BLACKBOXSTOCKS INC. - Quarter Report: 2019 September (Form 10-Q)

 

 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended

September 30, 2019

or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from

to

 

Commission File No.

0-55108

 

BLACKBOXSTOCKS INC.

(Exact name of registrant as specified in its charter)

 

Nevada		45-3598066
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

5430 LBJ Freeway, Suite 1485, Dallas, Texas	75240
(Address of principal executive offices)	(Zip Code)

 

(972) 726-9203

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

 

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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of 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). Yes ☒ 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 ☐
Non-accelerated filer ☐	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 pursuant to Section 13(a) of the Exchange Act.                                    ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The number of shares outstanding of the registrant’s Common Stock as of November 12, 2019 was 7,883,231.

 

---

 

 

TABLE OF CONTENTS

 

		Page
INTRODUCTORY COMMENT		1
CAUTION REGARDING FORWARD LOOKING STATEMENTS		1
PART I –FINANCIAL INFORMATION		2
Item 1.	Financial Statements	2
	Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018	2
	Statements of Operations for the Three and Nine Months Ended September 30, 2019  and 2018 (Unaudited)	3
	Statement of Stockholders’ Deficit for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)	4
	Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)	5
	Notes to Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
PART II – OTHER INFORMATION		18
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 Disclosures	19
Item 5.	Other Information	19
Item 6.	Exhibits	19
Signatures		19

 

---

 

---

 

		September 30,				December 31,
		2019				2018
Assets
Current assets:
Cash		$	35,101			$	28,001
Investments, market testing			12				-
Accounts receivable, net of allowance for doubtful accounts of $68,589 at September 30, 2019 and December 31, 2018, respectively			3,759				3,719
Advances receivable, related parties (Note 5)			29,849				-
Prepaid expenses			107,646				107,646
Prepaid expenses, related party (Note 5)			36,700				36,700
Total current assets			213,067				176,066
Property and equipment:
Office, computer and related equipment, net of depreciation of $36,944 and $28,802 at September 30, 2019 and December 31, 2018, respectively			12,208				18,763
Domain name, net of amortization of $8,118 and $3,821 at September 30, 2019 and December 31, 2018, respectively			9,074				13,371
Software development, net of amortization of $9,000 and $7,312 at September 30, 2019 and December 31, 2018, respectively			-				1,688
Right of use lease, net of amortization of $37,869 at September 30, 2019			122,204				-
Total property and equipment			143,486				33,822
Total Assets		$	356,553			$	209,888
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable		$	559,523			$	525,136
Accrued expenses			-				128,000
Accrued interest			23,977				834
Accrued interest, related party			13,000				2,080
Unearned subscriptions			108,377				90,034
Lease liability right of use, current			47,141				-
Other liabilities			180,000				180,000
Advances payable			11,100				-
Advances payable, related party (Note 5)			25,000				36,382
Convertible notes payable, net of discount of $180,346 as of September 30, 2019 (Note 8)			369,654				-
Notes payable, net of note discount of $25,571 and $25,435 at September 30, 2019 and December 31, 2018, respectively (Note 6)			191,139				165,889
Notes payable, related party (Note 7)			228,000				228,000
Total current liabilities			1,756,911				1,356,355
Lease liability right of use, long term			77,976				-
Commitments and contingencies (Note 9)
Stockholders' Deficit:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; no shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively			-				-
Series A Convertible Preferred Stock, $0.001 par value, 5,000,000 shares authorized; 5,000,000 issued and outstanding at September 30, 2019 and December 31, 2018, respectively			5,000				5,000
Common stock, $0.001 par value, 100,000,000 shares authorized: 7,883,231 and 7,678,047 issued and outstanding at September 30, 2019 and December 31, 2018, respectively			7,883				7,678
Common stock, subscribed			35,060				144,060
Additional paid in capital			3,476,332				2,543,264
Accumulated deficit			(5,002,609	)			(3,846,469	)
Total Stockholders' Deficit			(1,478,334	)			(1,146,467	)
Total Liabilities and Stockholders' Deficit		$	356,553			$	209,888

---

 

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2019				2018				2019				2018
Revenue:
Subscriptions		$	289,632			$	188,179			$	755,244			$	478,849
Other revenues			6,700				2,000				21,245				2,000
Total revenues			296,332				190,179				776,489				480,849
Cost of operations			195,344				156,366				525,670				474,379
Gross margin			100,988				33,813				250,819				6,470
Expenses:
Software development costs			27,140				32,234				102,489				47,034
General and administrative			317,134				332,986				902,885				715,289
Depreciation and amortization			4,196				6,482				14,128				15,992
Total operating expenses			348,470				371,702				1,019,502				778,315
Operating loss			(247,482	)			(337,889	)			(768,683	)			(771,845	)
Interest expense			37,373				13,033				94,078				25,574
Other expense			-				(21	)			-				-
Amortization of debt discount			223,004				-				293,379				-
Loss before income taxes			(507,859	)			(350,901	)			(1,156,140	)			(797,419	)
Income taxes			-				-				-				-
Net loss		$	(507,859	)		$	(350,901	)		$	(1,156,140	)		$	(797,419	)
Weighted average number of common shares outstanding - basic			7,788,008				7,667,942				7,701,581				7,667,096
Net loss per share - basic		$	(0.07	)		$	(0.05	)		$	(0.15	)		$	(0.10	)

---

 

		Series A Preferred Stock								Preferred Stock								Common Stock								Common Stock				Additional Paid-in				Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				Subscribed				Capital				Deficit				Total
Balance at December 31, 2017			5,000,000			$	5,000				-			$	-				7,667,047			$	7,667			$	-			$	2,510,275			$	(2,694,587	)		$	(171,645	)
Issuance of shares			-				-				-				-				7,333				7				-				21,993				-				22,000
Net loss			-				-				-				-				-				-				-				-				(797,419	)			(797,419	)
Balance at September 30, 2018			5,000,000			$	5,000				-			$	-				7,674,380			$	7,674			$	-			$	2,532,268			$	(3,492,006	)		$	(947,064	)
Balance at December 31, 2018			5,000,000			$	5,000				-			$	-				7,678,047			$	7,678			$	144,060			$	2,543,264			$	(3,846,469	)		$	(1,146,467	)
Issuance of shares for cash			-				-				-				-				191,354				191				(109,000	)			381,356				-				272,547
Issuance of shares in settlement of accrued expenses			-				-				-				-				13,830				14				-				127,986				-				128,000
Imputed discount on convertible notes payable (Note 8)			-				-				-				-				-				-				-				423,726				-				423,726
Net loss			-				-				-				-				-				-				-				-				(1,156,140	)			(1,156,140	)
Balance at September 30, 2019			5,000,000			$	5,000				-			$	-				7,883,231			$	7,883			$	35,060			$	3,476,332			$	(5,002,609	)		$	(1,478,334	)

---

 

		2019				2018
Cash flows from operating activities
Net loss		$	(1,156,140	)		$	(797,419	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense			14,128				15,992
Amortization of note discount			346,088				20,420
Financing cost			26,275				-
Expenses paid by lendor			24,984				-
Changes in operating assets and liabilities:
Investments, market testing			(12	)			(524	)
Accounts receivable			(40	)			(2,346	)
Advances, related party			-				(1,500	)
Prepaid expenses			-				16,682
Accounts payable			34,387				187,012
Accrued salary			-				4,122
Accrued interest			23,143				3,533
Accrued interest, related party			10,920				-
Unearned subscriptions			18,343				69,187
Other liabilities			-				296,060
Net cash used in operating activities			(657,924	)			(188,781	)
Cash flows from investing activities
Purchases of property and equipment			(1,587	)			(20,684	)
Net cash used in investing activities			(1,587	)			(20,684	)
Cash flows from financing activities
Common stock issued for cash			272,547				22,000
Proceeds from notes payable			175,684				248,015
Proceeds from convertible notes payable			473,725				-
Repayment of notes payable			(225,214	)			(55,505	)
Advances from others			11,100				-
Cash advances from related parties			93,442				122,000
Cash repayments to related parties			(134,673	)			(99,071	)
Net cash provided by financing activities			666,611				237,439
Net increase in cash			7,100				27,974
Cash - beginning of period			28,001				8,155
Cash - end of period		$	35,101			$	36,129
Supplemental disclosure- Non-cash investing and financing activities:
Acquisition of equipment in exchange for note payable		$	-			$	8,309
Discount on notes payable		$	52,845			$	-
Lease, right of use and liability		$	160,073			$	-
Discount on convertible notes payable		$	473,725			$	-
Common stock issued in settlement of accrued expenses		$	128,000			$	-

---

 

1. Organization

 

Blackboxstocks Inc. (the “Company”) was incorporated on October 4, 2011 under the laws of the State of Nevada under the name SMSA Ballinger Acquisition Corp. to effect the reincorporation of Senior Management Services of Heritage Oaks at Ballinger, Inc., a Texas corporation, mandated by a Plan of Reorganization confirmed by the United States Bankruptcy Court for the Northern District of Texas for reorganization under Chapter 11 of the United States Bankruptcy Code.

 

On December 1, 2015, the Company entered into a Share Exchange Agreement (“Exchange Agreement”), by and among the Company, Tiger Trade Technologies, Inc. (“Tiger Trade”), a Texas corporation and the stockholders of Tiger Trade. As a result of the Exchange Agreement transaction, the Tiger Trade stockholders acquired approximately 88.64% of the issued and outstanding capital stock of the Company, and Tiger Trade became a wholly owned subsidiary of the Company. 

 

On February 8, 2016, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Tiger Trade, providing for the merger of Tiger Trade with and into the Company. At the effective time of the merger (February 9, 2016), the shares of Tiger Trade capital stock outstanding immediately before the effective time were canceled, retired and the Tiger Trade corporate entity ceased to exist.

 

The Company filed a Certificate of Amendment to its Articles of Incorporation effective as of March 9, 2016, changing the name of the Company to Blackboxstocks Inc.

 

The Company is in the business of developing and marketing web and mobile based analytical software tools as a subscription based software as a service (the “Blackbox System”) to serve as a tool for day traders and swing traders on various securities exchanges and markets, including the OTC Markets Group, Inc. (“OTC”), the New York Stock Exchange, the NYSE MKT, LLC (formerly the American Stock Exchange), the NASDAQ markets, the Hong Kong Stock Exchange (“HKEX”), the Shanghai Stock Exchange (“SSE”) and the Shenzhen Stock Exchange (“SZSE”).

 

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern, which is dependent upon the Company's ability to obtain sufficient financing or establish itself as a profitable business.  At September 30, 2019, the Company had an accumulated deficit of $5,002,609 and for the nine months ended September 30, 2019 and 2018, the Company incurred net losses of $1,156,140 and $797,419, respectively.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans with respect to operations include the sustained and aggressive marketing of subscriptions for the Blackbox System both domestically and abroad and raising additional capital through sales of equity or debt securities as may be necessary to pursue its business plans and sustain operations until such time as the Company can achieve profitability. Management believes that aggressive marketing combined with additional financing as necessary will result in improved operations and cash flow. However, there can be no assurance that management will be successful in obtaining additional funding or in attaining profitable operations.

 

The financial statements do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation.

 

2. Summary of Significant Accounting Policies

 

The accompanying interim unaudited financial statements and footnotes of Blackboxstocks Inc. have been prepared in accordance with GAAP. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present such information. All such adjustments are of a normal recurring nature. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with the rules and regulation so fthe SEC have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report. The accompanying unaudited financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results for any subsequent quarter or the entire year ending December 31, 2019.

 

 

Basis of Presentation - The accompanying financial statements were prepared in conformity with GAAP.

 

Use of Estimates – The Company’s financial statement preparation requires that management make estimates and assumptions which affect the reporting of assets and liabilities and the related disclosure of contingent assets and liabilities in order to report these financial statements in conformity with GAAP.  Actual results could differ from those estimates.

 

Cash - Cash includes all highly liquid investments that are readily convertible to known amounts of cash and have original maturities at the date of purchase of three months or less.

 

Fair Value of Financial Instruments - The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement, defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the customer’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.

 

Recently Issued Accounting Pronouncements - During the nine months ended September 30, 2019 and 2018, there were several new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases. This is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It requires all leases that have a term in excess of 12 months be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset value based on the present value of future aggregate payments. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the term of the lease. Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest expense (for interest on the lease liability). This standard became effective beginning January 1, 2019 and was adopted on our financial statements. The Company recorded the right-of-use asset for the lease in the amount of $160,073 and the related lease liability. The current liability for the lease is $47,141 and non-current of $77,976 as of September 30, 2019.

 

Property and Equipment - The Company is engaged in the development of its proprietary Blackbox System technology, an algorithm driven system, through a combination of in-house system analysts and outside firms. The Company’s Blackbox System software for use in China was in development and costs were expensed until the software reached technological feasibility in April 2017 and capitalized until May 15, 2017 when the Blackbox System for use in China was marketable.

 

 

The Company’s property and equipment is being depreciated on the straight-line basis over an estimated useful life of three years.

 

Earnings or (Loss) Per Share - Basic earnings per share (or loss per share), is computed by dividing the earnings (loss) for the period by the weighted average number of common stock shares outstanding for the period.  Diluted earnings per share reflects the potential dilution of securities by including other potentially issuable shares of common stock, including shares issuable upon conversion of convertible securities or exercise of outstanding stock options and warrants, in the weighted average number of common shares outstanding for the period.  Therefore, because including shares issuable upon conversion of convertible securities and/or exercise of outstanding options and warrants would have an anti-dilutive effect on the loss per share, only the basic earnings (loss) per share is reported in the accompanying financial statements. At September 30, 2019 and 2018, the potential dilution would be 5,300,031 and 5,000,000 shares of common stock in the event the issued and outstanding shares of Series A Convertible Preferred Stock or other potentially dilutive securities be exercised.

 

Share-Based Payment - Under ASC Topic 718, Compensation - Stock Compensation, all share based payments to employees, including share option grants, are to be recognized in the statement of operations based on their fair values. No share-based payments were issued for the nine months ended September 30, 2019 and 2018.

 

Revenue Recognition - On January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” (ASC 606) and adoption of the new standard had no impact on the Company’s statements of operations or balance sheets. Revenue is recognized from the sale of subscriptions for the use of the Blackbox System web application, on a monthly or annual basis. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities. The Company launched its Blackbox System web application and began generating subscription sales revenues during the quarter ended September 30, 2016. Revenue related to annual subscriptions is recognized each month with unearned subscriptions reflected as a current liability.

 

Other Liabilities - The Company is planning the development of a future product, a complimentary platform that will share similar IP protocol with the current Blackbox System on a subscription basis. The future product has not yet launched. The Company has received advance payments from a new subscriber group in anticipation of the development of this future product. These amounts are deferred until such time as the platform is launched and the services earned. As of September 30, 2019, the Company has received $180,000 from this future subscriber group.

 

Software Development Costs - Blackboxstocks is engaged in the development of its proprietary Blackbox System technology, a proprietary algorithm driven system, through a combination of in-house system analysts and outside contractors. Under the guidelines of ASC Topic 985, “Software”, the cost of the Company’s Blackbox System was expensed during development and the Blackbox System software for use in the United States, reached technical feasibility in August 2016, became marketable and was made available to subscribers beginning September 1, 2016. The Blackbox System for use in China achieved technological feasibility and became marketable and available to subscribers during the quarter ended June 30, 2017. Subsequent to that time, in accordance with ASC Topic 985 these costs were expensed. Costs incurred during this period were capitalized and amortized.

 

Domain Name - The Company acquired a domain name for its exclusive use in anticipation of its rollout within the next three years. The cost was capitalized and due to the uncertainty of our ability to successfully market this name, we elected to amortize the cost over a period of three years.

 

Prepaid Expenses - Prepaid expenses are current assets created when the Company makes payments or incurs an obligation for expenses identified for a future period. These amounts are charged to expense as the services are provided.

 

 

Marketing Costs - The Company incurs significant marketing expenses related to the development and expansion of its subscription base to potential users. During the nine months ended September 30, 2019 and 2018, the Company reported $201,299 and $107,957 for marketing costs, respectively.

 

Contingencies - Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

 

If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements.

 

If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

 

3.   Stockholders’ Deficit

 

The Company has authorized 10,000,000 shares of preferred stock at $0.001 par value, 5,000,000 of which are designated as “Series A Convertible Preferred Stock” at $0.001 par value and 100,000,000 authorized shares of common stock at $0.001 par value (“Common Stock”).

 

Shares of Series A Convertible Preferred Stock do not accumulate dividends and are convertible into shares of Common Stock on a one-for-one basis. Additionally, each share entitles the holder to 100 votes and, with respect to dividend and liquidation rights, the shares rank pari passu with the Company’s Common Stock.

 

The Company announced and approved a reverse stock split effective July 15, 2019 at a ratio of 1 for 3, whereby every 3 shares of common stock issued and outstanding were automatically reclassified and combined into one share of common stock (“Reverse Stock Split”). The Reverse Stock Split has been reflected retroactively in these financial statements for all periods presented.

 

During the nine months ended September 30, 2019, the Company issued 30,833 shares of Common Stock at a cash price of $3.00 per share for a total of $92,500 and 3,333 shares of Common Stock for an aggregate cash price of $6,500 for subscriptions received during the year ended December 31, 2018.

 

During the nine months ended September 30, 2019 the Company issued 3,334 shares of Common Stock for an aggregate cash price of $10,000 for subscriptions received during the year ended December 31, 2018.

 

On April 10, 2019 the Company sold 51,282 shares of Common Stock and a Warrant, exercisable for a period of 5 years, to purchase 33,333 shares of Common Stock at an exercise price of $1.95 per share, to a third party for aggregate consideration of $100,000.

 

On or about May 7, 2019 the Company sold 25,641 shares of Common Stock to a third party at a price of $1.95 per share, for aggregate consideration of $50,000.

 

 

On or about May 22, 2019 the Company sold 12,821 shares of Common Stock and a Warrant, exercisable for a period of 5 years, to purchase 6,410 shares of Common Stock at an exercise price of $1.95 per share to a third party for aggregate consideration of $25,000.

 

On or about June 4, 2019 the Company sold 51,282 shares of Common Stock and a Warrant, exercisable for a period of 5 years, to purchase 25,641 shares of Common Stock at an exercise price of $1.95 per share, to a third party for aggregate consideration of $100,000.

 

On August 29, 2019 the Company sold 12,821 shares of Common Stock and a Warrant, exercisable for a period of 5 years, to purchase 6,411 shares of Common Stock at an exercise price of $1.95 per share, to a third party for aggregate consideration of $25,000.

 

4. Stock Options and Warrants

 

Costs attributable to the issuance of stock options and share purchase warrants are measured at fair value at the date of issuance and offset with a corresponding increase in ‘Additional Paid in Capital’ at the time of issuance. The fair value cost is computed utilizing the Black-Scholes model and assuming volatility based on U.S. Treasury yield rates for a similar period.

 

When the options or warrants are exercised, the receipt of consideration is an increase in stockholders’ equity.

 

Concurrently with certain of the securities purchase agreements entered into as described in Note 3 above, warrants to purchase the Company’s Common Stock were issued to the subscribers. Each warrant is exercisable for a period of five years from the date of the securities purchase agreement at an exercise price of $1.95 per share. The fair value cost at the date of issuance of the warrants was $502,398. There was no warrant activity during the nine months ended September 30, 2018 and as of September 30, 2019, there are 71,795 warrants outstanding.

 

 

 

5.  Related Party Transactions

 

During the nine months ended September 30, 2019, Gust C. Kepler, a Director, President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company advanced $68,442 to the Company and he was repaid $133,173. The balance remaining of $28,349 is owed to the Company, is unsecured and bears no interest.

 

During the nine months ended September 30, 2019 the Company advanced $1,500 to its VP/Director of Operations and the balance remains outstanding, is unsecured and bears no interest.

 

During the nine months ended September 30, 2019 and 2018, the Company engaged the services of Karma Black Box LLC (“Karma”), whose two stockholders became Company stockholders as a result of the Exchange Agreement with Tiger Trade and its stockholders (Note 1), for application development services of the Company’s Blackbox System technology. Karma began operating as EDM Operators (“EDM”) in the last quarter of 2018. During the nine months ended September 30, 2019 and 2018, Karma/EDM was paid $13,500 and $36,000 for services, respectively.

 

During the nine months ended September 30, 2019, one of the stockholders of EDM advanced $25,000 to the Company. The balance of $25,000 remains outstanding as of September 30, 2019 is unsecured and bears no interest.

 

 

G2 International, Inc. (“G2”), which does business as IPA Tech Group (“IPA”), is a company wholly owned by Gust C. Kepler, a Director, President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company, and the Company’s controlling stockholder. As of September 30, 2019 the Company has a prepaid balance of $36,700 for public relations and marketing services with G2/IPA. These funds are reserved in anticipation of a future campaign to move the Company’s stock to listing on a national exchange.

 

6. Notes Payable

 

On September 13, 2019 a third party advanced $90,000 to the Company in exchange for quasi-factoring financing arrangements to be repaid in daily installments of $490, through August 18, 2020. The related note discount of $27,000 is being amortized over the term of the agreement for a total of $1,429 in interest expense as of September 30, 2019.

 

On April 2, 2019 an additional $19,000 was advanced to be repaid in daily installments of $315.56, through August 8, 2019. The related note discount of $9,400 was amortized over the term of the agreement for a total of $9,400 in interest expense as of September 30, 2019.

 

On March 29, 2019 a third party advanced $38,755 to the Company in exchange for quasi-factoring financing arrangements to be repaid in daily installments, currently $460, through September 12, 2019. The related note discount of $16,445 was amortized over the term of the agreement for a total of $16,445 in interest expense as of September 30, 2019.

 

On February 19, 2019 a third party advanced $50,000 to the Company in exchange for a promissory note bearing interest at 12% per annum for a ninety-day period, maturing on May 20, 2019. This note and accrued interest of $2,000 was paid in full on June 17, 2019

 

During the year ended December 31, 2018 third parties advanced a total of $121,821 to the Company in exchange for quasi-factoring financing arrangements to be repaid in daily installments, currently $450, through September 18, 2019. The related note discounts of $55,190 was amortized over the term of the agreements for a total of $55,190 in interest expense as of September 30, 2019.

 

On June 26, 2018 the Company entered into a note payable with a third party for $8,309 for the purchase of office telecommunication equipment. The note bears interest at the rate of 18% per annum for 36 installments and matures on May 22, 2021.

 

On August 8, 2018 a third party advanced $200,000 to the Company in exchange for a secured promissory note, bearing interest at the rate of 12% per annum with a maturity date of November 20, 2018. The note is secured by a Security Agreement providing for a continuing lien and first priority security interest in the assets of the Company and by a personal Guaranty Agreement with Gust Kepler, a Director, President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company, and the Company’s controlling stockholder. On December 6, 2018, Mr. Kepler made a payment on the note in the amount of $100,000 plus accrued interest of $8,000 for an aggregate of $108,000. The principal balance of $100,000 remains outstanding and is in default as of September 30, 2019, although the holder has made no demand for settlement of the note.

 

7. Notes Payable, Related Party

 

On November 9, 2018, Gust C. Kepler, a Director, President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company advanced $120,000 to the Company in exchange for a promissory note bearing interest at 12% per annum for a ninety-day period, maturing on January 28, 2019. The note remains unpaid as of September 30 and is in default; however, no demand for repayment has been made by the holder.

 

On December 6, 2018, Gust C. Kepler, a Director, President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company advanced $108,000 to the Company for payment to a third party note holder (Note 6) in exchange for an unsecured promissory note.

---

 

8. Convertible Notes Payable

 

On May 21, 2019, the Company issued an 8% Fixed Convertible Promissory Note payable to a third party for a total face value up to $550,000, which included an original issue discount of 10% on the investment amount of up to $500,000. The note specifies that the note holder shall retain an original issue discount of 10% of any consideration, bears interest of 8%, and matures 180 days from the effective date. If the Company prepays the note within 90 days, the Company must pay a cash redemption premium of 110%; if such prepayment is made between the 91st day and the 180th day, then such redemption premium is 115%. The note holder paid the first consideration of $350,000 was allowed thirty days to pay additional consideration, however no further consideration was remitted within the thirty days. Until maturity, the note holder may convert all or a portion of the outstanding principal into shares of Common Stock of the Company at a fixed conversion price equal to $1.95 per share. If the note is not retired on or before the maturity date, the note holder may convert a portion or all the outstanding principle into shares of the Company’s common stock at a variable conversion price which equals the lower of the fixed conversion price or 65% of the lowest closing bid price during the 15 consecutive trading days prior to the date of the note holder’s election to convert.

 

On July 17, 2019, the Company issued an 8% Fixed Convertible Promissory Note payable to a third party for a total face value of $165,000, which included an original issue discount of 10% on the investment amount of $150,000. The note specifies that the note holder shall retain an original issue discount of 10% of any consideration, bears interest of 8%, and matures 180 days from the effective date. If the Company prepays the note within 90 days, the Company must pay a cash redemption premium of 110%; if such prepayment is made between the 91st day and the 180th day, then such redemption premium is 115%. Until maturity, the note holder may convert all or a portion of the outstanding principal into shares of Common Stock of the Company at a fixed conversion price equal to $1.95 per share. If the note is not retired on or before the maturity date, the note holder may convert a portion or all the outstanding principle into shares of the Company’s common stock at a variable conversion price which equals the lower of the fixed conversion price or 65% of the lowest closing bid price during the 15 consecutive trading days prior to the date of the note holder’s election to convert.

 

9. Commitments and Contingencies

 

The Company entered into a sublease agreement with G2 effective July 1, 2015 subject to the terms and conditions of the office lease between G2 and Teachers Insurance and Annuity Association of America for approximately 1,502 square feet of office space at 5430 LBJ Freeway, Dallas, Texas. On August 28, 2017, the Company acquired and was assigned all right, title and interest in the lease from G2. On September 19, 2017 the Company amended the lease to expand its space by approximately 336 square feet for a total of 1,838 square feet and extended the expiration date to September 30, 2022. On January 1, 2019 the Company adopted ASC 842 requiring this lease to be recorded as an asset and corresponding liability on its balance sheet. The Company records rent expense associated with this lease on the straight-line basis in conjunction with the terms of the underlying lease. During the nine months ended September 30, 2019 and 2018 we incurred $39,732 and $45,299, respectively, in office rental expense. Future minimum rental payments under the extended lease for years ending December 31, are:

 

 

On June 18, 2018 the Company entered into a letter agreement with IC Ventures, Inc. (“ICV”), pursuant to which the Company retained ICV to provide strategic advisory services for marketing and financial matters relating to investment and acquisition issues which services commenced July 1, 2018. The agreement provided for a twenty-month (24) month term and that ICV would be compensated monthly in Company common stock valued at$20,000 with such compensation to be increased by $15,000 in cash for a twelve-month period during the term, payable in cash beginning on the earlier of (i) the election by the Company or (ii) the sixth full month following the execution of the agreement. The agreement also provided that ICV would be issued 920,000 shares of the Company’s common stock if listing on NASDAQ is achieved during the term of the agreement and ICV shall be paid a closing fee of 1.5% of gross proceeds or a minimum of $500,000 if the Company should be acquired during the term of the agreement or within 12 months of the termination of the agreement. On December 18, 2018 the Company terminated the agreement and during the quarter ended September 30, 2019 issued 13,830 shares of common stock in settlement of the $128,000 due to ICV.

 

 

The Company engaged software design consulting services from a vendor for its Blackbox System which the Company found did not meet its standards and entered into negotiations to dispute the services rendered. The entity providing these services sought satisfaction through a complaint with the State of California for the disputed amount and a judgement in favor of the plaintiff/vendor was granted in the amount of $29,523.  This amount represents $24,920 for the disputed services, interest of $2,200 and legal costs of $2,403.  The Company is optimistic that a negotiated settlement of the judgement may be reached.  The aggregate of the judgement of $29,523 is included in accounts payable as of September 30, 2019.

 

On March 6, 2019 the Company entered into a letter agreement with Boustead Securities (“Boustead”), pursuant to which the Company retained Boustead to provide exclusive financial advisory services relating to corporate development, investment and acquisition issues. The agreement provides for an engagement fee of $20,000 due upon execution of the agreement; $5,000 upon the closing of any pre-initial public offering (“IPO”) financing and $25,000 upon the closing of the IPO. The agreement also provides for cash success fees should any business combination transactions or debt financing be achieved. Additionally, Boustead will earn warrants for purchase of the Company’s common stock for each debt financing transactions and success fees for any equity financing or initial public offering.

 

The Company is not currently a defendant in any material litigation or any threatened litigation that could have a material effect on the Company’s financial statements.

 

10. Subsequent Events

 

On October 3, 2019 a third party advanced $50,000 to the Company in exchange for quasi-factoring financing arrangements to be repaid in daily installments of $409, through May 28, 2020. The related note discount of $19,000 will be amortized over the term of the agreement.

---

 

---

---

---

---

---

---