BEGI 10-Q
BLACKSTAR ENTERPRISE GROUP, INC. (BEGI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
| [ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from __________ to ___________
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| (State of Incorporation) | (IRS Employer ID Number) |
(Address of principal executive offices)
(Registrant’s Telephone number)
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.
| [X] | No | [ ] |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 for Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| [X] | No | [ ] |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] |
| [X] | Smaller reporting company | [ | |
| Emerging growth company | [ | ||
If an emerging growth
company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. [
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | [ ] | No | [ |
Indicate the number of share outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of April 30, 2022, there were
TABLE OF CONTENTS
| Page | ||
| PART 1 – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements (Unaudited) | 3 |
| Consolidated Balance Sheets– December 31, 2021 and March 31, 2022 | 3 | |
| Consolidated Statements of Operations – Three months ended March 31, 2022 and 2021 | 4 | |
| Consolidated Statements of Stockholder’s Deficit – Three months ended March 31, 2022 and 2021 | 5 | |
| Consolidated Statements of Cash Flows – Three months ended March 31, 2022 and 2021 | 6 | |
| Notes to the Financial Statements | 7 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk – Not Applicable | 17 |
| Item 4. | Controls and Procedures | 17 |
| PART II- OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 18 |
| Item 1A. | Risk Factors | 18 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 18 |
| Item 3. | Defaults Upon Senior Securities | 18 |
| Item 4. | Mine Safety Disclosure – Not Applicable | 18 |
| Item 5. | Other Information | 18 |
| Item 6. | Exhibits | 19 |
| Signatures | 20 |
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| BLACKSTAR ENTERPRISE GROUP, INC. | ||||||||
CONSOLIDATED BALANCE SHEETS MARCH 31, 2022 AND DECEMBER 31, 2021 | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Intangibles | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payables | ||||||||
| Convertible notes payable, net of discounts of $189,989 | ||||||||
| Total current liabilities | ||||||||
| Stockholders' Equity (Deficit) | ||||||||
| Preferred stock, 10,000,000 shares authorized; | ||||||||
| Common stock, 700,000,000 shares authorized; $0.001 par value | ||||||||
| 192,001,253 and 128,689,319 shares issued and outstanding | ||||||||
| 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.
| 3 |
| BLACKSTAR ENTERPRISE GROUP, INC. | ||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
| FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 | ||||||||
| (Unaudited) | ||||||||
| 2022 | 2021 | |||||||
| Operating expenses | ||||||||
| Legal and professional | ||||||||
| Management consulting - related party | ||||||||
| General and administrative | ||||||||
| Total operating expenses | ||||||||
| Other expense (income) | ||||||||
| Amortization of discount on convertible notes | ||||||||
| Amortization of convertible debt issuance costs | ||||||||
| Loss on note payable conversions | ||||||||
| Interest expense | ||||||||
| Other expense (income) | ||||||||
| Net (loss) | $ | ( | ) | $ | ( | ) | ||
| Net (loss) per share - basic and diluted | $ | $ | ||||||
| Weighted average number of common shares | ||||||||
| outstanding - basic and diluted | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
| BLACKSTAR ENTERPRISE GROUP, INC. | ||||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||||||||||||||||||||||||||
| FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 | ||||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid in Capital | Common Stock Subject to Cancellation | Accumulated Deficit | Stockholders' Equity (Deficit) | |||||||||||||||||||||||||
| Balances - December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| Shares issued for conversion of notes and interest | ||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balances - March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| Balances - December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| Shares issued for conversion of notes payable | ||||||||||||||||||||||||||||||||
| Beneficial conversion feature of convertible note | — | — | ||||||||||||||||||||||||||||||
| Shares issued for loan costs | ||||||||||||||||||||||||||||||||
| Shares issued for financing fees | ||||||||||||||||||||||||||||||||
| Shares issued subject to cancellation | ( | ) | ||||||||||||||||||||||||||||||
| Net loss for the quarter ended March 31, 2021 | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balances - March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
| BLACKSTAR ENTERPRISE GROUP, INC. | ||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 | ||||||||
| (Unaudited) | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net (loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used | ||||||||
| in operating activities | ||||||||
| Amortization of convertible note issue costs | ||||||||
| Amortization of discounts on convertible notes | ||||||||
| Amortization of interest on convertible notes | ||||||||
| Loss on conversion of notes payable | ||||||||
| Interest and loan fees paid in stock | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Decrease in prepaids | ||||||||
| (Decrease) in accounts payable | ( | ) | ( | ) | ||||
| Increase in accrued payables | ||||||||
| Cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Software and patent costs | ( | ) | ( | ) | ||||
| Cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from convertible notes, net of offering costs | ||||||||
| and original issue discount | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of non-cash investing | ||||||||
| and financing activities | ||||||||
| Notes payable and interest converted to common stock | $ | $ | ||||||
| Beneficial conversion feature initially recorded as debt discount | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 6 |
BLACKSTAR ENTERPRISE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022
(Unaudited)
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
BlackStar Enterprise Group, Inc.
(the “Company” or “BlackStar”) was incorporated in the State of Delaware on December 18, 2007. On January
25, 2016, International Hedge Group, Inc. (“IHG”) signed an agreement to acquire a
The Company intends to act as a merchant banking firm seeking to facilitate venture capital to early stage revenue companies. BlackStar intends to offer consulting and regulatory compliance services to crypto-equity companies and blockchain entrepreneurs for securities, tax, and commodity issues. BlackStar is conducting ongoing analysis for opportunities in involvement in crypto-related ventures through a wholly-owned subsidiary, Crypto Equity Management Corp (“CEMC”). BlackStar intends to serve businesses in their early corporate lifecycles and may provide funding in the forms of ventures in which they control the venture until divestiture or spin-off by developing the businesses with capital. BlackStar formed a subsidiary nonprofit company, Crypto Industry SRO Inc. (“Crypto”) in 2017. Crypto’s business plan is to act as a self-regulatory membership organization for the crypto-equity industry and set guidelines and best-practice rules by which industry members would abide. BlackStar will provide management of this entity under a services contract.
Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance with United States generally accepted accounting principles for financial information and with the instructions to Form 10-Q. They do not include all information and footnotes required by United States generally accepted accounting principles (US GAAP) for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. These unaudited financial statements are condensed and should be read in conjunction with those financial statements included in the Form 10-K and interim disclosures generally do not repeat those in the annual statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
These unaudited consolidated financial statements include BlackStar and its wholly owned subsidiaries: Crypto Equity Management Corp. and Crypto Industry SRO Inc., and were prepared from the accounts of the Company in accordance with US GAAP. All significant intercompany transactions and balances have been eliminated on consolidation.
NOTE 2 – GOING CONCERN
The Company's financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the financial statements for the three months ended March 31, 2022 and the year ended
December 31, 2021, the Company has generated no revenues and has incurred losses. As of March 31, 2022, the Company had cash of
$
| 7 |
BLACKSTAR ENTERPRISE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022
(Unaudited)
NOTE 2 – GOING CONCERN (continued)
concern. The continuation of the Company as a going concern is dependent upon the ability to raise equity or debt financing, and the attainment of profitable operations from the Company's planned business. Management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect 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 revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
The Company’s significant estimates include income taxes provision and valuation allowance of deferred tax assets; the fair value of financial instruments; the carrying value and recoverability of long-lived assets, and the assumption that the Company will continue as a going concern. Those significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management regularly reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity; Own Equity (“ASU 2020-06”), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes from Generally Accepted Accounting Principles (“GAAP”) separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year. The Company has elected to adopt the guidance under ASU 2020-06 for the fiscal year commencing January 1, 2022.
Although there are several other new accounting pronouncements
issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of
these accounting pronouncements has had or will have a material impact on its consolidated financial position or results of operations.
Management has evaluated accounting standards and interpretations issued but not yet effective as of March 31, 2022 and does not
expect such pronouncements to have a material impact on the Company’s financial position, operations, or cash flows.
| 8 |
BLACKSTAR ENTERPRISE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022
(Unaudited)
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reclassifications
Certain amounts in the consolidated financial statements for prior year periods have been reclassified to conform with the current year presentation.
NOTE 4 – INTANGIBLES
Intangibles at March 31, 2022 and December 31, 2021 consist of capitalized costs for the Company’s proprietary software and patents as follows:
| 2022 | 2021 | |||||||||
| Software | $ | $ | ||||||||
| Patents | ||||||||||
| $ | $ | |||||||||
NOTE 5 – STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred Stock
The Company has an authorized number
of preferred shares of
Common Stock
During the three months ended March 31, 2022, the Company issued shares of its common stock as follows:
| ● |
During the three months ended March 31, 2021, the Company issued shares of its common stock as follows:
| ● |
| ● |
| ● |
| ● |
| 9 |
BLACKSTAR ENTERPRISE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022
(Unaudited)
NOTE 6 – WARRANTS
In April 2019, the Company issued a convertible
note for $
A summary of warrant activity during the three months ended March 31, 2022 is presented below:
Shares |
Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||||
| Outstanding and exercisable – December 31, 2021 | $ | |||||||||||||
| Exercised | ||||||||||||||
| Expired | ||||||||||||||
| Outstanding and exercisable – March 31, 2022 | $ | |||||||||||||
NOTE 7 – CONVERTIBLE NOTES
During the three months ended March 31, 2022, the Company had the following transactions related to its convertible note financings:
(i) On February 14, 2022, the Company
entered into a financing agreement with Sixth Street Lending LLC to borrow $
(ii) In February and March 2022,
Adar Alef LLC (“Adar Alef”) elected to make a partial conversion of $
(iii) In January and February 2022,
Power Up elected to convert, in five tranches, the total principal of $
| 10 |
BLACKSTAR ENTERPRISE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022
(Unaudited)
NOTE 7 – CONVERTIBLE NOTES (continued)
Company’s common stock (at
conversion prices of $
(iv) In February and March 2022,
Power Up Lending Group Ltd. (Power Up) elected to convert, in four tranches, the total principal due on their note of
(v) In March 2022, Power Up elected
to make a partial conversion of $
As of March 31, 2022, the Company was in default on its certain of its convertible debt obligations as follows:
| ● | Quick Capital LLC convertible note under the financing agreement
entered into on November 23, 2020 in the principal amount of $ |
| ● | SE Holdings LLC (“SE Holdings”) convertible note under
the financing agreement entered into on January 26, 2021 in the principal amount of $ |
| 11 |
BLACKSTAR ENTERPRISE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022
(Unaudited)
NOTE 7 – CONVERTIBLE NOTES (continued)
Convertible notes payable at March 31, 2022 and December 31, 2021 are summarized as follows:
| Note Holder | Face Amount | Interest Rate | Due Date | March 31, 2022 | December 31, 2021 | |||||||||||||
| GS Capital Partners LLC | $ | % | $ | $ | ||||||||||||||
| Power UP Lending Group Ltd. | $ | % | $ | $ | ||||||||||||||
| $ | % | $ | $ | |||||||||||||||
| $ | % | $ | $ | |||||||||||||||
| $ | % | $ | $ | |||||||||||||||
| SE Holdings LLC | $ | % | $ | $ | ||||||||||||||
| Quick Capital LLC | $ | % | $ | $ | ||||||||||||||
| Adar Alef LLC | $ | % | $ | $ | ||||||||||||||
| Sixth Street Lending LLC | $ | % | $ | $ | ||||||||||||||
| $ | % | $ | $ | |||||||||||||||
| Discount | $ | ( | ) | $ | ( | ) | ||||||||||||
| $ | $ | |||||||||||||||||
NOTE 8 – RELATED PARTY TRANSACTIONS
In support of the Company’s efforts and cash requirements, it must rely on advances from related parties until such time that the Company can support its operations or attains adequate financing through sales of its equity or traditional debt financing. There is no formal written commitment for continued support by shareholders. The advances are considered temporary in nature and have not been formalized by a promissory note.
IHG, controlling shareholder of
the Company, provides management consulting services to the Company. There is no formal written agreement that defines the compensation
to be paid. For the three months ended March 31, 2022 and 2021 the Company recorded related party management fees of $
| 12 |
BLACKSTAR ENTERPRISE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022
(Unaudited)
NOTE 8 – RELATED PARTY TRANSACTIONS (continued)
During the three months ended March 31, 2022 and 2021, there were
no advances from related parties. At March 31, 2021, a former officer of the Company was owed $
NOTE 9 – SUBSEQUENT EVENTS
In April 2022, Power Up elected
to convert, in two tranches, the remaining principal balance of $
In April 2022, Quick Capital, LLC
issued a notice of default on the convertible note dated
In April and May 2022, Power Up
elected to convert, in five tranches, the total principal balance of $
In May 2022, GS Captial Partners
LLC elected to make a partial conversion of $
On April 29, 2022, the Company
did not satisfy its obligations for final payment of outstanding principal of $
On April 27, 2022, the Company
entered into an Amendment and Abatement Agreement (“Abatement Agreement”) with SE Holdings and Adar Alef (collectively
“the Parties”) to address the Company’s default on the two outstanding convertible notes between the Parties.
Under the terms of the Abatement Agreement, the Parties agreed to abate the conversion features under the notes for a period of
fourty five (45) days from April 15, 2022, with the conversion features resuming no sooner than May 30, 2022. The Company has agreed
to pay to Adar Alef a total of $
The Company has analyzed its operations
subsequent to March 31, 2022 through the date that these financial statements were issued, and has determined that it does not
have any additional material subsequent events to disclose.
| 13 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements and Associated Risks.
This Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include but are not limited to economic conditions generally and in the industries in which we may participate; competition within our chosen industry, including competition from much larger competitors; technological advances and failure to successfully develop business relationships.
Based on our financial history since inception, our auditor has expressed substantial doubt as to our ability to continue as a going concern. As reflected in the accompanying financial statements, as of March 31, 2022, we had an accumulated deficit of $(8,666,662) and a working capital deficiency of $504,840. This raises substantial doubts about our ability to continue as a going concern.
Overview
BlackStar Enterprise Group, Inc. (the “Company” or “BlackStar”) intends to act as a merchant bank as of the date of these financial statements. We currently trade on the OTC QB under the symbol “BEGI”. The Company is a merchant banking firm seeking to facilitate venture capital to early-stage revenue companies. BlackStar intends to offer consulting and regulatory compliance services to crypto-equity companies and blockchain entrepreneurs for securities, tax, and commodity issues. BlackStar is conducting ongoing analysis for opportunities in involvement in crypto-related ventures though our newly formed wholly-owned subsidiary, Crypto Equity Management Corp., (“CEMC”), mainly in the areas of blockchain and distributed ledger technologies (“DLT”). BlackStar intends to serve businesses in their early corporate lifecycles and may provide funding in the forms of ventures in which we control the venture until divestiture or spin-off by developing the businesses with capital. We have only engaged in one transaction as a merchant bank form to date.
Our investment strategy focuses primarily on ventures with companies that we believe are poised to grow at above-average rates relative to other sectors of the U.S. economy, which we refer to as "emerging growth companies." Under no circumstances does the Company intend to become an investment company and its activities and its financial statement ratios of assets and cash will be carefully monitored and other activities reviewed by its Board of Directors to prevent being classified or inadvertently becoming an investment company which would be subject to regulation under the Investment Company Act of 1940.
As a merchant bank, BlackStar intends to seek to provide access to capital for companies and is specifically seeking out ventures involved in DLT or blockchain. BlackStar intends to facilitate funding and management of DLT-involved companies through majority controlled joint ventures through its subsidiary CEMC. BlackStar, through CEMC, intends to initially control and manage each venture. Potential ventures for both BlackStar and CEMC will be analyzed using the combined business experience of its executives, with CEMC looking to fill those venture criteria with companies in crypto-related businesses such as blockchain or DLT technologies. The Company does not intend to develop Investment Objectives or “criteria” in any manner but will rely on the acumen and experience of its executives. BlackStar is currently building a digital equity trading platform in order to trade registered BlackStar common shares in digital form (DWAC), and intends to use the platform design to provide custom subscription services to other public companies.
Recent Updates
The Company is finalizing the marketing plan to promote and roll out the three features of its blockchain platform. The Company plans to offer its Private Funding and Corporate Governance Blockchain to individual private companies. The Company is currently evaluating its options for the next major step in its main feature. BlackStar’s Digital Trading Platform (“BDTP TM”) will need to be paired with an operating partner (a broker-dealer, clearing firm, and/or registered Alternative Trading System (“ATS”)) to quote the shares prior to implementation. To that end, the Company is exploring relationships
| 14 |
with broker-dealers and existing ATS’s and other strategies to go live with BDTP in accordance with existing laws and regulations. As of the date of this filing, the core platform of BDTP TM is complete and will remain in the testing phase until we obtain an operating partner. BlackStar intends to continue to seek further input from various regulatory agencies and others on the functionality of the BDTP TM over the next several months. The BDTP TM has been completely designed in terms of the following components: data model, reports, web-based user interface, blockchain interface, transaction logic, cloud interface, and functional demonstration app. The software is complete in demonstrating a proof-of-concept trading ability, while recording activity using an immutable blockchain ledger. Currently, the working model platform is hosted on Amazon’s Quantum Ledger Database. During the year ended December 31, 2021, BlackStar and Artuova successfully completed a production ready and feature-complete user interface for the digital platform which is now in the final stages of quality assurance. BlackStar is actively pursuing relationships with various broker-dealers, clearing firms, and ATS’s to complete the final stages of this multi-year engineering effort. Additionally, during 2021, BlackStar has filed with the U.S. Patent and Trademark Office (“USPTO”) for patent protection of its proprietary software.
The Company’s success will be dependent upon its ability to analyze and manage the opportunities presented and is contingent upon successfully raising funds and, ultimately, the operationality of its digital trading platform.
Currently in the demonstration phase, we estimate $30,000 to be expended over the next three months. This budget will be used to finalize the integration of the digital platform into the broker-dealer ecosystem after the appropriate ATS and broker-dealer relationships are established.
Based on our current cash reserves of approximately $426,916 as of March 31, 2022, we have the cash for an operational budget of approximately twelve months. We intend to offer a private placement of common shares to investors in order to achieve at least $5,000,000 in funding in the next year to scale our business plan. We intend to commence this offering in mid-summer of 2022. If we are unable to generate enough revenue to cover our operational costs, we will need to seek additional sources of funds. Currently, we have no committed source for any funds as of date hereof. No representation is made that any funds will be available when needed. In the event funds cannot be raised if and when needed, we may not be able to carry out our business plan and could fail in business as a result of these uncertainties.
The independent registered public accounting firm’s report on our financial statements as of December 31, 2021, includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern.
Results of Operations
For the Three Months Ended March 31, 2022 compared to same period in 2021
Net loss for the three months ended March 31, 2022 was $516,902 as compared to $322,309 for the three months ended March 31, 2021, an increase of $194,593. As explained below, most of the losses in those periods was attributable to non-cash transactions from the issuance of convertible debt and other financings.
For the three months ended March 31, 2022, we had significantly higher non-operating (other) expenses, substantially all of which are non-cash, predominately due to amortization of discounts on debt issuance and conversion features of the convertible promissory notes that we have used to finance our continued operations. This resulted in total other expenses of $380,622 for the three months ended March 31, 2022 as compared to $193,021 for the same period in 2021. For the three months ended March 31, 2022, the Company recognized $313,923 for amortization of discount on convertible notes, as compared to $98,582 for the three months ended March 31, 2021. During the three months ended March 31, 2021, we recognized a loss of $41,677on notes payable conversions as compared to none in the three months ended March 31, 2022. This reduction is due to a change in the Company’s accounting treatment for conversion of debt to equity. The increase in amortization of discount on convertible notes is attributable to an increase in debt conversions in 2022 as compared to 2021.
General and administrative expenses in 2022 were $13,468 a decrease of $42,178 from general and administrative expenses of $55,646 in 2021. In 2021, the Company recorded an expense of $35,200 for cash and stock payments for fund raising fees as compared to no costs incurred of this nature in 2022. General and administrative costs, exclusive of fees for fund raising, were for investor relations, filing fees, transfer agent fees and overhead operational costs which were comparable for the 2022 and 2021 quarterly periods.
In 2022, the Company paid management consulting fees to IHG of $86,613 as compared to $51,142 paid in 2021.
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Legal and professional fees of $36,199 for the three months ended March 31, 2022 increased by $13,699 from $22,500 for the comparable period ended March 31, 2021. Fees for the 2022 and 2021 periods were predominately for SEC regulatory and statutory filings and audit and related fees for annual audits.
Liquidity and Capital Resources
At March 31, 2022, we had a working capital deficit of $504,840 and cash of $426,916 as compared to a working capital deficit of $283,414 and cash of $518,539, at December 31, 2021. The decrease in cash and increase in working capital deficit was due primarily to the utilization of available cash for operations and an increase in debt funding from December 31, 2021 as compared to March 31, 2022, with all new debt issuances maturing within one year from the date of issuance. The Company used new and existing fundings to maintain operating activities and complete software development and patent filings with the USPTO for its digital trading platform. During the three months ended March 31, 2022, we used $142,778 of cash for operating activities and paid $845 in investing activities for patent costs. In the comparable 2021 period, operating activities utilized cash of $110,537 and investing activities for software development and patent costs utilized cash of $11,000.
Substantially all of our funding has been from convertible debt financings in 2022 and 2021. The debt instruments were with non-related investment firms, carried an interest rate of 10%, matured six months to one year from date of financing and were convertible into shares of the Company’s common stock at a discount to the trading prices of the common shares of 35% to 40%. During three months ended March 31,2022, we issued convertible debt with a face value of $55,750, receiving cash proceeds, net of financing costs, of $52,000. During the three months ended March 31,2021, we issued convertible debt with a face value of $220,000, receiving cash proceeds, net of financing costs, of $217,500. During the three months ended March 31, 2022, convertible note holders were issued 63,311,934 shares of common stock for conversion of $296,321 face value of debt and related accrued interest and fees in 2022. In the comparable 2021 period, note holders were issued 2,894,231 shares of common stock for conversion of $86,827 face value of debt and related accrued interest and fees.
While management of the Company believes that the Company will be successful in its current and planned activities, there can be no assurance that the Company will be successful in obtaining sufficient revenues from our planned operations and raise sufficient equity, debt capital or strategic relationships to sustain the operations and future business of the Company.
Our ability to create sufficient working capital to sustain us over the next twelve-month period, and beyond, is dependent on our raising additional equity or debt capital, and ultimately to commence revenues form or digital trading platform.
There can be no assurance that sufficient capital will be available to us. We currently have no agreements, arrangements or understandings with any person to obtain funds through bank loans, lines of credit or any other sources.
Availability of Additional Capital
Notwithstanding our success in raising net cash proceeds of $52,000 and $217,500 from convertible debt financing in the periods ended March 31,2022 and 2021, respectively, there can be no assurance that we will continue to be successful in raising capital and have adequate capital resources to fund our operations or that any additional funds will be available to us on favorable terms or in amounts required by us. We estimate that we will need to raise $5,000,000 over the next twelve months to scale up our current plan. The Company feels it has sufficient capital to pay 2022 expenses and implement our platform of blockchain features in third quarter of 2022.
Any additional financings may be dilutive to our stockholders, new equity securities may have rights, preferences or privileges senior to those of existing holders of our shares of Common Stock. Debt or equity financing may subject us to restrictive covenants and significant interest costs.
Going Concern
We have only a very limited amount of cash and have incurred operating losses and limited cash flows from operations since inception. As of March 31, 2022 and December 31, 2021, we had accumulated deficit of $8,666,662 and $8,149,760, respectively and we will require additional working capital to fund operations through 2022 and beyond. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements included in this Form 10-Q do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and
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classification of liabilities that might result should we be unable to continue as a going concern. The audited financial statements included in the Company’s recent annual report on Form 10-K have been prepared assuming that we will continue as a going concern and do not include any adjustments that might result if we cease to continue as a going concern.
Our registered independent auditors have issued an opinion on our financial statements as of December 31, 2021 which includes a statement describing our going concern status. This means that there is substantial doubt that we can continue as an on-going business for the next twelve months unless we obtain additional capital to pay our bills and meet our other financial obligations. This is because we have not generated any revenues and no revenues are anticipated until we our digital trading platform has been approved to begin trading. There is no assurance that any revenue will be realized in the future. Accordingly, we must raise capital from sources other than the actual revenue from issuance of memberships in our digital trading platform.
There can be no assurance that we will have adequate capital resources to fund planned operations or that any additional funds will be available to us when needed or at all, or, if available, will be available on favorable terms or in amounts required by us. If we are unable to obtain adequate capital resources to fund operations, we may be required to delay, scale back or eliminate some or all of our operations, which may have a material adverse effect on our business, results of operations and ability to operate as a going concern.
Off Balance Sheet Arrangements
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is accumulated and communicated to management including our principal executive officer/principal financial officer as appropriate, to allow timely decisions regarding required disclosure.
Management has carried out an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures. Due to the lack of personnel and outside directors, management acknowledges that there may be deficiencies in these controls and procedures, but Management believes that the current procedures have been effective in disclosing all information required to be disclosed. The Company anticipates that with further resources, the Company will expand both management and the board of directors with additional officers and independent directors in order to provide sufficient disclosure controls and procedures.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)) during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
There are no material changes to risk factors as previously disclosed in the Company’s Form 10-K for the year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
For the three months ended March 31, 2022, the Company had one unregistered sales of equity securities. Prior to the filing of this report, the Company entered into no unregistered transactions.
On February 14, 2022, the Company entered into a convertible promissory note with Sixth Street Lending LLC totaling $55,750 and a securities purchase agreement. The note matures on February 14, 2023, bears interest at 10%, with a default rate of 22%, and is convertible, commencing 180 days after the date of issuance. The conversion price is to be calculated at 65% of the average of the two lowest trading price of the Company’s common stock for the previous fifteen trading days prior to the date of conversion. The lender agrees to limit the amount of stock received to less than 4.99% of the total outstanding common stock. There are no warrants or options attached to this note, and the Company has reserved 47,871,198 shares for conversion. Net proceeds from the loan were $52,000, after legal fees and offering costs of $3,750. Details of the promissory note and securities purchase agreement can be found in the Form 8-K and exhibits filed on February 25, 2022. The Company and the holder executed the securities purchase agreement in accordance with and in reliance upon the exemption from securities registration for offers and sales to accredited investors afforded, inter alia, by Rule 506 under Regulation D as promulgated by the SEC under the 1933 Act, and/or Section 4(a)(2) of the 1933 Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In April 2022, Quick Capital, LLC issued a notice of default on the convertible note dated November 16, 2020 and stated that the outstanding amount due on the note is $133,317.38, the default interest per annum is 24% and continues to accrue, and that the conversion price is the lowest trading price during the delinquency period with a 50% discount. As interest is accruing daily, the Company is exploring its options for resolving the default.
ITEM 4. MINE SAFETY DISCLOSURE
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibits. The following is a complete list of exhibits filed as part of this Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a–14(a) or 15d-14(a) of the Securities Exchange Act of 1934 |
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 |
| 32.1 | Certification of Chief Executive Officer under Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification of Chief Financial Officer under Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted as an Inline XBRL document and included in Exhibit 101) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BLACKSTAR ENTERPRISE GROUP, INC. | ||
| (Registrant) | ||
| Dated: May 16, 2022 | By: | /s/ John Noble Harris |
| John Noble Harris | ||
| (Chief Executive Officer, Principal Executive | ||
| Officer) | ||
| Dated: May 16, 2022 | By: | /s/ Joseph E. Kurczodyna |
| Joseph E. Kurczodyna | ||
| (Chief Financial Officer, Principal Accounting | ||
| Officer) | ||
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