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 June 30, 2022, we had an
accumulated deficit of $8,975,395 and a working capital deficiency of $659,099.
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 building a digital equity trading platform in order to
trade electronic fungible common shares equal to the shares held by DTCC (DWAC).
BlackStar intends to use the platform design to provide custom subscription
services to other public companies. More details regarding the BDTP TM can be
found in the most recent registration statement on Form S-1, as amended.
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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. BlackStars Digital Trading Platform ("BDTP") 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
in accordance with existing laws and regulations. As of the date of this filing,
the core platform of BDTP 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 over the next several months. The BDTP 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 it's 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
clears 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 $232,951 as of June 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 fall 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.
On July 8, 2022, the majority shareholder of BlackStar Enterprise Group, Inc.,
CFO Joseph Kurczodyna, submitted written consent to the resolution to increase
the authorized common stock from 700,000,000 to 2,000,000,000, with an effective
date of the Amendment to the Articles of Incorporation of August 5, 2022.
Following the increase in authorized shares proposed by the Company's Board of
Directors, we will have 2,000,000,000 shares of authorized common stock and
10,000,000 shares of authorized preferred stock (no change in preferred), with
no changes in the shares outstanding of either the common stock or preferred
stock as a result of the increase. Further information can be found in the
Schedule 14C Information Statement filed on July 8, 2022. A copy of the
Amendment to the Articles of Incorporation are attached hereto as Exhibit 3(i).8
and incorporated herein by reference.
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Results of Operations
For the Three Months Ended June 30, 2022 compared to same period in 2021
Net loss for the three months ended June 30, 2022 was $308,733 as compared to
$711,920 for the three months ended June 30, 2021, a decrease of $403,187. As
explained 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.
For the three months ended June 30, 2022, we had significantly lower
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 $157,508 for the
three months ended June 30, 2022 as compared to $450,590 for the same period in
2021. For the three months ended June 30, 2022, the Company recognized $102,446
for amortization of discount on convertible notes, as compared to $251,507 for
the three months ended June 30, 2021. During the three months ended June 30,
2021, we recognized a loss of $124,745 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 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 $32,138 a decrease of $107,388
from general and administrative expenses of $139,526 in 2021. In 2021, the
Company recorded 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 $78,661 as
compared to $98,000 paid in 2021.
Legal and professional fees of $40,426 for the three months ended June 30, 2022
increased by $16,622 from $23,804 for the comparable period ended June 30, 2021.
In 2022, the Company incurred legal fees for filing of its Registration
Statement which were not incurred in 2021. 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 Six Months Ended June 30, 2022 compared to same period in 2021
Net loss for the six months ended June 30, 2022 was $825,635 as compared to
$1,034,229 for the six months ended June 30, 2021, a decrease of $208,594. As
explained 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 included $165,274 in related party management consulting
fees, $76,625 in legal and professional fees, and $45,605 in general and
administrative fees, for a total of $287,504 for the six months ended June 30,
2022. Higher related party management consulting fees and an increase in costs
for fund raising increased the total operating expenses in the six months ended
June 30, 2021 by $103,114 as compared to the six months ended June 30, 2022. Our
net loss from operations was $1,034,229 for the six months ended June 30, 2021
compared to a net loss from operations of $825,635 for the same period ended
June 30, 2022.
For the six months ended June 30, 2021, we had significantly higher other
expenses, substantially all of which are non-cash, and were 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. This resulted in net other expenses of $643,611 for the six months
ended June 30, 2021 as compared to $538,131 for the same period in 2022. For the
six months ended June 30, 2022 the Company recognized $416,369 for amortization
of discount on convertible notes, as compared to $350,089 for the six months
ended June 30, 2021. This increase was due to increased funding from convertible
note issuances for the 2022 period as compared to the 2021 period. During the
six months ended June 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.
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Liquidity and Capital Resources
At June 30, 2022, we had a working capital deficit of $659,099 and cash of
$232,951 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
June 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 and complete software development and patent filings with
the USPTO for its digital trading platform. During the six months ended June 30,
2022, we used $329,832 of cash for operating activities and paid $9,634 in
investing activities for patent costs. In the comparable 2021 period, operating
activities utilized cash of $251,002 and investing activities for software
development and patent costs utilized cash of $36,000.
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 six
months ended June 30, 2022, we issued convertible debt with a face value of
$111,500, receiving cash proceeds, net of financing costs, of $104,000. During
the six months ended June 30,2021, we issued convertible debt with a face value
of $917,000, receiving cash proceeds, net of financing costs, of $779,500.
During the six months ended June 30, 2022, convertible note holders were issued
143,872,288 shares of common stock for conversion of $461,854 face value of debt
and related accrued interest in 2022. In the comparable 2021 period, note
holders were issued 7,468,804 shares of common stock for conversion of $309,467
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 $104,000 and
$779,500 from convertible debt financing in the six-month periods ended June 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 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 June 30, 2022 and
December 31, 2021, we had accumulated deficit of $8,975,395 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.
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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 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. 
