UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the Fiscal Year Ended December 31, 2015 |
| o | 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: 000-52942 | ||
| BLUE LINE PROTECTION GROUP, INC. | ||
| (Name of small business issuer in its charter) | ||
| Nevada | 20-5543728 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) | |
1350 Independence St. Lakewood, CO | 80215 | |
| (Address of principal executive offices) | (Zip code) | |
Issuer’s telephone number: (800) 844-5576 | ||
| Securities Registered Pursuant to Section 12(b) of the Act: | ||
| Title of each class | Name of each exchange on which registered | |
| None | None | |
| Securities Registered Pursuant to Section 12(g) of the Act: | ||
| Common Stock, $0.001 par value | ||
| (Title of class) | ||
| (Title of class) | ||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 x No o
Indicated 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 (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files) Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 | o | Accelerated filer | o | |
| Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, as of June 30, 2015 was approximately $5,000,000.
As of April 30, 2016 the registrant had 125,348,026 outstanding shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
BLUE LINE PROTECTION GROUP, INC.
FORM 10-K
For the year ended December 31, 2015
TABLE OF CONTENTS
| Page | ||
| PART I | ||
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements about our business, financial condition and prospects that reflect our 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 assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, our 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 report, words such as, "believes," "expects," "intends," "plans," "anticipates," "estimates" and similar expressions are intended to identify and qualify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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 year ended December 31, 2015 approximately 88% of our revenue was derived from armed protection and transportation services. The remaining 12% of our revenue was derived from compliance (9%), and other services (3%).
In March 2015, our wholly-owned Nevada subsidiary, BLPG, Inc., was granted licenses to provide our services in Nevada.
Our base of operations is in the Denver, Colorado metropolitan area. Our corporate headquarters is located at 1350 Independence St., Lakewood, CO 80215. We also own a building at 5765 Logan St., Denver, Colorado.
Principal Services
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.
We do not grow, test or sell cannabis.
Our services cover the following:
Protection and Transportation
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. In less than six months, 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.
Banking
The banking system in the U.S. is, in most states, federally regulated. 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.
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.
We communicate 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. We 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).
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 created and supervised by both:
| 1. | The former Chief of Police for the City of Aurora, the second largest city in Colorado and |
| 2. | A 26 years veteran of the Jefferson County, Colorado Sheriff's Office with 17 years on its SWAT (Special Weapons and Tactics) unit, seven of which were as team leader. |
In addition to internal training, we also offer other businesses, houses of worship and the general public a wide variety of safety, security and personal defense courses and firearms training.
Accounting and Bookkeeping
During March 2015 we formed a wholly-owned subsidiary, Blue Line Advisory Services, Inc., to provide a complete accounting solution for the legal marijuana industry. In September 2005 we terminated this segment of our business.
Growth Strategy
| 1. | Expand into new markets to establish first-mover advantages. |
| 2. | Market ourselves through strategic alliances and affiliations. |
| 3. | Acquire or joint venture with guard and alarm businesses throughout the USA if they represent good value and a good fit with our expansion plans. Organic growth will not suffice for the rapid growth of this industry and our ability to provide service immediately requires variations of this strategy. |
| 4. | Increase our client base to the various labs in state. Offering our superior chain of control compliance and software. |
| 5. | Develop and offer value-added, complementary or supplementary services. |
The development of the legal markets for cannabis is a function of state legislation. As a result, while specific markets may not be currently available, we actively monitor the progress of legislation and know with some degree of certainty when new geographic markets will be coming on line. This allows us to target our limited sales and marketing resources to those new markets. In this way, we believe the current legislative environment works in our favor - if the whole country were currently a potential market our limited resources would result in an inability to effectively cover all potential market territories. With limited markets open we can better cover those available territories.
Marketing
Virtually all of our sales, to date, have been generated without using paid media. Our security personnel conduct the majority of our marketing and advertising efforts. Nearly all of our guards are former police officers or military personnel and are the face of our company. They interact with business owners, employees and customers on a daily basis. As such, they generate significant brand awareness and word-of-mouth goodwill. Complementary to this, our management actively engages with business owners directly to generate awareness of our company and the services we provide, as well as to identify the potential for sales or referrals.
In addition to a direct sales approach and word-of-mouth advertising, we have been featured in news articles and video documentaries by outlets such as the Wall Street Journal, USA Today, Fortune and CNBC, which have served to increase brand awareness nationwide. We have also attended a variety of industry trade shows and have been granted membership in industry groups.
Industry Background
The total market for marijuana, legal or otherwise, is estimated to 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 that management expects to be worth over $50 billion by the year 2020. Marijuana sales reportedly averaged about $1,000,000 per day in the first five days of legalization in Colorado, and fiscal-year 2014 sales exceeded $700,000,000. California and Colorado each expect to collect tax revenue of approximately $100,000,000 during their 2015 fiscal years.
Competition
We believe the primary factors in attracting and retaining customers are expertise, service quality, and price. Our competitive advantages include:
● | Brand name recognition; |
● | Reputation; |
● | Expertise in regulatory and banking compliance; |
● | Operational excellence; |
● | Cash processing, transportation and storage capabilities; |
● | Security and logistics infrastructure; |
● | Services beyond guards and transportation, where we become intimate to the businesses continuance and success through mandatory standards of compliance; and |
● | Economies of scale as we increase the amount and number of items we securely transport. |
Our cost structure is generally competitive, although certain competitors may have lower costs due to a variety of factors, including lower wages, lower initial and ongoing training requirements, less costly employee benefits, or less stringent security and service standards. We anticipate facing competitive pricing pressure in many markets; however, we plan to resist competing on price alone. We believe our high levels of service and security, as well as value-added solutions, differentiates us from competitors.
We compete with companies of all sizes in a variety of geographies that offer solutions that compete with single elements of our platform, such as regulatory compliance, armed security, armored transportation services and money processing. The security services industry is a large and competitive market. More specifically, however, the market for security and storage solutions as it pertains to medical marijuana companies is a nascent market, resulting in a highly fragmented and fractured marketplace. Some of the companies we compete with are much larger than us, and such companies have significantly greater resources than us. None of the large security companies, such as Brinks, Argyle, Tyco or Torment, are currently competing in this market segment, although there can be no guarantee this trend will continue.
Significantly all of our current and potential traditional competitors have longer operating histories, larger customer or user bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Our competitors may be able to secure experienced employees, accommodate customers more efficiently and adopt more aggressive pricing policies than we can. Many of these current and potential competitors can devote substantially more resources to advertising, marketing and attracting experienced talent than we can. In addition, larger, more well-established and financed entities may acquire, invest in or form joint ventures with our competitors.
Government Regulation
In most jurisdictions we are required to obtain government approval to provide security and/or investigative services. We expect to make every effort to comply with all existing and pending regulatory conditions and licensing requirements in each state we currently or potentially operate in.
Continued development of the marijuana industry is dependent upon continued legislative authorization of marijuana at the state level. Any number of factors could slow or halt progress in this area. Further, progress, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of marijuana, which would negatively impact our proposed business.
Marijuana is a Schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal laws. There are currently 23 states and the District of Columbia allowing its citizens to use Medical Marijuana. Additionally, Alaska, Colorado, Oregon, Washington State, as well as Washington D.C., have voted to legalize cannabis for adult recreational use. The state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. The Obama administration has effectively stated that it is not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana. However, there is no guarantee that the administration will not change its stated policy regarding the low-priority enforcement of federal laws. Additionally, any new administration that follows could change this policy and decide to enforce the federal laws strongly. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect our revenues and profits. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us. While we do not intend to harvest, distribute or sell cannabis, we may be irreparably harmed by a change in enforcement by the Federal or state governments.
Intellectual Property
We are developing a proprietary streamlined government-certified software capable of tracking all movements of cannabis products through to cash to taxes paid to deposits with the Federal Reserve Bank. The technology behind our software is being engineered and developed by subcontractors, and we consider it proprietary and confidential, and protected under trade secret laws. We have not sought to patent our aspect of this technology; however, we have not yet determined if we will seek to patent any aspect of the software in the future.
We plan to protect our proprietary and confidential information through a series of non-compete and non-disclosure contracts with our employees, contractors and other interested parties. The law of protection of confidential information effectively allows a perpetual monopoly in secret information, and it does not expire as would a patent. The lack of formal protection, however, means that a third party is not prevented from independently duplicating and using the secret information once it is discovered.
Number of total employees and number of full time employees
As of April 30, 2016, we have approximately 84 full- and part-time employees, 95% of whom are former military or law enforcement professionals.
Properties
We lease office space at 1350 Independence St., Lakewood, CO 80215 at a rate of $1,442 per month. There are currently no proposed programs for the renovation, improvement or development of the facilities we use.
On July 15, 2014, we purchased a commercial building for a total purchase price of $750,000, for which we paid a down payment of $75,000 and financed the remaining $675,000 in the form of a promissory note. 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. We expect to place this property into service in May, 2016
ITEM 1A. RISK FACTORS
We have a limited operating history and may not succeed.
We have a limited operating history and may not succeed. We are subject to all risks inherent in a developing business enterprise. Our likelihood of continued success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with manufacturing specialty products and the competitive and regulatory environment in which we operate. You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages. For example, unanticipated expenses, problems, and technical difficulties may occur and they may result in material delays in the operation of our business, in particular with respect to our new products. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business to the point of having to cease operations and could impair the value of our common stock to the point investors may lose their entire investment.
We may not be able to attain profitability without additional funding, which may be unavailable.
We have limited capital resources. To date, we have not earned a profit or generated cash from our operations. Unless we begin to generate sufficient revenues from our proposed business to finance operations as a going concern, we may experience liquidity and solvency problems. Such liquidity and solvency problems may force us to go out of business if additional financing is not available. We have no intention of liquidating. In the event our cash resources are insufficient to continue operations, we intend to raise additional capital through offerings and sales of equity or debt securities. In the event we are unable to raise sufficient funds, we will be forced to go out of business and will be forced to liquidate. A possibility of such outcome presents a risk of complete loss of investment in our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
See Item 1. Business.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND MARKET INFORMATION FOR COMMON STOCK
The high and low closing prices of our common stock for the periods indicated are set forth below. These closing prices do not reflect retail mark-up, markdown or commissions.
| Year ended December 31, 2014 | High | Low | ||||||
| First Quarter | N/A | N/A | ||||||
| Second Quarter | $ | 0.80 | $ | 0.70 | ||||
| Third Quarter | $ | 0.81 | $ | 0.31 | ||||
| Fourth Quarter | $ | 0.50 | $ | 0.19 | ||||
| Year ended December 31, 2015 | High | Low | ||||||
| First Quarter | $ | 0.24 | $ | 0.21 | ||||
| Second Quarter | $ | 0.05 | $ | 0.05 | ||||
| Third Quarter | $ | 0.04 | $ | 0.04 | ||||
| Fourth Quarter | $ | 0.03 | $ | 0.03 | ||||
As of April 30, 2016, we had outstanding shares of common stock held by approximately 280 shareholders of record. Our transfer agent is: Pacific Stock Transfer Company, 4045 South Spencer Street, Suite 403, Las Vegas, NV 89119, phone (702) 361-3033.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Certain statements set forth below under this caption constitute forward-looking statements. See “Forward-Looking Statements” preceding Item 1 of this Annual Report on Form 10-K for additional factors relating to such statements.
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.
Results of Operations
Material changes in line items in our Statement of Operations for the year ended December 31, 2015 as compared to the same period last year, are discussed below:
| Increase (I) or | ||||
| Item | Decrease (D) | Reason | ||
| Revenue | I | More security for special events, private parties and transport of cash | ||
| Gross profit, as a % of revenue | D | Increase in personnel and salaries | ||
| Advertising expenses | D | Cost reduction measures | ||
| General and Administrative expenses | D | Decrease in stock based compensation and cost reduction measures |
Capital Resources and Liquidity
Our material sources and <uses> of cash during the years ended December 31, 2015 and 2014 were:
| 2015 | 2014 | |||||||
| Cash used by operations | $ | (682,630 | ) | $ | (443,425 | ) | ||
| Loan payments | (192,117 | ) | (147,333 | ) | ||||
| Loan proceeds | 603,575 | 560,604 | ||||||
| Sale of investments | -- | 200,000 | ||||||
| Construction in progress | (14,825 | ) | ||||||
| Purchase of property, plant and equipment | (6,166 | ) | (1,285,163 | ) | ||||
| Sale of common stock | 50,000 | 1,362,992 | ||||||
| Other | -- | 7,854 | ||||||
General
Our material capital commitments over the next five year are as follows:
| Description | 2016 | 2017 | 2018 | 2019 | 2020 | Total | ||||||||||||||||||
| Remodeling building we purchased in 2014 | $ | 400,000 | - | - | - | - | $ | 400,000 | ||||||||||||||||
Other than as disclosed above, we do not anticipate any material capital requirements for the twelve months ending December 31, 2016.
Other than as disclosed in this Item 7, 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.
Other than as disclosed in this Item 7, we do not know of 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 12 months, we anticipate that we will incur approximately $1,600,000 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 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 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. 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 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.
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 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.
Significant Accounting Policies
See Note 2 to the financial statements included as part of this report for a description of our significant accounting policies.
Recent Accounting Pronouncements
From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB ASCs are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our consolidated financial statements upon adoption.
To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included in Item 8 of this Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements attached to this report
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On July 17, 2015 Seale & Beers, CPAs resigned as our independent registered accounting firm.
On July 29, 2015 we engaged Malone Bailey, LLP as our independent registered public accounting firm.
See our 8-K reports dated July 17, 2015 and July 29, 2015 for further information.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness 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 not effective for the same reasons that our internal control over financial reporting was not effective.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
| 1. | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| 2. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| 3. | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
As of December 31, 2015, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, management concluded that, during the period covered by this report, such internal controls and procedures were not effective due to the following material weakness identified:
● | Lack of appropriate segregation of duties, |
● | Lack of control procedures that include multiple levels of supervision and review, and |
● | There is an overreliance upon independent financial reporting consultants for review of critical accounting areas and disclosures and material, nonstandard transactions. |
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only the management's report in this annual report.
Implemented or Planned Remedial Actions in response to the Material Weaknesses
We will continue to strive to correct the above noted weakness in internal control once we have adequate funds to do so. We believe appointing a director who qualifies as a financial expert will improve the overall performance of our control over our financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2015 that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company’s management, including the chief executive officer and principal financial officer, do not expect that its disclosure controls or internal controls will prevent all errors or all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our directors are elected by the stockholders to a term of one year and serve until their successors are elected and qualified. The officers are appointed by our Board of Directors to a term of one year and serve until his/her successor is duly elected and qualified, or until he/she is removed from office.
The names and ages of our directors and executive officers and their positions are as follows:
| Name | Age | Position | ||
| Daniel Allen | 64 | Chief Executive, Financial and Accounting Officer and a Director | ||
| Ricky G. Bennett | 58 | Vice President of Operations and Compliance | ||
| Michael Jerome | 45 | Vice President of Media and Public Relations | ||
| Scott Jackson | 59 | Director | ||
| Doyle Knudson | 64 | Director |
Daniel Allen was elected an officer and director July 28, 2015. Mr. Allen has been President, CEO and a Director of Sibannac, Inc. since August 25, 2014. Mr. Allen provided us with a consultanting services in the areas of banking and financing for four months in 2014. Between April 2013 and March 2014 Mr. Allen served as the Regional Vice President of Sunflower Bank in Longmont, Colorado. Between June 2001 and April 2013, Mr. Allen was the Chairman and Chief Executive Officer of Mile High Banks in Longmont, Colorado. Mr. Allen holds a Bachelor of Science in Management and Finance from the University of Utah.
Ricky G. Bennett was appointed an officer on March 24, 2014. Mr. Bennett was, between October 2013 and March 2014, an independent consultant to Convercent, Inc., a Denver, Colorado-based corporation which develops and markets computer software which firms use to comply with human resource regulations and conduct employee training. Between 2011 and October 2013 Mr. Bennett was Vice President of Professional Services and Director of Training for Convercent. Between 2008 and 2010 Mr. Bennett was an Interstate Compact and Youth Offender Officer for the Colorado Department of Corrections. In this position, Mr. Bennett used a variety of strategies and services to instill pro-social behaviors in offenders transitioning into the community. Mr. Bennett joined the Aurora, Colorado Police Department in 1980, served as the Aurora Chief of Police between 2002 and 2005, and retired as a commander in 2007.
Michael Jerome has been our Vice President of Media and Public Relations since February 2015. Between May 2014 and February 2015 Mr. Jerome served as our Director of Media and Public Relations. Between January 2002 and May 2014 Mr. Jerome was a Deputy Sheriff in Jefferson County Colorado. Between October 2005 and December 2006 Mr. Jerome was the Public Relations and Communications Manager for the Mizel Museum in Denver, Colorado. (He held this job when he was also a sheriff?) Between December 1997 and May 2001 Mr. Jerome was a Senior Producer for KHQ-TV in Spokane, Washington. Mr. Jerome graduated from the University of Colorado and holds a degree in Journalism and Mass Communication.
Scott Jackson was elected as one of our directors on July 28, 2015. Mr. Jackson is the founder of Colorado National Bank and has served as its Chief Executive Officer since 2009. As the Chief Executive Officer, Mr. Jackson is responsible for strategic planning, capital formation development of new market initiatives, loan production and regulatory relationships. Mr. Jackson has over three decades of experience in finance and banking with expertise in mergers and acquisitions, turnarounds, and start-ups. Mr. Jackson started at Merrill Lynch in 1980, executing financing and M&A transactions for many of the largest national and regional banks west of the Mississippi. From there he joined Republic Bank Texas to develop its Capital Markets Group, before founding and co-managing the Financial Institutions Restructuring Group at Goldman Sachs. At Goldman, he oversaw the restructuring of multiple troubled banks and thrifts and facilitated a number of 1988 Southwest Plan thrift transactions.
Doyle Knudson was elected as one of our directors on July 28, 2015. Between 1975 and 2002 Mr. Knudson held various positions with C.H. Robinson Company, a large multimodal transportation service provider. In 1975 he started in the corporate marketing center responsible for information services for carrier capacity, carrier insurance verification and research at the ICC in Washington, DC for common carrier authority. In 1976 Mr. Knudson was transferred to Ross Truck, a division of C.H. Robinson – customer support for publication logistics for Target stores and RR Donnelly. In 1978 Mr. Knudson was transferred to Lake Wales, FL as a Transportation Salesman responsible for customer development with agri business customers. In 1982 Mr. Knudson was promoted and transferred as Transportation Manager when he opened a new branch office in Houston, TX. In 1987 Mr. Knudson was promoted to General Manager at a new branch office in El Paso, TX, developing and providing logistics services for Coca Cola; Phelps Dodge, Dell Computers and Phillips Electronics.
Management Changes
The following shows the changes in our management during the two years ended December 31, 2015:
| Elected (E) | ||||||
| Appointed (A) | ||||||
| Resigned (R) | ||||||
| Name | Terminated (T) | Position | Date | |||
| David Uddman | R | President and a Director | 2-19-14 | |||
| Jolene Uddman | R | Treasurer and a Director | 2-19-14 | |||
| Ted Daniels | A | Director | 2-19-14 | |||
| Ted Daniels | R | Director | 3-13-14 | |||
| Dan Sullivan | A | Director | 2-19-14 | |||
| Dan Sullivan | R | Director | 3-13-14 | |||
| Sean Campbell | A | Director | 3-13-14 | |||
| Sean Campbell | A | Chief Executive Officer | 3-14-14 | |||
| Ted Daniels | A | Vice President of Marketing | 3-14-14 | |||
| Dan Sullivan | A | Vice President of Sales | 3-14-14 | |||
| Ricky Bennett | A | Vice President of Operations | 3-24-14 | |||
| Patrick Deparini | A | Chief Financial and Accounting Officer | 8-01-14 | |||
| Ted Daniels | T | Vice President of Marketing | 12-12-14 | |||
| Dan Sullivan | T | Vice President of Sales | 2-14-15 | |||
| Daniel Allen | A | Executive Vice President of Business | 7-08-15 | |||
| Development | ||||||
| Sean Campbell | R | Chief Executive Officer and a Director | 7-28-15 | |||
| Daniel Allen | E | Director | 7-28-15 | |||
| Scott Jackson | E | Director | 7-28-15 | |||
| Doyle Knudson | E | Director | 7-28-15 | |||
| Daniel Allen | A | Chief Executive Officer | 7-28-15 | |||
| Patrick Deparini | R | Chief Financial and Accounting Officer | 12-28-15 |
Audit Committee, Independent Directors and Financial Expert
We do not have an Audit Committee; our board of directors currently acts as our Audit Committee. Scott Jackson and Doyle Knudson are independent directors, as that term is defined in the rules of the NYSE MKT. None of our directors is considered a “Financial Expert”.
Code of Ethics
We have not adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions since one person, Dan Allen, serves in all the above capacities.
ITEM 11. EXECUTIVE COMPENSATION
Overview of Compensation Program
Our Board of Directors acts as our Compensation Committee and has responsibility for establishing, implementing and continually monitoring adherence to our compensation philosophy. The Board of Directors ensures that the total compensation paid to our executives is fair, reasonable and competitive.
Compensation Philosophy and Objectives
The Board of Directors believes that the most effective executive compensation program is one that is designed to reward the achievement of specific annual, long-term and strategic goals by the Company and that aligns executives’ interests with those of the stockholders by rewarding performance above established goals, with the ultimate objective of improving stockholder value. As a result of the size of the Company and only having two executive officers, the Board evaluates both performance and compensation on an informal basis. Upon hiring additional executives, the Board intends to evaluate the necessity of establishing a Compensation Committee to evaluate both performance and compensation to ensure that the Company maintains its ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly-situated executives of peer companies. To that end, the Board believes executive compensation packages provided by the Company to its executives, including the named executive officers, should include both cash and stock-based compensation that reward performance as measured against established goals.
Role of Executive Officers in Compensation Decisions
Our Directors make all compensation decisions for, and approves recommendations regarding equity awards to, the our Directors and employees.
Summary Compensation Table
The following table sets forth, for the last completed fiscal years ended December 31, 2015 and 2014 the cash compensation paid by the Company, as well as certain other compensation paid with respect to those years to our officers:
| Summary Compensation Table (in $) | ||||||||||||||||||||||
Name and Principal Position | Year | Salary (1) | Stock Awards (2) | Option Awards (3) | All Other Compensation (4) | Total | ||||||||||||||||
| Daniel Allen | 2015 | $ | 69,785 | -- | 214,555 | -- | $ | 284,340 | ||||||||||||||
| CEO | 2014 | -- | -- | -- | -- | -- | ||||||||||||||||
| Ricky G. Bennett | 2015 | 88,500 | $ | 320,000 | $ | 87,747 | -- | $ | 496,247 | |||||||||||||
| VP of Operations | 2014 | $ | 59,469 | -- | $ | 203,941 | -- | $ | 263,410 | |||||||||||||
| Michael Jerome | 2015 | $ | 73,538 | -- | $ | 25,416 | -- | $ | 100,954 | |||||||||||||
| VP of Media and Public Relations | ||||||||||||||||||||||
| Patrick Deparini | 2015 | $ | 77,000 | -- | -- | -- | $ | 77,000 | ||||||||||||||
| CFO | 2014 | -- | -- | $ | 466,564 | -- | $ | 466,564 | ||||||||||||||
| Sean Campbell | 2015 | -- | -- | $ | 178,459 | -- | $ | 178,459 | ||||||||||||||
| Former CEO | 2014 | $ | 46,154 | -- | $ | 423,090 | -- | $ | 469,244 | |||||||||||||
| Dan Sullivan | 2015 | $ | 13,462 | -- | -- | -- | $ | 13,462 | ||||||||||||||
| VP of Marketing | 2014 | $ | 45,231 | -- | $ | 1,749,620 | $ | 37,194 | $ | 1,821,485 | ||||||||||||
| Ted Daniels | 2015 | |||||||||||||||||||||
| VP of Sales | 2014 | $ | 23,077 | -- | -- | $ | 12,520 | $ | 35,597 | |||||||||||||
| David Uddman | ||||||||||||||||||||||
| Former President | 2014 | -- | -- | -- | -- | -- | ||||||||||||||||
| Jolene Uddman | ||||||||||||||||||||||
| Former Treasurer | 2014 | -- | -- | -- | -- | -- |
| (1) | The dollar value of base salary (cash and non-cash) earned during the year. |
| (2) | The fair value of the shares of common stock issued during the periods covered by the table calculated on the grant date in accordance with ASC 718-10-30-3. |
| (3) | The fair value of all stock options granted during the periods covered by the table calculated on the grant date in accordance with ACS 718-10-30-3. |
| (4) | All other compensation received that we could not properly report in any other column of the table including the dollar value of any insurance premiums we paid for life insurance for the benefit of the named executive officer. |
See Item 10 of this report for information concerning the changes in our management during the two years ended December 31, 2015.
Equity Compensation Plan
Up to 15,000,000 shares of common stock are reserved for issuance under our 2014-2015 Stock Incentive Plan (“the Plan”) that was adopted on November 12, 2014.
The purposes of the Plan are to enhance our ability to attract and retain the services of qualified employees, officers and directors, contractors and other service providers upon whose judgment, initiative and efforts the successful conduct and development of our business largely depends, and to provide additional incentives to such persons or entities to devote their utmost effort and skill to our advancement and betterment by providing them an opportunity to participate in the ownership of our common stock and thereby have an interest in our success.
Shares that are eligible for grant under the Plan include Incentive Stock Options, Non-Qualified Stock Options and Restricted Stock. “Incentive Options” are any options designated and qualified as an “incentive stock option” as defined in Section 422 of the Internal Revenue Code. “Non-Qualified Options” are any options that are not an Incentive Option. To the extent that any option designated as an Incentive Option fails in whole or in part to qualify as an Incentive Option, it will constitute a Non-Qualified Option. “Restricted Stock” are shares of common stock issued pursuant to any restrictions and conditions as established by the Plan.
Only our employees (including our officers and Directors if they are employees) are eligible to receive Incentive Options under the Plan.
Our employees, officers and Directors (whether or not employed by us), and service providers are eligible to receive Non-Qualified Options or acquire Restricted Stock under the Plan.
The following tables list the options granted, cancelled and exercised during the fiscal year ended December 31, 2015 to our current and former officers and directors pursuant to the Plan:
| Options Granted | |||||||||||
| Options | Exercise | Expiration | |||||||||
| Name | Grant Date | Granted | Price | Date | |||||||
| Dan Allen | 7/28/2015 | 6,328,764 | $ | 0.034 | 7/28/21 | ||||||
| Michael Jerome | 2/15/2015 | 150,000 | $ | 0.170 | 2/14/20 | ||||||
| Options Cancelled | ||||||||||||
| Weighted | Weighted Average | |||||||||||
| Average | Remaining Contractual | |||||||||||
| Employee | Total Options | Exercise Price | Term (Years) | |||||||||
| Sean Campbell | 4,001,402 | $ | 0.23 | 4.25 | ||||||||
| Patrick Deparini | 1,200,000 | $ | 0.23 | 4.25 | ||||||||
| Dan Sullivan | 3,000,000 | $ | 0.39 | 3.58 | ||||||||
| Options Exercised | ||||||
| Date of | Shares Acquired | Value | ||||
| Name | Exercise | On Exercise | Realized | |||
None
The following lists the options held by our current and former officers and directors:
| Shares underlying unexercised Options which are: | |||||||||||||
| Name | Exercisable | Unexercisable | Exercise Price | Expiration Date | |||||||||
| Dan Allen | 3,639,279 | 2,599,485 | $ | 0.03 | 7/28/2021 | ||||||||
| Ricky Bennett | 2,750,000 | 1,750,000 | $ | 0.04 | 10/31/2020 | ||||||||
| Ricky Bennett | 200,000 | 100,000 | $ | 1.00 | 3/31/2019 | ||||||||
| Michael Jerome | 100,000 | 50,000 | $ | 0.17 | 2/14/2020 | ||||||||
| Sean Campbell | 805,498 | -- | $ | 0.23 | 2/28/2019 | ||||||||
| Dan Sullivan | 1,500,000 | -- | $ | 0.39 | 7/31/2019 | ||||||||
The following shows certain information as of December 31, 2015 concerning the stock options and stock bonuses granted pursuant to the Plan. Each option represents the right to purchase one share of common stock.
| Name of Plan | Total Shares Reserved Under Plan | Shares Reserved for Outstanding Options | Shares Issued | Remaining Options/Shares Under Plan | ||||||||||||
| 2014-2015 Stock Incentive Plan | 15,000,000 | 900,000 | -- | 14,100,000 | ||||||||||||
The following table shows the weighted average exercise price of the outstanding options granted pursuant to the Plan as of December 31, 2015. The Plan has not been approved by our shareholders.
| Plan Name | Number of Securities to be Issued Upon Exercise of Outstanding Options (a) | Weighted-Average Exercise Price of Outstanding Options | Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans, Excluding Securities Reflected in Column (a) | |||||||||
| 2014-2015 Stock Incentive Plan | 900,000 | $ | 0.25 | 14,100,000 | ||||||||
Directors' Compensation
Our directors are not entitled to receive compensation for services rendered to us, or for each meeting attended except for reimbursement of out-of-pocket expenses. We have no formal or informal arrangements or agreements to compensate our director for services she provides as a director of our company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the beneficial ownership of the Company’s common stock as of December 31, 2015 by (i) each person whom the Company knows beneficially owns more than 5% of the outstanding shares of the Company’s common stock; (ii) each of the Company’s officers and directors; and (iii) all the officers and directors as a group. Unless otherwise indicated, each owner has sole voting and investment powers over his shares of common stock.
Title Of Class | Name, Title and Address of Beneficial Owner of Shares | Amount of Beneficial Ownership | Percent of Class | ||||||
| Common | Daniel Allen, Chief Executive Officer | 668,000 | 0.5 | % | |||||
| Common | Ricky G. Bennett, VP of Operations and Compliance | 42,000 | 0.0 | % | |||||
| Common | Michael Jerome, VP of Media and Public Relations | ||||||||
| Common | Scott Jackson, Director | ||||||||
| Common | Doyle Knudson, Director | ||||||||
| All Directors and Officers as a group (5 persons) | 15,482,688 | 12.5 | % | ||||||
| Common | NSG Group, Inc. | 6,280,390 | 5.1 | % | |||||
| Common | Dan Sullivan, Former VP of Marketing (1) | 26,754,755 | 21.7 | % | |||||
Note: As used in this table, “beneficial ownership” means the sole or shared power to vote, or to direct the voting of, a security, or the sole or share investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of a security).
| (1) | Includes 4,000,000 shares of the Company’s common stock held by Arapahoe Foundation, 10,904,455 shares held by Emerald Enterprises and 11,850,300 held in the name of Daniel Sullivan. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
On July 31, 2014, we borrowed $98,150 from an entity controlled by one of our officers and a shareholder. The loan is due and payable on demand and bears no interest. As of December 31, 2015 and 2014, the principal balance owed on this loan was $98,150.
As of December 31, 2014, a related party had loaned us $10,000, in the form of cash and expenses paid on our behalf. 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 from this person and the principal balance of this loan was $30,000 as of December 31, 2015.
As of December 31, 2014, a related party had loaned us $180,122, in the form of cash and expenses paid on our behalf. The loan is due and payable on demand and bears no interest. The Company repaid $125,500 towards this loan during 2015 and as of December 31, 2014 and 2015, the principal balance owed on this loan was $180,122 and $54,622, respectively.
During 2015, the Company borrowed $20,000 from an entity controlled by one of our shareholders. The loan is due and payable on demand and bears no interest. During 2015, we repaid this loan.
During 2015, we borrowed $43,575 from our former Chief Financial Officer. As of December 31, 2015 $43,000 of the loan had been repaid and the principal amount owed was $575. The loan is non-interest bearing, and due on demand.
During October 2015, we borrowed $30,000 from an entity controlled by one of our officers. The loan is due and payable on demand and is non-interest bearing. As of December 31, 2015, the principal balance owed on this loan was $30,000.
In July 2015, we entered into an arrangement with a related party whereby we could borrow up to $500,000 in Convertible Notes. Through December 31, 2015, we borrowed a total of $415,000 which is evidenced by one Convertible Note. The Convertible Note bears interest at 5% per year, payable quarterly in arrears, matures twelve months from the date of issuance and is convertible into shares of our common stock at a per share conversion price of $0.025. As of December 31, 2015, the principal balance owed on this Convertible Note was $415,000.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth fees billed to us by our independent auditors for the years ended 2015 and 2014 for (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services rendered that are reasonably related to the performance of the audit or review of our financial statements that are not reported as Audit Fees, and (iii) services rendered in connection with tax preparation, compliance, advice and assistance.
| SERVICES | 2015 | 2014 | ||||||
| Audit fees | $ | 40,000 | $ | 20,814 | ||||
| Audit-related fees | - | |||||||
| Tax fees | - | |||||||
| All other fees | - | |||||||
| Total fees | $ | 40,000 | $ | 20,814 | ||||
Audit fees and audit related fees represent amounts billed for professional services rendered for the audit of our annual financial statements and the review of our interim financial statements. Before our independent accountants were engaged by to render these services, their engagement was approved by our Directors.
Exhibit Number | Name and/or Identification of Exhibit | ||
| 3 | Articles of Incorporation & By-Laws | ||
(a) Articles of Incorporation (1) | |||
(b) By-Laws (1) |
| 101 | Interactive Data Files (2) | ||
| (INS) XBRL Instance Document | |||
| (SCH) XBRL Taxonomy Extension Schema Document | |||
| (CAL) XBRL Taxonomy Extension Calculation Linkbase Document | |||
| (DEF) XBRL Taxonomy Extension Definition Linkbase Document | |||
| (LAB) XBRL Taxonomy Extension Label Linkbase Document | |||
| (PRE) XBRL Taxonomy Extension Presentation Linkbase Document |
| (1) | Incorporated by reference to the Registration Statement on Form 10-SB, previously filed with the SEC on November 28, 2007. |
| (2) | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Blue Line Protection Group, Inc.
Lakewood, Colorado
We have audited the accompanying consolidated balance sheet of Blue Line Protection Group, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2015, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Blue Line Protection Group, Inc. and its subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has a working capital deficit and recurring net losses. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
May 4, 2016
PCAOB Registered Auditors – www.sealebeers.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Blue Line Protection Group, Inc.
We have audited the accompanying consolidated balance sheets of Blue Line Protection Group, Inc.as of December 31, 2014, and the related consolidated statements of income, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2014. Blue Line Protection Group, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Blue Line Protection Group, Inc. as of December 31, 2014, and the related statements of income, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2014.
As discussed in Note 2 of the accompanying financial statements, the 2014 consolidated financial statements have been restated to correct an error.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has incurred recurring losses and recurring negative cash flow from operating activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Seale and Beers, CPAs
Seale and Beers, CPAs
Las Vegas, Nevada
April 10, 2015, except for Note 2, as to which the date is April 15, 2016.
| BLUE LINE PROTECTION GROUP, INC. | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| December 31, | December 31, | |||||||
| 2015 | 2014 | |||||||
| (Restated) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and equivalents | $ | 16,211 | $ | 211,922 | ||||
| Accounts receivable, net | 51,251 | 62,101 | ||||||
| Accrued receivables | 73,995 | 54,790 | ||||||
| Notes receivable | - | 46,451 | ||||||
| Prepaid expenses and deposits | 20,669 | 2,500 | ||||||
| Total current assets | 162,126 | 377,764 | ||||||
| Fixed assets: | ||||||||
| Machinery and equipment, net | 150,910 | 189,438 | ||||||
| Construction in progress | 1,147,139 | 1,098,553 | ||||||
| Net assets from discontinued operations | 2,782 | - | ||||||
| Total fixed assets | 1,300,831 | 1,287,991 | ||||||
| Total assets | 1,462,957 | $ | 1,665,755 | |||||
| Liabilities and Stockholders' Equity (Deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 332,169 | $ | 295,863 | ||||
| Notes payable | 75,000 | 2,000 | ||||||
| Notes payable - related parties | 213,347 | 288,271 | ||||||
| Convertible notes payable - related parties, net of unamortized discounts | 283,385 | - | ||||||
| Current portion of long-term debt | 679,062 | 3,735 | ||||||
| Net liabilities from discontinued operations | 1,335 | - | ||||||
| Total current liabilities | 1,584,298 | 589,869 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt | 12,836 | 691,780 | ||||||
| Total Long-term liabilities | 12,836 | 691,780 | ||||||
| Total liabilities | 1,597,134 | 1,281,649 | ||||||
| Stockholders' equity (deficit): | ||||||||
| Preferred Stock, $0.001 par value, 100,000,000 shares authorized, | ||||||||
| no shares issued and outstanding as of December 31, 2015 and | ||||||||
| December 31, 2014, respectively | - | - | ||||||
| Common Stock, $0.001 par value, 1,400,000,000 shares authorized, | ||||||||
| 125,348,026 and 122,845,282 issued and outstanding as of | ||||||||
| December 31, 2015 and December 31, 2014, respectively | 125,348 | 122,845 | ||||||
| Common Stock, owed but not issued, 12,923 shares and 749,000 shares | ||||||||
| as of December 31, 2015 and December 31, 2014, respectively | 13 | 749 | ||||||
| Additional paid-in capital | 4,276,291 | 3,480,934 | ||||||
| Accumulated (deficit) | (4,535,829 | ) | (3,220,422 | ) | ||||
| Total stockholders' equity (deficit) | (134,177 | ) | 384,106 | |||||
| Total liabilities and stockholders' equity (deficit) | $ | 1,462,957 | $ | 1,665,755 | ||||
The accompanying notes are an integral part of these financial statements
BLUE LINE PROTECTION GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the years ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| (Restated) | ||||||||
| Revenue | $ | 2,618,849 | $ | 1,032,168 | ||||
| Cost of revenue | (2,227,176 | ) | (778,777 | ) | ||||
| Gross profit | 391,673 | 253,391 | ||||||
| Expenses: | ||||||||
| Advertising | 30,502 | 189,536 | ||||||
| Depreciation | 41,912 | 27,172 | ||||||
| General and administrative expenses | 1,500,382 | 3,353,998 | ||||||
| Total expenses | 1,572,796 | 3,570,706 | ||||||
| Operating loss | (1,181,123 | ) | (3,317,315 | ) | ||||
| Other expenses: | ||||||||
| Interest expense | (84,484 | ) | (11,308 | ) | ||||
| Interest income | 3,106 | 10,682 | ||||||
| Gain on sale of securities | - | 200,000 | ||||||
| Gain on forgiveness of debt | 2,000 | - | ||||||
| Total other expenses | (79,378 | ) | 199,374 | |||||
| Net loss from continuing operations | (1,260,501 | ) | (3,117,941 | ) | ||||
| Net loss from discontinued operations | (54,906 | ) | - | |||||
| Net loss | $ | (1,315,407 | ) | $ | (3,117,941 | ) | ||
| Net loss per share - basic: | ||||||||
| Continuing operations | $ | (0.01 | ) | $ | (0.03 | ) | ||
| Discontinued operations | (0.00 | ) | (0.00 | ) | ||||
| Net loss per share | $ | (0.01 | ) | $ | (0.03 | ) | ||
| Net loss per share - diluted: | ||||||||
| Continuing operations | $ | (0.01 | ) | $ | (0.03 | ) | ||
| Discontinued operations | (0.00 | ) | (0.00 | ) | ||||
| Net loss per share | $ | (0.01 | ) | $ | (0.03 | ) | ||
| Weighted average number of | ||||||||
| common shares outstanding - basic | 124,545,378 | 116,942,037 | ||||||
| Weighted average number of | ||||||||
| common shares outstanding - diluted | 124,545,378 | 122,184,808 | ||||||
The accompanying notes are an integral part of these financial statements
| BLUE LINE PROTECTION GROUP, INC. | ||||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||||||||||||||||||||||||||
| Additional | Stockholders' | |||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Stock | Accumulated | Equity | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Payable | (Deficit) | (Deficit) | |||||||||||||||||||||||||
| Balance, December 31, 2013 | - | $ | - | 106,820,000 | $ | 106,820 | $ | (5,795 | ) | $ | - | $ | (102,481 | ) | $ | (1,456 | ) | |||||||||||||||
| Donated capital | - | - | - | - | 127,106 | - | - | 127,106 | ||||||||||||||||||||||||
| Issued for cash $0.09 per share | - | - | 13,068,050 | 13,068 | 1,200,393 | - | - | 1,213,461 | ||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||
| Issued for fixed assets $0.09 per share | - | - | 323,078 | 323 | 29,677 | - | - | 30,000 | ||||||||||||||||||||||||
| Issued to retire notes payable $0.09 per share | - | - | 1,346,154 | 1,346 | 123,654 | - | - | 125,000 | ||||||||||||||||||||||||
| Stock owed for services $0.67 per share | - | - | - | - | 187,320 | 280 | - | 187,600 | ||||||||||||||||||||||||
| Issued for cash $0.32 per share | - | - | - | - | 149,531 | 469 | - | 150,000 | ||||||||||||||||||||||||
| Issuance of nonqualified stock options | - | - | - | - | 13,160 | - | - | 13,160 | ||||||||||||||||||||||||
| Issued for services $0.38 per share | - | - | 1,250,000 | 1,250 | 473,750 | - | - | 475,000 | ||||||||||||||||||||||||
| Issued to employees for services $0.25 per share | - | - | 38,000 | 38 | 9,462 | - | - | 9,500 | ||||||||||||||||||||||||
| . | ||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | 1,172,676 | - | - | 1,172,676 | ||||||||||||||||||||||||
| Net loss for the year ended December 31, 2014 (Restated) | - | - | - | - | - | - | (3,117,941 | ) | (3,117,941 | ) | ||||||||||||||||||||||
| Balance, December 31, 2014 | - | - | 122,845,282 | 122,845 | 3,480,934 | 749 | (3,220,422 | ) | 384,106 | |||||||||||||||||||||||
| Common stock issued for cash | - | - | 400,000 | 400 | 49,600 | - | - | 50,000 | ||||||||||||||||||||||||
| Common stock issued for services | - | - | 3,266,667 | 3,267 | 521,900 | - | - | 525,167 | ||||||||||||||||||||||||
| Common stock issued for stock payable | - | - | 736,077 | 736 | - | (736 | ) | - | - | |||||||||||||||||||||||
| Common stock issued with note | - | - | 100,000 | 100 | 14,286 | - | - | 14,386 | ||||||||||||||||||||||||
| Beneficial conversion feature on convertible note | - | - | - | - | 187,800 | - | - | 187,800 | ||||||||||||||||||||||||
| Common stock issued for exchange of stock options | - | - | (2,000,000 | ) | (2,000 | ) | 2,000 | - | - | - | ||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | 19,771 | - | - | 19,771 | ||||||||||||||||||||||||
| Net loss for the year ended December 31, 2015 | - | - | - | - | - | - | (1,315,407 | ) | (1,315,407 | ) | ||||||||||||||||||||||
| Balance, December 31, 2015 | - | $ | - | 125,348,026 | $ | 125,348 | $ | 4,276,291 | 13 | $ | (4,535,829 | ) | $ | (134,177 | ) | |||||||||||||||||
The accompanying notes are an integral part of these financial statements
| BLUE LINE PROTECTION GROUP, INC. | ||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| For the years ended | ||||||||
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| (Restated) | ||||||||
| Operating activities | ||||||||
| Net loss | $ | (1,315,407 | ) | $ | (3,117,941 | ) | ||
| Adjustments to reconcile net loss to | ||||||||
| net cash used in operating activities: | ||||||||
| Depreciation | 41,912 | 27,172 | ||||||
| Gain on sale of investments | - | (200,000 | ) | |||||
| Stock-based compensation expense | 544,938 | 1,182,176 | ||||||
| Shares issued for services | - | 662,600 | ||||||
| Shares issued for prepaid expenses | - | 133,161 | ||||||
| Amortization of discounts on note payable | 70,571 | - | ||||||
| Gain on forgiveness of notes payable | (2,000 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease (Increase) in accounts receivable | (8,355 | ) | (116,892 | ) | ||||
| Decrease (Increase) in deposits and prepaid expenses | (18,169 | ) | (2,500 | ) | ||||
| (Decrease) Increase in accounts payable and accrued liabilities | 2,545 | 297,018 | ||||||
| Increase in liabilities from discontinued operations | 1,335 | - | ||||||
| (Decrease) Increase in long-term liabilities | - | 691,781 | ||||||
| Net cash (used) by operating activities | (682,630 | ) | (443,425 | ) | ||||
| Cash flows from investing activities | ||||||||
| Issuance of notes receivable | - | (155,000 | ) | |||||
| Receipt of payments from notes receivable | 46,451 | 108,549 | ||||||
| Sale of investments held to maturity | - | 200,000 | ||||||
| Purchase of fixed assets | (3,384 | ) | (186,610 | ) | ||||
| Purchase of fixed assets from discontinued operations | (2,782 | ) | - | |||||
| Construction in progress | (14,824 | ) | - | |||||
| Purchase of property, plant and equipment | - | (1,098,553 | ) | |||||
| Net cash provided by investing activities | 25,461 | (1,131,614 | ) | |||||
| Financing activities | ||||||||
| Donated capital | - | 7,106 | ||||||
| Repayment of notes payable | (3,617 | ) | (41,008 | ) | ||||
| Proceeds from notes payable | 75,000 | 166,008 | ||||||
| Repayment of notes payable - related party | (188,500 | ) | (106,325 | ) | ||||
| Proceeds from notes payable - related party | 113,575 | 394,596 | ||||||
| Proceeds from convertible notes payable - related party | 415,000 | - | ||||||
| Common stock payable | - | 748 | ||||||
| Issuances of common stock | 50,000 | 1,362,992 | ||||||
| Net cash provided by financing activities | 461,458 | 1,784,117 | ||||||
| Net increase (decrease) in cash | (195,711 | ) | 209,078 | |||||
| Cash - beginning | 211,922 | 2,844 | ||||||
| Cash - ending | $ | 16,211 | $ | 211,922 | ||||
| Supplemental disclosures: | ||||||||
| Interest paid | $ | - | $ | - | ||||
| Income taxes paid | $ | - | $ | - | ||||
| Non-cash transactions: | ||||||||
| Common stock issued for fixed assets | $ | - | $ | 30,000 | ||||
| Common stock issued for stock payable | $ | 736 | $ | - | ||||
| Discount due to common stock issued with note | $ | 14,386 | $ | - | ||||
| Debt discount due to beneficial conversion feature | $ | 187,800 | $ | - | ||||
| Common stock exchanged for options | $ | 2,000 | $ | - | ||||
| Interest capitalized as construction in progress | $ | 33,762 | $ | - | ||||
The accompanying notes are an integral part of these financial statements
Blue Line Protection Group, Inc.
Notes to Consolidated Financial Statements
Note 1 – History and organization of the company
The Company was originally organized September 11, 2006 (Date of Inception) under the laws of the State of Nevada, as The Engraving Masters, Inc. The Company was authorized to issue up to 100,000,000 shares of its common stock and 100,000,000 shares of preferred stock, each with a par value of $0.001 per share.
On March 14, 2014, the Company acquired Blue Line Protection Group, Inc., a Colorado corporation formed in February 2014 (“Blue Line Colorado”), as a wholly-owned subsidiary of the Company. Blue Line Colorado provides protection, compliance and financial services to the lawful cannabis industry.
On March 15, 2014, the Company agreed to acquire all of the issued and outstanding membership interests in Blue Line Protection Group, LLC, a Colorado limited liability company (“Blue Line LLC”). The closing of the acquisition is to take place once the Company is provided with financial statements, audited as necessary and in proper form, which would be satisfactory for filing in an 8-K report with the Securities and Exchange Commission. If the acquisition of Blue Line LLC does not occur by July 31, 2014, the agreement pertaining to the acquisition of Blue Line LLC will terminate. As of July 31, 2014, the terms and conditions of the agreement were not satisfied and was resultantly been terminated.
On May 2, 2014, the Company changed its name 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 number capital of the Company concurrently increased to 1,400,000,000 shares of $0.001 par value common stock. All references to share and per share amounts in the condensed consolidated financial statements and accompanying notes thereto have been retroactively restated to reflect the forward stock split.
Blue Line Protection Group, Inc. provides armed protection, financial solutions, logistics, and compliance services for businesses engaged in the legal cannabis industry. The Company offers asset logistic services, such as armored transportation service; security services, including shipment protection, money escorts, security monitoring, asset vaulting, VIP and dignitary protection, and others; financial services, such as handling transportation and storage of currency; training; and compliance services.
Note 2 – Accounting policies and procedures
Principles of consolidation
For the years ended December 31, 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.”
Basis of presentation
The financial statements present the balance sheets, statements of operations, stockholder’s equity (deficit) and cash flows of the Company. The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America.
The Company has adopted December 31 as its fiscal year end.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company maintains a cash balance in a non-interest-bearing account that currently does not exceed federally insured limits. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of December 31, 2015 and 2014.
Accounts receivable
Accounts receivable are stated at the amount the Company expects to collect from outstanding balances and do not bear interest. The Company provides for probable uncollectible amounts through an allowance for doubtful accounts, if an allowance is deemed necessary. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. On a periodic basis, management evaluates its accounts receivable and determines the requirement for an allowance for doubtful accounts based on its assessment of the current and collectible status of individual accounts with past due balances over 90 days. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.
Allowance for uncollectible accounts
The Company estimates losses on receivables based on known troubled accounts, if any, and historical experience of losses incurred. The allowance for doubtful customer and vendor receivables was $0 and $18,864 at December 31, 2015 and 2014, respectively.
Notes receivable
Notes receivable are measured at historical cost and reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans. Interest income on notes receivable is recognized using the interest method. Interest income on impaired loans is recognized as cash is collected or on a cost-recovery basis.
Property and equipment
Property and equipment is recorded at cost and capitalized from the initial date of service. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
| Automotive Vehicles | 5 years | |
| Furniture and Equipment | 7 years | |
| Buildings and Improvements | 15 years |
The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment there was no impairment as December 31, 2015 and 2014. Depreciation expense for the years ended December 31, 2015 and 2014 totaled $41,912 and $27,172, respectively.
Impairment of long-lived assets
The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost or carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and its fair value or disposable value. As of December 31, 2015 and 2014, the Company determined that none of its long-term assets were impaired.
Concentration of business and credit risk
The Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company’s financial instruments that are exposed to concentration of credit risks consist primarily of cash. The Company maintains its cash in bank accounts, which may at times, exceed federally insured limits.
The Company had four major customers which generated approximately 49% (15%, 12%, 12% and 10%) of total revenue in the year ended December 31, 2015.
The Company had two major customers which generated approximately 26% (15%, and 11%, ) of total revenue in the year ended December 31, 2014.
Fair value of financial instruments
The carrying amounts reflected in the balance sheets for cash, accounts payable and related party payables approximate the respective fair values due to the short maturities of these items. The Company does not hold any investments that are available-for-sale.
As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The three levels of the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
Revenue recognition
The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of its fees is reasonably assured.
Advertising costs
The Company expenses all costs of advertising as incurred. There were $30,502 and $189,536 in advertising costs for the years ended December 31, 2015 and 2014, respectively.
General and administrative expenses
The significant components of general and administrative expenses consist mainly of legal and professional fees and compensation.
Stock-based compensation
The Company records stock-based compensation in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation.” FASB ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 505-50, “Equity-Based Payments to Non-Employees”, which requires that such equity instruments are recorded at their fair value on the measurement date, with the measurement of such compensation being subject to periodic adjustment as the underlying equity instruments vest.
Cost of Revenue
The Company’s cost of revenue primarily consists of labor, fuel costs and items purchased by the Company specifically purposed for the benefit of the Company’s client.
Basic and Diluted Earnings per share
Net loss per share is provided in accordance with FASB ASC 260-10, “Earnings per Share”. Basic loss per share is computed by dividing losses available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive.
Dividends
The Company has not yet adopted any policy regarding payment of dividends. No dividends have been paid or declared since inception.
Income Taxes
The Company follows FASB Codification Topic 740-10-25 (ASC 740-10-25) for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
Restatement
On April 8, 2016, the Company determined that the Company’s consolidated financial statements for the fiscal year ended December 31, 2014 should no longer be relied upon since the expense for the fair value of the stock options vested upon grant was incorrectly amortized instead of being expensed during the year.
The effects of the restatement on the Company’s financial statements as of, and for the year ended December 31, 2014, are following:
| Balance Sheet | ||||||||||||
| As Previously | Effect of | As | ||||||||||
| Reported | Restatement | Restated | ||||||||||
| Additional paid-in capital | $ | 2,788,934 | $ | 692,000 | $ | 3,480,934 | ||||||
| Accumulated (Deficit) | $ | (2,528,422) | $ | (692,000) | $ | (3,220,422) | ||||||
| Consolidated Statement of Operations | ||||||||||||
| As Previously | Effect of | As | ||||||||||
| Reported | Restatement | Restated | ||||||||||
| Stock based compensation | $ | 480,675 | $ | 692,000 | $ | 1,172,675 | ||||||
| Net loss | $ | (2,425,941 | ) | $ | (692,000 | ) | $ | (3,117,941 | ) | |||
| Net loss per share – basic | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.03 | ) | |||
| Net loss per share – fully diluted | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.03 | ) | |||
| Consolidated Statement of Shareholders’ Equity | ||||||||||||
| As Previously | Effect of | As | ||||||||||
| Reported | Restatement | Restated | ||||||||||
| Additional paid-in capital | $ | 2,788,934 | $ | 692,000 | $ | 3,480,934 | ||||||
| Accumulated (Deficit) | $ | (2,528,422 | ) | $ | (692,000 | ) | $ | (3,220,422 | ) | |||
| Consolidated Statement of Cash Flows | ||||||||||||
| As Previously | Effect of | As | ||||||||||
| Reported | Restatement | Restated | ||||||||||
| Operating activities | ||||||||||||
| Net loss | $ | (2,425,941 | $ | (692,000 | ) | $ | (3,117,941 | ) | ||||
| Stock based compensation expense | $ | 490,176 | $ | 692,000 | $ | 1,182,176 | ||||||
Contingencies
On December 28, 2015 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 accrued 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. If litigation is commenced the Company will attempt a reasonable out-of-court settlement and if such efforts are not successful, will vigorously 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. If litigation is commenced the Company will attempt a reasonable out-of-court settlement and if such efforts are not successful, will vigorously 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.
Leases
On February 15, 2014 the company entered into a sublease agreement for approximately 2,000 square feet of office space on a month to month basis contingent on the lessor’s master lease for the premises. The lease amount adjusts yearly and the current lease is $1,613.56 per month.
On July 30, 2015 the company entered into a month to month lease for approximately 1,500 square feet to be used for training.
Recent pronouncements
The Company evaluated all recent accounting pronouncements issued and determined that the adoption of these pronouncements would not have a material effect on the financial position, results of operations or cash flows of the Company.
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 $1,315,407 for the year ended December 31, 2015 and had a working capital deficit of $1,422,172 as of December 31, 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. The Company is currently conducting a private placement of its common stock to raise proceeds to finance its plan of operation. There are no assurances that the Company will be successful and without sufficient financing it would be unlikely for the Company to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. These financial statements do not include any adjustments that might arise from this uncertainty.
Note 4 – Deposits and notes receivable
On May 20, 2014, the Company entered into a Security Deposit Agreement with a third-party fuel credit provider, whereby the Company was obligated to pay an initial security deposit in the amount of $2,500. The balance of the Deposit, as of December 31, 2015 and 2014 was $2,500.
The Company provides short-term, secured financing to clients, represented as notes receivable. During the year ended December 31, 2014, the Company loaned a total of $105,000 to a non-affiliated entity on a revolving basis at a rate of 18% per annum and due within one year from the date of issuance. The borrower repaid the entire $105,000 balance and interest accrued thereupon during the year ended December 31, 2014. As of December 31, 2014 the principal balance of the loan is $0 and interest income recognized was $121.
On May 15, 2014, the Company loaned $50,000 to a non-affiliated entity on a revolving basis at a rate of 18% per annum and due within one year from the date of issuance. As of December 31, 2014, the principal balance of the loan is $46,451 and accrued interest thereupon was $834. The outstanding balance was collected during 2015.
Note 5 – Fixed assets and construction in progress
Fixed assets consisted of the following at:
| December 31, 2015 | December 31, 2014 | |||||||
| Automotive vehicles | $ | 173,926 | $ | 173,926 | ||||
| Furniture and equipment | 46,068 | 44,204 | ||||||
| Fixed assets, total | 219,994 | 218,130 | ||||||
| Less: accumulated depreciation | (69,084 | ) | (28,692 | ) | ||||
| Fixed assets, net | $ | 150,910 | $ | 189,438 | ||||
Depreciation expenses for the years ended December 31, 2015 and 2014 were $41,912 and $27,172, 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 December 31, 2015, approximately $363,377 in capital improvements and $33,762 of capitalized expenses have been made to the property. As of December 31, 2015, the Company has not yet completed the construction on the property and it was not available and ready for use, accordingly, no depreciation expense has been recorded. As of December 31, 2015 and 2014, the balance of construction in progress was $1,147,139 and $1,098,553, respectively.
Note 6 – Discontinued Operations
Effective September 30, 2015, the Company ceased operations of Blue Line Advisory Services, Inc.
The following table summarizes the assets and liabilities of discontinued operations and the loss from discontinued operations:
| December 31, 2015 | December 31. 2014 | |||||||
| Assets of discontinued operations: | ||||||||
| Fixed assets | $ | 2,782 | $ | — | ||||
| Total assets held for disposal | 2,782 | — | ||||||
| Liabilities of discontinued operations: | ||||||||
| Accounts payable | 1,335 | — | ||||||
| Total liabilities held for disposal | $ | 1,335 | $ | — | ||||
Income and Expenses of Discontinued Operations
| For the Period from | ||||||||
| For the Year | April 22, 2014 | |||||||
| Ended | (Inception) to | |||||||
| December 31, 2015 | June 30, 2014 | |||||||
| Revenue | $ | 67,920 | __ | |||||
| Costs of revenue | $ | 52,222 | __ | |||||
| General and administrative expenses | $ | 70,604 | $ | — | ||||
| Loss from discontinued operations | $ | (54,906 | ) | $ | — | |||
Note 7 – Notes payable
Through December 31, 2014, a non-affiliated third-party loaned the Company an aggregate of $2,000 in cash. The note bears no interest and is due upon demand. During 2015, the note was forgiven resulting in a gain on the forgiveness of debt of $2,000.
On February 21, 2014, the Company issued a Promissory Note to one non-affiliated person in the amount of $100,000. The loan was due and payable on demand and bore no interest. In April 2014, the lender agreed to convert the entire principal balance of $100,000, into 1,076,923 shares of common stock. As of December 31, 2014 and 2015, the principal balance owed on this loan is $0.
On February 21, 2014, the Company issued a Promissory Note to one non-affiliated entity in the amount of $25,000. The loan was due and payable on demand and bore no interest. In April 2014, the lender agreed to convert the entire principal balance of $25,000, into 269,231 shares of common stock. As of December 31, 2014 and 2015, the principal balance owed on this loan is $0.
On March 26, 2014, the Company issued a Promissory Note to one non-affiliated person in the amount of $25,000 for cash paid to purchase a vehicle on behalf of the Company. The loan was due and payable on demand and bore no interest. The loan was repaid in full. As of December 31, 2014 and 2015, the principal balance owed on this loan was $0.
During April 2014, the Company borrowed $16,008 from a non-affiliated person. The loan was due and payable on demand and bore no interest. The loan was repaid in full. As of December 31, 2014 and 2015, the principal balance owed on this loan was $0.
During February 2015, the Company borrowed $50,000 from a non-affiliated person. The loan was due and payable on demand with interest at 10% per annum. As of December 31, 2015, the principal balance owed on this loan was $50,000.
During April 2015, the Company borrowed $25,000 from a non-affiliated person. The loan was due and payable on demand and bore interest at 6% and has a 5% penalty upon default. As of December 31, 2015, the principal balance owed on this loan was $25,000.
Note 8 – Notes payable – related party
On July 31, 2014, the Company borrowed $98,150 from an entity materially controlled by an officer and shareholder of the Company. The loan is due and payable on demand and bears no interest. As of December 31, 2015 and 2014, the principal balance owed on this loan is $98,150.
As of December 31, 2014, a related party loaned the Company an aggregate of $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 December 31, 2015 and 2014, the principal balance owed on this loan was $30,000 and $10,000, respectively.
As of December 31, 2014, a related party loaned the Company an aggregate of $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 December 31, 2015 and 2014, the principal balance owed on this loan was $54,622 and $180,122, respectively.
During 2015, the Company borrowed $20,000 from an entity materially controlled by a shareholder of the Company. The loan is due and payable on demand and bears no interest. During 2015, the Company repaid the amount owed of $20,000.
During 2015, the company borrowed $43,575 from the former CFO. As of December 31, 2015 $43,000 of the loan had been repaid. As of December 31, 2015 the principal amount owed is $575. The note is non-interest bearing, due on demand and outstanding as of December 31, 2015.
During October 2015, the Company borrowed $30,000 from an entity materially controlled by an officer of the Company. The loan was due and payable on demand and is non-interest bearing. As of December 31, 2015, the principal balance owed on this loan was $30,000.
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. As of December 31, 2015, the principal balance owed on this Convertible Note is $415,000.
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 $187,800 was attributed to the beneficial conversion feature of the note, which amount is being amortized through the maturity date of the note. As of December 31, 2015, a total of $56,185 has been amortized and recorded as interest expense, leaving a balance of $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 $283,385 and $0 as of December 31, 2015 and 2014, respectively.
Note 9 – Long term notes payable
On July 15, 2014, the Company purchased a commercial building for a total purchase price of $750,000, for which the Company paid a down payment of $75,000 and financed the remaining $675,000 in the form of a promissory note. The note bears interest at a rate of 5% per annum on the unpaid principal balance and is due in full on July 31, 2016. Interest is paid monthly, in arrears, in the amount of $2,813 beginning August 31, 2014. As of December 31, 2015, the principal balance is $675,000 and a total of $49,292 in interest payments have been made.
On November 21, 2014, the Company purchased a vehicle for a purchase price of $20,827, net of discounts. The Company financed the entire amount of $20,827 at an interest rate of 2.42% for five years, with a maturity date of December 5, 2019. As of December 31, 2015, the total principal balance of the note is $16,898, of which $12,836 is considered a long-term liability and the current portion of $4,062 is considered a current liability.
Note 10 - Stockholders’ equity
The Company was originally authorized to issue 100,000,000 shares of $0.001 par value common stock and 100,000,000 shares of $0.001 par value preferred stock. On May 6, 2014, the Company effected a forward stock split and a pro-rata increase in its authorized common stock on a basis of 14-to-1, whereby each shareholder received 14 newly issued shares of common stock for each 1 share held. Additionally, the number of authorized shares increased to 1,400,000,000 shares of $0.001 par value common stock. All references to share and per share amounts in the condensed consolidated financial statements and accompanying notes thereto have been retroactively restated to reflect the forward stock split.
From March 24 through March 27, 2014, the Company sold an aggregate of 13,068,050 shares of its common stock for gross cash proceeds of $1,213,501.
On March 27, 2014, the Company purchased a vehicle from a non-affiliated entity with 323,078 shares of its common stock in lieu of cash. The value of this transaction was $30,000.
On April 8, 2014, the Company issued a total of 1,076,923 shares of common stock for the conversion of a promissory note in the total amount of $100,000.
On April 8, 2014, the Company issued a total of 269,231 shares of common stock for the conversion of a promissory note in the total amount of $25,000.
On June 11, 2014, the Company entered into an investment banking agreement, for which it was obligated to issue 280,000 shares of its common stock with a fair market value of $187,600. The stock was subscribed for; however, the certificates representing the shares were not issued as of December 31, 2014 and, resultantly, are considered owed as a common stock payable of $280.
On September 15, 2014, the Company received a subscription for 468,750 shares of its common stock for $150,000. The stock was subscribed for; however, the certificates representing the shares were not issued as of December 31, 2014 and, resultantly, are considered owed as a common stock payable of $469.
On October 22, 2014, the Company entered into an investment banking agreement, for which it issued 1,250,000 shares of its common stock with a fair market value of $475,000.
On December 24, 2014, the Company issued 38,000 shares of its common stock to various employees under its employee stock incentive program. The fair value of the shares on the date of issuance was $9,500.
During the year ended December 31, 2015 the Company sold a total of 400,000 shares of common stock for cash in the amount of $50,000 ($.125 per share).
During the year ended December 31, 2015 the Company issued a total of 3,226,667 shares of common stock to various employees and consultant valued at $526,167 as compensation ($.161 per share)
During the year ended December 31, 2015 the Company issued a total of 100,000 shares of common stock as additional consideration on a note payable valued at $14,386 ($.144 per share). The $14,386 was recognized as a discount to the note which was fully amortized to interest expense during 2015.
During the year ended December 31, 2015 the Company exchanged 2, 000,000 shares of common stock for stock options.
During the year ended December 31, 2015, the Company issued 736,077 shares of our common stock for shares committed to be issued during 2014. This amount had previously been recorded as a common stock payable.
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 follow:
Number Of RSUs | Weighted-Average Grant Date Fair Value Per Share | |||||||
| Balance at December 31, 2014 | 0 | $ | 0.00 | |||||
| Granted | 9,050,000 | $ | 0.16 | |||||
| Vested | 3,266,667 | $ | 0.16 | |||||
| Cancelled | (5,783,333 | ) | $ | 0.16 | ||||
| Balance at December 31, 2015 | -- | $ | 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. During 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 year ended December 31, 2015, the Company recorded $42,500of 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. During 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 1,033,333 shares to the Company for cancellation. During the year ended December 31, 2015, the Company recorded $162.667 of share-based compensation expense related to the shares vested under the original employment agreements.
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. The Company recognized compensation expense in the amount of $320,000 during the year ended December 31, 2015. This award was modified during November 2015 and the 2,000,000 previously issued common shares were exchanged for 4,500,000 common stock options.
Total stock-based compensation expense in connection with restricted stock units granted to employees recognized in the consolidated statement of operations for year ended December 31, 2015 and 2014 was $525,167and $0, respectively.
Note 11 – Warrants and options
All stock options have an exercise price equal to the fair market value of the common stock on the date of grant. The fair value of each option award is estimated using a Black-Scholes option valuation model. The Company has not paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model. Volatility is an estimate based on the calculated historical volatility of similar entities in industry, in size and in financial leverage, whose share prices are publicly available. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company has no historical experience with which to establish a basis for determining an expected life of these awards. Therefore, the Company only gave consideration to the contractual terms and did not consider the vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures significant to the expected life of the option award. The Company bases the risk-free interest rate used in the Black-Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term equal to the expected life of the award. In 2014, the Company used a volatility ranging from 256.35% to 264.57%, risk free rate ranging from 1.52% to 1.80%, an expected term of 5 years and zero expected dividends. In 2015, the Company used a volatility ranging from 260% to 265%, risk free rate ranging from 1.37% to 1.62%, an expected term of 5 years and zero expected dividends.
As of December 31, 2013, there were no warrants or options outstanding to acquire any additional shares of common stock.
On March 1, 2014, the Company issued stock options to an officer of the Company to purchase 4,806,900 shares of the Company’s common stock at an exercise price of $0.14 per share. The options vest in three annual installments, with the first portion immediately vested. The options carry a life of five years.
On April 1, 2014, the Company issued stock options to an employee of the Company to purchase 300,000 shares of the Company’s common stock at an exercise price of $0.07 per share. The options vest in three annual installments, with the first portion immediately vested. The options carry a life of five years.
On June 3, 2014, the Company issued stock options to an employee of the Company to purchase 150,000 shares of the Company’s common stock at an exercise price of $0.07 per share. The options vest over three years. The options carry a life of five years.
On August 1, 2014, the Company issued stock options to an officer of the Company to purchase 4,500,000 shares of the Company’s common stock at an exercise price of $0.39 per share. The options vest in three annual installments, with the first portion immediately vested. The options carry a life of five years.
On August 1, 2014, the Company issued stock options to an officer of the Company to purchase 1,200,000 shares of the Company’s common stock at an exercise price of $0.39 per share. The options vest in three annual installments, with the first portion immediately vested. The options carry a life of five years.
On July 9, 2014, the Company issued non-employee stock options to a third-party consultant purchase up to 30,000 shares of the Company’s common stock. The options have a fair market value of $13,160, all of which was recognized as professional fees during the year ended December 31, 2014.
On December 10, 2014, the Company issued stock options to its employees under an incentive plan. The employees were granted options to purchase up to an aggregate of 900,000 shares of the Company’s common stock at an exercise price of $0.25 per share and carry a life of five years.
During the year ended December 31, 2015 the Company granted a total of 1,410,000 stock options at prices ranging from $.05 -$.23 to various employees. The options vest over three years and carry a life of five years.
On July 28, 2015, the Company issued stock options to an officer of the Company to purchase 6,328,764 shares of the Company’s common stock at an exercise price of $0.034 per share. The options vest over three years, with the first third immediately vested. The options carry a life of five years.
During the year ended December 31, 2015 the Company granted a total of 5,336,238 additional stock options as a result of the modification of previously granted options and restricted stock unit awards.
During the year ended December 31, 2015 a total of 7,705,164 stock options were forfeited by various employees of the Company.
The following is a summary of the Company’s stock option activity for the years ended December 31, 2015 and 2014:
Number Of Shares | Weighted-Average Exercise Price | ||||||||
| Outstanding at December 31, 2013 | - | $ | 0.00 | ||||||
| Granted | 11,886,900 | $ | 0.29 | ||||||
| Exercised | - | $ | 0.00 | ||||||
| Cancelled | - | $ | 0.00 | ||||||
| Outstanding at December 31, 2014 | 11,886,900 | $ | 0.29 | ||||||
| Granted | 7,738,764 | $ | 0.06 | ||||||
| Granted as a result of modified awards | 5,336,238 | $ | 0.06 | ||||||
| Exercised | - | $ | 0.00 | ||||||
| Cancelled | (7,705,164 | ) | $ | 0.29 | |||||
| Outstanding at December 31, 2015 | 17,256,738 | $ | 0.14 | ||||||
| Options exercisable at December 31, 2014 | 2,204,417 | $ | 0.58 | ||||||
| Options exercisable at December 31, 2015 | 8,150,896 | $ | 0.19 | ||||||
The following tables summarize information about stock options outstanding and exercisable at December 31, 2015 and 2014:
| 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 | |||||
| 17,256,738 | 4.47 | $ 0.14 | 8,150,896 | $ 0.19 | ||||||
| OPTIONS OUTSTANDING AND EXERCISABLE AT DECEMBER 31, 2014 | |||||||||||
| 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 - 0.71 | 11,886,900 | 2.39 | $ 0.29 | 2,204,417 | $ 0.58 | ||||||
| 11,886,900 | 2.39 | $ 0.29 | 2,204,417 | $ 0.58 | |||||||
Total stock-based compensation expense in connection with options and modified awards recognized in the consolidated statement of operations for the years ended December 31, 2015 and 2014 was $19,771and $1,172,676, respectively.
Note 12 – Income taxes
For the years ended December 31, 2015 and 2014, the Company incurred net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At December 31, 2015 and 2014, the Company had approximately $3,224,320 and $2,528,422 of federal and state net operating losses. The net operating loss carry forwards, if not utilized, will begin to expire in 2027. The provision for income taxes consisted of the following components for the years ended December 31:
Components of net deferred tax assets, including a valuation allowance, are as follows at December 31:
| December 31 | ||||||||
| 2015 | 2014 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forwards | $ | 1,128,512 | $ | 884,948 | ||||
| Valuation allowance | (1,128,512 | ) | (884,948 | ) | ||||
| Total deferred tax assets | $ | - | $ | - | ||||
The valuation allowance for deferred tax assets as of December 31, 2015 and 2014 was $1,128,512 and $884,948, respectively. In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As a result, management determined it was more likely than not the deferred tax assets would not be realized as of December 31, 2015 and 2014 and recorded a full valuation allowance.
Reconciliation between the statutory rate and the effective tax rate is as follows at December 31:
| 2015 & 2014 | ||||
| Federal statutory tax rate | (35.0 | ) % | ||
| Permanent difference and other | 35.0 | % | ||
Note 13 – Subsequent Events
In January 2016 the Company borrowed $58,000 from an unrelated third party.
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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 may prepay this note according to the following schedule:
| Payment Dates | ||||
| On or before | Payment Amount | |||
| May 27, 2016 | $ | 69,600 | ||
| June 26, 2016 | $ | 75,400 | ||
| July 26, 2016 | $ | 78,300 | ||
After July 26, 2016, the Company may not prepay the note.
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 April 1, 2017.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
BLUE LINE PROTECTION GROUP, INC. (Registrant) | |||
May 4, 2016 | By: | /s/ Daniel Allen | |
| Daniel Allen, Chief Executive Officer | |||
In accordance with the requirements of the Securities Act of 1933, this Annual Report was signed by the following persons in the capacities and on the dates stated:
| Signature | Title | Date | ||
| /s/ Daniel Allen | Chief Executive, Financial and Accounting Officer and a Director | May 4, 2016 | ||
| Daniel Allen | ||||
| /s/ Scott Jackson | Director | May 4, 2016 | ||
| Scott Jackson |
| Director | ||||
| Doyle Knudson |
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