BLPG 10-K
Blue Line Protection Group, Inc. (BLPG)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the Fiscal Year Ended
| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period from __________ to _______
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| (Address of principal executive offices) | (Zip code) |
Registrant’s
telephone number:
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:
(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 ☐
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by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
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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
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has been subject to such filing requirements for the past 90 days.
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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)
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. ☒
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 ☐ |
| Smaller reporting company | |
| 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. ☐
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The
aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2022 was approximately
$
As of March 31, 2023 the registrant had outstanding shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
BLUE LINE PROTECTION GROUP, INC.
FORM 10-K
For the year ended December 31, 2022
TABLE OF CONTENTS
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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.
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PART I
| ITEM 1. | DESCRIPTION OF BUSINESS |
We were originally incorporated in Nevada on September 11, 2006, under the name The Engraving Masters, Inc. (the “Company”).
On May 2, 2014, we changed our name to Blue Line Protection Group, Inc.
On February 8, 2021, our directors approved a 100-for-1 reverse split of our common stock. The reverse stock split became effective in the public market in July 2021.
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, 2022 approximately 51% of our revenue was derived from transportation services. The remaining 49% of our revenue was derived from currency processing services (47%) and compliance services (2%).
Our base of operations are in the Denver, Colorado and Phoenix, Arizona metropolitan areas. 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.
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. Since that time, 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.
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We currently supply asset protection via 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.
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 deposit cash, make payroll and pay taxes like a traditional 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.
We have created a means for the banks to validate compliance with the federal mandate mentioned above. 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.
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 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 our armored transportation team and security operators are required to undertake our mandatory, rigorous 40-hour introductory compliance and training curriculum created and supervised by veteran law enforcement officers.
In addition to internal training, we also offer other businesses, houses of worship and the general public a wide variety of safety, security and personal defense courses and firearms training.
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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 armed operators conduct the majority of our marketing and advertising efforts. Several of our operators 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 sales team and our management actively engage 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.
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; |
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| ● | Operational excellence; | |
| ● | Cash processing, transportation and storage capabilities; | |
| ● | Security and logistics infrastructure; | |
| ● | Services beyond transportation and banking services, 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, armored transportation services and cash processing. The security services industry is a large and competitive market. More specifically, however, the market for security and storage solutions as it pertains to medical marijuana companies is a nascent market, resulting in a highly fragmented and fractured marketplace. Some of the companies we compete with are much larger than us, and such companies have significantly greater resources than us. None of the large security companies, such as Brinks, Argyle, Tyco or Torment, are currently competing in this market segment, although there can be no guarantee this trend will continue.
Significantly all of our current and potential traditional competitors have longer operating histories, larger customer or user bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Our competitors may be able to secure experienced employees, accommodate customers more efficiently and adopt more aggressive pricing policies than we can. Many of these current and potential competitors can devote substantially more resources to advertising, marketing and attracting experienced talent than we can. In addition, larger, more well-established and financed entities may acquire, invest in or form joint ventures with our competitors.
Government Regulation
In most jurisdictions we are required to obtain government approval to provide security and/or investigative services. We expect to make every effort to comply with all existing and pending regulatory conditions and licensing requirements in each state we currently or potentially operate in.
Continued development of the marijuana industry is dependent upon continued legislative authorization of marijuana at the state level. Any number of factors could slow or halt progress in this area. Further, progress, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of marijuana, which would negatively impact our proposed business.
Marijuana is a Schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal laws. There are currently 37 states and the District of Columbia allowing its citizens to use Medical Marijuana. Additionally, 18 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.
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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 employees
As of March 31, 2023, we had approximately 32 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 31, 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.
| ITEM 1A. | RISK FACTORS |
We may not be able to attain profitability without additional funding, which may be unavailable.
We have limited capital resources. To date, we have not earned a profit or generated cash from our operations. Unless we begin to generate sufficient revenues from our proposed business to finance operations as a going concern, we may experience liquidity and solvency problems. Such liquidity and solvency problems may force us to go out of business if additional financing is not available. We have no intention of liquidating. In the event our cash resources are insufficient to continue operations, we intend to raise additional capital through offerings and sales of equity or debt securities. In the event we are unable to raise sufficient funds, we will be forced to go out of business and will be forced to liquidate. A possibility of such outcome presents a risk of complete loss of investment in our common stock.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
See Item 1. Business.
| ITEM 3. | LEGAL PROCEEDINGS |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
None.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND MARKET INFORMATION FOR COMMON STOCK |
The high and low closing prices of our common stock for the periods indicated are set forth below. These closing prices do not reflect retail mark-up, markdown or commissions.
Prices for 2021 reflect a 100-for-1 reverse stock split which became effective in the public market in July 2021.
| Year ended December 31, 2022 | High | Low | ||||||
| First Quarter | $ | 0.50 | $ | 0.31 | ||||
| Second Quarter | $ | 0.41 | $ | 0.12 | ||||
| Third Quarter | $ | 0.45 | $ | 0.17 | ||||
| Fourth Quarter | $ | 0.25 | $ | 0.15 | ||||
| Year ended December 31, 2021 | High | Low | ||||||
| First Quarter | $ | 2.30 | $ | 0.13 | ||||
| Second Quarter | $ | 2.15 | $ | 0.76 | ||||
| Third Quarter | $ | 1.98 | $ | 0.54 | ||||
| Fourth Quarter | $ | 2.95 | $ | 0.78 | ||||
As of March 31, 2023 we had 8,250,144 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, 2022 as compared to the same period last year, are discussed below:
| Increase (I) or | ||||
| Item | Decrease (D) | Reason | ||
| Revenue | D | Decrease in services | ||
| Gross Profit | D | Decrease in services and increase in expenses | ||
| General and Administrative Expenses | I | Expansion of services | ||
| Interest expense | D | Decrease in borrowings | ||
| Loss on derivate securities | I | Reduced debt and lower stock price |
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Capital Resources and Liquidity
Our material sources and <uses> of cash during the years ended December 31, 2022 and 2021 were:
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Cash provided by <used in> operations | 369,471 | 903,374 | ||||||
| Purchase of property, plant and equipment | <33,725> | <66,002> | ||||||
| Loan payments | <717,850> | <419,945> | ||||||
| Loan proceeds | - | - | ||||||
General
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 March 31, 2024.
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.
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 $1,896,000 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 may need to 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.
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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 measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.
Significant Accounting Policies
See Note 2 to the financial statements included as part of this report for a description of our significant accounting policies.
Recent Accounting Pronouncements
From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB ASCs are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our consolidated financial statements upon adoption.
To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included as part of this Report.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
Not applicable.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our financial statements are contained later in this report beginning on page F-1.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS |
None
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| 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, 2022 for the same reasons that our internal control over financial reporting was not effective:
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
| 1. | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; | |
| 2. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and | |
| 3. | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
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As of December 31, 2022, 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, 2022 that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company’s management, including the chief executive officer and principal financial officer, do not expect that its disclosure controls or internal controls will prevent all errors or all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
| ITEM 9B. | OTHER INFORMATION |
None.
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PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Our directors are elected by the stockholders to a term of one year and serve until their successors are elected and qualified. The officers are appointed by our Board of Directors to a term of one year and serve until his/her successor is duly elected and qualified, or until he/she is removed from office.
The names and ages of our directors and executive officers and their positions are as follows:
| Name | Age | Position | ||
| Daniel Allen | 71 | Chief Executive, Financial and Accounting Officer and a Director | ||
| Doyle Knudson | 71 | Director | ||
| Andrew Berman | 63 | Director |
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.
Andrew Berman was elected as one of our directors on February 28, 2023. Berman has a B.A. from the University of Michigan and a J.D. from the University of Miami School of Law. His work experience includes practicing law, Business Affairs at America Online, C-level roles in technology businesses, private investing, and extensive cannabis experience in 5 states since 2015. This cannabis work includes Maui Wellness Group (HI), Ohio Grown Therapies (OH), CEO of Harborside Inc. (CA), which he took public on the CSE in 2019, President of Greenfield Cannabis Co. (CA), a cultivator and manufacturer of premier cannabis products located in Monterey County, and PRICH Biotech, Puerto Rico’s largest vertical operator. Berman also has broad government relations experience, having been twice elected to the City Council for the City of Mill Valley, California, including two terms as Mayor.
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, Daniel Allen, serves in all the above capacities.
| 14 |
| ITEM 11. | EXECUTIVE COMPENSATION |
Overview of Compensation Program
Our Board of Directors acts as our Compensation Committee and has responsibility for establishing, implementing and continually monitoring adherence to our compensation philosophy. The Board of Directors ensures that the total compensation paid to our executives is fair, reasonable and competitive.
Compensation Philosophy and Objectives
The Board of Directors believes that the most effective executive compensation program is one that is designed to reward the achievement of specific annual, long-term and strategic goals by the Company and that aligns executives’ interests with those of the stockholders by rewarding performance above established goals, with the ultimate objective of improving stockholder value. As a result of the size of the Company and only having two executive officers, the Board evaluates both performance and compensation on an informal basis. Upon hiring additional executives, the Board intends to evaluate the necessity of establishing a Compensation Committee to evaluate both performance and compensation to ensure that the Company maintains its ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly-situated executives of peer companies. To that end, the Board believes executive compensation packages provided by the Company to its executives, including the named executive officers, should include both cash and stock-based compensation that reward performance as measured against established goals.
Role of Executive Officers in Compensation Decisions
Our Directors make all compensation decisions for, and 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, 2022 and 2021 the compensation paid by the Company to those years to its 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 | 2022 | $ | 80,769 | $ | - | $ | 94,711 | - | $ | 175,480 | ||||||||||||||
| Chief Executive Officer(5) | ||||||||||||||||||||||||
| Doyle Knudson | 2022 | $ | - | $ | - | $ | 142,066 | - | $ | 142,066 | ||||||||||||||
| Board Member | ||||||||||||||||||||||||
| Evan DeVoe | 2022 | $ | 172,083 | $ | - | $ | - | - | $ | 172,083 | ||||||||||||||
| Chief Executive Officer(5) | 2021 | $ | 188,462 | $ | - | $ | - | - | $ | 188,462 | ||||||||||||||
| (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) | Evan DeVoe resigned as our Chief Financial and Accounting Officer on July 29, 2022. On August 4, 2022 Daniel Allen became our new Chief Executive, Financial and Accounting Officer. |
| 15 |
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”).
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, 2022 and 2021 to our officers and directors pursuant to the Plan:
Options Granted
| Name | Grant Date | Options Granted | Exercise Price | Expiration Date | ||||||||
| Dan Allen | 10/1/22 | 1,000,000 | $ | 0.21 | 9/30/2027 | |||||||
| Doyle Knudson | 10/1/22 | 1,500,000 | $ | 0.21 | 9/30/2027 | |||||||
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 | - | - | - | |||||||||
| 16 |
The following shows certain information as of December 31, 2022 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) | |||||||||
| Stock Incentive Plan | 7,700,000 | $ | 0.21 | 4,287,000 | ||||||||
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 March 31, 2023 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 | ||||||
| Daniel Allen | 8,366 | * | ||||||
| Doyle Knudson | 71,172 | * | ||||||
| Andrew Berman | - | * | ||||||
| All Directors and Officers as a group (3 persons) | 79,538 | * | ||||||
| * | 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).
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
See Note 7 to the Financial Statements included as a part of this report for information regarding notes payable to related parties.
| 17 |
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The following table sets forth fees billed to us by our independent auditors for the years ended 2022 and 2021 for (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services rendered that are reasonably related to the performance of the audit or review of our financial statements that are not reported as Audit Fees, and (iii) services rendered in connection with tax preparation, compliance, advice and assistance.
| SERVICES | 2022 | 2021 | ||||||
| Audit- M&K CPA | $ | 56,850 | $ | 53,450 | ||||
| Tax fees | - | - | ||||||
| All other fees | - | - | ||||||
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) Inline XBRL Instance Document | ||
| (SCH) Inline XBRL Taxonomy Extension Schema Document | ||
| (CAL) Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
| (DEF) Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
| (LAB) Inline XBRL Taxonomy Extension Label Linkbase Document | ||
| (PRE) Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL 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. |
| ITEM 16. | FORM 10-K SUMMARY |
None.
| 18 |
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. | ||
| March 31, 2023 | By: | /s/ Daniel Allen |
| Daniel Allen, 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 | ||
| Principal Executive, Financial and | March 31, 2023 | |||
| Daniel Allen | Accounting Officer and a Director | |||
| Director | March 31, 2023 | |||
| Doyle Knudson | ||||
| Director | March 31, 2023 | |||
| Andrew Berman |
| 19 |
Blue Line Protection Group, Inc.
INDEX TO FINANCIAL STATEMENTS
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Blue Line Protection Group, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Blue Line Protection Group, Inc. (the Company) as of December 31, 2022, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the period ended December 31, 2022, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company suffered net losses from operations for the year ended December 31, 2022, has an accumulated deficit and has a net capital deficiency as of December 31, 2022, 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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 audits to obtain reasonable assurance about whether the consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| F-2 |
Derivative Liabilities
As discussed in Note 8, the Company borrows funds through the use of convertible notes payable that contain a conversion price that may be fixed or fluctuates with the stock price.
Auditing management’s estimates of the fair value of the derivative liability involves significant judgments and estimates given the embedded conversion features of the notes.
To evaluate the appropriateness of the fluctuation of the conversion price, the embedded conversion feature requires bifurcation from the host contract and is recorded as a liability subject to market adjustments as of each reporting period. Significant judgment is exercised by the Company in determining derivative liability values for these convertible note agreements, including the use of a specialist engaged by management.
We evaluated management’s conclusions regarding their derivative liability, reviewed support for the significant inputs used in the valuation model, and assessed the model for reasonableness. In addition, we evaluated the Company’s disclosure in relation to this matter included in Note 8 to the consolidated financial statements.
Capital Stock and Other Equity Accounts
As discussed in Note 9, the Company issues stock options as stock-based compensation to employees.
Auditing management’s calculation of the fair value of the options issued can be a significant judgment given the fact that the Company uses management estimates on various inputs to the calculations.
To test the valuation of the options, we evaluated management’s significant judgments and estimates. Significant judgements and estimates related to the valuation of the options include fair valuing of the options which involve significant estimates of volatility, grant terms, risk-free rates and the use of historical trading data.
We evaluated management’s conclusions regarding their fair values and reviewed support for the significant inputs used in the valuation model, as well as assessing the model for reasonableness. In addition, we evaluated the Company’s disclosure in relation to this matter included in Note 9 to the consolidated financial statements
| We
have served as the Company’s auditor since 2020. |
|
| March 31, 2023 |
| F-3 |
BLUE LINE PROTECTION GROUP, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Prepaid expenses and deposits | ||||||||
| Total current assets | ||||||||
| Long-term assets: | ||||||||
| Right to use assets | ||||||||
| Machinery and equipment, net et, net of accumulated depreciation of $ | ||||||||
| Fixed assets of discontinued operations | ||||||||
| Total long-term assets | ||||||||
| Security Deposit | ||||||||
| Total assets | ||||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Financed lease liabilities | ||||||||
| Notes payable - related parties | ||||||||
| Convertible notes payable - related parties, net of unamortized discount | ||||||||
| Current portion of operating lease obligation | ||||||||
| Derivative liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Financed lease liabilities - long term | ||||||||
| Notes payable - related parties | ||||||||
| Operating lease liability-long term | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ deficit: | ||||||||
| Preferred Stock, $ par value, shares authorized, shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively | ||||||||
| Common Stock, $par value, shares authorized, and issued and outstanding as of December 31, 2022 and December 31, 2021, respectively | ||||||||
| Common Stock, owed but not issued, shares and shares as of December 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
BLUE LINE PROTECTION GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the years ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | $ | ||||||
| Cost of revenue | ( | ) | ( | ) | ||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| General and administrative expenses | ||||||||
| Total expenses | ||||||||
| Operating Income | ||||||||
| Other income (expenses): | ||||||||
| Gain on settlement of accounts payable | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Income / (Loss) on derivative | ( | ) | ||||||
| Total other income / (expenses) | ( | ) | ||||||
| Net income / (loss) | $ | ( | ) | $ | ||||
| Net income per common share: Basic and Diluted | $ | ( | ) | $ | ||||
| Net Income / (loss) per common share: Diluted | $ | ( | ) | $ | ||||
| Weighted average number of | ||||||||
| common shares outstanding- Basic | ||||||||
| common shares outstanding- Diluted | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
BLUE LINE PROTECTION GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| Preferred Stock | Common Stock | Additional Paid-in | Stock | Accumulated | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Payable | Deficit | Deficit | |||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Common stock issued for conversion of debt and accrued interest | - | |||||||||||||||||||||||||||||||
| Rounding shares issued from reverse stock split | - | |||||||||||||||||||||||||||||||
| Derivative resolution | - | - | ||||||||||||||||||||||||||||||
| Gain on the forgiveness of accrued interest - related party | - | - | ||||||||||||||||||||||||||||||
| Net income for the year ended December 31, 2021 | - | - | ||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Cancellation of common stock | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Common stock issued for services | - | |||||||||||||||||||||||||||||||
| Stock options expense | - | - | ||||||||||||||||||||||||||||||
| Forgiveness of interest - related party | - | - | ||||||||||||||||||||||||||||||
| Derivative resolution | - | - | ||||||||||||||||||||||||||||||
| Net Income for the year ended December 31, 2022 | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
BLUE LINE PROTECTION GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| For the years ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating activities | ||||||||
| Net income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of right to use lease asset | ||||||||
| Common stock issued for services | ||||||||
| Stock Option expense | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) in accounts receivable | ( | ) | ( | ) | ||||
| (Increase) / decrease in deposits and prepaid expenses | ( | ) | ||||||
| Increase (decrease) in accounts payable and accrued liabilities | ||||||||
| Increase (decrease) in lease obligations | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash provided by/(used in) investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Repayments on convertible notes payable - related party | ( | ) | ||||||
| Repayments on convertible notes payable | ( | ) | ( | ) | ||||
| Repayments from notes payable - related party | ( | ) | ( | ) | ||||
| Payments on notes payable | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net increase in cash | ( | ) | ||||||
| Cash - beginning | ||||||||
| Cash - ending | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Capitalized leased fixed assets | $ | $ | ||||||
| Common stock issued for conversion of debt and interest | $ | $ | ||||||
| Derivative resolution | $ | $ | ||||||
| Cancellation of common stock | $ | $ | ||||||
| Gain on the forgiveness of accrued interest - related party | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-7 |
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 shares of its common stock and shares of preferred stock, each with a par value of $ 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”)
The Company provides logistics, and compliance services for businesses engaged in the legal cannabis industry. The Company offers asset logistic services, such as armed transportation service; including shipment protection, money escorts, asset vaulting, financial services, such as handling transportation and storage of currency; training; and compliance services.
Note 2 – Accounting policies and procedures
Principles of consolidation
For the years ended December 31, 2022 and 2021, 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 consolidated financial statements present the balance sheets, statements of operations, stockholders’ equity (deficit) and cash flows of the Company. The consolidated 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.
| F-8 |
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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The
Company maintains a cash balance in a non-interest-bearing account that currently does 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. As of December 31, 2022 the Company has cash in excess of FDIC insured limits of $
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
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 | ||
| Furniture and Equipment | ||
| Buildings and Improvements |
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
| F-9 |
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, 2022 and December 31, 2021, the Company determined that none of its long-lived assets were impaired.
Concentration of business and credit risk
The Company has no significant off-balance sheet risks such as foreign exchange contracts, option contracts or other 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
The
Company had one major customer which generated
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). |
| F-10 |
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, 2022 and December 31, 2021:
December 31, 2022
| Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
| Embedded conversion derivative liability | $ | $ | $ | $ | ||||||||||||
| Warrant derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
December 31, 2021
| Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
| Embedded conversion derivative liability | $ | $ | $ | $ | ||||||||||||
| Warrant derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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).
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 records revenue when 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 adoption of these standards did not have an impact on the Company’s Statements of Operations for the year ended December 31, 2018.
| F-11 |
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 | 2022 | 2021 | ||||||
| Service: Transportation | $ | $ | ||||||
| Service: Currency Processing | $ | $ | ||||||
| Service: Compliance | $ | $ | ||||||
| Total | $ | $ | ||||||
Advertising costs
The
Company expenses all costs of advertising as incurred. Advertising expense for the years ended December 31, 2022 and December 31, 2021
amounted to $
General and administrative expenses
The significant components of general and administrative expenses consist mainly of rent and compensation.
Share-Based Compensation
Share-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. 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.
Cost of Revenue
The Company’s cost of revenue primarily consists of labor, fuel costs and items purchased by the Company specifically for the benefit of the Company’s clients.
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. For the years ended December 31, 2022 and 2011 all common stock equivalents of and , respectively were excluded from the calculation of diluted loss per share as their effect would be anti-dilutive.
| F-12 |
Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||||
| Numerator: | ||||||||
| Net income / (loss) | $ | ( | ) | $ | ||||
| Denominator: | ||||||||
| Weighted-average shares of common stock | ||||||||
| Dilutive effect of warrants | ||||||||
| Dilutive effect of convertible instruments | ||||||||
| Diluted weighted-average of common stock | ||||||||
| Net income per common share from: | ||||||||
| Basic | $ | ( | ) | $ | ||||
| Diluted | $ | ( | ) | $ | ||||
Dividends
The Company has not yet adopted any policy regarding payment of dividends. No dividends have been paid or declared since inception.
Income Taxes
The Company follows FASB Codification Topic 740-10-25 (ASC 740-10-25) for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
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
| F-13 |
The Company evaluated all other 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, 2022. 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 to the Company. 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 $
Mile
High Real Estate Group, an entity owned by Mr. Sullivan, sent correspondence to the Company 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 $
On
April 14, 2016, the Company entered into an agreement with a third party to provide the Company with investor relations services. Upon
signing the agreement, the Company paid the investor relations consultant $ and agreed to issue the consultant shares
of its restricted common stock. The agreement required the Company to pay the consultant an additional $ 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, 2022 and
December 31, 2021 there was a payable recorded of $
Finance leases
On
March 1, 2019, the Company recorded finance lease obligation for a leased a vehicle for $
On
June 2, 2021, the Company recorded finance lease obligation for a leased a vehicle for $
| F-14 |
On
June 17, 2022, the Company recorded finance lease obligation for a leased vehicle for $
| Future minimum lease payments as December 31, 2022 | ||||
| 2023 | $ | |||
| 2024 | ||||
| Total minimum lease payments | $ | |||
Operating Leases
On
October 27, 2016 the Company sold its building located at 5765 Logan Street Denver, Colorado to an unrelated third party for $.
The Company repaid the mortgage on the building in the amount of $
On
May 29, 2018 the Company leased a building located at 4328 E. Magnolia Street, Phoenix, Arizona.
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
The
Company adopted ASC 842 and recorded right of use asset and operating lease liability of $
Supplemental balance sheet information related to leases is as follows:
December 31, 2022
| Operating Leases | Classification | December 31, 2022 | ||||
| Right-of-use assets | Operating right of use assets | $ | ||||
| Total | $ | |||||
| Current lease liabilities | Current operating lease liabilities | $ | ||||
| Non-current lease liabilities | Long-term operating lease liabilities | $ | ||||
| Total | $ | |||||
| F-15 |
Lease term and discount rate were as follows:
| December 31, 2022 | ||||
| Weighted average remaining lease term (years) | ||||
| Weighted average discount rate | % | |||
The following summarizes lease expenses for the year ended December 31, 2022:
Finance lease expenses:
| Depreciation/amortization expense | $ | |||
| Interest on lease liabilities | ||||
| Finance lease expense | $ |
Supplemental disclosures of cash flow information related to leases were as follows:
| December 31, 2022 | ||||
| Cash paid for operating lease liabilities | $ | |||
| Operating right of use assets obtained in exchange for operating lease liabilities | $ | |||
Maturities of lease liabilities were as follows as of December 31, 2022:
Operating Leases | ||||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ | |||
| 2026 | $ | |||
| Total | $ | |||
| Less: Imputed interest | $ | ( | ) | |
| Present value of lease liabilities | $ | |||
December 31, 2021
| Operating Leases | Classification | December 31, 2021 | ||||
| Right-of-use assets | Operating right of use assets | $ | ||||
| Total | $ | |||||
| Current lease liabilities | Current operating lease liabilities | $ | ||||
| Non-current lease liabilities | Long-term operating lease liabilities | $ | ||||
| Total | $ | |||||
| December 31, 2021 | ||||
| Weighted average remaining lease term (years) | ||||
| Weighted average discount rate | % | |||
Finance lease expenses:
| Depreciation/amortization expense | $ | |||
| Interest on lease liabilities | ||||
| Finance lease expense | $ |
| F-16 |
Supplemental disclosures of cash flow information related to leases were as follows:
| December 31, 2021 | ||||
| Cash paid for operating lease liabilities | $ | |||
| Operating right of use assets obtained in exchange for operating lease liabilities | $ | |||
Note 5 – Fixed assets
Machinery and equipment consisted of the following at:
| December 31, 2022 | December 31, 2021 | |||||||
| Automotive vehicles | $ | $ | ||||||
| Furniture and equipment | $ | $ | ||||||
| Machinery and Equipment | $ | $ | ||||||
| Leasehold improvements | $ | $ | ||||||
| Fixed assets, total | $ | $ | ||||||
| Total: accumulated depreciation | $ | ( | ) | $ | ( | ) | ||
| Fixed assets, net | $ | $ | ||||||
During
the years ended December 31, 2022 and December 31, 2021 the Company had $
Depreciation
expense for the years ended December 31, 2022 and December 31, 2021 were $
Note 6 – Notes payable
Convertible notes payable to non-related parties
On
October 18, 2017, the Company borrowed $ from an unrelated third party. The Company paid $ 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 % (default interest %) and has a maturity date of . The Holder has the option to convert
the outstanding principal and accrued interest into common stock of the Company. During the year ended December 31, 2018 the Company paid $ to extend the maturity date
until . During the year ended December 31, 2019, the Company paid $ in extension fees. The note was discounted for
a derivative (see note 8 for details) and the discount of $ 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 $ of accrued
interest into shares of common stock resulting in a loss of $. As of December 31, 2021 and December 31, 2020 the balance
outstanding on the loan is $ and $, respectively. On May 28, 2021 the Company entered into a settlement and release agreement
with the borrower and agreed to pay them discuss additional amount bounded to interest expense for the settlement $
| F-17 |
On March 21, 2018, the Company borrowed $ from an unrelated third party. The Company paid $ of fees associated with the loan and had amortized $ of the costs as of December 31, 2018. The note bears an interest rate: % (default interest lesser of % or maximum permitted by law) and matures on . The note was discounted for a derivative (see note 8 for details) and the discount of $ has been fully amortized over the life of the note using the effective interest method. As of December 31, 2021 the amount had been fully amortized. As of December 31, 2022 and December 31, 2021 accrued interest and the note balance had been repaid.
Note 7 – Notes payable – related parties
Long-term liabilities: Notes payable - related parties
As
of December 31, 2021 the Company owed MKM Capital Advisors and two related entities $
As
of December 31, 2021 the Company owed CGDK, LLC $
Current liabilities: Notes payable – related parties
On July 31, 2014, the Company borrowed $ from an entity controlled by a former officer and shareholder of the Company. The loan is due and payable on demand and bears no interest. As of December 31, 2022 and December 31, 2021, the principal balance owed on this loan is $ and $, respectively.
As
of December 31, 2014, a related party loaned the Company $
| F-18 |
Current Liabilities: Convertible notes payable to related parties
As
of December 31, 2021 the Company owed Hypur Inc. $
| ● | On
March 3, 2022 the Company paid Hypur $ | |
| ● | On
or before each date shown below, the Company paid Hypur $ |
| Date | Amount | |||
| $ | ||||
| $ | ||||
| $ | ||||
| $ | ||||
| ● | On
or before July 31, 2022 the Company will pay Hypur $ | |
| ● | All
principal amounts owed to Hypur under the Promissory Notes will bear interest at | |
| ● | If
by July 31, 2022 all payments required by the Company’s agreement with Hypur have been made in a timely fashion, Hypur will
forgive $ | |
| ● | After
July 31, 2022 future payment plans will be negotiated, provided however that any principal amounts owed to Hypur under the Promissory
Notes after July 31, 2022 will not bear interest in excess of | |
| ● | Hypur will waive any default rights between January 31, 2022 and August 31, 2022 on a month-to-month basis so long as all payments required by the Company’s agreement with Hypur have been made. |
During
the year ended December 31, 2022 the Company repaid a total of $
On
September 1, 2016, 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 borrowed $
On
October 14, 2016, the Company entered into a convertible promissory note with Hypur Ventures, L.P., a Delaware limited partnership (the
“Hypur Ventures”) and a related party, pursuant to which the Company borrowed $
On
March 7, 2017, the Company borrowed $
| F-19 |
The Company re-measured the fair value of derivative liabilities on December 31, 2022 and December 31, 2021. See Note 8.
Note 8 – Derivative Liability
The Company analyzed the conversion options for derivative accounting consideration under ASC 815, Derivatives and Hedging, and determined that an instrument should be classified as a liability when a 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, 2020 | $ | |||
| Settlement of derivatives upon conversion | $ | ( | ) | |
| Gain on change in fair value of the derivative | $ | ( | ) | |
| Balance – December 31, 2021 | $ | |||
| Settlement of derivatives upon conversion | $ | ( | ) | |
| Gain on change in fair value of the derivative | $ | |||
| Balance – December 31, 2022 | $ |
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, 2022 | Year ended December 31, 2021 | |||||||
| Expected term | ||||||||
| Expected average volatility | % | % | ||||||
| Expected dividend yield | ||||||||
| Risk-free interest rate | % | % |
Note 9 – Stockholders’ deficit
The Company was originally authorized to issue shares of common stock and 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 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.
| F-20 |
Common stock
During the year ended December 31, 2022, shares of common stock were returned to the treasury.
During
October 2022 the Company issued a total of shares of common stock valued at $
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, shares of the Company’s
preferred stock and
Between
July and August of 2016 Hypur Ventures purchased an additional shares of the Company’s preferred stock and
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 $
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 10 – 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.
| F-21 |
| Number Of Options | Weighted-Average Exercise Price | |||||||
| Outstanding at December 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Expired | $ | |||||||
| Cancelled | ( | ) | $ | |||||
| Outstanding at December 31, 2022 | $ | |||||||
| Options exercisable at December 31, 2022 | $ | |||||||
| OPTIONS OUTSTANDING AND EXERCISABLE AT DECEMBER 31, 2022 | ||||||||||||||||||||||
| 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 | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
Total stock-based compensation expense in connection with options and modified awards recognized in the consolidated statement of operations for the years ended December 31, 2022 and 2021 was $ and $ respectively.
Note 11 – Income taxes
On
December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (
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 year ended December 31, 2022 the company had an operating profit but had a net operating loss as of December 31, 2021 that exceeded
the profit 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, 2022 and 2021, the Company had approximately $
Components of net deferred tax assets, including a valuation allowance, are as follows at December 31:
| December 31 | ||||||||
| 2022 | 2021 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forwards | $ | ( | ) | $ | ( | ) | ||
| Valuation allowance | $ | ( | ) | ( | ) | |||
| Total deferred tax assets | $ | $ | ||||||
| F-22 |
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 $
At
December 31, 2022 and December 31, 2021, respectively, the Company had $
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, 2022, 2021, 2020, 2019, and 2018 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:
| 2022 | 2021 | |||||||
| Federal statutory taxes | ( | )% | ( | )% | ||||
| Change in tax rate estimate | ||||||||
| Change in valuation allowance | % | % | ||||||
| % | % | |||||||
The
valuation allowance for deferred tax assets as of December 31, 2022 and 2021 was $
Reconciliation between the statutory rate and the effective tax rate is as follows at December 31:
| 2022 | 2021 | |||||||
| Federal statutory tax Reconciliation rate | ( | )% | ( | )% | ||||
| Permanent difference and other | % | % | ||||||
Note 12 – Subsequent events
On
March 14, 2023, the Company entered into a lease extension for 4328 E. Magnolia Street location. The lease expires on
| Months 1-12: | $ | ||||
| Months 13-24: | $ | ||||
| Months 25-36: | $ | ||||
| Months 37-48: | $ | ||||
| Months 49-60: | $ |
The Company has evaluated all other 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.
| F-23 |