Notes
to Consolidated Financial Statements
Note
1 – History and organization of the company
The
Company was originally organized on September 11, 2006 (Date of Inception) under the laws of the State of Nevada, as The Engraving Masters,
Inc. The Company was authorized to issue up to 100,000,000 shares of its common stock and 100,000,000 shares of preferred stock, each
with a par value of $0.001 per share.
On
March 14, 2014, the Company acquired Blue Line Protection Group, Inc., a Colorado corporation formed in February 2014 (“Blue Line
Colorado”), as a wholly-owned subsidiary of the Company. Blue Line Colorado provides protection, compliance, and financial services
to the lawful cannabis industry.
On
May 2, 2014, the Company changed its name from The Engraving Masters, Inc. to Blue Line Protection Group, Inc. (“BLPG”)
On
May 6, 2014, the Company effected a forward stock split and a pro-rata increase in its authorized common stock on a basis of 14-to-1,
whereby each shareholder received 14 newly issued shares of common stock for each 1 share held. Additionally, the authorized capital
of the Company concurrently increased to 1,400,000,000 shares of common stock. All references to share and per share amounts in the consolidated
financial statements and accompanying notes thereto have been retroactively restated to reflect the forward stock split.
On
July 6, 2021, the Company effected a reverse stock split and a pro-rata decrease in its authorized common stock on a basis of 1-for-100,
the authorized capital of the Company concurrently decreased to 14,000,000 shares of common stock. All references to share and per share
amounts in the consolidated financial statements and accompanying notes thereto have been retroactively restated to reflect the forward
stock split.
The
Company provides 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.
Interim
financial statements
The
unaudited interim consolidated financial statements included herein, presented in accordance with United States generally accepted accounting
principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information presented not misleading.
In
the opinion of management, these statements reflect all adjustments, all of which are of a normal recurring nature, which, in the opinion
of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial
statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2021 and notes thereto
included in the Company’s annual report on Form 10-K. The Company follows the same accounting policies in the preparation of interim
reports.
Results
of operations for the interim periods are not indicative of annual results.
Note
2 – Accounting policies and procedures
Principles
of consolidation
For
the years ended December 31, 2021 and 2020, the consolidated financial statements include the accounts of Blue Line Protection Group,
Inc. (formerly The Engraving Masters, Inc.), Blue Line Advisory Services, Inc. (a Nevada corporation; “BLAS”), Blue Line
Capital, Inc. (a Colorado corporation; “Blue Line Capital”), Blue Line Protection Group (California), Inc. (a California
corporation; “Blue Line California”), Blue Line Colorado, Blue Line Protection Group Illinois, Inc. (an Illinois corporation;
“Blue Line Illinois”), BLPG, Inc. (a Nevada corporation; “Blue Line Nevada”), Blue Line Protection Group (Washington),
Inc. (a Washington corporation; “Blue Line Washington”). All significant intercompany balances and transactions have been
eliminated. BLPG and its subsidiaries are collectively referred herein to as the “Company.”
Basis
of presentation
The
financial statements present the balance sheets, statements of operations, stockholder’s equity (deficit) and cash flows of the
Company. The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the
United States of America.
The
Company has adopted December 31 as its fiscal year end.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Cash
and cash equivalents
The
Company maintains a cash balance in a non-interest-bearing account that currently does not exceed federally insured limits. For the purpose
of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be
cash equivalents. As of September 30, 2022 the Company has cash in excess of FDIC insured limits of $124,273. There were no cash equivalents
as of September 30, 2022 or December 31, 2021.
Accounts
receivable
Accounts
receivable are stated at the amount the Company expects to collect from outstanding balances and do not bear interest. The Company provides
for probable uncollectible amounts through an allowance for doubtful accounts, if an allowance is deemed necessary. The allowance for
doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts
receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in
the future. On a periodic basis, management evaluates its accounts receivable and determines the requirement for an allowance for doubtful
accounts based on its assessment of the current and collectible status of individual accounts with past due balances over 90 days. Account
balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered
remote.
Allowance
for uncollectible accounts
The
Company estimates losses on receivables based on known troubled accounts, if any, and historical experience of losses incurred. There
was no allowance for doubtful customer receivables at September 30, 2022 and December 31, 2021.
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:
Schedule of Estimated useful Lives of Property and Equipment
| Automotive Vehicles | |
5 years |
| Furniture and Equipment | |
5 years |
| Buildings and Improvements | |
the lesser of the life of the lease or the
estimated useful life of the lease |
The
Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying
value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.
In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an
amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment
include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand,
competition and other economic factors. Based on this assessment there was no impairment as September 30, 2022 and December 31, 2021.
Depreciation expense for the three and nine months ended September 30, 2022 and, 2021 were $38,767, $96,034, $37,828 and $97,889 respectively.
Impairment
of long-lived assets
The
Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of
Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the historical cost or carrying value of an asset may no longer be appropriate. The Company assesses recoverability
of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition.
If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between
the asset’s carrying value and its fair value or disposable value. As of September 30, 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 21% of total revenue for the nine months ended September 30, 2022 and one customer comprised
10% of the account receivable balance at September 30, 2022.
The
Company had one major customer which generated 21%, of total revenue in the nine months ended September 30, 2021.
Related
party transactions
FASB
ASC 850, “Related Party Disclosures” requires companies to include in their financial statements disclosures of material
related party transactions. The Company discloses all material related party transactions. Related parties are defined to include any
principal owner, director or executive officer of the Company and any immediate family members of a principal owner, director or executive
officer.
Fair
value of financial instruments
The
carrying amounts reflected in the balance sheets for cash, accounts payable and related party payables approximate the respective fair
values due to the short maturities of these items. The Company does not hold any investments that are available-for-sale.
As
required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in
active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly;
and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The
three levels of the fair value hierarchy are described below:
| Level
1: |
Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| |
|
| Level
2: |
Quoted
prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term
of the asset or liability; |
| |
|
| Level
3: |
Prices
or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by
little or no market activity). |
The
following table presents the derivative financial instruments, the Company’s only financial liabilities, measured and recorded
at fair value on the Company’s consolidated balance sheet on a recurring basis, and their level within the fair value hierarchy
as of September 30, 2022 and December 31, 2021:
September
30, 2022
Schedule of Fair Value of Liabilities Measured on Recurring Basis
| | |
Amount | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
| Embedded conversion derivative
liability | |
$ | 499,128 | | |
$ | - | | |
$ | - | | |
$ | 499,128 | |
| Warrant derivative liabilities | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| Total | |
$ | 499,128 | | |
$ | - | | |
$ | - | | |
$ | 499,128 | |
December
31, 2021
| | |
Amount | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
| Embedded conversion derivative
liability | |
$ | 712,784 | | |
$ | - | | |
$ | - | | |
$ | 712,784 | |
| Warrant derivative liabilities | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| Total | |
$ | 712,784 | | |
$ | - | | |
$ | - | | |
$ | 712,784 | |
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.
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.
Schedule of Revenue by Major Customers by Reporting Segments
| Revenue Breakdown by Streams | |
2022 | | |
2021 | |
| Three
months ended September 30, |
| Revenue Breakdown by Streams | |
2022 | | |
2021 | |
| Service: Transportation | |
$ | 386,339 | | |
$ | 452,155 | |
| Service: Currency Processing | |
| 509,327 | | |
| 690,512 | |
| Service: Compliance | |
| 16,787 | | |
| 18,763 | |
| Total | |
$ | 912,453 | | |
$ | 1,161,430 | |
| Revenue Breakdown by Streams | |
2022 | | |
2021 | |
| Nine
months ended September, |
| Revenue Breakdown by Streams | |
2022 | | |
2021 | |
| Service: Transportation | |
$ | 1,175,417 | | |
$ | 1,381,231 | |
| Service: Currency Processing | |
| 1,696,898 | | |
| 2,162,424 | |
| Service: Compliance | |
| 25,205 | | |
| 36,777 | |
| Total | |
$ | 2,897,520 | | |
$ | 3,580,432 | |
Advertising
costs
The
Company expenses all advertising expenses as incurred. For the three and nine months ended September 30, 2022 and 2021 the Company expensed
$0.
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.
Basic
and Diluted Earnings per share
Net
loss per share is provided in accordance with FASB ASC 260-10, “Earnings
per Share”. Basic loss per share is computed by dividing losses available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted income (loss) per share gives effect to all dilutive potential common shares outstanding
during the period. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive. For
the periods presented for the three and nine months ended September 30, 2022 and the three months ended September 30,
2021 all common stock equivalents of 3,572,255 and 3,849,543, respectively were excluded from the calculation of diluted loss
per share as their effect would be anti-dilutive.
The
following is a reconciliation of the numerator and denominator used in the basic and diluted earnings per share (“EPS”) calculations
for the three and nine months September 30, 2022 and 2021.
Schedule of Basic and Diluted Earnings Per Share (“EPS”)
| | |
Three
months ended September
30, 2022 | | |
Three
months ended September
30, 2021 | | |
Nine
Months ended September
30, 2022 | | |
Nine
Months ended September
30, 2021 | |
| | |
| | |
| | |
| | |
| |
| Numerator: | |
| | | |
| | | |
| | | |
| | |
| Net income (loss) | |
$ | (99,928 | ) | |
$ | (441,695 | ) | |
$ | (64,188 | ) | |
$ | 421,424 | |
| | |
| | | |
| | | |
| | | |
| | |
| Denominator: | |
| | | |
| | | |
| | | |
| | |
| Weighted-average shares of common stock | |
| 8,448,001 | | |
| 8,485,145 | | |
| 8,374,927 | | |
| 8,446,995 | |
| Dilutive effect of warrants | |
| - | | |
| - | | |
| - | | |
| - | |
| Dilutive effect of convertible
instruments | |
| - | | |
| - | | |
| - | | |
| 3,849,543 | |
| Diluted weighted-average of common stock | |
| 8,448,001 | | |
| 8,485,145 | | |
| 8,374,927 | | |
| 12,296,538 | |
| | |
| | | |
| | | |
| | | |
| | |
| Net loss per common share
from: | |
| | | |
| | | |
| | | |
| | |
| Basic | |
$ | (0.01 | ) | |
$ | (0.05 | ) | |
$ | (0.01 | ) | |
$ | 0.05 | |
| Diluted | |
$ | (0.01 | ) | |
$ | (0.05 | ) | |
$ | (0.01 | ) | |
$ | 0.03 | |
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
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 September 30, 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 $8,055 and unreimbursed expenses in the amount of $154,409. The Company denies the agreement
was ever signed. If litigation is commenced the Company will defend any claims by Mr. Sullivan.
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 $98,150. Counsel for Mr. Sullivan stated that he was still compiling information. The Company is investigating
whether Mr. Sullivan and/or Mile High Real Estate Group ever made the alleged loans. The Company will defend any claims of Mile High
Real Estate Group.
On
April 14, 2016, the Company entered into an agreement with an unrelated third party to provide the Company with investor relations services.
Upon signing the agreement, the Company paid the investor relations consultant $75,000 and agreed to issue the consultant 1,500,000 shares
of its restricted common stock. The agreement required the Company to pay the consultant an additional $75,000 prior to June 14, 2016.
The Company cancelled the agreement and is of the opinion that the shares are not owed to the consultant. As of September 30, 2022 and
December 31, 2021 there was no payable recorded.
Finance
leases
On
March 1, 2019, the Company recorded finance lease obligation for a leased a vehicle for $64,354. The Company made a down payment of $30,000
which included delivery fees, taxes and its first month payment and agreed to make 36 monthly payments of $1,129.76, including sales
tax. The Company recognized this arrangement as a finance lease based on the determination that the lease exceeded 75% of the economic
life of the underlying assets.
On
June 2, 2021, the Company recorded finance lease obligation for a leased a vehicle for $56,733. The Company made a down payment of $3,510
which included delivery fees, taxes and its first month payment and agreed to make 24 monthly payments of $2,765.19, including sales
tax. The Company recognized this arrangement as a finance lease based on the determination that the lease exceeded 75% of the economic
life of the underlying assets
On
June 17, 2022, the Company recorded finance lease obligation for a leased a vehicle for $69,255. The Company made a down payment of $2,882
which included delivery fees, taxes and its first month payment and agreed to make 36 monthly payments of $2,338, including sales tax.
The Company recognized this arrangement as a finance lease based on the determination that the lease exceeded 75% of the economic life
of the underlying assets
Schedule of future minimum lease payments
| Future minimum lease payments
as September 30, 2022 | |
| |
| | |
| |
| 2022 | |
$ | 16,765 | |
| 2023 | |
| 41,196 | |
| 2024 | |
| 26,130 | |
| Total minimum lease
payments | |
$ | 84,091 | |
Operating
Leases
On
October 27, 2016 the Company sold its building located at 5765 Logan Street Denver, Colorado to an unrelated third party for $1,400,000.
The Company repaid the mortgage on the building in the amount of $677,681. After the sale, the Company leased the building from the purchaser
of the property. The lease is for an initial term of ten years, with the Company having the option to extend the term of the lease for
two additional five-year periods. The lease requires rental payments of $10,000 per month which will increase 2% annually. The Company
paid a $30,000 deposit at the inception of the lease
On
May 29, 2018 the Company leased a building located at 4328 E. Magnolia Street, Phoenix, Arizona. The lease is for an initial term of
one year, with the Company having the option to extend the term of the lease for additional four year periods. The lease requires rental
payments of $3,880 per month which will increase 2% annually. The Company paid a $4,369 deposit at the inception of the lease.
On
January 22, 2019 the Company leased a building located at 7490 Bridgewater Road, Huber Heights, Ohio. The lease is for an initial term
of 63 months. The lease requires rental payments of $3,200 per month and will increase to $3,400 between months 28 through 63. The Company
paid a $3,200 deposit at the inception of the lease. During the year ended December 31, 2020 the Company terminated the lease agreement.
The Company paid a $35,760 cancellation fee included in rent expense and recorded a gain of $8,800 on the termination of the lease.
The
Company adopted ASC 842 and recorded right of use asset and operating lease liability of $1,082,241 The Company used 12% as incremental
borrowing rate as is the average interest rate of the Company’s outstanding third party note. The lease agreement gives the Company
the option to renew it for two additional 5 year terms but the Company did not consider it likely to exercise that option. Therefore,
the Company did not include such amounts in its computations of the present value of remaining lease payment on the adoption date.
Supplemental
balance sheet information related to leases is as follows:
Schedule of Operating Leases
September
30, 2022
| Operating
Leases | |
Classification | |
September
30, 2022 | |
| Right-of-use
assets | |
Operating
right of use assets | |
$ | 440,306 | |
| Total | |
| |
$ | 440,306 | |
| Current lease liabilities | |
Current operating lease liabilities | |
$ | 121,510 | |
| Non-current lease liabilities | |
Long-term operating
lease liabilities | |
$ | 352,249 | |
| Total | |
| |
$ | 473,759 | |
Lease
term and discount rate were as follows:
Summary of Operating Lease Liabilities
| | |
September
30, 2022 | |
| Weighted average remaining lease
term (years) | |
| 2.75 | |
| Weighted average discount rate | |
| 12 | % |
The
following summarizes lease expenses for the nine months ended September 30, 2022:
Finance
lease expenses:
Summary of Lease Expenses
| | |
| | |
| Depreciation/amortization expense | |
$ | 34,459 | |
| Interest on lease liabilities | |
| 5,005 | |
| Finance lease expense | |
$ | 39,461 | |
Supplemental
disclosures of cash flow information related to leases were as follows:
Schedule of Cash Flow Information Related to Lease
| | |
September
30, 2022 | |
| Cash paid for operating lease liabilities | |
$ | 143,676 | |
| Operating right of use assets obtained in exchange
for operating lease liabilities | |
$ | - | |
Maturities
of lease liabilities were as follows as of September 30, 2022:
Schedule of Maturities of Lease Liabilities
| | |
Operating Leases | |
| | |
| |
| 2022 | |
$ | 46,614 | |
| 2023 | |
$ | 158,298 | |
| 2024 | |
$ | 138,532 | |
| 2025 | |
$ | 141,302 | |
| 2026 | |
$ | 107,558 | |
| Total | |
$ | 592,304 | |
| Less: Imputed interest | |
$ | (118,545 | ) |
| Present value of lease liabilities | |
$ | 473,759 | |
December
31, 2021
Lease
term and discount rate were as follows:
The
following summarizes lease expenses for the year ended December 31, 2021:
Supplemental
disclosures of cash flow information related to leases were as follows:
Maturities
of lease liabilities were as follows as of December 31, 2021:
Note
5 – Fixed assets
Machinery
and equipment consisted of the following at:
Schedule of Machinery and Equipment
| | |
September
30, 2022 | | |
December
31, 2021 | |
| | |
| | |
| |
| Automotive vehicles | |
$ | 565,695 | | |
$ | 485,701 | |
| Furniture and equipment | |
$ | 108,265 | | |
$ | 108,265 | |
| Machinery and Equipment | |
$ | 135,706 | | |
$ | 135,706 | |
| Leasehold improvements | |
$ | 148,994 | | |
$ | 141,234 | |
| Fixed assets, total | |
$ | 958,660 | | |
$ | 870,906 | |
| Total: accumulated depreciation | |
$ | (682,164 | ) | |
$ | (586,130 | ) |
| Fixed assets, net | |
$ | 276,496 | | |
$ | 284,776 | |
Depreciation
expense for the three and nine months ended September 30, 2022 and, 2021 were $38,767, $96,034, $37,828 and $97,889 respectively.
Note
6 – Notes payable
Convertible
notes payable to non-related parties
On
October 18, 2017, the Company borrowed $150,000 from an unrelated third party. The Company paid $15,250 of fees associated with the loan,
which was recorded as discount and to be amortized over the term of the debt and was fully amortized as of December 31, 2018. The loan
bears interest at a rate of 10% (default interest 24%) and has a maturity date of July 16, 2018. The Holder has the option to convert
the outstanding principal and accrued interest into common stock of the Company. The conversion price is the lesser of (1) lowest trading
price during the previous 25 days prior to the note agreement or (2) 50% lowest trading price during the 25 days prior to conversion.
Covenants: The Borrower shall not, without the Holder’s consent, sell, lease or dispose of any significant portion of its assets
outside the ordinary course of business. During the year ended December 31, 2018 the Company paid $150,000 to extend the maturity date
until May 11, 2019. During the year ended December 31, 2019, the Company paid $75,000 in extension fees. The note was discounted for
a derivative (see note 8 for details) and the discount of $134,750 is being amortized over the life of the note using the effective interest
method which was fully amortized as of December 31, 2018. During the year ended December 31, 2019 the holder converted $39,478 of accrued
interest into 2,178,825 shares of common stock resulting in a loss of $61,624. As of December 31, 2021 and December 31, 2020 the balance
outstanding on the loan is $0 and $150,000, 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 $400,000. The first
payment of $200,000 was due upon signing and Company agreed to make additional $100,000 payments on the 30th and 60th
day after signing. The additional $250,000 settlement was record as interest during the year ended December 31, 2021. As of September
30, 2022 and December 31, 2021 accrued interest and the note balance had been repaid.
On
March 21, 2018, the Company borrowed $45,000 from an unrelated third party. The Company paid $4,500 of fees associated with the loan
and had amortized $3,514 of the costs as of December 31, 2018. The note bears an interest rate: 12% (default interest lesser of 15% or
maximum permitted by law) and matures on March 21, 2019. The conversion Feature Convertible immediately after the issuance, the Holder
has the option to convert the outstanding principal and accrued interest into common stock of the Company. The Conversion price is 55%
of the lowest trading price during the 25 Trading Day periods prior to the Conversion. Covenants: The Borrower shall not, without the
Holder’s consent, sell, lease or dispose of any significant portion of its assets outside the ordinary course of business. The
note was discounted for a derivative (see note 8 for details) and the discount of $40,500 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 September 30, 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 $128,600 plus accrued interest of $70,088. The amount
owed to the MKM entities was represented by three Promissory Notes dated between February 6, 2015 and July 7, 2016. In March 2022 the
MKM entities agreed to (i) consolidate the Promissory Notes into a new note in the principal amount of $128,600 and (ii) forgive the
accrued interest of $70,088. The new Promissory Note is due and payable on December 27, 2026 and bears an interest (from December 27,
2021 to the date of payment) of 5% per year. During the nine months ended September 30, 2022, the Company repaid $25,301 of principle
and accrued interest as of September 30, 2022, amounted to $0. As of September 30, 2022 the balance owed on the loan is $103,298.
As
of December 31, 2021 the Company owed CGDK, LLC $1,185,217, plus accrued interest of $452,246. The amount owed to CGDK was represented
by seven Promissory Notes dated between July 9, 2015 and August 6, 2018. In March 2022, CGDK agreed to (i) consolidate the Promissory
Notes into a new note in the principal amount of $1,185,217 and (ii) forgive the accrued interest of $452,246. The new Promissory Note
is due and payable on December 31, 2026 and bears an interest (from January 1, 2022 to the date of payment) of 5% per year. During the
nine months ended September 30, 2022, the loan was assumed by Doyle Knudson a related party and the Company repaid $233,131 of principal
and accrued interest as of September 30, 2022. As of September 30, 2022, the balance on the loan is $952,086.
Current liabilities: Notes payable - related parties
On
July 31, 2014, the Company borrowed $98,150 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 September 30, 2022 and December 31, 2021, the principal balance owed on this loan
is $98,150 and $98,150, respectively.
As
of December 31, 2014, a related party loaned the Company $180,121, in the form of cash and expenses paid on behalf of the Company. The
loan is due and payable on demand and bears no interest. The Company repaid $125,500 towards this note during 2015 and as of September
30, 2022 and December 31, 2021 the principal balance owed on this loan was $54,621 and $54,621, respectively.
Current Liabilities: Convertible notes payable
to related parties
As
of December 31, 2021 the Company owed Hypur Inc. $688,500 plus accrued interest. The amounts owed to Hypur were represented by eight
Promissory Notes dated between September 20, 2016 and September 3, 2019. By an agreement effective January 31, 2022 the Company and Hypur
agreed to the following:
| |
● |
On
March 3, 2022 the Company paid Hypur $137,500, which was applied to principal of the notes. |
| |
|
|
| |
● |
On
or before each date shown below, the Company paid Hypur $12,500, which applied to principal of the notes. |
Schedule of Related Parties Debt Maturity
| Date | |
Amount | |
| | |
| |
| March 31, 2022 | |
$ | 12,500 | |
| | |
| | |
| April 30, 2022 | |
$ | 12,500 | |
| | |
| | |
| May 31, 2022 | |
$ | 12,500 | |
| | |
| | |
| June 30, 2022 | |
$ | 12,500 | |
| |
● |
On
or before July 31, 2022 the Company will pay Hypur $137,500, which will apply to principal of the notes. |
| |
|
|
| |
● |
All
principal amounts owed to Hypur under the Promissory Notes will bear interest at 7.5% per year between January 31, 2022 and July
31, 2022 as long as the Company is not in default under the terms of its agreement with Hypur. |
| |
● |
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 $250,000 of accrued interest owed by the Company under the Promissory Notes. |
| |
● |
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 7.5% per year with a default rate of 12% per year. |
| |
|
|
| |
● |
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 nine months ended September 30, 2022 the
Company repaid a total of $338,570. The amount due as of September 30, 2022 is $349,930. Hypur forgave $250,000 of accrued interest owed
by the Company under the Promissory Notes, which was recognized as additional paid in capital.
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 to borrow $75,000. The loan was due 180 days
from the date of issuance and bears interest at 10% per annum. The note is convertible into common stock at a price of $.05 per share.
The note is mandatory redeemable into common stock if the price per share is over $.50 per share during a 10 day period. The principal
balance owed on this loan at September 30, 2022, and December 31, 2021 was $75,000 and $75,000, respectively. Upon default, the note
bears a default rate of interest of 15% per annum, and if the default has not been remedied within 30 days, the redemption price would
be 150% of the principal amount. As of September 30, 2022 and December 31, 2021, Hyper has waived the default provision until further
notice.
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 $100,000. The loan was due 180 days from the
date of issuance and bears interest at 10% per annum. The note is convertible into common stock at a price of $.05 per share. The note
is mandatory redeemable into common stock if the price per share is over $.50 per share during a 10 day period. The principal balance
owed on this loan at September 30, 2022 and December 31, 2021 was $100,000 and $100,000, respectively. Upon default, the note bears a
default rate of interest of 15% per annum, and if the default has not been remedied within 30 days, the redemption price would be 150%
of the principal amount. As of September 30, 2022 and December 31, 2021, Hyper has waived the default provision until further notice.
On
March 7, 2017, the Company borrowed $100,000 from Hypur Ventures, L.P., a related party. The loan is due 180 days from March 7, 2017
and bears interest at 10% per annum. The loan is convertible into shares of the Company’s common stock at a price of $.05 per share.
The loan will automatically convert into shares of the Company’s common stock if the price of the Company’s common stock
is over $.50 per share during any ten-day period. The principal balance owed on this loan September 30, 2022 and December 31, 2021 was
$100,000 and $100,000 respectively. Upon default, the note bears a default rate of interest of 15% per annum, and if the default has
not been remedied within 30 days, the redemption price would be 150% of the principal amount. As of September 30, 2022, and December
31, 2021, Hyper has waived the default provision until further notice.
The
Company re-measured the fair value of derivative liabilities on September 30, 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:
Schedule of Derivative Liabilities at Fair Value
| Balance - December 31, 2020 | |
$ | 2,247,645 | |
| Settlement of derivatives upon conversion | |
$ | (457,572 | ) |
| Gain on change in fair value of the derivative | |
$ | (1,077,289 | |
| Balance – December 31, 2021 | |
$ | 712,784 | |
| Settlement of derivatives upon conversion | |
$ | (417,018 | ) |
| Gain on change in fair
value of the derivative | |
$ | 203,362 | |
| Balance – September 30, 2022 | |
$ | 499,128 | |
The
table below shows the Black-Scholes option-pricing model inputs used by the Company to value the derivative liability at each measurement
date:
Schedule of Derivative Instruments, Black-Scholes Option-pricing Model Inputs Used
| | |
| Year
ended September 30, 2022 | | |
| Year
ended December 31, 2021 | |
| Expected term | |
| 0.25
– 1.09 years | | |
| 0.25
– 1.09 years | |
| Expected average volatility | |
| 142.75
– 284.09 | % | |
| 138.34%
– 162.05 | % |
| Expected dividend yield | |
| - | | |
| - | |
| Risk-free interest rate | |
| 2.79
% – 4.05 | % | |
| 0.06
% – 0.39 | % |
Note
9 – Stockholders’ deficit
The
Company was originally authorized to issue 100,000,000 shares of common stock and 100,000,000 shares of preferred stock. On May 6, 2014,
the Company effected a forward stock split and a pro-rata increase in its authorized common stock on a basis of 14-to-1, whereby each
shareholder received 14 newly issued shares of common stock for each 1 share held. Additionally, the number of authorized shares increased
to 1,400,000,000 shares of common stock. All references to share and per share amounts in the consolidated financial statements and these
notes thereto have been retroactively restated to reflect the forward stock split.
On
July 6, 2021, the Company effected a reverse stock split and a pro-rata decrease in its authorized common stock on a basis of 1-for-100,
the authorized capital of the Company concurrently decreased to 14,000,000 shares of common stock. All references to share and per share
amounts in the consolidated financial statements and accompanying notes thereto have been retroactively restated to reflect the forward
stock split. The Company issued a total of 1,570 shares of common stock due to rounding on the reverse stock split.
Common
stock
During
the nine months ended September 30, 2022, 260,000 shares of common stock were returned to the treasury.
Preferred
stock
On
May 3, 2016, the Company entered into, an agreement with Hypur Ventures, L.P., a Delaware limited partnership (the “Hypur Ventures”)
which is a related party pursuant to which the Company sold to Hypur Ventures, in a private placement, 10,000,000 shares of the Company’s
preferred stock and 5,000,000 common stock warrants with a five year term and an exercise price of $0.10, at a purchase price of $0.05
per share for gross proceeds of $500,000. The shares of preferred stock are convertible into shares of the Company’s common stock.
The preferred stock shall have such other rights, preferences and privileges to be set forth in a certificate of designation to be filed
with the Nevada Secretary of State. The Company evaluated the convertible preferred stock under FASB ASC 470-20-30 and determined it
contained a beneficial conversion feature. The intrinsic value of the beneficial conversion feature was determined to be $114,229. The
beneficial conversion feature was fully amortized and recorded as a deemed dividend.
Between
July and August of 2016 Hypur Ventures purchased an additional 10,000,000 shares of the Company’s preferred stock and 5,000,000
common stock warrants with a five year term and an exercise price of $0.10, at a purchase price of $0.05 per share for net proceeds of
$445,000, net of legal fees of $55,000. The shares of preferred stock are convertible into shares of the Company’s common stock.
The preferred stock shall have such other rights, preferences and privileges to be set forth in a certificate of designation to be filed
with the Nevada Secretary of State. The Company evaluated the convertible preferred stock under FASB ASC 470-20-30 and determined it
does not contain a beneficial conversion feature. The intrinsic value of the beneficial conversion feature was determined to be $0. The
preferred stock is convertible at any time at the election of Hypur Ventures. The preferred stock shall automatically convert to common
stock if the closing price of the Company’s common stock equals or exceeds $0.50 per share over any consecutive twenty day trading
period. The preferred stock terms include a one-time purchase price preference. No preferential dividends apply to the preferred stock.
The preferred stock attributes include weighted average anti-dilution protection, rights to appoint one director, pre-emptive rights
to purchase future offerings of securities by the Company, demand and piggy-back registration rights.
The
preferred stock is convertible at any time at the election of Hypur Ventures. The preferred stock shall automatically convert to common
stock if the closing price of the Company’s common stock equals or exceeds $0.50 per share over any consecutive twenty day trading
period. The preferred stock terms include a one-time purchase price preference. No preferential dividends apply to the preferred stock.
The preferred stock attributes include weighted average anti-dilution protection, rights to appoint one director, pre-emptive rights
to purchase future offerings of securities by the Company, demand and piggy-back registration rights.
The
Company has reserved thirty million shares of common stock that may be issued upon the conversion and/or exercise of the preferred stock
and the warrants. The preferred stock sold to Hypur Ventures will be subject to the terms and conditions of the Certificate of Designation,
as well as further documentation to be drafted in accordance with the terms and conditions agreed upon between the Company and Hypur
Ventures.
Note
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.
Note
11 – Subsequent events
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.