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, 2019
| [ ] | 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) | |
5765 Logan Street Denver, CO |
80216 | |
| (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 | Trading Symbol | Name of each exchange on which registered | ||
| None | None | None |
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(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 [ ] 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 [ ] 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 [ ]
Indicated by check mark whether the registrant has submitted electronically 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 [ ] No [X]
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 [ ] | Accelerated filer [ ] |
| Non-accelerated filer [X] | Smaller reporting company [X] |
| Emerging growth company [ ] |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2019 was approximately $672,000.
As of August 13, 2020 the registrant had 793,357,428 outstanding shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
BLUE LINE PROTECTION GROUP, INC.
FORM 10-K
For the year ended December 31, 2019
TABLE OF CONTENTS
| 2 |
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.
| 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, 2019 approximately 74% of our revenue was derived from transportation and banking services. The remaining 26% of our revenue was derived from protection services (24%), and compliance (2%).
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 are located at 5765 Logan Street, Denver, CO 80216.
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.
| 3 |
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 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.
| 4 |
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
Many of our security personnel have established military or police backgrounds. 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 17 year veteran of Law Enforcement with certifications including: NRA Law Enforcement patrol rifle instructor, Colorado POST, and handgun instructor. | |
| 3. | A 15 year veteran of Federal Law Enforcement with certifications including: NRA Law Enforcement handgun and shotgun instructor. |
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.
| 5 |
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, 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 cannabis industry, projected to reach as high as $37 billion in retail sales by 2024. Colorado, Arizona and Nevada combined are projected to have $3.45 billion in legal sales during the 2020 fiscal year.
| 6 |
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.
| 7 |
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 29 states and the District of Columbia allowing its citizens to use Medical Marijuana. Additionally, 8 states and Washington D.C. have legalized 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 former 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, the new Trump administration 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 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 August 12, 2020, we had approximately 31 full and part-time employees, some of which are former military or law enforcement professionals.
Properties
We lease our offices in Denver, Colorado pursuant to a lease which expires on October 26, 2026. We have the option to extend the term of the lease for two additional five-year periods. The lease requires rental payments of approximately $10,612.00 per month which increases 2% annually.
We lease our offices in Phoenix, Arizona pursuant to a lease which expires on May 31st, 2023. We have the option to extend the term of the lease for two additional five-year periods. The lease requires rental payments of approximately $4,113.56 per month which increases approximately 3% annually.
On January 22, 2019 the Company leased office space at 7490 Bridgewater Road, Huber Heights, Ohio The lease is for an initial term of 63 months, with rental payments of $3,200 per month.
| 8 |
| 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.
The occurrence of the COVID-19 pandemic may negatively affect our operations depending on the severity and longevity of the pandemic.
The COVID-19 pandemic is currently impacting countries, communities, supply chains and markets as well as the global financial markets. A pandemic typically results in social distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support staff and professional advisors. These factors, in turn, may not only impact our operations, financial condition and demand for services but our overall ability to react timely to mitigate the impact of this event. Also, it may hamper our efforts to comply with our filing obligations with the Securities and Exchange Commission. Depending on the severity and longevity of the COVID-19 pandemic, our business, customers, and shareholders may experience a significant negative impact.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
See Item 1. Business.
| ITEM 3. | LEGAL PROCEEDINGS |
On March 2, 2018, Steve Neumeyer filed a complaint against the Company in the Eighth Judicial District Court, Clark County, Nevada, alleging, among other matters, breach of contract, and seeking damages of an unspecified amount for allegedly providing services to the Company. The Company believes Mr. Neumeyer’s complaint is without merit. An agreement was reached in July 2019, and the claim was settled for $1,000.
On September 5, 2018, Andy Sims, a former employee, filed a complaint against the Company in the United States District Court, District of Colorado alleging unpaid wages, and seeking compensation for unpaid wages, liquidated damages, penalties, and attorneys’ fees under the Fair Labor Standards Act. An agreement was reached in February 2019, and the claim was settled for $15,000.
| ITEM 4. | MINE SAFETY DISCLOSURES |
None.
| 9 |
| 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, 2018 | High | Low | ||||||
| First Quarter | $ | 0.12 | $ | 0.03 | ||||
| Second Quarter | $ | 0.07 | $ | 0.012 | ||||
| Third Quarter | $ | 0.025 | $ | 0.005 | ||||
| Fourth Quarter | $ | 0.007 | $ | 0.001 | ||||
| Year ended December 31, 2019 | High | Low | ||||||
| First Quarter | $ | 0.0030 | $ | 0.0012 | ||||
| Second Quarter | $ | 0.0033 | $ | 0.0011 | ||||
| Third Quarter | $ | 0.0013 | $ | 0.0005 | ||||
| Fourth Quarter | $ | 0.0006 | $ | 0.0003 | ||||
As of August 13, 2020 we had 793,357,428 outstanding shares of common stock held by approximately 216 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, 2019 as compared to the same period last year, are discussed below:
| Increase (I) or | ||||
| Item | Decrease (D) | Reason | ||
| Revenue | I | Increased revenues from processing and transportation. | ||
| Operating expenses | I | Expansion costs related to additional office in Ohio. | ||
| Interest expense | D | Decrease in interim borrowings. | ||
| Loss on conversion | I | Lower stock price | ||
| Loss on derivate securities | I | Additional convertible loans |
| 10 |
Capital Resources and Liquidity
Our material sources and <uses> of cash during the years ended December 31, 2019 and 2018 were:
| 2019 | 2018 | |||||||
| Cash used in operations | (336,051 | ) | (856,180 | ) | ||||
| Lease payments | (42,413 | ) | (63,301 | ) | ||||
| Purchase of property, plant and equipment | (86,602 | ) | (216,740 | ) | ||||
| Borrowings convertible debt – related party | 300,000 | - | ||||||
| Loan payments | (75,000 | ) | (181,188 | ) | ||||
| Loan proceeds | 200,317 | 1,295,500 | ||||||
| Loan proceeds – related party | 133,500 | - | ||||||
As of December 31, 2019 the Company has shut-down is Service-Guards segment.
General
Our material capital commitments over the next five years are as follows:
On October 27, 2016 the Company sold its building located at 5765 Logan Street, Denver, Colorado to an unrelated third party for $1,400,000. The Company repaid the mortgage on the building in the amount of $677,681. After the sale, the Company leased the building from the purchaser of the property. The lease is for an initial term of ten years, with the Company having the option to extend the term of the lease for two additional five year periods. The lease requires rental payments of approximately $10,612 per month which increases 2% annually.
| Future minimum lease payments: | ||||
| 2020 | $ | 56,114 | ||
| 2021 | 30,388 | |||
| 2022 and thereafter | 2,260 | |||
| Total minimum lease payments | $ | 88,712 | ||
See Notes 6 and 7 to the financial statements included as part of this report for information concerning our notes payable.
Other than as disclosed above, we do not anticipate any material capital requirements for the twelve months ending December 31, 2019.
Other than as disclosed elsewhere in this report, 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.
| 11 |
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 $1,500,000 of general and administrative expenses in order to execute our current business plan. We also plan to incur 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.
| 12 |
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 as part 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 |
None
| 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 as of December 31, 2019 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 |
| 13 |
| 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, 2019, 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 (2013) 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 controls over related party transactions. The Company did not establish a formal written policy for the approval, identification, and authorization of related party transactions. | |
| ● | 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, 2019 that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.
| 14 |
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.
| 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 | ||
| Evan DeVoe | 34 | Chief Executive, Financial and Accounting Officer and a Director | ||
| Ricky G. Bennett | 61 | Vice President of Operations and Compliance | ||
| Christopher Galvin | 52 | Chairman of the Board of Directors | ||
| Daniel Allen | 67 | Director | ||
| Doyle Knudson | 66 | Director |
Evan DeVoe was appointed as the Company’s Chief Executive, Financial and Accounting Officer and a Director on March 13, 2020. Mr. DeVoe, prior to March 13, 2020, was the Company’s Chief Operating Officer (August 2019 – March 2020) and the Company’s Vice President of Systems Development (January 2018 to August 2019). Prior to that time Mr. DeVoe was the controller (May 2016 - June 2017) and an accounting associate (October 2015 - May 2016) for the Weisser Companies, a firm engaged in commercial real estate and retail operations. Between March 2014 and October 2015 Mr. DeVoe was a client service associate for Millennium Portfolio Advisors.
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. Mr. Bennet left the company in September of 2019 for personal reasons.
| 15 |
Christopher Galvin has been a director since January 30, 2018. Mr. Galvin founded and served as Chief Executive Officer and chairman of several public and private companies. He began his career in investment banking – focusing on mergers and acquisitions and structured finance – and has deep experience in corporate finance, hedge fund and private equity strategies. Mr. Galvin is the founder and chief executive officer of Hypur Inc., an Arizona-based company providing banking and payment technology designed specifically to enable financial institutions to safely and profitably serve cash-intensive and high-risk businesses. Mr. Galvin is also co-founder and president of Hypur Ventures, a venture capital fund dedicated to investing in businesses that operate in the cannabis industry.
Daniel Allen was elected an officer and director July 28, 2015. Mr. Allen resigned as an Officer on March 13, 2020. Mr. Allen provided us with consulting 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. On March 13th, 2020, Daniel Allen resigned from his position as CEO. Dan remains an active member of our Board.
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.
Audit Committee, Independent Directors and Financial Expert
We do not have an Audit Committee; our board of directors currently acts as our Audit Committee. Doyle Knudson is an independent director, as that term is defined in the rules of the NYSE American. 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.
| 16 |
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 approve recommendations regarding, equity awards to our Directors and employees.
Summary Compensation Table
The following table sets forth, for the fiscal years ended December 31, 2019 and 2018 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, CEO | 2019 | $ | 144,000 | $ | — | $ | — | — | $ | 144,000 | ||||||||||||||
| 2018 | $ | 144,000 | $ | — | $ | — | — | $ | 144,000 | |||||||||||||||
| Ricky G. Bennett | 2019 | $ | 102,000 | $ | — | $ | — | — | $ | 102,000 | ||||||||||||||
| VP of Operations and Compliance | 2018 | $ | 102,000 | $ | — | $ | — | — | $ | 102,000 | ||||||||||||||
| (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. |
| (5) | Mr. Allen resigned as our Chief Financial and Accounting Officer on March 13, 2020. On March 13, 2020 Evan DeVoe became our new Chief Executive, Financial and Accounting Officer. |
| (6) | Ricky Bennett resigned from his position on September 6th, 2019. |
| 17 |
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 years ended December 31, 2019 and 2018 to our officers and directors pursuant to the Plan:
Options Granted
| Name | Grant Date | Options Granted | Exercise Price | Expiration Date | ||||
| None | - | - | - | - |
Options Cancelled
| Employee | Total Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | |||
| None | - | - | - |
Options Exercised
| Name | Date of Exercise | Shares Acquired on Exercise | Value Realized | |||
| None | - | - | - |
| 18 |
The following shows certain information as of December 31, 2019 concerning the stock options and stock bonuses granted pursuant to the Plan. Each option represents the right to purchase one share of common stock.
| 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 | 7,700,000 | $ | 0.05 | 7,300,000 | ||||||||
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 August 13, 2020 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.
| Name and Address of Owner | Shares Owned | Percent of Class | ||||||
| Evan DeVoe | - | * | ||||||
| Ricky G. Bennett | 668,000 | * | ||||||
| Christopher Galvin | 3,824,559 | (1) | * | |||||
| Daniel Allen | 836,650 | * | ||||||
| Doyle Knudson | 3,558,559 | (2) | * | |||||
| All Directors and Officers as a group (5 persons) | ||||||||
| (1) | Includes 3,588,559 shares owned by CGDK, LLC, a company in which Mr. Galvin owns a 50% interest. |
| (2) | Represents 3,588,559 shares owned by CGDK, LLC a company in which Mr. Knudson owns a 50% interest. |
| * | less than 1%. |
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).
| 19 |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
In November 2015, the Company entered into an arrangement with a related party, whereby the Company borrowed $25,000 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. The note was due on November 4, 2016. In December 2015 the lender loaned the Company an additional $20,000 with same terms except that it is payable upon demand. As of December 31, 2019 and December 31, 2018, the Company owed a total of $45,000 and $45,000, respectively. The holder of the note has agreed to extend the default date of the note to September 30, 2018. As of December 31, 2019 the note is currently in default.
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. Upon the occurrence and during the continuation of an event of default, the holder may require the Company to redeem all or any portion of this Note in cash at a price equal to 150% of the principal amount. During the year ended December 31, 2017, the Company borrowed an additional $430,000. As of December 31, 2019 and December 31, 2018, the Company owed a total of $500,000 and $1,103,000, respectively. Since the debt holder has not elect the right to require the Company to redeem the note at a price equal to 150% of the principal amount, the terms stated prior to maturity are still in effect. The holder has waived the default term and the note is not considered to be in default as of December 31, 2019
During October 2015, the Company borrowed $30,000 from an entity controlled by an officer of the Company. The loan is due and payable on demand and is non-interest bearing. During the year ended December 31, 2017, the Company repaid $121,500 and borrowed an additional $184,500 from the same related party. As of December 31, 2019 the principal balance outstanding is $30,000.
On July 7, 2016, the Company borrowed $73,000 from a related party. The loan was due and payable on July 7, 2017 and bore interest at 5% per annum. The principal balance owed on this loan at June 30, 2019 and December 31, 2018 was $73,000 and $73,000, respectively. The holder of the note has agreed to extend the default date of the note to September 30, 2018. As of and December 31, 2019 and December 31, 2018 the note is currently in default.
On August 8, 2016, the Company entered into a promissory note with Hypur Inc., a Nevada Corporation which is a related party pursuant to which the Company to borrow $52,000. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower The loan was due and payable on August 10, 2017 and bore interest at 18% per annum. The principal balance owed on this loan at June 30, 2019 and December 31, 2018 was $52,000 and $52,000, respectively. The Note is currently in default at bears a default rate of interest of 24% per annum as part of the default terms of this note. On October 1, 2017, it was determined this note had derivative. Upon default, if the default has not been remedied within 30 days, the redemption price would be 150% of the principal amount. The notes are in default as of December 31, 2019, but the holder has agreed to waive the 150% redemption price default term.
On September 20, 2016, the Company borrowed $47,500 from Hypur Inc., which is a related party. The loan is due and payable on December 20, 2016 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. The principal balance owed on this loan at September 30, 2019 and December 31, 2018 was $47,500 and $47,500, respectively. The loan is currently past due and in default. The Note is currently in default at bears a default rate of interest of 24% per annum as part of the default terms of this note. On October 1, 2017 it was determined this note had derivative. Upon default, and if the default has not been remedied within 30 days, the redemption price would be 150% of the principal amount. The notes are in default as of December 31, 2019, but the holder has agreed to waive the 150% redemption price default term.
| 20 |
On September 20, 2016, the Company borrowed $47,500 from Hypur Inc., which is a related party. The loan is due and payable on December 20, 2016 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. The principal balance owed on this loan at September 30, 2019 and December 31, 2018 was $47,500 and $47,500, respectively. The loan is currently past due and in default. The Note is currently in default at bears a default rate of interest of 24% per annum as part of the default terms of this note. On October 1, 2017 it was determined this note had derivative. Upon default, and if the default has not been remedied within 30 days, the redemption price would be 150% of the principal amount. The notes are in default as of December 31, 2019, but the holder has agreed to waive the 150% redemption price default term.
On October 29, 2018, the Company borrowed $100,000 from Hypur Inc., which is a related party. The loan is due and payable on January 28, 2019 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. Upon default the note bears a default rate of interest of 24% per annum as part of the default terms of this note. The principal balance owed on this loan at June 30, 2019 and December 31, 2018 was $100,000 and $100,000, respectively. The note was discounted for a derivative (see note 8 for details) and the discount of $89,350 is being amortized over the life of the note using the effective interest method resulting in $89,350 of interest expense for the year ended December 31, 2019. As of December 31, 2019 the note is currently in default.
On November 21, 2018, the Company borrowed $70,000 from Hypur Inc., which is a related party. The loan is due and payable on February 19, 2019 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. Upon default the note bears a default rate of interest of 24% per annum as part of the default terms of this note. The principal balance owed on this loan at September 30, 2019 and December 31, 2018 was $70,000 and $70,000, respectively. The note was discounted for a derivative (see note 8 for details) and the discount of $55,830 is being amortized over the life of the note using the effective interest method resulting in $55,830 of interest expense for the year ended December 31, 2019. As of December 31, 2019 the note is currently in default.
On November 26, 2018, the Company borrowed $75,000 from Hypur Inc., which is a related party. The loan is due and payable on February 24, 2019 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. Upon default the note bears a default rate of interest of 24% per annum as part of the default terms of this note. The principal balance owed on this loan at September 30, 2019 and December 31, 2018 was $75,000 and $75.000, respectively. The note was discounted for a derivative (see note 8 for details) and the discount of $58,913 is being amortized over the life of the note using the effective interest method resulting in $58,913 of interest expense for the year ended nine December 31, 2019. As of December 31, 2019 the Note is currently in default.
On May 10, 2019, the Company borrowed $75,000 from Hypur Inc., which is a related party. The loan is due and payable on May 12, 2020 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. Upon default the note bears a default rate of interest of 24% per annum as part of the default terms of this note. The principal balance owed on this loan at December 31, 2019 was $75,000.
On September 3, 2019, the Company borrowed $21,000 from Hypur Inc., which is a related party. The loan is due and payable on December 3, 2019 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. Upon default the note bears a default rate of interest of 24% per annum as part of the default terms of this note. The principal balance owed on this loan at December 31, 2019 was $21,000.
May 26, 2017, the Company borrowed $100,000 from CGDK, a related party. The loan is due 360 days from May 26, 2017 and bears interest at 5% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.025 per share. The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock is over $.25 per share during any ten-day period. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 was $100,000 and $100,000, respectively. As of December 31, 2019 and December 31, 2018 the note is currently in default.
| 21 |
On July 13, 2017, the Company borrowed $150,000 from CGDK, a related party. The loan is due 360 days from July 13, 2017, and bears interest at 5% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.05 per share. The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock is over $.25 per share during any ten-day period. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 was $150,000. The conversion feature has been waved through October 15, 2019. As of December 31, 2019 and December 31, 2018, the note is currently in default.
On April 13, 2018, the Company borrowed $130,000 from CGDK, a related party. The loan is due 360 days from April 13, 2018, bears interest at 12% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.05 per share. The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock is over $.25 per share during any ten-day period. The Company recorded a discount of $101,272 due to derivative. The Company amortized $72,694 in debt discounts during the year ended December 31, 2018. The Company amortized $27,560 in debt discounts during the nine months ended September 30, 2019. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 is $130,000 and $130,000, respectively. On November 5, 2019 CGDK waived the default provision until April 13, 2020.
On June 14, 2018, the Company issued a $30,217 promissory note to CGDK, a related party, for previous expenses paid on behalf of the Company. The loan is due 360 days from June 18, 2018, bears interest at 12% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.05 per share. The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock is over $.25 per share during any ten-day period. The Company recorded a debt discount of $10,292 due to derivative. During the year ended December 31, 2018 the Company amortized $5,639 of the discount. The Company amortized $3,697 in debt discounts during the nine months ended December 31, 2019. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 is $30,217 and $30,217, respectively. On November 5, 2019 CGDK waived the default provision until June 14, 2020.
On July 2, 2018, the Company borrowed $150,000 from CGDK, a related party. The loan is due July 2, 2019 and bears interest at 12% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.05 per share. The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock is over $.10 per share during any ten-day period or the trading volume of the Company’s common stock during these ten trading days was at least 2,500,000 shares. The Company recorded a debt discount of $19,779 due to derivative. During the year ended December 31, 2018 the Company amortized $9,862 of the discount. The Company amortized $7,390 in debt discounts during the year ended December 31, 2019. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 is $150,000 and $150,000, respectively. On November 5, 2019 CGDK waived the default provision until July 2, 2020.
On August 6, 2018, the Company borrowed $150,000 from CGDK, a related party. The loan is due July 2, 2019 and bears interest at 12% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.05 per share. The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock is over $.10 per share during any ten-day period or the trading volume of the Company’s common stock during these ten trading days was at least 2,500,000 shares. The Company recorded a debt discount of $20,095 due to derivative. During the year ended December 31, 2018 the Company amortized $8,093 of the discount. The Company amortized $7,793 in debt discounts during the year ended December 31, 2019. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 is $150,000 and $150,000, respectively. On November 5, 2019 CGDK waived the default provision until August 6, 2020.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The following table sets forth fees billed to us by our independent auditors for the years ended 2019 and 2018 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.
| 22 |
| SERVICES | 2019 | 2018 | ||||||
| Audit fees – Malone Bailey | $ | 43,500 | $ | 53,000 | ||||
| Audit- M&K CPA | $ | 19,000 | — | |||||
| Tax fees | — | — | ||||||
| All other fees | — | — | ||||||
| Total fees | $ | 62,500 | $ | 53,000 | ||||
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.
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| Exhibit Number | Name and/or Identification of Exhibit | |
| 3 | Articles of Incorporation & By-Laws | |
| (a) Articles of Incorporation (1) | ||
| (b) By-Laws (1) | ||
| 31 | Rule 13a-14(a)/15d-14(a) Certifications | |
| 32 | Certification under Section 906 of the Sarbanes-Oxley Act (18 U.S.C. Section 1350) | |
| 101 | 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. |
| 23 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Blue Line Production Group, Inc.
We have audited the accompanying consolidated balance sheet of Blue Line Production Group, Inc. and its subsidiaries (Collectively, the “Company”) as of December 31, 2018, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ 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 consolidated financial statements based on our audit.
We conducted our audit in accordance with 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 consolidated 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 financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Blue Line Production Group, Inc. as of December 31, 2018, and the results of its consolidated operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
April 16, 2019
| 24 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of Blue Line Protection Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Blue Line Protection Group, Inc. (the Company) as of December 31, 2019, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the period ended December 31, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. The financial statements of Blue Line Protection Group, Inc., as of December 31, 2018, were audit by other auditors whose report dated April 16, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continues as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered net losses from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are discussed in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
M&K CPAS, PLLC.
We have served as the Company’s auditor since 2019.
Houston, TX
August 28, 2020
| 25 |
BLUE LINE PROTECTION GROUP, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and equivalents | 45,113 | 15,862 | ||||||
| Accounts receivable, net | 336,840 | 300,188 | ||||||
| Prepaid expenses and deposits | 11,980 | 21,831 | ||||||
| Total current assets | 393,933 | 337,881 | ||||||
| Fixed assets: | ||||||||
| Right to use assets | 859,426 | - | ||||||
| Machinery and equipment, net | 383,414 | 393,289 | ||||||
| Security Deposit | 32,158 | 38,958 | ||||||
| Fixed assets of discontinued operations | 2,782 | 2,782 | ||||||
| Total fixed assets | 1,277,780 | 435,029 | ||||||
| Total assets | 1,671,713 | $ | 772,910 | |||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | 1,052,275 | 813,683 | ||||||
| Finance lease liabilities | 88,712 | - | ||||||
| Notes payable | 185,000 | 85,054 | ||||||
| Notes payable - related parties | 726,847 | 707,847 | ||||||
| Convertible notes payable, net of unamortized discount | 172,198 | 248,952 | ||||||
| Convertible notes payable - related parties, net of unamortized discount | 1,821,507 | 1,475,068 | ||||||
| Current portion of long-term debt | - | 4,310 | ||||||
| Current portion of capital lease obligations | 114,653 | 34,505 | ||||||
| Current liabilities of discontinued operations | - | 1,334 | ||||||
| Derivative liabilities | 1,170,060 | 727,332 | ||||||
| Total current liabilities | 5,331,252 | 4,098,085 | ||||||
| Long-term liabilities: | ||||||||
| Finance lease liabilities | ||||||||
| Long Term portion of capital lease obligations | 785,802 | 57,534 | ||||||
| Long-term debt | - | 368 | ||||||
| Total current liabilities | 785,802 | 57,902 | ||||||
| Total liabilities | 6,117,054 | 4,155,987 | ||||||
| Stockholders’ deficit: | ||||||||
| Preferred Stock, $0.001 par value, 100,000,000 shares authorized, 20,000,000 shares issued and outstanding as of December 31, 2019 and December 31, 2018, respectively | 20,000 | 20,000 | ||||||
| Common Stock, $0.001 par value, 1,400,000,000 shares authorized, 793,357,428 and 368,468,701 issued and outstanding as of December 31, 2019 and December 31, 2018, respectively | 793,360 | 368,469 | ||||||
| Common Stock, owed but not issued, 12,923 shares and 12,923 shares as of December 31, 2019 and December 31, 2018, respectively | 13 | 13 | ||||||
| Additional paid-in capital | 7,228,528 | 7,107,400 | ||||||
| Accumulated deficit | (12,487,242 | ) | (10,878,959 | ) | ||||
| Total stockholders’ deficit | (4,445,341 | ) | (3,383,077 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 1,671,713 | $ | 772,910 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 26 |
BLUE LINE PROTECTION GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Year Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenue | $ | 4,126,059 | $ | 4,050,037 | ||||
| Cost of revenue | (2,127,347 | ) | (2,712,319 | ) | ||||
| Gross profit | 1,998,712 | 1,337,718 | ||||||
| Operating expenses: | ||||||||
| Advertising | 15,079 | 9,871 | ||||||
| Depreciation | 130,831 | 89,717 | ||||||
| General and administrative expenses | 2,161,499 | 2,073,346 | ||||||
| Total expenses | 2,307,409 | 2,165,880 | ||||||
| Operating loss | (308,697 | ) | (828,162 | ) | ||||
| Other income (expenses): | ||||||||
| Loss on conversion | (107,541 | ) | - | |||||
| Disposition of Fixed Assets | - | (3,327 | ) | |||||
| Interest expense | (839,971 | ) | (1,361,933 | ) | ||||
| Income / (Loss) on derivative | (352,074 | ) | 940,687 | |||||
| Total other expenses | (1,299,586 | ) | (424,573 | ) | ||||
| Net loss | $ | (1,608,283 | ) | $ | (1,252,735 | ) | ||
| NET LOSS PER COMMON SHARE OUTSTANDING | ||||||||
| Basic | $ | (0.00 | ) | $ | (0.01 | ) | ||
| Diluted | $ | (0.00 | ) | $ | (0.01 | ) | ||
| NET LOSS PER COMMON SHARE OUTSTANDING | ||||||||
| Basic | 574,434,681 | 191,219,900 | ||||||
| Diluted | 574,434,681 | 191,219,900 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 27 |
BLUE LINE PROTECTION GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
| Additional | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Stock | Accumulated | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Payable | Deficit | (Deficit) | |||||||||||||||||||||||||
| Balance, December 31, 2017 | 20,000,000 | $ | 20,000 | 128,348,026 | $ | 128,348 | $ | 5,417,266 | $ | 13 | $ | (9,626,224 | ) | $ | (4,060,597 | ) | ||||||||||||||||
| Common stock issued for services | - | - | 1,000,000 | 1,000 | 30,917 | - | - | 31,917 | ||||||||||||||||||||||||
| Settlement of derivative liability | - | - | - | - | 1,076,702 | - | - | 1,076,702 | ||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | 52,437 | - | - | 52,437 | ||||||||||||||||||||||||
| Common stock issued for conversion of debt and accrued interest | - | - | 239,120,675 | 239,121 | 530,078 | - | - | 769,199 | ||||||||||||||||||||||||
| Net income for the year ended December 31, 2018 | - | - | - | - | - | - | (1,252,735 | ) | (1,252,735 | ) | ||||||||||||||||||||||
| Balance, December 31, 2018 | 20,000,000 | $ | 20,000 | $ | 368,468,701 | $ | 368,469 | $ | 7,107,400 | $ | 13 | $ | (10,878,959 | ) | $ | (3,383,077 | ) | |||||||||||||||
| Balance, December 31, 2018 | 20,000,000 | $ | 20,000 | $ | 368,468,701 | $ | 368,469 | $ | 7,107,400 | $ | 13 | $ | (10,878,959 | ) | $ | (3,383,077 | ) | |||||||||||||||
| Settlement of derivative liability | - | - | - | - | 280,518 | - | - | 280,518 | ||||||||||||||||||||||||
| Common stock issued for conversion of debt and accrued interest | - | - | 424,888,727 | 424,891 | (159,390 | ) | - | - | 265,501 | |||||||||||||||||||||||
| Net income for the year ended December 31, 2019 | - | - | - | - | - | - | (1,608,283 | ) | (1,608,283 | ) | ||||||||||||||||||||||
| Balance, December 31, 2019 | 20,000,000 | $ | 20,000 | $ | 793,357,428 | $ | 793,360 | $ | 7,228,528 | $ | 13 | $ | (12,487,242 | ) | $ | (4,445,341 | ) | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 28 |
BLUE LINE PROTECTION GROUP, INC .
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the year ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating activities | ||||||||
| Net income / (loss) | $ | (1,608,283 | ) | $ | (1,252,735 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 130,831 | 89,717 | ||||||
| Loss on disposal of fixed assets | - | 3,751 | ||||||
| Stock based compensation | - | 52,437 | ||||||
| Amortization of discounts on notes payable | 419,323 | 1,016,719 | ||||||
| Non-cash Addition to related party convertible notes | - | 30,217 | ||||||
| Noncash operating lease expense | 222,815 | - | ||||||
| Common stock issued for services | - | 31,917 | ||||||
| Extension Fees | 75,000 | - | ||||||
| Change in fair value of derivative liabilities | 352,074 | (940,687 | ) | |||||
| Excess derivative | 17,079 | - | ||||||
| Loss on conversion | 107,541 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) in accounts receivable | (36,652 | ) | (93,780 | ) | ||||
| (Increase) / decrease in deposits and prepaid expenses | 9,851 | (3,311 | ) | |||||
| (Increase) in other assets | 6,800 | 209,575 | ||||||
| Increase in accounts payable and accrued liabilities | 149,355 | - | ||||||
| Decrease in lease liability | (181,785 | ) | - | |||||
| (Decrease) in long-term liabilities | - | - | ||||||
| Net cash used in operating activities | (336,051 | ) | (856,180 | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchase of fixed assets | (86,602 | ) | (216,740 | ) | ||||
| Net cash provided by (used in) investing activities | (86,602 | ) | (216,740 | ) | ||||
| Financing activities | ||||||||
| Borrowings on convertible debt – related party | 300,000 | - | ||||||
| Proceeds from notes payable - related party | 133,500 | - | ||||||
| Repayments from notes payable - related party | - | (141,500 | ) | |||||
| Proceeds from notes payable | 200,317 | 429,500 | ||||||
| Proceeds from convertible note - related party, net of original issue discount | - | 430,000 | ||||||
| Repayment of notes payable | - | (35,782 | ) | |||||
| Payments on convertible notes payable - related party | (64,500 | ) | - | |||||
| Repayment of convertible note | (75,000 | ) | - | |||||
| Payments on auto loan | - | (3,906 | ) | |||||
| Repayments on capital leases | (42,413 | ) | (63,301 | ) | ||||
| Proceeds from convertible notes payable, net of original discount costs | - | 436,000 | ||||||
| Net cash provided by financing activities | 451,904 | 1,051,011 | ||||||
| Net decrease in cash | 29,251 | (21,909 | ) | |||||
| Cash - beginning | 15,862 | 37,771 | ||||||
| Cash - ending | $ | 45,113 | $ | 15,862 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Interest paid | $ | 60 | $ | 3,432 | ||||
| Income taxes paid | $ | - | $ | - | ||||
| Debt discount due to derivative liability | $ | - | $ | - | ||||
| Non-cash investing and financing activities: | ||||||||
| Debt discount due to derivative liability | $ | 354,093 | $ | 769,199 | ||||
| Common stock issued for conversion of debt and interest | $ | 157,960 | $ | 1,076,702 | ||||
| Derivative resolution | $ | 280,518 | $ | 864,791 | ||||
| Fixed assets purchased with notes payable | $ | 34,354 | $ | - | ||||
| Adoption of lease standard ASC 842 | $ | 1,082,241 | $ | - | ||||
| Capital Lease Assets | $ | - | $ | 155,340 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 29 |
Blue Line Protection Group, Inc.
Notes to Consolidated Financial Statements
Note 1 – History and organization of the company
The Company was originally organized on September 11, 2006 (Date of Inception) under the laws of the State of Nevada, as The Engraving Masters, Inc. The Company was authorized to issue up to 100,000,000 shares of its common stock and 100,000,000 shares of preferred stock, each with a par value of $0.001 per share.
On March 14, 2014, the Company acquired Blue Line Protection Group, Inc., a Colorado corporation formed in February 2014 (“Blue Line Colorado”), as a wholly-owned subsidiary of the Company. Blue Line Colorado provides protection, compliance, and financial services to the lawful cannabis industry.
On May 2, 2014, the Company changed its name from The Engraving Masters, Inc. to Blue Line Protection Group, Inc. (“BLPG”)
On May 6, 2014, the Company effected a forward stock split and a pro-rata increase in its authorized common stock on a basis of 14-to-1, whereby each shareholder received 14 newly issued shares of common stock for each 1 share held. Additionally, the authorized capital of the Company concurrently increased to 1,400,000,000 shares of common stock. All references to share and per share amounts in the consolidated financial statements and accompanying notes thereto have been retroactively restated to reflect the forward stock split.
The Company provides armed protection, logistics, and compliance services for businesses engaged in the legal cannabis industry. The Company offers asset logistic services, such as armored transportation service; security services, including shipment protection, money escorts, security monitoring, asset vaulting, VIP and dignitary protection, financial services, such as handling transportation and storage of currency; training; and compliance services.
Note 2 – Accounting policies and procedures
Results of operations for the interim periods are not indicative of annual results.
Principles of consolidation
For the years ended December 31, 2019 and 2018, 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.
| 30 |
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, 2019 and December 31, 2018.
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. There was no allowance for doubtful customer receivables at December 31, 2019 and December 31, 2018.
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, 2019 and December 31, 2018. Depreciation expense for the December 31, 2019 and December 31, 2018, is $130,831 and $82,663, 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, 2019 and December 31, 2018, the Company determined that none of its long-term assets were impaired.
| 31 |
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 one major customer which generated approximately 12% of total revenue in the year ended December 31, 2019.
The Company had two major customers which generated approximately 34% (17%, and 17%) of total revenue in the year ended December 31, 2018.
Related party transactions
FASB ASC 850, “Related Party Disclosures” requires companies to include in their financial statements disclosures of material related party transactions. The Company discloses all material related party transactions. Related parties are defined to include any principal owner, director or executive officer of the Company and any immediate family members of a principal owner, director or executive officer.
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).
The following table presents the derivative financial instruments, the Company’s only financial liabilities measured and recorded at fair value on the Company’s consolidated balance sheet on a recurring basis, and their level within the fair value hierarchy as of December 31, 2019 and December 31, 2018:
December 31, 2019
| Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
| Embedded conversion derivative liability | $ | 1,169,515 | $ | - | $ | - | $ | 1,695,515 | ||||||||
| Warrant derivative liabilities | $ | 545 | $ | - | $ | - | $ | 545 | ||||||||
| Total | $ | 1,170,060 | $ | - | $ | - | $ | 1,170,060 | ||||||||
December 31, 2018
| Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
| Embedded conversion derivative liability | $ | 716,080 | $ | - | $ | - | $ | 716,080 | ||||||||
| Warrant derivative liabilities | $ | 11,252 | $ | - | $ | - | $ | 11,252 | ||||||||
| Total | $ | 727,332 | $ | - | $ | - | $ | 727,332 | ||||||||
The embedded conversion feature in the convertible debt instruments that the Company issued, that became convertible qualified them as derivative instruments since the number of shares issuable under the notes are indeterminate based on guidance in FASB ASC 815, Derivatives and Hedging. These convertible notes tainted all other equity linked instruments including outstanding warrants and fixed rate convertible debt on the date that the instrument became convertible. The valuation of the derivative liability of the warrants was determined through the use of Black Scholes option-pricing model (See Note 8).
| 32 |
Revenue Recognition
The Company recognizes revenue when delivery of the promised goods or services is transferred to its customers, in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services. We determine revenue recognition through the following five steps:
| ● | Identify the contract with the customer; | |
| ● | Identify the performance obligations in the contract; | |
| ● | Determine the transaction price; | |
| ● | Allocate the transaction price to the performance obligations in the contract; and | |
| ● | Recognize revenue when, or as, the performance obligations are satisfied. |
We generate substantially all our revenue from providing services to customers. The Company recorded revenue with the 5 steps above have been completed.
Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. The updated guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. The Company adopted the standard using the modified retrospective approach effective January 1, 2018.
The Company adopted these standards at the beginning of the first quarter of fiscal 2018 using the modified retrospective method. The adoption of these standards did not have an impact on the Company’s Statements of Operations in for the year ended December 31, 2018.
In general, the Company’s business segmentation is aligned according to the nature and economic characteristics. Revenue is characterized by several lines of services and typically the pricing is fixed.
| Year ended December 31, | ||||||||
| Revenue Breakdown by Streams | 2019 | 2018 | ||||||
| Service: Guards | $ | 991,581 | $ | 2,119,534 | ||||
| Service: Transportation | 1,442,049 | 898,992 | ||||||
| Service: Currency Processing | 1,614,905 | 912,792 | ||||||
| Service: Compliance | 76,851 | 112,562 | ||||||
| Service: Consulting | - | - | ||||||
| Other | 673 | 6,157 | ||||||
| Total | $ | 4,126,059 | $ | 4,050,037 | ||||
As of December 31, 2019 the Company has shut-down is Service-Guards segment.
Advertising costs
The Company expenses all costs of advertising as incurred.
General and administrative expenses
The significant components of general and administrative expenses consist mainly of rent and compensation.
| 33 |
Share-Based Compensation
The Stock-based compensation expense is recorded as a result of stock options granted in return for services rendered. Previously, the share-based payment arrangements with employees were accounted for under ASC 718, while nonemployee share-based payments issued for goods and services are accounted for under ASC 505-50. ASC 505-50 differs significantly from ASC 718. On June 20, 2018, the FASB issued ASU 2018-07, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The Company has adopted the new standard and has made some adjustment with regard to the share-based compensation costs. Under the ASU 2018-07, the measurement of equity-classified nonemployee share-based payments is generally fixed on the grant date. And the options are no longer revalued on each reporting date. The expenses related to the share-based compensation are recognized on each reporting date. The amount is calculated as the difference between total expenses incurred and the total expenses already recognized.
Recently Adopted Accounting Pronouncements
Management reviewed accounting pronouncements issued during the year ended December 31, 2019, and the following pronouncements were adopted during the period.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). Under ASU 2016-02, lessees recognize a right-of-use asset and a lease liability for all of their leases, other than those that meet the definition of a short-term lease. For income statement purposes, leases must be classified as either operating or finance. Operating leases will result in straight-line expense, similar to current operating leases, while finance leases will result in a front-loaded pattern, similar to current capital leases. We adopted Topic 842 effective January 1, 2019 and elected certain available transitional practical expedients. This adoption resulted in right-of-use assets, in the amount of $859,426 and operating lease liability, in the amount of $900,455, to be added to the December 31, 2019 balance sheet. These additions are the result of an office leases.. In the prior year, the Company disclosed capital lease obligations, which has been changed to finance lease obligation in the current year, as a result of this adoption. The finance lease obligation totaled $195,299 as of December 31, 2019.
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. During 2019 and 2018 all common stock equivalents were excluded from the calculation of diluted loss per share as their effect would be 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.
| 34 |
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.
Recent Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company elected the practical expedient under ASU 2018-11 “Leases: Targeted Improvements” which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earliest comparative period presented in the financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019 but without retrospective application. Therefore, there was no impact recorded to beginning retained earnings or the statement of operations
In April 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” ASU 2016 - provides guidance regarding the classification of certain items within the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, with early adoption permitted
On November 17, 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, a consensus of the FASB’s Emerging Issues Task Force (the “Task Force”). The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. ASU No. 2016-18 is effective for public business entities for fiscal years beginning after December 15, 2017. This ASU will not have an impact on our results of operation, cash flows, other than presentation, or financial condition.
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, accumulated deficit and had a working capital deficit as of December 31, 2019. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. The Company is significantly dependent upon its ability, and will continue to attempt, to secure additional equity and/or debt financing. There are no assurances that the Company will be successful and without sufficient financing it would be unlikely for the Company to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. These financial statements do not include any adjustments that might arise from this uncertainty.
Note 4 – Commitments and contingencies
Contingencies
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, 2019 and December 31, 2018 the Company accrued a total of $34,346 and $88,968, respectively of contingent liabilities. If litigation is commenced the Company will attempt a reasonable out-of-court settlement and if such efforts are not successful, will defend the litigation.
| 35 |
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, 2019 and December 31, 2018 the Company accrued a total of $98,150.
On April 14, 2016, the Company entered into an agreement with an unrelated third party to provide the Company with investor relations services. Upon signing the agreement, the Company paid the investor relations consultant $75,000 and agreed to issue the consultant 1,500,000 shares of its restricted common stock. The agreement requires the Company to pay the consultant an additional $75,000 prior to June 14, 2016. The Company cancelled the agreement and is of the opinion that the shares are not owed to the consultant. As of December 31, 2019 and December 31, 2018 there was no payable recorded.
Finance leases
On April 25, 2018, the Company recorded finance lease obligation for a leased a vehicle for $38,388. The Company made a down payment of $7,500 and agreed to make 36 monthly payment of $1,015.78 including sales tax. The Company recognized this arrangement as a finance lease based on the determination that the lease exceeded 75% of the economic life of the underlying assets
On August 16, 2018, the Company recorded finance lease obligation for a leased a vehicle for $58,476. The Company made a down payment of $20,000 and an additional $10,000 for delivery fees, taxes and its first month payment and agreed to make 36 monthly payments of $1,265.30, including sales tax. The Company recognized this arrangement as a finance lease based on the determination that the lease exceeded 75% of the economic life of the underlying assets
On August 16, 2018, the Company recorded finance lease obligation for a leased a vehicle for $58,476. The Company made a down payment of $20,000 and an additional $10,000 for delivery fees, taxes and its first month payment and agreed to make 36 monthly payments of $1,265.30, including sales tax. The Company recognized this arrangement as a finance lease based on the determination that the lease exceeded 75% of the economic life of the underlying assets
On March 1, 2019, the Company recorded finance lease obligation for a leased a vehicle for $64,354. The Company made a down payment of $30,000 for delivery fees, taxes and its first month payment and agreed to make 36 monthly payments of $1,129.76, including sales tax. The Company recognized this arrangement as a finance lease based on the determination that the lease exceeded 75% of the economic life of the underlying assets
| Future minimum lease payments: | ||||
| 2020 | $ | 56,114 | ||
| 2021 | 30,338 | |||
| 2022 and thereafter | 2,260 | |||
| Total minimum lease payments | $ | 88,712 | ||
Operating Leases
On October 27, 2016 the Company sold its building located at 5765 Logan Street Denver, Colorado to an unrelated third party for $1,400,000. The Company repaid the mortgage on the building in the amount of $677,681. After the sale, the Company leased the building from the purchaser of the property. The lease is for an initial term of ten years, with the Company having the option to extend the term of the lease for two additional five-year periods. The lease requires rental payments of $10,000 per month and will increase 2% annually. The Company paid a $30,000 deposit at the inception of the lease
On May 29, 2018 the Company leased a building located at 4328 E. Magnolia Street Phoenix The lease is for an initial term of one years, with the Company having the option to extend the term of the lease for additional four year periods. The lease requires rental payments of $3,880 per month and will increase 2% annually. The Company paid a $4,369 deposit at the inception of the lease.
| 36 |
On January 22, 2019 the Company leased a building located at 7490 Bridgewater Road, Huber Heights, Ohio the lease is for an initial term of 63 months. The lease requires rental payments of $3,200 per month and will increase to $3,400 between months 28 through 63ly. The Company paid a $3,200 deposit at the inception of the lease
The Company adopted ASC 842 and recorded right of use asset and operating lease liability of $1,082,241. The company used 12% as incremental borrowing rate as is the average interest rate of the company’s outstanding third party note. The lease agreement gives the Company the option to renew it for two additional 5 year terms but the Company did not consider it likely to exercise that option. Therefore, the company did not include such amounts in its computations of the present value of remaining lease payment on adoption date.
Supplemental balance sheet information related to leases is as follows:
| Operating Leases | Classification | December 31, 2019 | ||||
| Right-of-use assets | Operating right of use assets | $ | 859,426 | |||
| Current lease liabilities | Current operating lease liabilities | 114,653 | ||||
| Non-current lease liabilities | Long-term operating lease liabilities | 785,802 | ||||
| Total lease liabilities | $ | 900,455 | ||||
Lease term and discount rate were as follows:
| December 31, 2019 | ||||
| Weighted average remaining lease term (years) | 5.26 | |||
| Weighted average discount rate | 12 | % | ||
The following summarizes lease expenses for the year ended December 31, 2019:
Finance lease expenses:
| Depreciation/amortization expense | $ | 189,290 | ||
| Interest on lease liabilities | 6,009 | |||
| Finance lease expense | $ | 195,299 |
Supplemental disclosures of cash flow information related to leases were as follows:
| December 31, 2019 | ||||
| Cash paid for operating lease liabilities | $ | 155,549 | ||
| Operating right of use assets obtained in exchange for operating lease liabilities | $ | 1,082,241 | ||
Maturities of lease liabilities were as follows as of December 31, 2019:
| Operating Leases | ||||
| 2020 | $ | 216,587 | ||
| 2021 | 222,067 | |||
| 2022 | 227,253 | |||
| 2023 | 199,098 | |||
| 2024 | 155,531 | |||
| 2025 | 141,302 | |||
| 2026 | 107,558 | |||
| Total | 1,269,396 | |||
| Less: Imputed interest | (368,941 | ) | ||
| Present value of lease liabilities | $ | 900,455 | ||
| 37 |
Note 5 – Fixed assets
Machinery and equipment consisted of the following at:
| December 31, 2019 | December 31, 2018 | |||||||
| Automotive vehicles | $ | 381,844 | $ | 317,489 | ||||
| Furniture and equipment | 85,435 | 85,435 | ||||||
| Machinery and Equipment | 135,706 | 115,335 | ||||||
| Leasehold improvements | 105,714 | 69,484 | ||||||
| Fixed assets, total | 708,699 | 587,743 | ||||||
| Total : accumulated depreciation | (325,285 | ) | (194,454 | ) | ||||
| Fixed assets, net | $ | 383,414 | $ | 393,289 | ||||
Total depreciation expenses for the years ended December 31, 2019 and December 31,2018 were $130,831 and $82,663, respectively.
Note 6 – Notes payable
Notes payable to non-related parties
During February 2015, the Company borrowed $50,000 from a non-affiliated person. The loan is due and payable on April 6, 2015 and is now payable on demand with interest at 10% per annum. As of December 31, 2019 and December 31, 2018, the principal balance owed on this loan was $50,000 and $50,000, respectively. The note is currently past due.
During April 2015, the Company borrowed $25,000 from a non-affiliated person. The loan is due and payable May 1, 2015 with interest at 6% per year and has a 5% per month penalty upon default. As of December 31, 2019 and December 31, 2018, the principal balance owed on this loan was $25,000 and $25,000, respectively. The note is currently past due.
On January 5, 2016, the Company borrowed $10,000 from a non-affiliated person. The loan was due and payable on January 5, 2017 and bore interest at 5% per annum and has a 5% per month penalty upon default. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 was $10,000 and $10,000, respectively. The note is currently past due.
On August 24, 2017 the Company signed a Merchant Agreement with a lender. Under the agreement the Company received $50,000 in exchange for rights to all customer receipts until the lender is paid $69,000 which is collected at the rate of $410.71 per day with 15% interest per year. The Company recorded a debt discount of $19,000, which was fully amortized as of December 31, 2018. The note was fully repaid as of December 31, 2018.
On May 15, 2019 the Company entered in a 12% promissory loan with Helix Funding, LLC for the Principle amount of $100,000. The note matures on November 1, 2019. The note is currently past due.
Convertible notes payable to non-related party
On July 18, 2017 the Company borrowed $125,000 from an unrelated third party. The loan has a maturity date of April 30, 2018 and bears interest at the rate of 8% per year. The Company paid $3,000 of fees associated with the loan, during the year ended December 31, 2017. The Company had amortized $1,741 of the discount and the remaining discount of $1,259 was amortized during the year ended December 31, 2018. If the loan is not paid when due, any unpaid amount will bear interest at 22% per year. The Lender is entitled, at its option, at any time after January 14, 2018, (180 days from date of the note) 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. On January 14, 2018 the note became convertible note was discounted for a derivative (see note 8 for details) and the discount of $122,000 was being amortized over the life of the note using the effective interest method resulting in 122,000 of interest expense for the year ended December 31, 2018. During the year ended December 31, 2018, the principal of $125,000 and accrued interest of $5,000 were converted into a total of 4,558,402 shares of common stock.
On August 24, 2017 the Company borrowed $58,500 from an unrelated third party. The Company paid $3,500 of fees associated with the loan, which was recorded as discount and to be amortized over the term of the debt the Company amortized $1,618 as of December 31, 2017. During the year ended December 31, 2018 the remaining discount of $1,822 was fully amortized. The loan has a maturity date of May 30, 2018 and bears interest at the rate of 8% per year. On February 20, 2018 the note became convertible note was discounted for a derivative (see note 8 for details) and the discount of $55,000 was being amortized over the life of the note using the effective interest method resulting in $55,000 of interest expense for the year ended December 31, 2018. As during the year ended December 31, 2018 the principal of $58,500 and accrued interest of $2,340 were converted into a total of 3,342,857 shares of common stock.
| 38 |
On October 18, 2017, the Company borrowed $150,000 from an unrelated third party. The Company paid $15,250 of fees associated with the loan, which was recorded as discount and to be amortized over the term of the debt and was fully amortized as of December 31, 2018. The loan bears interest at a rate of 10% (default interest 24%) and has a maturity date of July 16, 2018. The Holder has the option to convert the outstanding principal and accrued interest into common stock of the Company. The conversion price is the lesser of (1) lowest trading price during the previous 25 days prior to the note agreement or (2) 50% lowest trading price during the 25 days prior to conversion. Covenants: The Borrower shall not, without the Holder’s consent, sell, lease or dispose of any significant portion of its assets outside the ordinary course of business. During the year ended December 31, 2018 the Company paid $150,000 to extend the maturity date until May 11, 2019. During the year months ended December 31, 2019 the Company paid an $75,000 of extension fees. The note was discounted for a derivative (see note 8 for details) and the discount of $134,750 is being amortized over the life of the note using the effective interest method which was fully amortized as of December 31, 2018. During the year ended December 31, 2019 the holder converted $39,478 of accrued interest into 217,882,455 shares of common stock resulting in a loss of $61,624. As of December 31, 2019 the balance outstanding on the loan is $150,000.
On October 19, 2017 the Company borrowed $73,000 from an unrelated third party. The Company paid $3,000 of fees associated with the loan, which was recorded as discount which was fully amortized as of December 31, 2018. During the year ended December 31, 2018, the Company paid $150,000 to extend the maturity date until May 11, 2019. The loan has a maturity date of July 30, 2018 and bears interest at the rate of 8% per year. If the loan is not paid when due, any unpaid amount will bear interest at 22% per year. The Lender is entitled, at its option, at any time after April 17, 2018 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. During the year ended December 31, 2018, the principal of $73,000 and accrued interest of $2,920 converted into a total of 3,836,781 shares of common stock.
On November 24, 2017, the Company borrowed $75,000 from an unrelated third party. The Company paid $7,000 of fees associated with the loan which was fully amortized as of December 31, 2018. The note bears an interest rate of 12% (default interest lesser of 15% or maximum permitted by law) and matures on November 20, 2018. The conversion Feature Convertible immediately after the issuance, the Holder has the option to convert the outstanding principal and accrued interest into common stock of the Company. The Conversion price is 55% of the lowest trading price during the 25 Trading Day periods prior to the Conversion. The note was discounted for a derivative (see note 8 for details) and the discount of $68,000 was fully amortized as of December 31, 2018. During the year ended December 31, 2018, principal of $75,000 and fees of $4,500 were converted into a total of 28,252,481 shares of common stock.
On December 15, 2017, the Company borrowed $63,000 from an unrelated third party. The Company paid $3,000 of fees associated with the loan, which was fully amortized as of December 31, 2018. The loan has a maturity date of September 15, 2018 and bears interest at the rate of 8% per year. If the loan is not paid when due, any unpaid amount will bear interest at 22% per year. The Lender is entitled, at its option, at any time after June 13, 2018 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 lowest 3 trading prices during the 10 days prior to conversion date. On June 13, 2018, the Company recorded a discount of $60,000 and recorded day one loss due to derivative of $9,528. During the year ended December 31, 2018 the discount was fully amortized. During the year ended December 31, 2018 the principal of $63,000 and accrued interest and fees of $3,413 converted into a total of 4,682,540 shares of common stock.
On January 2, 2018 the Company borrowed $30,000 from an unrelated third party. The Company paid $2,000 of fees associated with the loan and the Company amortized $1,989 as of December 31, 2018. The loan has a maturity date of January 2, 2019 and bears interest at the rate of 12% (default interest lesser of 15% or maximum permitted by law). The conversion Feature Convertible immediately after the issuance, the Holder has the option to convert the outstanding principal and accrued interest into common stock of the Company. The Conversion price is 55% of the lowest trading price during the 25 Trading Day periods prior to the Conversion. The note was discounted for a derivative (see note 8 for details) and the discount of $28,000 is being amortized over the life of the note using the effective interest method resulting in $27,847 of interest expense for the year ended December 31, 2018. On February 24, 2019, the remaining balance of the note payable in the amount of $9,373, fees of $500 and accrued interest of $2,625 were converted into 18,380,000 shares of common stock. During the year ended December 31, 2019 the Company recorded amortization expense of $164 and a loss on conversion of $10,527.
On January 25, 2018 the Company borrowed $150,000 from an unrelated third party. The Company paid $7,500 of fees associated with the loan, which was recorded as discount and to be amortized over the term of the debt the Company amortized $6,986 as of December 31, 2018. The loan has a maturity date of January 25, 2019 and bears interest at the rate of 12% per year. If the loan is not paid when due, any unpaid amount will bear interest at 18% per year. The Lender is entitled, at its option, at any time after July 24, 2018 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 55% of the average of the lowest trading price for the 20 trading days immediately preceding the conversion date. On July 24, 2018, the Company recorded a discount of $142,500 and recorded day one loss due to derivative of $74,900 As during the year ended December 31, 2018 the principal of $85,149 converted into a total of 33,375,972 shares of common stock. During the year ended December 31, 2019 the remaining balance of $64,881 and accrued interest was converted into a total of 104,466,022 shares of common stock. The Company also recorded amortization of debt discount (from derivative) of $132,740 during the year ended December 31, 2018. During the year ended December 31, 2019 the Company recorded amortization expense of $9,863. The conversion resulted in a loss of $2,532.
| 39 |
On February 13, 2018 the Company borrowed $128,000 from an unrelated third party. The Company paid $3,000 of fees associated with the loan, which was recorded as discount and to be amortized over the term of the debt the Company amortized $3,000 as of December 31, 2018. The loan has a maturity date of November 30, 2018 and bears interest at the rate of 8% per year. If the loan is not paid when due, any unpaid amount will bear interest at 22% per year. The Lender is entitled, at its option, at any time after August 12, 2018 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. On August 12, 2018, the Company recorded a debt discount due to the derivative of $107,711. During the year ended December 31, 2018 the discount of $107,711 was fully amortized. During the year ended December 31, 2018 the principal of $128,000 and accrued interest of $5,120 converted into a total of 26,673,229 shares of common stock.
On March 21, 2018, the Company borrowed $45,000 from an unrelated third party. The Company paid $4,500 of fees associated with the loan and had amortized $3,514 of the costs as of December 31, 2018. The note bears an interest rate: 12% (default interest lesser of 15% or maximum permitted by law) and matures on March 21, 2019. The conversion Feature Convertible immediately after the issuance, the Holder has the option to convert the outstanding principal and accrued interest into common stock of the Company. The Conversion price is 55% of the lowest trading price during the 25 Trading Day periods prior to the Conversion. Covenants: The Borrower shall not, without the Holder’s consent, sell, lease or dispose of any significant portion of its assets outside the ordinary course of business. The note was discounted for a derivative (see note 8 for details) and the discount of $40,500 is being amortized over the life of the note using the effective interest method resulting in $31,623 of interest expense for the year ended December 31, 2018. During the year ended December 31, 2019 $23,223 of principle and interest were converted into 84,160,250 shares of common stock resulting in a loss of $32,858. During the year ended December 31, 2019 the Company recorded amortization expense of $9,863. On December 31, 2019 there was a balance remaining on the loan of $22,198.
On April 11, 2018 the Company borrowed $103,000 from an unrelated third party. The Company paid $3,000 of fees associated with the loan, which was recorded as discount and to be amortized over the term of the debt the Company amortized $3,000 as of December 31, 2018. The loan has a maturity date of January 30, 2019 and bears interest at the rate of 8% per year. If the loan is not paid when due, any unpaid amount will bear interest at 22% per year. The Lender is entitled, at its option, at any time after October 8, 2018 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. As during the year ended December 31, 2018, the principal of $103,000 and accrued interest of $4,120 converted into a total of 79,061,412 shares of common stock. The Company also recorded amortization of debt discount (from derivative) of $87,642 during the year ended December 31, 2018.
During the year ended December 31, 2019, the Company recognized amortization expense of $419,323 from deferred financing cost and amortization expense of $18,790 of discount from derivative liabilities.
During the year ended December 31, 2018, the Company recognized amortization expense of $897,600 for the discount from derivative liabilities.
Note 7 – Notes payable – related parties
On July 31, 2014, the Company borrowed $98,150 from an entity controlled by an officer and shareholder of the Company. The loan is due and payable on demand and bears no interest. As of December 31, 2019 and December 31, 2018, the principal balance owed on this loan is $98,150 and $98,150, respectively.
As of December 31, 2014, a related party loaned the Company $10,000, in the form of cash and expenses paid on behalf of the Company. The loan is due and payable on demand and bears no interest. During the year ended December 31, 2015 the Company borrowed an additional $20,000. As of December 31, 2019 and December 31, 2018, the principal balance owed on this loan was $30,000 and $30,000, respectively.
| 40 |
As of December 31, 2014, a related party loaned the Company $180,121, 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, 2019 and December 31, 2018; the principal balance owed on this loan was $54,621 and $54,621, respectively.
During 2015, the Company borrowed $43,575 from its former CFO and repaid $43,000 of the loan. The note is non-interest bearing, and due on demand. As of December 31, 2019 and December 31, 2018, the principal amount owed on this loan was $575.
During October 2015, the Company borrowed $30,000 from an entity controlled by an officer of the Company. The loan is due and payable on demand and is non-interest bearing. During the year ended December 31, 2017, the Company repaid $251,363 and borrowed an additional $265,363 from the same related party. As of December 31, 2019 the principal balance outstanding is $20,000.
During the year ended December 31, 2018 the Company repaid $121,500 and borrowed an additional $184,500 from the same related party. During year ended December 31, 2019 the Company borrowed an additional $22,500 and repaid a total of $49,500. As of December 31, 2019 and December 31, 2018, the principal balance owed on this loan was $30,000 and $107,000, respectively.
On July 7, 2016, the Company borrowed $73,000 from a related party. The loan was due and payable on July 7, 2017 and bore interest at 5% per annum. The principal balance owed on this loan at June 30, 2019 and December 31, 2018 was $73,000 and $73,000, respectively. The holder of the note has agreed to extend the default date of the note to September 30, 2018. As of and December 31, 2019 and December 31, 2018 the note is currently in default.
On August 8, 2016, the Company entered into a promissory note with Hypur Inc., a Nevada Corporation which is a related party pursuant to which the Company to borrow $52,000. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower The loan was due and payable on August 10, 2017 and bore interest at 18% per annum. The principal balance owed on this loan at June 30, 2019 and December 31, 2018 was $52,000 and $52,000, respectively. The Note is currently in default at bears a default rate of interest of 24% per annum as part of the default terms of this note. On October 1, 2017, it was determined this note had derivative. Upon default, if the default has not been remedied within 30 days, the redemption price would be 150% of the principal amount. The notes are in default as of December 31, 2019, but the holder has agreed to waive the 150% redemption price default term.
On September 20, 2016, the Company borrowed $47,500 from Hypur Inc., which is a related party. The loan is due and payable on December 20, 2016 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. The principal balance owed on this loan at September 30, 2019 and December 31, 2018 was $47,500 and $47,500, respectively. The loan is currently past due and in default. The Note is currently in default at bears a default rate of interest of 24% per annum as part of the default terms of this note. On October 1, 2017 it was determined this note had derivative. Upon default, and if the default has not been remedied within 30 days, the redemption price would be 150% of the principal amount. The notes are in default as of December 31, 2019, but the holder has agreed to waive the 150% redemption price default term.
On October 29, 2018, the Company borrowed $100,000 from Hypur Inc., which is a related party. The loan is due and payable on January 28, 2019 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. Upon default the note bears a default rate of interest of 24% per annum as part of the default terms of this note. The principal balance owed on this loan at June 30, 2019 and December 31, 2018 was $100,000 and $100,000, respectively. The note was discounted for a derivative (see note 8 for details) and the discount of $89,350 is being amortized over the life of the note using the effective interest method resulting in $89,350 of interest expense for the year ended December 31, 2019. As of December 31, 2019 the note is currently in default.
On November 21, 2018, the Company borrowed $70,000 from Hypur Inc., which is a related party. The loan is due and payable on February 19, 2019 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. Upon default the note bears a default rate of interest of 24% per annum as part of the default terms of this note. The principal balance owed on this loan at September 30, 2019 and December 31, 2018 was $70,000 and $70,000, respectively. The note was discounted for a derivative (see note 8 for details) and the discount of $55,830 is being amortized over the life of the note using the effective interest method resulting in $55,830 of interest expense for the year ended December 31, 2019. As of December 31, 2019 the note is currently in default.
| 41 |
On November 26, 2018, the Company borrowed $75,000 from Hypur Inc., which is a related party. The loan is due and payable on February 24, 2019 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. Upon default the note bears a default rate of interest of 24% per annum as part of the default terms of this note. The principal balance owed on this loan at September 30, 2019 and December 31, 2018 was $75,000 and $75.000, respectively. The note was discounted for a derivative (see note 8 for details) and the discount of $58,913 is being amortized over the life of the note using the effective interest method resulting in $58,913 of interest expense for the year ended nine December 31, 2019. As of December 31, 2019 the Note is currently in default.
On May 10, 2019, the Company borrowed $75,000 from Hypur Inc., which is a related party. The loan is due and payable on May 12, 2020 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. Upon default the note bears a default rate of interest of 24% per annum as part of the default terms of this note. The principal balance owed on this loan at December 31, 2019 was $75,000.
On September 3, 2019, the Company borrowed $21,000 from Hypur Inc., which is a related party. The loan is due and payable on December 3, 2019 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. Upon default the note bears a default rate of interest of 24% per annum as part of the default terms of this note. The principal balance owed on this loan at December 31, 2019 was $21,000.
Convertible notes payable to related party
In November 2015, the Company entered into an arrangement with a related party, whereby the Company borrowed $25,000 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. The note was due on November 4, 2016. In December 2015 the lender loaned the Company an additional $20,000 with same terms except that it is payable upon demand. As of December 31, 2019 and December 31, 2018, the Company owed a total of $45,000 and $45,000, respectively. The holder of the note has agreed to extend the default date of the note to September 30, 2018. As of December 31, 2019 the note is currently in default.
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. Upon the occurrence and during the continuation of an event of default, the holder may require the Company to redeem all or any portion of this Note in cash at a price equal to 150% of the principal amount. During the year ended December 31, 2017, the Company borrowed an additional $110,000. As of December 31, 2019 and December 31, 2018, the Company owed a total of $500,000 and $500,000, respectively. Since the debt holder has not elect the right to require the Company to redeem the note at a price equal to 150% of the principal amount, the terms stated prior to maturity are still in effect. The holder has waived the default term and the note is not considered to be in default as of December 31, 2019.
On September 1, 2016, the Company entered into, an convertible promissory note with Hypur Ventures, L.P., a Delaware limited partnership (the “Hypur Ventures”) which is a related party pursuant to which the Company to borrow $75,000. The loan was due 180 days from the date of issuance and bears interest at 10% per annum. The note is convertible into common stock at a price of $.05 per share. The note is mandatory redeemable into common stock if the price per share is over $.50 per share during a 10 day period. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 was $75,000 and $75,000, respectively. Upon default, the note bears a default rate of interest of 15% per annum, and if the default has not been remedied within 30 days, the redemption price would be 150% of the principal amount. As of December 31, 2019, Hyper has waived the default provision.
On October 14, 2016, the Company entered into, an convertible promissory note with Hypur Ventures, L.P., a Delaware limited partnership (the “Hypur Ventures”) which is a related party pursuant to which the Company to borrow $100,000. The loan was due 180 days from the date of issuance and bears interest at 10% per annum. The note is convertible into common stock at a price of $.05 per share. The note is mandatory redeemable into common stock if the price per share is over $.50 per share during a 10 day period. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 was $100,000 and $100,000, respectively. Upon default, the note bears a default rate of interest of 15% per annum, and if the default has not been remedied within 30 days, the redemption price would be 150% of the principal amount. As of December 31, 2019, Hyper has waived the default provision.
| 42 |
On March 7, 2017, the Company borrowed $100,000 from Hypur Ventures, L.P., a related party. The loan is due 180 days from March 7, 2017 and bears interest at 10% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.05 per share. The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock is over $.50 per share during any ten-day period. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 was $100,000 and $100,000 respectively. Upon default, the note bears a default rate of interest of 15% per annum, and if the default has not been remedied within 30 days, the redemption price would be 150% of the principal amount. As of December 31, 2019, Hyper has waived the default provision.
On May 26, 2017, the Company borrowed $100,000 from CGDK, a related party. The loan is due 360 days from May 26, 2017 and bears interest at 5% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.025 per share. The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock is over $.25 per share during any ten-day period. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 was $100,000 and $100,000, respectively. As of December 31, 2019 and December 31, 2018 the note is currently in default.
On July 13, 2017, the Company borrowed $150,000 from CGDK, a related party. The loan is due 360 days from July 13, 2017, and bears interest at 5% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.05 per share. The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock is over $.25 per share during any ten-day period. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 was $150,000. The conversion feature has been waved through October 15, 2019. As of December 31, 2019 and December 31, 2018, the note is currently in default.
On April 13, 2018, the Company borrowed $130,000 from CGDK, a related party. The loan is due 360 days from April 13, 2018, bears interest at 12% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.05 per share. The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock is over $.25 per share during any ten-day period. The Company recorded a discount of $101,272 due to derivative. The Company amortized $72,694 in debt discounts during the year ended December 31, 2018. The Company amortized $27,560 in debt discounts during the nine months ended September 30, 2019. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 is $130,000 and $130,000, respectively. On November 5, 2019 CGDK waived the default provision until April 13, 2020.
On June 14, 2018, the Company issued a $30,217 to CGDK, a related party, for previous expenses paid on behalf of the Company. The loan is due 360 days from June 18, 2018, bears interest at 12% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.05 per share. The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock is over $.25 per share during any ten-day period. The Company recorded a debt discount of $10,292 due to derivative. During the year ended December 31, 2018 the Company amortized $5,639 of the discount. The Company amortized $3,697 in debt discounts during the nine months ended December 31, 2019 . The principal balance owed on this loan at December 31, 2019 and December 31, 2018 is $30,217 and $30,217, respectively. On November 5, 2019 CGDK waived the default provision until June 14, 2020t.
On July 2, 2018, the Company borrowed $150,000 from CGDK, a related party. The loan is due July 2, 2019 and bears interest at 12% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.05 per share. The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock is over $.10 per share during any ten-day period or the trading volume of the Company’s common stock during these ten trading days was at least 2,500,000 shares. The Company recorded a debt discount of $19,779 due to derivative. During the year ended December 31, 2018 the Company amortized $9,862 of the discount. The Company amortized $7,390 in debt discounts during the year ended December 31, 2019. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 is $150,000 and $150,000, respectively. On November 5, 2019 CGDK waived the default provision until July 2, 2020.
On August 6, 2018, the Company borrowed $150,000 from CGDK, a related party. The loan is due July 2, 2019 and bears interest at 12% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.05 per share. The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock is over $.10 per share during any ten-day period or the trading volume of the Company’s common stock during these ten trading days was at least 2,500,000 shares. The Company recorded a debt discount of $20,095 due to derivative. During the year ended December 31, 2018 the Company amortized $8,093 of the discount. The Company amortized $7,793 in debt discounts during the year ended December 31, 2019. The principal balance owed on this loan at December 31, 2019 and December 31, 2018 is $150,000 and $150,000, respectively. On November 5, 2019 CGDK waived the default provision until August 6, 2020.
| 43 |
On January 18, 2019, the Company entered into, a convertible promissory note with Hypur Ventures, L.P., a Delaware limited partnership (the “Hypur Ventures”) which is a related party pursuant to which the Company to borrow $250,000. The loan was due 10 days from the date of issuance and bears interest at 18% per annum. The note is convertible into common stock at a price at the lower of $.0002 per share or 60% of the closing price of the common stock prior to conversion. Upon default, the note bears a default rate of interest of 24% per annum. The note was discounted for a derivative (see note 8 for details) and the discount of $167,079 is being amortized over the life of the note using the effective interest method resulting in $167,079 of interest expense for the year ended December 31, 2019. As of December 31, 2019 the note is currently in default.
On March 5, 2019, the Company entered into, an convertible promissory note with Hypur Ventures, L.P., a Delaware limited partnership (the “Hypur Ventures”) which is a related party pursuant to which the Company to borrow $50,000. The loan was due 10 days from the date of issuance and bears interest at 18% per annum. The note is convertible into common stock at a price at the lower of $.0002 per share or 60% of the closing price of the common stock prior to conversion. Upon default, the note bears a default rate of interest of 24% per annum. As of December 31, 2019 the note is currently in default.
The carrying amount of the convertible note, net of the unamortized debt discount, at December 31, 2019 and December 31, 2018 is $1,821,507 and $1,419,919, respectively. Total unamortized debt discount at December 31, 2019 and December 31, 2018 is $8,710 and $55,149, respectively.
On October 1, 2017, these notes were tainted by the variable conversion price notes and remained tainted as of December 31, 2019. The Company re-measured the fair value of derivative liabilities on December 31, 2019. See Note 8.
| 44 |
NOTE 8 – Derivative Liability
The Company analyzed the conversion options for derivative accounting consideration under ASC 815, Derivatives and Hedging, and hedging, and determined that the instrument should be classified as a liability when the conversion option becomes effective.
The derivative liability in connection with the conversion feature of the convertible debt is measured using, level 3 inputs.
The change in the fair value of derivative liabilities is as follows:
| Balance - December 31, 2017 | $ | 1,879,930 | ||
| Addition of new derivative as a derivative loss | 448,579 | |||
| Settlement of derivatives upon conversion | (1,076,702 | ) | ||
| Debt discount from derivative liability | 864,791 | |||
| Gain on change in fair value of the derivative | (1,389,266 | ) | ||
| Balance - December 31, 2018 | $ | 727,332 | ||
| Debt discount from derivative liability | 383,265 | |||
| Settlement of derivatives upon conversion | (292,611 | ) | ||
| Loss on change in fair value of the derivative | 352,074 | |||
| Balance – December 31, 2019 | $ | 1,170,060 |
The table below shows the Black-Scholes option-pricing model inputs used by the Company to value the derivative liability at each measurement date:
| Year
ended December 31, 2019 |
Year
ended December 31, 2018 |
|||||
| Expected term | 0.01 – 1.67 years | 0.02 – 2.69 years | ||||
| Expected average volatility | 24.93% – 270.08 | % | 144.96% – 446.59 | % | ||
| Expected dividend yield | - | - | ||||
| Risk-free interest rate | 1.55% – 1.60 | % | 2.25% – 2.66 | % |
Note 9 – Long term notes payable
On November 21, 2014, the Company purchased a vehicle for $20,827, net of discounts. The Company financed the $20,827 at an interest rate of 2.42% for five years, with a maturity date of December 5, 2019. As of December 31, 2019 and December 31, 2018 the total principal balance of the note is $0 and $4,678, respectively, of which $0 and $368 is considered a long-term liability and $0 and $4,310 is considered a current liability.
Note 10 – Stockholders’ equity
The Company was originally authorized to issue 100,000,000 shares of common stock and 100,000,000 shares of preferred stock. On May 6, 2014, the Company effected a forward stock split and a pro-rata increase in its authorized common stock on a basis of 14-to-1, whereby each shareholder received 14 newly issued shares of common stock for each 1 share held. Additionally, the number of authorized shares increased to 1,400,000,000 shares of common stock. All references to share and per share amounts in the consolidated financial statements and these notes thereto have been retroactively restated to reflect the forward stock split.
Common stock
During the year ended December 31, 2018 the Company issued the remaining 1,000,000 shares and remeasured the fair value of those shares on the service completion date and recorded the remaining expense of $31,917.
During the year ended December 31, 2018, the Company issued a total of 239,120,675 shares of common stock for the conversion of $769,199 of convertibles loans, accrued interest, and fees.
| 45 |
During the year ended December 31, 2019 the Company issued a total of 424,888,727 shares of common stock for the conversion of $157,960 of convertibles loans, accrued interest, and fees. The Company recorded on a loss on conversion of $107,541.
Preferred stock
On May 3, 2016, the Company entered into, an agreement with Hypur Ventures, L.P., a Delaware limited partnership (the “Hypur Ventures”) which is a related party pursuant to which the Company sold to Hypur Ventures, in a private placement, 10,000,000 shares of the Company’s preferred stock and 5,000,000 common stock warrants with a five year term and an exercise price of $0.10, at a purchase price of $0.05 per share for gross proceeds of $500,000. The shares of preferred stock are convertible into shares of the Company’s common stock. The preferred stock shall have such other rights, preferences and privileges to be set forth in a certificate of designation to be filed with the Secretary of State. The Company evaluated the convertible preferred stock under FASB ASC 470-20-30 and determined it contained a beneficial conversion feature. The intrinsic value of the beneficial conversion feature was determined to be $114,229. The beneficial conversion feature was fully amortized and recorded as a deemed dividend.
Between July and August of 2016 Hypur Ventures purchased an additional 10,000,000 shares of the Company’s preferred stock and 5,000,000 common stock warrants with a five year term and an exercise price of $0.10, at a purchase price of $0.05 per share for net proceeds of $445,000, net of legal fees of $55,000. The shares of preferred stock are convertible into shares of the Company’s common stock. The preferred stock shall have such other rights, preferences and privileges to be set forth in a certificate of designation to be filed with the Secretary of State. The Company evaluated the convertible preferred stock under FASB ASC 470-20-30 and determined it does not contain a beneficial conversion feature. The intrinsic value of the beneficial conversion feature was determined to be $0. The preferred stock is convertible at any time at the election of Hypur Ventures. The preferred stock shall automatically convert to common stock if the closing price of the Company’s common stock equals or exceeds $.50 per share over any consecutive twenty day trading period. The preferred stock terms include a one-time purchase price preference. No preferential dividends apply to the preferred stock. The preferred stock attributes include weighted average anti-dilution protection, rights to appoint one director, pre-emptive rights to purchase future offerings of securities by the Company, demand and piggy-back registration rights.
The preferred stock is convertible at any time at the election of Hypur Ventures. The preferred stock shall automatically convert to common stock if the closing price of the Company’s common stock equals or exceeds $.50 per share over any consecutive twenty day trading period. The preferred stock terms include a one-time purchase price preference. No preferential dividends apply to the preferred stock. The preferred stock attributes include weighted average anti-dilution protection, rights to appoint one director, pre-emptive rights to purchase future offerings of securities by the Company, demand and piggy-back registration rights.
The Company has reserved thirty million shares of common stock that may be issued upon the conversion and/or exercise of the preferred stock and the warrants. The preferred stock sold to Hypur Ventures will be subject to the terms and conditions of the Certificate of Designation, as well as further documentation to be drafted in accordance with the terms and conditions agreed upon between the Company and Hypur Ventures.
Note 11 – Options and warrants
Options
All stock options have an exercise price equal to the fair market value of the common stock on the date of grant. The fair value of each option award is estimated using a Black-Scholes-Merton option valuation model. The Company has not paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model. Volatility is an estimate based on the calculated historical volatility of similar entities in industry, in size and in financial leverage, whose share prices are publicly available. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company has no historical experience with which to establish a basis for determining an expected life of these awards. Therefore, the Company only gave consideration to the contractual terms and did not consider the vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures significant to the expected life of the option award. The Company bases the risk-free interest rate used in the Black-Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term equal to the expected life of the award.
On December 28, 2016, the Company issued stock options to various offices and employees of the Company to purchase 7,950,000 shares of the Company’s common stock at an exercise price of $0.05 per share. The options vest immediately. The options carry a life of three years.
| 46 |
During the year ended December 31, 2018 a total of 466,667 stock options were forfeited by various employees of the Company.
The following is a summary of the Company’s stock option activity for the year ended December, 31 2019 and the year ended December 31, 2018:
| Number Of Shares | Weighted-Average Exercise Price | |||||||
| Outstanding at December 31, 2017 | 24,478,405 | $ | 0.11 | |||||
| Granted | - | $ | - | |||||
| Expired | (466,667 | ) | $ | 0.11 | ||||
| Cancelled | - | $ | - | |||||
| Outstanding at December 31, 2018 | 24,011,738 | $ | 0.11 | |||||
| Granted | - | $ | - | |||||
| Expired | - | $ | - | |||||
| Cancelled | - | $ | - | |||||
| Outstanding at December 31, 2019 | 24,011,738 | $ | 0.11 | |||||
| Options exercisable at December 31, 2018 | 24,011,738 | $ | 0.11 | |||||
| Options exercisable at December 31, 2019 | 24,011,738 | $ | 0.11 | |||||
The following tables summarize information about stock options outstanding and exercisable at December 31, 2019 and December 31, 2018:
| OPTIONS OUTSTANDING AND EXERCISABLE AT DECEMBER 31, 2019 | ||||||||||||||||||||||
| 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 |
|||||||||||||||||
| $ | 0.034 – 1.00 | 24,011,738 | .30 | $ | 0.11 | 24,011,738 | $ | 0.11 | ||||||||||||||
| OPTIONS OUTSTANDING AND EXERCISABLE AT DECEMBER 31, 2018 | ||||||||||||||||||||||
| 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 |
|||||||||||||||||
| $ | 0.034 – 1.00 | 24,011,738 | 1.05 | $ | 0.11 | 24,011,738 | $ | 0.11 | ||||||||||||||
Total stock-based compensation expense in connection with options and modified awards recognized in the consolidated statement of operations for years ended December 31, 2019 and 2018 was $0 and $52,437 respectively.
Warrants
The following is a summary of the Company’s warrant activity for the years ended December 31, 2018 and 2019:
Number Of Shares | Weighted-Average Exercise Price | |||||||
| Outstanding at December 31, 2018 | 10,000,000 | $ | 0.10 | |||||
| Granted | - | $ | - | |||||
| Exercised | - | $ | - | |||||
| Cancelled | - | $ | - | |||||
| Outstanding at December 31, 2019 | 10,000,000 | $ | 0.10 | |||||
| Warrants exercisable at December 31, 2018 | 10,000,000 | $ | 0.10 | |||||
| Warrants exercisable at December 31, 2019 | 10,000,000 | $ | 0.10 | |||||
| 47 |
The following tables summarize information about warrants outstanding and exercisable at September 30, 2019 and December 31, 2018:
| WARRANTS OUTSTANDING AND EXERCISABLE AT DECEMBER 31, 2019 | ||||||||||||||||||||||
| Range
of Exercise Prices | Number
of Warrants Outstanding | Weighted- Average Remaining Contractual Life in Years | Weighted- Average Exercise Price | Number Exercisable | Weighted- Average Exercise Price | |||||||||||||||||
| $ | 0.10 | 10,000,000 | 1.52 | $ | 0.10 | 10,000,000 | $ | 0.10 | ||||||||||||||
| WARRANTS OUTSTANDING AND EXERCISABLE AT DECEMBER 31, 2018 | ||||||||||||||||||||||
| Range of Exercise Prices | Number
of Warrants Outstanding | Weighted- Average Remaining Contractual Life in Years | Weighted- Average Exercise Price | Number Exercisable | Weighted- Average Exercise Price | |||||||||||||||||
| $ | 0.10 | 10,000,000 | 2.52 | $ | 0.10 | 10,000,000 | $ | 0.10 | ||||||||||||||
Note 13 – Income taxes
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “TCJA”) that significantly reforms the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, effective as of January 1, 2018; limitation of the tax deduction for interest expense; limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carry backs, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such tax losses may be carried forward indefinitely); modifying or repealing many business deductions and credits, including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”; and repeal of the federal Alternative Minimum Tax (“AMT”).
The staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. In connection with the initial analysis of the impact of the TCJA, the Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The remeasurement of the Company’s deferred tax assets and liabilities was offset by a change in the valuation allowance.
For the years ended December 31, 2019 and 2018, 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, 2019 and 2018, the Company had approximately $7,889,253 and $7,275,182 of federal and state net operating losses. The net operating loss carry forwards, if not utilized, will begin to expire in 2029. 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 | ||||||||
| 2019 | 2018 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forwards | $ | 1,656,743 | $ | 1,527,788 | ||||
| Valuation allowance | (1,656,743 | ) | (1,527,788 | ) | ||||
| Total deferred tax assets | $ | - | $ | - | ||||
FASB ASC 740, Income Taxes, requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a full valuation allowance of $1,656,743 and $1,527,788 against its net deferred taxes is necessary as of December 31, 2019 and December 31, 2018, respectively. The change in valuation allowance for the years ended December 31, 2019 and 2018 is $337,740 and $323,583 respectively.
| 48 |
At December 31, 2019 and December 31, 2018, respectively, the Company had $7,884,253 and $7,275,182, respectively, of U.S. net operating loss carryforwards remaining, which expire beginning in 2017.
As a result of certain ownership changes, the Company may be subject to an annual limitation on the utilization of its U.S. net operating loss carryforwards pursuant to Section 382 of the Internal Revenue Code. A study to determine the effect, if any, of this change, has not been undertaken.
Tax returns for the years ended December 31, 2019, 2018, 2017, 2016, and 2015 are subject to examination by the Internal Revenue Service.
A reconciliation of the Company’s income taxes to amounts calculated at the federal statutory rate is as follows for the years ended December 31:
| 2019 | 2018 | |||||||
| Federal statutory taxes | (21.00 | )% | (21.00 | )% | ||||
| Change in tax rate estimate | — | — | ||||||
| Change in valuation allowance | 21.00 | % | 21.00 | % | ||||
| — | % | — | % | |||||
The valuation allowance for deferred tax assets as of December 31, 2018 and 2017 was $1,572,788 and $1,204,205 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, 2019 and 2018 and recorded a full valuation allowance.
Reconciliation between the statutory rate and the effective tax rate is as follows at December 31:
| 2019 | 2018 | |||||||
| Federal statutory tax Reconciliation rate | (21.0 | )% | (35.0 | )% | ||||
| Permanent difference and other | 21.0 | % | 35.0 | % | ||||
Note 14 – Subsequent events
The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued and has determined there are no additional events required to be disclosed.
| 49 |
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. | ||
| August 28, 2020 | By: | /s/ Evan DeVoe |
| Evan DeVoe, Principal 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/ Evan DeVoe | Principal Executive, Financial and | August 28, 2020 | ||
| Evan DeVoe | Accounting Officer and a Director | |||
| /s/ Christopher Galvin | Director | August 28, 2020 | ||
| Christopher Galvin | ||||
| /s/ Daniel Allen | Director | August 28, 2020 | ||
| Daniel Allen | ||||
| /s/ Doyle Knudson | Director | August 28, 2020 | ||
| Doyle Knudson |
| 50 |