. If litigation is commenced the Company will attempt a reasonable out-of-court settlement and if such efforts are not successful, will defend the litigation.

On November 6, 2015 Daniel Sullivan sent a wage claim demand. Mr. Sullivan purports to have had an Independent Contractor Agreement with the Company which provides he is entitled to certain compensation and to be reimbursed for Company expenses. The demand claims unpaid compensation in the amount of $8,055 and unreimbursed expenses in the amount of $154,409. The Company denies the agreement was ever signed. As of December 31, 2015 the Company accrued a total of $88,968 contingent liabilities. If litigation is commenced the Company will attempt a reasonable out-of-court settlement and if such efforts are not successful, will defend the litigation.

   

Mile High Real Estate Group, an entity owned by Mr. Sullivan, sent correspondence stating the Mr. Sullivan and/or Mile High Real Estate loaned the Company either directly or directly to contractors, material suppliers or utilities for operating and building remodeling in the amount of $98,150. Counsel for Mr. Sullivan stated that he was still compiling information. The Company is investigating whether Mr. Sullivan and/or Mile High Real Estate Group ever made the alleged loans. If the alleged loan was actually made, the Company will seek an out-of-court settlement. As of December 31, 2015 the Company accrued a total of $98,150.

 

On April 14, 2016, the Company entered into an agreement with an unrelated third party to provide the Company with investor relations services.  Upon signing the agreement, the Company paid the investor relations consultant $75,000 and agreed to issue the consultant 1,500,000 shares of its restricted common stock.  The agreement requires the Company to pay the consultant an additional $75,000 prior to June 14, 2016. The Company cancelled the agreement and is of the opinion that the shares are not owed to the consultant. As of September 30, 2016 there was no payable recorded.

 

 

 

 

Note 5 – Fixed assets and construction in progress

Machinery and equipment consisted of the following at:

		September 30, 2016				December 31, 2015
Automotive vehicles		$	194,882			$	173,926
Furniture and equipment			53,314				46,068
Fixed assets, total			248,196				219,994
Total : accumulated depreciation			(103,139	)			(69,084	)
Fixed assets, net		$	145,057			$	150,910

  

Total depreciation expenses for the nine months ended September 30, 2016 and 2015 were $51,105 and $31,353, respectively.

On July 15, 2014, the Company purchased a commercial building for a total purchase price of $750,000, for which the Company paid a down payment of $75,000 and financed the remaining $675,000 in the form of a promissory note.  The note bears interest at a rate of 5% per annum on the unpaid principal balance and is due on July 31, 2016.  Interest is paid monthly, in arrears, in the amount of $2,813 beginning August 31, 2014.  Through December 31, 2015, approximately $363,377 in capital improvements and $33,762 of capitalized expenses have been made to the property.  As of September 30, 2016, the Company has completed the construction on the property and it was available and ready for use, accordingly. As of September 30, 2016 and December 31, 2015, the balance of construction in progress was $0 and $1,147,139, respectively. The net book value of the building and improvements was $1,568,857 as of September 30, 2016.

Note 6 – Notes payable

Notes payable to non-related parties

On July 15, 2014, the Company purchased a commercial building for $750,000, for which the Company made a down payment of $75,000 and financed the remaining $675,000 with a promissory note.  The note bears interest at a rate of 5% per annum on the unpaid principal balance and is originally due in full on July 31, 2016.  On June 30, 2016, the Company extended the maturity date to October 31, 2016.  Interest is paid monthly, in arrears, in the amount of $2,813 beginning August 31, 2014.  As of September 30, 2016 and December 31, 2015, the principal balance was $675,000 and a total of $74,609 and $49,292, respectively, in interest payments have been made.

During February 2015, the Company borrowed $50,000 from a non-affiliated person.  The loan is due and payable on demand with interest at 10% per annum. As of September 30, 2016 and December 31, 2015, the principal balance owed on this loan was $50,000 and $50,000, respectively.

During April 2015, the Company borrowed $25,000 from a non-affiliated person.  The loan is due and payable on demand with interest at 6% per year and has a 5% per month penalty upon default. As of September 30, 2016 and December 31, 2015, the principal balance owed on this loan was $25,000 and $25,000, respectively.

On February 23, 2016 the Company signed a Merchant Agreement with a lender. Under the agreement the Company received $193,550 in exchange for rights to all customer receipts until the lender is paid $264,000, which is collected at the rate of $1,397 per business day. The payments were secured by second position rights to all customer receipts until the loan has been paid in full. The Company paid $6,450 in fees in connection with this loan. During the nine months ended September 30, 2016, the Company made $212,318 repayment to the loan. The note was still outstanding as of September 30, 2016 with a balance of $51,682. The Company is amortizing the debt discount of$70,000 over the term of the loan. As of September 30, 2016 the unamortized discount was $13,796.

On January 5, 2016, the Company borrowed $10,000 from a non-affiliated person.  The loan was due and payable on January 5, 2017 and bore interest at 5% per annum. The principal balance owed on this loan at September 30, 2016 was $10,000.

 

 

On April 1, 2016 the Company borrowed $144,000 from an unrelated third party.  The loan bears interest at a rate of 24.25% per year and is due and payable on March 27, 2017. The Company paid $8,640 in fees in connection with this loan. During the nine months ended September 30, 2016, the Company made repayment of $65,113 to the loan. The note was still outstanding as of September 30, 2016 with a balance of $78,887. The Company is amortizing the debt discount of $8,640 over the term of the loan. As of September 30, 2016 the unamortized discount was $4,272.

On August 8, 2016 the Company signed a Merchant Agreement with a lender. Under the agreement we received $100,000 in exchange for rights to all customer receipts until the lender is paid $136,000, which is collected at the rate of $810 per business day. The payments were secured by second position rights to all customer receipts until the loan has been paid in full. The Company paid $2,000 in fees in connection with this loan. During the nine months ended September 30, 2016, the Company made $32,381 to the loan. The note was still outstanding as of September 30, 2016 with a balance of $103,619. The Company is amortizing the debt discount of $38,000 over the term of the loan. As of September 30, 2016 the unamortized discount was $29,430.

On September 21, 2016, the Company borrowed $100,000 from a non-affiliated person.  The loan is due and payable on December 21, 2016 and bears interest at 60% per annum. The principal balance owed on this loan at September 30, 2016 was $100,000. The Company paid $5,000 in fees in connection with this loan which the Company is amortizing as debt issuance costs over the term of the loan. As of September 30, 2016 the unamortized discount was $4,505.

Convertible notes payable to non-related party

In January 2016 the Company borrowed $58,000 from an unrelated third party. The Company paid fees of $3,000 associated with this note which were recognized as a discount to the note.  The Company is amortizing the debt discount of $3,000 over the term of the loan. For the nine months ended September 30, 2016, the Company recognized amortization expenses of $3,000.

 

The loan has a maturity date of November 1, 2016 and bears interest at the rate of 8% per year.  If the loan is not paid when due, any unpaid loan amount will bear interest at 22% per year.  The Lender is entitled, at its option, at any time after July 26, 2016 to convert all or any part of the outstanding and unpaid principal and accrued interest into shares of the Company's common stock at a price per share equal to 58% of the average of the three lowest trading prices for the 10 trading days immediately preceding the conversion date. The Company was funded on February 3, 2016, and the note is not convertible till 180 days after the issuance date, which is August 1, 2016. The Company repaid the loan in full on July 27, 2016 with the premium of $20,300.

In February 2016 the Company borrowed $110,000 from an unrelated third party. The Company paid fees of $7,250 associated with this note which were recognized as a discount to the note. The Company paid $7,250 in fees in connection with this loan. The Company is amortizing the debt discount of $7,250 over the term of the loan. For the nine months ended September 30, 2016, the Company recognized amortization expenses of $7,500.

  

The loan has a maturity date of November 11, 2016 and bears interest at the rate of 10% per year.  If the loan is not paid when due, any unpaid amount will bear interest at 24% per year.  The Lender is entitled, at its option, at any time after August 9, 2016 to convert all or any part of the outstanding and unpaid principal and accrued interest into shares of the Company's common stock at a price per share equal to 50% of the average of the five lowest trading prices for the 25 trading days immediately preceding the conversion date. The Company paid premium of $51,384 to postpone the lender's conversion right to August 25, 2016. The Company repaid the loan in full on August 23, 2016 and there's no outstanding balance as of September 30, 2016.

Note 7 – Notes payable – related parties

On July 31, 2014, the Company borrowed $98,150 from an entity controlled by an officer and shareholder of the Company.  The loan is due and payable on demand and bears no interest.  As of September 30, 2016 and December 31, 2015, the principal balance owed on this loan is $98,150 and $98,150, respectively.

 

As of December 31, 2014, a related party loaned the Company $10,000, in the form of cash and expenses paid on behalf of the Company.  The loan is due and payable on demand and bears no interest.  During the year ended December 31, 2015 the Company borrowed an additional $20,000 and as of September 30, 2016 and December 31, 2015, the principal balance owed on this loan was $30,000 and $30,000, respectively.

 

 

As of December 31, 2014, a related party loaned the Company $180,122, in the form of cash and expenses paid on behalf of the Company.  The loan is due and payable on demand and bears no interest.  The Company repaid $125,500 towards this note during 2015 and as of September 30, 2016 and December 31, 2015; the principal balance owed on this loan was $54,622 and $54,622, respectively.

During 2015, the Company borrowed $43,575 from its former CFO. As of December 31, 2015 $43,000 of the loan had been repaid. The note is non-interest bearing, and due on demand. As of September 30, 2016 and December 31, 2015 the principal amount owed on this loan was $575.

  

During October 2015, the Company borrowed $30,000 from an entity controlled by an officer of the Company. The loan is due and payable on demand and is non-interest bearing. During the nine months ended September 30, 2016, the Company repaid $135,000 and borrowed an additional $135,000 from the related party.  As of September 30, 2016 and December 31, 2015, the principal balance owed on this loan was $30,000 and $30,000, respectively.

On July 7, 2016, the Company borrowed $73,000 from a related party.  The loan was due and payable on July 7, 2017 and bore interest at 5% per annum. The principal balance owed on this loan at September 30, 2016 was $73,000.

On August 8, 2016, the Company entered into, an promissory note  with Hypur Inc., a Nevada Corporation which is a related party pursuant to which the Company to borrow $52,000. The loan was due and payable on August 10, 2017 and bears interest at 18% per annum. The principal balance owed on this loan at September 30, 2016 was $52,000.

On September 20, 2016, the Company borrowed $47,500 from Hypur Inc., which is a related party. The loan is due and payable on December 20, 2016 and bears interest at 18% per annum. The principal balance owed on this loan at September 30, 2016 was $47,500.

Convertible notes payable to related party

 

In July 2015, the Company entered into an arrangement with a related party, whereby the Company could borrow up to $500,000 in Convertible Notes. The Convertible Note bears interest at a rate of 5% per annum and payable quarterly in arrears and matures twelve months from the date of issuance, and is convertible into shares of the Company's common stock at a per share conversion price equal to $0.025. Through December 31, 2015, the Company borrowed a total of $415,000. During the nine month ended September 30, 2016, we borrowed an additional $20,000 from related party convertible notes. As of September 30, 2016 and December 31, 2015, the principal balance owed on this Convertible Note is $435,000 and $415,000, respectively.

   

On September 1, 2016, the Company entered into, an convertible promissory note with Hypur Ventures, L.P., a Delaware limited partnership (the "Hypur Ventures")   which is a related party pursuant to which the Company to borrow $75,000. The loan was due 180 days from the date of issuance and bears interest at 10% per annum. The note is convertible into common stock at a price of $.05 per share. The note is mandatory redeemable into common stock if the price per share is over $.50 per share during a 10 day period. The principal balance owed on this loan at September 30, 2016 was $75,000.

The Company evaluated the convertible note for possible embedded derivatives and concluded that none exist. However, the Company concluded a portion of the note should be allocated to additional paid-in capital as a beneficial conversion feature at the issuance date, since the conversion price on that date was lower than the fair market value of the underlying stock. Resultantly, a discount of $190,040 was attributed to the beneficial conversion feature of the note, which amount is being amortized through the maturity date of the note. As of September 30, 2016 and December 31, 2015, a total of $124,667 and $56,185, respectively has been amortized and recorded as interest expense, leaving a balance of $9,178 and $131,615 in discounts related to the beneficial conversion feature of this note. The carrying amount of the convertible note, net of the unamortized debt discount, was $500,822 and $283,385 as of September 30, 2016 and December 31, 2015, respectively.

Aggregate amortization of debt discounts was $124,677 and $131,615 for the nine months ended September 30, 2016 December 31, 2015, respectively.

 

Note 8 – Long term notes payable

On November 21, 2014, the Company purchased a vehicle for $20,827, net of discounts.  The Company financed the $20,827 at an interest rate of 2.42% for five years, with a maturity date of December 5, 2019.  As of September 30, 2016 and December 31, 2015, the total principal balance of the note is $13,826 and $16,898, respectively, of which $9,689 and $12,836 is considered a long-term liability and $4,136 and $4,062 is considered a current liability.

Note 9 – Stockholders' equity

The Company was originally authorized to issue 100,000,000 shares of common stock and 100,000,000 shares of preferred stock.  On May 6, 2014, the Company effected a forward stock split and a pro-rata increase in its authorized common stock on a basis of 14-to-1, whereby each shareholder received 14 newly issued shares of common stock for each 1 share held.  Additionally, the number of authorized shares increased to 1,400,000,000 shares of common stock.  All references to share and per share amounts in the consolidated financial statements and these notes thereto have been retroactively restated to reflect the forward stock split.

  

On May 3, 2016, the Company entered into, an agreement with Hypur Ventures, L.P., a Delaware limited partnership (the "Hypur Ventures")   which is a related party pursuant to which the Company sold to Hypur Ventures, in a private placement, 10,000,000 shares of the Company's preferred stock and 5,000,000 common stock warrants with a five year term and an exercise price of $0.10, at a purchase price of $0.05 per share for gross proceeds of $500,000.  The shares of Preferred Stock are convertible into shares of the Company's common stock.  The Preferred Stock shall have such other rights, preferences and privileges to be set forth in a certificate of designation to be filed with the Secretary of State. The Company evaluated the convertible preferred stock under FASB ASC 470-20-30 and determined it contained a beneficial conversion feature. The intrinsic value of the beneficial conversion feature was determined to be $114,229. The beneficial conversion feature was fully amortized and recorded as a deemed dividend.

 

Between July and August of 2016 Hypur Ventures purchased an additional 10,000,000 shares of the Company's preferred stock and 5,000,000 common stock warrants with a five year term and an exercise price of $0.10, at a purchase price of $0.05 per share for net proceeds of $445,000, net of legal fees of $55,000.  The shares of Preferred Stock are convertible into shares of the Company's common stock.  The Preferred Stock shall have such other rights, preferences and privileges to be set forth in a certificate of designation to be filed with the Secretary of State. The Company evaluated the convertible preferred stock under FASB ASC 470-20-30 and determined it does not contain a beneficial conversion feature. The intrinsic value of the beneficial conversion feature was determined to be $0.The Preferred Stock is convertible at any time at the election of Hypur Ventures.  The Preferred Stock shall automatically convert to Common Stock if the closing price of the Company's Common Stock equals or exceeds $.50 per share over any consecutive twenty day trading period.  The Preferred Stock terms include a one-time purchase price preference. No preferential dividends apply to the Preferred Stock.  The Preferred Stock attributes include weighted average anti-dilution protection, rights to appoint one director, pre-emptive rights to purchase future offerings of securities by the Company, demand and piggy-back registration rights.

 

The Preferred Stock is convertible at any time at the election of Hypur Ventures.  The Preferred Stock shall automatically convert to Common Stock if the closing price of the Company's Common Stock equals or exceeds $.50 per share over any consecutive twenty day trading period.  The Preferred Stock terms include a one-time purchase price preference. No preferential dividends apply to the Preferred Stock.  The Preferred Stock attributes include weighted average anti-dilution protection, rights to appoint one director, pre-emptive rights to purchase future offerings of securities by the Company, demand and piggy-back registration rights.  

 

The Company has reserved thirty million shares of Common Stock that may be issued upon the conversion and/or exercise of the Preferred Stock and the Warrants.  The Preferred Stock to Hypur Ventures will be subject to the terms and conditions of the Certificate of Designation, as well as further documentation to be drafted in accordance with the terms and conditions agreed upon between the Company and Hypur Ventures. 

In February, the Company entered a consultant agreement for business advisory services. In August 2016 the Company issued 1,000,000 shares of common stock to a consultant for business advisory services valued at $28,000.

 

 

Note 10 – Options

All stock options have an exercise price equal to the fair market value of the common stock on the date of grant. The fair value of each option award is estimated using a Black-Scholes-Merton option valuation model.  The Company has not paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model.  Volatility is an estimate based on the calculated historical volatility of similar entities in industry, in size and in financial leverage, whose share prices are publicly available. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company has no historical experience with which to establish a basis for determining an expected life of these awards. Therefore, the Company only gave consideration to the contractual terms and did not consider the vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures significant to the expected life of the option award.  The Company bases the risk-free interest rate used in the Black-Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term equal to the expected life of the award.

The following is a summary of the Company's stock option activity for the nine months ended September 30, 2016:

		Number Of Shares				Weighted-Average Exercise Price
Outstanding at December 31, 2015			17,256,738			$	0.14
Exercised			-			$	0.00
Cancelled			(380,000	)		$	0.19
Outstanding at September 30, 2016			16,876,738			$	0.14
Options exercisable at December 31, 2015			8,150,896			$	0.19
Options exercisable at September  30, 2016			8,394,229			$	0.20

The following tables summarize information about stock options outstanding and exercisable at September 30, 2016 and December 31, 2015:

 

OPTIONS OUTSTANDING AND EXERCISABLE AT SEPTEMBER 30, 2016
Range of Exercise Prices				Number of Options Outstanding				Weighted-Average Remaining Contractual Life in Years				Weighted- Average Exercise Price				Number Exercisable				Weighted- Average Exercise Price
	$	0.035 – 1.00				16,876,738				3.72	3		$	0.14				11,101,420			$	0.16

 

 

OPTIONS OUTSTANDING AND EXERCISABLE AT DECEMBER 31, 2015
Range of Exercise Prices				Number of Options Outstanding				Weighted-Average Remaining Contractual Life in Years				Weighted- Average Exercise Price				Number Exercisable				Weighted- Average Exercise Price
	$	0.035 – 1.00				17,256,738				4.47			$	0.14				8,150,896			$	0.19

Total stock-based compensation expense in connection with options and modified awards recognized in the consolidated statement of operations for the nine months ended September 30, 2016 and 2015 was $57,006 and $250,528, respectively.

 

Note 11 – Subsequent Events

On October 27, 2016 the Company sold its building located at 5765 Logan Street, Denver, Colorado to an unrelated third party for $1,400,000.  The Company repaid the mortgage on the building in the amount of $677,681.  After the sale, the Company leased the building from the purchaser of the property. The lease is for an initial term of ten years, with the Company having the option to extend the term of the lease for two additional five year periods. The lease requires rental payments of $10,000 per month.

 

 

 

ITEM 2     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

You should read the following discussion and analysis of financial condition and results of operations in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Report.

We were originally incorporated in Nevada on September 11, 2006, under the name The Engraving Masters, Inc. (the "Company").  

On May 2, 2014, we changed our name to Blue Line Protection Group, Inc.

On May 6, 2014, our directors approved a 14-for-1 forward stock split.  In connection with the stock split, our authorized capital increased to 1,400,000,000 shares of common stock.  All references to share and per share amounts in the consolidated financial statements and accompanying notes have been retroactively restated to reflect the forward stock split.

We provide armed protection and transportation, banking, compliance and training services for businesses engaged in the legal cannabis industry.   During the nine months ended September 30, 2016 approximately 97% of our revenue was derived from armed protection and transportation services.  The remaining 3% of our revenue was derived from other services. 

It is estimated that the total market for marijuana, legal or otherwise, will exceed the economic value of corn and wheat combined.  Marijuana is widely considered the largest cash crop in the United States.  Businesses have been positioning themselves for years, each trying to establish a leadership position in the legal marijuana industry.  

Cultivation facilities are the producers of legal cannabis that eventually make its way to consumers.  Growers' operations typically span a large geographic footprint, making them susceptible to theft, as are shipments from the growers to testing laboratories or to retail dispensaries.  Additionally, due to current federal marijuana legislation and banking environment, growers are finding it increasingly difficult to secure their cash, purchase equipment and obtain financing for expansion.

Dispensaries are the retail face of the legal cannabis industry.  All legal sales of cannabis products are transacted through dispensaries that are state-licensed.  To maintain their licenses, dispensaries must comply with a variety of state-mandated reporting requirements, including reporting every gram of cannabis passing in and out of the store.  Dispensaries also face financing and banking challenges similar to those that growers encounter.

In March 2015, our wholly-owned Nevada subsidiary, BLPG, Inc., was granted licenses to provide our services in Nevada.

We do not grow, test or sell marijuana.

Armed Protection and Transportation

During the nine months ended September 30, 2016, most of our revenue was derived from armed protection and transportation services.  

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 Colorado in February 2014.  Since then, we have become the largest legal cannabis protection services company in the state.  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 currently supply guards, protection and armed and armored transportation to approximately 60% of all the licensees in Colorado. 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.

We also offer security monitoring, asset vaulting, and VIP and dignitary protection.

Results of Operations

 

Material changes in line items in our Statement of Operations for the three months ended September 30, 2016 as compared to the same period last year, are discussed below:

 

		Increase (I) or
Item		Decrease (D)		Reason
Revenue		D		Termination of old security agreements which were not profitable
Gross profit, as a % of revenue		D		Security agreements which were not profitable
General and Administrative expenses		D		Better cost containment

Material changes in line items in our Statement of Operations for the nine months ended September 30, 2016 as compared to the same period last year, are discussed below:

 

		Increase (I) or
Item		Decrease (D)		Reason
Revenue		I		Providing security services for special events
Gross profit, as a % of revenue		D		Additional costs for hiring and training personnel
General and Administrative expenses		D		Streamlining operations and cost containment measures

 

Capital Resources and Liquidity

Our material sources and <uses> of cash during the nine months ended September 30, 2016 and 2015 were:

 

 

 

		2016				2015
Cash used by operations		$	(1,029,503	)		$	(429,849	)
Purchase of property, plant and equipment			(502,702	)			(29,963	)
Receipt of payments from notes receivable			--				46,451
Loan payments			(687,568	)			(192,425	)
Loan proceeds			1,092,610				412,500
Sale of preferred stock			945,000				--
Sale of common stock			--				50,000
Cash overdraft			165,952				--

 

As of September 30, 2016 we did not have any material capital commitments.

 

Other than as disclosed above, we do not anticipate any material capital requirements for the twelve months ending September 30, 2017.

Other than as disclosed above, we do not know of any:

●	trends, demands, commitments, events or uncertainties that will result in, or that are reasonable likely to result in, our liquidity increasing or decreasing in any material way; or

●	any significant changes in our expected sources and uses of cash.

We do not have any commitments or arrangements from any person to provide us with any equity capital.

During the next twelve months, we anticipate that we will incur approximately $1,900,000 of general and administrative expenses in order to execute our current business plan. We also plan to incur significant sales, marketing, research and development expenses during the next 12 months. We must obtain additional financing to continue our operations. We may not be able to obtain additional funding on terms that are favorable to us or at all. We may not be able to obtain sufficient funding to continue our operations, or if we do receive funding, to generate adequate revenues in the future or to operate profitably in the future. These conditions raise substantial doubt about our ability to continue as a going concern.

Off-Balance Sheet Arrangements

 

We have not entered into any off-balance sheet arrangements.

Critical Accounting Policies

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.

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 our 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 services 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 reasonably assured.

 

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 non-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 measureable.  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.

ITEM 4.  CONTROLS AND PROCEDURES

An evaluation was carried out under the supervision and with the participation of our management, including our Principal Financial Officer and Principal Executive Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Disclosure controls and procedures are procedures designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Form 10-Q, is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and is communicated to our management, including our Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our management concluded that, as of September 30, 2016, our disclosure controls and procedures were not effective due to the material weaknesses identified at the audit.

Change in Internal Control over Financial Reporting

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

 

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

 

ITEM 6.   EXHIBITS

Exhibit Number		Description of Exhibit
31.1		Rule 13a-14(a) Certifications
31.2		Rule 13a-14(a) Certifications
32		Section 1350 Certifications

 

 

 

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

 

 

	BLUE LINE PROTECTION GROUP, INC.
November 17, 2016	By:	/s/ Daniel Allen
		Daniel Allen
		Principal Executive, Financial and   Accounting  Officer