7
BLACKBOX SEMICONDUCTOR, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
NOTE 1.
ORGANIZATION
BlackBox Semiconductor, Inc. (“the Company,” “we,” or “us”) was incorporated in the state of Delaware on October 28, 2010. We were a wholly-owned subsidiary of Shrink Nanotechnologies, Inc. On June 3, 2011, Shrink Nanotechnologies, Inc. finalized an agreement to spin off its ownership of the Company.
On September 25, 2012, the Company formed SunPower Technologies, LLC (“SunPower”), a Delaware limited liability company, as a wholly-owned subsidiary. SunPower will hold future intellectual properties.
NOTE 2.
CHANGE IN STRATEGY
We have deployed capital resources to study the Intellectual Property landscape relating to the use and application of nanoscale liquid semiconductor technology. Based on this research we have determined that our best path forward is to pursue an aggressive licensing strategy regarding the use of alternative chemistries and applications relating to the preparation and use of liquid nanoscale semiconductor technology. Pursuant to this strategy, we no longer plan to build research facilities and manufacture a product. Instead we plan to exploit our knowledge of the IP space relating to this technology to identify and patent new applications and chemistries relating to general liquid and printable semiconductor technology. Furthermore we plan to rapidly scale the size of our patent portfolio in order to facilitate licenses to interested parties in the semiconductor space. We have identified methods and partners that will significantly accelerate this process at modest costs. We currently do not have adequate capital to meet our continuing requirements of the University Chicago License and hence we have been given notice that our license has been terminated. However based on our study of the intellectual property landscape we believe that the company would be better served applying its resources to the development of new intellectual property in the general area of liquid semiconductor technology.
We have recently begun to follow through on this strategy in filing our first application based provisional patent relating to the use of semiconductor chemistry to address applications in the display and LED space. We have also identified several other application areas in which we plan to aggressively file provisional patents.
NOTE 3.
GOING CONCERN
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. Because of the recurring operating losses, no revenues and the excess of current liabilities over current assets, there is substantial doubt about the Company’s ability to continue as a going concern.
As a result of the aforementioned conditions the Company may be unable to meet certain obligations to fund future technology and business development activities. The Company’s continuation as a going concern is dependent on obtaining additional outside financing, as it is not anticipated that the Company will have profitable operations from its current operations during the near term. The Company believes that the issuance of equity and debt will be needed to fund operating losses in the short-term until the Company can generate revenues sufficient to fund its operations. If management can’t achieve its plans there is a possibility that operations will discontinue.
NOTE 4.
SIGNIFICANT ACCOUNTING POLICIES
Development Stage Enterprise
The Company is a development stage company as defined by the Financial Accounting Standards Board (the “FASB”). The Company is devoting substantially all of its present efforts to establish a new business, and its planned principal operations have not yet commenced. All losses accumulated since inceptions have been considered as part of the Company’s development stage activities.
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 the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions principally relate to the fair value and forfeiture rates of stock based transactions, and long-lived asset depreciation and amortization, and potential impairment.
8
BLACKBOX SEMICONDUCTOR, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with maturities of three months or less at the time of acquisition.
Concentration of Credit Risk
A financial instrument which potentially subjects the Company to concentrations of credit risk is cash. The Company places its cash with financial institutions deemed by management to be of high credit quality. The Federal Deposit Insurance Corporation (“FDIC”) provides basic deposit coverage with limits to $250,000 per owner. In addition to the basic insurance deposit coverage, the FDIC is providing temporary unlimited coverage for noninterest-bearing transaction accounts from December 31, 2010 to December 31, 2012. At September 30, 2012, there were no uninsured deposits.
Securities Available for Sales and Other Comprehensive Income
Our accounting policy is to book all restricted and publicly tradable securities under Securities Available for Sale and, as such, are carried at fair value based on quoted market prices. The Company owns restricted common stock representing approximately a 5.8% interest in Shrink Nanotechnologies, Inc., its former parent and a publicly traded company. These shares are valued at their quoted market price. Unrealized holding gains and losses for securities available for sale are excluded from earnings and reported as a separate component of stockholder’s equity as other comprehensive income, until the securities are disposed of. Upon disposal, the changes accumulated in other comprehensive income are to be recognized in income. Under this method, the Company’s share of the earnings or losses of the investments are not included in the Consolidated Balance Sheet or Statement of Operations.
The balance of $40,950 in securities available for sale on the Balance Sheet reflects a $4,550 mark to market increase adjustment in relation to the December 31, 2011 balance of $36,400.
Fair Value Measurements
Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. US GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The established fair value hierarchy prioritizes the use of inputs used in valuation methodologies into the following three levels:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and must be used to measure fair value whenever available.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. For example, level 3 inputs would relate to forecasts of future earnings and cash flows used in a discounted future cash flows method.
Basic Net Loss per Share of Common Stock
Basic net loss per common share is based on the weighted average number of shares outstanding during the periods presented. Diluted earnings per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Common stock equivalents resulting from the issuance of stock options have been considered, but have not been included in the per share calculations because such inclusion would be anti-dilutive due to the Company’s net loss. Common stock issuable is considered outstanding as of the original approval date for purposes of earnings per share computations.
9
BLACKBOX SEMICONDUCTOR, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
Accounts Payable
Accounts payable consisted of the following at:
| | | | |
| | | | |
| | September 30, | | December 31, |
| | 2012 | | 2011 |
Accounts payable | $ | 84,014 | $ | 87,744 |
Accrued payroll | | - | | - |
Total | $ | 84,014 | $ | 93,744 |
Concentration of Risk
A financial instrument which potentially subjects the Company to concentrations of credit risk is cash. The Company places its cash with financial institutions deemed by management to be of high credit quality.
NOTE 5.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2011, the FASB issued ASU 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The update contains the results of the work of the FASB and the International Accounting Standards Board to develop common requirements for measuring fair value and for disclosing fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in this update are effective for periods beginning after December 15, 2011 and as a result are not yet applicable to the Company. The Company is evaluating the impact of the update on its consolidated financial statements.
NOTE 6.
REVERSE ACQUISITION, PRINCIPLES OF CONSOLIDATION – RELATED PARTY
On June 3, 2011, the Company entered into and completed a reverse acquisition following a share exchange agreement (the “Share Exchange”) in which BlackBox Semiconductor, Inc., a Nevada corporation (the accounting acquiree, “BlackBox Parent”) acquired 100% ownership of BlackBox Semiconductor Inc., a Delaware corporation (the accounting acquirer, “BlackBox Subsidiary”) and 14,000,000 shares of the of restricted common stock of Shrink Nanotechnologies, Inc. at a fair value of $729,960, which included a Discount Factor of 35% taken from the quoted market price at the effective date. In exchange, BlackBox Parent issued to Shrink Nanotechnologies, Inc. 27,030,000 shares of common stock representing approximately 19.9% ownership in the Company and $75,000 to be paid by December 31, 2011.
In October, the Company agreed to settle the payable of $75,000 due in December 2011 to Shrink Nanotechnologies, Inc. as related to the Share Exchange for immediate payment of $12,500. This amount was paid on October 25, 2011, and there are no other amounts are due as related to this agreement and the Company recorded a gain of $62,500 related to debt settlement.
The Share Exchange was an interested party transaction as, both the Company and Shrink Nanotechnologies, Inc. are and were indirectly controlled by and affiliated with, Mark L. Baum, a former president and CEO and control person of both companies (“Baum”) and James B. Panther, II, a former director and control person of both companies (“Panther”). These were the same principals that controlled Shrink Nanotechnologies, Inc. Luis Leung, our current CEO and Director, is also a director for Shrink Nanotechnologies, Inc. Given the percentage of ownership of Shrink Nanotechnologies, Inc. and our operating plan to liquidate the shares to raise additional funds, the investment should be accounted for as Available for sale.
The Company did not record a gain or loss related to the Share Exchange. This transaction was accounted for as a reverse acquisition. As a result, all financial information prior to June 3, 2011 is that of BlackBox Subsidiary. Following the merger, a reverse merger adjustment was made to reflect BlackBox Parent’s capital structure. All of the assets and liabilities acquired in the reverse acquisition were recorded at cost.
10
BLACKBOX SEMICONDUCTOR, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
The consolidated balance sheets include the accounts of BlackBox Subsidiary and its wholly owned subsidiary, BlackBox Parent thereby reflecting the transactions related to the June 3, 2011 effective date of the Share Exchange. The consolidated statements of operations include the operations (which consisted mostly of research and development) of the predecessor entity, BlackBox Subsidiary from inception on October 28, 2010 and the Company from June 3, 2011, the effective date of the acquisition of the BlackBox Parent business. All significant intercompany accounts and transactions have been eliminated in consolidation.
The following is a condensed balance sheet disclosing the fair values of the BlackBox Business assets and liabilities acquired.
| | |
| | |
Total assets | $ | 70,077 |
Total liabilities | $ | 343,658 |
Total stockholders’ equity | | (273,581) |
Total liabilities and stockholders’ deficit | $ | 70,077 |
| | | | |
| | | | |
| | For the year ended | | For the year ended |
| | December 31, 2011 | | December 31, 2010 |
| | | | |
Net Loss | $ | (336,665) | $ | (153,508) |
Earnings per share | $ | (0.00) | $ | (0.00) |
NOTE 7.
INTANGIBLE ASSET WRITEDOWN
The Company entered into an exclusive agreement with the University of Chicago on November 30, 2010 wherein the Company licensed the exclusive, worldwide right to use and sublicense Chicago’s patent-pending Materials and Methods for the Preparation of Nanocomposites and future patent applications filed by the University of Chicago based on certain other patentable technologies described in the Chicago License. This intangible asset had a book value of $ 44,853 as of December 31, 2011. The Company does not have adequate capital to meet continuing requirements of the University Chicago License and hence we have been given notice that our license has been terminated. However based on our study of the intellectual property landscape we believe that the company would be better served applying its resources to the development of new intellectual property in the general area of liquid semiconductor technology. As a result, the Company wrote down the full book value of this intangible asset.
NOTE 8.
DUE TO RELATED PARTY
BlackBox Parent previously subleased space from Business Consulting Group Unlimited, Inc. (“BCGU”), an entity co-owned by Baum and Panther pursuant to which the Company leased approximately 3,000 square feet of office and administrative space, as well as use of, among other things, internet, postage, copy machines, electricity, furniture, fixtures etc. at a rate of $2,000 per month. The lease term with BCGU expired October 1, 2009, and continued based on a month to month term thereafter. This agreement was terminated on January 31, 2011. On April 4, 2012, this note was sold to an unrelated third party.
On August 22, 2012, the Company converted $22,000 of accounts payable into 44,000,000 shares of common stock to the CEO of the Company, Luis J. Leung (see Note 12).
NOTE 9.
OTHER PAYABLES – RELATED PARTY
In anticipation of the closing of the Share Exchange, BlackBox Parent began capital raising efforts to meet the $75,000 cash obligation due at closing and other capital funding needs. At the date of the Share Exchange, BlackBox Parent had raised $40,000 as a loan, $20,000 in a sale of stock do Dan Landry which were recorded as founder shares, and following the Share Exchange the Company raised an additional $150,000 in exchange for a bridge promissory note and/or future share issuances of which the terms have not been finalized.
11
BLACKBOX SEMICONDUCTOR, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
The Company received the cash advances from entities that are indirectly controlled by and affiliated with, Mark L. Baum, a former president and CEO and control person of both companies (“Baum”) and James B. Panther, a former director and control person of both companies (“Panther”).
NOTE 10.
CONVERTIBLE NOTES, WARRANTS, COMMITMENTS – RELATED PARTY TRANSACTIONS
We recognize the advantageous value of conversion rights attached to convertible debt. Such rights give the debt holder the ability to convert his debt into common stock at a price per share that is less than the trading price to the public on the day the loan is made to the Company. The beneficial value is calculated as the intrinsic value (the market price of the stock at the commitment date in excess of the conversion rate) of the beneficial conversion feature of debentures. This feature is recorded as a discount to the related debt and an addition to additional paid in capital. The discount is amortized over the remaining outstanding period of related debt using the interest method.
A.
Convertible Note Payable– Related Party Transactions – Partial Conversion
On April 1, 2010 BlackBox Parent issued a 5% convertible note with a principal amount of $36,168 to Noctua Fund Manager, LLC. The note matured on October 1, 2010. The note was issued in exchange for cash advances totaling $36,168. The note held a conversion option, whereby the principal and interest on the note was convertible into shares of our common stock at the conversion price of $.027 (the market price of our stock at the issuance of the note) per share if both: (i) the Company’s authorized common stock has been increased to not less than 1,000,000,000 shares and (ii) the Principal Amount and all interest and penalties accrued have not been paid in full. On January 31, 2011, the Company and Noctua Fund Manager, LLC agreed to amend certain terms found in its 5% Convertible Note agreement. All the previous terms remained unchanged with the exception of the following: the Note became convertible into common stock at a conversion rate of $.00045, the conversion provisions with respect to our authorized share amount and payments were eliminated, the Note’s default provision was cured, the principal amount of the Note was increased to $45,881 to reflect previous accrued interest and in exchange for $7,000 in cash advances owed to Noctua Fund Manager, LLC, and a new maturity date of June 30, 2011.
BlackBox Parent evaluated these modifications to the Note and they have been considered significant in particular the terms of an embedded conversion option. The change in fair value of the embedded conversion option is over the 10 percent of the carrying amount of the original debt instrument immediately before the modification. As result on January 31, 2011, prior to the merger, the Company applied debt extinguishment accounting to record a loss on extinguishment of debt of $45,881. This was recorded as an increase in additional paid in capital and expensed at the time of the note modification.
On March 21, 2011, BlackBox Parent issued 80,000,000 shares of common stock to Noctua Fund Manager, LLC, as conversion of $36,000 of principal balance and accrued interest of this convertible note. On August 30, 2011 the Company received conversion demands for the $6,602 principal balance and accrued interest of $226, the total common share equivalent is 15,173,156. As of September 30, 2012, the remaining balance was $3,179.
Baum and Panther are members of the Noctua Fund Manager, LLC. Noctua Fund Manager, LLC is also a controlling shareholder. The foregoing notes and shares have been transferred to a third party as discussed below and are no longer controlled by said persons.
B.
Convertible Note Payable, Warrants – Related Party Transactions – Converted
BlackBox Parent obtained certain administrative, bookkeeping and management services from Noctua Fund Manager, LLC for a fee of $10,000 per month. On January 31, 2011, BlackBox Parent terminated this operating agreement with Noctua Fund Manager, LLC. On March 15, 2011, the Company issued a $274,000 principal balance convertible note to Noctua Fund Manager, LLC, in exchange for all outstanding debt related to these fees totaling $274,000. The note accrues interest at 2% and matures on March 15, 2012. The note can convert into common stock at a conversion rate of $0.017 per share. Noctua Fund Manager, LLC also received 3,000,000 detachable, callable common stock purchase warrants, exercisable at $.075 a share, these warrants have a maturity date of March 14, 2014. The warrants are exercisable in cash at any time, and, shall be exercisable via cashless exercise commencing nine months after the issuance date.
12
BLACKBOX SEMICONDUCTOR, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
The warrants are valued at $274,000 and were recorded as discount on the issuance. The discount is being accreted over the 12 month life of the note. The warrants were valued using a Black-Scholes valuation model. The variables used in this option-pricing model included: (1) discount rates of 1.08% (2) expected warrant life was 3 years, (3) expected volatility of 300% and (4) zero expected dividends.
On June 15, 2011, the Company issued 12,227,560 shares of common stock as conversion of $209,397 of principal balance and accrued interest of this convertible note. As a result of the early conversion request and subsequent decrease in the principal balance of the note, the discount accretion was accelerated and the Company recognized an expense of $147,654 at the date of share issuance. On August 30, 2011, the Company received conversion demands for the balance due and accrued interest of $375, the total common share equivalent is 3,849,453, at that time the Company recorded the remaining discount accretion of $41,270.
The following summarizes stock purchase warrants at September 30, 2012:
| | | |
| | | |
| | | Weighted Average |
| Amount | | Exercise Price |
Outstanding December 31, 2009 | - | $ | - |
Expired/Retired | - | | - |
Exercised | - | | - |
Issued | - | | - |
Outstanding December 31, 2010 | - | $ | - |
Expired/Retired | - | | - |
Exercised | - | | - |
Issued | 3,000,000 | | 0.075 |
Outstanding December 31, 2011 | 3,000,000 | $ | 0.075 |
Expired/Retired | - | | - |
Exercised | - | | - |
Issued | - | | - |
Outstanding September 30, 2012 | 3,000,000 | $ | 0.075 |
As of September 30, 2012, the Company had a note payable with a remaining principal balance due of $3,600, this note is currently in default due to non-payment is classified as current liabilities on the balance sheet.
NOTE 11.
COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of October 29, 2012, there were no pending or threatened lawsuits.
Other
On January 5, 2011, BlackBox Parent entered into a sublease agreement with a third party. And pursuant to the Share Exchange the Company acquired this lease agreement and leases approximately 64 square foot executive office space at a rate of $96 per month, which includes additional variable charges for telephone and internet usage. The lease term expires on January 5, 2012 and shall create a month to month tenancy thereafter. The Company’s rent expense for the nine months ended September 30, 2012 and 2011 was $1,685 and $0, respectively.
On June 14, 2012, the Company entered into an Intellectual Property Development Agreement with MDB Capital Group, LLC (“MDB”), an investment banking and intellectual property consulting company, whereas MDB will provide intellectual property development research for the Company. The agreement is on an as needed basis and obligates the Company to pay $3,500, plus expenses, for each disclosure package.
On October 15, 2012, the Company and Norman Meier entered into a consulting agreement for services through December 15, 2012 (see Note 14).
13
BLACKBOX SEMICONDUCTOR, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
NOTE 12.
COMMON STOCK
All share amounts have been restated to reflect a 1 for 270 reverse stock split affected on January 15, 2011 and, the subsequent 20 for 1 Forward Split, effected on June 13, 2011.
Pursuant to the reverse merger the Company issued 27,030,000 shares of common stock to Shrink Nanotechnologies, Inc. Reverse merger accounting requires these shares to be shown retroactively as though a stock split had occurred. Therefore this issuance adjusted the initial issuance to the founders at inception.
Pursuant to this same reverse acquisition, the statement of stockholders equity is then adjusted to reflect the shareholders of the public entity (89,415,760 common shares) while establishing the equity of the parent Company. The retained deficit of the parent Company is removed and reorganized to reflect only the history of the subsidiary.
In June 2011, the Company issued 12,227,560 shares of common stock to Noctua Fund Manager, LLC, as conversion of $209,397 of principal balance and accrued interest of a convertible note.
In June 2011, the Company issued 6,750,000 shares of common stock to Dan Landry, in exchange for $20,000 of cash paid to the Company prior to the Share Exchange and as founder shares in the new operations of BlackBox Semiconductor, Inc., a Delaware corporation.
In June 2011, the Company issued 250,000 shares of common stock valued at $12,250 to Ford Sinclair, our president and a member of our board of directors, as payment for services rendered.
In August 2011, the Company received conversion notices related to convertible debt with principal balances totaling $72,148 and accrued interest of $601. The common share equivalent for the conversion demands is equal to 19,022,609 common shares. The shares were issued in October 2011.
On August 22, 2012, the Company converted $22,000 of accounts payable to Luis J. Leung, the CEO of the Company, into 44,000,000 shares of common stock. The shares issued, based on the previous day’s closing price, were valued at $114,400. A loss on conversion of $92,400 was recorded accordingly (see Note 8).
At September 30, 2012, 198,245,929 shares of common stock were issued and outstanding.
NOTE 13.
PREFERRED STOCK
Pursuant to the reverse acquisition, the statement of stockholders equity is adjusted to reflect the preferred shareholders of the public entity (5,000,000 preferred shares) while establishing the equity of the parent Company. The retained deficit of the parent Company is removed and reorganized to reflect only the history of the subsidiary.
At September 30, 2012, the Company was authorized to issue 25,000,000 shares of Preferred Stock, par value $0.001, of which 5,000,000 shares have been issued and are currently outstanding.
The Series A Preferred shares are non-convertible and maintain a 250 for one voting preference such that a holder of the Series A Preferred shall be entitled to vote 250 shares for every one share of Series A Preferred held by such shareholder.
NOTE 14.
SUBSEQUENT EVENTS
On October 15, 2012, the Company and Norman Meier entered into a consulting agreement for services through December 15, 2012. The agreement requires the payment of $2,750 and, if certain obligations are met, the issuance of 150,000 shares of common stock of the Company.
On October 13, 2012, the Company sold 62,500 shares of common stock for $25,000, or $0.40 per share. The previous day’s closing price was $0.15. The Company will recognize a gain on the transaction.
14
Item 2.
Management’s Discussion and Analysis of Financial Condition and Plan of Operations.
This discussion and analysis in this Quarterly Report on Form 10-Q (the “Report” or “Quarterly Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The Report should be read in conjunction with the accompanying Financial Statements and related notes and the Risk Factors contained herein as well as business section. You can reference additional specific risks relating to the Company and disclosure set forth in this report as provided in the “Forward Looking Statements” section in the forepart to this Report and in the “Risk Factors” section in our Annual Report on Form 10-K as supplemented in this Report.
OVERVIEW AND PLAN OF OPERATION
On June 3, 2011 (the “Closing Date”), we completed the closing of its acquisition of BlackBox Semiconductor, Inc., a Delaware corporation (“BlackBox” or sometimes “BlackBox Subsidiary” or “BlackBox Delaware”) from Shrink (Symbol “INKN”) (“Shrink” or the “Seller”), pursuant to a Share Exchange Agreement (the “Share Exchange”) with Shrink (the “BlackBox Acquisition”). Prior to such time we were a retailer of aftermarket Triumph motorcycle parts and accessories. We no longer operate in this segment and do not have material liabilities relating to it. As a result of the BlackBox Acquisition, we succeeded to the Business of BlackBox on June 3, 2011.
As a result of our BlackBox Acquisition, we have succeeded to the business and technology development operations of BlackBox, which now constitute our primary asset and operations. Accordingly, BlackBox is deemed the financial acquirer for accounting related purposes, and in this Management Discussion and Analysis of Financial Condition and Results of Operations, are those of BlackBox, unless the context requires otherwise. At this time, we were in the process of disposing of our Sportbike-customs.com related business.
Description of Business
BlackBox was formed in Delaware on October 28, 2010 by Shrink for the purposes of acquiring and holding certain licenses, specifically, those related to the University of Chicago. We acquired BlackBox under the BlackBox Acquisition effective as of June 3, 2011.
Our primary asset and business immediately after the BlackBox Acquisition is BlackBox and its intellectual property and licenses.
BlackBox Nevada, through its subsidiaries, is a development stage company dedicated to the creation (or development) and aggregation of intellectual property offering innovative methods, materials and infrastructure solutions for a new generation of applications never before possible or cost effective to address some of the greatest challenges of critical national importance that face America and the World today-
·
Energy from the sun, water, and air as a means to better harness clean and inexpensive renewable power- lesser dependent on traditional energy sources.
·
Bio-hazard and environmental sensor systems.
·
Semiconductor technologies that enable efficient displays and next generation lighting.
The Company is in the business of creating and aggregating Intellectual Property in distinct large markets using a process for developing and aggregating IP through partnerships and a methodology of analysis of the existing IP landscape. The Company brings together inventors, scientists, business advisors and an executive team to execute joint development agreements, out license programs, prototype design for potential OEM manufacturers, and the possible sale of Intellectual Property.
Change in Business Strategy in April 2012
We have been deploying capital resources to study the Intellectual Property landscape relating to the use and application of nanoscale liquid semiconductor technology. Based on this research we have determined that our best path forward, given our limited capital, is to pursue an aggressive licensing strategy regarding the use of alternative chemistries and applications relating to the preparation and use of liquid nanoscale semiconductor technology. Pursuant to this strategy, we no longer plan to build research facilities and manufacture a product. Instead we plan to exploit our knowledge of the IP space relating to this technology to identify and patent new applications and chemistries relating to general liquid and printable semiconductor technology. Furthermore we plan to rapidly scale the size of our patent portfolio in order to facilitate licenses to interested parties in the semiconductor space. We have identified methods and partners that will significantly accelerate this process at modest costs. We currently do not have adequate capital to meet our continuing requirements of the University Chicago License and hence we have been given notice that our license has been terminated. However based on our study of the intellectual property landscape we believe that the company would be better served applying its resources to the development of new intellectual property in the general area of liquid semiconductor technology.
15
We have recently begun to follow through on this strategy in filing our first application based provisional patent relating to the use of semiconductor chemistry to address applications in the display and LED space. We have also identified several other application areas in which we plan to aggressively file provisional patents.
In June 2012, the Company contracted with MDB Capital Group, LLC, an investment banking and intellectual property consulting company, to assist the Company in further development of the Company’s intellectual properties as it continues the pursuit of the goals of the Company.
Results of Operations
Three months ended September 30, 2012 compared to the three months September 30, 2011
Revenue
The Company, including its subsidiaries, has not had any revenues during the three months ended September 30, 2012 or 2011, as it is a development stage company.
Operating Expenses
BlackBox had total operating expenses of $17,855 for the three months ended September 30, 2012 as compared to $63,504 from the same period in 2011.
General and Administrative Expenses.
Our general and administration expenses decreased to $6,580 for the three months ended September 30, 2012 as compared to $42,050 for the same period in 2011. This decrease was mainly due to the Company decreasing its expenses in conjunction with its decreased activities.
Professional Fees. Professional fees are generally related to public company reporting and governance expenses as well as costs related to our acquisition. Our costs for professional fees decreased to $11,275 for the three months ended September 30, 2012, as compared to $20,125 for the same period in 2011. The change was due to an increase in legal costs and accounting fees.
Interest Expense. Interest expense decreased to $135 for the three months ended September 30, 2012 as compared to $46,748 for the same period in 2011.
Net Loss
For the three months ended September 30, 2012, we had a net loss of $110,390, as compared to $110,252 for the same period in 2011. The Company recognized $92,400 as a loss on conversion of debt into stock for the three months ended September 30, 2012.
Nine months ended September 30, 2012 compared to the nine months September 30, 2011
Revenue
The Company, including its subsidiaries, has not had any revenues during the nine months ended September 30, 2012, as it is a development stage company.
Operating Expenses
BlackBox had total operating expenses of $54,620 for the nine months ended September 30, 2012 as compared to $135,485 from the same period in 2011.
General and Administrative Expenses
Our general and administration expenses decreased to $22,345 for the nine months ended September 30, 2012 as compared to $82,244 for the same period in 2011. This decrease was mainly due to the Company decreasing its expenses in conjunction with its decreased activities.
Professional Fees. Our costs for professional fees decreased to $32,275 for the nine months ended September 30, 2012, as compared to $49,300 for the same period in 2011. The change was due to the change in the business of the Company offset by the increased costs associated with the fees associated with being a public corporation.
16
Interest Expense . Interest expense decreased to $405 for the nine months ended September 30, 2012 as compared to $217,441 for the same period in 2011.
Net Loss
For the nine months ended September 30, 2012, we had a net loss of $147,425 as compared to $352,926 for the same period in 2011. Management attributes the decrease in net loss due to a decrease in operational and research activities offset by the loss on conversion of debt into stock, $92,400.
We anticipate continued losses relating to investment into our development activities relating to BlackBox, and to our capital raising activities. We intend to fund our technology development activities, through potential government grants, partnerships and arrangements with universities and equity and debt financings.
We expect operating expenses to continue as we invest further in business development activities and invest into research and development of our core technologies. We do not have capital commitments yet to cover any of our operating expenses and to date. To date, our capital needs for BlackBox have been funded by our principals, and private convertible debt financing.
We have limited cash on hand, and to the extent we are able to negotiate with parties with whom we enter into business agreements with to accept stock in lieu of cash, these issuances could dilute the ownership of our shareholders.
Liquidity and Capital Resources
Our cash on hand at September 30, 2012 was $4,042. We have historically met our cash needs through financing. Our cash requirements are generally for selling, general and administrative activities. We believe that our cash balance is not sufficient to finance our cash requirements for expected operational activities (see “Need for Additional Capital” below).
Net cash used in operating activities was $36,350 for the nine months ended September 30, 2012, as compared to $102,587 provided in operating activities during the same period in 2011. The change in net cash used in operating activities was mainly due to legal and accounting expenses.
Net cash provided in investing activities for the nine months ended September 30, 2012 was $0 compared to $23,992 for the same period in 2011 was $0.
Net cash provided by financing activities for the nine months ended September 30, 2012 was $0 and $150,619 for the same period in 2011 was $0. Management will look toward raising further capital through financing activities during the fiscal year ended 2012.
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Because of the Company has not yet generated revenues and the excess of current liabilities over current assets at the period ended, there is substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on obtaining additional outside financing. The Company has funded losses from operations primarily from the issuance of debt. The Company believes that the issuance of debt will continue to fund operating losses in the short-term until the Company can generate revenues sufficient to fund its operations.
We intend to retain any future earnings to retire any existing debt, finance the expansion of our business and any necessary capital expenditures, and for general corporate purposes.
Our expectations are based on certain assumptions concerning the anticipated costs associated with any new projects. These assumptions concern future events and circumstances that our officers believe to be significant to our operations and upon which our working capital requirements will depend. Some assumptions will invariably not materialize and some unanticipated events and circumstances occurring subsequent to the date of this Report. We will continue to seek to fund our capital requirements over the next 12 to 24 months from the additional sale of our securities and possibly through the sale of Shrink stock; however, it is possible that we will be unable to obtain sufficient additional capital through the sale of our and Shrink’s securities as needed.
The amount and timing of our future capital requirements will depend upon many factors, including the level of cash needed to continue our research program, fulfill our obligations under license agreements, or fund initial production efforts.
We intend to retain future earnings, if any, to retire any existing debt, finance the expansion of our business and any necessary capital expenditures, and for general corporate purposes.
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Going Concern
The accompanying financial statements have been prepared assuming we will continue as a going concern. We have had substantial operating losses for the past years and are dependent upon outside financing to continue operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. It is management’s plan to raise necessary funds from shareholders to satisfy the expense requirements of the Company.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures. We base our estimates on historical experience and various other 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. Actual results may differ from these estimates. The significant accounting policies that are believed to be the most critical to fully understanding and evaluating the reported financial results include recoverability of intangible assets, the recovery of deferred income tax assets and share-based compensation.
Our intangible assets consist principally of intellectual properties such as licensing rights and provisional patents. We are currently amortizing certain intangible assets using the straight line method based on an estimated legal life, of eight years. We (our BlackBox subsidiary prior to the BlackBox Acquisition) began amortization of the electric glue related intangibles in December 2010 since the license agreement finalized and patent filings were first being filed. The Company will re-evaluate its amortization practice once products related to these patents are put into full production. When our products are placed in full production we can better evaluate market demand for our technology.
We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or indicate that impairment exists. Once our intellectual property is placed into productive service, we expect to utilize a net present value of future cash flows analysis to calculate carrying value after an impairment determination.
The Company strives to save liquid capital by paying for services or satisfying liabilities, whenever able, by issuance of stock and stock options to consultants and services providers. We also may grant stock options, restricted stock units and restricted stock to directors and consultants.
We measure compensation cost for all stock-based awards at fair value on date of grant and recognize compensation over the requisite service period for awards expected to vest. The fair value of restricted stock and restricted stock units is determined based on the number of shares granted and the quoted price of our common stock on the date of grant. The determination of grant-date fair value for stock option awards is estimated using a Black-Scholes model, which includes variables such as the expected volatility of our share price, the anticipated exercise behavior of our employees, interest rates, and dividend yields. These variables are projected based on our historical data, experience, and other factors. Changes in any of these variables could result in material adjustments to the expense recognized for share-based payments.
Such value is recognized as an expense over the requisite service period, net of estimated forfeitures, using the straight-line attribution method. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
As part of the process of preparing our financial statements, we must estimate our actual current tax liabilities together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the balance sheet. We must assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, a valuation allowance must be established. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, the impact will be included in the tax provision in the statement of operations.
Off Balance Sheet Financings
The Company does not have any off balance sheet arrangements or financings.
Item 3. Quantitative and qualitative disclosures about market risk.
As the Company is a “smaller reporting company,” this item is inapplicable.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2011, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures are not effective to satisfy the objectives for which they are intended.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Exchange Act defines internal control over financial reporting as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
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Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
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Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
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Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management has not assessed the effectiveness of our internal control over financial reporting as of December 31, 2011 as set forth in the report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Due to the December 2011 change in management, as well as other factors, it is assumed that our internal controls over financial reporting are not effective at the reasonable assurance level based on those criteria, due to the following weakness described below.
Insufficient segregation of duties in our finance and accounting functions due to limited personnel. During the year ended December 31, 2011, the company internally performed all aspects of our financial reporting process, including, but not limited to, access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements. Due to the fact these duties were performed oftentimes by the same people, a lack of review was created over the financial reporting process that might result in a failure to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures as filed with the SEC. These control deficiencies could result in a material misstatement to our interim or annual financial statements that would not be prevented or detected.
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Insufficient corporate governance policies. Although we have a code of ethics which provides broad guidelines for corporate governance, our corporate governance activities and processes are not always formally documented. Specifically, decisions made by the board to be carried out by management should be documented and communicated on a timely basis to reduce the likelihood of any misunderstandings regarding key decisions affecting our operations and management.
We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies and we intend to consider the results of our remediation efforts and related testing as part of our next year-end assessment of the effectiveness of our internal control over financial reporting. The Company intends on further staffing and adapting this committee if and as new qualified board members with accounting experience or knowledge are appointed from time to time.
This quarterly report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the first quarter of fiscal year 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Item 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of November 5, 2012, there were no pending or threatened lawsuits.
Item 2. Unregistered Sales of Equity Securities and Use o Proceeds.
On August 22, 2012, the Company issued 44,000,000 shares of common stock to the CEO of the Company as a settlement of accounts payable.
On October 13, 2012, the Company sold 62,500 shares of common stock for $25,000.
The Securities were issued pursuant to exemptions from registration requirements relying on Section 4(2) of the Securities Act of 1933 and upon Rule 506 of Regulation D of the Securities Act of 1933.
Item 3. Default on Senior Securities.
We are in default on payment of interest and principal upon the following note: 5% Convertible Note with a remaining principal amount of $3,179 owed to AF Fund, a copy of the note which was filed as an exhibit to this report as incorporated from our Form 8-K filed with the SEC on March 28, 2011. During the default period this note accrues interest at an accelerated rate of 15% with a total of approximately $3,660 of principal and interest due at October 31, 2011. No enforcement actions have been taken by the holder of this note as against the Company at this time.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information
None.
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Item 6. EXHIBITS
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Exhibit # | Title |
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3.1(i) | Articles of Incorporation. (Attached as an exhibit to our Form 10-SB filed with the SEC on December 17, 2007 and incorporated herein by reference). |
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3.1(ii) | Certificate of Amendment to Articles of Incorporation dated July 7, 2003 (Attached as an exhibit to our Form 10-SB filed with the SEC on December 17, 2007 and incorporated herein by reference). |
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3.1(iii) | Certificate of Amendment, filed June 9, 2011, relating to Forward Split (Incorporated by reference from Exhibit 3.1 to Current Report on Form 8-K, Date of Event June 3, 2011) |
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3.2 | Bylaws (Attached as an exhibit to our Form 10-SB filed with the SEC on December 17, 2007 and incorporated herein by reference). |
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10.1 | Letter of Intent, dated February 23, 2011, among the Registrant, Shrink Nanotechnologies, Inc. and BlackBox Semiconductor, Inc. (Delaware) (Attached as an exhibit to our Form 8-K filed with the SEC on March 28, 2011and incorporated herein by reference). |
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10.2 | Loan Modification Letter, dated January 31, 2011, between the Registrant and Noctua Fund Manager, LLC (Attached as an exhibit to our Form 8-K filed with the SEC on March 28, 2011and incorporated herein by reference). |
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10.3 | Amended Secured Convertible Promissory Note issued to Noctua Fund Manager, LLC on January 31, 2011 (Attached as an exhibit to our Form 8-K filed with the SEC on March 28, 2011and incorporated herein by reference). |
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10.4 | Letter Agreement, dated March 15, 2011, between the Registrant and Noctua Fund Manager, LLC (Attached as an exhibit to our Form 8-K filed with the SEC on March 28, 2011and incorporated herein by reference). |
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10.5 | Unsecured Convertible Promissory Note issued to Noctua Fund Manager, LLC on March 15, 2011 (Attached as an exhibit to our Form 8-K filed with the SEC on March 28, 2011and incorporated herein by reference). |
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10.6 | Consulting Agreement, dated February 15, 2011, between the Registrant and David Duncan (Attached as an exhibit to our Form 8-K filed with the SEC on March 28, 2011and incorporated herein by reference). |
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10.7 | Share Exchange Agreement between the Company, BlackBox Semiconductor, Inc., and Shrink Nanotechnologies, Inc, as seller, dated as of June 3, 2011. (Incorporated by reference from Exhibit 10.1 to Current Report on Form 8-K, Date of Event June 3, 2011) |
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10.8 | BlackBox Semiconductor, Inc. 2011 Stock Incentive Plan, adopted June 13, 2011. (Incorporated by reference from Exhibit 10.2 to Current Report on Form 8-K, Date of Event June 3, 2011). |
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10.9 | License Agreement between Shrink Nanotechnologies, Inc., BlackBox Semiconductor, Inc., and the University of Chicago, dated as of November 30, 2011. (Incorporated by reference from Exhibit 10.3 to Current Report on Form 8-K, Date of Event June 3, 2011). |
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14.1 | Code of Ethics. (Attached as an exhibit to our Form 10-KSB filed with the SEC on October 14, 2008 and incorporated herein by reference). |
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21 | Subsidiaries |
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31.1 | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 | Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 | Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Signatures
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf on November 19, 2012, by the undersigned, thereunto duly authorized.
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| BLACKBOX SEMICONDUCTOR, INC. |
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| /s/ Luis Leung |
By: | By: Luis Leung |
Its: | Its: Chief Executive Officer and Principal Accounting Officer |
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