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 September 30, 2022, we had an
accumulated deficit of $9,189,724 and a working capital deficiency of $859,107.
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 Pink 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
blockchain and DLT companies and blockchain entrepreneurs for securities, tax,
and commodity issues. BlackStar is conducting ongoing analysis for opportunities
in involvement in electronic fungible share-related ventures though our
wholly-owned subsidiary, Crypto Equity Management Corp. ("CEMC") formed in
September 2017. CEMC is currently non-operational, inactive and has no business
or clients at this time. It is intended to offer advisory services as to how to
implement use of a custom platform for the client's equity based off of the BDTP
TM. CEMC has not established any anticipated time frames or key milestones for
CEMC business. 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. CEMC is currently non-operational,
inactive and has no business or clients at this time. It is intended to offer
advisory services as to how to implement use of a custom platform for the
client's equity based off of the BDTP TM. CEMC has not established any
anticipated time frames or key milestones for CEMC business.
BlackStar is currently developing a blockchain-based software platform ("BDTP
TM") to trade electronic fungible shares of our common stock equal to the shares
held and transferred by DTCC Brokers (DWAC). Once completed, the platform design
might enable us to license the technology as a Platform as a Service ("PaaS")
for other publicly traded companies, providing revenue to finance our merchant
banking. The completion of our software platform depends on our ability to
license it to an existing Alternative Trading System ("ATS") or for us to
possibly register as an ATS, which we do not intend to do at this time as we
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would prefer to license our platform to an existing ATS. The platform is not
currently operational or in use by anyone. More details regarding the BDTP TM
can be found in the most recent registration statement on Form S-1, as amended.
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 licensee (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 licensing and contractual relationships
with broker-dealers and existing ATS's and other strategies to go live with BDTP
TM 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 licensee. 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. During 2021, BlackStar filed with
the USPTO patent protection for 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 SEC approval of our digital trading platform.
Currently in the testing phase, we estimate $30,000 to finalize the integration
of the digital platform into the broker-dealer eco system once the SEC and FINRA
clear BlackStar to promote broker dealers and or exchanges. The ability to
obtain a licensee may be dependent on our ability to confirm that FINRA and the
SEC will allow trading on our platform as described. If this is the case, the
Company may alternatively seek to acquire an existing broker-dealer in order to
become a FINRA-registered broker-dealer. Once we have secured a licensee
broker-dealer, clearing firm, or ATS for the operations of the BDTP TM and begun
operating the BDTP TM, we will seek subscriber companies desiring customized
platforms. At that point, we will have the ability to showcase BDTP TM's live
operations. The technical platform operations and updates will be managed by
Artuova, through our oversight and direction. The software building of
additional platforms for subscriber companies may take as little as 48 hours. We
have not yet developed our marketing campaign to seek out these customers, but
plan to do so after securing our operating licensee, likely within the next six
months. We anticipate our overall expansion of services into the blockchain
industry within the next twelve months.
Based on our current cash reserves of approximately $98,662 as of September 30,
2022, we have the cash for an operational budget of approximately six (6)
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 winter 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 September 30, 2022 compared to same period in 2021
Net loss for the three months ended June 30, 2022 was $214,329 as compared to
$772,953 for the three months ended June 30, 2021, a decrease of $558,624. As
discussed below, a significant portion of the losses in those periods was
attributable to non-cash transactions from the issuance of convertible debt and
other financings.
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For the three months ended September 30, 2022, we had significantly lower
non-operating (other) expenses, substantially all of which are non-cash,
predominately due to a decrease in 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
$113,140 for the three months ended September 30, 2022 as compared to $382,104
for the same period in 2021. For the three months ended September 30, 2022, the
Company recognized $56,071 for amortization of discount on convertible notes, as
compared to $306,396 for the three months ended September 30, 2021. The decrease
in amortization of discount on convertible notes is attributable to a decrease
in debt conversions in 2022 as compared to 2021.
General and administrative expenses in 2022 were $11,434 a decrease of $262,343
from general and administrative expenses of $273,777 in 2021. In 2021, the
Company recorded cash and stock payments for fund raising fees, including the
$250,000 value of common shares issued to a convertible note lender, 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 $70,028 as
compared to $93,500 paid in 2021.
Legal and professional fees of $19,727 for the three months ended September 30,
2022 decreased by $3,845 from $23,572 for the 2021 comparable period. Recurring
professional fees for the 2022 and 2021 periods were predominately for SEC
regulatory and statutory filings and auditor and related fees for quarterly
reviews and annual audits.
For the Nine Months Ended September 30, 2022 compared to same period in 2021
Net loss for the nine months ended September 30, 2022 was $1,039,964 as compared
to $1,807,182 for the nine months ended September 30, 2021, a decrease of
$767,218. As discussed below, a significant portion of the losses in those
periods was attributable to non-cash transactions from the issuance of
convertible debt and other financings.
Our operating expenses for the nine months ended September 30, 2022 included
$235,301 in related party management consulting fees, $96,352 in legal and
professional fees, and $57,040 in general and administrative fees, for a total
of $388,693. Total operating expenses decreased by $392,775 from the 2021 period
as compared to 2022 predominately due to a decrease in general and
administrative expenses, which included $411,778 for fund raising costs in 2021
as compared to no costs for fund raising incurred in the 2022 period. Legal and
professional fees increased by $26,475 in 2022 for fees incurred for SEC
registration and regulatory filings.
For the nine months ended September 30, 2022, we had significantly lower other
expenses as compared to the comparable 2021 period. The decrease of $374,443,
from $1,025,714 in 2021 to $651,271 in 2022, is substantially non-cash and
predominately due to amortization of discounts on debt issuances and conversion
features of the convertible promissory notes that we have used to finance our
continued operations. For the nine months ended September 30, 2022 the Company
recognized $472,440 for amortization of discount on convertible notes, as
compared to $656,485 for the comparable 2021 period. This decrease was due to
decreased funding from convertible note issuances for the 2022 period as
compared to the 2021 period. During the nine months ended September 30, 2021, we
recognized a loss of $166,422 on notes payable conversions as compared to none
in the 2022 comparable period. 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.
Liquidity and Capital Resources
At September 30, 2022, we had a working capital deficit of $859,107 and cash of
$98,662 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
September 30, 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, complete software development and patent filings with the
USPTO for its digital trading platform. During the nine months ended September
30, 2022, we used $456,277 of cash for operating activities and paid $11,634 in
investing activities for software development and patent costs. In the
comparable 2021 period, operating activities utilized cash of $394,269 and
investing activities for software development and patent costs utilized cash of
$45,000.
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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 nine
months ended September 30, 2022, we issued convertible debt with a face value of
$155,250, receiving cash proceeds, net of financing costs, of $144,000. During
the nine months ended September 30,2021, we issued convertible debt with a face
value of $1,183,250, receiving cash proceeds, net of financing costs, of
$1,004,500. During the nine months ended September 30, 2022, convertible note
holders were issued 196,896,962 shares of common stock for conversion of
$528,2123 face value of debt and related accrued interest. In the comparable
2021 period, note holders were issued 12,018,049 shares of common stock for
conversion of $371,132 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 $144,000 and
$1,004,500 from convertible debt financing in the nine-month periods ended
September 30, 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 fourth 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 September 30, 2022
and December 31, 2021, we had accumulated deficit of $9,189,724 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
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 obtain final SEC approval for our digital trading platform.
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
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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.
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BLACKSTAR ENTERPRISE GROUP, INC. 