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, 2015
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-52942
BLUE LINE PROTECTION GROUP, INC.
| (Exact name of registrant as specified in its charter) | ||
| Nevada | 20-5543728 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 1350 Independence St., Lakewood, CO | 80215 | |
| (Address of principal executive offices) | (Zip Code) | |
| (800) 844-5576 | ||
| (Registrant's telephone number, including area code) | ||
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 the 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 (Do not check if a smaller reporting company) |
☐ | 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
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
| Common Stock, $0.001 par value | 126,575,282 shares |
| (Class) | (Outstanding as at November 16, 2015) |
BLUE LINE PROTECTION GROUP, INC.
Form 10-Q
| Page | |||
| PART I - FINANCIAL INFORMATION | 3 | ||
| Item 1. | Financial Statements | 3 | |
| Condensed Consolidated Balance Sheets | 4 | ||
| Condensed Consolidated Statements of Operations | 5 | ||
| Condensed Consolidated Statements of Cash Flows | 6 | ||
| Notes to Condensed Consolidated Financial Statements | 7 | ||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 12 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 19 | |
| Item 4. | Controls and Procedures | 19 | |
| PART II - OTHER INFORMATION | 20 | ||
| Item 1. | Legal Proceedings | 20 | |
| Item1A. | Risk Factors | 20 | |
| Item 2. | Unregistered Sales of Equity Securities | 20 | |
| Item 3. | Defaults Upon Senior Securities | 20 | |
| Item 4. | Mine Safety Disclosures | 20 | |
| Item 5. | Other Information | 20 | |
| Item 6. | Exhibits | 20 | |
| SIGNATURES | 21 | ||
PART I – FINANCIAL INFORMATION
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)
| September 30, | December 31, | |||||||
| 2015 | 2014 | |||||||
| Assets | (Unaudited) | (Audited) | ||||||
| Current assets: | ||||||||
| Cash and equivalents | $ | 68,636 | $ | 211,922 | ||||
| Accounts and other receivables | 201,135 | 116,891 | ||||||
| Notes receivable | — | 46,451 | ||||||
| Prepaid expenses and deposits | 2,500 | 2,500 | ||||||
| Total current assets | 272,271 | 377,764 | ||||||
| Fixed assets: | ||||||||
| Machinery and equipment, net | 164,251 | 189,438 | ||||||
| Property, plant and equipment | 750,000 | 750,000 | ||||||
| Building improvements | 373,868 | 348,553 | ||||||
| Total fixed assets | 1,288,119 | 1,287,991 | ||||||
| Total assets | $ | 1,560,390 | $ | 1,665,755 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 414,530 | $ | 295,863 | ||||
| Notes payable | 75,000 | 2,000 | ||||||
| Notes payable - related parties, net of discount | 183,347 | 288,271 | ||||||
| Convertible notes payable - related parties, net of discount | 149,449 | — | ||||||
| Current portion of long-term debt | 678,735 | 3,735 | ||||||
| Total current liabilities | 1,501,061 | 589,869 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt | 14,166 | 691,780 | ||||||
| Total current liabilities | 14,166 | 691,780 | ||||||
| Total liabilities | 1,515,227 | 1,281,649 | ||||||
| Stockholders' equity: | ||||||||
| Preferred Stock, $0.001 par value, 100,000,000 shares authorized, no shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively | — | — | ||||||
| Common Stock, $0.001 par value, 1,400,000,000 shares authorized, 124,291,958 and 122,845,282 issued and outstanding as of September 30, 2015 and December 31, 2014, respectively | 124,291 | 122,845 | ||||||
| Common Stock, owed but not issued, 2,568,750 shares and 748,750 shares as of September 30, 2015 and December 31, 2014, respectively | 2,569 | 749 | ||||||
| Additional paid-in capital | 3,719,554 | 2,788,934 | ||||||
| Accumulated (deficit) | (3,801,251 | ) | (2,528,422 | ) | ||||
| Total stockholders' equity | 45,163 | 384,106 | ||||||
| Total liabilities and stockholders' equity | $ | 1,560,390 | $ | 1,665,755 |
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)
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Revenue, net | $ | 773,484 | $ | 268,763 | $ | 2,073,865 | $ | 556,756 | ||||||||
| Cost of revenue | (564,440 | ) | (261,713 | ) | (1,352,296 | ) | (488,113 | ) | ||||||||
| Gross profit | 209,044 | 7,050 | 721,569 | 68,643 | ||||||||||||
| Expenses: | ||||||||||||||||
| Advertising | 3,000 | 57,073 | 3,314 | 179,885 | ||||||||||||
| Depreciation | 10,558 | 9,145 | 31,353 | 17,485 | ||||||||||||
| General and administrative expenses |
451,152 | 695,230 | 1,923,400 | 2,307,819 | ||||||||||||
| Total expenses | 464,710 | 761,448 | 1,958,067 | 2,505,189 | ||||||||||||
| Operating loss | (255,666 | ) | (754,398 | ) | (1,236,498 | ) | (2,436,546 | ) | ||||||||
| Other expenses: | ||||||||||||||||
| Interest expense | (1,467 | ) | — | (21,761 | ) | — | ||||||||||
| Interest expense - related party | (13,057 | ) | — | (18,258 | ) | — | ||||||||||
| Interest income | 195 | 2,382 | 3,106 | 3,620 | ||||||||||||
| Forgiveness of debt expense | 5,539 | — | 582 | — | ||||||||||||
| Total other expenses | (8,790 | ) | 2,382 | (36,331 | ) | 3,620 | ||||||||||
| Net loss | $ | (264,456 | ) | $ | (752,016 | ) | $ | (1,272,829 | ) | $ | (2,432,926 | ) | ||||
| Net loss per share – basic | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | ||||
| Net loss per share - fully-diluted | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | ||||
| Weighted average number of | ||||||||||||||||
| common shares outstanding - basic | 126,575,282 | 122,029,005 | 125,204,110 | 116,942,037 | ||||||||||||
| Weighted average number of | ||||||||||||||||
| common shares outstanding - fully diluted | 131,299,521 | 130,915,253 | 131,833,740 | 122,184,808 | ||||||||||||
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)
| For the nine months ended | ||||||||
| September 30, | ||||||||
| 2015 | 2014 | |||||||
| Operating activities | ||||||||
| Net loss | $ | (1,272,829 | ) | $ | (2,432,926 | ) | ||
| Adjustments to reconcile net loss to | ||||||||
| net cash used by operating activities: | ||||||||
| Depreciation | 29,833 | 17,485 | ||||||
| Stock-based compensation expense | 750,802 | 239,379 | ||||||
| Shares issued for services | — | 938,000 | ||||||
| Shares issued for prepaid expenses | — | 120,000 | ||||||
| Amortization of discount on note payable | 32,535 | — | ||||||
| Forgiveness of notes payable | (2,000 | ) | — | |||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease (Increase) in accounts receivable | (84,244 | ) | (24,771 | ) | ||||
| Decrease (Increase) in deposits and prepaid expenses | — | (2,500 | ) | |||||
| (Decrease) Increase in accounts payable and accrued liabilities | 118,668 | 156,500 | ||||||
| (Decrease) Increase in long-term liabilities | (2,614 | ) | 675,000 | |||||
| Net cash (used) by operating activities | (429,849 | ) | (313,833 | ) | ||||
| Cash flows from investing activities | ||||||||
| Issuance of notes receivable | — | (50,000 | ) | |||||
| Receipt of payments from notes receivable | 46,451 | — | ||||||
| Purchase of fixed assets | (29,963 | ) | (1,292,497 | ) | ||||
| Net cash provided by investing activities | 16,488 | (1,342,497 | ) | |||||
| Financing activities | ||||||||
| Donated capital | — | 7,106 | ||||||
| Repayment of notes payable | — | (25,000 | ) | |||||
| Proceeds from notes payable | 75,075 | 166,008 | ||||||
| Repayment of notes payable - related party | (192,425 | ) | (25,000 | ) | ||||
| Proceeds from notes payable - related party | 587,425 | 293,138 | ||||||
| Proceeds from convertible notes payable - related party | 250,000 | — | ||||||
| Issuances of common stock for cash | 50,000 | 1,313,462 | ||||||
| Net cash provided by financing activities | 270,075 | 1,729,714 | ||||||
| Net increase (decrease) in cash | (143,286 | ) | 73,384 | |||||
| Cash - beginning | 211,922 | 2,844 | ||||||
| Cash - ending | $ | 68,636 | $ | 76,228 | ||||
| Non-cash transactions: | ||||||||
| Shares issued for fixed assets | $ | — | $ | 30,000 | ||||
| Discount attributed to beneficial conversion feature, net | $ | 100,551 | $ | — | ||||
| Forgiveness of accrued salary based on settlement | $ | 123,994 | $ | — | ||||
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 for the period
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 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 $1,272,829 during the nine months ended September 30, 2015, and had negative working capital at September 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 nine months ended September 30, 2015 and 2014, interest income earned was $3,106 and $3,620, respectively. As of September 30, 2015, the loan and interest accrued thereupon was repaid in full and the principal balance of the loan is $0.
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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:
| September 30, 2015 | December 31, 2014 | |||||||
| Automotive vehicles | $ | 173,926 | $ | 173,926 | ||||
| Furniture and equipment | 48,850 | 44,204 | ||||||
| Fixed assets, total | 222,776 | 218,130 | ||||||
| Less: accumulated depreciation | (58,525 | ) | (28,692 | ) | ||||
| Fixed assets, net | $ | 164,251 | $ | 189,438 | ||||
Depreciation expenses for the nine months ended September 30, 2015 and 2014 were $31,353 and $17,485, respectively.
On July 15, 2014, the Company purchased a commercial building for a total purchase price of $750,000, for which the Company paid a down payment of $75,000 and financed the remaining $675,000 in the form of a promissory note. The note bears interest at a rate of 5% per annum on the unpaid principal balance and is due in full on July 31, 2016. Interest is paid monthly, in arrears, in the amount of $2,813 beginning August 31, 2014. Through September 30, 2015, the Company has capitalized interest related to the note in the amount of $25,316. Through September 30, 2015, approximately $373,868 in capital improvements and capitalized interest have been recorded in relation to the property. As of September 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
Notes Payable – Non-Related Parties
Through September 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. During the quarter ended September 30, 2015, the lender forgave the note and no longer expects to be repaid. As of September 30, 2015, the principal balance owed on this loan is $0.
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 September 30, 2015 and 2014, accrued interest payable was $3,233 and $0, respectively. During the three-month periods ended September 30, 2015 and 2014, interest expense was $1,260 and $0, respectively. As of September 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 September 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 September 30, 2015 and 2014, accrued interest payable was $1,203 and $0, respectively. During the three month periods ended September 30, 2015 and 2014, interest expense was $693 and $0, respectively. As of September 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 6 – Debt and interest expense (continued)
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. Through September 30, 2015, the Company has capitalized interest related to the note in the amount of $25,316. During the three months ended September 30, 2015 and 2014 and a total of $8,441 and $5,626 in interest payments have been made. As of December 31, 2014, the Company considered the note as a long-term note payable in the amount of $675,000. However, as of September 30, 2015, the entire $675,000 principal balance of the note is due within 12 months and has therefore been reclassified as a current liability
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 September 30, 2015, the total principal balance of the note is $17,902, of which $14,166 is considered a long-term liability and the current portion of $3,735 is considered a current liability.
Note 7 – Notes payable – Related Party
Related Party Notes Payable
On July 31, 2014, the Company borrowed $98,150 from an entity materially controlled by an officer and shareholder of the Company. The loan is due and payable on demand and bears no interest. As of September 30, 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. As of September 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 September 30, 2015, the principal balance owed on this loan is $54,621.
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. The Company has repaid $20,000 toward this loan and as of September 30, 2015, the principal balance owed on this loan is $0.
Through September 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 $43,425 and as of September 30, 2015, the principal balance owed on this loan is $575.
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 September 30, 2015, the Company borrowed a total of $250,000. As of September 30, 2015, the principal balance owed on this Convertible Note is $250,000. As of September 30, 2015 and 2014, accrued interest payable was $2,041 and $0, respectively. During the three-month periods ended September 30, 2015 and 2014, interest expense was $2,041 and $0, respectively.
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Blue Line Protection Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 7 – Notes payable – Related Party (continued)
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 $118,800 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, 2015, a total of $18,249 has been amortized and recorded as interest expense, leaving a balance of $100,551 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 $149,449 and $0 as of September 30, 2015 and 2014, respectively.
Note 8 - 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 September 30, 2015, the Company had 124,291,958 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:
|
Number Of RSUs |
Weighted-Average Grant Date Fair Value Per Share | ||
| Balance at December 31, 2014 | 0 | $ 0.00 | |
| Granted | 5,050,000 | $ 0.16 | |
| Vested | 2,000,000 | $ 0.16 | |
| Cancelled | (3,050,000) | $ 0.00 | |
| Balance at September 30, 2015 | 2,000,000 | $ 0.16 |
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. On September 30, 2015, the Company entered into a Settlement Agreement with this subsidiary director, whereby, subject to the terms and conditions of the settlement, the parties mutually rescinded all prior existing agreements between them, as well as all compensatory arrangements set forth therein and the director returned 750,000 shares to the Company for cancellation. During the nine months ended September 30, 2015, the Company recorded $42,500 of share-based compensation expense related to the shares vested under the original director agreement.
On May 1, 2015, the Company issued an aggregate of 2,050,000 shares of its common stock as Restricted Stock Units to employees as incentive compensation. On September 30, 2015, the Company entered into Settlement Agreements with certain of these employees, whereby, subject to the terms and conditions of the settlements, the parties mutually rescinded all prior existing agreements between them, as well as all compensatory arrangements set forth therein and returned 1,533,324 shares to the Company for cancellation. During the nine months ended September 30, 2015, the Company recorded $13,778 of share-based compensation expense related to the shares vested under the original employment agreements.
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Blue Line Protection Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 - Stockholders’ equity and share-based compensation (continued)
On May 1, 2015, the Company issued Restricted Stock Units to an employee pursuant to the satisfaction of performance conditions of his employment agreement. The employee is eligible to earn up to an aggregate of 6,000,000 restricted stock units in accordance with the following schedule: (a) 2,000,000 shares upon the Company realizing consolidated revenue of $1,000,000 and (b) an additional 2,000,000 shares for each additional $1,000,000 of consolidated revenue up to a maximum of an additional 4,000,000 shares. As of May 1, 2015, the Company issued 2,000,000 shares of its common stock to this employee. The fair market value of the common stock on the date of issuance was $0.16 per share. As of September 30, 2015, the shares were not issued and are considered to be a common stock payable in the amount of $2,000. The Company recognized compensation expense in the amount of $320,000 during the nine-month period ended September 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 nine-month periods ended September 30, 2015 and 2014 was $320,000 and $0, respectively.
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:
| Expected dividend yield | 0 | % | |
| Expected volatility range | 234% - 366 | % | |
| Expected term (in years) | 3 | years | |
| Risk-free interest rate | 0.91 | % |
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:
|
Number Of Shares |
Weighted-Average Exercise Price | ||
| Outstanding at December 31, 2014 | 11,736,900 | $ 0.29 | |
| Granted | 1,230,000 | $ 0.19 | |
| Exercised | 0 | $ 0.00 | |
| Vested | 1,409,602 | $ 0.41 | |
| Cancelled/Forfeited | (10,246,900) | $ 0.26 | |
| Outstanding at September 30, 2015 | 2,720,000 | $ 0.34 | |
| Options exercisable at September 30, 2015 | 1,409,602 | $ 0.41 |
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Blue Line Protection Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 - Stockholders’ equity and share-based compensation (continued)
The following tables summarize information about stock options outstanding and exercisable at September 30, 2015:
| OPTIONS OUTSTANDING AND EXERCISABLE | ||||||||||
|
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 | |||||
| $ 0.05 - 0.71 | 2,720,000 | 2.06 | $ 0.34 | 1,409,602 | $ 0.41 | |||||
| 2,720,000 | 2.06 | $ 0.34 | 1,409,602 | $ 0.41 | ||||||
Total stock-based compensation expense in connection with options granted to employees recognized in the consolidated statement of operations for the nine-month periods ended September 30, 2015 and 2014 was $250,528 and $239,379, respectively.
Note 9 – Agreements
On July 7, 2015, the Company entered into a Separation Agreement and Release in connection with the resignation of a former officer and director. As part of the Separation, the former officer released the Company from all amounts owed to him, including actual or future accrued salary and expenses. Resultantly, the Company recorded additional paid-in capital on the settlement in the amount of $123,994, during the three months ended September 30, 2015.
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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, summarized 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.
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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 September 30, 2015, we generated net revenue of $773,484. In the three month period ended September 30, 2014, we realized net revenue in the amount of $268,763. The approximately $504,721, or 188%, increase in revenues year-over-year is primarily attributable to greater market penetration experienced during the most recent quarter ended September 30, 2015.
In the nine month period ended September 30, 2015, net revenue was $2,073,865, compared to $556,756 of net revenue generated during the nine months ended September 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.
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.
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 nine-months ended September 30, 2015 and 2014 was as follows:
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Revenue, net | $ | 773,484 | $ | 268,763 | $ | 2,073,865 | $ | 556,756 | ||||||||
| Cost of revenue | (564,440 | ) | (261,713 | ) | (1,352,296 | ) | (488,113 | ) | ||||||||
| Gross margin | $ | 209,044 | $ | 7,050 | $ | 721,569 | $ | 68,643 | ||||||||
| Gross margin as a percentage of net revenue | 27.0 | % | 2.6 | % | 34.8 | % | 12.3 | % | ||||||||
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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 nine-month periods ended September 30, 2015 and 2014, the primary components of our operating expenses were, as follows (all figures in dollars, except for percentage change):
| Three months ended | Nine months ended | |||||||||||||||||||||||
| September 30, | Change | September 30, | Change | |||||||||||||||||||||
| 2015 | 2014 | (%) | 2015 | 2014 | (%) | |||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Advertising | $ | 3,000 | $ | 57,073 | (94.7 | ) | $ | 3,314 | $ | 179,885 | (98.2 | ) | ||||||||||||
| Depreciation | 10,558 | 9,145 | 15.5 | 31,353 | 17,485 | 79.3 | ||||||||||||||||||
| General and administrative: | ||||||||||||||||||||||||
| Executive compensation | 116,490 | 175,374 | (33.6 | ) | 237,345 | 278,782 | (14.9 | ) | ||||||||||||||||
| General and administrative | 247,774 | 298,332 | (16.9 | ) | 557,671 | 530,667 | 5.1 | |||||||||||||||||
| Professional fees | 52,296 | 109,900 | (52.4 | ) | 101,072 | 1,145,538 | (91.2 | ) | ||||||||||||||||
| Salaries and wages | 70,408 | 111,624 | (36.9 | ) | 400,506 | 352,832 | 13.5 | |||||||||||||||||
| Stock-based compensation | (35,816 | ) | — | NMF | 626,806 | — | NMF | |||||||||||||||||
| Total operating expenses | 464,710 | 761,448 | (59.0 | ) | 1,958,067 | 2,505,189 | (21.8 | ) | ||||||||||||||||
| Other expenses: | ||||||||||||||||||||||||
| Interest expense | (1,467 | ) | — | NMF | (21,761 | ) | — | NMF | ||||||||||||||||
| Interest expense - related party | (13,057 | ) | — | NMF | (18,258 | ) | — | NMF | ||||||||||||||||
| Interest income | 195 | 2,382 | (91.8 | ) | 3,106 | 3,620 | (14.2 | ) | ||||||||||||||||
| Forgiveness of debt | 5,539 | — | NMF | 582 | — | NMF | ||||||||||||||||||
| Total other expenses | $ | (8,790 | ) | $ | 2,382 | (469.0 | ) | $ | (36,331 | ) | $ | 3,620 | (1,103.6 | ) | ||||||||||
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 nine-month periods ended September 30, 2015 from the comparable periods ended September 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 third 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 nine months ended September 30, 2015 compared to the same period ended September 30, 2014 due mainly to increased insurance premiums and taxes paid offsetting other declines.
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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 nine month periods ended September 30, 2015 and 2014 are primarily attributable to the cessation of short-term consulting agreements entered into during 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. Historically, our staffing levels tend to fluctuate from month-to-month and are difficult to predict with any certainty.
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 negative amount of stock-based compensation in the three-month period ended September 30, 2015, is primarily attributable to the forfeiture of stock options related to employees whose option grants were not yet vested as of their termination dates.
Other Income and Expenses
In the quarter ended September 30, 2015, we incurred 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.
Interest income is attributable to our lending short-term, fully-collateralized loans to existing, recurring clients. During the quarter ended September 30, 2015, all notes receivable have been fully-repaid.
Net Loss
For the three- and nine-month periods ended September 30, 2015 and 2014, our net losses were, as follows (all figures in dollars, except for percentage change):
| Three months ended | Nine months ended | |||||||||||||||||||||||
| September 30, | Change | September 30, | Change | |||||||||||||||||||||
| 2015 | 2014 | (%) | 2015 | 2014 | (%) | |||||||||||||||||||
| Net loss | $ | (264,456 | ) | (752,016 | ) | (64.8 | ) | (1,272,829 | ) | (2,432,926 | ) | (47.7 | ) | |||||||||||
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 September 30, 2015 and 2014:
| Nine months ended September 30, | ||||||||
| 2015 | 2014 | |||||||
| Net cash used by operations | $ | (429,849 | ) | $ | (313,833 | ) | ||
| Net cash provided by (used in) investing activities | 16,488 | (1,342,497 | ) | |||||
| Net cash provided by financing activities | 270,075 | 1,729,714 | ||||||
| Net increase (decrease) in cash | (143,286 | ) | 73,384 | |||||
| Cash at the beginning of the period | 211,922 | 2,844 | ||||||
| Cash as the end of the period | $ | 68,636 | $ | 76,228 | ||||
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Operating Activities. The increase in net cash used in operating activities during the nine-months ended September 30, 2015 compared to the same period in 2014 was primarily attributable to increases in general and administrative costs, such as insurance and property taxes, as well as continued increases in costs of sales.
Investing Activities. Cash provided by investing activities in the nine-month period ended September 30, 2015 is related primarily to the collection of principal on outstanding notes receivable. In the comparable period ended September 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 nine-months ended September 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.
Management’s goal is to be cash flow neutral by the end of fiscal 2015, of which there can be no guarantee. 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.
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.
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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.
Principles of consolidation. For the periods ended September 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.
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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.
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 September 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.
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PART II – OTHER INFORMATION
We are not a party to any material legal proceedings.
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.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
| Exhibit Number | Name and/or Identification of Exhibit | |
| 31 | Rule 13a-14(a)/15d-14(a) Certifications | |
| 32 | Certification under Section 906 of the Sarbanes-Oxley Act (18 U.S.C. Section 1350) | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presenation Linkbase Document | |
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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.
| BLUE LINE PROTECTION GROUP, INC. | ||
| (Registrant) | ||
| Signature | Title | Date |
| /s/ Daniel Allen | Chief Executive Officer | November 16, 2015 |
| Daniel Allen | ||
| /s/ Patrick Deparini | Chief Financial Officer | November 16, 2015 |
| Patrick Deparini | ||
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CERTIFICATIONS
I, Daniel Allen, certify that:
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 16, 2015
/s/ Daniel Allen
Daniel Allen
Chief Executive Officer
CERTIFICATIONS
I, Patrick Deparini, certify that:
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 16, 2015
/s/ Patrick Deparini
Patrick Deparini
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Blue Line Protection Group, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel Allen, acting in the capacity as the Chief Executive Officer of the Company, and I, Patrick Deparini, acting in the capacity as the Chief Financial Officer of the Company, certify to the best of our knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
/s/ Daniel Allen
Daniel Allen
Chief Executive Officer
November 16, 2015
/s/ Patrick Deparini
Patrick Deparini
Chief Financial Officer
November 16, 2015
Stockholders' equity and share-based compensation (Details 2) - Warrants and Options [Member] |
9 Months Ended |
|---|---|
Sep. 30, 2015 | |
| Fair Value Assumptions, Method Used | Black-Scholes pricing model |
| Expected dividend yield | 0.00% |
| Expected term (in years) | 3 years |
| Risk-free interest rate | 0.91% |
| Minimum [Member] | |
| Minimum Expected volatility range | 234.00% |
| Maximum [Member] | |
| Minimum Expected volatility range | 366.00% |
Notes Receivable |
9 Months Ended |
|---|---|
Sep. 30, 2015 | |
| Receivables [Abstract] | |
| Notes Receivable | 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 nine months ended September 30, 2015 and 2014, interest income earned was $3,106 and $3,620, respectively. As of September 30, 2015, the loan and interest accrued thereupon was repaid in full and the principal balance of the loan is $0. |