As Filed With the Securities and Exchange Commission on December 6, 2021November 7, 2022
Registration Number 333-256785
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 12
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DATA443 RISK MITIGATION, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 7372 | 86-0914051 | ||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
101 J Morris Commons Lane4000 Park Drive, Suite 105400
MorrisvilleResearch Triangle Park, NC 2756027709
((919)919) 858-6542526-1070
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)
Jason Remillard
President and Chief Executive Officer
101 J Morris Commons Lane,4000 Park Drive, Suite 105400
Morrisville,Research Triangle Park, NC 2756027709
(919) 858-6542443-0654
(Name, address, including zip code, and telephone number, including area code, of agent for service)
With Copies to:
| M. Ali Panjwani |
| Ralph V. De Martino | |
| Pryor Cashman LLP | ArentFox Schiff LLP | ||
| 7 Times Square | 1717 K Street | ||
| New York, New York 10036 | Washington, DC 20006 | ||
| 202-724-6848 | |||
| 919-526-1070 x136 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
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 | [X] | ||
| Smaller reporting company | [X] | ||
| Emerging growth company | [X] |
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 7(a)(2)(B) of the Securities Act. [ ]
CALCULATION OF REGISTRATION FEE
Proposed Maximum | ||||||||
| Aggregate | Amount of | |||||||
| Title of Each Class of Securities to be Registered | Offering Price(1)(2) | Registration Fee(3) | ||||||
| Units consisting of shares of Common Stock, par value $0.001 per share, and | ||||||||
| Warrants to purchase shares of Common Stock, par value $0.001 per share(2) | $ | 13,800,000 | $ | 1,279.26 | ||||
| Common Stock included as part of the Units | — | — | ||||||
| Warrants to purchase shares of Common Stock included as part of the Units(4) | — | — | ||||||
| Shares of Common Stock issuable upon exercise of the Warrants(5)(6) | $ | 13,800,000 | $ | 1,279.26 | ||||
| Underwriter’s Warrants(7) | — | — | ||||||
| Shares of Common Stock issuable upon exercise of the Underwriter’s Warrants(8) | $ | 960,000 | $ | 88.99 | ||||
| TOTAL: | $ | 28,560,000 | $ | 2,647.51 | (9) | |||
| |
|
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.
| PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION | DATED |
The information in this preliminary Prospectus is not complete and may be changed. TheseNeither we nor the selling stockholders may sell these securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.
2,891,566 Units
Each Unit Consisting of
One Share of Common Stock and
One Warrant to Purchase One Share of Common Stock
DATA443 RISK MITIGATION, INC.
ALL THINGS DATA SECURITY™
This is a firm commitment for an underwritten public offering of units (the “Units”), based on an assumed initial offering price of $4.15$ per Unit, of DATA443 RISK MITIGATION, INC., a Nevada corporation (alternatively, the “Company”; “we”; “us”; “our”). We anticipate a public offering price of $4.15$ per Unit. Each Unit consists of one share of common stock, $0.001 par value per share, and one warrant (each, a “Warrant” and collectively, the “Warrants”) to purchase one share of common stock at an exercise price of $4.15$ per share, constituting 100% of the price of each Unit sold in this offering based on an assumed initial offering price of $4.15$ per Unit. The Units have no stand-alone rights and will not be certificated or issued as stand-alone securities. The shares of common stock and the Warrants comprising the Units are immediately separable and will be issued separately in this offering. Each Warrant offered hereby is immediately exercisable on the date of issuance and will expire five years from the date of issuance. This offering also includes the shares of common stock issuable from time to time upon exercise of the Warrants.
We have also registered for public sale 931,000 shares of common stock held by 37 selling stockholders (the selling stockholders referred to herein as the “Selling Stockholders”). We will not receive any of the proceeds from the sale of Common Stock by the Selling Stockholders. The shares to be sold by the Selling Stockholders (the “Selling Stockholder Shares”) will not be purchased by the underwriters or otherwise included in the underwritten offering of our Units in this public offering. The Selling Stockholders may sell or otherwise dispose of their shares in a number of different ways and at varying prices, but will not sell any Selling Stockholder Shares until after the closing of this offering. See “Selling Stockholders—Plan of Distribution.” We will pay all expenses (other than discounts, concessions, commissions and similar selling expenses, if any) relating to the registration of the Selling Stockholders’ shares of Common Stock with the U.S. Securities and Exchange Commission.
Our common stock is quoted on the OTC Link LLC quotation system operated by OTC Markets, Group, Inc., under the symbol “ATDS” on the OTC Pink Sheets tier. On December 3, 2021,November 4, 2022, the reported closing price of our Common Stock was $1.40$2.24 per share. We have applied to list our common stock and warrantsWarrants on theThe Nasdaq Capital Market under the symbols “ATDS” and “ATDSW”, respectively. No assurance can be given that our application will be approved or that the trading prices of our common stock on the OTC Pink Sheets tier will be indicative of the prices of our common stock if our common stock were traded on theThe Nasdaq Capital Market. The approval of our listing on theThe Nasdaq Capital Market is a condition of closing this offering.
The offering price of the Units has been determined between the Underwriterunderwriter and us, considering our historical performance and capital structure, prevailing market conditions, and overall assessment of our business, and may be at a discount to the current market price.
On February 19, 2021, our shareholders approved a reverse split of our outstanding shares of common stock by a ratio within the range of 10-to-1 to 2,000-to-1, to be effective at the ratio and date to be determined by our Board of Directors. On June 10, 2021, the Company filed a Certificate of Amendment to the Articles of Incorporation (the “Certificate of Amendment”) which served to (i) reduce the number of authorized shares of common stock to one billion (1,000,000,000); and, (ii) effect a reverse stock split (the “Reverse Stock Split”) of its issued common stock in a ratio of 1-for-2,000. The preferred stock of the Company was not changed. The 1-for-2,000 Reverse Stock split was processed by FINRA and became effective at the start of trading on July 1, 2021. As a result of the Reverse Stock Split, every 2,000 shares of the Company’s issued and outstanding common stock, par value $0.001 per share, were converted into one (1) share of common stock, par value $0.001 per share. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would be entitled to receive fractional shares because they hold a number of pre-Reverse Stock Split shares of the Company’s common stock not evenly divisible by 2,000 had the number of post-Reverse Stock Split shares of the Company’s common stock to which they are entitled rounded up to the nearest whole number of shares of the Company’s common stock. No stockholders received cash in lieu of fractional shares. Unless otherwise noted, the share and per share information in this Prospectus reflects the Reverse Stock Split.
Investing in our Common Stockcommon stock involves a high degree of risk. This offering is highly speculative and these securities involve a high degree of risk and should be considered only by persons who can afford the loss of their entire investment. You should carefully review carefully the risks and uncertainties described under the heading “Risk Factors” beginning on page 138 of this Prospectus, and under similar headings in any amendments or supplements to this Prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
| Per Unit | Total | |||||||
| Offering price | $ | $ | ||||||
| Underwriting discount and commissions (1) | $ | $ | ||||||
| Proceeds to us before offering expenses (2) | $ | $ | ||||||
| (1) | We have also agreed to issue warrants to purchase shares of our common stock to the |
| (2) | The amount of offering proceeds to us presented in this table does not give effect to any exercise of the: (i) over-allotment option (if any) we have granted to the |
We have granted a 45-day option to the Underwriter,underwriter, exercisable one or more times in whole or in part, to purchase up to an additional 433,735 shares of common stock and/or 433,735 additional warrantsWarrants at the public offering price of $4.15$ per share, less, in each case, the underwriting discounts payable by us, in any combination solely to cover over-allotments, if any. If the Underwriterunderwriter exercises the option in full, the total underwriting discounts and commissions payable will be $ , and the total proceeds to us, before expenses, will be $ .
The Underwriterunderwriter expects to deliver the securities against payment to the investors in this offering on or about ___________, __, 2021., 2022.
Sole Book-Running Manager
MAXIM GROUP LLCDAWSON JAMES SECURITIES, INC.
The date of this Prospectus is _____ __, 2021, 2022
DATA443 RISK MITIGATION, INC.
“ALL THINGS DATA SECURITY”™SECURITY™
TABLE OF CONTENTS
In this Prospectus, “we”; “us”; “our”; the “Company”; the “company”; and “ATDS” refer to DATA443 RISK MITIGATION, INC., a Nevada corporation, and where appropriate, its subsidiaries, unless expressly indicated or the content requires otherwise.
ABOUT THIS PROSPECTUS
You should rely only on information contained in this Prospectus. We have not, and the Underwriterunderwriter has not, authorized anyone to provide you with additional information or information different from that contained in this Prospectus. Neither the delivery of this Prospectus nor the sale of our securities means that the information contained in this Prospectus is correct after the date of this Prospectus. This Prospectus is not an offer to sell or the solicitation of an offer to buy our securities in any circumstances under which the offer or solicitation is unlawful or in any state or other jurisdiction where the offer is not permitted.
For investors outside the United States: Neither we nor the Underwriterunderwriter have taken any action that would permit this offering or possession or distribution of this Prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this Prospectus must inform themselves about, and observe any restrictions relating to, the offering of the securities covered hereby and the distribution of this Prospectus outside of the United States.
The information in this Prospectus is accurate only as of the date on the front cover of this Prospectus. Our business, financial condition, results of operations and prospects may have changed since those dates.
No person is authorized in connection with this Prospectus to give anyWe are responsible for the information or to make any representations about us, the securities offered hereby or any matter discussedcontained in this Prospectus other thanand in any free-writing prospectus we prepare or authorize. We have not, the Selling Stockholders have not, and the underwriters have not, authorized anyone to provide you with different information, and representations contained in this Prospectus. Ifwe take no, the Selling Stockholders take no, and the underwriters take no, responsibility for any other information others may give you. If anyone provides you with different or representation is given or made, suchinconsistent information, or representation mayyou should not be relied upon as having been authorized by us.
Neither we norrely on it. We are not, the Underwriter have done anything that would permit this offering or possession or distribution of this ProspectusSelling Stockholders are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where action forthe offer or sale is not permitted. You should not assume that purposethe information contained in this prospectus is required,accurate as of any date other than the United States. You are required to inform yourself about, and to observe any restrictions relating to, this offering anddate on the distribution of this Prospectus.
Information contained in, and that can be accessed through, our web site, www.data443.com, does not constitute partfront of this Prospectus.
This Prospectus includes market and industry data that has been obtained from third partythird-party sources, including industry publications, as well as industry data prepared by our management on the basis of its knowledge of and experience in the industries in which we operate (including our management’s estimates and assumptions relating to such industries based on that knowledge). Management’s knowledge of such industries has been developed through its experience and participation in these industries. While our management believes the third-party sources referred to in this Prospectus are reliable, neither we nor our management have independently verified any of the data from such sources referred to in this Prospectus or ascertained the underlying economic assumptions relied upon by such sources. Internally prepared and third-party market forecasts in particular are estimates only and may be inaccurate, especially over long periods of time. In addition, the Underwriterunderwriter has not independently verified any of the industry data prepared by management or ascertained the underlying estimates and assumptions relied upon by management. Furthermore, references in this Prospectus to any publications, reports, surveys, or articles prepared by third parties should not be construed as depicting the complete findings of the entire publication, report, survey, or article. The information in any such publication, report, survey, or article is not incorporated by reference in this Prospectus.
| 1 |
INFORMATION PROSPECTUS SUMMARY
This summary highlights selected information about this offering and the information included elsewhere in this Prospectus. This summary does not contain all of the information that you should evaluate and consider before investing in our securities. You should carefully read, consider, and evaluate this entire Prospectus, especially the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included herein, including the notes thereto, before making an investment decision.
Company Organization
Data443 Risk Mitigation, Inc. was original incorporated under the name LandStar, Inc. as a Nevada corporation on May 4, 1998, for the purpose of purchasing, developing, and reselling real property, with its principal focus on the development of raw land. From incorporation through December 31, 1998, LandStar had no business operations and was a development-stage company. LandStar did not purchase or develop any properties and decided to change its business plan and operations. On March 31, 1999, the Company acquired approximately 98.5% of the common stock of Rebound Rubber Corp. pursuant to a share exchange agreement with Rebound Rubber Corp. (“Rebound Rubber”) and substantially all of Rebound Rubber’s shareholders. The acquisition was effected by issuing 14,500,100 shares of common stock, which constituted 14.5% of the 100,000,000 authorized shares of LandStar, and 50.6% of the 28,622,100 issued and outstanding shares on completion of the acquisition (all numbers in this paragraph do not reflect either the 2019 1:750 reverse stock split or the Reverse Stock Split). The acquisition was treated for accounting purposes as a continuation of Rebound Rubber under the LandStar capital structure. If viewed from a non-consolidated perspective, on March 31, 1999 LandStar issued 14,500,100 shares for the acquisition of the outstanding shares of Rebound Rubber.
The share exchange with Rebound Rubber (and other transactions occurring in March 1999) resulted in a change of control of LandStar and the appointment of new officers and directors of the Company. These transactions also redefined the focus of the Company on the development and exploitation of the technology to de-vulcanize and reactivate recycled rubber for resale as a raw material in the production of new rubber products. The Company’s business strategy was to sell the de-vulcanized material (and compounds using the materials) to manufacturers of rubber products.
Prior to 2001 the Company had no revenues. In 2001 and 2002 revenues were derived from management services rendered to a rubber recycling company.
In August 2001 the Company amended its Articles of Incorporation (the “Articles”) to authorize 500,000,000 shares of common stock, $0.001 par value; and, 150,000,000 shares of preferred stock, $0.01 par value. Preferred shares could be designated into specific classes and issued by action of the Company’s Board of Directors. In May 2008 the Company’s Board established a class of Convertible Preferred Series A (the “Series A”), authorizing 10,000,000 shares. The Series A provided for, among other things, (i) each share of Series A was convertible into 1,000 shares of the Company’s common stock; and, (ii) a holder of Series A was entitled to vote 1,000 shares of common stock for each share of Series A on all matters submitted to a vote by shareholders.
In September 2008 the Company amended its Articles to increase the number of authorized shares to 985,000,000, $0.001 par value. In January 2009 the Company amended its Articles to increase the number of authorized shares to 4,000,000,000, $0.001 par value. In January 2010 the Company once again amended its Articles to increase the number of authorized shares to 8,888,000,000, $0.001 par value.
Prior to 2008, the Company’s last filing of financial information with the SEC was the Form 10-QSB it filed on December 19, 2002 for the quarter ended 30 September 2002. No other filings were effected with the SEC until the Company filed a Form 15 May 19, 2008, which terminated the Company’s filing obligations with SEC.
The Company was effectively dormant for a number of years. In or around February 2014 there was a change in control when Kevin Hayes acquired 1,000,000 shares of the Series A (without giving effect to either the 2019 1:750 reverse stock split or the Reverse Stock Split), and was appointed as the sole director and officer. In or around April 2017 there was another change in control when Kevin Hayes sold the 1,000,000 shares of Series A to Hybrid Titan Management, which then proceeded to assign the Series A to William Alessi. Mr. Alessi was then appointed as the sole director and officer of the Company. Mr. Alessi initiated legal action in his home state of North Carolina to confirm, among other things, his ownership of the Series A; his “control” over the Company; and, the status of creditors of the Company. In or around June 2017 the court entered judgment in favor of Mr. Alessi.
In or around July 2017, while under the majority ownership and management of Mr. Alessi, the Company sought to effect a merger transaction (the “Merger”) under which the Company would be merged into Data443 Risk Mitigation, Inc. (“Data443”). Data443 was formed as a North Carolina corporation in July 2017 under the original name LandStar, Inc. The name of the North Carolina corporation was changed to Data443 in December 2017. In November 2017 the controlling interest in the Company was acquired by our current chief executive officer and sole board member, Jason Remillard, when he acquired all of the Series A shares from Mr. Alessi. In that same transaction Mr. Remillard also acquired all of the shares of Data443 from Mr. Alessi. Mr. Remillard was then appointed as the sole director and sole officer of the Company, and of Data443. Initially, Mr. Remillard sought to recognize the Merger initiated by Mr. Alessi and respect the results of the Merger. The Company relied upon documents previously prepared and proceeded as if the Merger had been effected.
In January 2018 the Company acquired substantially all of the assets of Myriad Software Productions, LLC, which is owned 100% by Mr. Remillard. Those assets were comprised of the software program known as ClassiDocs, and all intellectual property and goodwill associated therewith. This acquisition changed the Company’s status to no longer being a “shell” under applicable securities rules. In consideration for the acquisition, the Company agreed to a purchase price of $1,500,000 comprised of (i) $50,000 paid at closing; (ii) $250,000 in the form of our promissory note; and, (iii) $1,200,000 in shares of our common stock, valued as of the closing, which equated to 1,200,000,000 shares of our common stock (without giving effect to either the 2019 1:750 reverse stock split or the Reverse Stock Split). The shares have not yet been issued and are not included as part of the issued and outstanding shares of the Company. However, these shares have been recorded as additional paid in capital within our consolidated financial statements for the period ending 30 June 2018.
In April 2018 the Company amended the designation for its Series A Preferred Stock by providing that a holder of Series A was entitled to (i) vote 15,000 shares of common stock for each share of Series A on all matters submitted to a vote by shareholders; and, (ii) convert each share of Series A into 1,000 shares of our common stock.
In May 2018 the Company amended and restated its Articles. The total authorized number of shares is: 8,888,000,000 shares of common stock, $0.001 par value; and, 50,000,000 shares of preferred stock, $0.001 par value, designated in the discretion of the Board of Directors. The Series A remains in full force and effect.
In June 2018, after careful analysis and in reliance upon professional advisors retained by the Company, it was determined that the Merger had, in fact, not been completed, and that the Merger was not in the best interests of the Company and its shareholders. As such, the Merger was legally terminated. In place of the Merger, in June 2018 the Company acquired all of the issued and outstanding shares of stock of Data443 (the “Share Exchange”). As a result of the Share Exchange, Data443 became a wholly-owned subsidiary of the Company, with both the Company and Data443 continuing to exist as corporate entities. The finances and business conducted by the respective entities prior to the Share Exchange will be treated as related party transactions in anticipation of the Share Exchange. As consideration in the Share Exchange, we agreed to issue to Mr. Remillard: (a) One hundred million (100,000,000) shares of our common stock; and (b) On the eighteen (18) month anniversary of the closing of the Share Exchange (the “Earn Out Date”), an additional 100,000,000 shares of our common stock (the “Earn Out Shares”) provided that Data 443 has at least an additional $1 million in revenue by the Earn Out Date (not including revenue directly from acquisitions). The aforementioned share numbers in this paragraph do not give effect to either the 2019 1:750 reverse stock split or the Reverse Stock Split. None of our shares of our common stock to be issued to Mr. Remillard under the Share Exchange have been issued. As such, none of said shares are included as part of the issued and outstanding shares of the Company. However, the shares committed to Mr. Remillard have been recorded as common shares issuable and included in additional paid-in capital and the earn out shares have been reflected as a contingent liability for common stock issuable within the consolidated financial statements as of December 31, 2019.
On or about June 28, 2018 we secured the rights to the WordPress GDPR Framework through our wholly owned subsidiary Data443 for a total consideration of €40,001, or $46,521, payable in four payments of €10,000, with the first payment due at closing, and the remaining payments issuable at the end of July, August and September, 2018. All of the payments were made and upon issuance of the final payment, we have the right to enter into an asset transfer agreement for the nominal cost of one euro (€1).
On or about October 22, 2018 we entered into an asset purchase agreement with Modevity, LLC (“Modevity”) to acquire certain assets collectively known as ARALOC™, a software-as-a service (“SaaS”) platform that provides cloud-based data storage, protection, and workflow automation. The acquired assets consist of intellectual and related intangible property including applications and associated software code, and trademarks. While the Company did not acquire any of the customers or customer contracts of Modevity, the Company did acquire access to books and records related to the customers and revenues Modevity created on the ARALOC™ platform as part of the asset purchase agreement. These assets were substantially less than the total assets of Modevity, and revenues from the platform comprised a portion of the overall sales of Modevity. We are required to create the technical capabilities to support the ongoing operation of this SaaS platform. A substantial effort on the part of the Company is needed to continue generating ARALOC™ revenues through development of a sales force, as well as billing and collection processes. We paid Modevity (i) $200,000 in cash; (ii) $750,000, in the form of our 10-month promissory note; and, (iii) 110 shares of our common stock. In July 2020 the Company completed all payments due to Modevity under the asset purchase agreement.
On or around February 7, 2019, the Company entered into an Exclusive License and Management Agreement (the “License Agreement”) with Wala, Inc. (“Wala”). Under the License Agreement the Company was granted the exclusive right and license to receive all benefits from the marketing, selling, and licensing of the data archiving platform known as ArcMail and all assets related thereto (the “ArcMail Assets”). In connection with the License Agreement, the Company also executed (i) a Stock Rights Agreement, under which the Company had the right to acquire all shares of stock of Wala; and, (ii) a Business Covenants Agreement, under which Wala and its CEO agreed to not compete with the Company’s use of the ArcMail assets for a designated period of time. The Company has not purchased any outstanding shares under the Stock Purchase Rights Agreement. The License Agreement, Stock Rights Agreement, and Business Covenants Agreement are collectively referred to herein as the “ArcMail Agreements”).
On June 21, 2019, the Company filed an amendment to its articles of incorporation to increase the total number authorized shares of the Company’s common stock, par value $0.001 per share, from 8,888,000,000 shares to 15,000,000,000 shares.
On September 16, 2019, the Company entered into an Asset Purchase Agreement with DMBGroup, LLC to acquire certain assets collectively known as DataExpress®, a software platform for secure sensitive data transfer within the hybrid cloud. The total purchase price of approximately $2.8 million consists of: (i) a $410,000 cash payment at closing; (ii) a promissory note in the amount of $940,000, payable in the amount of $41,661 over 24 monthly payments starting on October 15, 2019, accruing at a rate of 6% per annum; (iii) assumption of approximately $98,000 in liabilities and, (iv) approximately 1,233 shares of our common stock.
On October 14, 2019, the Company filed an amendment to its Articles to change its name to Data443 Risk Mitigation, Inc., and to effect a 1-for-750 reverse stock split of its issued and outstanding shares of common and preferred shares, each with $0.001 par value, and to reduce the numbers of authorized common and preferred shares to 60,000,000 and 337,500, respectively. On October 28, 2019, the name change and the split and changes in authorized common and preferred shares was effected, resulting in approximately 7,282,678,714 issued and outstanding shares of the Company’s common stock to be reduced to approximately 9,710,239, and 1,000,000 issued and outstanding shares of the Company’s preferred shares to be reduced to 1,334 as of October 28, 2019. All per share amounts and number of shares, including the authorized shares, in the consolidated financial statements and related notes have been retroactively adjusted to reflect the October 2019 1-for 750 reverse stock split and decrease in authorized common and preferred shares.
On March 5, 2020 the Company amended its Articles to increase the number of shares of authorized common stock to 250,000,000. On April 15, 2020 the Company further amended its Articles of Incorporation to increase the number of shares of authorized common stock to 750,000,000. On August 17, 2020 the Company again amended its Articles of Incorporation to increase the number of shares of authorized common stock to 1.5 billion. On November 25, 2020 the Company filed a Certificate of Designation to authorize and create its Series B Preferred shares, consisting of 80,000 shares. On December 15, 2020 the Company again amended its Articles of Incorporation to increase the number of shares of authorized common stock from 1.5 billion to 1.8 billion. On April 21, 2021 the Company increased the number of authorized shares of common stock from 1.8 billion to 3.8 billion in order to satisfy the share reserve requirement under the Auctus financing closed April 23, 2021, as described below.
On August 13, 2020, the Company entered into an Asset Purchase Agreement to acquire certain assets collectively known as FileFacets™, a Software-as-a-Service (SaaS) platform that performs sophisticated data discovery and content search of structured and unstructured data within corporate networks, servers, content management systems, email, desktops and laptops. The total purchase price was $135,000, which amount was paid in full at the closing of the transaction.
On September 21, 2020, the Company entered into an Asset Purchase Agreement with the owners of a business known as IntellyWP™, to acquire the intellectual property rights and certain assets collectively known as IntellyWP™, an Italy-based developer that produces WordPress plug-ins that enhance the overall user experience for webmaster and end users. The total purchase price of $135,000 consists of: (i) a $55,000 cash payment at closing; (ii) a cash payment of $40,000 upon completion of certain training; and, (iii) a cash payment of $40,000 upon the Company collecting $25,000 from the assets acquired in the subject transaction.
On October 8, 2020, the Company entered into an Asset Purchase Agreement with Resilient Network Systems, Inc. (“RNS”) to acquire the intellectual property rights and certain assets collectively known as Resilient Networks™, a Silicon Valley based SaaS platform that performs SSO and adaptive access control “on the fly” with sophisticated and flexible policy workflows for authentication and authorization. The total purchase price of $305,000 consists of: (i) a $125,000 cash payment at closing; and, (ii) the issuance of 9,575 shares of our common stock to RNS.
On December 11, 2020, the Company entered into a Common Stock Purchase Agreement (“CSPA”) with Triton Funds, LP, a Delaware limited partnership (“Triton”), an unrelated third party. Triton agreed to invest $1 million in the Company in the form of common stock purchases. Subject to the terms and conditions set forth in the CSPA, the Company agreed to sell to Triton common shares of the Company having an aggregate value of One Million Dollars ($1,000,000). The price of the shares to be sold will be $0.006 per shares. Triton’s obligation to purchase securities is conditioned on certain factors including, but not limited, to the Company having an effective registration available for resale of the securities being purchased; a minimum closing price of $0.009 per share for the Company’s common stock on the delivery date for the shares; and, Triton’s ownership not exceeding 9.9% of the issued and outstanding shares of the Company at any time. The Company filed a registration statement on Form S-1 with the SEC on December 28, 2020. The S-1 was declared effective by the SEC as of January 26, 2021.
On February 12, 2021, and effective January 31, 2021 the Company declared terminated each of the ArcMail Agreements. The Company has asserted numerous claims under the ArcMail Agreements. Further, Wala lost all rights to the ArcMail Assets through a foreclosure action brought by certain secured creditors of Wala (the “Wala Creditors”). The Company considers its relationship with Wala to be closed and will not pursue any further action in that regard.
On February 12, 2021 the Company closed its acquisition of the ArcMail Assets from the Wala Creditors pursuant to the terms and conditions of an Asset Sale Agreement executed by and between the Company and the Wala Creditors. The effective date of the Asset Sale Agreement and the acquisition was deemed to be January 31, 2021. Total purchase price (the “Purchase Price”) was One Million Four Hundred Four Thousand Dollars ($1,404,000), evidenced by three promissory notes in favor of the Wala Creditors in the total amount of the Purchase Price (the “Notes”). Payments under the Notes commence in 30-days and continue monthly thereafter for 60-months. The Notes are secured by a pledge of the ArcMail Assets as collateral under the terms of a Security Agreement in favor of the Wala Creditors. The foregoing descriptions of the Asset Sale Agreement; Notes; and, Security Agreement do not purport to be complete and are qualified in their entirety by the actual language contained in the Asset Sale Agreement, Notes, and Security Agreement, respectively.
On February 23, 2021, the Company filed with the SEC its Schedule 14C, Preliminary Information Statement, providing notice that the Board of Directors and the holders of a majority of our shares entitled to vote had approved and authorized the following actions:
(1) Amendment of our Articles to provide for a decrease in the authorized shares of the Company’s common stock from 1,800,000,000 to a number of not less than 10,000,000 and not more than 1,000,000,000 (the “Authorized Common Stock Reduction”), at any time prior to the one year anniversary of the filing of the Definitive Information Statement on Schedule 14C with respect to these actions the “Definitive Information Statement”), with the Board of Directors of the Company (the “Board”) having the discretion to determine whether or not the Authorized Common Stock Reduction is to be effected, and if effected, the exact number of the Authorized Common Stock Reduction within the above range.
(2) That the Board be authorized to implement through the amendment to our Articles a reverse stock split of the Company’s Common Stock by a ratio of not less than 1-for-10 and not more than 1-for-2,000, (the “Reverse Split”), at any time prior to the one year anniversary of the filing of the Definitive Information Statement, with the Board having the discretion to determine whether or not the Reverse Split is to be effected, and if effected, the exact ratio for the Reverse Split within the above range.
On April 23, 2021, the Company entered into and closed a financing transaction pursuant to the terms and conditions of a Securities Purchase Agreement (the “Purchase Agreement”) with Auctus Fund, LLC, a Delaware limited liability company (“Auctus”). Pursuant to the Purchase Agreement, Auctus purchased from the Company a Senior Secured Promissory Note (the “Note”) in the aggregate principal amount of $832,000 (the “Principal Amount”), and delivered gross proceeds of $750,000 (excluded were legal fees for Auctus and a transaction fee charged by Auctus). The Note is secured by a security interest in the assets of the Company and its subsidiaries, pursuant to the terms and conditions of a Security Agreement (the “Security Agreement”). Timely payment under the Note is further secured by the issuance of Common Stock Purchase Warrant (the “Second Warrant”) to Auctus for 55,467 shares of the Company’s common stock at an exercise price of $15.00, exercisable only in the event of a default under the Note. Interest on the Principal Amount of the Note accrues at the rate of 12% per annum, which amount is fully due and owing upon the issuance of the Note. Repayment of all amounts due under the Note shall be tendered on the 12-month anniversary of the Note. The Note may be prepaid in whole at any time without prepayment penalty or premium. If the Company fails to meet its obligations under the terms of the Note, the Note shall become immediately due and payable and subject to penalties provided for in the Note. The Company also granted to Auctus warrants to acquire 55,467 shares of the Company’s common stock pursuant to a Common Stock Purchase Warrant (the “First Warrant”). Exercise price for the warrants is $0.0075, with a cashless exercise option. Both the First Warrant and the Second Warrant impose an obligation on the Company to reserve for issuance that number of shares of the Company’s common stock which is 5 times the number of shares issuable under both the First Warrant and the Second Warrant.
As of September 30, 2021, the Company had sold to Triton 83,334 shares of its common stock pursuant to the CSPA, and which shares were registered under the S-1. All sales occurred during the three month period ended March 31, 2021 and resulted in the receipt by the Company of net proceeds in the amount of $847,000 during the six months ended 30 June 2021, which is the final amount the Company will receive from the sale of these shares, which includes proceeds from two unrelated third party for shares of our common stock acquired from Triton.
On June 10, 2021, the Company filed a Certificate of Amendment to the Articles (the “Certificate of Amendment”) which served to (i) reduce the number of authorized shares of common stock to one billion (1,000,000,000); and, (ii) effect a reverse stock split (the “Reverse Stock Split”) of its issued common stock in a ratio of 1-for-2,000. The preferred stock of the Company was not changed. The 1-for-2,000 Reverse Stock split was processed by FINRA and became effective at the start of trading on July 1, 2021. As a result of the Reverse Stock Split, every 2,000 shares of the Company’s issued and outstanding common stock, par value $0.001 per share, were converted into one (1) share of common stock, par value $0.001 per share. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would be entitled to receive fractional shares because they held a number of pre-Reverse Stock Split shares of the Company’s common stock not evenly divisible by 2,000 had the number of post-Reverse Stock Split shares of the Company’s common stock to which they are entitled rounded up to the nearest whole number of shares of the Company’s common stock. No stockholders received cash in lieu of fractional shares.
Business Overview
The Company is a leader inWe provide data security and privacy management (a critical element of IT security), providing solutions for All Things Data Security™, across the enterprise and in the cloud. Trusted by over 170 clients, including over 1% of10,000 customers, we provide the Fortune 500, the Company provides the necessary visibility and control needed to protect at-scale, obtaindata at scale, regardless of format, location, or consumer, and to facilitate compliance objectives,with fast-changing global data privacy requirements. Our customers include established leaders and enhance operational efficiencies. Our clients include leading brand name enterprises in aup-and-coming businesses spanning the private and public/government sectors across diverse set of industries and fields, including financial services, healthcare, manufacturing, retail, technology, and telecommunications.
The mounting threatransomware landscape hasas well as other threats to data have accelerated the rate at which businesses are adopting data security adoption ratessolutions and we believe that our extensive portfolio of data security and privacy products provide a holistic methodologyprovides an encompassing solution set such that we are well positioned to capitalize on that increased adoption rate and establish our products as new data privacy as a newand security standard.standards. Our offering isofferings are anchored in reliable and comprehensive privacy management equippingand equip organizations with a seamless approach to safeguarding theirsafeguard data, protectingprotect against attacks, and mitigatingotherwise mitigate the most critical risks.
AsSector-specific US laws, state-level legislation, and outside-the-United States (OUS) regulations are confounding enterprises of all sizes for whom safeguarding and stewarding data is key, but for whom becoming specialists in privacy and security is not an element of their strategic roadmap. For many of these enterprises, we can bridge the resultgap between their need to protect data and their need to use their resources to grow their core business by offering turnkey solutions and related counseling and technical support to offset risks from data breaches and security incidents of various types. We provide products and services for the marketplace that are designed to protect data that is stored in the cloud, on-premises, and in hybrid cloud/on-premises environments, and data that is transmitted throughout the enterprise, including but not limited to by remote employees. Our suite of security products focuses on protecting sensitive files and email, confidential customer, patient and employee data, financial records, strategic and product plans, intellectual property and other proprietary information, allowing our customers to create, share, and protect their sensitive data wherever it is stored and however it is used.
We deliver solutions and capabilities that businesses can use in conjunction with their use of established cloud vendors such as Microsoft® Azure, Google® Cloud Platform (GCP), and Amazon® Web Services (AWS), as well as with on-premises databases and database applications and with virtualization platforms, such as those hosted or configured using VMWare®, Citrix®, and Oracle® products.
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We sell or plan to sell substantially all our products and services through a sales model that combines the leverage of a recent rebrandingchannel sales model or direct account management, thereby providing us with opportunities to grow our current customer base and marketing effort by the Company,deliver our value proposition for data privacy and security. We endeavor to use subscription models to license products and services, commonly for a paid-in-advance, multiyear term that is auto-renewing. We also make use of channel partners, distributors, and resellers which sell to end-users of the products and services. This approach allows us to maintain close relationships with our customers and benefit from the global reach of our partners. Additionally, we are enhancing our product offerings and go-to-market strategy by establishing technology alliances within the IT infrastructure and security vendor ecosystem. Our sales and marketing focus for new organic growth is on organizations with 500 or more users who are adopting cloud services offeredand can make larger purchases with us over time and have a greater potential lifetime value.
We continue to onboard to cloud-native technology adoption portals such as the Microsoft® Azure Marketplace and the Amazon® AWS Marketplace. Vendors may offer incentives to us as a software and services provider to onboard and market via their marketplace portals.
We strive to create new and innovative products and to improve existing products, proactively identifying and solving the data security needs of our customers.
As cloud adoption continues to accelerate, data privacy requirements get more complex, and data security becomes more challenging, we believe that Data443 is well positioned to capture more market share, continue to lead in strategic data security technology development, and prepare organizations for the next epoch in IT data privacy services.
Our Products
Each of our major product lines provides features and functionality which we believe enable our customers to optimally secure their data. The products are modular, giving our customers the flexibility to select what they require for their business needs and the flexibility to expand their usage simply by the Company are now marketed underadding a license. We currently offer the following names:products and services:
| ● | Data443® Ransomware Recovery | |
| ● | ||
| Data443® Data Identification | ||
| ● | Data443® Data Archive Manager (also known as ArcMail®), a simple, secure, and cost-effective solution for enterprise data retention management and archiving. | |
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| ● | ||
| Data443® Data Placement | ||
| ● | ||
| Data443® Access Control |
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| ● | ||
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| Data443® Global Privacy | ||
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| Data443® IntellyWP, | ||
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| Data443® Chat History Scanner, which scans chat messages for compliance, security, | ||
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| Data443® GDPR Framework, CCPA Framework, and LGPD Framework WordPress Plugins, which help organizations of all sizes comply with Europe, California and Brazil privacy rules and regulations and are currently used by over 30,000 active site |
Data security and privacy legislation is driving significant investment by organizations to offset risks from data breaches and damaging information disclosures of various types. We provide solutions for the marketplace that are designed to protect data via the cloud, hybrid, and on-premises architectures. Our suite of security products focus on protection of: sensitive files and emails; confidential customer, patient, and employee data; financial records; strategic and product plans; intellectual property; and any other data requiring security, allowing our clients to create, share, and protect their data wherever it is stored.
We deliver solutions and capabilities via all technical architectures, and in formats designed for each client. Licensing and subscription models are available to conform to customer purchasing requirements. Our solutions are driven by several proprietary technologies and methodologies that we have developed or acquired, giving us our primary competitive advantage.
We sell substantially all of our products, solutions, and services through a sales model which combines the leverage of channel sales with the account control of direct sales, thereby providing us with significant opportunities to grow our current customer base and successfully deliver our value proposition for data privacy and security. We also make use of channel partners, distributors, and resellers which sell to end-user customers. This approach allows us to maintain close relationships with our customers and benefit from the global reach of our channel partners. Additionally, we are enhancing our product offerings and go-to-market strategy by establishing technology alliances within the IT infrastructure and security vendor ecosystem. While our products serve customers of all sizes in all industries, the marketing focus and majority of our sales focus is on targeting organizations with 100 users or more which can make larger purchases with us over time and have a greater potential lifetime value.
Listing on the Nasdaq Capital MarketGrowth Strategy
Key elements of our growth strategy include:
Our common stock is currently quoted
Acquisitions. We intend to aggressively pursue acquisitions of other cybersecurity software and service providers focused on the OTC Link LLC quotation system operated by OTC Markets, Group, Inc., underdata security sector. We target companies with a developed and/or steady client base, as well as companies with offerings that complement our existing suite of products.
Research & Development; Innovation. We intend to increase our spending on research and development to create new and innovative products and to improve existing products, proactively identifying and solving the symbol “ATDS” ondata security needs of our clients.
Grow Our Customer Base. We believe the Pink Sheets tier. In connection with this offering, we have applied to list our common stockcontinued challenges businesses face in managing their enterprise data and the Warrantsever-evolving landscape of cybersecurity threats will keep the demand high for the type of products and services we offer. We intend to capitalize on the Nasdaq Capital Market (“Nasdaq”) under the symbols “ATDS”this demand by continually developing and “ATDSW,” respectively. Nasdaq listing requirements include, among other things,curating a stock price threshold. As a result, we effected the Reverse Stock Split priorcollection of products and services that are attractive and relevant to submittingboth our applicationestablished revenue base and to Nasdaq. Ifnew customers.
Expand Our Sales Capacity. We believe that continuing to expand our applicationsales force will be essential to the Nasdaq Capital Market is not approved or we otherwise determine that we will not be ableachieving our expansion and growth. We intend to secure the listing of the Common Stockexpand our sales capacity by adding sales and Warrantsmarketing employees, with heavy focus on the Nasdaq Capital Market, we will not complete this offering.customer success and leveraging our existing customer relationships.
Reverse Stock SplitOur Customers
On June 10, 2021,Our current customer base is comprised primarily of two segments – commercial enterprises and open-source consumers. Our commercial enterprise customers are generally focused within the Company filed a CertificateU.S., range from 500 employees to over 150,000 employees, and use our data security products. We have over 10,000 commercial enterprise customers. We have approximately 20 customers in the financial technology industry that contract with us directly for products with subscriptions with terms of Amendmentmore than three years. We have more than 2,500 customers comprising mid-market-sized organizations that also contract with us directly for products with subscriptions with terms of one to the Articlesthree years. Our open-source consumers are more widely distributed geographically, include organizations of Incorporation (the “Certificateall sizes in terms of Amendment”) which served to (i) reduce theboth number of authorized sharesemployees and revenues, and typically use our online GDPR/CCPA/GLPD Privacy plugins, our Privacy Badge solution, or our user experience enhancement products. We have over 200,000 open-source consumers with active installations of common stock to one billion (1,000,000,000);our plugins, and (ii) effectwe have 9,000 open-source consumers that pay a reverse stock split (the “Reverse Stock Split”)premium for additional or advanced features. We expect that some of its issued common stock in a ratio of 1-for-2,000. The preferred stock of the Company was not changed. The 1-for-2,000 Reverse Stock split was processed by FINRA and became effective at the start of trading on July 1, 2021. As a result of the Reverse Stock Split, every 2,000 shares of the Company’s issued and outstanding common stock, par value $0.001 per share, were converted into one (1) share of common stock, par value $0.001 per share. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would be entitled to receive fractional shares because they hold a number of pre-Reverse Stock Split shares of the Company’s common stock not evenly divisible by 2,000 had the number of post-Reverse Stock Split shares of the Company’s common stock to which they are entitled rounded up to the nearest whole number of shares of the Company’s common stock. No stockholders received cash in lieu of fractional shares. The share and per share information in this Prospectus reflects such assumed reverse stock split.
our open-source consumers will become commercial customers over time.
Risk Factors
An investment in our securities involves a high degree of risk. You should carefully consider the risks summarized below. These risks are discussed more fully in the section titled “Risk Factors.” These risks include, but are not limited to, the following:
Corporate Information
Our principal executive offices are located at 101 J Morris Commons Lane, Suite 105, Morrisville,4000 Park Drive, Research Triangle Park, North Carolina 27560,27709, and our telephone number is (919) 858-6542.526-1070.
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act.” An emerging growth company may take advantage of certain reduced disclosure and other requirements that are otherwise generally applicable to public companies that are not emerging growth companies. As a result, the information that we provide to stockholders may be different than the information you may receive from other public companies in which you hold equity. For example, as long as we are an emerging growth company:
| ● | we are not required to engage an auditor to report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, | |
| ● | we are not required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board | |
| ● | we are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes”; and | |
| ● | we are not required to comply with certain disclosure requirements related to executive compensation, such as the requirement to disclose the correlation between executive compensation and performance and the requirement to present a comparison of our Chief Executive Officer’s compensation to our median employee compensation. |
We may take advantage of these reduced disclosure and other requirements until the last day of our fiscal year following the fifth anniversary of the completion of our IPO, or such earlier time that we are no longer an emerging growth company. For example, if certain eventsWe will remain an emerging growth company until the earliest to occur beforeof: the endlast day of such five-year period, including ifthe fiscal year in which we have more than $1.07 billion in annual revenue,revenue; the last day of the fiscal year in which we qualify as a “large accelerated filer”; the date on which we have, more than $700 million in market value of our common stock held by non-affiliates, or issueduring the previous three-year period, issued more than $1.0 billion of non-convertible debt over a three-year period, we will cease to be an emerging growth company.securities; and the last day of the fiscal year in which the fifth anniversary of this offering occurs.
As mentioned above, the JOBS Act permits us, as an emerging growth company, to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected not to opt out of the extended transition period which means that when an accounting standard is issued or revised and it has different application dates for public or private companies, as an emerging growth company, we can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make it difficult or impossible because of the potential differences in accounting standards used to compareAs a result, our financial statements withmay not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies that are not emerging growth companies, which may make comparison of our financials to those of such other public companies more difficult.
We are also a public“smaller reporting company,” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company. The market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates (public float) is less than $250 million as of the last business day of the second fiscal quarter or (ii) our annual revenue is less than $100 Million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million as of the last business day of the second fiscal quarter. If we are a smaller reporting company at the time we cease to be an emerging growth company, orwe may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements of anin our Annual Report on Form 10-K and, similar to emerging growth companycompanies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. In the event that has opted outwe are still considered a “smaller reporting company” at such time as we cease being an “emerging growth company,” the disclosure we will be required to provide in our SEC filings will increase, but it will still be less than it would be if we were considered neither an “emerging growth company” nor a “smaller reporting company.” Specifically, similar to “emerging growth companies,” “smaller reporting companies” are able to provide simplified executive compensation disclosures in their filings; are exempt from the provisions of using the extended transition period.Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings, including, among other things, being required to provide only two years of audited financial statements in annual reports. Decreased disclosures in our SEC filings due to our status as an “emerging growth company” or “smaller reporting company” may make it harder for investors to analyze our results of operations and financial prospects.
OFFERING SUMMARY
| Issuer: | ||
| Securities offered by us: | ||
| Number of shares of common stock offered by us: | ||
| Number of Warrants offered by us: | ||
| Number of shares of common stock offered by the Selling Stockholders | Up to a maximum of 931,000 shares. See “Selling Stockholders” for a description of how we calculated the number of shares offered by the Selling Stockholders. | |
| Public offering price: | $ | |
| Shares of common stock outstanding prior to the offering (1): | ||
| Shares of common stock outstanding after the offering(2): | ||
| Over-allotment option: | We have granted a 45-day option to the | |
| Use of proceeds: | We estimate that we will receive net proceeds of approximately |
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| Description of the Warrants: | The exercise price of the Warrants is |
| Underwriter’s Warrants: | The Registration Statement of which this Prospectus is a part also registers for sale warrants (the “Underwriter’s Warrants”) to purchase shares of our common stock (based on an offering price of | |
| Underwriter Compensation: | In connection with this offering, the | |
| Trading Symbol: | Our | |
| Risk Factors: | Investing in our common stock involves a high degree of risk, and the purchasers of our | |
| Dividends: | We do not anticipate paying dividends on our common stock in the foreseeable future. | |
| Lock-up Agreements: | We and our directors, officers and certain shareholders have agreed with the |
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The number of shares of our common stock outstanding prior to and to be outstanding immediately after this offering, as set forth in the table above, is based on | |
| 2 | The number of shares outstanding after this offering is based on |
FINANCIAL SUMMARY
The following table presents a summary of certain of our historical financial information. Historical results are not necessarily indicative of future results and you should read the following summary financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this Prospectus. The summary financial data as of December 31, 2020 and December 31, 2019, and for the fiscal years ended December 31, 2020 and 2019 was derived from our audited financial statements included elsewhere in this Prospectus. The summary financial data as of September 30, 2021 and for the nine months ended September 30, 2021 and 2020, was derived from our unaudited interim financial statements included elsewhere in this Prospectus. The summary financial data in this section is not intended to replace the financial statements and is qualified in its entirety by the financial statements and related notes included elsewhere in this Prospectus.
| Nine Months Ended | Fiscal Years Ended | |||||||||||||||
| September 30, | December 31, | |||||||||||||||
| Statement of Operations Data: | 2021 | 2020 | 2020 | 2019 | ||||||||||||
| Revenue | $ | 3,095,279 | $ | 1,644,087 | $ | 2,474,627 | $ | 1,453,413 | ||||||||
| Cost of revenue | 412,545 | 161,749 | 303,515 | 117,106 | ||||||||||||
| Total operating expenses | 4,039,958 | 4,100,856 | 6,071,597 | 5,270,386 | ||||||||||||
| Total other (expenses) income | (3,338,552 | ) | (11,635,817 | ) | (10,006,700 | ) | 3,326,708 | |||||||||
| Net Loss | $ | (4,695,776 | ) | $ | (14,254,335 | ) | $ | (13,907,185 | ) | $ | (607,371 | ) | ||||
| Net Loss per Common Share, Basic and Diluted | $ | (6.63 | ) | $ | (182.64 | ) | $ | (82.92 | ) | $ | (132.07 | ) | ||||
| Weighted Average Number of Shares Outstanding, Basic and Diluted | 708,058 | 78,048 | 167,715 | 4,599 | ||||||||||||
| As of | ||||||||||||
| September 30, | December 31, | December 31, | ||||||||||
| Balance Sheet Data: | 2021 | 2020 | 2019 | |||||||||
| Cash | $ | 1,377,579 | $ | 58,783 | $ | 18,673 | ||||||
| Working Capital Deficiency | (2,400,595 | ) | (5,419,748 | ) | (9,403,571 | ) | ||||||
| Total Assets | 3,655,525 | 3,110,219 | 3,749,734 | |||||||||
| Total Liabilities | 6,650,283 | 6,600,891 | 10,146,185 | |||||||||
| Additional Paid-In Capital | 37,234,387 | 32,027,240 | 15,214,458 | |||||||||
| Accumulated Deficit | (40,230,125 | ) | (35,518,584 | ) | (21,610,915 | ) | ||||||
| Total Stockholders’ Deficit | $ | (2,994,758 | ) | $ | (3,490,672 | ) | $ | (6,396,451 | ) | |||
RISK FACTORS
An investment in our securities involves a high degree of risk. In addition toYou should carefully read, consider, and evaluate risks described below, as well as all the other information contained in this Prospectus, prospective investors should carefully consider the following risksincluding “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes, before investing in our securities.common stock. If any of the following risks actually occur, as well as other risks not currently known to us or that we currently consider immaterial, our business, operating results and financial condition could be materially adversely affected. As a result, the market or trading price of our common stock could decline, and you may lose all or part of your investment in our common stock.investment.
Special Information Regarding Forward-Looking StatementsRisk Factor Summary
Our business is subject to numerous risks and uncertainties, including those described in “Risk Factors” in this Prospectus, any of which could materially and adversely impact our business and operations, adversely impact our growth prospects, cause us to incur additional costs or liabilities and/or cause the price of our common stock to decline. You should carefully consider these risks and uncertainties when investing in our common stock. Some of the statements in this Prospectus are “forward-looking statements”. These forward-looking statements involve certain knownprincipal risks and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include among others, the factors set forth herein under “Risk Factors.” The words “believe,” “expect,” “anticipate,” “intend,” “plan,” and similar expressions identify forward-looking statements. We caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update and revise any forward-looking statements or to publicly announce the result of any revisions to any of the forward-looking statements in this document to reflect any future or developments.following:
| ● | We will require additional funds in the future to achieve our current business strategy; |
| ● | Technology is constantly changing and evolving and the continued viability of our products and services requires that we keep up with an ever-changing technological landscape; |
| ● | We face intense competition in our market, especially from larger, well-established companies; |
| ● | We are dependent on the continued services and performance of our founder and Chief Executive Officer; |
| ● | We may be unable to attract new customers and/or expand sales to existing customers; |
| ● | We may be unable to maintain successful relationships with our channel partners; |
| ● | We may be subject to breaches in our security, cyberattacks or other cyber risks; |
| ● | We may be unable to protect our proprietary technology and intellectual property rights; |
| ● | We may be subject to real or perceived errors, failures, or bugs in our technology; |
| ● | We are subject to federal, state and industry privacy and data security regulations; |
| ● | Our business is susceptible to risks associated with international operations; |
| ● | Our business is subject to the risks of pandemic, fire, power outages, floods, earthquakes, and other catastrophic events, and to interruption by manmade problems such as terrorism and war; |
| ● | Our operations may continue to increase in complexity as we grow, which will add additional challenges to the management of our business in the future; |
| ● | We may be unable to secure necessary financing on acceptable terms and in a timely manner; |
| ● | There is no assurance that future financing from Mr. Remillard will be available or, if available, that it will be on terms that are satisfactory to us; |
| ● | We may not be able to identify suitable acquisition candidates or consummate acquisitions on acceptable terms, or we may be unable to successfully integrate acquisitions; |
| ● | The JOBS Act allows us to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we provide in reports filed with the SEC; |
| ● | Failure to implement proper and effective internal controls or to remediate weakness in internal accounting controls could result in material misstatements in our financial statements. |
| ● | We have secured debt, which could have adverse consequences to you; |
| ● | We may not be able to attract the attention of research analysts at major brokerage firms; |
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| ● | In the event of a bankruptcy, liquidation or winding up of our assets, our common stock will rank junior to all of our liabilities to third party creditors, and to any class or series of our capital stock created after this offering that, by its terms, ranks senior to our common stock; |
| ● | Future issuances of debt securities and preferred stock may adversely affect the return of your investment; |
| ● | Our common stock is subject to the SEC’s penny stock rules; |
| ● | Our common stock has historically experienced low trading volume on the OTC Pink, and therefore the price may not accurately reflect our value and there can be no assurance that an active market for our common stock will develop, either now or in the future; |
| ● | We have had a history of losses and may incur future losses, which may prevent us from attaining profitability; |
| ● | There is substantial doubt about our ability to continue as a going concern; |
| ● | We currently have outstanding shares of preferred stock that have special rights that could limit our ability to undertake corporate transactions, inhibit potential changes of control and reduce the proceeds available to our common stockholders in the event of a change in control; |
| ● | Our Chief Executive Officer has the ability to control all matters submitted to stockholders for approval; |
| ● | We will continue to incur substantial costs as a result of operating as a public reporting company, and our management will be required to devote substantial time to compliance initiatives; |
| ● | We may issue additional shares of our common stock, which may dilute current stockholders; |
| ● | Our management will have broad discretion in the use of the net proceeds from this offering; |
| ● | We may not be able to continue to comply with the continued listing standards of the Nasdaq Capital Market; |
| ● | Adverse or uncertain macroeconomic or geopolitical conditions or reduced IT spending may adversely impact our business, revenues, and profitability; and |
Prolonged economic uncertainties or downturns could materially adversely affect our business.
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Risks Related to Our Business and Industry
We will require additional funds in the future to achieve our current business strategy and ouran inability to obtain funding willcould cause our business to fail.
We will need to raise additional funds through public or private debt or equity salesfinancings in order to fund our future operations and fulfill our future contractual obligations in the future.obligations. These financings may not be available when needed. Even if these financings are available, itthey may be on terms that we deem unacceptable or that are materially adverse to your interests with respect to dilution of book value, dividend preferences, liquidation preferences, or other terms. Our inability to obtain financing wouldcould have an adverse effect on our ability to implement our current business plan and develop our products, and as a result, could diminish our sales or require us to diminish or suspend our operations and possibly cease our existence.
Even if we are successful in raising capital in the future, we will likely need to raise additional capital to continue and/or expand our operations. If we do not raise the additional capital, the value of any investment in us may become worthless. In the event
If we do not raise additional capital but from other than conventional sources, it is likely that we may need to scale back or curtailotherwise adjust our growth strategy which may prevent us from fully implementing our business plan.
Technology is constantly undergoing significant changeschanging and evolutionsevolving and it is imperative that we keep up with an ever changing technological landscape in order to ensure the continued viability of our products and services.services requires that we keep up with an ever-changing technological landscape.
Our industry is categorized by rapid technological progression, ever increasingever-increasing innovation, changes in customer requirements, and frequent new product introductions, and we may be subject to legal and regulatory compliance mandates and frequent new product introductions.as the relevant law develops in the fields in which are products are used. As a result, we must continually change and improve our products in response to such changes, and our products must also successfully interface with products from other vendors, which are also subject to constant change. While we believe we have the competency to aid our clientscustomers in all aspects of data privacy and security, we will need to constantly work on improvingimprove our current assets in orderand offerings to keep up with technological advances that will almost certainlyare expected to occur.
We cannot guarantee that we will be able to anticipate future market needs and opportunities or be able to develop new products and services or expand the functionality of our current products and services in a timely manner or at all. Even if we are able to anticipate, develop, and introduce new products and expand the functionality of our current products, there can be no assurance that enhancements or new products will achieve widespread market acceptance. Should we fail toacceptance: If they do so,not, our business may be adversely affected and in the worst possible scenario, we may have to cease operations altogether if we do not adapt to the constant changes that occur in the way business is conducted.altogether.
We will face intense competition in our market, especially from larger, well establishedwell-established companies, and we may lack sufficient financial and other resources to maintain and improve our competitive position.
The market for data privacy and security and other data governance solutions is intensely competitive and is characterized by constant change and innovation. We face competition from both traditional, larger software vendors offering enterprise-wide software frameworks and services and smaller companies offering point solutions for specific identityidentification and data governance issues. We also compete with IT equipment vendors and systems management solution providers whose products and services address identitydata identification and classification and data governance requirements. Our principal competitors vary depending on the product we offer.product. Many of our existing competitors have achieved, and some of our potential competitors could have,achieve, substantial competitive advantages such as:due to:
| ● | greater name recognition and longer operating histories; | |
| ● | more comprehensive and varied products and services; |
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| ● | broader | |
| ● | greater resources to develop technologies or make acquisitions; | |
| ● | ||
| ● | broader distribution capabilities and established relationships with distribution partners and customers; | |
| ● | greater customer support resources; and | |
| ● | substantially greater financial, technical, and other resources. |
Given their larger size, greater resources, and existing customer relationships, ourOur competitors may be able to compete and respond more effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. Our competitors may also seek to extend or supplement their existing offeringsproducts and services to provide data security and data governance solutions that more closely compete with our products and services offerings. Potential customers may also prefer to purchase, or incrementally add solutions, from their existing suppliers rather than to onboard with us as a new or additional supplier regardless of productwhether our products offer better performance or more features.
In addition, with the recent increase in large merger and acquisition transactions in the technology industry, particularly transactions involving cloud-based technologies, there is a greater likelihood that we will compete with other large technology companies in the future.
Some of our competitors have made acquisitions or entered into strategic relationships to offer a more comprehensive product offerings in combination than they individually had offered.were previously able to offer alone. Companies and alliances resulting from these possible consolidations and partnerships may create more compelling product offerings and be able to offer more attractive pricing, making itthem more compelling to customers and more difficult for us to compete with effectively. In addition, continued industry consolidation may adversely impact customers’customer perceptions of the viability of smallsmall- and medium-sized technology companies and consequently their willingness to purchase from those companies. Conditions in our market could change rapidly and significantly as a result of technological advancements, partnering byamong our competitors, or continuing market consolidation. These competitive pressures in our market or our failurepotential inability to compete effectively may result in price reductions, fewer orders, reduced revenue and gross margins, increased net losses, and loss of market share. Any failure to meet and address these factors could adversely affect our business, financial condition, and operating results.
We are dependent on the continued services and performance of our chief executive officer,founder and Chief Executive Officer, Jason Remillard, the loss of whom could adversely affect our business.
Our future performance depends in large part on the continued services and continuing contributions of our chief executive officerfounder, Chief Executive Officer and president, Jason Remillard, to successfully manage our company,the Company, to execute on our business plan, and to identify and pursue new opportunities and deliver product innovations. The loss of services of Mr. RemillardRemillard’s services could significantly delay or prevent the achievement ofus from achieving our development and strategic objectives and adversely affect our business.
Our sole officer and director lacks experience in and with the reporting and disclosure obligations of publicly-traded companies.
Our chief executive officer and president, Jason Remillard, lacks experience in and with the reporting and disclosure obligations of publicly-traded companies and with serving as an officer and director of a publicly-traded company. Such lack of experience may impair our ability to maintain effective internal controls over financial reporting and disclosure controls and procedures, which may result in material misstatements to our financial statements and an inability to provide accurate financial information to our stockholders. Consequently, our operations, future earnings, and ultimate financial success could suffer irreparable harm due to Mr. Remillard’s lack of experience with publicly-traded companies and their reporting requirements in general. Notwithstanding Mr. Remillard’s recent experience as our CEO and his commitment to best public company practices, there is no assurance he will be successful.
A failure to hire and integrate additional sales and marketing personnel or maintain their productivity could adversely affect our results of operations and growth prospects.
Our business requires intensive sales and marketing activities. Our sales and marketing personnel are essential to attracting new customers and expanding sales to the customers we recently acquired through acquisitions; this is key to our future growth. We face a number of challenges in successfully expanding our sales force. We must locate and hire a significant number of qualified individuals, and competition for such individuals is intense. We may be unable to achieve our hiring or integration goals due to a number of factors, including, but not limited to, the number of individuals we hire; challenges in finding individuals with the correct background due to increased competition for such hires; and, increased attrition rates among new hires and existing personnel. Furthermore, based on our past experience, it often can take up to 12 months before a new sales force member is trained and operating at a level that meets our expectations. We plan to invest significant time and resources in training new members of our sales force, and we may be unable to achieve our target performance levels with new sales personnel as rapidly as we have done in the past due to larger numbers of hires or lack of experience training sales personnel to operate in new jurisdictions. Our failure to hire a sufficient number of qualified individuals, to integrate new sales force members within the time periods we have achieved historically or to keep our attrition rates at levels comparable to others in our industry may materially impact our projected growth rate.
If we are unable to attract new customers andand/or expand sales to existing customers, both domestically and internationally, our growth could be slower than we expect, and our business may be harmed.
Our future growth depends in part upon increasing our customer base. Our ability to achieve significant growth in revenues in the future will depend in large part, upon the effectiveness of our sales and marketing efforts, both domestically and internationally, and our ability to attract new customers. If we fail to attract new customers, and maintain and expand those customer relationships, our revenues willmay grow more slowly than expected, and our business willmay be harmed.
Our future growth also depends upon expanding sales of our products and services to existing customers and their organizations. If our customers do not purchase additional licenses or capabilities,our other offerings related to complementary products and services , our revenues may grow more slowly than expected, may not grow at all, or may decline. There can be no assurance that our efforts wouldwill result in increased sales to existing customers and additional revenues. If our efforts are not successful, our business wouldmay suffer.
If we are unable to maintain successful relationships with our channel partners, our business could be adversely affected.
We intend to rely to some extent on channel partners, such as distribution partners and resellers, to sell licenses for our products and to sell our technical support and maintenance agreements.services. Our ability to achieve revenue growth in the future may depend in part on our success in maintaining successful relationships with our channel partners. Agreements with channel partners tend to be non-exclusive, meaning our channel partners may offer customers the products of several different companies. If our channel partners do not effectively market and sell our products and services, choose to use greater efforts to market and sell their own products or those of others, or fail to meet the needs of our customers, our ability to grow our business may be adversely affected. Further,Furthermore, agreements with channel partners generally allow them to terminate their agreements for any reason upon 30 days’ notice. A termination of the agreement has no effect on orders already placed. The loss of a substantial number of our channel partners, our possible inability to replace them, or the failure to recruit additional channel partners could materially and adversely affect our results of operations. If we are unable to maintain our relationships with these channel partners, our business, results of operations, financial condition, or cash flows could be adversely affected.
Breaches in our security, cyber-attacks,cyberattacks, or other cyber-riskscyber risks could expose us to significant liability and cause our business and reputation to suffer.
Our operations may involve transmissiontransmitting and processing of our customers’the confidential, proprietary, and sensitive information.information of our customers. We have legal and contractual obligations to protect the confidentiality of and appropriateto appropriately use of customer data. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks as a result of third partythird-party action, employee error, or misconduct. Security risks, including, but not limited to, unauthorized use or disclosure of customer data, theft of proprietary information, loss or corruption of customer data, and computer hacking attacks or other cyber-attacks,cyberattacks, could expose us to substantial litigation expenses and damages, indemnity and other contractual obligations, government fines and penalties, mitigation expenses and other liabilities. We arehave been subject to attempted cyberattacks in the past and expect to be subject to such attacks in the future. We continuously workingwork to improve our information technology systems, together with creatingand to create security boundaries around our critical and sensitive assets. We provide advance security awareness training to our employees and contractors that focuses on various aspects of the cyber security world. All of these steps are taken in orderperform activities to mitigate the risk of attackattacks and to ensureincrease our readinesscapabilities to responsibly handle any security violation or attack. However, because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until successfully launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures and our products could be harmed, we could lose potential sales and existing customers, our ability to operate our business could be impaired, and we may incur significant liabilities.
Failure to protect our proprietary technology and intellectual property rights could substantially harm our business.
The success of our business depends on our ability to obtain, protect, and enforce our trade secrets, trademarks, copyrights, patents, and other intellectual property rights.rights such as copyrights and trademarks. We attempt to protect our intellectual property under trade secret, patent, trademark, copyright, and trade secrettrademark laws, and through a combination of confidentiality procedures, contractual provisions and other methods, all of which offer only limited protection. The process of obtaining patent protection is expensive and time-consuming,time consuming, and we may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions. In addition, issuance of ajurisdictions in which we do or plan to do business. Not seeking patent does not guarantee that we have an absolute rightprotection may limit our options to practice the patented invention.exclude competitors from using those innovations altogether or in those jurisdictions.
Our policy is to require our employees (and our consultants and service providers that develop intellectual property included in our products) to execute written agreements in which they assign to us their rights in potential inventions and other intellectual property created within the scope of their employment (or,employment. We also require any consultants we engage to provide services that may result in intellectual property that would benefit us to contractually agree to assign their rights to their inventions or creations to us, in connection with respect to consultants and service providers, their engagement to develop such intellectual property), butthe engagement. However, we cannot assure you that we have adequately protected our rights in every such agreement or that we have executed an agreement with every such party. Finally, in order to benefit from intellectual property protection, we must monitor, detect, and pursue infringement claims in certain circumstances in relevant jurisdictions, all of which is costly and time-consuming. As a result, we may not be able to obtain adequate protection ofadequately protect our intellectual property.property rights.
The data security, cyber-security,cybersecurity, data retention, and data governance industries are characterized by the existence of a large number of relevant patents and frequent claims and related litigation regarding patent and other intellectual property rights. From time-to-time,time to time, third parties have asserted and may assert their patent, copyright, trademark and other intellectual property rights against us, our channel partners, or our customers. Successful claims of infringement or misappropriation by a third party could prevent us from distributing certain products or performing certain services or could require us to pay substantial damages (including, for example, treble damages if we are found to have willfully infringed patents and increased statutory damages if we are found to have willfully infringed copyrights), royalties or other fees. Such claims also could require us to cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others or to expend additional development resources to attempt to redesign our products or services or otherwise to develop non-infringing technology. Even if third parties may offer a license to their technology, the terms of any offered license may not be acceptable, and the failure to obtain a license or the costs associated with any license could cause our business, results of operations or financial condition to be materially and adversely affected. In some cases, we indemnify our channel partners and customers against claims that our products infringe the intellectual property of third parties. Defending against claims of infringement or being deemed to be infringing the intellectual property rights of others could impair our ability to innovate, develop, distribute, and sell our current and planned products and services. If we are unable to protect our intellectual property rights and ensure that we are not violating the intellectual property rights of others, we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time, and effort required to create the innovative products that have enabled us to be successful to date.
Real or perceived errors, failures, or bugs in our technology could adversely affect our growth prospects.
Because we develop, use, and provide complex technology, undetected errors, failures, or bugs may occur. Our technology is often installed and used in a variety of computing environments with different operating system management software, and equipment, and networking configurations, which may cause errors or failures of our technology or other aspects of the computing environment into which it is deployed. In addition, deployment of our technology into computing environments may expose undetected errors, compatibility issues, failures, or bugs in our technology. Despite testing by us, errors, failures, or bugs may not be found until our technology is released to our customers. Moreover, our customers could incorrectly implement or inadvertently misuse our technology, which could result in customer dissatisfaction and adversely impact the perceived utility of our products. Any of these real or perceived errors, compatibility issues, failures, or bugs could result in negative publicity, reputational harm, loss of or delay in market acceptance, loss of competitive position, or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem.
We are subject to federal, state and industry privacy and data security regulations, which could result in additional costs and liabilities to us or inhibit sales of our software.
The regulatory framework for privacy issues worldwide is rapidly evolving and is likely to remain uncertainfluid and unpredictable for the foreseeable future. Many federal, state, and foreign government bodies and agencies have adopted or are considering adopting privacy and data security laws and regulations. In addition, privacy advocates and industry groups may propose new and different self-regulatory standards. We also may determine that certain requirements or standards that either legally or contractually applyare best practices for us to us.implement. Because the interpretation and application of privacy and data protection laws are stillcan be uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data security practices. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our technology, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business.
Because our long-term success depends, in part, on our ability to expand the sales and marketing of our technology and solutions to customers located outside of the United States, our business will beis susceptible to risks associated with international operations.
We intend to expand our international sales and marketing operations. Conducting international operations subjects us to risks that we domay not generally face in the United States.States or may prove more challenging to address. These risks include:
| ● | pandemics, political instability, war, armed conflict, or terrorist activities; | |
| ● | challenges developing, marketing, selling, and implementing our technology and solutions caused by language, cultural and ethical differences, and the competitive environment; | |
| ● | heightened risks of unethical, unfair, or corrupt business practices, actual or claimed, in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and | |
| ● | competition from bigger and stronger companies in the new markets; | |
| ● | laws imposing heightened restrictions on data | |
| ● | currency fluctuations; | |
| ● | management communication and integration problems resulting from cultural differences and geographic dispersion; | |
| ● | potentially adverse tax consequences, including multiple and possibly overlapping tax structures, the complexities of foreign | |
| ● | lack of familiarity with local laws, customs and practices, and laws and business practices favoring local competitors or commercial parties. |
The occurrence of any one of these risks could harm our international business and, consequently, our operating results. Additionally, operating in international markets requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required to operate in other countries will produce desired levels of revenue or net income.
The adoption of the recent tax reform and the enactment of additional legislation changing the United States taxation of international business activities could materially impact our financial position and results of operations.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “TCJA”), which significantly reformed the Internal Revenue Code. The TCJA, among other things, included changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, restricts the use of net operating loss carry-forwards arising after December 31, 2017, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We continue to examine the impact this tax reform legislation may have on our business. Due to the proposed expansion of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our financial position and results of operations. Further, foreign governments may enact tax laws in response to the TCJA that could result in further changes to global taxation and materially affect our financial position and results of operations. The impact of the TCJA on holders of our securities is uncertain. With the change in the presidency in 2021, increased corporate tax rates are being considered, as are proposals for corporate tax increases in foreign countries. These proposals, if enacted, may increase our worldwide effective tax rate, create tax and compliance obligations in jurisdictions in which we previously had none, and adversely affect our financial position. We urge our stockholders to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences.
Changes in financial accounting standards may cause adverse and unexpected revenue fluctuations and impact our reported results of operations.
A change in accounting standards or practices could harm our operating results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may harm our operating results or the way we conduct our business. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems process and controls.controls, which could be time consuming and costly.
Our business is subject to the risks of pandemic, fire, power outages, floods, earthquakes, and other catastrophic events, and to interruption by manmade problems such as terrorism.terrorism and war.
A pandemic, significant natural disaster, such as a fire, flood or an earthquake, or a significant power outage could have a material adverse impact on our business, results of operations and financial condition. In the event our customers’ information technology systems or our channel partners’ selling or distribution abilities are hindered by any of these events, we may miss financial targets, such as revenues and sales targets, for a particular quarter. Further,Furthermore, if a natural disaster occurs in a region from which we derive a significant portion of our revenue, customers in that region may delay or forego purchases of our products, which may materially and adversely impact our results of operations for a particular period. In addition, acts of terrorism or war could cause disruptions in our business or the business of channel partners, customers, or the economy as a whole. All of the aforementioned risks may be exacerbated if the disaster recovery plans for us and our channel partners prove to be inadequate. To the extent that any of the above results in delays or cancellations of customer orders, or the delaydelays in the manufacture, deploymentproducing, deploying or shipment ofshipping our products or delivering our services, our business, financial condition and results of operations would be adversely affected.
We anticipate that our operations will continue to increase in complexity as we grow, which will add additional challenges to the management of our business in the future.
We expect that our business will grow as we execute on our business plan, and that as we grow our operations will increase in complexity. To effectively manage this growth, we have made and continue to make substantial investments to improve our operational, financial and management controls as well as our reporting systems and procedures. Further, as our customer base grows, we will need to expand our professional services and other personnel. We also will need to effectively manage our direct and indirect sales processes as the number and type of our sales personnel and channel partners grows and becomes more complex, and as we expand into foreign markets. If we are unable to effectively manage the increasing complexity of our business and operations, the quality of our technology and customer service could suffer, and we may not be able to adequately address competitive challenges. These factors could all negatively impact our business, operations, operating results, and financial condition.
Any failureWe require additional financing to offer high-quality customer servicesustain our operations and execute our business plan. If we fail to secure the required additional financing on acceptable terms and in a timely manner, our ability to implement our business plan will be compromised and we may adversely affectbe unable to sustain our relationships with our customers and our financial results.operations.
Our customers depend onWe have limited capital resources and operations. To date, our customer success organizationoperations have been funded largely from the proceeds of debt and equity financings. We will require substantial additional capital in the near future to manage the post-sale customer lifecycle, including to implement new applications foroperate our customers, provide training and ongoing education services, and resolve technical issues relating to our applications.business. We may be unable to respond quickly enoughobtain additional financing on terms acceptable to accommodate short-term increases in demandus, or at all. Even if we obtain financing for our customer success services. We also may be unablenear-term operations, we expect that we will require additional capital thereafter. Our capital needs will depend on numerous factors including but not limited to modify(i) the formatscale of our customer success servicesmarketing and sales activities , (ii) other expenditures of resources to compete with changesmaintain or increase revenue and (iii) the amount of our capital expenditures, including acquisitions. We cannot assure you that we will be able to obtain capital in similar services providedthe future to meet our needs. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership held by our competitors. Increased customer demand for these services, without corresponding revenue, could increase costsexisting shareholders will be reduced and adversely affect our operating results.shareholders may experience significant dilution. In addition, our sales process is highly dependent on the reliable functional operationnew securities may contain rights, preferences, or privileges that are senior to those of our applications,common stock. If we raise additional capital by incurring debt, this will result in increased interest expense. If we raise additional funds through the issuance of securities, market fluctuations in the price of our business reputation, and positive recommendations from our existing customers. Any failure to maintain high-quality customer service, or a market perception that we do not maintain high-quality customer service,shares of common stock could adversely affect our reputation,limit our ability to sell our applicationsobtain equity financing. We cannot give any assurance that any additional financing will be available to existing and prospective customers andus, or if available, will be on terms favorable to us. If we are unable to raise capital when needed, our business, operatingfinancial condition, and results of operations would be materially adversely affected, and financial position.we could be forced to reduce or discontinue our operations.
IfWe have relied on funding from Jason Remillard for working capital to fund operations in the market for cloud-based enterprise work management applications develops more slowly than we expect,past, and there is no assurance that future financing from Mr. Remillard will be available or, declines, our business couldif available, that it will be adversely affected.on terms that are satisfactory to us.
The marketFor the past several years, we have depended on our Chief Executive Officer, Jason Remillard, for cloud-based enterprise work management applications is not as mature asworking capital to fund our operations and to execute our business plan. In addition, we have in the market for legacy on-premise enterprise systems,past been and in the future be dependent upon Mr. Remillard to provide continued funding and capital resources. However, no assurance can be given that future financing from Mr. Remillard will be available or, if available, that it is uncertain whether cloud-based applications will achieve and sustain high levelsbe on terms that are satisfactory to us. In the absence of customer demand and market acceptance. Our success will dependfinancing from other sources, the inability to a substantial extent on increased adoption of cloud-based applications, andobtain additional financing from Mr. Remillard could result in the scaling back or discontinuance of our enterprise work management software applications in particular. Many large organizations have invested substantial personnel and financial resources to integrate legacy on-premise enterprise systems into their businesses, and therefore may be reluctantoperations or unwilling to migrate to cloud-based applications or away from their traditional vendors or to new practices because of the organizational changes often requiredour inability to successfully implement new enterprise work management systems. In addition, we do not know whether the adoptionour plan of enterprise work management software will continue to grow and displace manual processes and traditional tools, such as paper-based techniques, spreadsheets, and email. It is difficult to predict customer adoption rates and demand for our applications, the future growth rate and size of the cloud-based software application market or the entry of competitive products. The expansion of the cloud-based software application market depends on a number of factors, including the cost, performance, and perceived value associated with cloud-based applications, as well as the ability of cloud-based application companies to address security and privacy concerns. If other cloud-based software application providers experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for cloud-based applications as a whole, including our enterprise work management applications, may be negatively affected. If cloud-based applications do not achieve widespread adoption, or there is a reduction in demand for cloud-based applications caused by a lack of customer acceptance, technological challenges, weakening economic conditions, security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise, our revenues may decrease and our business could be adversely affected.operations.
We have made and expect to continue to make acquisitions as a primary component of our growth strategy. We may not be able to identify suitable acquisition candidates or consummate acquisitions on acceptable terms, or we may be unable to successfully integrate acquisitions, which could disrupt our operations and adversely impact our business and operating results.
A primary component of our growth strategy has beenis to acquire complementary businesses to grow our company. For example, in September 2019, we acquired certain assets collectively known as DataExpressTM, a software platform for secure sensitive data transfer within the hybrid cloud.businesses. We intend to continue to pursue acquisitions of complementary technologies, products, and businesses as a primary component of our growth strategy to enhance the features and functionality of our applications,offerings, to expand our customer base and provide access to new markets, and to increase benefits of scale. Acquisitions involve certain known and unknown risks that could cause our actual growth or operating results to differ from our expectations. For example:
| ● | we may not be able to identify suitable acquisition candidates or to consummate acquisitions on acceptable terms; | |
| ● | we may pursue international acquisitions, which inherently pose more risks than domestic acquisitions; | |
| ● | we compete with others to acquire complementary products, technologies, and businesses, which may result in decreased availability of, or increased price for, suitable acquisition candidates; | |
| ● | we may not be able to obtain the necessary financing on favorable terms or at all, to finance | |
| ● | we may ultimately fail to consummate an acquisition even if we announce that we plan to acquire a technology, product, or business; and | |
| ● | acquired technologies, products, or businesses may not perform as we expect and we may fail to realize anticipated revenue and profits. |
In addition, our acquisition strategy may divert management’s attention away from our existing business, resulting in the loss of key customers or employees, and expose us to unanticipated problems or legal liabilities, including responsibility as a successor for undisclosed or contingent liabilities of acquired businesses or assets.
If we fail to conduct due diligence on our potential targets effectively, we may, for example, not identify problems at target companies or fail to recognize incompatibilities or other obstacles to successful integration. Our inability to successfully integrate future acquisitions could impede us from realizing all of the benefits of those acquisitions and could severely weaken our business operations. The integration process may disrupt our business and, if new technologies, products, or businesses are not implemented effectively, may preclude the realization of the full benefits expected by us and could harm our results of operations. In addition, the overall integration of new technologies, products, or businesses may result in unanticipated problems, expenses, liabilities, and competitive responses. The difficulties integrating an acquisition include, among other things:
In addition, even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of the acquisition, including the synergies, cost savings, or growth opportunities that we expect. TheseThe benefits we do realize may not be achieved within the anticipated time frame, or at all.frame.
Further, acquisitions may cause us to:
We expect our quarterly financial results to fluctuate.
We expect our net sales and operating results to vary significantly from quarter to quarter due to a number of factors, including changes in:
The variability and unpredictability of these and other factors, many of which are outside of our control, could result in our failing to meet or exceed financial expectations for a given period. If our operating results in future quarters fall below the expectations of investors or any securities analysts that cover our stock, the price of our common stock could decline substantially.
The JOBS Act allows us to postpone the date by which itwe must comply with certain laws and regulations intended to protect investors and to reduce the amount of information providedwe provide in reports filed with the SEC.
The JOBS Act is intended to reduce the regulatory burden on “emerging growth companies.” We meet the definition of an “emergingemerging growth company”company and so long as we qualify as an “emergingemerging growth company,” we will be,are, among other things:
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| ● | subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exempt from the | |
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We currently intendmay choose to take advantage of some or all of thethese reduced regulatory and reporting requirements that will be available to it so long asburdens while we qualify as an “emergingemerging growth company”.company. We have taken advantage of all of these reduced burdens in this Prospectus, and currently intend to do so in future filings. As a result, the information we provide stockholders may be different than information you might receive from other public companies in which you hold equity. In addition, the JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until those standards apply to private companies. We have elected not to opt outavail ourselves of the extension of time to comply with new or revised financial accounting standards available under Section 102(b)(1) of the JOBS Act. Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an “emerging growth company,” which may increase the risk that weaknesses or deficiencies in the internal control over financial reporting go undetected. Likewise, so long as we qualify as an “emerging growth company,” we may elect not to provide certain information, including certain financial information and certain information regarding compensation of executive officers, which we would otherwise have been required to provide in filings with the SEC, which may make it more difficult for investors and securities analysts to evaluate us.exemption. We will remain an “emergingemerging growth company” for upcompany until the earliest to five years, althoughoccur of the last day of the fiscal year in which we will lose that status sooner if our revenues exceed $1have more than $1.07 billion ifin annual revenue; the last day of the fiscal year in which we issuequalify as a “large accelerated filer”, the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt in a three-year period, or if the market value of our common stock that is held by non-affiliates exceeds $700 million. As a result, investor confidence in ussecurities; and the market pricelast day of our common stock may be adversely affected.the fiscal year in which the fifth anniversary of this offering occurs.
Notwithstanding the above, weWe are also currently a “smaller reporting company,” meaning that wethe market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company. We may continue to be a smaller reporting company and have a public floatafter this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million andas of the last business day of the second fiscal quarter or (ii) our annual revenues ofrevenue is less than $100 million during the most recently completed fiscal year.year and the market value of our stock held by non-affiliates is less than $700 million as of the last business day of the second fiscal quarter. In the event that we are still considered a “smallersmaller reporting company,” at suchthe time are we cease being an “emergingemerging growth company,” we may continue to rely on exemptions from certain disclosure requirements that area available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the disclosure we will be required to provide in our SEC filings will increase, but will still be less than it would be if we were not considered either an “emerging growth company” or a “smaller reporting company.” Specifically, similar to “emerging growth companies,” “smaller reporting companies” are able to provide simplified executive compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings, including, among other things, being required to provide only two most recent fiscal years of audited financial statements in annual reports. our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Decreased disclosures in our SEC filings due to our status as an “emergingemerging growth company”company or “smallersmaller reporting company”company may make it harder for investors to analyze our results of operations and financial prospects.
Adverse economic conditions may negatively impact our business.
Our business depends on the overall demand for information technology and on the economic health of our current and prospective customers. Any significant weakening of the economy in the United States or Europe, or of the global economy, more limited availability of credit, a reduction in business confidence and activity, decreased government spending, economic uncertainty and other difficulties may affect one or more of the sectors or countries in which we sell our solutions. Global economic and political uncertainty may cause some of our customers or potential customers to curtail spending generally or IT and data security spending specifically and may ultimately result in new regulatory and cost challenges to our operations. In addition, a strong dollar could reduce demand for our products in countries with relatively weaker currencies. These adverse conditions could result in reductions in sales of our solutions, longer sales cycles, slower adoption of new technologies and increased price competition. Any of these events could have an adverse effect on our business, operating results and financial position.
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Failure to remediate weakness in internal accounting controls could result in material misstatements in our financial statements.statements and may result in a lack of certain protections typically afforded to investors.
As a reporting company we are required, pursuant to the Sarbanes-Oxley Act, to include in our annual report our assessment of the effectiveness of our internal control over financial reporting. Our assessment must include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, and when we cease to be an emerging growth company, we will need to provide a statement that our independent registered public accounting firm has issued an opinion on the effectiveness of our internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis. Our management has identified a material weakness in our internal control over financial reporting related to lack of segregation of duties resulting from our limited personnel and has concluded that, due to such weakness, our disclosure controls and procedures were not effective as of September 30,December 31, 2021. We do not have a sufficient number of employees to segregate responsibilities and may be unable to afford increasing our staff or engaging outside consultants or professionals to overcome our lack of employees, and we do not expect to be able to remediate this weakness until after this Offering.the offering. If not remediated, or if we identify further weaknesses in our internal controls, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.
IfWe do not have a majority of independent directors on our board of directors, and we fail to implement properhave not voluntarily implemented various corporate governance measures, in the absence of which stockholders may have more limited protections against interested director transactions, conflicts of interest and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and our stock price.similar matters.
We must ensureFederal legislation, including the Sarbanes-Oxley Act, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or the NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address the board of directors’ independence, audit committee oversight, and the adoption of a code of ethics. Although we plan to adopt these corporate governance measures upon our listing on The Nasdaq Capital Market, we have adequate internal financialnot yet adopted any of these other corporate governance measures and accounting controls and procedures in place to produce accurate financial statementssince our securities are not yet listed on a timely basis. We have tested our internal controls and identified a weakness and may find additional areas for improvement in the future. Remediating this weakness will require us to hire and train additional personnel. Implementing any future changes to our internal controls may require compliance training of our directors, officers and employees, entail substantial costs to modify our accounting systems and take a significant period of time to complete. Such changes may not, however, be effective in establishing the adequacy of our internal control over financial reporting, and our failure to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In addition, investors’ perceptions that our internal control over financial reporting is inadequate or thatnational securities exchange, we are unablenot required to produce accurate financial statementsdo so.
Our Board of Directors is comprised of one individual, who is also our executive officer. As a result, we do not have independent directors on our Board of Directors. Upon our listing on The Nasdaq Capital Market, we plan to establish audit and compensation committees comprised only of independent directors. However, until that date, our current sole director has the ability, among other things, to determine his own level of compensation and to unilaterally make certain other governance decisions. and the prior absence of such standards of corporate governance may materially adversely affectleave our stock price.stockholders without protections against interested-director transactions, conflicts of interest, and similar matters.
We have recently incurred secured debt, which could have importantadverse consequences to you.
The terms of the secured debt we recentlyhave incurred could result in adverse consequences, including but not limited to the following, among other, adverse consequences:following:
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If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital, or restructure our debt. In the event that we are required to dispose of material assets or operations to meetservice our debt service and to meet our other obligations, the value realized on such assets or operations will depend on market conditions and the availability of buyers. Accordingly, any such sale may not, among other things, be for a sufficient dollar amount. Certain of our obligations are secured by a security interest in all of our assets. The foregoing encumbrances may limit our ability to dispose of material assets or operations. We also may not be able to restructure our indebtedness on favorable economic terms, if at all.
Risks Related to this Offering and Ownership of Our Securities
Because we became a reporting company under the Exchange Act by means other than a traditional underwritten initial public offering, we may not be able to attract the attention of research analysts at major brokerage firms.
Because we did not become a reporting company by conducting an underwritten initial public offering, or IPO, of our common stock on a national securities exchange, and because prior to this offering, our stock traded on OTC Pink rather than being listed on a national securities exchange, research analysts of brokerage firms may not provide coverage of our Company. In addition, investment banks may be less likely to agree to underwrite secondary offerings on our behalf than they might if we had become a public reporting company by means of an IPO because they may be less familiar with our Company as a result of more limited coverage by analysts and the media, and because we became public at an early stage in our development.
Our common stock will rank junior to all our liabilities to third party creditors, and to any class or series of our capital stock created after this offering specifically ranking by its terms senior to the common stock, in the event of a bankruptcy, liquidation or winding up of our assets.
In the event of bankruptcy, liquidation or winding up, our assets will be available to pay obligations on our common stock only after all our liabilities have been paid. Our common stock will effectively rank junior to all existing and future liabilities held by third party creditors. The terms of our common stock do not restrict our ability to raise additional capital in the future through the issuance of debt or senior series of preferred stock. Our common stock will also rank junior to our existing Series A and any Series B Preferred Stock we may issue, as well as any class or series of our capital stock created after this offering specifically ranking by its terms senior to the common stock. In the event of bankruptcy, liquidation or winding up, there may not be sufficient assets remaining, after paying our liabilities, to pay amounts due on any or all of our common stock then outstanding.
Future issuances of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and future issuances of preferred stock, which could rank senior to our common stock for the purposes of dividends and liquidating distributions, may adversely affect the level of return you may be able to achieve from an investment in our common stock.
In the future, we may attempt to increase our capital resources by offering debt securities. Upon bankruptcy or liquidation, holders of our debt securities, and lenders with respect to other borrowings we may make, would receive distributions of our available assets prior to any distributions being made to holders of our common stock. Moreover, if we issue preferred stock, the holders of such preferred stock could be entitled to preferences over holders of common stock in respect of the payment of dividends and the payment of liquidating distributions. Because our decision to issue debt or preferred stock in any future offering, or borrow money from lenders, will depend in part on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any such future offerings or borrowings. Holders of our common stock must bear the risk that any future offerings we conduct or borrowings we make may adversely affect the level of return, if any, they may be able to achieve from an investment in our common stock.
Our common stock is currently quotedsubject to the SEC’s penny stock rules, which may make it difficult for broker-dealers to complete customer transactions and could adversely affect trading activity in our securities.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock may be less than $5.00 per share for some period of time and therefore would be a penny stock according to SEC rules, unless we are listed on a national securities exchange. We can offer no assurance that if we successfully list on The Nasdaq Capital Markets, we will be able to continue to satisfy the conditions necessary to stay listed on The Nasdaq Capital Market. Under the SEC penny stock rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
| ● | make a special written suitability determination for the purchaser; | |
| ● | receive the purchaser’s prior written agreement to the transaction; | |
| ● | provide the purchaser with risk disclosure documents which identify certain risks associated with investing in penny stocks and which describe the market for these penny stocks as well as a purchaser’s legal remedies; and | |
| ● | obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a penny stock can be completed. |
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If required to comply with these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected.
Our common stock has historically experienced low trading volume on the OTC Pink, underand therefore the price may not accurately reflect our value. There can be no assurance that an active market for our common stock will develop, either now or in the future.
Our shares of common stock have been thinly traded on the OTC Pink. Only a small percentage of our common stock is available to be traded and is held by a small number of holders and the price, if traded, may not reflect our actual or perceived value. There can be no assurance that there will be an active market for our shares of common stock either now or in the future. The market liquidity will be dependent on the perception of our operating business, among other things. We will take certain steps that may include any or all of investor awareness campaigns, press releases, road shows and conferences to increase awareness of our business and any steps that we might take to bring us to the awareness of investors may require that we compensate consultants with cash and/or stock.
In addition, the trading symbol “ATDS.” However, trading involume of stocks quoted on the OTC Pink is often thin. Therefore, you may be unable to liquidate your investment in our stock.
Trading in stocks quoted on the OTC Pinklow and is often thin and is characterized by wide fluctuations in trading prices due to many factors that may have little to do with a company’s operations or business prospects. We cannot assure you that there will be a market forBecause our common stock inwas quoted on the future.
Offers or availability for sale of a substantial number of sharesOTC Pink prior to this offering, trading has been only possible through broker-dealers, and the trading volume of our common stock may causehas been low. Because we were quoted on the price ofOTC Pink prior to this offering and were not a privately-held company, our common stock may continue to decline.
The existence of shares of common stock issuable upon conversion of outstanding shares of our Series A Convertible Preferred Stock creates a circumstance commonly referred to as an “overhang” which can act as a depressant to our common stock price. The existence of an overhang, whether or not sales have occurred or are occurring, also could make our ability to raise additional financing through the sale of equity or equity-linked securities more difficult in the future at a time and price that we deem reasonable or appropriate. If our existing shareholders and investors seek to sell a substantial number of shares of our common stock, such selling efforts may cause significant declines in the market price of our common stock.
We may not be successful in our attempts to list on the Nasdaq. As such,experience low trading in our stock may be limitedvolume after this offering, and you may not be able to liquidateexperience difficulty liquidating your investment in our stock.
We intend to list our shares of common stock and the Warrants on Nasdaq. However, there is no assurance we will be successful. The approval of such listing on the Nasdaq Capital Market is a condition of closing this offering. The OTC Pink is significantly more limited market than the Nasdaq stock market. The quotation of our shares of common stock on the OTC Pink may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.
There can be no assurance that there will be an active market for our shares of common stock either now or in the future. Market liquidity will depend on the perception of our operating business and any steps that our management might take to bring us to the awareness of investors. There can be no assurance given that there will be any awareness generated. Consequently, investors may not be able to liquidate their investment or liquidateliquidating it at a price that reflects the value of theour business. As a result, holders of our securities may not find purchasers for our securities should they desire to sell them. Consequently,Accordingly, our securities should be purchased only by investors having no need for liquidity in their investment and who can hold our securities for an indefinite period of time. Our listing on The Nasdaq Capital Market is a condition of this offering, but we cannot assure you that there will be a market for our common stock in the future.
We have had a history of losses and may incur future losses, which may prevent us from attaining profitability.
We have had a history of operating losses since our inception and, as of SeptemberJune 30, 2021,2022, we had an accumulated deficit of $40,230,125.$45,978,192. We may incur operating losses in the future, and these losses could be substantial and impact our ability to attain profitability. We do not expect to significantly increase expenditures for product development, general and administrative expenses, and sales and marketing expenses; however, ifIf we cannot increase revenue growth, we will not achieve or sustain profitability or positive operating cash flows. Even if we achieve profitability and positive operating cash flows, we may not be able to sustain or increase profitability or positive operating cash flows on a quarterly or annual basis.
There is substantial doubt about our ability to continue as a going concern.
Our independent registered public accounting firm has included an explanatory paragraph in their report in our audited financial statements for the fiscal year ended December 31, 20202021 to the effect that our losses from operations and our negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern within one year after the date that the financial statements are issued. We may be required to cease operations which could result in our stockholders losing all or almost all of their investment.
Because As of June 30, 2022, we becamehad no cash and a reporting company under the Exchange Act by meansbank overdraft of $3,781 and our principal sources of liquidity were trade accounts receivable of $231,507 and prepaid, advance payment for acquisition of $2,726,188 and other than a traditional underwritten initial public offering, we may not be ablecurrent assets of $27,950, as compared to attract the attentioncash of research analysts at major brokerage firms.
Because we did not become a reporting company by conducting an underwritten initial public offering, or IPO,$1,204,933, trade accounts receivable of our common stock,$21,569 and because our stock traded on OTC Pink rather than being listed on a national securities exchange, research analystsprepaid and other current assets of brokerage firms may not provide coverage$70,802 as of our company. In addition, investment banks may be less likely to agree to underwrite secondary offerings on our behalf than they might if we were to become a public reporting company by means of an IPO because they may be less familiar with our company as a result of more limited coverage by analysts and the media, and because we became public at an early stage in our development.
Our common stock is subject to the SEC’s penny stock rules, which may make it difficult for broker-dealers to complete customer transactions and could adversely affect trading activity in our securities.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock may be less than $5.00 per share for some period of time and therefore would be a “penny stock” according to SEC rules, unless we are listed on a national securities exchange. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
If required to comply with these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected.December 31, 2021.
The market price of our common stock may be volatile and may fluctuate in a way that is disproportionate to our operating performance.
Our stock price may experience substantial volatility as a result of a number of factors, including:
| ● | sales or potential sales of substantial amounts of our common stock; | |
| ● | the success of competitive products or technologies; | |
| ● | announcements about us or about our competitors, including new product introductions and commercial results; | |
| ● | the recruitment or departure of key personnel; | |
| ● | litigation and other developments; |
| ● | actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts; | |
| ● | variations in our financial results or those of companies that are perceived to be similar to us; and | |
| ● | general economic, industry and market conditions. |
Many of these factors are beyond our control. The stock markets in general, and the market for companies whose shares are quoted on the OTC Pink Sheet companies in particular have historically experienced extreme price and volume fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors could reduce the market price of our common stock, regardless of our actual operating performance.
We currently have outstanding shares of preferred stock that have special rights that could limit our ability to undertake corporate transactions, inhibit potential changes of control and reduce the proceeds available to our common stockholders in the event of a change in control.
We currently have outstanding two classes of stock, common stock and preferred stock; thestock outstanding. Our preferred stock consists of two series, one of which is designated as Series A Preferred Stock. Thestockholders have special rights that holders of our common stock do not have. Currently, we have two types of preferred stock: Series A Preferred Stock are entitledand Series B Preferred Stock. An example of special rights that holders of our Series A Preferred Stock have is the ability to vote on all matters submitted to holders of common stock at a conversion ratio ofwith 15,000 votes for each share of Series A Preferred Stock. Examples of the special rights that holders of our Series B Preferred Stock have are that each share of Series B Preferred Stock has (i) a stated value of $10.00 per share; (ii) is convertible into common stock at a price per share equal to 61% of the lowest price for the Company’s common stock during the 20 day of trading preceding the date of the conversion; (iii) earns dividends at the rate of 9% per annum; but (iv) has no voting rights. Our Series A Preferred Stock and Series B Preferred Stock ranks senior to holders of our common stock as to dividend rights and liquidation preference. We currently have shares of Series A Preferred Stock outstanding.
As a result of the rights our preferred stockholders have, we may not be able to undertake certain corporate transactions, including equity or debt offeringstransactions necessary to raise sufficient capital to run our business, change of control transactions or other transactions that may otherwise be beneficial to our businesses. These provisionsThe holdings of the preferred stockholders may discourage, delay, or prevent a merger, acquisition, or other change in control of us that stockholders may consider favorable, including transactions in which our common stockholders might otherwise receive a premium price for their shares. The market price of our common stock could be adversely affected by the rights of our preferred stockholders.
We have never paid and do not currently intend to pay cash dividends.
We have never paid cash dividends on any of our capitalcommon stock and we currently intend to retain future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be our common stockholders’ sole source of gain for the foreseeable future. Under the terms of our existing Articles of Incorporation, we cannot declare, pay, or set aside any dividends on shares of any class or series of our capital stock, other than dividends on shares of common stock payable in shares of common stock, unless we pay dividends to the holders of our preferred stock. Additionally, without special stockholder and boardBoard of Directors approvals, we cannot currently pay or declare dividends and will be limited in our ability to do so until such time, if ever, that we are listed on a stock exchange.
Our chief executive officerChief Executive Officer has the ability to control all matters submitted to stockholders for approval, which limits minority stockholders’ ability to influence corporate affairs.
Our chief executive officer,Chief Executive Officer, Jason Remillard, holds 150,000149,892 shares of our Series A Preferred Stock (each share votes as the equivalent of 15,000 shares of common stock on all matters submitted for a vote by the common stockholders), and as such, Mr. Remillard would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, Mr. Remillard would control the election of directors and approval of any merger, consolidation, or sale of all or substantially all of our assets.
This concentration of voting power could delay or prevent a change of control of our companyCompany on terms that other stockholders may desire, which could deprive our stockholders from receiving a premium for their common shares.stock. Concentrated ownership and control by Mr. Remillard could adversely affect the price of our common stock. Any material sales of common stock by Mr. Remillard, for example, could adversely affect the price of our common stock.
The interests of Mr. Remillard and his affiliates may differ from the interests of other stockholders with respect to the issuance of shares, business transactions with and/or sales to other companies, selection of officers and directors, and other business decisions. The non-controlling stockholders are severely limited in their ability to override the decisions of Mr. Remillard.
Provisions in our articles of incorporation and bylaws and under Nevada law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our Articlesarticles of incorporation and bylaws, respectively, may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which our common stockholders might otherwise receive a premium price for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our boardBoard of directorsDirectors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our boardBoard of directors.Directors.
We will continue to incur increasedsubstantial costs as a result of operating as a public reporting company, and our management will be required to devote substantial time to new compliance initiatives.
As a public reporting company listed on The Nasdaq Capital Market, we will incur significant legal, accounting, and other expenses that we did not incur as a private company.company or while our common stock was quoted on the OTC Pink. In addition, the Sarbanes-Oxley Act and rules subsequently implemented by the SEC have imposed various requirements on public companies, including establishmentto establish and maintenance ofmaintain effective disclosure and financial controls and corporate governance practices. Complying with these laws and regulations requireswill require the time and attention of our boardBoard of directorsDirectors and management and increaseswill increase our expenses. We estimate that we will incur approximately $150,000$350,000 to $200,000$600,000 in 20212022 to comply with public company compliance requirements with many of those costs recurring annually thereafter.
Among other things, we will be required to:
| ● | maintain and evaluate a system of internal controls over financial reporting in compliance with the requirements of | |
| ● | maintain adequate insurance coverage to attract and retain directors and officers; | |
| ● | provide adequate compensation to attract qualified directors; | |
| ● | maintain policies relating to disclosure controls and procedures; | |
| ● | prepare and distribute periodic reports in compliance with our obligations under federal securities laws; | |
| ● | institute a more comprehensive compliance function, including corporate governance; and | |
| ● | involve, to a greater degree, our outside legal counsel and accountants in the above activities. |
The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders are expensivesignificant and much greater for a publicly-held company listed on The Nasdaq Capital Market than that offor a privately-held company or for a Company whose common stock is quoted on the OTC Pink, and compliance with these rules and regulations may require us to hire additional financial reporting, internal controls and other finance personnel, and will involve a material increase in regulatory, legal and accounting expenses, and the attention of management. There can be no assurance that we will be able to comply with the applicable regulations in a timely manner, if at all. In addition, being a public company makeslisted on The Nasdaq Capital Market may make it more expensive for us to obtain director and officer liability insurance. In the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain this coverage.
We may be exposed to potential risks resulting from requirements under Section 404 of the Sarbanes-Oxley Act.
As a reporting company we are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to include in our annual report our assessment of the effectiveness of our internal control over financial reporting. We do not have a sufficient number of employees to segregate responsibilities and may be unable to afford increasing our staff or engaging outside consultants or professionals to overcome our lack of employees.
Our audit and compensation committees will be established with independent Board members as the sole members of such committees on the first day our Common Stock and Warrants are traded on Nasdaq. Until that date, our sole director has the ability, among other things, to determine his own level of compensation. the prior absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations.
We currently have outstanding, and we may in the future issue, instruments which are convertible into shares of common stock, which will result in additional dilution to you.
We currently have outstanding instruments which are convertible into shares of common stock, and we may need to issue similar instruments in the future. In the event thatIf these convertible instruments are converted into shares of common stock, outstanding stock, or thatif we make additional issuances ofissue other convertible or exchangeable securities, you could experience additional dilution. Furthermore, we cannot assure you that we will be able to issue shares or other securities in any other offering at a price per share that is equal to or greater than the price per share paid by investorsyou pay or the then currentthen-current market price.
We may, in the future, issue additional shares of our common stock, which may have a dilutive effect on our current stockholders.
Our Articles authorizesarticles of incorporation authorize the issuance of one billion (1,000,000,000)125,000,000 shares of common stock, of which 945,3161,097,721 shares were issued and outstanding as of December 6, 2021.November 2, 2022. The future issuance of shares of our common sharesstock may result in substantial dilution in the percentage of our common sharesstock held by our then existingthen-existing stockholders. We may value any common stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors and might have an adverse effect on any trading market for our common stock.
An investment in our common stock is speculative and there can be no assurance of any return on any such investment.
An investment in our common stock is speculative and there is no assurance that investors will obtain any return on their investment. Investors will be subject to substantial risks involved in an investment in us, including the risk of losing their entire investment.
If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud. Any inability to report and file our financial results accurately and on a timely basis could harm our reputation and adversely impact the trading price of our common stock.
Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operation, and access to capital. We have not performed an in-depth analysis to determine if historical un-discoveredundiscovered failures of internal controls exist, and we may in the future discover areas of our internal control that need improvement.
Our shares of common stock are thinly traded,We must ensure that we have adequate internal financial and therefore the priceaccounting controls and procedures in place to produce accurate financial statements on a timely basis. We have tested our internal controls and identified a weakness and may not accurately reflect our value. There can be no assurance that there will be an active marketfind additional areas for our shares of common stock either now or in the future.
Our shares of common stock are thinly traded. Only a small percentage of our common stock is available to be traded, and is held by a small number of holders and the price, if traded, may not reflect our actual or perceived value. There can be no assurance that there will be an active market for our shares of common stock either now orimprovement in the future. The market liquidityRemediating this weakness will be dependent on the perceptionrequire us to hire and train additional personnel. Implementing any future changes to our internal controls may require compliance training of our operating business, among other things. We willdirectors, officers, and employees, entail substantial costs to modify our accounting systems and take certain steps including utilizing investor awareness campaigns, press releases, road shows and conferencesa significant period of time to increase awarenesscomplete. Such changes may not, however, be effective in establishing the adequacy of our businessinternal control over financial reporting, and any stepsour failure to produce accurate financial statements on a timely basis could increase our operating costs and could materially impair our ability to operate our business. In addition, investor perception that our internal control over financial reporting is inadequate or that we might takeare unable to bring us to the awareness of investorsproduce accurate financial statements may require that we compensate consultants with cash and/or stock.materially adversely affect our stock price.
There can be no assurance that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business and trading may be at an inflated price relative to the performance of our company due to, among other things, availability of sellers of our shares. If a market should develop, the price may be highly volatile. Because there may be a low price for our shares of common stock, many brokerage firms or clearing firms may not be willing to effect transactions in the securities or accept our shares for deposit in an account. Even if an investor finds a broker willing to affect a transaction in the shares of our common stock, the combination of brokerage commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of low priced shares of common stock as collateral for any loans.
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If our stockholders sell substantial amounts of our common stock in the public market, or upon the expiration of any statutory holding period under Rule 144 or upon the exercise of outstanding options or warrants, itWarrants, such sale could create a circumstance commonly referred to as an “overhang” and in. In anticipation of which,an overhang, the market price of our common stock could fall.decline. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financingfunds through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
Our management will have broad discretion in the use of the net proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.
Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section titled “Use of Proceeds”, and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary from their currently intended use. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in investment-grade, interest-bearing securities. These investments may not yield a favorable return to holders of our security holders.common stock.
Warrants The warrants offered hereby are speculative in nature.
The Warrants offered in this offering do not confer any rights of common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of our common stock at a fixed price for a limited period of time. Specifically, commencing on the date of issuance, holders of the Warrants may exercise their right to acquire the common stock and pay an exercise price of $4.15$ per share (100% of the public offering price of a Unit), prior to five years from the date of issuance, after which date any unexercised Warrants will expire and have no further value. In addition, there is no established trading market for the Warrants and, although we have applied to list the warrantsWarrants on The Nasdaq Capital Market, there can be no assurance that an active trading market will develop. The approval of such listing on theThe Nasdaq Capital Market is a condition of closing this offering. Without an active trading market, the liquidity of the warrantsWarrants will be limited.
Holders of the Warrants will have no rights as a common stockholder until they acquire our common stock.
Until holders of the Warrants acquire shares of our common stock upon exercise of the Warrants, the holders will have no rights with respect to shares of our common stock issuable upon exercise of the Warrants. Upon exercise of the Warrants, the holder will be entitled to exercise the rights of a common stockholder as to the security exercised only as to matters for which the record date occurs after the exercise.
Provisions of the Warrants offered by this Prospectus could discourage an acquisition of us by a third party.
Certain provisions of the Warrants offered by this Prospectus could make it more difficult or expensive for a third party to acquire us. The Warrants prohibit us from engaging in certain transactions constituting “fundamental transactions” unless, among other things, the surviving entity assumes our obligations under the warrants.Warrants. These and other provisions of the Warrants offered by this Prospectus could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to you.
Even if the reverse stock split achieves the requisite increase in the market price of our common stock, we cannot assure youThere is no guarantee that we will be able to continue to comply with the minimum bid price requirementcontinued listing standards of the Nasdaq Capital Market , and a failure to do so could result in a delisting of our common stock.
Even if the reverse stock split achieves the requisite increase in the market price of our common stock to be in compliance with the minimum bid price of the Nasdaq Capital Market, thereThere can be no assurance that the market price of our common stock following the reverse stock split will remain at the level required for continuing compliance with that requirement. It is not uncommon for the market priceThe Nasdaq Capital Market continued listing requirement of a company’s common stock to decline in the period followingminimum bid price above one dollar. There are a reverse stock split. If the market price of our common stock declines following the effectuation of the reverse stock split, the percentage decline may be greater than would occur in the absence of a reverse stock split. In any event, other factors unrelated to the number of shares of our common stock outstanding, such asfactors, including negative financial or operational results, that could adversely affect the market price of our common stock and jeopardize our ability to meet or maintain theThe Nasdaq Capital Market’s minimum bid price requirement. The approval of such listing on the Nasdaq Capital Market is a condition of closing this offering.
Even if the reverse stock split increases the market price of our common stock and we meet the initial listing requirements of the Nasdaq Capital Market, there can be no assurance that we will be able to comply with the continued listing standards of the Nasdaq Capital Market, a failure of which could result in a de-listing of our common stock.
The Nasdaq Capital Market requires that the trading price of its listed stocks remain above one dollar in order for the stock to remain listed. If a listed stock trades below one dollar for more than 30 consecutive trading days, then it is subject to delisting from theThe Nasdaq Capital Market. In addition, to maintain a listing on theThe Nasdaq Capital Market we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, and certain corporate governanceshareholder approval requirements. If we are unable to satisfy these requirements or standards, we could be subject to delisting, which would have a negative effect on the price of our common stock and wouldcould impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with the listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price, or improve the liquidity of our common stock, prevent our common stock from dropping below the minimum bid price requirement, or prevent future non-compliance with the listing requirements.
The reverse stock split may decrease the liquidity of the shares of our common stockOur .
The liquidity of the shares of our common stock may be affected adversely by the reverse stock split given the reduced number of shares that will be outstanding following the reverse stock split, especially if the market price of our common stock does not increase as a result of the reverse stock split. In addition, the reverse stock split may increase the number of shareholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such shareholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales.
Following the reverse stock split, the resulting market price of our common stock may not attract new investors, including institutional investors, and may not satisfy the investing requirements of those investors. Consequently, the trading liquidity of our common stock may not improve.
Although we believe that a higher market price of our common stock may help generate greater or broader investor interest, there can be no assurance that the reverse stock split will result in aour share price that will attract new investors, including institutional investors. In addition, there can be no assurance that the market price of our common stock will satisfy the investing requirements of those investors. As a result,
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Even once listed on The Nasdaq Capital Market, the trading liquidityshare price of our common stock may not necessarily improve.
There is no assurance that once listed on the Nasdaq Capital Market we will not continue to experience volatility in our share price.
The OTC Pink, tier, where our common stock is currently quoted, provides significantly less liquidity than theThe Nasdaq Capital Market. As such, investors and potential investors may find it difficult to obtain accurate stock price quotations, and holders of our common stock may be unable to resell their securities at or near their original offering price or at any price. Our public offering price per Unit may vary from the market price of our common stock after the offering. If an active market for our stock develops and continues, our stock price may nevertheless be volatile. If our stock experiences volatility, investors may not be able to sell their common stock at or above the public offering price per Unit. Sales of substantial amounts of our common stock, or the perception that such sales might occur, could adversely affect prevailing market prices of our common stock and our stock price may decline substantially in a short period of time. As a result, our shareholders could suffer losses or be unable to liquidate their holdings. No assurance can be given that the price of our common stock will become less volatile whenthan it is now once listed on theThe Nasdaq Capital Market.
Risks Related to the Covid-19 Pandemic
Adverse or uncertain macroeconomic or geopolitical conditions or reduced IT spending may adversely impact our business, revenues, and profitability.
Our business, operations and performance are dependent in part on worldwide economic conditions and events that may be outside of our control, such as political and social unrest, terrorist attacks, hostilities, malicious human acts, climate change, natural disasters (including extreme weather), pandemics or other major public health concerns and other similar events, and the impact these conditions and events have on the overall demand for enterprise computing infrastructure solutions and on the economic health and general willingness of our current and prospective end customers to purchase our solutions and to continue spending on IT in general. The global macroeconomic environment has been, and may continue to be, inconsistent, challenging and unpredictable due to international trade disputes, tariffs, including those recently imposed by the U.S. government on Chinese imports to the U.S., restrictions on sales and technology transfers, uncertainties related to changes in public policies such as domestic and international regulations, taxes, or international trade agreements, elections, geopolitical turmoil and civil unrests, instability in the global credit markets, uncertainties regarding the effects of the United Kingdom’s separation from the European Union, commonly known as “Brexit”, actual or potential government shutdowns, and other disruptions to global and regional economies and markets. Specifically, the recent and developing outbreak of a respiratory illness caused by the 2019 novel coronavirus that was named by the World Health Organization as COVID-19 (collectively with any future mutations or related strains thereof, “COVID-19”) has caused and may continue to cause travel bans or disruptions, supply chain delays and disruptions, and additional macroeconomic uncertainty. The impact of COVID-19 is fluid and uncertain, but it has caused and may continue to cause various negative effects, including an inability to meet with actual or potential customers, our end customers deciding to delay or abandon their planned purchases, us deciding to delay, cancel, or withdraw from user and industry conferences and other marketing events, and delays or disruptions in our or our OEM partners’ supply chains, including delays or disruptions in procuring and shipping the hardware appliances on which our software solutions run. As a result, we may experience extended sales cycles, our ability to close transactions with new and existing customers and partners may be negatively impacted, potentially significantly, our ability to recognize revenue from software transactions we do close may be negatively impacted, potentially significantly, our demand generation activities, and the efficiency and effect of those activities, may be negatively affected, our ability to provide 24x7 worldwide support and/or replacement parts to our end customers may be effected, and it has been and, until the COVID-19 outbreak is contained, willmay continue to be more difficult for us to forecast our operating results. These macroeconomic challenges and uncertainties, including the COVID-19, outbreak, have, and may continue to, put pressure on global economic conditions and overall IT spending and may cause our end customers to modify spending priorities or delay or abandon purchasing decisions, thereby lengthening sales cycles and potentially lowering prices for our solutions and product and services offerings, and may make it difficult for us to forecast our sales and operating results and to make decisions about future investments, any of which could materially harm our business, operating results and financial condition.
Public health threats or outbreaks of communicable diseases could have a material adverse effect on the Company’sour operations and overall financial performance.
The CompanyWe may face risks related to public health threats or outbreaks of communicable diseases. A global health crisis, such as the current outbreak of coronavirus or COVID-19, could adversely affect the United States and global economies and limit the ability of enterprises to conduct business for an indefinite period of time. The current outbreak of COVID-19 has negatively impacted the global economy, disrupted financial markets, and international trade, resulted in increased unemployment levels and significantly impacted global supply chains, all of which have the potential to impact the Company’sour business.
In addition, government authorities have implemented various mitigation measures, including travel restrictions, limitations on business operations, stay-at-home orders, and social distancing protocols. The economic impact of the aforementioned actions may impair our ability to sustain sufficient financial liquidity and impact our financial results. Specifically, the continued existence and/or spread of COVID-19 and efforts to contain the virus could: (i) result in an increase in costs related to delayed payments from customers and uncollectable accounts, (ii) cause a reduction in revenue related to late fees and other charges related to governmental regulations, (iii) cause delays and disruptions in the supply chain related to obtaining necessary materials for our network infrastructure or customer equipment, (iv) cause workforce disruptions, including the availability of qualified personnel; and (v) cause other unpredictable events.
As we cannot predict the duration or scope of the global health crisis, the anticipated negative financial impact to our operating results cannot be reasonably estimated but could be material and last for an extended period of time.
Prolonged economic uncertainties or downturns could materially adversely affect our business.
Our business depends on our current and prospective customers’ ability and willingness to invest money in IT services, and more importantly cybersecurity projects, which in turn is dependent upon their overall economic health. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from COVID-19 and numerous other factors beyond our control, could cause a decrease in business investments, including corporate spending on enterprise software in general, and could negatively affect the rate of growth of our business. Uncertainty in the global economy makes it extremely difficult for our customers and us to forecast and plan future business activities accurately. This could cause our customers to reevaluate decisions to purchase our product or to delay their purchasing decisions, which could lengthen our sales cycles.
We have aA significant number of our customers many of which arehave been and continue to be impacted significantly by the economic turmoil caused by the COVID-19 pandemic. Our customers may reduce their spending on IT; delay or cancel IT projects; focus on in-house development efforts; or seek to lower their costs by renegotiating maintenance and support agreements. To the extent purchases of licenses for our software and services are perceived by customers and potential customers to be discretionary, our revenues may be disproportionately affected by delays or reductions in general IT spending. If the economic conditions of the general economy or industries in which we operate worsen from present levels, our business, results of operations and financial condition could be adversely affected.
IfIn addition, should we are unable to attract new customers and expand sales to existing customers, both domestically and internationally,have a significant number of our growthemployees contract the COVID-19 virus it could be slower than we expect, and our business may be harmed.
Our success will depend, in part,have a negative impact on our ability to support new and existing customer growth and maintain customer satisfaction. Due to COVID-19, our sales and marketing teams have avoided in-person meetings and are increasingly engaging withserve customers online and through other communications channels, including virtual meetings. While our revenues increased in the third quarter of 2020 compared to the third quarter of 2019, there is no guarantee that for the long run our sales and marketing teams will be as successful or effective using these other communications channels as they try to build relationships. If we cannot provide the tools and training to our teams to efficiently do their jobs and satisfy customer demands, we may not be able to achieve anticipated revenue growth as quickly as expected.
Our future growth depends upon expanding sales of our products to existing customers and their organizations and receiving subscription and maintenance renewals. If our customers do not purchase additional licenses or capabilities, our revenues may grow more slowly than expected, may not grow at all, or may decline. There can be no assurance that our efforts would result in increased sales to existing customers (“upsells”) and additional revenues. If our efforts to upsell to our customers are not successful, our business would suffer. Our future growth also depends in part upon increasing our customer base, particularly those customers with potentially high customer lifetime values. Our ability to achieve significant growth in revenues in the future will depend, in large part, upon the effectiveness of our sales and marketing efforts, both domestically and internationally, and our ability to attract new customers. Our ability to attract new customers may be adversely affected by the continued COVID-19 pandemic. If we fail to attract new customers and maintain and expand those customer relationships, our revenues may be adversely affected, and our business will be harmed.a timely fashion.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions, or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements.” All statements other than statements of historical facts contained in this Prospectus may be forward-looking statements. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “continues,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “would” or “should” or, in each case, their negative or other variations or comparable terminology. They appear in a number of places throughout this Prospectus, and include statements regarding our intentions, beliefs, or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, future acquisitions, and the industry in which we operate.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the “Risk Factors” section of this Prospectus, which include, but are not limited to, the following:
| ● | we will need additional capital to fund our operations; | |
| ● | there is substantial doubt about our ability to continue as a going concern; | |
| ● | we will face intense competition in our market, and we may lack sufficient financial and other resources to maintain and improve our competitive position; | |
| ● | we are dependent on the continued services and performance of our | |
| ● | our common stock is currently quoted on the OTC Pink and is | |
| ● | we have had a history of losses and may incur future losses, which may prevent us from attaining profitability; | |
| ● | the market price of our common stock may be volatile and may fluctuate in a way that is disproportionate to our operating performance; | |
| ● | we have shares of preferred stock that have special rights that could limit our ability to undertake corporate transactions, inhibit potential changes of control, and reduce the proceeds available to our common stockholders in the event of a change in control; | |
| ● | we have never paid and do not intend to pay cash dividends; | |
| ● | our | |
| ● | the other factors described in “Risk Factors.” |
Those factorsfactors should not be construed as exhaustive and should be read with the other cautionary statements in this Prospectus.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this Prospectus. The matters summarized under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this Prospectus could cause our actual results to differ significantly from those contained in our forward-looking statements. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this Prospectus, those results or developments may not be indicative of results or developments in subsequent periods.
In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this Prospectus speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments, except as required by applicable law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.
USE OF PROCEEDS
We estimate that the net proceeds from this offering will be approximately $10,615,000$ from the sale of the 2,891,566 Units offered in this Offering,offering, after deducting estimated underwriting discounts and estimated offering expenses payable by us. If the Underwriter’sunderwriter’s over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $12,253,000.$ . We will not receive any of the proceeds from the sale of our Common Stock by the Selling Stockholders. We intend to use the net proceeds from this offering, and any proceeds from the exercise of warrants,the Warrants, for the following purposes:
| Use of Net Proceeds*: | ||||
| Research and Development | $ | 1,500,000 | ||
| Debt repayment | 2,400,000 | |||
| Engineering, operations, quality control, information technology and sales force expansion Marketing and Sales | 3,000,000 | |||
| Working Capital | 3,715,000 | |||
| Total Uses | $ | 10,615,000 | ||
| Use of Net Proceeds*: | ||||
| General corporate purposes and operations, including engineering, tooling investments, information technology | ||||
| Acquisitions | ||||
| Debt repayment | ||||
| Expansion of sales force, inbound and outbound marketing | ||||
| Technology and research development | ||||
| IT development operations and hosting facility expansion | ||||
| Total Uses | $ | |||
* Assuming the over-allotment is not exercised.
The Company intendsWe intend to use $1,247,000the net proceeds of this offering to for general corporate purposes, working capital, potential acquisitions and to repay approximately $ of short-term debt obligations.
Our management will have broad discretion over the use of the net proceeds to repay two secured promissory notes to Auctus Fund, LLC (interest rate of 12%; maturity dates of April 23, 2022 and July 27, 2022, respectively; the proceeds of the notes were used for general corporate purposes); $90,337.50from this offering. Our expected use of the net proceeds to repay a convertible promissory note to Quick Capital, LLC (interest ratefrom this offering represents our intentions based upon our current plans and business conditions. The amounts and timing of 5%; maturity dates of August 15, 2021;our expenditures will depend upon numerous factors, and the proceeds of the note were used for general corporate purposes); $1,016,944 to repay five other outstanding convertible promissory notes (interest rates range from 9% to 12%; maturity dates range from August 2022 to October 2022; the proceeds of the notes were used for general corporate purposes); and, accrued and unpaid interest on all of the foregoing convertible promissory notes.
The actual allocation of proceeds realized from this offering will depend upon our operating revenues and cash position and our working capital requirements and may change. Therefore, asAs of the date of this Prospectus, we cannot specifypredict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. Accordingly,offering or the amounts that we will actually spend on the uses set forth above. While we have discretion in the applicationno current agreements or commitments for any specific acquisitions at this time, we may use a portion of the net proceeds and investors will be relying on our judgment regarding the application of the proceeds of this offering.for these purposes.
Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S.United States government securities. We anticipate that the proceeds from this offering will enable us to further grow the business and increase cash flows from operations.
DETERMINATION OF OFFERING PRICE
The offering price of the Units has been negotiated between the Underwriterunderwriter and us considering our historical performance and capital structure, prevailing market conditions, and overall assessment of our business. Each Unit consists of one share of our common stock and a warrantWarrant to purchase one share of our common stock at an exercise price equal to $4.15$ , which is 100% of the assumed public offering price of the Units.
DILUTION
If you invest in our Units in this offering, your interest will be diluted to the extent of the difference between the assumed public offering price per share of common stock that is part of the Unit and the as adjustedas-adjusted net tangible book value per share of common stock immediately after this offering.
Our net tangible book value is the amount of our total tangible assets less our total liabilities. Our net tangible book value as of SeptemberJune 30, 20212022 was ($4,774,623)$ , or ($5.76)$ per share of common stock.
As adjustedAs-adjusted net tangible book value is our net tangible book value after taking into account the effect of the sale of Units in this offering at the assumed public offering price of $4.15$ per Unit and after deducting the underwriting discounts and commissions and other estimated offering expenses payable by us. Our as adjusted net tangible book value as of SeptemberJune 30, 20212022 would have been approximately $7,395,377,$ , or $1.78$ per share. This amount represents an immediate increase in as adjustedas-adjusted net tangible book value of approximately $7.54$ per share to our existing stockholders, and an immediate dilution of $2.37$ per share to new investors participating in this offering. Dilution per share to new investors is determined by subtracting as adjusted net tangible book value per share after this offering from the public offering price per share paid by new investors.
The following table illustrates this per share dilution:
| Assumed public offering price per share (attributing no value to the warrants) | $ | 4.15 | ||
| Net tangible book value per share as of September 30, 2021 | $ | (5.76 | ) | |
| Increase in as adjusted net tangible book value per share after this offering | $ | 7.54 | ||
| As adjusted net tangible book value per share after giving effect to this offering | $ | 1.78 | ||
| Dilution in as adjusted net tangible book value per share to new investors | $ | 2.37 |
| Assumed public offering price per share (attributing no value to the warrants) | $ | |||
| Net tangible book value per share as of June 30, 2022 | $ | |||
| Increase in as-adjusted net tangible book value per share after this offering | $ | |||
| As adjusted net tangible book value per share after giving effect to this offering | $ | |||
| Dilution in as-adjusted net tangible book value per share to new investors | $ |
A $1.00 increase (decrease) in the assumed public offering price of $1.00 per Unit would increase (decrease) the as adjustedas-adjusted net tangible book value per share by $0.73,$ , and the dilution per share to new investors in this offering by $0.27,$ , assuming the number of Units offered by us, as set forth on the cover page of this Prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
The information above assumes that the Underwriterunderwriter does not exercise its over-allotment option. If the Underwriterunderwriter exercises its over-allotment option in full, the as adjustedas-adjusted net tangible book value will increase to $1.92$ per share, representing an immediate increase to existing stockholders of $7.68$ per share and an immediate dilution of $2.23$ per share to new investors.
The foregoing discussion and table do not take into account further dilution to new investors that could occur upon the exercise of outstanding warrantsWarrants having a per share exercise price less than the per share offering price to the public in this offering.
We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.
The above discussion and table are based on 829,5181,097,721 shares outstanding as of September 30, 2021.November 2, 2022. The discussion and table do not include, as of that date:
| ● | shares of common stock issuable upon conversion of our outstanding Series A Convertible Preferred | |
| ● | exercise of the Warrants; | |
| ● | exercise of the Underwriter’s Warrants; and | |
| ● | exercise of the |
PRICE RANGE OF THE REGISTRANT’S COMMON STOCK
Our common stock is currently quoted on the OTC Pink tier of the OTC Markets, Inc. under the trading symbol “ATDS.” Our stock has been thinly traded on“ATDS”.
For the OTC Pinkperiods indicated, the following table sets forth the high and there can be no assurance that a liquid market for ourlow bid prices per share of common stock will ever develop. The tables below reflectbased on inter-dealer prices, without retail mark-up, markdown,mark-down or commission and may not necessarily represent actual transactions. All per share amounts are adjusted for the reverse stock split of 1-for-750 shares of common stock, which became effective on October 29, 2019, and the Reverse Stock Split.
| Fiscal Year Ended December 31, 2019 | High | Low | ||||||
| First Quarter | $ | 5,545.125 | $ | 1,785.75 | ||||
| Second Quarter | $ | 2,266.625 | $ | 563.875 | ||||
| Third Quarter | $ | 939.875 | $ | 376.00 | ||||
| Fourth Quarter | $ | 3,800.00 | $ | 600.00 | ||||
| Fiscal Year 2022 | High Bid | Low Bid | ||||||
| First Quarter | $ | 18.40 | $ | 1.41 | ||||
| Second Quarter | $ | 7.50 | $ | 1.55 | ||||
| Third Quarter | $ | 6.99 | $ | 1.61 | ||||
| Fiscal Year Ended December 31, 2020 | High | Low | ||||||
| First Quarter | $ | 1,580.00 | $ | 60.03 | ||||
| Second Quarter | $ | 150.00 | $ | 19.40 | ||||
| Third Quarter | $ | 85.80 | $ | 15.00 | ||||
| Fourth Quarter | $ | 23.00 | $ | 9.80 | ||||
| Fiscal Year 2021 | High Bid | Low Bid | ||||||
| First Quarter | $ | 592.00 | $ | 96.00 | ||||
| Second Quarter | $ | 206.40 | $ | 73.60 | ||||
| Third Quarter | $ | 80.40 | $ | 25.00 | ||||
| Fourth Quarter | $ | 28.00 | $ | 6.40 | ||||
| Fiscal Year Ended December 31, 2021 | High | Low | ||||||
| First Quarter | $ | 74.00 | $ | 12.00 | ||||
| Second Quarter | $ | 25.80 | $ | 9.20 | ||||
| Third Quarter | $ | 10.05 | $ | 3.125 | ||||
| Fiscal Year 2020 | High Bid | Low Bid | ||||||
| First Quarter | $ | 12,640.00 | $ | 480.00 | ||||
| Second Quarter | $ | 2,160.00 | $ | 152.00 | ||||
| Third Quarter | $ | 3,888.00 | $ | 120.00 | ||||
| Fourth Quarter | $ | 192.00 | $ | 77.60 | ||||
As of December 3, 2021,November 4, 2022, the last reported sales price reported on the OTC Markets, Inc.Pink for our common stock was $1.40$2.24 per share. As of December 6, 2021,November 2, 2022, we had approximately 544563 holders of record of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers or registered clearing agencies. The transfer agent of our common stock is Madison Stock Transfer Inc., located at 2500 Coney Island Ave, Sub Level, Brooklyn, New York 11223.
DIVIDEND POLICY
Holders of our common stock are entitled to receive dividends as may be declared from time to time by our boardBoard of directors.Directors. We have not paid any cash dividends since inception on our common stock and do not anticipate paying any in the foreseeable future. Our current policy is to retain earnings, if any, for use in our operations.
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2021:2022:
| ● | on an actual basis; | |
| ● | on an as adjusted basis to reflect the issuance and sale by us of |
You should consider this table in conjunction with “Use“Use of Proceeds”Proceeds” above as well as our “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” and our financial statements and the notes to those financial statements for the three and ninesix months ended SeptemberJune 30, 2022 and the year ended December 31, 2021 included elsewhere in this Prospectus.
| As of | ||||||||
| September 30, 2021 | ||||||||
| Actual | Pro Forma As Adjusted | |||||||
| Cash | $ | 1,377,579 | $ | 13,547,579 | ||||
| Total Current Liabilities | 3,890,393 | 3,890,393 | ||||||
| Total Long Term Liabilities | 2,759,890 | 2,759,890 | ||||||
| Stockholders’ Equity: | ||||||||
| Series A convertible preferred stock, par value $0.001, 150,000 shares designated, 150,000 shares issued and outstanding | 150 | 150 | ||||||
| Common stock, par value $0.001, 1,800,000,000 shares authorized, 829,518 shares issued and outstanding; pro forma as adjusted; 4,154,819 shares issued and outstanding | 830 | 4,155 | ||||||
| Additional paid in capital | 37,234,387 | 49,401,062 | ||||||
| Accumulated Deficit | (40,230,125 | ) | (40,230,125 | ) | ||||
| Total Stockholders’ Equity | $ | (2,994,758 | ) | $ | 9,175,242 | |||
| September 30, 2022 | ||||||||
| Actual | Pro Forma As Adjusted | |||||||
| Cash | $ | $ | ||||||
| Total Current Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity: | ||||||||
| Series A convertible preferred stock, par value $0.001, 150,000 shares designated, 149,892 shares issued and outstanding | ||||||||
| Common stock, par value $0.001, 125,000,000 shares authorized, 954,561 shares issued and outstanding Pro forma as adjusted; 1,907,173 shares issued and outstanding | ||||||||
| Additional paid in capital | ||||||||
| Accumulated Deficit | ||||||||
| Total Stockholders’ Equity (Deficit) | ||||||||
| Total capitalization | $ | $ | ||||||
(1) The as adjustedas-adjusted information discussed above is illustrative only and will be further adjusted based on the actual public offering price and other terms of this offering determined at pricing.
A $1.00 increase (decrease) in the assumed public offering price of $4.15$ per Unit would increase (decrease) cash and cash equivalents, working capital, total assets, and total stockholders’ (deficit) equity by $3 million,$ , assuming that the number of Units offered by us, as set forth on the cover page of this Prospectus, remains the same, after deducting the estimated underwriting discounts and commissions.
The above discussion and table are based on 829,5181,097,721 shares outstanding as of September 30, 2021November 2, 2022 do not include, as of that date:
| ● | shares of common stock issuable upon conversion of our outstanding Series A Convertible Preferred Stock and, if any, Series B Convertible Preferred Stock; and | |
| ● | exercise of the Underwriter’s Warrants. |
As of September 30, 2021,November 2, 2022 we are authorized to issue one billion125,000,000 shares of common stock, par value $0.001 per share, of which 829,5181,097,721 shares of common stock were issued and outstanding. We are also authorized to issue 337,500 shares of preferred stock, par value $0.001 per share, of which (a) 150,000 shares are designated Series A Preferred Stock, of which 150,000149,892 shares of Series A Preferred Stock were issued and outstanding; and (b) 80,000 shares are designated Series B Preferred Stock, none of which 30,250 shares of Series A Preferred Stock were issued and outstanding.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and financial condition for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020, and for the years ended December 31, 20202021 and 2019,2020, should be read in conjunction with our consolidated financial statements, and the notes to those financial statements that are included elsewhere in this Prospectus.
All references to “Data443”, “we”, “our,” “us” and the “Company” in this Item 2 refer to Data443 Risk Mitigation, Inc., a Nevada corporation.
The discussion in this section contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “would” or “will” or the negative of these terms or other comparable terminology, but their absence does not mean that a statement is not forward-looking. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, which could cause our actual results to differ from those projected in any forward-looking statements we make. Several risks and uncertainties we face are discussed in more detail under “Risk Factors” beginning on page 138 of this Prospectus, and in the discussion and analysis below. You should, however, understand that it is not possible to predict or identify all risks and uncertainties and you should not consider the risks and uncertainties identified by us to be a complete set of all potential risks or uncertainties that could materially affect us. You should not place undue reliance on the forward-looking statements we make herein because some or all of them may turn out to be wrong. We undertake no obligation to update any of the forward-looking statements contained herein to reflect future events and developments, except as required by law. The following discussion should be read in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Prospectus.
On February 19, 2021, we announced the approval of a reverse stock split of our common stock and a reduction in the number of authorized, each within a specified range, with a final decision to be made by our board of directors. On June 14, 2021, we were advised by the Nevada Secretary of State that it had accepted the Company’s filing of a Certificate of Amendment to the Articles of Incorporation, with a filing and effective date of June 11, 2021 (the “Certificate of Amendment”). The Certificate of Amendment (i) reduced the number of authorized shares of common stock to one billion (1,000,000,000); and, (ii) effected a reverse stock split (the “Reverse Stock Split”) of its issued common stock in a ratio of 1-for-2,000. The preferred stock of the Company was not changed. Trading of our common stock began on a split-adjusted basis on July 1, 2021. All common stock and per share data have been retroactively adjusted for the impact of the split.
Overview
Our company was incorporated as LandStar, Inc., a Nevada corporation, on May 4, 1998, for the purpose of purchasing, developing and reselling real property, with its principal focus on the development of raw land. From incorporation through December 31, 1998, we had no business operations and was a development-stage company. We did not purchase or develop any properties and decided to change our business plan and operations. On March 31, 1999, we acquired approximately 98.5% of the common stock of Rebound Rubber Corp. (“Rebound Rubber”) pursuant to a share exchange agreement with Rebound Rubber and substantially all of Rebound Rubber’s shareholders. The acquisition was effected by issuing 14,500,100 shares of common stock, which constituted 14.5% of the 100,000,000 of our authorized shares, and 50.6% of the 28,622,100 issued and outstanding shares on completion of the acquisition.
The share exchange with Rebound Rubber (and other transactions occurring in March 1999) resulted in a change of control and the appointment of new officers and directors. These transactions also changed our focus to the development and utilization of technology to de-vulcanize and reactivate recycled rubber for resale as a raw material in the production of new rubber products. Our business strategy was to sell the de-vulcanized material (and compounds using the materials) to manufacturers of rubber products.
Prior to 2001 we had no revenues. In 2001 and 2002 revenues were derived from management services rendered to a rubber recycling company.
In August 2001, we amended our Articles of Incorporation to authorize 500,000,000 shares of common stock, $0.001 par value per share, and 150,000,000 shares of preferred stock, $0.01 par value per share. We may designate preferred stock into specific classes by action of our board of directors. In May 2008, our board of directors established a class of Convertible Preferred Series A (the “Series A”), authorizing 10,000,000 shares. When established, among other things, (i) each share of Series A was convertible into 1,000 shares of our common stock, and (ii) a holder of Series A was entitled to vote 1,000 shares of common stock for each share of Series A on all matters submitted to a vote by stockholders.
In September 2008, we amended our Articles of Incorporation to increase the number of authorized shares to 985,000,000, $0.001 par value per share, further amended the Articles in January 2009 to increase the number of authorized shares to 4,000,000,000, and in January 2010 amended our Articles to increase the number of authorized shares to 8,888,000,000.
We were effectively dormant for a number of years. In or around February 2014, there was a change in control whereby Kevin Hayes acquired 1,000,000 shares of the Series A and was appointed as our sole director and officer. In or around April 2017, there was another change in control when Mr. Hayes sold the 1,000,000 shares of Series A to Hybrid Titan Management, which then proceeded to assign the Series A to William Alessi. Mr. Alessi was then appointed as our sole director and officer. Mr. Alessi initiated legal action in his home state of North Carolina to confirm, among other things, his ownership of the Series A; his “control” over the company, and the status of creditors of the company. In or around June 2017, the court entered judgment in favor of Mr. Alessi, confirming his majority ownership and control of the company.
In or around July 2017, while under the majority ownership and management of Mr. Alessi, we sought to effect a merger transaction (the “Merger”) under which the company would be merged into Data443 Risk Mitigation, Inc., a North Carolina corporation (“Data443”). Data443 was originally formed under the name LandStar, Inc. The name of the North Carolina corporation was changed to Data443 in December 2017. In November 2017, our controlling interest was acquired by our current chief executive officer and sole board member, Jason Remillard, when he acquired all of the Series A shares from Mr. Alessi. In that same transaction, Mr. Remillard also acquired all of the shares of Data443 from Mr. Alessi. Mr. Remillard was then appointed as our sole director and sole officer and of Data443.
In January 2018, we acquired substantially all of the assets of Myriad Software Productions, LLC, which was owned 100% by Mr. Remillard. Those assets were comprised of the software program known as ClassiDocs®, and all intellectual property and goodwill associated therewith. As a result of the acquisition, the Company was no longer a “shell” under applicable securities rules. In consideration for the acquisition, we agreed to a purchase price of $1,500,000, comprised of: (i) $50,000 paid at closing; (ii) $250,000 in the form of a promissory note; and (iii) $1,200,000 in shares of our common stock, valued as of the closing, which equated to 800 shares of our common stock. The shares have not yet been issued and are not included as part of our issued and outstanding shares. However, these shares have been recorded as “Acquisition of ClassiDocs” included in additional paid in capital within our financial statements for the year ending December 31, 2019.
In April 2018, we amended the designation for our Series A by providing that a holder of Series A was entitled to (i) vote 15,000 shares of common stock for each share of Series A on all matters submitted to a vote by stockholders, and (ii) convert each share of Series A into 1,000 shares of our common stock.
In May 2018, the Company amended and restated its Articles of Incorporation. The total authorized number of shares is 8,888,000,000 shares of common stock, $0.001 par value per share, and 50,000,000 shares of preferred stock, $0.001 par value per share, designated in the discretion of our board of directors. The Series A remains in full force and effect.
In June 2018, after careful analysis and in reliance upon professional advisors we retained, it was determined that the Merger had, in fact, not been completed, and that the Merger was not in the best interests of the Company and its stockholders. As such, the Merger was legally terminated. In place of the Merger, in June 2018, we acquired all of the issued and outstanding shares of stock of Data443 (the “Share Exchange”). As a result of the Share Exchange, Data443 became our wholly-owned subsidiary, with both the Company and Data443 continuing to exist as corporate entities. As consideration in the Share Exchange, we agreed to issue to Mr. Remillard: (a) 67 shares of our common stock and (b) on the eighteen-month anniversary of the closing of the Share Exchange (the “Earn Out Date”), an additional 67 shares of our common stock, provided that Data443 has at least an additional $1,000,000 in revenue by the Earn Out Date (not including revenue directly from acquisitions). None of the shares of our common stock to be issued to Mr. Remillard under the Share Exchange have been issued. As such, none of said shares are included as part of our issued and outstanding shares. However, these shares have been recorded as “Share exchange with related party for Data443 additional share issuable” included in additional paid in capital within our financial statements for the year ending December 31, 2019.
On or about June 29, 2018, we secured the rights to the WordPress GDPR Framework through our wholly-owned subsidiary Data443 for a total consideration of €40,001, or approximately $46,521, payable in four payments of approximately €10,000, with the first payment due at closing, and the remaining payments due at the end of July, August and September 2018. Upon issuance of the final payment, we gained the right to enter into an asset transfer agreement for the nominal cost of one euro (€1).
On or about October 22, 2018, we entered into an asset purchase agreement with Modevity, LLC (“Modevity”) to acquire certain assets collectively known as ARALOC®, a software-as-a service (“SaaS”) platform that provides cloud-based data storage, protection, and workflow automation. The acquired assets consist of intellectual and related intangible property including applications and associated software code, and trademarks. Access to books and records related to the customers and revenues Modevity created on the ARALOC® platform were also included in the asset purchase agreement. These assets were substantially less than the total assets of Modevity, and revenues from the platform comprised a portion of the overall sales of Modevity. We are required to create the technical capabilities to support the ongoing operation of this SaaS platform. A substantial effort on our part is needed to continue generating ARALOC® revenues through development of a sales force, as well as billing and collection processes. We paid Modevity (i) $200,000 in cash, (ii) $750,000, in the form of a 10-month promissory note, and (iii) 110 shares of our common stock.
On or around February 7, 2019, the Company entered into an Exclusive License and Management Agreement (the “License Agreement”) with Wala, Inc. (“Wala”). Under the License Agreement the Company was granted the exclusive right and license to receive all benefits from the marketing, selling, and licensing of the data archiving platform known as ArcMail and all assets related thereto (the “ArcMail Assets”). In connection with the License Agreement, the Company also executed (i) a Stock Rights Agreement, under which the Company had the right to acquire all shares of stock of Wala; and, (ii) a Business Covenants Agreement, under which Wala and its CEO agreed to not compete with the Company’s use of the ArcMail assets for a designated period of time. The License Agreement, Stock Rights Agreement, and Business Covenants Agreement are collectively referred to herein as the “ArcMail Agreements”).
On June 21, 2019, the Company filed an amendment to its articles of incorporation to increase the total number authorized shares of the Company’s common stock, par value $0.001 per share, from 8,888,000,000 shares to 15,000,000,000 shares.
On September 16, 2019, the Company entered into an Asset Purchase Agreement with DMBGroup, LLC to acquire certain assets collectively known as DataExpressTM, a software platform for secure sensitive data transfer within the hybrid cloud. The total purchase price of approximately $2.8 million consists of: (i) a $410,000 cash payment at closing; (ii) a promissory note in the amount of $940,000, payable in the amount of $41,661 over 24 monthly payments starting on October 15, 2019, accruing at a rate of 6% per annum; (iii) assumption of approximately $98,000 in liabilities and, (iv) approximately 1,233 shares of our common stock. As of December 31, 2019, these shares have not been issued and are recorded as “Stock issuable for asset purchase” included in additional paid in capital.
On October 14, 2019, the Company filed an amendment to its Articles of Incorporation to change its name to Data443 Risk Mitigation, Inc., and to effect a 1-for-750 reverse stock split of its issued and outstanding shares of common and preferred shares, each with $0.001 par value, and to reduce the numbers of authorized common and preferred shares to 60,000,000 and 337,500, respectively. On October 28, 2019, the name change and the split and changes in authorized common and preferred shares was effected, resulting in approximately 7,282,678,714 issued and outstanding shares of the Company’s common stock to be reduced to approximately 9,710,239, and 1,000,000 issued and outstanding shares of the Company’s preferred shares to be reduced to 1,334 as of October 28, 2019. All per share amounts and number of shares, including the authorized shares, in the consolidated financial statements and related notes have been retroactively adjusted to reflect the reverse stock split and decrease in authorized common and preferred shares.
On March 5, 2020 the Company amended its Articles of Incorporation to increase the number of shares of authorized common stock to 250,000,000. On April 15, 2020 the Company further amended its Articles of Incorporation to increase the number of shares of authorized common stock to 750,000,000. On August 17, 2020 the Company again amended its Articles of Incorporation to increase the number of shares of authorized common stock to 1.5 billion. On November 25, 2020 the Company filed a Certificate of Designation to authorize and create its Series B Preferred shares, consisting of 80,000 shares. On December 15, 2020 the Company again amended its Articles of Incorporation to increase the number of shares of authorized common stock to 1.8 billion.
On August 13, 2020, the Company entered into an Asset Purchase Agreement to acquire certain assets collectively known as FileFacets™, a Software-as-a-Service (SaaS) platform that performs sophisticated data discovery and content search of structured and unstructured data within corporate networks, servers, content management systems, email, desktops and laptops. The total purchase price was $135,000, which amount was paid in full at the closing of the transaction.
On September 21, 2020, the Company entered into an Asset Purchase Agreement with the owners of a business known as IntellyWP™, to acquire the intellectual property rights and certain assets collectively known as IntellyWP™, an Italy-based developer that produces WordPress plug-ins that enhance the overall user experience for webmaster and end users. The total purchase price of $135,000 consists of: (i) a $55,000 cash payment at closing; (ii) a cash payment of $40,000 upon completion of certain training; and, (iii) a cash payment of $40,000 upon the Company collecting $25,000 from the assets acquired in the subject transaction.
On October 8, 2020, the Company entered into an Asset Purchase Agreement with Resilient Network Systems, Inc. (“RNS”) to acquire the intellectual property rights and certain assets collectively known as Resilient Networks™, a Silicon Valley based SaaS platform that performs SSO and adaptive access control “on the fly” with sophisticated and flexible policy workflows for authentication and authorization. The total purchase price of $305,000 consists of: (i) a $125,000 cash payment at closing; and, (ii) the issuance of 9,575 shares of our common stock to RNS.
On December 11, 2020, the Company entered into a Common Stock Purchase Agreement (“CSPA”) with Triton Funds, LP, a Delaware limited partnership (“Triton”), an unrelated third party. Triton agreed to invest $1 million in the Company in the form of common stock purchases. Subject to the terms and conditions set forth in the CSPA, the Company agreed to sell to Triton common shares of the Company having an aggregate value of One Million Dollars ($1,000,000). The price of the shares to be sold will be $12.00 per shares. Triton’s obligation to purchase securities is conditioned on certain factors including, but not limited, to the Company having an effective registration available for resale of the securities being purchased; a minimum closing price of $18.00 per share for the Company’s common stock on the delivery date for the shares; and, Triton’s ownership not exceeding 9.9% of the issued and outstanding shares of the Company at any time. The Company filed a registration statement on Form S-1 with the SEC on December 28, 2020. The S-1 was declared effective by the SEC as of January 26, 2021.
On February 12, 2021, and effective January 31, 2021 the Company declared terminated each of the ArcMail Agreements. The Company has asserted numerous claims under the ArcMail Agreements. Further, Wala lost all rights to the ArcMail Assets through a foreclosure action brought by certain secured creditors of Wala (the “Wala Creditors”). The Company considers its relationship with Wala to be closed and will not pursue any further action in that regard.
On February 12, 2021 the Company closed its acquisition of the ArcMail Assets from the Wala Creditors pursuant to the terms and conditions of an Asset Sale Agreement executed by and between the Company and the Wala Creditors. The effective date of the Asset Sale Agreement and the acquisition was deemed to be January 31, 2021. Total purchase price (the “Purchase Price”) was One Million Four Hundred Four Thousand Dollars ($1,404,000), evidenced by three promissory notes in favor of the Wala Creditors in the total amount of the Purchase Price (the “Notes”). Payments under the Notes commence in 30-days and continue monthly thereafter for 60-months. The Notes are secured by a pledge of the ArcMail Assets as collateral under the terms of a Security Agreement in favor of the Wala Creditors. The foregoing descriptions of the Asset Sale Agreement; Notes; and, Security Agreement do not purport to be complete and are qualified in their entirety by the actual language contained in the Asset Sale Agreement, Notes, and Security Agreement, respectively.
On February 23, 2021, the Company filed with the SEC its Schedule 14C, Preliminary Information Statement, providing notice that the Board of Directors and the holders of a majority of our shares entitled to vote had approved and authorized the following actions:
(1) Amendment of our articles of incorporation (the “Articles of Incorporation”) to provide for a decrease in the authorized shares of the Company’s common stock from 1,800,000,000 to a number of not less than 10,000,000 and not more than 1,000,000,000 (the “Authorized Common Stock Reduction”), at any time prior to the one year anniversary of the filing of the Definitive Information Statement on Schedule 14C with respect to these actions the “Definitive Information Statement”), with the Board of Directors of the Company (the “Board”) having the discretion to determine whether or not the Authorized Common Stock Reduction is to be effected, and if effected, the exact number of the Authorized Common Stock Reduction within the above range.
(2) That the Board be authorized to implement through the amendment to our Articles of Incorporation a reverse stock split of the Company’s Common Stock by a ratio of not less than 1-for-10 and not more than 1-for-2,000, (the “Reverse Split”), at any time prior to the one year anniversary of the filing of the Definitive Information Statement, with the Board having the discretion to determine whether or not the Reverse Split is to be effected, and if effected, the exact ratio for the Reverse Split within the above range.
On April 21, 2021, the Company increased the number of authorized shares of common stock from 1.8 billion to 3.8 billion in order to satisfy the share reserve requirement under the Auctus financing closed on April 23, 2021, as described in the next paragraph.
On April 23, 2021, the Company entered into and closed a financing transaction pursuant to the terms and conditions of a Securities Purchase Agreement (the “Purchase Agreement”) with Auctus Fund, LLC, a Delaware limited liability company (“Auctus”). Pursuant to the Purchase Agreement, Auctus purchased from the Company a Senior Secured Promissory Note (the “Note”) in the aggregate principal amount of $832,000.00 (the “Principal Amount”), and delivered gross proceeds of $750,000.00 (excluded were legal fees for Auctus and a transaction fee charged by Auctus). The Note is secured by a security interest in the assets of the Company and its subsidiaries, pursuant to the terms and conditions of a Security Agreement (the “Security Agreement”). Timely payment under the Note is further secured by the issuance of Common Stock Purchase Warrant (the “Second Warrant”) to Auctus for 55,467 shares of the Company’s common stock at an exercise price of $15.00, exercisable only in the event of a default under the Note. Interest on the Principal Amount of the Note accrues at the rate of 12% per annum, which amount is fully due and owing upon the issuance of the Note. Repayment of all amounts due under the Note shall be tendered on the 12-month anniversary of the Note. The Note may be prepaid in whole at any time without prepayment penalty or premium. If the Company fails to meet its obligations under the terms of the Note, the Note shall become immediately due and payable and subject to penalties provided for in the Note. The Company also granted to Auctus warrants to acquire 55,467 shares of the Company’s common stock pursuant to a Common Stock Purchase Warrant (the “First Warrant”). Exercise price for the warrants is $15.00, with a cashless exercise option. Both the First Warrant and the Second Warrant impose an obligation on the Company to reserve for issuance that number of shares of the Company’s common stock which is 5 times the number of shares issuable under both the First Warrant and the Second Warrant.
As of September 30, 2021, the Company had sold to Triton 83,334 shares of its common stock pursuant to the CSPA, and which shares were registered under the S-1. All sales occurred during the three month period ended March 31, 2021 and resulted in the receipt by the Company of net proceeds in the amount of $847,000 during the six months ended 30 June 2021, which is the final amount the Company will receive from the sale of these shares, which includes proceeds from two unrelated third party for shares of our common stock acquired from Triton.
The 1-for-2,000 Reverse Stock split was processed by FINRA and became effective at the start of trading on July 1, 2021. As a result of the Reverse Stock Split, every 2,000 shares of the Company’s issued and outstanding common stock, par value $0.001 per share, were converted into one (1) share of common stock, par value $0.001 per share.
The Company is a leader in data security and privacy management (a critical element of IT security), providing solutions for All Things Data Security™, across the enterprise and in the cloud. Trusted by over 170 clients, including over 1% of10,000 customers, we provide the Fortune 500, the Company provides the necessary visibility and control needed to protect at-scale, obtaindata at scale, regardless of format, location, or consumer, and to facilitate compliance objectives,with fast-changing global data privacy requirements. Our customers include established leaders and enhance operational efficiencies. Our clients include leading brand name enterprises in aup-and-coming businesses spanning the private and public/government sectors across diverse set of industries and fields, including financial services, healthcare, manufacturing, retail, technology, and telecommunications.
The mounting threatransomware landscape hasas well as other threats to data have accelerated the rate at which businesses are adopting data security adoption ratessolutions and we believe that our extensive portfolio of data security and privacy products provide a holistic methodologyprovides an encompassing solution set such that we are well positioned to capitalize on that increased adoption rate and establish our products as new data privacy as a newand security standard.standards. Our offering isofferings are anchored in reliable and comprehensive privacy management equippingand equip organizations with a seamless approach to safeguarding theirsafeguard data, protectingprotect against attacks, and mitigatingotherwise mitigate the most critical risks.
DataSector-specific US laws, state-level legislation, and outside-the-United States (OUS) regulations are confounding enterprises of all sizes for whom safeguarding and stewarding data is key, but for whom becoming specialists in privacy and security is not an element of their strategic roadmap. For many of these enterprises, we can bridge the gap between their need to protect data and privacy legislation is driving significant investmenttheir need to use their resources to grow their core business by organizationsoffering turnkey solutions and related counseling and technical support to offset risks from data breaches and damaging information disclosuressecurity incidents of various types. We provide solutionsproducts and services for the marketplace that are designed to protect data viathat is stored in the cloud, on-premises, and in hybrid cloud/on-premises environments, and on-premises architectures.data that is transmitted throughout the enterprise, including but not limited to by remote employees. Our suite of security products focusfocuses on protection of:protecting sensitive files and emails;email, confidential customer, patient and employee data;data, financial records;records, strategic and product plans;plans, intellectual property;property and any other data requiring security,proprietary information, allowing our clientscustomers to create, share, and protect their sensitive data wherever it is stored.stored and however it is used.
We deliver solutions and capabilities via all technical architectures,that businesses can use in conjunction with their use of established cloud vendors such as Microsoft® Azure, Google® Cloud Platform (GCP), and in formats designed for each client. LicensingAmazon® Web Services (AWS), as well as with on-premises databases and subscription models are available to conform to customer purchasing requirements. Our solutions are driven by several proprietary technologiesdatabase applications and methodologies that we have developedwith virtualization platforms, such as those hosted or acquired, giving us our primary competitive advantage.configured using VMWare®, Citrix®, and Oracle® products.
We sell or plan to sell substantially all of our products solutions, and services through a sales model whichthat combines the leverage of a channel sales with themodel or direct account control of direct sales,management, thereby providing us with significant opportunities to grow our current customer base and successfully deliver our value proposition for data privacy and security. We endeavor to use subscription models to license products and services, commonly for a paid-in-advance, multiyear term that is auto-renewing. We also make use of channel partners, distributors, and resellers which sell to end-user customers.end-users of the products and services. This approach allows us to maintain close relationships with our customers and benefit from the global reach of our channel partners. Additionally, we are enhancing our product offerings and go-to-market strategy by establishing technology alliances within the IT infrastructure and security vendor ecosystem. While our products serve customers of all sizes in all industries, theOur sales and marketing focus and majority of our sales focusfor new organic growth is on targeting organizations with 100 users500 or more whichusers who are adopting cloud services and can make larger purchases with us over time and have a greater potential lifetime value.
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We continue to onboard to cloud-native technology adoption portals such as the Microsoft® Azure Marketplace and the Amazon® AWS Marketplace. Vendors may offer incentives to us as a software and services provider to onboard and market via their marketplace portals.
We strive to create new and innovative products and to improve existing products, proactively identifying and solving the data security needs of our customers.
As cloud adoption continues to accelerate, data privacy requirements get more complex, and data security becomes more challenging, we believe that Data443 is well positioned to capture more market share, continue to lead in strategic data security technology development, and prepare organizations for the next epoch in IT data privacy services.
Our Products
Each of our major product lines provideprovides features and functionality which we believe enable our clientscustomers to fullyoptimally secure the value of their data. This architecture easily extends throughThe products are modular, functionalities, giving our clientscustomers the flexibility to select the featureswhat they require for their business needs and the flexibility to expand their usage simply by adding a license. AsWe currently offer the result of a recent rebranding and marketing effort by the Company, thefollowing products and services offered by the Company are now marketed under the following names:services:
| ● | Data443® Ransomware Recovery | |
| ● | Data443® Data Identification |
| ● | Data443® Data Archive | |
| ● | Data443® Sensitive Content |
| ● | Data443® Data Placement Manager (also known as DATAEXPRESS®), a data transport, transformation, and delivery product being used by leading financial organizations worldwide. | |
| ● | Data443® Access Control | |
| ● |
| ● | Data443® Global Privacy | |
| ● | Data443® IntellyWP, | |
| ● | Data443® Chat History Scanner, which scans chat messages for compliance, security, | |
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COVID-19 Update
The Company continues to closely monitor developments and is taking steps to mitigate the potential risks related to the COVID-19 pandemic to the Company, its employees and its customers. The extent to which the COVID-19 pandemic will impact our business and operations will depend on future developments that are highly uncertain. While in the near-term we may experience reductions in our billing and revenue growth rates, we are proactively managing expenditures, including reductions of non-critical and discretionary expenses, while preserving strategic investment in sales capacity and still seeking new acquisition targets and opportunities. To protect our employees while continuing to provide the services needed by our clients the Company continues to limit customer contact, and continues to minimize employee contact with other employees by having our employees work remotely while they shelter in place as required by local regulations. The dedication of our employees and their work ethic have allowed us to continue providing critical services to our customers during these challenging times.
Due to the pandemic, we have been forced to adapt and change the way we have historically operated. At the end of the first quarter, we temporarily closed our office and instructed our employees to work remotely as a precautionary measure intended to minimize the risk of the virus to them, our customers, partners and the communities in which we operate. Towards the end of the second quarter, we cautiously and gradually started to open our office. While we did not require employees to work from our office, we did ensure all required adjustments were made and all local regulations and recommendations were met to ensure the safety of our employees should they voluntarily choose to work from our office. As part of the move to remote work and virtual-only customer experience, we have had to postpone or cancel customer and industry events, as well as travel to visit potential customers, or conduct them virtually. We cannot predict with certainty the impact these changes may have on our sales.
We believe that the impact of COVID-19 has increased the long-term opportunity to help our customers protect their data and detect threats, as well as achieve regulatory compliance. Nevertheless, in the early stages of the pandemic, we experienced some negative impact on our results of operations in the last two weeks of the first quarter of 2020, as we believe our customers’ focus turned primarily to the safety of their employees and to positioning themselves to operate under a work-from-home environment. However, since that time, we have seen companies pivot from that emergency mode to become more focused on the elevated risks associated with having a highly distributed workforce. Companies around the world now have the majority of their employees working from potentially vulnerable home networks, accessing critical on-premises data stores and infrastructure through VPNs and in cloud data stores. We believe this trend will continue in the long-term and that we are well positioned to capitalize on the opportunity ahead. As companies of all sizes and industries are increasingly facing cyberattacks, they understand that a data-centric approach to security is critical, and elevated risks are here for the long-term. This has caused increased customer engagement which has converted into new business and expansion of existing business.
We remain positioned to help our clients protect against data and infrastructure against cybercrime. This has resulted in increase in traffic to our website. During the second and third quarters of 2021, we saw greater interest in our products and services, with some of this interest converting into new business or the expansion of existing business. While we are encouraged by these trends, we continue to see corporate expenditures subject to elevated scrutiny in the current environment. We have also been unable to travel to meet with prospective new clients, which has impacted our ability to convert prospects into new clients. We anticipate that as the COVID-19 pandemic continues, it will continue to be challenging to estimate conversion rates of prospective business into actual new client.
Through September 30, 2021, there has not been a noticeable increase in accounts receivable for the Company. However, it is likely that if the COVID-19 pandemic persists and state stay-at-home orders remain in place, it is likely that more customers will be unable to keep their bills current. Further, while we have not yet experienced any interruption to our normal materials and supplies process, it is impossible to predict whether COVID-19 will cause future interruptions and delays.
Through September 30, 2021 we have not had any of our employees contract the COVID-19 virus. Should we have a significant number of our employees contract the COVID-19 virus it could have a negative impact on our ability to serve customers in a timely fashion.
For additional information on the potential effects of the COVID-19 pandemic on our business, financial condition and results of operations, see “Risk Factors” beginning on page 13 of this Prospectus.
CARES Act
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. There are several different provisions withwithin the CARES Act that impact income taxes for corporations. While we continue to evaluate the tax implications, we believe these provisions will not have a material impact to the financial statements.
Additionally, the Company has applied for, and has received, funds under the Paycheck Protection Program (the “PPP Loan”) after the period covered in these financial statements in the amount of $339,000. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on our having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.
The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The promissory note issued in connection with the PPP Loan contains events of default and other provisions customary for a loan of this type.
The PPP Loan was used to retain our employees, as well as for other permitted uses under the terms and conditions of the PPP Loan. The Company has applied for forgiveness of the PPP Loan.
The Company alsoWe received a $150,000 loan (the “EID Loan”) from the U.S. Small Business Administration (the “SBA”“SBA”) under the SBA’s Economic Injury Disaster Loan program. The Company received the loan proceedsprogram on or around May 27, 2020.2020 (the “EID Loan”). The EID Loan has a thirty year term and bears interest at a rate of 3.75% per annum. Monthly principal and interest payments are deferred for twelve months after the date of disbursement. The EID Loan may be prepaid at any time prior to maturity with no prepayment penalties, and is otherwise repaid at the rate of $731 per month. The proceeds from the EID Loan must be used for working capital. The Loan Authorization and Agreement and the Note executed by the Companyus in connection with the EID Loan contains events of default and other provisions customary for a loan of this type.
The Company We received a second EID loan from the SBA under the SBA’s Economic Injury Disaster Loan program in the amount of $350,000 on or around June 27, 2021 (the “Second EID Loan”). The Second EID Loan has a thirty yearthirty-year term and bears interest at a rate of 3.75% per annum. Monthly principal and interest payments arewere deferred for twelve months after the date of disbursement. The Second EID Loan may be prepaid at any time prior to maturity with no prepayment penalties and is otherwise repaid at the rate of $731 per month. The proceeds from the Second EID Loan must be used for working capital. The Loan Authorizationloan authorization and Agreementagreement and the Notenote executed by the Companyus in connection with the Second EID Loan contains events of default and other provisions customary for a loan of this type.
Recent Accounting Pronouncements
From time-to-time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies, relating to the treatment and recording of certain accounting transactions. Unless otherwise discussed herein, management of the Company has determined that these recent accounting pronouncements will not have a material impact on the financial position or results of operations of the Company. For further discussion of recently issued and adopted accounting pronouncements, please see Note 1 to the consolidated financial statements included herein.
Critical Accounting Policies
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements which we have been prepared in accordance with U.S. generally accepted accounting principles. In preparing our consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material.
These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the consolidated financial statements taken as a whole 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.
Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.
Actual results could differ from those estimates.
While our significant accounting policies are described in more detail in Note 2 of our consolidated Quarterly financial statements included in this Prospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements:
Assumption as a Going Concern
Management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. However, given our current financial position and lack of liquidity, there is substantial doubt about our ability to continue as a going concern.
Convertible Financial Instruments
The Company bifurcates conversion options from their host instruments and accounts for them as free standing derivative financial instruments if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable GAAP.
When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, discounts are recorded for the intrinsic value of conversion options embedded in the instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the instrument.
Beneficial Conversion Feature
The issuance of the convertible debt issued by the Company generated a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, resulting in a discount on the convertible debt (recorded as a component of additional paid in capital).
Fair Value of Financial Instruments
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined as follows:
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.
Stock-Based Compensation
We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date. For non-employees, as per ASU No. 2018-7, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, remeasurement is not required. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by us in the same expense classifications in the consolidated statements of operations, as if such amounts were paid in cash. Also, refer to Note 1 – Summary of Significant Accounting Policies, in the consolidated financial statements that are included in this Prospectus.
Deferred Tax Assets and Income Taxes Provision
The Company adopted the provisions of paragraph 740-10-25-13 of the FASB Accounting Standards Codification. Paragraph 740-10-25-13 which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under paragraph 740-10-25-13, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Paragraph 740-10-25-13 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of paragraph 740-10-25-13.
The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its balance sheets and provides valuation allowances as management deems necessary.
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses and presently has no revenue-producing business; (b) general economic conditions; and, (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors.
Outlook
Our continued objective is to further integrate our growing suite of proven industry leading data security, ransomware protection and privacy offerings and to deliver the combined offeringofferings to our growing stablebase of enterprise and medium-sized clients both directly and via our partner channel. Data privacy concerns continue to grow in lockstep with security breaches and ongoing expansion of data storage and consumption, and the spread of telework, telehealth and remote learning requirements.
We have utilized,used, and expect to continue to utilize,use, acquisitions to contribute to our long-term growth objectives. During fiscal 2021 weWe hope to continue to acquire complimentarycomplementary business assets and client bases.add to our customer base in the process. Some of the key elementelements to our growth strategy include, without limitation:
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While we report primarily income based on recognized and deferred revenue, another measurement internally for the business is booked revenues. Management utilizesuses this measure to track numerous indicators such as: contract value growth; initial contract value per customer; and certain other metrics the values thatof which change quarter-over-quarter. These results may also be subject to, and impacted by, sales compensation plans, internal performance objectives, and other activities. We continue to increase revenue from our existing operations. We generally recognize revenue from customers ratably over the terms of their subscription, which is generally one year at a time. As a result, a substantial portion of the revenue we report in each period is attributable to the recognition of deferred revenue relating to agreements that we entered intoexecuted during previous periods. Consequently, any increase or decline in new sales or renewals in any one period will not be immediately reflected in our revenue for that period. Any such change, however, would affect our revenue in future periods. Accordingly, the effect of downturns or upturns in new sales and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods.
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In December 2019, COVID-19 was reported in China; in January 2020 the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern;, and, in March 2020 the WHO declared it a pandemic. The long-term impact of COVID-19 on our operational and financial performance will depend on certain developments including the duration, spread, severity, and potential recurrence of the virus. Our future performance will also depend on the impact of COVID-19 on our customers, partners, employee productivity, and sales cycles, including as a result of travel restrictions. These potential developments are uncertain and cannot be predicted and as such, the extent to which COVID-19 will impact our business, operations, financial condition and results of operations over the long term is unknown. Furthermore, due to our shift to a predominantly subscription model, the effect of COVID-19 may not be fully reflected in our results of operations until future periods.
While we are actively managing our response to the COVID-19 pandemic, its impact on our year 2021 results and beyond is uncertain. We continue to conduct business as usual with modifications to employee travel, employee work locations, customer interactions, and cancellation of certain marketing events, among other things. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, and stockholders. The extent to which the COVID-19 pandemic may impact our longer-term operational and financial performance remains uncertain. Furthermore, due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods, if at all. The extent of the impact of the COVID-19 pandemic will depend on several factors, including the pace of reopening the economy around the world; the possible resurgence in the spread of the virus; the development cycle of therapeutics and vaccines; the impact on our customers and our sales cycles; the impact on our customer, employee, and industry events; and the effect on our vendors. Please see “Risk Factors” beginning on page 13 of this Prospectus for a further description of the material risks we currently face, including the risks related to the COVID-19 pandemic.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBERResults of Operations for the Three and Six Months Ended June 30, 2021 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER2022 Compared to the Three and Six Months Ended June 30, 20202021
Our operations for the three months ended June 30, 2022 and 2021 are outlined below:
| Three Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2022 | 2021 | Change | % | |||||||||||||
| Revenue | $ | 750,989 | $ | 762,352 | $ | (11,363 | ) | (1 | )% | |||||||
| Cost of revenue | 78,593 | 96,830 | (18,237 | ) | (19 | )% | ||||||||||
| Gross Profit | 672,396 | 665,522 | 6,874 | 1 | % | |||||||||||
| Gross Profit Percentage | 90 | % | 87 | % | ||||||||||||
| Operating expense | 2,175,855 | 1,360,616 | 815,239 | 60 | % | |||||||||||
| Other income (expense) | (942,753 | ) | (850,260 | ) | (92,493 | ) | 11 | % | ||||||||
| Net loss | $ | (2,446,212 | ) | $ | (1,545,354 | ) | $ | (900,858 | ) | 58 | % | |||||
Revenue
The decrease in revenue in part is due to our ongoing shift for some products from year-over-year one-time sales perpetual licenses with annual maintenance contracts (also referred to as perpetual license “renewals” to time-based subscriptions with multiyear upfront payments; this shift resulted in fewer customers paying for subscriptions licenses or renewals in the quarter. We recognized $1,495,000also believe customers and $3,095,000prospective customers were reluctant to consider deals regarding new business opportunities due to concerns based on uncertainty in the economy and other global events. However, we continue to see organic growth in increased consumption of our services that contain storage or volume components, matching our expectations and as is reflected in our continuing ARR growth.
Cost of revenue during the three and nine months ended September 30, 2021, respectively, compared to $700,000 and $1,644,000
Cost of revenue during the threeconsists of direct expenses, such as sales commission, shipping, and nine months ended September 30, 2020. We had net billings for the threesupplies. The increase in cost of revenue was primarily due to an increase in one-time costs, including advertising in national publications and nine months ended September 30, 2021 of $1,832,000 and $3,011,000, respectively, compared to $835,000 and $2,370,000 in the prior year periods. Deferred revenues were $1,135,000 as of September 30, 2021, a decrease of $343,000 from $1,478,000 as of December 31, 2020.customer outreach.
General and AdministrativeOperating Expenses
For the three months ended June 30, 2022 and 2021 our operating expenses were as follows:
| Three Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2022 | 2021 | Change | % | |||||||||||||
| General and administrative | $ | 2,116,220 | $ | 1,311,396 | $ | 804,824 | 61 | % | ||||||||
| Sales and marketing | 59,635 | 49,220 | 10,415 | 21 | % | |||||||||||
| Total operating expenses | $ | 2,175,855 | $ | 1,360,616 | $ | 815,239 | 60 | % | ||||||||
General and Administrative Expenses
The general and administrative expenses for the three and nine months ended September 30, 2021 amounted to $1,061,000 and $3,806,000, respectively, as compared to $858,000 and $3,950,000 for the three and nine months ended September 30, 2020, respectively, which is an increase of $203,000, or 24%, and a decrease of $143,000, or 4%, respectively. The expenses for the nine months ended September 30, 2021 primarily consisted of management costs, costs to integrate assets we acquired and to expand sales, product enhancements, audit and review fees, filing fees, professional fees, and other expenses related to SEC reporting, including the re-classification of sales-related management expenses, in connection with the projected growth of our business. Additionally, we continue to incur specific one-time costs in relation to our planned listing on the Company’s business,Nasdaq Capital Market, additional financing activities and related functions. The increase in general and administrative expense was primarily due to an increase in professional fees and expenses related to the filing of the Company’s S-1 Registration Statement and application to list its common stock on Nasdaq. Expenses for the nine months ended September 30, 2020 consisted of primarily the same items, excluding same for the Company’s S-1 filing and Nasdaq application.service fees.
Sales and Marketing Expenses
SalesThe sales and marketing expense for the three and nine months ended September 30, 2021 amounted to $89,000 and $234,000, respectively, as compared to $3,000 and $151,000 for the three and nine months ended September 30, 2020, respectively, which is an increase of $86,000, or 2,863%, and $83,000, or 55%, respectively. The expenses for the nine months ended September 30, 2021 primarily consisted of sponsorship of major trade conferences, engaging tier-1 analyst coverage, and growingcontinuing to shift our sales operation with sometoward an inbound model, continued high focus on renewals and customer success operations and previously reported expenses, (primarilyprimarily management costs)costs, reclassified to general and administrative expenses. Expenses for the nine months ended September 30, 2020 consisted ofThe increase in sales and marketing expense was primarily the same items.due to an increase in trade show events, related travel and marketing expenses.
Other income (expense)
Other expenses for the three months ended June 30, 2022 consisted of interest expense. Other expenses for the June 30, 2021 consisted of interest expense and loss on change in fair value of derivative. The increase in other expenses was primarily due to an increase in interest expense.
Net Income (Loss)Loss
The net loss for the three and nine months ended SeptemberJune 30, 20212022 was $974,000 and $4,696,000 as compared to a netmainly derived from an operating loss of $1,500,000$1,503,459, and $14,254,000 for the three and nine months ended September 30, 2020, respectively.interest expense of $942,753. The net loss for the three and nine months ended SeptemberJune 30, 2021 was mainly derived from aan operating loss of $695,094, interest expense of $671,862 and loss on change in fair value of derivative liability of $68,000$178,398.
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Our operations for the six months ended June 30, 2022 and $432,000, respectively, associated with convertible notes payable2021 are outlined below:
| Six Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2022 | 2021 | Change | % | |||||||||||||
| Revenue | $ | 1,363,505 | $ | 1,600,220 | $ | (236,715 | ) | (15 | )% | |||||||
| Cost of revenue | 278,272 | 263,824 | 14,448 | 5 | % | |||||||||||
| Gross Profit | 1,085,233 | 1,336,396 | (251,163 | ) | (19 | )% | ||||||||||
| Gross Profit Percentage | 80 | % | 84 | % | ||||||||||||
| Operating expense | 3,269,812 | 2,889,605 | 380,207 | 13 | % | |||||||||||
| Other income (expense) | (2,094,952 | ) | (2,168,443 | ) | 73,491 | (3 | )% | |||||||||
| Net loss | $ | (4,279,531 | ) | $ | (3,721,652 | ) | $ | (557,879 | ) | 15 | % | |||||
Revenue
The decrease in revenue for the six months ended June 30, 2022 was primarily due to increased pull through of deals in Q4 of 2021 – both by the Company and convertible preferred stockour customers who took advantage of prepaid multi-year discounts and gross marginsalso took advantage of $1,346,000multi-year commitments to our SaaS products and $2,683,000, respectively, offsetother software product offerings. As discussed elsewhere herein, this impacted Q1 2022 revenue attainments. Significant disruption and distraction in part bycustomer operations primarily due to increased pandemic activity in January 2022 and the Russian invasion of Ukraine in February 2022 also contributed to customers deferring decisions to renew existing relationships or to sign up for new product offerings. A return to pre-first quarter activity levels has resumed midway through the first quarter of 2022 which is demonstrated in our Q2 of 2022 results.
Cost of Revenue
Cost of revenue consists of direct expenses, such as sales commission, shipping, and supplies. The increase in cost of revenue was primarily due to an increase in one-time costs, including sales commissions for some larger deal closings and customer outreach.
Operating Expenses
For the six months ended June 30, 2022 and 2021 our operating expenses were as follows:
| Six Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2022 | 2021 | Change | % | |||||||||||||
| General and administrative | $ | 3,089,782 | $ | 2,744,961 | $ | 344,821 | 13 | % | ||||||||
| Sales and marketing | 180,030 | 144,644 | 35,386 | 24 | % | |||||||||||
| Total operating expenses | $ | 3,269,812 | $ | 2,889,605 | $ | 380,207 | 13 | % | ||||||||
General and Administrative Expenses
The general and administrative expenses primarily consisted of management costs, costs to integrate assets we acquired and to expand sales, product enhancements, audit and review fees, filing fees, professional fees, and other expenses related to SEC reporting, including the re-classification of sales-related management expenses, in connection with the projected growth of our business. Additionally, we continue to incur specific one-time costs in relation to our planned uplist to the Nasdaq Capital Markets, additional financing activities and related functions. The increase in general and administrative expense was primarily due to a increases in professional services fees related to uplist activities, increased overhead costs associated with our continued public OTC Pink Market listing, and acquisition-related costs.
Sales and Marketing Expenses
The sales and marketing expenses incurred.primarily consisted of continuing to shift our sales operation toward an inbound model, continued high focus on renewals and customer success operations and previously reported expenses, primarily management costs, reclassified to general and administrative expenses. The increase in sales and marketing expense was primarily due to an increase in technology-related expenses.
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Other income (expense)
Other expenses for the six months ended June 30, 2022 consisted of interest expense and loss on change in fair value of derivative. Other expenses for the six months ended June 30, 2021 consisted of interest expense, loss on change in fair value of derivative, and loss on settlement on debt. The decrease in other expenses was primarily due to change in fair value of derivative liabilities and loss on settlement of debt.
Net Loss
The net loss for the three and ninesix months ended SeptemberJune 30, 20202022 was mainly derived from aan operating loss of $2,184,579, and interest expense of $2,037,069. The net loss for the six months ended June 30, 2021 was mainly derived from an operating loss of $1,553,209, interest expense of $1,577,288, loss on settlement of debt of $227,501 and loss on change in fair value of derivative liability of $420,000 and $9,698,000, respectively, associated with convertible notes payable and gross margins of $592,000 and $1,482,000, respectively, offset in part by general and administrative, and sales and marketing expenses incurred.$363,654.
Provision for Income TaxAccumulated Losses
No provision for income taxes was recordedWe had a net operating loss carry forward of approximately $6 million from prior operations in either2017, before our current president and Chief Executive Officer acquired a controlling interest in the threeCompany. Subsequent to this and nine months ended Septemberthrough June 30, 2021 or 2020, as2022, we have incurred taxable losses in both periods.relied on convertible notes and other debt instruments that contain unfavorable discounts, origination fees, and have embedded conversion features that are subject to derivative treatment for accounting purposes. Due primarily to this treatment of convertible notes, debt and related derivative accounting, since 2017, we have accumulated deficits of approximately $14.1 million due to derivative valuations and $9.6 million expensed for interest and amortization of debt discounts for financing and other origination fees.
Related Party TransactionsLiquidity and Capital Resources
The following individualstable provides selected financial data about our company as of June 30, 2022 and entities have been identified as related parties based on their affiliation with our CEO, Jason Remillard:December 31, 2021, respectively.
Jason Remillard
Myriad Software Productions, LLCWorking Capital
The following amounts were owed to related parties, affiliated with the CEOtable provides selected financial data about our company as of June 30, 2022 and Chairman of the Board, at the dates indicated:December 31, 2021, respectively.
| September 30, 2021 | December 31, 2019 | |||||||
| Jason Remillard | $ | 143,578 | $ | 155,848 | ||||
CASH FLOW FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2020
Liquidity and Capital Resources
| June 30, | December 31, | |||||||||||||||
| 2022 | 2021 | Change | % | |||||||||||||
| Current assets | $ | 2,985,645 | $ | 1,297,304 | $ | 1,688,341 | 130 | % | ||||||||
| Current liabilities | $ | 6,420,970 | $ | 4,502,937 | $ | 1,918,033 | 43 | % | ||||||||
| Working capital deficiency | $ | (3,435,325 | ) | $ | (3,205,633 | ) | $ | (229,692 | ) | 7 | % | |||||
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of SeptemberJune 30, 2021,2022, we had no cash and a bank overdraft of $3,781 and our principal sources of liquidity were cash of $1,378,000; trade accounts receivable of $102,000;$231,507 and prepaid, advance payment for acquisition of $2,726,188 and other current assets of $11,000,$27,950, as compared to cash or cash equivalents of $483,000;$1,204,933, trade accounts receivable of $77,000,$21,569 and prepaid and other current assets of $9,000$70,802 as of September 30, 2020.December 31, 2021.
During the last two years, and through October 26, 2021 (thethe date of our Quarterlythis Report, on Form 10-Q for the period ended September 30, 2021 was filed), we have faced an increasingly challenging liquidity situation that has impactedlimited our ability to execute our operating plan. We started generating revenue in the fourth quarter of 2018, and we have continued to increase revenue through September 30, 2021 as we have actively sought to grow our business in the data security and data privacy markets. We have also been required to maintain our corporate existence;existence, satisfy the requirements of being a public company;company, and have chosen to become a mandatory filer with the SEC. We will need to obtain capital to continue operations. There is no assurance that our Companywe will be able to secure such funding on acceptable (or any) terms. During the ninesix months ended SeptemberJune 30, 2021 and 2020,2022, we reported a loss from operations of $1,357,000 and $2,619,000, respectively; and, generated (used) cash flows from operating activities totaling $58,000 and ($584,000), respectively, for the same periods. We had a beginning cash balance of $59,000 as of January 01, 2021, and a beginning cash balance of $19,000 as of January 01, 2020.$2,184,579.
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As of SeptemberJune 30, 2022, we had assets of cash in the amount of $0 and other current assets in the amount of $2,985,645. As of June 30, 2022, we had current liabilities of $6,420,970. Our accumulated deficit as of June 30, 2022 was $45,978,192.
As of December 31, 2021, we had assets of cash in the amount of $1,378,000$1,204,933 and other current assets in the amount of $112,000.$92,371. As of September 30,December 31, 2021, we had current liabilities of $3,890,000. The Company’s$4,502,937. Our accumulated deficit as of December 31, 2021 was $40,230,125, largely due to derivate liability treatments.$42,033,887.
As of September 30, 2020, we had assets of cash in the amount of $483,000 and otherThe revenues generated from our current assets in the amount of $86,000. As of September 30, 2020, we had current liabilities of $9,656,000. The Company’s accumulated deficit was $35,865,000, largely dueoperations will not be sufficient to derivate liability treatments.
fund our planned growth. We will require additional capital to continue to operate our business, and to further expand our business. Sources of additional capital through various financing transactions or arrangements with third parties may include equity or debt financing, bank loans or revolving credit facilities. We may not be successful in locating suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means. Unless the Companywe can attract additional investment, the future of the Companyour operating as a going concern is in serious doubt.
We are now obligated to file annual, quarterly and current reports with the SEC pursuant to the Securities Exchange Act.Act of 1934, as amended (the “Exchange Act”). In addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the rules subsequently implemented by the SEC and the Public Company Accounting Oversight BoardPCAOB have imposed various requirements on public companies, including requiring changes in corporate governance practices. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities of ours more time- consumingtime-consuming and costly. In order to meet the needs to comply with the requirements of the Securities Exchange Act, we will need investment of capital.
Management has determined that additional capital will be required in the form of equity or debt securities. There is no assurance that management will be able to raise capital on terms acceptable to the Company. We also continue to monitor the effects COVID-19 could have on our operations and liquidity including our ability to collect account receivable timely from our customers due to the economic impacts COVID-19 could have on the general economy. us, or at all.
If we are unable to obtain sufficient amounts of additional capital, we may have to cease filing the required reports and cease operations completely. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our shareholdersstockholders will be reduced, shareholdersstockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock.
Cash Flow
| Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2022 | 2021 | Change | ||||||||||
| Cash used in operating activities | $ | (115,911 | ) | $ | (823,075 | ) | $ | 707,164 | ||||
| Cash used in investing activities | $ | (346,960 | ) | $ | (79,020 | ) | $ | (267,940 | ) | |||
| Cash provided by financing activities | $ | (742,062 | ) | $ | 850,519 | $ | (1,592,581 | ) | ||||
| Cash on hand | $ | - | $ | 7,207 | $ | (7,207 | ) | |||||
InvestingOperating Activities
During the ninesix months ended SeptemberJune 30, 2022, we used $115,911 by operating activities, compared to $823,075 during the six months ended June 30, 2021. The elimination of cash on hand was primarily due to an increase in net loss.
Investing Activities
During the six months ended June 30, 2022, we used funds in investing activities of $346,960 to acquire property and equipment and advance payment for acquisition. During the six months ended June 30, 2021, we used funds in investing activities of $138,000$79,020 to purchase property and equipment. During the nine months ended September 30, 2020, we used funds in investing activities of $285,000 to acquire intellectual property and purchase property and equipment.
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Common Stock Reverse Split
On February 19, 2021, we announced the approval of a reverse stock split of our common stock and a reduction in the number of authorized, each within a specified range, with a final decision to be made by our board of directors. On June 14, 2021, we were advised by the Nevada Secretary of State that it had accepted the Company’s filing of a Certificate of Amendment to the Articles of Incorporation, with a filing and effective date of June 11, 2021 (the “Certificate of Amendment”). The Certificate of Amendment (i) reduced the number of authorized shares of common stock to one billion (1,000,000,000); and, (ii) effected a reverse stock split (the “Reverse Stock Split”) of its issued common stock in a ratio of 1-for-2,000. The preferred stock of the Company was not changed. Trading of our common stock began on a split-adjusted basis on July 1, 2021. All common stock and per share data have been retroactively adjusted for the impact of the split.
Financing Activities
During the ninesix months ended SeptemberJune 30, 20212022, we raised net proceeds of $390,000$75,000 through the issuance of our Series B ConvertiblePreferred Stock; $1,207,800 from issuance of convertible debt; proceeds from related party of $116,238, bank overdraft of $3,781 and $1,186,453 from issuance of notes payable; offset in part through redemption of Series B Preferred Stock inof $487,730; repayment of convertible note payable of $758,346; repayment of $1,957,492 on notes payable; repayment to related party of $86,571 and, $41,195 of capital lease payments. For June 30, 2022 we had net cash outflows for financing activities of $742,062. By comparison, during the gross amountsix months ended June 30, 2021, we had net financing inflows of $417,750. We also$850,519, having raised net proceeds of $847,000$846,801 through the issuance of our common stock. We raised proceeds of $366,000 through loans from related parties and repaid $538,000 to related parties. We raised net proceeds of $642,000stock; $250,000 through the issuance of our convertible note and net proceeds of $3,713,000 through theSeries B Preferred Stock; $100,000 from issuance of ourconvertible debt; $2,574,647 from issuance of notes payable,payable; and, repaid $3,953,000$271,464 from loan from a related party, offset in part through repayment of $2,734,275 on notes payable. By comparison, during the nine months ended September 30, 2020, we raised net proceeds of $1,352,250 through the issuance of our convertible promissory notes in the gross amount of $1,641,500. We also repaid $685,000 on notes payable. We raised proceeds of $242,000 through loans from related parties and repaid $692,000payable; repayment to related parties.party of $414,187 and, $43,931 of capital lease payments.
We are dependent upon the receipt of capital investment or other financing to fund our ongoing operations and to execute our business plan. In addition, we are dependent upon our controlling stockholder to provide continued funding and capital resources. If continued funding and capital resources are unavailable at reasonable terms, we may not be able to implement our plan of operations.
Results of Operations for the Years Ended December 31, 2021 and December 31, 2020
Our operations for the year ended December 31, 2021 and 2020 are outlined below:
| Years Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2021 | 2020 | Change | % | |||||||||||||
| Revenue | $ | 3,609,494 | $ | 2,474,627 | $ | 1,134,867 | 46 | % | ||||||||
| Cost of revenue | 546,888 | 303,515 | 243,373 | 80 | % | |||||||||||
| Gross Profit | 3,062,606 | 2,171,112 | 891,494 | 41 | % | |||||||||||
| Gross Profit Percentage | 85 | % | 88 | % | (3 | )% | (3 | )% | ||||||||
| Operating expense | 5,699,845 | 6,071,597 | (371,752 | ) | (6 | )% | ||||||||||
| Other expense | (3,837,915 | ) | (10,006,700 | ) | 6,168,785 | (62 | )% | |||||||||
| Net loss | $ | (6,475,154 | ) | $ | (13,907,185 | ) | $ | 7,432,031 | (53 | )% | ||||||
Revenue
The increase in revenue was primarily due to continued growth in our financial services customer base, increases in our multiyear renewals and new contracts that are subscription-based. Our enhanced file transfer capabilities (via our Data443® Placement Manager product) continue to grow and our customers’ reliance on them are becoming more focused and centralized. This reliance powers business transformation activities, including functions we’ve announced such as over ‘6 nines’ of uptime for over a decade for one customer. Additionally, our data-archiving business that was heavily on-premises based and perpetual software in the past (Data443® Data Archive Manager), is now quickly migrating to our cloud-based facilities that we have invested in over the past few years. Our hosting model contributes higher margins, recurring annual recurring revenue (ARR) and a better experience for our customers. Additionally, it greatly accelerates the adoption of other products that Data443 already offers and plans to offer in the future.
Cost of revenue
Cost of revenue consists of direct expense, such as sales commission, shipping, and supplies. We continue to manage a requisite ratio of expenses to revenues model. The increase in cost of revenue was primarily due to an increase in revenue, with pointed and focused investments in marketing spend and customer outreach.
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For the years ended December 31, 2021 and 2020 our operating expenses are as follows:
| Years Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2021 | 2020 | Change | % | |||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | $ | 5,433,113 | $ | 5,830,703 | $ | (397,590 | ) | (7 | )% | |||||||
| Sales and marketing | 266,732 | 240,894 | 25,838 | 11 | % | |||||||||||
| Total operating expenses | $ | 5,699,845 | $ | 6,071,597 | $ | (371,752 | ) | (6 | )% | |||||||
General and Administrative Expenses
The general and administrative expenses primarily consisted of management costs, costs to integrate assets we acquired and to expand sales of those assets, product enhancements, audit and review fees, filing fees, professional fees, and other expenses related to SEC reporting, including the reclassification of sales-related management expenses in connection with the projected growth of our business. The decrease in general and administrative expense was primarily due to a decrease in amortization and stock-based compensation offset by an increase in insurance and conference expenses.
Sales and Marketing Expenses
The sales and marketing expenses primarily consisted of developing a sales operation, with some previously reported expenses, primarily management costs, reclassified to general and administrative expenses. The increase in sales and marketing expenses was primarily due to an increase in advertising and marketing.
Other income (expense)
Other expense for the year ended December 31, 2021 consisted of non-dilutional significant short-term interest expense, loss on change in fair value of derivative, and gain on settlement of debt. Other expense for the year ended December 31, 2020 consisted of interest expense, loss on impairment of intangible assets, loss on change in fair value of derivative, and loss on settlement on debt. The decrease in other expense was primarily due to change in fair value of derivative liabilities.
Net Loss
The net loss for the year ended December 31, 2021 was mainly derived from an operating loss of $2,637,239, and interest expense of $3,334,413 and loss on change in fair value of derivative liability of $614,658. The net loss for the year ended December 31, 2020 was mainly derived from an operating loss of $3,900,485, and loss on change in fair value of derivative liability of $7,406,416.
Cash Flow for the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Liquidity and Capital Resources
The following table provides selected financial data security market.about our company as of December 31, 2021 and 2020, respectively.
Working Capital
The following table provides selected financial data about our company as of December 31, 2021 and 2020, respectively.
| December 31, | December 31, | |||||||||||||||
| 2021 | 2020 | Change | % | |||||||||||||
| Current assets | $ | 1,297,304 | $ | 195,286 | $ | 1,102,018 | 564 | % | ||||||||
| Current liabilities | $ | 4,502,937 | $ | 5,615,034 | $ | (1,112,097 | ) | (20 | )% | |||||||
| Working capital deficiency | $ | (3,205,633 | ) | $ | (5,419,748 | ) | $ | 2,214,115 | (41 | )% | ||||||
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We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of December 31, 2021, our principal sources of liquidity were cash of $1,204,933, trade accounts receivable of $21,569 and prepaid and other current assets of $70,802, as compared to cash of $58,783 and trade accounts receivable of $136,503 as of December 31, 2020.
During the last two years, and through the date of this Prospectus, we have faced a challenging liquidity situation that has intermittently limited our ability to execute our operating plan. We have also been required to maintain our corporate existence, satisfy the requirements of being a public company, and have chosen to become a mandatory filer with the SEC. We will need to obtain capital to continue operations. There is no assurance that we will be able to secure such funding on acceptable (or any) terms. During the year ended December 31, 2021 and 2020, we reported a loss from operations of $2,637,239 and $3,900,485, respectively, and had negative cash flows used in operating activities of $855,540 and $758,479, respectively, for the same periods.
As of December 31, 2021, we had assets of cash in the amount of $1,204,933 and other current assets in the amount of $92,371. As of December 31, 2021, we had current liabilities of $4,502,937. Our accumulated deficit as of December 31, 2021 was $42,033,887.
As of December 31, 2020, we had assets of cash in the amount of $58,783 and other current assets in the amount of $136,503. As of December 31, 2020, we had current liabilities of $5,615,034. Our accumulated deficit as of December 31, 2020 was $35,518,584.
The revenues, if any, generated from our continued business operations will not be sufficient to fund our operations or planned growth. We will require additional capital to continue to operate our business, and to further expand our business. Sources of additional capital through various financing transactions or arrangements with third parties may include equity or debt financing, bank loans or revolving credit facilities. We may not be successful in locating suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means. Unless we can attract additional investment, our future operation as a going concern is in doubt.
We are obligated to file annual, quarterly and current reports with the SEC pursuant to the Exchange Act. In addition, the Sarbanes-Oxley Act and the rules subsequently implemented by the SEC and the PCAOB impose various requirements on public companies, including requiring changes in corporate governance practices. These rules and regulations have increased and are expected to continue to increase our legal and financial compliance costs and to make some of our activities more time-consuming and costly. In order to continue to comply with the requirements of the Exchange Act, we will need investment of capital.
Management has determined that additional capital will be required in the form of equity or debt securities. There is no assurance that management will be able to raise capital on terms acceptable to us or at all.
If we are unable to obtain sufficient amounts of additional capital, we may have to cease filing the required reports and cease operations completely. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock.
Cash Flow
| Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2021 | 2020 | Change | ||||||||||
| Cash used in operating activities | $ | (855,540 | ) | $ | (758,479 | ) | $ | (97,061 | ) | |||
| Cash used in investing activities | $ | (138,331 | ) | $ | (461,400 | ) | $ | 323,069 | ||||
| Cash provided by financing activities | $ | 2,140,021 | $ | 1,259,989 | $ | 880,032 | ||||||
| Cash on hand | $ | 1,204,933 | $ | 58,783 | $ | 1,146,150 | ||||||
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Operating Activities
During the year ended December 31, 2021, we used $855,540 in operating activities, compared to $758,479 during the year ended December 31, 2020. Cash used in operation activities was primarily due to a decrease in operating liabilities.
Investing Activities
During the year ended December 31, 2021, we used funds in investing activities of $138,331 to acquire property and equipment. During the year ended December 31, 2020, we used funds in investing activities of $315,000 to acquire intellectual property and $146,400 to acquire property and equipment.
Financing Activities
During the year ended December 31, 2021, we raised $846,801 through the issuance of common stock; $525,000 through the issuance of Series B Preferred Stock; $1,482,000 from issuance of convertible debt; $4,377,226 from issuance of notes payable; and, $366,943 from loan from related party, offset in part through redemption of Series B Preferred Stock of $63,999; repayment of convertible note payable of $45,000; repayment of $4,577,578 on notes payable; repayment to related party of $680,807 and, $90,565 of capital lease payments. By comparison, during the year ended December 31, 2020, we raised $50,000 through the issuance of Series B Preferred Stock; $1,502,250 from issuance of convertible debt; $2,147,996 from issuance of notes payable; and, $299,173 from loan from related party, offset in part through repayment of $1,689,846 on notes payable; repayment to related party of $976,257 and, $73,327 of capital lease payments.
We are dependent upon the receipt of capital investment or other financing to fund our ongoing operations and to execute our business plan. If continued funding and capital resources are unavailable at reasonable terms, we may not be able to implement our plan of operations.
Going Concern
The consolidated financial statements included inaccompanying this Prospectus have been prepared on a going concern basis, which implies that our Companycompany will continue to realize its assets and discharge its liabilities and commitments in the normal course of business. Our Company has generated limited revenues since inception and has never paid any dividends and is unlikely to pay dividends or generate earnings in the immediate or foreseeable future. The continuation of our company as a going concern is dependent upon the ability of our company to obtain necessary financing to achieve our operating objectives, and the attainment of profitable operations. As of September 30, 2021,March 31, 2022, our Company has an accumulated deficit of $40,230,125.and working capital deficiency. We do not have sufficient working capital to enable us to carry out our plan of operation for the next twelve months.
Due to the uncertainty of our ability to meet our current operating expenses and the capital expenses noted above in their report on the consolidated financial statements for the nine monthsyear ended September 30,December 31, 2021, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our consolidated financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.
The continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity or debt securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. There can be no assurance that the Companywe will be able to raise any additional capital.
Management’s Plans
Our plan is to continue to grow our business through strategic acquisitions, related product development and then expand selling across our sales channels. We continue to focus heavily on our renewals business that we inherited or expect to inherit from our acquisitions. During the next twelve months, we anticipate incurring costs related to (i) filing of Exchange Act reports and (ii) operating our businesses. We will require additional operating capital to maintain and continue operations. We will need to raise additional capital through debt or equity financing, and there is no assurance we will be able to raise the necessary capital. We expect our cost basis for fundraising will be significantly less if we are able to be listed on a major stock exchange (e.g., The Nasdaq Capital Market). We also expect our equity to have more value to support our acquisitions and by virtue of this, to be less costly for us.
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Off-Balance Sheet Arrangements
There are currently no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Management’s PlansContractual Obligations
Our plan is to continue to grow our business through strategic acquisitions, and then expand selling across our subsidiaries and affiliated companies. During the next twelve months, we anticipate incurring costs related to (i) filing of Exchange Act reports; and, (ii) operating our businesses. We will require additional operating capital to maintain and continue operations. We will need to raise additional capital through debt or equity financing, and there is no assurance we will be able to raise the necessary capital.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2020 COMPARED TO THE YEAR ENDED DECEMBER 31, 2019
Our operations for the year ended December 31, 2020 and 2019 are outlined below:
| Year Ended | ||||||||||||
| December 31, | ||||||||||||
| 2020 | 2019 | Change | ||||||||||
| Revenue | $ | 2,474,627 | $ | 1,453,413 | $ | 1,021,214 | ||||||
| Cost of revenue | 303,515 | 117,106 | 186,409 | |||||||||
| Gross Profit | 2,171,112 | 1,336,307 | 834,805 | |||||||||
| Gross Profit Percentage | 88 | % | 92 | % | (4 | )% | ||||||
| Operating expense | 6,071,597 | 5,270,386 | 801,211 | |||||||||
| Other income (expense) | (10,006,700 | ) | 3,326,708 | (13,333,408 | ) | |||||||
| Net loss | $ | (13,907,185 | ) | $ | (607,371 | ) | $ | (13,299,814 | ) | |||
Revenue
The increase in revenue was primarily due to revenues from assets acquired during 2020.
Cost of revenue
Cost of revenue consists of direct expense, such as sales commission, shipping, and supplies. The increase in cost of revenue was primarily due to an increase in revenue.
For the years ended December 31, 2020 and 2019 our operating expenses are as follows:
| Year Ended | ||||||||||||
| December 31, | ||||||||||||
| 2020 | 2019 | Change | ||||||||||
| Operating expenses | ||||||||||||
| General and administrative | $ | 5,830,703 | $ | 4,796,652 | $ | 1,034,051 | ||||||
| Sales and marketing | 240,894 | 469,529 | (228,635 | ) | ||||||||
| Research and development | - | 4,205 | (4,205 | ) | ||||||||
| Total operating expenses | $ | 6,071,597 | $ | 5,270,386 | $ | 801,211 | ||||||
General and Administrative Expenses
The general and administrative expenses primarily consisted of management costs, costs to integrate assets we acquired and to expand sales, product enhancements, audit and review fees, filing fees, professional fees, and other expenses related to SEC reporting, including the re-classification of sales-related management expenses, in connection with the projected growth of the Company’s business. The increase in general and administrative expense was primarily due to an increase in amortization of intangible assets, payroll expense, professional fees.
Sales and Marketing Expenses
The sales and marketing expenses primarily consisted of developing a sales operation, with some previously reported expenses, primarily management costs, reclassified to general and administrative expenses. The decrease in sales and marketing expense was primarily due to a decrease in consulting and management costs.
Other income (expense)
Other income for the year ended December 31, 2020 consisted of interest expense, loss on change in fair value of derivative, and loss on settlement and extinguishment of debt. Other income for the year ended December 31, 2019 consisted of interest expense, gain on change in fair value of derivative, gain on contingent liability, and loss on settlement on lawsuit. The increase in other income was primarily due to change in fair value of derivative liabilities.
Net Loss
The net loss for the year ended December 31, 2020 was mainly derived from an operating loss of $3,900,485, and loss on change in fair value of derivative liability of $7,406,416. The net loss for the year ended December 31, 2019 was mainly derived from an operating loss of $3,934,079, due in part by increased general and administrative costs and reduced by other net income of $3,326,708, which was mainly from a gain on change in fair value of derivative liability of $7,238,498.
CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 2020 COMPARED TO THE YEAR ENDED DECEMBER 31, 2019
Liquidity and Capital Resources
The following table provides selected financial data about our company as of December 31, 2020 and 2019, respectively.
Working Capital
The following table provides selected financial data about our company as of December 31, 2020 and 2019, respectively.
| December 31, | December 31, | |||||||||||
| 2020 | 2019 | Change | ||||||||||
| Current assets | $ | 195,286 | $ | 91,337 | $ | 103,949 | ||||||
| Current liabilities | $ | 5,617,390 | $ | 9,494,908 | $ | (3,877,518 | ) | |||||
| Working capital deficiency | $ | (5,422,104 | ) | $ | (9,403,571 | ) | $ | 3,981,467 | ||||
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of December 31, 2020, our principal sources of liquidity were cash of $58,783 and trade accounts receivable of $136,503, as compared to cash of $18,673, trade accounts receivable of $63,556, inventory of $8,301 and other current assets of $807 as of December 31, 2019.
During the last two years, and through the date of this Annual Report, we have faced an increasingly challenging liquidity situation that has severely limited our ability to execute our operating plan. We generated no revenue until the fourth quarter of 2018, though we have actively prepared to initiate business in the data security market. We have also been required to maintain our corporate existence, satisfy the requirements of being a public company, and have chosen to become a mandatory filer with the SEC. We will need to obtain capital to continue operations. There is no assurance that we will be able to secure such funding on acceptable (or any) terms. During the year ended December 31, 2020 and 2019, we reported a loss from operations of $3,900,485 and $3,934,079, respectively, and had negative cash flows used in operating activities of $758,479 and $828,437, respectively, for the same periods.
As of December 31, 2020, we had assets of cash in the amount of $58,783 and other current assets in the amount of $136,503. As of December 31, 2020, we had current liabilities of $5,617,390. The Company’s accumulated deficit as of December 31, 2020 was $35,518,584.
As of December 31, 2019, we had assets of cash in the amount of $18,673 and other current assets in the amount of $72,664. As of December 31, 2019, we had current liabilities of $9,494,908. The Company’s accumulated deficit as of December 31, 2019 was $21,610,915. The decrease in working capital deficiency was primarily due to a decrease in derivative liability, offset by an increase in deferred revenue, convertible notes, due to related party and license fee payable.
The revenues, if any, generated from our acquisitions alone will not be sufficient to fund our operations or planned growth. We will require additional capital to continue to operate our business, and to further expand our business. Sources of additional capital through various financing transactions or arrangements with third parties may include equity or debt financing, bank loans or revolving credit facilities. We may not be successful in locating suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means. Unless the Company can attract additional investment, the future of the Company operating as a going concern is in serious doubt.
We are now obligated to file annual, quarterly and current reports with the SEC pursuant to the Exchange Act. In addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the rules subsequently implementeda smaller reporting company as defined by the SEC and the Public Company Accounting Oversight Board have imposed various requirements on public companies, including requiring changes in corporate governance practices. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities of ours more time-consuming and costly. In order to meet the needs to comply with the requirementsRule 12b-2 of the Exchange Act, we will need investmentand are therefore not required to provide this information.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of capital.our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) 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 our financial statements and reported amounts of income and expense during the reporting periods presented.
Management has determinedOur critical estimates include revenue recognition and intangible assets. Although we believe that additional capital will be requiredthese estimates are reasonable, actual results could differ from those estimates given a change in conditions or assumptions that have been consistently applied. We also have other policies that we consider key accounting policies, such as our policy for revenue recognition, however, the formapplication of equitythese policies does not require us to make significant estimates or debt securities. There is no assurancejudgments that management will be able to raise capital on terms acceptable to the Company.are difficult or subjective.
If weThe critical accounting policies used by management and the methodology for its estimates and assumptions are unable to obtain sufficient amounts of additional capital, we may have to cease filing the required reports and cease operations completely. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our shareholders will be reduced, shareholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock.as follows:
Cash Flow
| Year Ended | ||||||||||||
| December 31, | ||||||||||||
| 2020 | 2019 | Change | ||||||||||
| Cash used in operating activities | $ | (758,479 | ) | $ | (828,437 | ) | $ | 69,958 | ||||
| Cash used in investing activities | $ | (461,400 | ) | $ | (279,938 | ) | $ | (181,462 | ) | |||
| Cash provided by financing activities | $ | 1,259,989 | $ | 802,113 | $ | 457,876 | ||||||
| Cash on hand | $ | 58,783 | $ | 18,673 | $ | 40,110 | ||||||
Operating ActivitiesConvertible Financial Instruments
DuringWe bifurcate conversion options from their host instruments and accounts for them as free-standing derivative financial instruments if certain criteria are met. The criteria include circumstances in which (a) the year ended December 31, 2020, our Company used $758,479economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in operating activities, comparedfair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to $828,437 duringthis rule is when the year ended December 31, 2019. Cash usedhost instrument is deemed to be conventional, as that term is described under applicable GAAP.
When we have determined that the embedded conversion options should not be bifurcated from their host instruments, discounts are recorded for the intrinsic value of conversion options embedded in operation activities was primarily due to an increasethe instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in operating liabilities.the instrument.
Investing ActivitiesStock-Based Compensation
During
We measure the year ended December 31, 2020, we used fundscost of services received in investing activitiesexchange for an award of $315,000equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date. For non-employees, as per ASU No. 2018-7, Compensation-Stock Compensation (Topic 718): Improvements to acquire intellectual property and $146,400Nonemployee Share-Based Payment Accounting, re-measurement is not required. The fair value amount is then recognized over the period during which services are required to acquire property and equipment. Duringbe provided in exchange for the year ended December 31, 2019, we used fundsaward, usually the vesting period. Stock-based compensation expense is recorded by us in investing activitiesthe same expense classifications in the consolidated statements of $269,309operations, as if such amounts were paid in cash. Also, refer to acquire intellectual property and $10,629 to acquire property and equipment.Note 2 – Summary of Significant Accounting Policies, in the consolidated financial statements that are included in this Prospectus.
Financing Activities
During the year ended December 31, 2020 we raised $50,000 through the issuance of Series B Preferred Stock; $1,502,250 from issuance of convertible debt; $2,147,996 from issuance of notes payable; and, $299,173 from loan from related party, offset in part through repayment of $1,689,846 on notes payable; repayment to related party of $976,257 and, $73,327 of capital lease payments. By comparison, during the year ended December 31, 2019 we raised $500,000 through the issuance of approximately 557,936 shares of our common stock and warrants to acquire approximately 291,219 shares of our common stock on a post reverse split basis, $440,000 for stock subscriptions of commons stock and warrants to be issued later, and $676,000 from issuance of convertible debt, $215,120 from issuance of notes payable, $12,900 from loan form related party, offset in part through repayment of $650,000 on notes payable, repayment to related party of $371,623 and $20,284 of capital lease payments.
We are dependent upon the receipt of capital investment or other financing to fund our ongoing operations and to execute our business plan. In addition, we are dependent upon our controlling shareholder to provide continued funding and capital resources. If continued funding and capital resources are unavailable at reasonable terms, we may not be able to implement our plan of operations.
BUSINESS
Business History
Our company wasWe are a corporation organized under the laws of the State of Nevada and have a wholly-owned subsidiary corporation with the same name organized under the laws of the State of North Carolina. We were incorporated as LandStar,Landstar, Inc., a Nevada corporation, on May 4, 1998, for the purpose of purchasing, developing and reselling real property, with its principal focus on the development of raw land. From incorporation through December 31, 1998, we had no business operations and1998. Landstar NC was a development-stage company. We did not purchase or develop any properties and decided to change our business plan and operations. On March 31, 1999, we acquired approximately 98.5% of the common stock of Rebound Rubber Corp. (“Rebound Rubber”) pursuant to a share exchange agreement with Rebound Rubber and substantially all of Rebound Rubber’s shareholders. The acquisition was effected by issuing 14,500,100 shares of common stock, which constituted 14.5% of the 100,000,000 of our authorized shares, and 50.6% of the 28,622,100 issued and outstanding shares on completion of the acquisition.
The share exchange with Rebound Rubber (and other transactions occurringincorporated in March 1999) resulted in a change of control2017, and the appointment of new officers and directors. These transactions also changed our focus to the development and utilization of technology to de-vulcanize and reactivate recycled rubber for resale as a raw material in the production of new rubber products. Our business strategy was to sell the de-vulcanized material (and compounds using the materials) to manufacturers of rubber products.
Prior to 2001 we had no revenues. In 2001 and 2002 revenues were derived from management services rendered to a rubber recycling company.
In August 2001, we amended our Articles of Incorporation to authorize 500,000,000 shares of common stock, $0.001 par value per share, and 150,000,000 shares of preferred stock, $0.01 par value per share. We may designate preferred stock into specific classes by action of our board of directors. In May 2008, our board of directors established a class of Convertible Preferred Series A (the “Series A”), authorizing 10,000,000 shares. When established, among other things, (i) each share of Series A was convertible into 1,000 shares of our common stock, and (ii) a holder of Series A was entitled to vote 1,000 shares of common stock for each share of Series A on all matters submitted to a vote by stockholders.
In September 2008, we amended our Articles of Incorporation to increase the number of authorized shares to 985,000,000, $0.001 par value per share, further amended the Articles in January 2009 to increase the number of authorized shares to 4,000,000,000, and in January 2010 amended our Articles to increase the number of authorized shares to 8,888,000,000.
We were effectively dormant for a number of years. In or around February 2014, there was a change in control whereby Kevin Hayes acquired 1,000,000 shares of the Series A and was appointed as our sole director and officer. In or around April 2017, there was another change in control when Mr. Hayes sold the 1,000,000 shares of Series A to Hybrid Titan Management, which then proceeded to assign the Series A to William Alessi. Mr. Alessi was then appointed as our sole director and officer. Mr. Alessi initiated legal action in his home state of North Carolina to confirm, among other things, his ownership of the Series A; his “control” over the company, and the status of creditors of the company. In or around June 2017, the court entered judgment in favor of Mr. Alessi, confirming his majority ownership and control of the company.
In or around July 2017, while under the majority ownership and management of Mr. Alessi, we sought to effect a merger transaction (the “Merger”) under which the company would be merged into Data443 Risk Mitigation, Inc., a North Carolina corporation (“Data443”). Data443 was originally formed under the name LandStar, Inc. The name of the North Carolina corporation was changed to Data443 Risk Mitigation, Inc. in December 2017. In NovemberBetween July and December 2017, our controlling interest was acquired by our current chief executive officer and sole board member, Jason Remillard when he acquired all of theour outstanding Series A shares from Mr. Alessi. In that same transaction, Mr. Remillard also acquired all of the shares of Data443 from Mr. Alessi. Mr. Remillard was then appointed as our sole director and sole officer and of Data443.
Convertible Preferred Shares (the “
In January 2018, we acquired substantially all of the assets of Myriad Software Productions, LLC, which was owned 100% by Mr. Remillard. Those assets were comprised of the software program known as ClassiDocs®, and all intellectual property and goodwill associated therewith. As a result of the acquisition, the Company was no longer a “shell” under applicable securities rules. In consideration for the acquisition, we agreed to a purchase price of $1,500,000, comprised of: (i) $50,000 paid at closing; (ii) $250,000 in the form of a promissory note; and (iii) $1,200,000 in shares of our common stock, valued as of the closing, which equated to 800 shares of our common stock. The shares have not yet been issued and are not included as part of our issued and outstanding shares. However, these shares have been recorded as “Acquisition of ClassiDocs” included in additional paid in capital within our financial statements for the year ending December 31, 2019.
In April 2018, we amended the designation for our Series A by providing that a holder of Series A was entitled to (i) vote 15,000 shares of common stock for each share of Series A on all matters submitted to a vote by stockholders, and (ii) convert each share of Series A into 1,000 shares of our common stock.Shares
In May 2018, the Company amended and restated its Articles of Incorporation. The total authorized number of shares is 8,888,000,000 shares of common stock, $0.001 par value per share, and 50,000,000 shares of preferred stock, $0.001 par value per share, designated in the discretion of our board of directors. The Series A remains in full force and effect.
In June 2018, after careful analysis and in reliance upon professional advisors we retained, it was determined that the Merger had, in fact, not been completed, and that the Merger was not in the best interests of the Company and its stockholders. As such, the Merger was legally terminated. In place of the Merger, in June 2018, we acquired all of the issued and outstanding shares of stock of Data443 (the “Share Exchange”). As a result of the Share Exchange, Data443 became our wholly-owned subsidiary, with both the Company and Data443 continuing to exist as corporate entities. As consideration in the Share Exchange, we agreed to issue to Mr. Remillard: (a) 67 shares of our common stock and (b) on the eighteen-month anniversary of the closing of the Share Exchange (the “Earn Out Date”), an additional 67 shares of our common stock, provided that Data443 has at least an additional $1,000,000 in revenue by the Earn Out Date (not including revenue directly from acquisitions). None of the shares of our common stock to be issued to Mr. Remillard under the Share Exchange have been issued. As such, none of said shares are included as part of our issued and outstanding shares. However, these shares have been recorded as “Share exchange with related party for Data443 additional share issuable” included in additional paid in capital within our financial statements for the year ending December 31, 2019.
On or about June 29, 2018, we secured the rights to the WordPress GDPR Framework through our wholly-owned subsidiary Data443 for a total consideration of €40,001, or approximately $46,521, payable in four payments of approximately €10,000, with the first payment due at closing, and the remaining payments due at the end of July, August and September 2018. Upon issuance of the final payment, we gained the right to enter into an asset transfer agreement for the nominal cost of one euro (€1).
On or about October 22, 2018, we entered into an asset purchase agreement with Modevity, LLC (“Modevity””) to acquire certain assets collectively known as ARALOC®, a software-as-a service (“SaaS”) platform that provides cloud-based data storage, protection, and workflow automation. The acquired assets consist of intellectual and related intangible property including applications and associated software code, and trademarks. Access to books and records related to the customers and revenues Modevity created on the ARALOC platform were also included in the asset purchase agreement. These assets were substantially less than the total assets of Modevity, and revenues from the platform comprised a portion of the overall sales of Modevity. We are required to create the technical capabilities to support the ongoing operation of this SaaS platform. A substantial effort on our part is needed to continue generating ARALOC revenues through development of a sales force, as well as billing and collection processes. We paid Modevity (i) $200,000 in cash, (ii) $750,000, in the form of a 10-month promissory note, and (iii) 110 shares of our common stock.
On June 21, 2019, the Company filed an amendment to its articles of incorporation to increase the total number authorized shares of the Company’s common stock, par value $0.001 per share, from 8,888,000,000 shares to 15,000,000,000 shares.
On September 16, 2019, the Company entered into an Asset Purchase Agreement with DMBGroup, LLC to acquire certain assets collectively known as DataExpressTM, a software platform for secure sensitive data transfer within the hybrid cloud. The total purchase price of approximately $2.8 million consists of: (i) a $410,000 cash payment at closing; (ii) a promissory note in the amount of $940,000, payable in the amount of $41,661 over 24 monthly payments starting on October 15, 2019, accruing at a ratewe changed our name with the Secretary of 6% per annum; (iii) assumptionState of approximately $98,000 in liabilities and, (iv) approximately 2 shares of our common stock. As of December 31, 2019, these shares have not been issued and are recorded as “Stock issuable for asset purchase” included in additional paid in capital.
On October 14, 2019, the Company filed an amendment to its Articles of Incorporation to change its nameNevada from Landstar, Inc. to Data443 Risk Mitigation, Inc., and to effect a 1-for-750 reverse stock split of its issued and outstanding shares of common and preferred shares, each with $0.001 par value, and to reduce the numbers of authorized common and preferred shares to 60,000,000 and 337,500, respectively. On October 28, 2019, the name change and the split and changes in authorized common and preferred shares was effected, resulting in approximately 7,282,678,714 issued and outstanding shares of the Company’s common stock to be reduced to approximately 9,710,239, and 1,000,000 issued and outstanding shares of the Company’s preferred shares to be reduced to 1,334 as of October 28, 2019. All per share amounts and number of shares, including the authorized shares, in the consolidated financial statements and related notes have been retroactively adjusted to reflect the reverse stock split and decrease in authorized common and preferred shares.
On March 5, 2020 the Company amended its Articles of Incorporation to increase the number of shares of authorized common stock to 250,000,000. On April 15, 2020 the Company further amended its Articles of Incorporation to increase the number of shares of authorized common stock to 750,000,000. On August 17, 2020 the Company again amended its Articles of Incorporation to increase the number of shares of authorized common stock to 1.5 billion. On November 25, 2020 the Company filed a Certificate of Designation to authorize and create its Series B Preferred shares, consisting of 80,000 shares. On December 15, 2020 the Company again amended its Articles of Incorporation to increase the number of shares of authorized common stock from 1.5 billion to 1.8 billion. Thereafter, the Company again amended its Articles of Incorporation to increase the number of shares of authorized common stock from 1.8 billion to 3.8 billion.
On August 13, 2020, the Company entered into an Asset Purchase Agreement to acquire certain assets collectively known as FileFacets™, a Software-as-a-Service (SaaS) platform that performs sophisticated data discovery and content search of structured and unstructured data within corporate networks, servers, content management systems, email, desktops and laptops. The total purchase price was $135,000, which amount was paid in full at the closing of the transaction.
On September 21, 2020, the Company entered into an Asset Purchase Agreement with the owners of a business known as IntellyWP™, to acquire the intellectual property rights and certain assets collectively known as IntellyWP™, an Italy-based developer that produces WordPress plug-ins that enhance the overall user experience for webmaster and end users. The total purchase price of $135,000 consists of: (i) a $55,000 cash payment at closing; (ii) a cash payment of $40,000 upon completion of certain training; and, (iii) a cash payment of $40,000 upon the Company collecting $25,000 from the assets acquired in the subject transaction.
On October 8, 2020, the Company entered into an Asset Purchase Agreement with Resilient Network Systems, Inc. (“RNS”) to acquire the intellectual property rights and certain assets collectively known as Resilient Networks™, a Silicon Valley based SaaS platform that performs SSO and adaptive access control “on the fly” with sophisticated and flexible policy workflows for authentication and authorization. The total purchase price of $305,000 consists of: (i) a $125,000 cash payment at closing; and, (ii) the issuance of 9,575 shares of our common stock to RNS.
On December 11, 2020, the Company entered into a Common Stock Purchase Agreement (“CSPA”) with Triton Funds, LP, a Delaware limited partnership (“Triton”), an unrelated third party. Triton agreed to invest $1 million in the Company in the form of common stock purchases. Subject to the terms and conditions set forth in the CSPA, the Company agreed to sell to Triton common shares of the Company having an aggregate value of One Million Dollars ($1,000,000). The price of the shares to be sold will be $0.006 per shares. Triton’s obligation to purchase securities is conditioned on certain factors including, but not limited, to the Company having an effective registration available for resale of the securities being purchased; a minimum closing price of $0.009 per share for the Company’s common stock on the delivery date for the shares; and, Triton’s ownership not exceeding 9.9% of the issued and outstanding shares of the Company at any time. The Company filed a registration statement on Form S-1 with the SEC on December 28, 2020. The S-1 was declared effective by the SEC as of January 26, 2021.
On February 12, 2021, and effective January 31, 2021 the Company declared terminated each of the ArcMail Agreements. The Company has asserted numerous claims under the ArcMail Agreements. Further, Wala lost all rights to the ArcMail Assets through a foreclosure action brought by certain secured creditors of Wala (the “Wala Creditors”). The Company considers its relationship with Wala to be closed and will not pursue any further action in that regard.
On February 12, 2021 the Company closed its acquisition of the ArcMail Assets from the Wala Creditors pursuant to the terms and conditions of an Asset Sale Agreement executed by and between the Company and the Wala Creditors. The effective date of the Asset Sale Agreement and the acquisition was deemed to be January 31, 2021. Total purchase price (the “Purchase Price”) was One Million Four Hundred Four Thousand Dollars ($1,404,000), evidenced by three promissory notes in favor of the Wala Creditors in the total amount of the Purchase Price (the “Notes”). Payments under the Notes commence in 30-days and continue monthly thereafter for 60-months. The Notes are secured by a pledge of the ArcMail Assets as collateral under the terms of a Security Agreement in favor of the Wala Creditors. The foregoing descriptions of the Asset Sale Agreement; Notes; and, Security Agreement do not purport to be complete and are qualified in their entirety by the actual language contained in the Asset Sale Agreement, Notes, and Security Agreement, respectively.
On February 23, 2021, the Company filed with the SEC its Schedule 14C, Preliminary Information Statement, providing notice that the Board of Directors and the holders of a majority of our shares entitled to vote had approved and authorized the following actions:
(1) Amendment of our articles of incorporation (the “Articles of Incorporation”) to provide for a decrease in the authorized shares of the Company’s common stock from 1,800,000,000 to a number of not less than 10,000,000 and not more than 1,000,000,000 (the “Authorized Common Stock Reduction”), at any time prior to the one year anniversary of the filing of the Definitive Information Statement on Schedule 14C with respect to these actions the “Definitive Information Statement”), with the Board of Directors of the Company (the “Board”) having the discretion to determine whether or not the Authorized Common Stock Reduction is to be effected, and if effected, the exact number of the Authorized Common Stock Reduction within the above range.
(2) That the Board be authorized to implement through the amendment to our Articles of Incorporation a reverse stock split of the Company’s Common Stock by a ratio of not less than 1-for-10 and not more than 1-for-2,000, (the “Reverse Split”), at any time prior to the one year anniversary of the filing of the Definitive Information Statement, with the Board having the discretion to determine whether or not the Reverse Split is to be effected, and if effected, the exact ratio for the Reverse Split within the above range.
On April 23, 2021, the Company entered into and closed a financing transaction pursuant to the terms and conditions of a Securities Purchase Agreement (the “Purchase Agreement”) with Auctus Fund, LLC, a Delaware limited liability company (“Auctus”). Pursuant to the Purchase Agreement, Auctus purchased from the Company a Senior Secured Promissory Note (the “Note”) in the aggregate principal amount of $832,000.00 (the “Principal Amount”), and delivered gross proceeds of $750,000.00 (excluded were legal fees for Auctus and a transaction fee charged by Auctus). The Note is secured by a security interest in the assets of the Company and its subsidiaries, pursuant to the terms and conditions of a Security Agreement (the “Security Agreement”). Timely payment under the Note is further secured by the issuance of Common Stock Purchase Warrant (the “Second Warrant”) to Auctus for 55,467 shares of the Company’s common stock at an exercise price of $15.00, exercisable only in the event of a default under the Note. Interest on the Principal Amount of the Note accrues at the rate of 12% per annum, which amount is fully due and owing upon the issuance of the Note. Repayment of all amounts due under the Note shall be tendered on the 12-month anniversary of the Note. The Note may be prepaid in whole at any time without prepayment penalty or premium. If the Company fails to meet its obligations under the terms of the Note, the Note shall become immediately due and payable and subject to penalties provided for in the Note. The Company also granted to Auctus warrants to acquire 55,467 shares of the Company’s common stock pursuant to a Common Stock Purchase Warrant (the “First Warrant”). Exercise price for the warrants is $15.00, with a cashless exercise option. Both the First Warrant and the Second Warrant impose an obligation on the Company to reserve for issuance that number of shares of the Company’s common stock which is 5 times the number of shares issuable under both the First Warrant and the Second Warrant.
As of September 30, 2021, the Company had sold to Triton 83,334 shares of its common stock pursuant to the CSPA, and which shares were registered under the S-1. All sales occurred during the three month period ended March 31, 2021 and resulted in the receipt by the Company of net proceeds in the amount of $847,000 during the six months ended 30 June 2021, which is the final amount the Company will receive from the sale of these shares, which includes proceeds from two unrelated third party for shares of our common stock acquired from Triton.
The 1-for-2,000 Reverse Stock split was processed by FINRA and became effective at the start of trading on July 1, 2021. As a result of the Reverse Stock Split, every 2,000 shares of the Company’s issued and outstanding common stock, par value $0.001 per share, were converted into one (1) share of common stock, par value $0.001 per share.
Business Overview
The Company is a leader inWe provide data security and privacy management (a critical element of IT security), providing solutions for All Things Data Security™, across the enterprise and in the cloud. Trusted by over 170 clients, including over 1% of10,000 customers, we provide the Fortune 500, the Company provides the necessary visibility and control needed to protect at-scale, obtaindata at scale, regardless of format, location, or consumer, and to facilitate compliance objectives,with fast-changing global data privacy requirements. Our customers include established leaders and enhance operational efficiencies. Our clients include leading brand name enterprises in aup-and-coming businesses spanning the private and public/government sectors across diverse set of industries and fields, including financial services, healthcare, manufacturing, retail, technology, and telecommunications.
The mounting threatransomware landscape hasas well as other threats to data have accelerated the rate at which businesses are adopting data security adoption ratessolutions and we believe that our extensive portfolio of data security and privacy products provide a holistic methodologyprovides an encompassing solution set such that we are well positioned to capitalize on that increased adoption rate and establish our products as new data privacy as a newand security standard.standards. Our offering isofferings are anchored in reliable and comprehensive privacy management equippingand equip organizations with a seamless approach to safeguarding theirsafeguard data, protectingprotect against attacks, and mitigatingotherwise mitigate the most critical risks.
DataSector-specific US laws, state-level legislation, and outside-the-United States (OUS) regulations are confounding enterprises of all sizes for whom safeguarding and stewarding data is key, but for whom becoming specialists in privacy and security is not an element of their strategic roadmap. For many of these enterprises, we can bridge the gap between their need to protect data and privacy legislation is driving significant investmenttheir need to use their resources to grow their core business by organizationsoffering turnkey solutions and related counseling and technical support to offset risks from data breaches and damaging information disclosuressecurity incidents of various types. We provide solutionsproducts and services for the marketplace that are designed to protect data viathat is stored in the cloud, on-premises, and in hybrid cloud/on-premises environments, and on-premises architectures.data that is transmitted throughout the enterprise, including but not limited to by remote employees. Our suite of security products focusfocuses on protection of:protecting sensitive files and emails;email, confidential customer, patient and employee data;data, financial records;records, strategic and product plans;plans, intellectual property;property and any other data requiring security,proprietary information, allowing our clientscustomers to create, share, and protect their sensitive data wherever it is stored.stored and however it is used.
We deliver solutions and capabilities via all technical architectures,that businesses can use in conjunction with their use of established cloud vendors such as Microsoft® Azure, Google® Cloud Platform (GCP), and in formats designed for each client. LicensingAmazon® Web Services (AWS), as well as with on-premises databases and subscription models are available to conform to customer purchasing requirements. Our solutions are driven by several proprietary technologiesdatabase applications and methodologies that we have developedwith virtualization platforms, such as those hosted or acquired, giving us our primary competitive advantage.configured using VMWare®, Citrix®, and Oracle® products.
We sell or plan to sell substantially all of our products solutions, and services through a sales model whichthat combines the leverage of a channel sales with themodel or direct account control of direct sales,management, thereby providing us with significant opportunities to grow our current customer base and successfully deliver our value proposition for data privacy and security. We endeavor to use subscription models to license products and services, commonly for a paid-in-advance, multiyear term that is auto-renewing. We also make use of channel partners, distributors, and resellers which sell to end-user customers.end-users of the products and services. This approach allows us to maintain close relationships with our customers and benefit from the global reach of our channel partners. Additionally, we are enhancing our product offerings and go-to-market strategy by establishing technology alliances within the IT infrastructure and security vendor ecosystem. While our products serve customers of all sizes in all industries, theOur sales and marketing focus and majority of our sales focusfor new organic growth is on targeting organizations with 100 users500 or more whichusers who are adopting cloud services and can make larger purchases with us over time and have a greater potential lifetime value.
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We continue to onboard to cloud-native technology adoption portals such as the Microsoft® Azure Marketplace and the Amazon® AWS Marketplace. Vendors may offer incentives to us as a software and services provider to onboard and market via their marketplace portals.
We strive to create new and innovative products and to improve existing products, proactively identifying and solving the data security needs of our customers.
As cloud adoption continues to accelerate, data privacy requirements get more complex, and data security becomes more challenging, we believe that Data443 is well positioned to capture more market share, continue to lead in strategic data security technology development, and prepare organizations for the next epoch in IT data privacy services.
Size of Our Market Opportunity
Worldwide spending on information security products and services will reach more than $114 billion in 2018, an increase of 12.4 percent from last year,By 2024, according to the latest forecasta study from Gartner, Inc. In 2019, the, it is expected that 30% of enterprises will have adopted data security platforms, up from less than 5% in 2019. Gartner, Inc. also stated in another report titled “Predicts 2022: Consolidated Security Platforms Are The Future” that customers are working on vendor consolidation strategies aggressively in addition to expecting a portfolio or stack approach to their purchasing requirements.
We expect that current market was forecast to grow 8.7 percent to $124 billion, with further increases expected for 2020. As cloud-based services increase in popularity, that market increases to an estimated $300 billion by 2021. The International Data Corporation’s Data Age 2025: The Evolution of Data to Life-Critical study estimates that the amount ofconditions, recent data createdthefts, ransomware shutdowns and continued variability in the worldworldwide worker and retail marketplace will growcontinue to 163 Zettabytes (or 151 trillion gigabytes)position our product line front and center for many strategic IT and critical board-level opportunities with customers.
The competitive marketplace continues to consolidate via buyouts, take-private transactions and large ‘unicorn’ competitors being acquired prior to their initial public offerings. We believe that these changes in 2025, representing a nearly tenfold increase from the amount createdownership, closure of product lines and general turmoil in 2016. They estimate that nearly 20% of that data will be critical to our daily lives (and nearly 10% will be hypercritical). The study also suggests that by 2025, almost 90% of all data will require a meaningful level of security, but less than half will be secured. Every enterprise and governmental agency will almost certainly require new technologies to protect and manage data.certain product segments represent opportunities for us.
We believe that the functionalities offered by our programs and services position us to benefit from this growing market. Further,Furthermore, as we continue to grow our business, we believe that we may have opportunities to expand into collateral growing markets, such IT operations management, storage management and data integration.
Our Products
Each of our major product lines provide features and functionality which we believe enable our clients to fullyoptimally secure the value of their data. This architecture easily extends throughThe products are modular, functionalities, giving our clients the flexibility to select the featureswhat they require for their business needs and the flexibility to expand their usage simply by adding a license. As the result of a recent rebranding and marketing effort by the Company, theThe products and related services offered by the Company are now marketed under the following names:we offer include:
| ● | Data443® Ransomware Recovery | |
| ● | Data443® Data Identification | |
| ● | Data443® Data Archive | |
| ● | Data443® Sensitive Content |
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| ● | Data443® | |
| Data Placement | ||
| ● | Data443® Access Control | |
| ● | ||
| ● | Data443® Global Privacy | |
Key Benefits of Our Products and Services
Our products and services:
| ● |
| ● | ||
| ● | Data443® - GDPR Framework, CCPA Framework, and LGPD Framework WordPress Plugins, which helps organizations of all sizes to comply with California, Brazil and Europe privacy rules and regulations and are | |
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Our Growth Strategy
Our objective is to be a leading provider of data security products and services. The following are keyKey elements of our growth strategy:strategy include:
Acquisitions. We intend to aggressively pursue acquisitions of other cybersecurity software and servicesservice providers focused on the data security sector. Targets areWe target companies with a developed and/or steady client base, as well as companies with complementary product offerings.offerings that complement our existing suite of products.
Research & Development; Innovation. We intend to increase our spending on research and development in order to drive innovationcreate new and innovative products and to improve existing products, and to deliver new products. We will work towards proactively identifying and solving the data security needs of our clients.
Grow Our Customer Base. We believe that the continued risechallenges businesses face in managing their enterprise data and increasedthe ever-evolving landscape of cybersecurity concernsthreats will increasekeep the demand high for ourthe type of products and services and products.we offer. We intend to capitalize on this demand by targetingcontinually developing and curating a collection of products and services that are attractive and relevant to both our established revenue base and to new customers.
Expand Our Sales Force. ContinuingCapacity. We believe that continuing to expand our salesforcesales force will be essential to achieving our customer base expansion goals. At the appropriate time, weand growth. We intend to expand our sales capacity by adding headcount throughout our sales and marketing department.
Focus on EU Opportunities. We believe there is a significant opportunity for our products and services in the EU and other international markets in order to enable complianceemployees, with the GDPR. We believe that aheavy focus on international markets will be a key component ofcustomer success and leveraging our growth strategy.existing customer relationships.
Our Customers
Our current customer base is comprised primarily of two segments – commercial enterprises and open-source consumers. Our commercial enterprise customers purchasing ARALOC, ArcMail, DataExpress,are generally focused within the U.S., range from 500 employees to over 150,000 employees, and ClassiDocsuse our data security products. We have over 10,000 commercial enterprise customers. We have approximately 20 customers in the financial technology industry that contract with us directly for products with subscriptions with terms of more than three years. We have more than 2,500 customers comprising mid-market-sized organizations that also contract with us directly for products with subscriptions with terms of one to three years. Our open-source consumers are more widely distributed geographically, include organizations of all sizes in terms of both number of employees and revenues, and typically use our online GDPR/CCPA/GLPD Privacy plugins, our Privacy Badge solution, or our user experience enhancement products. We have over 200,000 open-source consumers with active installations of our plugins, and we have 9,000 open-source consumers that pay a premium for additional or advanced features. We expect that some of our open-source consumers will become commercial customers vary greatly in size, ranging from small and medium businesses to large enterprises.over time.
Services
Maintenance and Support
Our intendedSome of our customers will typically purchase an initial ‘perpetual license’ to one or more of our software products and subsequent maintenance and support contracts on an annual basis. We are striving to move customers to a business model in which they purchase a license to use the software as a time-based subscription, with maintenance and technical support included as part of their initial purchase of our products. These maintenance agreements provide customers the rightsubscription. We have and plan to receive support and unspecified upgrades and enhancements when and if they become available during the maintenance period and access to our technical support services. We will maintain a customer support organization that provides all levels of technical support to our customers.
Professional Services
While users can easily download, install and deploy our software on their own, we anticipate that certain enterprises will use our professional service team to provide fee-based services, which include training our customers in the use of our products, providing advice on deployment planning, network design, product configuration and implementation, automating and customizing reports, and tuning policies and configuration of our products for the particular characteristics of the customer’s environment. In some cases, we bundle the professional services with the sale of the product(s).
Sales and Marketing
Sales
We intend to sell the majority of our products and services directly to end users of our end users/clients. We will also proposeproducts and services. In specialized cases where local markets dictate, we intend to effect sales through a network of channel partners, which in turn, will sell the products they purchase from us.us to the end users. We have a highly-trained professional sales force that is responsibleexpect to continue to develop, refine and leverage different models for overalldifferent regions, product lines and marketplaces as the market development, including the management of the relationships with our channel partners and supporting channel partners.changes.
Marketing
Our marketing strategy focuses on building our brand and product awareness, increasing customer adoption and demand, communicating advantages and business benefits, and generating leads for our channel partners and sales force. We will market our products as a solution for securing and managing file systems and enterprise data and protecting against cyber-attacks.cyberattacks. Our internal marketing organization will be responsible forfocus is on branding, content generation, and product marketing. Our marketing efforts will also include public relations in multiple regions, analyst relations, customer marketing, and extensive content development available through our web sitewebsite and our social media outlets.
Seasonality
Our business is not subject to seasonality.
Research and Development
While currently limited,We continue to invest and develop our plannedcapabilities in research and development efforts will be focused on improvingdevelopment. In addition to core software code, we have continued to enhance our capabilities in user experience and enhancingdesign, which we believe benefits our existing productsproduct lines and services, as well as developing new products, featuresfurther supports customer adoption. We continue to increase the frequency, quality, and functionality. We plan to regularly release new versionsfeature set of our products which incorporate new featuresfor our customers and enhancements to existing ones.adopt advanced development, quality assurance and deployment methodologies.
Intellectual Property
The Company has a policy of requiring key employeesOur commercial success depends in part on our ability to obtain and consultantsmaintain intellectual property protection for our products and services and our brands, to execute confidentiality agreements upon the commencement of an employmentprevent others from infringing, misappropriating, or consulting relationship. The Company’s employee agreements also require relevant employees to assign to it allotherwise violating our intellectual property rights, to any inventions made or conceived during their employment with the Company. In addition, the Company has a policy of requiring individualsdefend and entities with which it discusses potential business relationships to sign non-disclosure agreements. The Company’s agreements with clients include confidentiality and non-disclosure provisions. We cannot assure you that the steps taken by us will prevent misappropriation of our trade secrets or technology or infringement ofenforce our intellectual property. In addition,property rights, and to operate without infringing, misappropriating, or otherwise violating valid and enforceable intellectual property rights of others. We actively seek to protect intellectual property that we believe is important to our business, which includes maintaining issued patents that we believe cover our products and services or features of the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws ofsame, and pursuing new patents through patent applications filed with the United States Patent and many foreign countries do not enforce theseTrademark Office (the “USPTO”) for processes or other inventions that are commercially or strategically important to developing and maximizing our value. We seek to protect the confidentiality of trade secrets that may be important to our existing businesses or to developing and exploiting new opportunities. We take steps to build and maintain the integrity of our brands, for example, with trademarks and service marks. We rely on a strategy that combines the use of patents, trade secrets, and trademarks, know-how, and license agreements, as well as other intellectual property laws, as diligently as government agenciesemployment agreements imposing confidentiality and private parties in the United States.invention assignment obligations, and other contractual protections to establish and protect our intellectual property rights.
Patents
We currently make useown three patents that claim inventions related to the technology associated with its Data443® Asset Control Manager product, namely, US Patent Nos. 8,347,313, 8,752,069, and 8,443,997 and which have anticipated expiration dates in 2025, 2024, and 2031, respectively. We also acquired an exclusive, royalty-free license to certain patent assets as a result of its January 19, 2022 purchase of the assets of Centurion Holdings I, LLC. US Patent No. 9,390, 275 has claims directed to protecting a numberhard drive and controlling hard drive data change and is anticipated to expire in January 2035. US Patent Application Nos. 16/923,747 and 16/923,785 were filed July 8, 2020 and both are pending with the USPTO. The ‘747 and ‘785 applications have been published as US 2021-0011807 and 2021-0012002, respectively and seek protection for claims directed to methods and systems for recognizing unintended file system changes. For new innovations, we intend to seek patent protection either to exclude others from practicing its inventions or to leverage the patent rights for licensing/cross-licensing, whichever may be most appropriate, to further the interests of trademarks in our business, including, without limitation, the following:business.
Unlike copyrights and patents, trademark rights can last indefinitely so long as the owner continues to use the mark to identify its goods or services. The term of a federal trademark is ten years, with ten-year renewal terms. The number of years remaining for the federal trademark on the three trademarks we make use of in our business is as follows:Trade Secrets
ClassiDocs: Eight yearsWe also rely on trade secrets relating to our product and technology, and we maintain the confidentiality of such proprietary information to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection. We seek to protect our trade secrets and know-how by entering into confidentiality and invention assignment agreements with employees, contractors, consultants, suppliers, customers, and other third parties, who have access to such information. These agreements generally provide that all confidential information concerning our business or financial affairs developed or made known to the individual during the course of the individual’s relationship with us are to be kept confidential and not disclosed to third parties except in specific circumstances.
ARALOC: Four yearsTrademarks
DataExpress: Fourteen yearsOur trademark portfolio is designed to protect the brands of our products and services and any future products and services. As of March 31, 2022, we own and presently intend to maintain 12 United States trademark registrations for word marks and logos including for “DATA443”, and “ALL THINGS DATA SECURITY”, “CLASSIDOCS”, “DATAEXPRESS”, “ARALOC”, “FILEFACETS”, “ENTERPRISE ID”, and “ARCMAIL”.
We also make use of, manage, and otherwise enforce the use of several graphical implementations of our service marks in various capacities, including on our website, and with direct marketing and our product lines. These are also managed as part of our normal IP management processes.
For more information regarding the risks related to our intellectual property, please see “Risk Factors-Failure to protect our proprietary technology and intellectual property rights could substantially harm our business.”
Competition
The industry in which we compete is highly competitive. Many companies offer similar products and services for data security. We may be at a substantial disadvantage to our competitors who have more capital than we do to carry out operations and marketing efforts. We hope to maintain oura competitive advantage by offering quality at a competitive price, continuing to acquire unique and capable technologies and by utilizing the experience, knowledge, and expertise of our management team.
We will face competition from more established companies that have competitive advantages, such as greater name recognition, larger sales, marketing, research and acquisition resources, access to larger customer bases and channel partners, a longer operating history and lower labor and development costs, which may enable them to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than we do. Increased competition could result in us failing to attract customers or maintaining them. It could also lead to price cuts, alternative pricing structures or the introduction of products available for free or a nominal price, reduced gross margins, longer sales cycles and loss of market share. If we are unable to compete successfully against current and future competitors, our business and financial condition may be harmed.
Employees
As of December 6, 2021,November 4, 2022, we had 2124 full-time employees and one non-employee independent contractors, of which one was considered to becontractor engaged part of our management team; our CEO, Jason Remillard.time. We have not experienced any work stoppages, and we consider our relations with our employees to be good. The Company believesWe believe that itwe will be successful in attracting experienced and capable personnel. The Company’sOur employees are not represented by any labor union.
Government regulation
We are subject to the laws and regulations of the jurisdictions in which we operate, which may include business licensing requirements, income taxes and payroll taxes. In general, the development and operation of our business is not subject to special regulatory and/or supervisory requirements.
Legal Proceedings
The Company may from time to time be involved in various claims and legal proceedings of a nature it believes are normal and incidental to its business. These matters may include product liability, intellectual property, employment, personal injury cause by the Company’s employees, and other general claims. The Company is not presently a party to any legal proceedings that, in the opinion of its management, are likely to have a material adverse effect on its business. Regardless of outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
DMB Note Collection Action
DMB Group, LLC (“DMB”) filed a lawsuit against Data443 Risk Mitigation, Inc., a North Carolina corporation, the Company’s wholly-owned subsidiary (the “Subsidiary”), June 17, 2021 in County Court in Denton County, Texas, naming the Subsidiary as the defendant (the “Complaint”). DMB claimed a breach of the note issued to it on or around 16 September 2019 in the original principal amount of $940,000 (the “DMB Note”). The DMB Note was issued by the Subsidiary in connection with the Subsidiary’s acquisition of assets from DMB. DMB claims that the Subsidiary is delinquent on its payments under the DMB Note and is therefore in default under the DMB Note. The Company has already accounted for the liability owed under the DMB Note. The matter was settled on 30 September 2021 by mutual agreement of the involved parties. The Subsidiary will make payment of the remaining amount due under the DMB Note over the next six months. This matter is now considered closed.
Employment Related Claims
The Company views most legal proceedings involving claims of former employees as routine litigation incidental to the business, and therefore not material. The Company is currently involved in two such matters with former employees. One matter involves three former employees, and that matter has been resolved and settled. The other matter involves one former employee who is seeking additional compensation. In response, the Company believes that the former employee was terminated “for cause” and is owed no further consideration or compensation. The Company intends to vigorously dispute the claim.
Properties
Our principal executive office is located at 101 J Morris Commons Lane, Suite 105, Morrisville, North Carolina 27560. The space is a shared office space, which at the current time is suitable for the conduct of our business.
Going Concern
We are dependent upon the receipt of capital investment and other financing to fund our ongoing operations and to execute our business plan. If continued funding and capital resources are unavailable at reasonable terms, we may not be able to implement our plan of operations. We may be required to obtain alternative or additional financing, from financial institutions or otherwise, in order to maintain and expand our existing operations. The failure by us to obtain such financing would have a material adverse effect upon our business, financial condition and results of operations.
Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our independent registered public accounting firm has included an explanatory paragraph in their report in our audited financial statements for the fiscal year ended December 31, 2019 to the effect that our limited operations and lack of profitability raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern within one year after the date that the financial statements are issued. We may be required to cease operations which could result in our stockholders losing all or almost all of their investment.
Available Information
The Company expectsWe expect to continue to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, proxy statements and other information with the SEC. TheAny materials we filed with the SEC maintains amay be read on the website maintained by the SEC that contains annual, quarterly and current reports, proxy statements and other information that issuers (including the Company) file electronically with the SEC. The Internetinternet address of the SEC’s website is http://www.sec.gov.At some point in the near future we intend to We also make our reports, amendments thereto, and other information available, free of charge, on our website at www.data443.com. Our telephone number is 919-526-1070.
Legal Proceedings
We may from time to time be involved in various claims and legal proceedings of a website fornature it believes are normal and incidental to its business. These matters may include product liability, intellectual property, employment, personal injury caused by our employees, and other general claims. We are not presently a party to any legal proceedings that, in the Company. At this time, the Company does not provideopinion of its management, are likely to have a linkmaterial adverse effect on its website to such filings,business. Regardless of outcome, litigation can have an adverse impact on us because of defense and there is no estimate for when such a link on the Company’s website will be available. settlement costs, diversion of management resources and other factors.
Properties
Our corporate offices are located at 101 J Morris Commons Lane,4000 Park Drive, Suite 105, Morrisville, North Carolina 27560. 400, Research Triangle Park, NC 27709. The space is a shared office space, which at the current time is suitable for the conduct of our business.
Going Concern
We are dependent upon the receipt of capital investment and other financing to fund our ongoing operations and to execute our business plan. If continued funding and capital resources are unavailable at reasonable terms, we may not be able to implement our plan of operations. We may be required to obtain alternative or additional financing, from financial institutions or otherwise, in order to maintain and expand our existing operations. The failure by us to obtain such financing would have a material adverse effect upon our business, financial condition and results of operations.
Our telephone number is 919-858-6542.financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our independent registered public accounting firm has included an explanatory paragraph in their report in our audited financial statements for the fiscal year ended December 31, 2021 to the effect that our limited operations and lack of profitability raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern within one year after the date that the financial statements are issued. We may be required to cease operations which could result in our stockholders losing all or almost all of their investment.
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers, including their age, positions, and biographical information as of December 6, 2021,November 4, 2022, are set forth below.
| Name | Position | Age | ||
| Jason Remillard | President, Chief Executive Officer, and Director | |||
| Vice President, Chief Financial Officer |
| ||
| Pamela Maher | Vice President, Chief Legal Officer, Corporate Secretary | 62 | ||
Omkhar Arasaratnam | Independent Director Nominee* | 43 | ||
| Independent Director Nominee* | 74 | ||
| Lewis Jaffe | Independent Director Nominee* | 64 |
* Appointment will be effective as of the first day our Common Stockcommon stock and Warrants are traded on Nasdaq.The Nasdaq Capital Market.
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our stockholders or until removed from office in accordance with our bylaws. Our officers are appointed by our boardBoard of directorsDirectors and hold office until removed by the board. All officers and directors listed above will remain in office until the next annual meeting of our stockholders, and until their successors have been duly elected and qualified. There are no agreements with respect to the election of directors.
Set forth below is a brief description of the background and business experience of our current executive officers and directors for the past five years.
Jason Remillard
Jason Remillard is our Founder, President, Chief Executive Officer, and Director,Chairman of the Board of Directors, positions he has held since November 2017. From November 2017 until May 2019, Mr. Remillard also served as our Chief Financial Officer. Mr. Remillard once again assumed the position of Chief Financial Officer on January 23, 2020. Mr. Remillard resigned his position as our Chief Financial Officer on December 3, 2021, when Mr. Warman assumed the position.
Mr. Remillard started his career in the early 1990s with an internet service provider,provider. Mr. Remillard has led software organizations of all sizes throughout his career. In addition to product management, development, and marketing, he has delivered strategic consulting for leading organizations worldwide and in both cyber-securitycybersecurity and IT operations capabilities. He has had a long and distinguished career of over 25-years in the business of enterprise information technology, providing services world-wide. He has been on all three of the recognized aspects of information technology: (i) as a vendor; (ii) as an implementer; and (iii) as the customer. Mr. Remillard has developed, delivered, and sold pervasive solutions and products for companies culminating in four successful market exits.
Immediately prior to forming Data443, Mr. Remillard focused on building an award-winning data privacy and compliance product – ClassiDocs™ClassiDocs®. During this period, he focused on enterprise customer relationships, strategic industry partnerships and setting the foundation for a new and unique entry into the global and growing data privacy and compliance marketplace. Prior to this, he relocated to New York City to serveHe served as VPVice President of Security Architecture and Engineering for Deutsche Bank based in New York City and managed a large and complex portfolio of technology and staff globally, including risk management, data security and enterprise compliance programs. During the last five years Mr. Remillard also led a large global diversified security products portfolio for Dell Software (formerly Quest Software), with over 4,000 active customers, development & marketing teams, and international distribution channels. In addition to Mr. Remillard’s previous years asRemillard was a management consultant for IBM Corporation, he has alsoand developed, marketed, and successfully managed five other startups in the cyber securitycybersecurity space. With almost 30 years of enterprise IT, business development and product sales experience, Mr. Remillard continues to execute on his vision of simplifying important security capabilities to protect important assets.
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Mr. Remillard holds an MBA from the Richard Ivey School of Business (London, ON Canada). He is also a Certified Information Systems Security Professional (CISSP). Mr. Remillard is a founding member of the Blockchain Executive Group; former VPVice President of CISO Global Security Architecture and Engineering at Deutsche Bank; Senior Product Manager for Dell/Quest Software; Management Consultant for IBM; and, Strategic Consultant for RBC Bank, TD Bank. Based upon his experience, and expertise, in the data security space, we believe that Mr. Remillard lends himselfis qualified to be an ideal candidate to head the Companyserve as our Chief Executive Officer and serve on the Board.our Board of Directors.
Greg McCraw
Greg McCraw joined as our Vice President and Chief Financial Officer in September 2022. Mr. Remillard devotes one hundred percent (100%)McCraw has over 25 years of experience helping businesses strengthen accounting and finance operations, addressing compliance challenges in highly regulated environments, and implementing accounting best practices. Mr. McCraw previously was Vice President of Finance for Light Wave Dental (d/b/a Gladwell Orthodontics) in Wake Forest, NC since January 2021, overseeing seven direct reports and controlling a budget of $17 million. From April 2011 until January 2021, Mr. McCraw was the Managing Director of FMAC Group, LLC of Wake Forest, a boutique accounting and finance consulting firm, advising Fortune clients in pharmaceutical, financial services, and private equity sectors on executing on regulatory and compliance solutions. Mr. McCraw is a certified public accountant and holds a bachelor of arts degree in accounting from North Carolina State University. Based on his timeextensive experience in finance, we believe Mr. McCraw is qualified to us.serve as our Chief Financial Officer.
Pamela Maher
Pamela Maher joined as our Chief Legal Officer in April 2022 and was appointed as Vice President and Corporate Secretary in June 2022. Ms. Maher has been practicing law for almost 30 years. She was a law firm partner at Brown Raysman Millstein Felder & Steiner from 2000 to 2006 and from 2007 to 2022 held several legal roles with NeuroPace, Inc., the manufacturer of a medical device that creates, receives, stores and transmits sensitive patient data, which completed its initial public offering in 2021. She received her law degree from Loyola Law School in Los Angeles and she is a member of both the California State Bar and the bar of the U.S. Patent Office. She received her undergraduate degree in biomedical engineering from Boston University. We believe Ms. Maher’s credentials and experience make her well-suited to head our legal, corporate governance, compliance, and strategic intellectual property functions. Based upon hison her experience and expertise in the data security space, we believe Mr. Remillardthat Ms. Maher is an ideal candidate to head the Company and serve on our Board of Directors.
Nanuk Warman
Nanuk Warman now serves as our Chief Financial Officer, having assumed this position as of December 3, 2021 in place of Jason Remillard, who assumed the position of Chief Financial Officer as of January 23, 2020 until his resignation on December 3, 2021. Mr. Warman is a CPA, CMA, CFA with over 23 years of experience in corporate accounting and finance focused primarily on US and Canadian publicly listed companies across a diverse range of industries. Mr. Warman worked with KPMG in British Columbia, Canada, and then went on to found PubCo Reporting Solutions in 2008. Mr. Warman has significant experience in dealing with complex financial reporting requirements under US GAAP and IFRS. His specialties include complex debt and equity transaction accounting, mergers, acquisitions and reverse mergers. Mr. Warman has worked with the Company for almost three years as an independent consultant and has extensive knowledge of our financial history and our business. Mr. Warman’s history with our Company and his extensive experience preparing financial statements for public companies qualifies himqualified to serve as our Chief Financial Officer.Legal Officer and Corporate Secretary.
Set forth below is a brief description of the background and business experience of the individuals who have agreed to join the Company as our independent directors upon the first day our Common Stockcommon stock and Warrants are traded on Nasdaq:The Nasdaq Capital Market:
Omkhar Arasaratnam
Omkhar Arasaratnam is a member of our advisory board and is an experienced cyber securitycybersecurity and technical risk management executive with over 20 years of technology experience. He has had a long history of leading global, multibillion-dollar projects, and has aided businesses in achieving their objectives while effectively managing risk and regulatory requirements. As an accomplished author with several granted patents, Mr. Arasaratnam has led contributions to several international standards. Currently, Mr. Arasaratnam is the director of engineering for regulated cloud solutions at Google. Mr. Arasaratnam was previously at JP Morgan Chase, Credit Suisse, Deutsche Bank, and TD Bank. He is also presently an active senior Fellow at NYU Center for Cybersecurity, and a member of the NYU Cyber Fellow Advisory Council. He has been an advisor to YL Ventures, an investor and advisor for the Cyber Mentor Fund. We believe that Mr. Arasaratnam’s experience in the cyber securitycybersecurity and privacy industry,industries, as well as his extensive understanding of our business, operations, and strategy qualifies him to serve on our boardBoard of directors.Directors.
Norman Gardner
Norman Gardner is the founder & Chairman Emeritus of VerifyMe, Inc. (NASDAQ: VRME), as well as the inventor of VerifyMe’s core anti-counterfeiting technology. He served as Chairman and Chief Executive Officer from 1999-2013. Mr. Gardner will serve as chairman of our compensation committee, leveraging his deep knowledge and expertise of financial and capital markets, as well as expertise and have and his leadership capabilities in shaping and building highly scalable leadership teams. We believe Mr. Gardner’s extensive experience as an expert in myriad aspects of business and public markets, as well as his understanding of our business, operations and strategy qualifies him to serve on our board of directors.
Lewis Jaffe
Lewis (“(Lew”) Jaffe is a Clinical Professor and an Entrepreneur-in-Residence at Loyola Marymount University in the Fred Kiesner Center for Entrepreneurship Management, where he teaches both undergraduates and MBA candidates. LewMr. Jaffe serves on the board of directors of ReedsReed Inc. (NASDAQ: REED); Fit Life Brands (OTCQX: FTLF); and is the lead independent director for York Telecom, a privately heldprivately-held company. Formerly, he was the lead independent director of Benihana Inc. prior to it being taken private. Mr. Jaffe’s career includes serving as CEO and Founder/Cofounder of numerous companies including, MoviMe Network; CEO of Oxford Media Inc. (publicly traded at the time of Mr. Jaffe’s involvement); and President and COO of Verso Technologies (publicly traded at the time of Mr. Jaffe’s involvement) where he integrated numerous acquisitions that were made prior to his tenure while creating product bundles with in-house technology. As the CEO of PictureTel Corporation (publicly traded at the time of Mr. Jaffe’s involvement), a $750 million revenue video conferencing company which he sold in 2001, he developed video compression and communications technologies. Mr. Jaffe has been a guest on a number of business shows for CNBC, MSNBC, and ABC, and has been quoted in a variety of business and trade publications, including Forbes Magazine, The Wall Street Journal, the New York Times, Business Week, and The Boston Globe. We believe Mr. Jaffe’s extensive experience as a financial expert in myriad aspects of business and markets, as well as his understanding of our business, operations, and strategy, qualifies him to serve on our boardBoard of directors.Directors.
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Michael Favish
Michael Favish has more than 30 years of experience in founding, developing, and managing private and public companies. He is an acknowledged and respected leader, entrepreneur, and innovator with hands-on experience in strategic marketing, brand building, sales, and product development. Mr. Favish also founded Fotoball USA, a pioneer in retail licensed products and marketing, in 1984. In 1994, Mr. Favish transformed Fotoball into a publicly-held company listed on The Nasdaq Stock Exchange with 200 employees. After growing revenues from $7 million in 1994 to $50 million in 2003, Fotoball was acquired in January 2004 by an industry-leading NYSE company. Mr. Favish also founded Guardion Health Sciences (GHS) in 2009 with a strong belief that the healthcare industry has not focused enough on a proactive model of wellness for an expanding and increasingly affluent market. Mr. Favish is a strong advocate of bringing research-validated technologies and solutions to the medical and patient markets’ attention. Mr. Favish led GHSI through an IPO in April 2019 and raise $20 million for GHSI from inception. Upon stepping down as Founder and CEO in June 2020, the company had $12 million in cash with no debt. In late 2020 Mr. Favish co-founded and became CEO of Cyrano Medical Health with a mission to provide a real alternative to the current methods used to collect samples for testing for pathogens residing in the nasopharyngeal channel. Throughout his career, Mr. Favish has been a guest speaker at several leading universities and an advisor to companies in both the United States and Asia, advising them on branding, product development, and marketing strategies. We believe that Mr. Jaffe’s experience qualifies him to serve on our Board of Directors.
Involvement in Certain Legal Proceedings
To our knowledge, (i) no director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past ten years; (ii) no director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding during the past ten years; (iii) no director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities during the past ten years; and (iv) no director or officer has been found by a court to have violated a federal or state securities or commodities law during the past ten years.]
Family Relationships
There are no family relationships between any of our officers, anddirectors, or persons nominated to become directors.
Board Committees
We intend to list our common stock on The Nasdaq Capital Market. Under the rules of Nasdaq, independent directors must comprise a majority of a listed company’s board of directors within a specified period of the completion of this offering. In addition, rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation, and nominating and corporate governance committee be independent. Under rules, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
The Company’s
Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act. In order to be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries. We intend to satisfy the audit committee independence requirements of Rule 10A-3 as of the closing of this offering.
Our Board of Directors has establishedundertaken a review of the independence of each director and considered whether each director has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. As a result of this review, our Board of Directors determined that Mr. Favish, Mr. Jaffe and Mr. Arasaratnam are “independent directors” as defined under the applicable rules and regulations of the SEC and the listing requirements and rules of Nasdaq. In making these determinations, our Board of Directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and current and prior relationships as they may relate to us and our management, including the beneficial ownership of our capital stock by each non-employee director and the transactions involving them described in the section titled “Certain Relationships and Related Party Transactions.”
Upon completion of this offering, our Board of Directors plans to establish three standing committees: an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance.Governance Committee. Each of the committees will operate pursuant to its charter.charter then in effect. The committee charters will be reviewed annually by the Nominating and Corporate Governance Committee. IfCommittee and if appropriate, and in consultation with the chairs of the other committees, the Nominating and Corporate Governance Committee may propose revisions to the charters. The responsibilities of each committee are described in more detail below.
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Audit Committee
The Audit Committee, among other things, will be responsible for:
| ● | appointing; approving the compensation of; overseeing the work of; and assessing the independence, qualifications, and performance of the independent auditor; |
| ● | reviewing the internal audit function, including its independence, plans, and budget; |
| ● | approving, in advance, audit and any permissible non-audit services performed by our independent auditor; |
| ● | reviewing our internal controls with the independent auditor, the internal auditor, and management; |
| ● | reviewing the adequacy of our accounting and financial controls as reported by the independent auditor, the internal auditor, and management; |
| ● | overseeing our financial compliance system; and |
| ● | overseeing our major risk exposures regarding |
TheOur Board of Directors has affirmatively determined that each member of the Audit Committee meets the additional independence criteria applicable to audit committee members under SEC rules and listing rules for The Nasdaq listing rules.Capital Market. Effective upon the first day our Common Stockcommon stock and Warrants are traded on Nasdaq,, the Board of Directors will adopt a written charter setting forth the authority and responsibilities of the Audit Committee. The Board of Directors has affirmatively determined that each member of the Audit Committee is financially literate, and that Mr. Jaffe meets the qualifications of an Audit Committee financial expert.
The Audit Committee will consist of Mr. Jaffe, and Mr. Arasaratnam and Mr. Gardner.Favish. Mr. Jaffe will chair the Audit Committee. We believe that on the first day our Common Stockcommon stock and Warrants are traded on The Nasdaq Capital Market the functioning of the Audit Committee will comply with the applicable requirements of the rules and regulations of the Nasdaq listing rules of The Nasdaq Capital Market and the SEC.
Compensation Committee
The Compensation Committee will be responsible for:
| ● | reviewing and making recommendations to |
| ● | overseeing and administering |
| ● | negotiating and overseeing employment agreements with officers and directors; and |
| ● | overseeing how |
Effective upon the first day our Common Stockcommon stock and Warrants are traded on The Nasdaq Capital Market, the Board of Directors will adopt a written charter setting forth the authority and responsibilities of the Compensation Committee. The Compensation Committee will consist of Mr. GardnerFavish, Mr. Jaffe and Mr. Arasaratnam. Mr. GardnerFavish will serve as chairman of the Compensation Committee. The Board of Directors has affirmatively determined that each member of the Compensation Committee meets the independence criteria applicable to compensation committee members under SEC rules and Nasdaq listing rules. The Company believesWe believe that, after the consummation of the offering, the composition of the Compensation Committee will meet the requirements for independence under, and the functioning of such Compensation Committee will comply with, any applicable requirements of the rules and regulations of Nasdaq listing rules for The Nasdaq Capital Market and the SEC.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee, among other things, will be responsible for:
| ● | reviewing and assessing the development of the executive officers and considering and making recommendations to the Board of Directors regarding promotion and succession issues; |
| ● | evaluating and reporting to the Board of Directors on the performance and effectiveness of the directors, committees and the Board of Directors as a whole; |
| ● | working with the Board of Directors to determine the appropriate and desirable mix of characteristics, skills, expertise and experience, including diversity considerations, for the full Board of Directors and each committee; |
| ● | annually presenting |
| ● | reviewing, evaluating, and recommending changes to |
| ● | recommending to the Board of Directors individuals to be elected to fill vacancies and newly created directorships; |
| ● | overseeing |
| ● | overseeing and evaluating how |
Effective upon the first day our Common Stockcommon stock and Warrants are traded on The Nasdaq Capital Market, the Board of Directors will adopt a written charter setting forth the authority and responsibilities of the Nominating and Corporate Governance Committee.
The Nominating and Corporate Governance Committee will consist of Mr. Arasaratnam and Mr. Jaffe. Mr. Arasartnam will serve as chairperson. The Company’s Board of Directors has affirmatively determined that each member of the Nominating and Corporate Governance Committee is independent within the meaning of the independent director guidelines of the listing rules for The Nasdaq listing rules.Capital Market and the SEC.
Compensation Committee Interlocks and Insider Participation
Jason Remillard, the Company’s CEO,our President and Chief Executive Officer, has previously served as the Company’s sole member of the Board.our Board of Directors. In that role Mr. Remillard performed an equivalent function to the compensation committee. Moving forward, none of the members of the Company’sour compensation committee will be an officer or employee of the Company.ours.
Code of Business Conduct and Ethics
Prior to the first day our Common Stock and Warrants are traded on Nasdaq, the Company’s BoardWe will adopt a codeCode of business conductBusiness Conduct and ethicsEthics applicable to its employees, directors and officers, in accordance with applicable U.S.United States federal securities laws and the corporate governance rules of Nasdaq. The codeNasdaq Capital Market. The Code of business conductBusiness Conduct and ethicsEthics will be publicly available on the Company’sour website. Any substantive amendments or waivers of the codeCode of business conductBusiness Conduct and ethics or code of ethics for senior financial officersEthics may be made only by the Company’s boardour Board of directorsDirectors and will be promptly disclosed as required by applicable U.S. federalUnited States securities laws and the corporate governance rules of Nasdaq.The Nasdaq Capital Market.
Director Terms; Qualifications
Members of our boardBoard of directorsDirectors serve until the next annual meeting of stockholders, or until their successors have been duly elected. When considering whether directors and nominees have the experience, qualifications, attributes and skills to enable the boardBoard of directorsDirectors to satisfy its oversight responsibilities effectively in light of the Company’sour business and structure, the boardBoard of directorsDirectors focuses primarily on the industry and transactional experience, and other background, in addition to any unique skills or attributes associated with a director.
Director or Officer Involvement in Certain Legal Proceedings
There are no material proceedings to which any director or officer, or any associate of any such director or officer, is a party that is adverse to our Company or any of our subsidiaries or has a material interest adverse to our Company or any of our subsidiaries. No director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past ten years. No director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding during the past ten years. No director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities during the past ten years. No director or officer has been found by a court to have violated a federal or state securities or commodities law during the past ten years.
Directors and Officers Liability Insurance
The Company plans on obtainingWe have obtained directors’ and officers’ liability insurance insuring its directors and officers against liability for acts or omissions in their capacities as directors or officers, subject to certain exclusions. Such insurance may also insure the Companyinsures us against losses, which it may incur in indemnifying its officers and directors. In addition, officers and directors also have indemnification rights under applicable laws, and the Company’s Articlesour articles of Incorporationincorporation and Bylaws.
Director Independence
The listing rules of Nasdaq require that independent directors must comprise a majority of a listed company’s board of directors. In addition, the rules of Nasdaq require that, subject to specified exceptions, each member of a listed company’s audit, compensation, and nominating and governance committees be independent. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act. Under the rules of Nasdaq, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.bylaws.
Our Board has undertaken a review of the independence of our directors and considered whether any director has a material relationship with it that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. Based upon information requested from and provided by each person nominated to be a non-employee director concerning his or her background, employment and affiliations, including family relationships, the Board has determined that Mr. Jaffe, Mr. Gardner, and Mr. Arasaratnam are “independent”, as that term is defined under the applicable rules and regulations of the SEC and the listing standards of Nasdaq. In making these determinations, our Board considered the current and prior relationships that each non-employee director has with the Company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of the Company’s capital stock by each non-employee director, and any transactions involving them described in the section captioned “Certain Relationships and Related Party Transactions”.
Corporate Governance Guidelines
Prior to the completion of this offering, the Company’sour Board of Directors will adopt corporate governance guidelines in accordance with the corporate governance rules of Nasdaq.The Nasdaq Capital Market.
EXECUTIVE AND DIRECTOR COMPENSATION
Summary Compensation Table
The following table sets forth certain compensation awarded to, earned by, or paid to the following “named executive officers,” which is defined as follows:
| (a) | all individuals serving as our principal executive officer during the year ended December 31, 2021 and 2020; and | |
| (b) | each of our two other most highly compensated executive officers who were serving as executive officers at the end of the year ended December 31, 2021 and 2020. |
We did not have any individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer as of the fiscal yearsyear ended December 31, 2020 and 2019, compensation awarded or paid to our named executive officers, consisting of our principal executive officer during such time (the “Named Executive Officers”):2021.
| Stock | Option | All Other | ||||||||||||||||||||||
| Name and | Salary | Awards | Awards | Compensation | Total | |||||||||||||||||||
| Principal Position | Year | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||
| Jason Remillard | 2020 | 163,282 | 185,000 | - | - | 294,788 | ||||||||||||||||||
| CEO, CFO, Sole Director | 2019 | 109,359 | 180,000 | 132,692 | 78,500 | 391,192 | ||||||||||||||||||
Steven Dawson CFO(1) | 2019 | 95,000 | 136,275 | 52,632 | - | 283,907 | ||||||||||||||||||
| Stock | Option | All Other | ||||||||||||||||||||||
| Fiscal | Salary | Awards | Awards | Compensation | Total | |||||||||||||||||||
| Name and Principal Position | Year | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||
| Jason Remillard | 2021 | 201,441 | - | 6,834 | - | 201,441 | ||||||||||||||||||
| President, Chief Executive Officer and Director(1) | 2020 | 163,282 | 216,000 | - | - | 379,283 | ||||||||||||||||||
| Nanuk Warman | 2021 | 10,000 | - | - | - | 10,000 | ||||||||||||||||||
| Chief Financial Officer(2) | ||||||||||||||||||||||||
(1) Mr. DawsonRemillard served as our Chief Financial Officer from May 1, 2019 until January 24, 2020.2020 until December 3, 2021.
(2) Mr. Warman served as our Chief Financial Officer from December 3, 2021 to September 8, 2022.
Outstanding Equity Awards at 2020 Fiscal Year-End
The following table sets forth information regarding outstandingAs of December 31, 2021, we had one Named Executive Officer, Jason Remillard, and we granted him incentive stock options andto purchase a total of 12 shares of common stock, awards held by our Named Executive Officersnone of which were exercised as of December 31, 2020:2021. The option exercise price for all of Mr. Remillard’s outstanding incentive stock options is $475.20. The market value of such incentive stock options based on the market price of our common stock as of November , 2022 was $ . As of December 31, 2021, Mr. Remillard also owned six shares of common stock that were granted to him as restricted stock awards.
| Option Awards | ||||||||||||||||||
| Name | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) unexercisable | Equity incentive plan awards: number of securities unexercised unearned options (#) | Option exercise price ($) | Option expiration date | |||||||||||||
| Jason Remillard | 38,462 | - | - | $ | 3.90 | December 30, 2028 | ||||||||||||
Employment Agreements
As of December 31, 2020, we did not have an employment or consulting agreement with any officers or directors and there were no annuity, pension or retirement benefits proposed to be paid to officers, directors or employees in the event of retirement at normal retirement date pursuant to any presently existing plan provided or contributed to by us or any of our subsidiaries, if any.
Director CompensationJason M. Remillard Employment Agreement
Our boardEffective March 1, 2019, we entered into an employment agreement with Mr. Remillard (the “Remillard Employment Agreement”) providing for at-will employment, each party having the right to terminate the employment relationship at any time for any reason or no reason.
The Remillard Employment Agreement provides that Mr. Remillard will be employed by us as President and Chief Executive Officer. Under the Remillard Employment Agreement, Mr. Remillard receives a base salary of directors does not currently$180,000 annually. Mr. Remillard is also entitled to receive any consideration for their servicesrestricted stock awards (“RSAs”) every three months until such time as membersMr. Remillard is no longer employed by us. Each RSA consists of a number of shares of our boardcommon stock equal to the value of directors. Our board$45,000. The RSAs vest in full six months from date of directors reservesgrant.
Each quarter, Mr. Remillard is also entitled to receive incentive stock options to purchase our common stock up to a value of $35,000, in accordance with the vesting schedule determined by the administrator of the 2019 Omnibus Stock Incentive Plan.
Under the Remillard Employment Agreement, Mr. Remillard is entitled to participate in all employee benefit programs that we establish and make available to its employees from time to time, including our health and dental plans.
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Greg McCraw Employment Agreement
Effective September 6, 2022, we entered into an employment agreement with Mr. McCraw (the “McCraw Employment Agreement”) providing for at-will employment, each party having the right to terminate the employment relationship at any time for any reason or no reason.
The McCraw Employment Agreement provides that Mr. McCraw will be employed by us as Chief Financial Officer and he was appointed Vice President and Chief Financial Officer on September 8, 2022. Under the McCraw Employment Agreement, Mr. McCraw receives a base salary of $180,000 annually. Mr. McCraw is also entitled to restricted stock awards (“RSAs”) every three months until such time as Mr. McCraw is no longer employed by us. Each RSA consists of a number of shares of our common stock equal to the value of $45,000. The RSAs vest in full six months from date of grant.
Each quarter, Mr. McCraw is also entitled to receive incentive stock options to purchase our common stock up to a value of $35,000, in accordance with the future to awardvesting schedule determined by the membersadministrator of the board of directors cash or stock based consideration for their services2019 Omnibus Stock Incentive Plan.
Under the McCraw Employment Agreement, Mr. McCraw is entitled to us, which awards, if granted shall beparticipate in the sole determination of the board of directors.all employee benefit programs that we establish and make available to its employees from time to time, including our health and dental plans.
Executive Compensation Philosophy
Our boardBoard of directorsDirectors determines the compensation given to our executive officers in their sole determination. Our board of directors reserves the right to pay our executive or any future executives a salary, and/or issue them shares of common stock in consideration for services rendered and/or to award incentive bonuses which are linked to our performance, as well as to the individual executive officer’s performance. This package may also include long-term stock basedstock-based compensation to certain executives, which is intended to align the performance of our executives with our long-term business strategies. Additionally, while our boardBoard of directorsDirectors has not granted any performance baseperformance-based stock options to date, the boardBoard of directorsDirectors reserves the right to grant such options in the future, if the boardBoard of directorsDirectors in its sole determination believes such grants would be in our best interests.
Incentive Bonus
Our boardBoard of directorsDirectors may grant incentive bonuses to our executive officers and/or future executive officers in its sole discretion, if the boardBoard of directorsDirectors believes such bonuses are in our best interests, after analyzing our current business objectives and growth, if any, and the amount of revenue we are able to generate each month, which revenue is a direct result of the actions and ability of such executives.
Long-term, Stock BasedStock-based Compensation
In order to attract, retain and motivate executive talent necessary to support our long-term business strategy we may award our executives and any future executives with long-term, stock-based compensation in the future, at the sole discretion of our boardBoard of directors.Directors. We do not currently have any immediate plans to grant any additional awards.
Our 2019 Omnibus Stock Incentive Plan (the “2019 Plan”) was adopted by our Board of Directors on May 16, 2019 and by a majority of our voting securities on June 24, 2019.2019 (“2019 Plan”). The 2019 Plan permits the granting of incentive stock options non-statutoryto eligible employees and other incentive equity grants to directors or consultants such as restricted stock options,units, restrictive stock awards, stock appreciation rights, restricted stock awards, restricted stock unit awards, and dividend equivalent rights to eligible employees, directors and consultants.or other right or benefit under the 2019 Plan. We grant options to purchase shares of our common stock under the 2019 Plan at no less than the fair value of the underlying common stock as of the date of grant. Options granted under the Plan have a maximum term of ten years. Under the Plan, a total of 1,333,334 shares of common stock are reserved for issuance, of which options to purchase 156,521 and 180,426 shares of common stock and 522,720 and 133,168 shares of common stock were granted as of December 31, 2019 and December 31, 2018, respectively.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Certain Relationships and Related Transactions
In January 2018, we acquired substantially all of the assets of Myriad Software Productions, LLC (“Myriad”), which was wholly owned byJason Remillard is our then sole directorpresident and chief executive officer Jason Remillard. Those assets were comprisedand sole director. Through his ownership of the software program known as ClassiDocs, andSeries A Shares, Mr. Remillard has voting control over all intellectual property and goodwill associated therewith. This acquisition changed our statusmatters to no longer being a “shell” under applicable securities rules. In consideration for the acquisition, we agreedbe submitted to a purchase price of $1,500,000 comprised of the following: (i) $50,000 paid at closing, (ii) $250,000 in the form of a promissory note, and (iii) $1,200,000 in shares of common stock, valued as of the closing, which equated to 1,600,000 sharesvote of our common stock. The shares were issued in the form of 144,000 shares of the Company’s Series A preferred stock as part of the consideration under a Share Settlement Agreement dated August 14, 2020 by and between the Company and Mr. Remillard.stockholders.
In June 2018,During the year ended December 31, 2021, we acquired allborrowed $231,150 from our chief executive officer, our Chief Executive Officer paid operating expenses of $135,793 on our behalf and we repaid $399,169 to our Chief Executive Officer. During the issuedyear ended December 31, 2020, our Chief Executive Officer paid operating expenses of $299,173 on our behalf and outstanding shareswe repaid $303,079 to our Chief Executive Officer.
During the year ended December 31, 2020, our Chief Executive Officer repaid $135,000 to purchase convertible note of stock (the “Share Exchange”)$81,000 and a prepayment penalty of Data443 Risk Mitigation, Inc., a North Carolina corporation (“Data443”).$54,000. As a result, we recorded $54,000 as loss on settlement of debt.
During the Share Exchange, Data443 becameyear ended December 31, 2020 we issued to our Chief Executive Officer a wholly-owned subsidiarytotal of the Company, with both the Company and Data443 continuing to exist as corporate entities. The finances and business conducted by the respective entities prior to the Share Exchange were treated as related party transactions in anticipation of the Share Exchange. As consideration in the Share Exchange, we agreed to issue to Mr. Remillard: (a) One hundred million (100,000,000)148,666 shares of our common stock;Series A Shares.
As of December 31, 2021 and (b) on2020, we owed $247,366 and $561,230, respectively, to related parties which arose from the eighteen (18) month anniversary oftransaction with DMBGroup to acquire the closing of the Share Exchange (the “Earn Out Date”), an additional 100,000,000 shares of our common stock, provided that Data443 has at least an additional $1,000,000 in revenue by the Earn Out Date (not including revenue directly from acquisitions). None of our shares of our common stock to be issued to Mr. Remillardassets sold under the Share Exchange have been issued.trade name DATAEXPRESS.®. These amounts were fully paid as of May 2022.
During the three months ended March 31, 2022, we repaid $43 to our Chief Executive Officer.
During the six months ended June 30, 2022, we received cash from our Chief Executive Officer of $116,238 and repaid $86,571 to our Chief Executive Officer.
As of June 30, 2022 and December 31, 2021, we owed $277,033 and $247,366, respectively, to related parties.
Review, Approval and Ratification of Related Party Transactions
Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval, or ratification of transactions with our executive officers, directors, and significant stockholders. We intend to establish formal policies and procedures in the future, once we have sufficient resources and have appointed additional directors, so that such transactions will be subject to the review, approval, or ratification of our board of directors, or an appropriate committee thereof. Going forward, our directors will continue to approve any related partyrelated-party transaction.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of December 6, 2021,November 2, 2022, certain information concerningwith regard to the record and beneficial ownership of our common stock and Series A Preferred Stock by (i) each stockholderperson known byto us to own beneficially five percentbe the record or beneficial owner of more of anythan 5% of our outstanding common stock, or our Series A Preferred Stock; (ii) each director;of our directors, (iii) each of the named executive officer, as defined in Item 402 of Regulation S-K;officers, and (iv) all of our executive officers and directors as a group, and their percentage ownership and voting power. As of December 6, 2021, there were (i) 945,316 shares of common stock issued; (ii) 150,000 shares of Series A Preferred Stock issued and outstanding (that are convertible into 150,000,000 shares of common stock with a limitation of 9.5% of the issued and outstanding shares of the Company’s common stock, with total voting power of 2,250,000,000 votes); and, (iii) 29,750 shares of Series B Preferred Stock issued and outstanding that are convertible into shares of our common stock.
group.
Unless otherwise stated, beneficialBeneficial ownership has beenis determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to disposerules of the shares).SEC and generally includes voting or investment power with respect to securities. Beneficial ownership also includes shares of stock subject to options and warrants currently exercisable or exercisable within 60-days of the date of this table. In addition, shares are deemed to be beneficiallydetermining the percent of common stock owned by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within 60 daysentity as of the date as of whichthis Prospectus (a) the informationnumerator is provided. In computing the percentage ownership of any person, the number of shares of the class beneficially owned by such person or entity, including shares which may be acquired within 60 days on exercise of warrants or options and conversion of convertible securities, and (b) the denominator is deemed to include the numbersum of (i) the total shares beneficially owned by such person by reason of such acquisition rights,common stock outstanding as of the date of this Prospectus, which is 1,097,721 shares, and (ii) the total number of shares outstanding is also deemed to include such shares (but not shares subject to similar acquisition rights held by any other person, except with respect to the percentage ownership of directors and officers as a group) for purposes of that calculation. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual ownership or voting power at any particular date. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.that the beneficial owner may acquire upon exercise of the derivative securities. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of its shares.
| Name of Beneficial Owner | Number of Shares of Beneficially Owned | Percentage Beneficially Owned | ||||||
| 5% Beneficial Stockholders | ||||||||
| Jason Remillard(1)(2) | 99,232 | 9.5 | %(3) | |||||
| Officers and Directors | ||||||||
| Jason Remillard | 99,232 | 9.5 | % | |||||
| Officers and Directors as a Group (1 person) | 99,232 | 9.5 | % | |||||
| Name of Beneficial Owner(1) | Number of Shares of Beneficially Owned(2) | Percentage Beneficially Owned(2) | ||||||
| 5% Beneficial Stockholders | ||||||||
| Jason Remillard– Series A - Preferred | 149,892 | |||||||
- | ||||||||
| - | - | |||||||
| All current executive officers and directors as a group (3 people) | 149,892 | |||||||
| - | ||||||||
| - | ||||||||
| Officers and Directors | ||||||||
| Jason Remillard | 149,892 | |||||||
| (1) | The mailing address for each officer and director is c/o Data443 Risk Mitigation, Inc., | |
Includes (i) 149,892,000 shares |
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SELLING STOCKHOLDERS
Selling Stockholder Sales
This prospectus covers the possible resale by the Selling Stockholders identified in the table below of up to 931,000 shares of our Common Stock, which were issued to 37 Selling Stockholders. The Selling Stockholders acquired the Selling Stockholder Shares pursuant to a private placement of securities.
The Selling Stockholders may sell some, all or none of their Selling Stockholder Shares. We currently have no agreements, arrangements or understandings with the Selling Stockholders regarding the sale of any of the Selling Stockholder Shares. Unless otherwise indicated in the footnotes to the below table, no Selling Stockholder has had any material relationship with us or any of our affiliates within the past three years other than as a securityholder of our company.
We have prepared the following table based on written representations and information furnished to us by or on behalf of the Selling Stockholders. Since the date on which the Selling Stockholders provided this information, the Selling Stockholders may have sold, transferred or otherwise disposed of all or a portion of the Selling Stockholder Shares in a transaction exempt from the registration requirements of the Securities Act. Unless otherwise indicated in the footnotes below, we believe that: (i) none of the Selling Stockholders are broker-dealers or affiliates of broker-dealers, and (ii) no Selling Stockholder has direct or indirect agreements or understandings with any person to distribute their Selling Stockholder Shares. To the extent any Selling Stockholder identified below is, or is affiliated with, a broker-dealer, it could be deemed to be an “underwriter” within the meaning of the Securities Act. Information about the Selling Stockholders may change over time.
The following table presents information regarding the Selling Stockholders and the Selling Stockholder Shares that each may offer and sell from time to time under this Prospectus. The table is prepared based on information supplied to us by the Selling Stockholders, and reflects their respective holdings as of , 2022, unless otherwise noted in the footnotes to the table. Beneficial ownership is determined in accordance with the rules of the SEC, and thus represents voting or investment power with respect to our securities. Under such rules, beneficial ownership includes any shares over which the individual has sole or shared voting power or investment power as well as any shares that the individual has the right to acquire within 60 days after the date of this table. To our knowledge and subject to applicable community property rules, the persons and entities named in the table have sole voting and sole investment power with respect to all equity interests beneficially owned. The percentage of shares beneficially owned before and after the Offering is based on shares of our Common Stock issued and outstanding on , 2022, and shares to be issued and outstanding after the Offering, which excludes (i) shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise price per share in the range of about $ 0.93 to $20.00 (ii) 149,892 shares of common stock issuable upon conversion of our outstanding Series A Preferred Stock; (iii) exercise of the Underwriter’s Warrants; and, (iv) exercise of the underwriter’s option to purchase additional shares and/or Warrants from us in this offering.
| Selling Stockholder | Number of shares of Common Stock owned by Selling Stockholder | Number of shares being registered | Number of shares owned after the Offering(1) | Percentage owned after the Offering(1) | ||||||||||||
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* Represents ownership of less than 1.0% of the total shares of Common Stock outstanding after the Offering.
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| (1) | Assumes all shares offered by the Selling Stockholders hereby are sold and that the Selling Stockholders buy or sell no additional shares of Common Stock prior to the completion of this offering. The registration of these shares does not necessarily mean that the Selling Stockholders will sell all or any portion of the shares covered by this Prospectus. | |
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Plan of Distribution
We are registering the Selling Stockholder Shares issued to permit the resale of the Selling Stockholder Shares by the Selling Stockholders from time to time after the date of this Prospectus. We will not receive any of the proceeds from the sale of the Selling Stockholder Shares. We will bear all fees and expenses incident to the registration of the Selling Stockholder Shares in the registration statement of which this Prospectus forms a part. The Selling Stockholder Shares will not be sold through Dawson in this public offering.
The Selling Stockholders may sell all or a portion of the Selling Stockholder Shares beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the Selling Stockholder Shares are sold through underwriters or broker-dealers, the Selling Stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. The Selling Stockholder Shares may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions,
| ● | on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale; |
| ● | in the over-the-counter market; |
| ● | in transactions otherwise than on these exchanges or systems or in the over-the-counter market; |
| ● | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| ● | block trades in which the broker-dealer will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
| ● | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| ● | an exchange distribution in accordance with the rules of the applicable exchange; |
| ● | privately negotiated transactions; |
| ● | short sales; |
| ● | in transactions through broker-dealers that agree with the Selling Stockholders to sell a specified number of such securities at a stipulated price per security; |
| ● | through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; |
| ● | a combination of any such methods of sale; or |
| ● | any other method permitted pursuant to applicable law. |
The Selling Stockholders may also sell securities under Rule 144 or any other exemption from registration under the Securities Act, if available, rather than under this Prospectus. However, the Selling Stockholders will not sell any Selling Stockholder Shares until after the closing of this offering.
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If the Selling Stockholders effect such transactions by Selling Stockholder Shares to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the Selling Stockholders or commissions from purchasers of the Selling Stockholder Shares for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the Selling Stockholder Shares or otherwise, the Selling Stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the Selling Stockholder Shares in the course of hedging in positions they assume. The Selling Stockholders may also sell Selling Stockholder Shares short and deliver Selling Stockholder Shares covered by this Prospectus to close out short positions and to return borrowed shares in connection with such short sales. The Selling Stockholders may also loan or pledge Selling Stockholder Shares to broker-dealers that in turn may sell such shares.
The Selling Stockholders may pledge or grant a security interest in some or all of the Selling Stockholder Shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the Selling Stockholder Shares from time to time pursuant to this Prospectus or any amendment to this Prospectus under the applicable provision of the Securities Act, amending, if necessary, the list of Selling Stockholders to include the pledgee, transferee or other successors in interest as Selling Stockholders under this Prospectus. The Selling Stockholders also may transfer and donate the Selling Stockholder Shares in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this Prospectus.
The Selling Stockholders and any broker-dealer participating in the distribution of the Selling Stockholder Shares may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the Selling Stockholder Shares is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of Selling Stockholder Shares being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the Selling Stockholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.
Under the securities laws of some states, the Selling Stockholder Shares may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the Selling Stockholder Shares may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
There can be no assurance that any Selling Stockholder will sell any or all of the Selling Stockholder Shares registered pursuant to the registration statement, of which this Prospectus forms a part.
The Selling Stockholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the Selling Stockholder Shares by the Selling Stockholders and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the Selling Stockholder Shares to engage in market-making activities with respect to the Selling Stockholder Shares. All of the foregoing may affect the marketability of the Selling Stockholder Shares and the ability of any person or entity to engage in market-making activities with respect to the Selling Stockholder Shares.
Once sold under the registration statement, of which this Prospectus forms a part, the Selling Stockholder Shares will be freely tradeable in the hands of persons other than our affiliates.
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of our Common Stock,common stock, including sales by the Selling Stockholders, or the perception that such sales could occur, could adversely affect prevailing market prices for our Common Stock.common stock. In addition, any such sale or perception could make it more difficult for us to sell equity, or equity related, securities in the future at a time and price that we deem appropriate. If and when this Registration Statement, of which this Prospectus is a part, becomes effective, we might elect to adopt a stock option plan and file a Registration Statement under the Securities Act registering the shares of Common Stockcommon stock reserved for issuance thereunder. Following the effectiveness of any such Registration Statement, the shares of Common Stockcommon stock issued under such plan, other than shares held by affiliates, if any, would be immediately eligible for resale in the public market without restriction.
The sale of shares of our Common Stockcommon stock which are not registered under the Securities Act, known as “restricted” shares, typically are effected under Rule 144. As of December 6, 2021,November 2, 2022, we had outstanding an aggregate of 945,3161,097,721 shares of Common Stock,common stock, of which approximately 34,525552,985 shares are restricted Common Stock.common stock. All our shares of Common Stockcommon stock might be sold under Rule 144 after having been held for six months. No prediction can be made as to the effect, if any, that future sales of “restricted” shares of our Common Stock,common stock, or the availability of such shares for future sale, will have on the market price of our Common Stockcommon stock or our ability to raise capital through an offering of our equity securities.
All of the shares of our Common Stockcommon stock sold under this Prospectus will be freely tradable without restriction or further registration under the Securities Act, unless the shares are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act. Any shares purchased by an affiliate or held by our current stockholders, or issued by us in connection with the conversion or exercise of the preferred stock, warrants and options described above, may not be resold except pursuant to an effective registration statement or an exemption from registration, including the exemption under Rule 144 of the Securities Act described below. 4,641,804 shares of common stock outstanding prior to this offering are “restricted securities” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which are summarized below.
Rule 144
In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the current public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person is entitled to sell those shares without complying with any of the requirements of Rule 144.
In general, under Rule 144 as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell, within any three-month period, a number of shares that does not exceed the greater of:
| ● | 1.0% of the then outstanding shares of our common stock; or | |
| ● | the average weekly trading volume during the four calendar weeks preceding the date on which notice of the sale is filed on Form 144. |
Such sales by affiliates under Rule 144 are also subject to restrictions relating to the manner of sale, notice requirements, and the availability of current public information about us, and to the holding period requirements set forth above if the shares are restricted securities.
Rule 701
Rule 701 of the Securities Act, as currently in effect, permits each of our employees, officers, directors, and consultants, to the extent such persons are not “affiliates” as that term is defined in Rule 144, who purchased or received our shares pursuant to a written compensatory plan or contract, to resell such shares in reliance upon Rule 144, but without compliance with the specific requirements regarding the availability of public information or holding periods thereunder. Rule 701 provides that affiliates who purchased or received shares pursuant to a written compensatory plan or contract are eligible to resell their Rule 701 shares under Rule 144 without complying with the holding period requirement of Rule 144.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Sections 78.7502 and 78.751 of the Nevada Revised Statutes authorize a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit indemnification, including reimbursement of expenses incurred, under certain circumstances for liabilities arising under the Securities Act. In addition, our Amended and Restated Bylaws provide that we have the authority to indemnify our directors and officers and may indemnify our employees and agents (other than officers and directors) against liabilities to the fullest extent permitted by Nevada law. We are also empowered under our Bylawsbylaws to purchase insurance on behalf of any person whom we are required or permitted to indemnify.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
DESCRIPTION OF SECURITIES
We are offering Units in this offering at an assumed initial offering price of $4.15$ per unit. Each Unit consists of one share of our common stock and one warrantWarrant to purchase one share of our common stock at an exercise price equal to $4.15,$ , which is 100% of the assumed public offering price of the Units (each a “Warrant” and together, the “Warrants”). Our Units will not be certificated and the shares of our common stock and the Warrants part of such Units are immediately separable and will be issued separately in this offering. We are also registering the shares of common stock issuable upon exercise of the Warrants. These securities are being issued pursuant to an underwriting agreement between us and the Underwriter.underwriter. You should review the underwriting agreement and the form of Warrant, each filed as exhibits to the Registration Statement, of which this Prospectus is a part, for a complete description of the terms and conditions applicable to the Warrants.
As of December 6, 2021,November 2, 2022, we are authorized to issue one billion125,000,000 shares of common stock, par value $0.001 per share, of which 945,3161,097,721 shares of common stock were issued and outstanding. We are also authorized to issue 337,500 shares of preferred stock, par value $0.001 per share, of which (a) 150,000 shares are designated Series A Preferred Stock, of which 150,000149,892 shares of Series A Preferred Stock were issued and outstanding; and (b) 80,000 shares are designated Series B Preferred Stock of which 29,750 shares of Series B Preferred Stock werenone are issued andor outstanding.
This description is intended as a summary and is qualified in its entirety by reference to our amended and restated articles of incorporation and amended and restated bylaws, which are filed, or incorporated by reference, as exhibits to the Registration Statement of which this Prospectus forms a part.
Common Stock
The holders of our common stock have equal ratable rights to dividends from funds legally available therefor, when, as and if declared by our board of directors. Holders of common stock are also entitled to share ratably in all of our assets available for distribution to holders of common stock upon liquidation, dissolution, or winding up of the affairs.
The holders of shares of our common stock do not have cumulative voting rights, which means that the holders of more than 50% of such outstanding shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose, and in such event, the holders of the remaining shares will not be able to elect any of our directors. The holders of 50% percent of the outstanding common stock constitute a quorum at any meeting of stockholders, and the vote by the holders of a majority of the outstanding shares or a majority of the stockholders at a meeting at which quorum exists are required to effect certain fundamental corporate changes, such as liquidation, merger or amendment of our articles of incorporation.
The authorized but unissued shares of our common stock are available for future issuance without stockholder approval. These additional shares may be used for a variety of corporate purposes, including future offerings to raise additional capital, corporate acquisitions, and employee benefit plans. The existence of authorized but unissued shares of common stock may enable our board of directors to issue shares of stock to persons friendly to existing management, which may deter or frustrate a takeover of the Company.us.
Series A Preferred Stock
All issued and outstanding shares of Series A Preferred Stock are held by our Jason Remillard, our Chief Executive Officer and sole director on our Board of the Company.Directors. The terms of the Series A Preferred Stock are set forth below:
Seniority. The shares of Series A Preferred Stock rank senior to the common stock.
Dividends. The shares of Series A Preferred Stock are not entitled to receive any dividends in any amount.
Liquidation Preference. In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holdersa holder of Series A Preferred Stock areis entitled to receive, prior and in preference to any distribution of any of theour assets or surplus funds of the Company to the holders of common stock, an amount equal to $0.125 per share (the “Liquidation Preference”).share. If upon suchour liquidation, dissolution, or winding up, of the Company, theour assets of the Company available for distribution to the holders of theour Series A Preferred Stock are insufficient to permit payment in full to holders of the Liquidation Preference,our Series A Preferred Stock, then all suchof our assets of the Company shall be distributed ratably among the holders of the Series A Preferred Stock. Neither theour consolidation or merger of the Company nor the sale, lease or transfer by the Company of all or a part of itsour assets shall be deemed a liquidation, dissolution, or winding up of the Company for these purposes.
Voting. Except as required by law, each holder of outstanding shares of Series A Preferred Stock shall be entitled to vote on any and all matters considered and voted upon by the holders of common stock. The holdersA holder of shares of Series A Preferred Stock areis entitled to fifteen thousand (15,000)15,000 votes per share of Series A Preferred Stock.
Optional Conversion. Each share of Series A Preferred Stock is convertible, at the option of the holder thereof, at any time, into one thousand (1,000)1,000 shares of common stock, subject to customary adjustments in the event of reclassifications, consolidations and mergers.Mr. Remillard has agreed to a limitation of 9.5% of the issued and outstanding shares of the Company’s common stock.
Series B Preferred Stock
All issued and outstandingAs of November 2, 2022, there were no shares of Series B Preferred Stock are held by Geneva Roth Remark Holdings, Inc.issued or outstanding. The terms of the Series B Preferred Stock are set forth below:
Seniority. The shares of Series B Preferred Stock rank senior to the common stock, and junior to the Series A Preferred Stock.
Dividends. The shares of Series B Preferred Stock are entitled to receive an annual dividend in the amount of nine percent (9%)9% of the Stated Value,stated value, which shall percentage shall be increased to twenty two percent (22%)22% in the event of an event of default by the Company in regard to the Series B Preferred Stock.
Stated Value. Each share of Series B Preferred Stock shall has a stated value of $10.00.
Liquidation Preference. In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holdersa holder of Series B Preferred Stock areis entitled to receive, prior and in preference to any distribution of any of theour assets or surplus funds of the Company to the holders of common stock andbut after the holders of Series A Preferred Stock, an amount equal to $10.00 per share (the “Liquidation Preference”).share. If upon suchour liquidation, dissolution, or winding up, of the Company, theour assets of the Company available for distribution to the holders of theour Series B Preferred Stock are insufficient to permit payment in full to holders of the Liquidation Preference,our Series B Preferred Stock, then all suchof our assets of the Company shall be distributed ratably among the holders of the Series B Preferred Stock. Neither theour consolidation or merger of the Company nor the sale, lease or transfer by the Companyus of all or a part of itsour assets shall be deemed a liquidation, dissolution, or winding up of the Company for these purposes.
Voting. Except as required by law, each holder of outstanding shares of Series B Preferred Stock shall have no voting rights, except that any action altering any rights of the Series B Preferred Stock shall require the consent of the holders of a majority of the issued Series B Preferred Stock.
Optional Redemption. The Company hasWe have the right, at the Company’sour option, to redeem all or any portion of the shares of Series B Preferred Stock, as follows:
(i) beginning on the date of the issuance of shares of Series B Preferred Stock (the “Issuance Date”) and ending on the date which is thirty (30)30 days following the Issuance Date, 115% of the Stated Value;stated value;
(ii) beginning on the date thirty one (31)31 days after the Issuance Date and ending on the date which is sixty (60)60 days following the Issuance Date, 120% of the Stated Value;stated value;
(iii) beginning on the date sixty one (61)61 days after the Issuance Date and ending on the date which is ninety (90)90 days following the Issuance Date, 125% of the Stated Value;
(iv) beginning on the date ninety one (91)91 days after the Issuance Date and ending on the date which is 120 days following the Issuance Date, 130% of the stated value;
(v) beginning on the date 121 days after the Issuance Date and ending on the date which is one hundred twenty (120)150 days following the Issuance Date, 130%135% of the Stated Value;stated value; and
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(v)(vi) beginning on the date one hundred twenty one (121)151 days after the Issuance Date and ending on the date which is one hundred fifty (150) days following the Issuance Date, 135% of the Stated Value; and
(vi) beginning on the date one hundred fifty one (151) days after the Issuance Date and ending on the date which is one hundred eighty (180)180 days following the Issuance Date, 140% of the Stated Value;stated value;
After the expiration of one hundred eighty (180)180 days following the Issuance Date of the applicable shares of Series B Preferred Stock, the Companywe shall have no right of redemption. All 29,750 shares of Series B Preferred Stock currently outstanding are available for redemption.
Optional Conversion. Each share of Series B Preferred Stock is convertible, at the option of the holder thereof, at any time after one hundred eighty (180)180 days following the Issuance Date, in whole or in part, into fully paid and non-assessable shares of Common Stock,common stock, as such Common Stockcommon stock exists on the Issuance Date, or any shares of our capital stock or our other securities of the Company into which such Common Stockcommon stock shall hereafter be changed or reclassified at the conversion price. The conversion price shall be 61% multiplied by the lowest trading price for the Company’sour common stock during the twenty (20)20 days of trading ending on the latest complete trading day prior to the conversion date.
Convertible Notes
The Company hasWe have issued and outstanding nine (9)thirteen notes which are convertible into shares of our Common Stockcommon stock (collectively, the “Convertible Notes”). Three (3) of the Convertible Notes were issued in thehave a total original total principal amount of $100,000 and have identical terms, including a conversion price of $0.01. The remaining fiveten Convertible Notes were issued in thehave a total original total principal amount of $1,141,444,$2,224,025, with conversion prices ranging from $3.50 per share; $4.00$1.00 to $4.50 per share; and 61% to 80% of the trading price with a lookback for the Common Stock.common stock with a floor price of $0.01.
Warrants HereunderOffered in this Offering
Overview. The following summary of certain terms and provisions of the Warrants offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the warrant agent agreement between us and the Warrant Agent, and the form of Warrant, both of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. Prospective investors should carefully review the terms and provisions set forth in the warrant agent agreement, including the annexes thereto, and form of Warrant.
The Warrants issued in this offering entitle the registered holder to purchase one share of our common stock at a price equal to $4.15$ per share (based on the public offering price of $4.15$ per Unit), subject to adjustment as discussed below, immediately following the issuance of such warrant and terminating at 5:00 p.m., New York City time, five years after the closing of this offering. As described herein, we have applied to list the Warrants on theThe Nasdaq Capital Market under the symbol “ATDSW”.
The exercise price and number of shares of common stock issuable upon exercise of the Warrants may be adjusted in certain circumstances, including in the event of a stock dividend or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of common stock at prices below its exercise price.
Exercisability. The Warrants are exercisable at any time after their original issuance and at any time up to the date that is five (5) years after their original issuance. The warrantsWarrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the Warrant Agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of Warrants being exercised. Under the terms of the Warrant Agreement, we must use our best efforts to maintain the effectiveness of the Registration Statement and current Prospectus relating to common stock issuable upon exercise of the Warrants until the expiration of the Warrants. If we fail to maintain the effectiveness of the Registration Statement and current Prospectus relating to the common stock issuable upon exercise of the Warrants, the holders of the Warrants shall have the right to exercise the Warrants solely via a cashless exercise feature provided for in the Warrants, until such time as there is an effective registration statement and current prospectus.
Exercise Limitation. A holder may not exercise any portion of a Warrant to the extent that the holder, together with its affiliates and any other person or entity acting as a group, would own more than 4.99% of the outstanding common stock after exercise, as such percentage ownership is determined in accordance with the terms of the Warrant, except that upon prior notice from the holder to us, the holder may waive such limitation up to a percentage not in excess of 9.99%.
Exercise Price. The exercise price per whole share of common stock purchasable upon exercise of the Warrants is $4.15$ per share (based on the public offering price of $4.15$ per Unit) or 100% of the public offering price of the common stock. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock and also upon any distributions of assets, including cash, stock or other property to our stockholders.
Fractional Shares. No fractional shares of common stock will be issued upon exercise of the Warrants. If, upon exercise of the Warrant, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, pay a cash adjustment in respect of such fraction in an amount equal to such fraction multiplied by the exercise price. If multiple Warrants are exercised by the holder at the same time, we shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the exercise price.
Transferability. Subject to applicable laws, the Warrants may be offered for sale, sold, transferred or assigned without our consent.
Exchange Listing. We have applied to list our Warrants on theThe Nasdaq Capital Market under the symbol “ATDSW”. No assurance can be given that our listing application will be approved. The approval of such listing on theThe Nasdaq Capital Market is a condition of closing this offering.
Warrant Agent; Global Certificate. The Warrants will be issued in registered form under a warrant agent agreement between the Warrant Agent and us. The warrants shall initially be represented only by one or more global warrants deposited with the Warrant Agent, as custodian on behalf of The Depository Trust Company (DTC) and registered in the name of Cede & Co., a nominee of DTC, or as otherwise directed by DTC.
Fundamental Transactions. In the event of a fundamental transaction, as described in the Warrants and generally including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the Warrants will be entitled to receive the kind and amount of securities, cash or other property that the holders would have received had they exercised the warrants immediately prior to such fundamental transaction.
Rights as a Stockholder. The Warrant holders do not have the rights or privileges of holders of common stock or any voting rights until they exercise their Warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the Warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.
Governing Law. The Warrants and the warrant agent agreement are governed by New York law.
Underwriter’s Warrants. The Registration Statement of which this Prospectus is a part also registers for sale the Underwriter’s Warrants, as a portion of the underwriting compensation in connection with this offering. The Underwriter’s Warrants will be exercisable for a four and one-half yearfour-and-one-half-year period commencing 180 days from the effective date of the offering (i.e., following the effective date of the Registration Statement of which this Prospectus is a partpart) at ana per share exercise price of $4.15 (100%$ (125% of the assumed public offering price of the Units). Please see “Underwriting—Underwriter’s Warrants” for a description of the warrantsUnderwriter’s Warrants we have agreed to issue to the Underwriterunderwriter in this offering, subject to the completion of the offering.
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Other Warrants and Options
The Company hasWe have additional warrants issued and outstanding in favor of: (i) Auctus Fund, LLC (as described elsewhere herein) issued in connection with the financing closed April 23, 2021 in the total amount of 110,9346,934 shares, and 125,33415,666 shares issued in connection with the financing closed July 30, 2021 ; (ii) Triton Fund, LP (as described elsewhere herein) issued in connection with the financing transaction entered into on December 11, 2020 in the total amount of 100,000,0006,250 shares; (iii) Jefferson Street Capital, LLC (as described elsewhere herein) issued in connection with the financing closed September 28, 2021 in the total amount of 22,2222,778 shares; (iv) Moody Capital Solutions, LLC (as described elsewhere herein) issued in connection with the financing closed September 28, 2021 in the total amount of 1,111139 shares; (v) Mast Hill Fund, L.P. (as described elsewhere herein) issued in connection with the financing closed October 19, 2021 in the total amount of 323,23232,837 shares; (vi) Westland Properties, LLC (as described elsewhere herein) issued in connection with the financing closed December 21, 2021 in the total amount of 74,671 shares; (vii) Jefferson Street Capital LLC (as described elsewhere herein) issued in connection with the financing closed May 9, 2022 in the total amount of 19,166 shares; (viii) Moody Capital Solutions (as described elsewhere herein) issued in connection with the financing closed May 9, 2022 in the total amount of 1,533 shares; and (vi)(ix) in favor of certain employees and individuals who have rendered valuable services to the Company.
us.
Combinations with Interested Stockholders Provisions of the Nevada Revised Statutes
Pursuant to provisions in our articles of incorporation, we have elected not to be governed by certain Nevada statutes that may have the effect of discouraging corporate takeovers.
Nevada’s “combinations with interested stockholders” statutes (NRS 78.411 through 78.444, inclusive) prohibit specified types of business “combinations” between certain Nevada corporations and any person deemed to be an “interested stockholder” for two years after such person first becomes an “interested stockholder” unless the corporation’s board of directors approves the combination (or the transaction by which such person becomes an “interested stockholder”) in advance, or unless the combination is approved by the board of directors and sixty percent of the corporation’s voting power not beneficially owned by the interested stockholder, its affiliates and associates. Furthermore, in the absence of prior approval certain restrictions may apply even after such two-year period. For purposes of these statutes, an “interested stockholder” is any person who is (1) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation, or (2) an affiliate or associate of the corporation and at any time within the two previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then-outstanding shares of the corporation. The definition of the term “combination” is sufficiently broad to cover most significant transactions between a corporation and an “interested stockholder.” Our articles of incorporation opt out of these provisions, as provided for in the NRS, and accordingly, the combinations with interested stockholders statutes are not applicable to us.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Madison Stock Transfer, Inc. Our transfer agent will also be the Warrant Agent.
Reverse Stock Split
On 19 February 2021, our stockholders approved a reverse stock split within the range of not less than 1-for-10 and not more than 1-for-2,000, (the “Reverse Split”), at any time prior to the one year anniversary of the filing of the Definitive Information Statement, with the Board having the discretion to determine whether or not the Reverse Split is to be effected, and if effected, the exact ratio for the Reverse Split within the above range. At the same time, the same stockholders approved a decrease in the authorized shares of the Company’s Common Stock to a number of not less than 10,000,000 and not more than 1,000,000,000 (the “Authorized Common Stock Reduction”), at any time prior to the one year anniversary of the filing of the Definitive Information Statement. The Board will have the discretion to determine whether or not the Authorized Common Stock Reduction is to be effected, and if effected, the exact number of the Authorized Common Stock Reduction within the above range.
On June 10, 2021, the Company filed a Certificate of Amendment to the Articles of Incorporation (the “Certificate of Amendment”) which served to (i) reduce the number of authorized shares of common stock to one billion (1,000,000,000); and, (ii) effect a reverse stock split (the “Reverse Stock Split”) of its issued common stock in a ratio of 1-for-2,000. The preferred stock of the Company was not changed. The 1-for-2,000 Reverse Stock split was processed by FINRA and became effective at the start of trading on July 1, 2021. As a result of the Reverse Stock Split, every 2,000 shares of the Company’s issued and outstanding common stock, par value $0.001 per share, were converted into one (1) share of common stock, par value $0.001 per share. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would be entitled to receive fractional shares because they hold a number of pre-Reverse Stock Split shares of the Company’s common stock not evenly divisible by 2,000 had the number of post-Reverse Stock Split shares of the Company’s common stock to which they are entitled rounded up to the nearest whole number of shares of the Company’s common stock. No stockholders received cash in lieu of fractional shares. The share and per share information in this Prospectus reflects such reverse stock split.
UNDERWRITING
Maxim Group LLCDawson is acting as the Underwriterunderwriter of the offering (the “Underwriter”).offering. We have entered into an underwriting agreement dated as of this Prospectus with the Underwriter.underwriter. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the Underwriter,underwriter, and such Underwriterunderwriter has agreed to purchase from us, at the public offering price per Unit less the underwriting discounts set forth on the cover page of this Prospectus, the number of Units listed next to its name in the following table:
| Underwriter | Number of Units | |||
| Total | ||||
The underwriting agreement provides that the obligation of the Underwriterunderwriter to purchase all of the Units being offered to the public is subject to specific conditions, including the absence of any material adverse change in our business or in the financial markets and the receipt of certain legal opinions, certificates, and letters from us, our counsel and the independent auditors. The underwriting agreement also provides that if an Underwriterthe underwriter defaults, the offering may be terminated. Subject to the terms of the underwriting agreement, the Underwriterunderwriter will purchase all of the Units being offered to the public, other than those covered by the over-allotment option described below, if any of these Units are purchased. The underwriter is not involved in the sale of the Selling Stockholder Shares.
The Underwriterunderwriter is offering the Units, subject to prior sale, when, as and if issued to and accepted by it, subject to approval of legal matters by its counsel and other conditions specified in the underwriting agreement. The Underwriterunderwriter reserves the right to withdraw, cancel, or modify offers to the public and to reject orders in whole or in part.
Over-Allotment Option
We have granted to the Underwriterunderwriter an option, exercisable one or more times in whole or in part, not later than 45-days after the date of this Prospectus, to purchase from us up to (i) 433,735 additional shares of common stock (15% of the shares of common stock included in the Units sold in this offering) at a price of $4.15$ per share and/or (ii) additional warrants to purchase shares of common stock at a price of $4.15 per warrant (15% of the shares of common stock and warrants included in the Units sold in this offering), at a price of $ per warrant, in each case, less the underwriting discounts and commissions set forth on the cover of this Prospectus in any combination thereof to cover over-allotments, if any. The underwriters may exercise this option solely to cover over-allotments, if any, made in connection with this offering. To the extent that the Underwriter exercises this option itis exercised, and the conditions of the underwriting agreement are satisfied, we will becomebe obligated subject to conditions,sell to the underwriter, and the underwriter will be obligated to purchase, approximately the same percentage of these additional shares of common stock and/or warrants as the number of Units to be purchased by it in the above table bears to the total number of Units offered by this Prospectus. We will be obligated, pursuant to the option, to sell these additional shares of common stock and/or warrants to the Underwriter to the extent the option is exercised. If any additional shares of common stock and/or warrants are purchased, the Underwriter will offer the additional shares of common stock and/or warrants on the same terms as those on which the other Units are being offered hereunder. If this option is exercised in full, the total offering price to the public will be $4.15 per Unit, and the total net proceeds, before expenses and after the credit to the underwriting commissions and corporate finance fee described below, to us will be $13,800,000.warrants.
Discounts and Commissions; Expenses
The following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the Underwriterunderwriter of the over-allotment option.
| Per Unit | Total Without Over- Allotment Option | Total With Full Over- Allotment Option | ||||||||||||
| Public offering price | $ | $ | $ | |||||||||||
| Underwriting discount (8%) | $ | $ | $ | |||||||||||
| Proceeds, before expenses, to us | $ | $ | $ | |||||||||||
The Underwriterunderwriter proposes to offer the Units offered by us to the public at the public offering price of per $4.15$ per Unit, set forth on the cover of this Prospectus. In addition, the Underwriterunderwriter may offer some of the Units to other securities dealers at such price less a concession of $ per Unit. After the initial offering, the public offering price and concession to dealers may be changed.
We have paid an advance of $15,000 to the Underwriter, which will be applied against the accountable expenses that will be paid by us to the Underwriter in connection with this offering. The $15,000 advance will be returned to us to the extent not actually incurred. The underwriting agreement also provides that in the event the offering is terminated, the $15,000 expense deposit paid to the Underwriter will be returned to us to the extent that offering expenses are not actually incurred by the Underwriter in accordance with Financial Industry Regulation Authority (“FINRA”) Rule 5110(f)(2)(C).
We have also agreed to reimburse the Underwriterunderwriter for reasonable out-of-pocket legal expenses not to exceed $105,000$150,000 in the aggregate, if there is a closingplus payment of this offering, or up to $30,000 in the event there is not a closing, as well as certain other out-of-pocket actual expenses related to the offering, which we have estimated to be one percent (1%) of the gross proceeds from the sale of Units in the offering.$25,000 for “blue sky” legal fees and expenses. We estimate that total expenses payable by us in connection with this offering, other than the underwriting discount and corporate finance fee, will be approximately $1,385,000.$ .
Discretionary Accounts
The Underwriterunderwriter does not intend to confirm sales of the Units offered hereby to any accounts over which it has discretionary authority.
Indemnification
We have agreed to indemnify the Underwriterunderwriter against specified liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriterunderwriter may be required to make in respect thereof.
Lock-Up Agreements
We and our officers andOur directors and the holders of 3% or more of the outstanding shares of our common stock,executive officers, as of the effective date of the Registration Statement of which this Prospectus is a part, have agreed, subject to limited exceptions, for a period of 180 dayssix months after the closing of this offering, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of, directly or indirectly any shares of our common stock or any securities convertible into or exchangeable for our common stock either owned as of the date of the underwriting agreement or thereafter acquired without the prior written consent of the Underwriter. The Underwriter may, in its sole discretion and at any time or from time to time before the termination of the lock-up period, without notice, release all or any portion of the securities subject to lock-up agreements.underwriter.
We have agreed that for a period of six months after the closing of this offering that we will not, without the prior written consent of the representative of the underwriters, which may be withheld or delayed in the representative’s sole discretion: (a) offer, sell, or otherwise transfer or dispose of, directly or indirectly, our common stock or any securities convertible into or exercisable or exchangeable for common stock; or (b) file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock or any securities convertible into or exercisable or exchangeable for common stock.
Pricing of this Offering
Prior to this offering, there has not been an active market for our common stock and there has been no public market for our warrants. The public offering price for our Units will be determined through negotiations between us and the Underwriter.underwriter. Among the factors to be considered in these negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the Underwriterunderwriter believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant.
We offer no assurances that the public offering price of our Units will correspond to the price at which our common stock will trade in the public market subsequent to this offering or that an active trading market for our common stock and warrants will develop and continue after this offering.
Underwriter’s Warrants
We have agreed to issue to the Underwriterunderwriter (or its permitted assignees) warrants to purchase up to a total of shares of common stock (8% of the shares of common stock included in the Units, excluding the over-allotment, if any). The warrantsUnderwriter’s Warrants will be exercisable at any time, and from time to time, in whole or in part, during the four and one-half year period commencing 180 days from the effective dateclosing of the Registration Statementoffering and expiring five (5) years from the commencement of sales in the offering and will have a cashless exercise provision. The Underwriter’s Warrants are not exercisable or convertible for more than five years from the commencement of sales of the public offering. The Underwriter’s Warrants will also provide for customary anti-dilution provisions, a one-time demand registration right and unlimited piggyback registration rights with respect to the registration of the shares underlying the Warrants for a period of five years from commencement of sales of this offering. The Warrants are not redeemable by us. The Underwriter’s Warrants and the shares of common stock issuable upon exercise of the Underwriter’s Warrants have been included on the registration statement of which this Prospectus isprospectus forms a part, which period is in compliance with FINRA Rule 5110(f)(2)(G)(i). part.
The warrantsUnderwriter’s Warrants and the underlying shares are exercisable at a per share price equaldeemed to $4.15 per share, or 100% of the public offering price per Unit in the offering (based on the assumed public offering price of $4.15 per Unit). The warrants have been deemedbe compensation by FINRA, and are therefore will be subject to a 180-day lock-up period pursuant to FINRA Rule 5110(g)5110(e)(1). In accordance with FINRA Rule 5110(e)(1), neither the Underwriter’s Warrants nor any of FINRA. The Underwriter (or permitted assignees under Rule 5110(g)(1)) will not sell, transfer, assign, pledge,our common stock issued upon exercise of the Underwriter’s Warrants may be sold, transferred, assigned, pledged or hypothecate these warrantshypothecated, or be the securities underlying these warrants, nor will they engage insubject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the warrants or the underlyingsuch securities by any person, for a period of 180 days from the effective dateimmediately following commencement of the Registration Statementsale of which this Prospectus is a part. In addition, the warrants provide foroffering subject to certain piggyback registration rights. The piggyback registration rights provided will not be greater than five years from the effective date of the Registration Statement of which this Prospectus is a part in compliance withexceptions permitted by FINRA Rule 5110(f)5110(e)(2)(G)(v). We will bear all fees and expenses attendant to registering the securities issuable on exercise of the Underwriter’s warrants. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary cash dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying shares will not be adjusted for issuances of shares of common stock at a price below the warrant exercise price.
Right of First Refusal and Certain Post-Offering Investments
Subject to the closing of this offering and certain conditions set forth in the underwriting agreement, for a period of twelve (12)seven months after the closing of this offering, the Underwriterunderwriter shall have a right of first refusal to act as lead managing Underwriterunderwriter and book-runner and/or placement agent for any and all future public or private equity, equity-linked or debt (excluding commercial bank debt) offerings undertaken during such period by us, or any of our successors or subsidiaries, on terms customary to each of the Underwriter.underwriter. The Underwriter,underwriter, in conjunction with us, shall have the sole right to determine whether or not any other broker-dealer shall have the right to participate in any such offering and the economic terms of any such participation.
For a period of seven months after the closing of this offering, the underwriter shall be entitled to the compensation discussed above with respect to any public or private offering or other financing or capital-raising transaction of any kind to the extent that financing or capital is provided by investors that were contacted by Dawson James Securities, Inc. in connection with this offering during the term of its engagement for this offering or seven months following the completion thereof.
Trading; The Nasdaq Capital Market Listing
Our common stock is presently quoted on the OTC Markets Pink Sheets under the symbol “ATDS.” We have applied to apply to list our common stock and the warrantsWarrants offered in the offering on theThe Nasdaq Capital Market under the symbols “ATDS” and “ATDSW”, respectively. No assurance can be given that our listing application will be approved by theThe Nasdaq Capital Market. The approval of such listing on theThe Nasdaq Capital Market is a condition of closing this offering.
Price Stabilization, Short Positions and Penalty Bids
In connection with this offering the Underwriterunderwriter may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act:
| ● | ||
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| ● |
| ● |
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our securities or preventing or retarding a decline in the market price of the securities. As a result, the price of our shares of common stock and warrants may be higher than the price that might otherwise exist in the open market. These transactions may be discontinued at any time.
Neither we nor the Underwriterunderwriter make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our shares of common stock and warrants. In addition, neither we nor the Underwriterunderwriter make any representation that the Underwriterunderwriter will engage in these transactions or that any transaction, if commenced, will not be discontinued without notice.
Electronic Distribution
This Prospectus in electronic format may be made available on websites or through other online services maintained by the Underwriter,underwriter, or by their affiliates. Other than this Prospectus in electronic format, the information on the Underwriter’sunderwriter’s website and any information contained in any other websites maintained by the Underwriterunderwriter is not part of this Prospectus or the Registration Statement of which this Prospectus forms a part, has not been approved and/or endorsed by us or the Underwriterunderwriter in its capacity as Underwriter,underwriter, and should not be relied upon by investors.
Other
The underwriter and certain of its affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. From time to time, the Underwriterunderwriter and/or its affiliates have provided, and may in the future provide, various investment banking and other financial services for us for which services it has received and, may in the future receive, customary fees. Except for the services provided in connection with this offering and other than as described below, the Underwriterunderwriter has not provided any investment banking or other financial services during the 180-day period preceding the date of this Prospectus.
On August 28, 2020, we engaged Maxim Group, LLC (“Maxim”)In the ordinary course of their various business activities, the underwriter and certain of its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for Maxim to provide general financial advisory, investment banking,their own account and digital marketing services for the Company for an initial termaccounts of 6-months. In exchange for the services under the Agreement, the Company shall issue to Maxim sharestheir customers, and such investment and securities activities may involve securities and/or instruments of the Company’s company stock (a) upon executionissuer or its affiliates. If the underwriter or its affiliates have a lending relationship with us, they routinely hedge their credit exposure to us consistent with their customary risk management policies. The underwriter and its affiliates may hedge such exposure by entering into transactions which consist of either the Maxim Agreementpurchase of credit default swaps or the creation of short positions in an amount equal to 2.50%our securities or the securities of our affiliates, including potentially the Company’s issued and outstanding shares of common stock; and, (b) 2.49% of the of the Company’s issued and outstanding shares of common stock upon the up-listingoffered hereby. Any such credit default swaps or short positions could adversely affect future trading prices of the Company’sshares of common stock offered hereby. The underwriter and certain of its affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to a national exchange (Nasdaq clients that they acquire, long and/or NYSE). All shares issued to Maxim will be non-dilutable for 2-years. Further, cash fees will be paid to Maxim as follows: (i) monthly fee of $2,500; (ii) 8% of the amount of capital raised, invested or committed through or arranged by Maxim; (iii) fee for unallocated expenses of 1% of the amount of capital raised, invested or committed through or arranged by Maxim;short positions in such securities and (iv) a 5-year warrant to purchase shares of the Company’s common stock equal to eight percent (8%) of the number of shares of the common stock underlying the securities issued in the financing arranged by Maxim. Lastly, Maxim shall receive a transaction fee equal of 3% of the consideration underlying an acquisitive transaction (such as a merger) arranged by Maxim.instruments.
Offers Outside the United States
Other than in the United States, no action has been taken by us or the Underwriterunderwriter that would permit a public offering of the securities offered by this Prospectus in any jurisdiction where action for that purpose is required. The securities offered by this Prospectus may not be offered or sold, directly or indirectly, nor may this Prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this Prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this Prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for us by GARY ROSENBERG, PA, Weston, Florida.Flangas Law Group. Certain legal matters in connection with this offering will be passed upon for us by Pryor Cashman LLP, New York, New York. Lucosky BrookmanArentFox Schiff LLP, Woodbridge, New Jersey,Washington, DC, is acting as counsel for the Underwriterunderwriter in this offering.
EXPERTS
TheOur audited consolidated financial statements of the Company as of December 31, 20202021 and 20192020 and for the years then ended appearing in this Prospectus have been so included in reliance on the reports of TPS Thayer, LLC, and Thayer O’Neal Company, LLC, respectively, each an independent public accounting firm, appearing elsewhere herein, given on the authority of said firm as experts in auditing and accounting. Prior to the preparation and filing of the Company’s Form 10-Q for the period ending September 30, 2020, the Company engaged TPS Thayer, LLC as its independent registered public accounting firm.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the information requirements of the Exchange Act and, in accordance therewith, file annual, quarterly, and special reports, proxy statements and other information with the SEC. These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system, or EDGAR, via electronic means, including the SEC’s home page on the Internet (www.sec.gov). At some point inOn our website, as listed under the near future we intend‘Investor Relations’ link – https://data443.com/investor-relations/ - you may find summaries of all our filings with the SEC. However, authoritatively the SEC website continues to makebe the primary source for all our reports, amendments thereto, and other information available, free of charge, on a website for the Company. At this time, the Company does not provide a link on its website to such filings, and there is no estimate for when such a link on the Company’s website will be available.information.
We have filed with the SEC a Registration Statement on Form S-1 under the Securities Act, with respect to the securities being offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement or the exhibits and schedules filed with the Registration Statement. For further information about us and the securities offered hereby, we refer you to the Registration Statement and the exhibits filed with the Registration Statement. Statements contained in this Prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the Registration Statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the Registration Statement.
INDEX TO FINANCIAL STATEMENTSDATA443 RISK MITIGATION, INC.
Consolidated Financial Statements
Contents
| F-1 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | 1,377,579 | $ | 58,783 | ||||
| Accounts receivable, net | 101,581 | 136,503 | ||||||
| Inventory | ||||||||
| Prepaid expense and other current assets | 10,638 | - | ||||||
| Total current assets | 1,489,798 | 195,286 | ||||||
| Property and equipment, net | 354,422 | 324,349 | ||||||
| Operating lease right-of-use assets, net | 193,524 | 248,237 | ||||||
| Intellectual property, net of accumulated amortization | 1,586,341 | 2,310,907 | ||||||
| Deposits | 31,440 | 31,440 | ||||||
| Total Assets | $ | 3,655,525 | $ | 3,110,219 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 204,916 | $ | 401,014 | ||||
| Deferred revenue | 1,134,535 | 1,478,430 | ||||||
| Interest payable | 119,203 | 62,212 | ||||||
| Notes payable, net of unamortized discount | 1,225,672 | 585,310 | ||||||
| Convertible notes payable, net of unamortized discount | 586,663 | 1,241,412 | ||||||
| Derivative liability | 39,993 | - | ||||||
| Due to a related party | 389,229 | 561,230 | ||||||
| License fee payable | - | 1,094,691 | ||||||
| Operating lease liability | 109,193 | 100,170 | ||||||
| Finance lease liability | 80,989 | 90,565 | ||||||
| Total Current Liabilities | 3,890,393 | 5,615,034 | ||||||
| Commitments and contingencies | ||||||||
| Series B Preferred Stock, shares designated; $par value; Stated value $ and shares issued and outstanding, net of discount, respectively | 233,881 | 50,203 | ||||||
| Notes payable, net of unamortized discount - non-current | 1,817,520 | 572,495 | ||||||
| Convertible notes payable, net of unamortized discount - non-current | 17,315 | 2,356 | ||||||
| Deferred revenues - non-current | 510,825 | 39,733 | ||||||
| Operating lease liability - non-current | 154,565 | 237,961 | ||||||
| Finance lease liability - non-current | 25,784 | 83,109 | ||||||
| Total Liabilities | 6,650,283 | 6,600,891 | ||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock: authorized; $ par value Series A Preferred Stock, shares designated; $par value; shares issued and outstanding, respectively | 150 | 150 | ||||||
| Common stock: authorized; $ par value and shares issued and outstanding, respectively | 830 | 522 | ||||||
| Common stock value | 830 | 522 | ||||||
| Additional paid in capital | 37,234,387 | 32,027,240 | ||||||
| Accumulated deficit | (40,230,125 | ) | (35,518,584 | ) | ||||
| Total Stockholders’ Deficit | (2,994,758 | ) | (3,490,672 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 3,655,525 | $ | 3,110,219 | ||||
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | - | $ | 1,204,933 | ||||
| Accounts receivable, net | 231,507 | 21,569 | ||||||
| Advance payment for acquisition | 2,726,188 | - | ||||||
| Prepaid expense and other current assets | 27,950 | 70,802 | ||||||
| Total current assets | 2,985,645 | 1,297,304 | ||||||
| Property and equipment, net | 305,196 | 288,406 | ||||||
| Operating lease right-of-use assets, net | 134,198 | 174,282 | ||||||
| Intellectual property, net of accumulated amortization | 809,275 | 1,269,819 | ||||||
| Deposits | 21,026 | 31,440 | ||||||
| Total Assets | $ | 4,255,340 | $ | 3,061,251 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Bank overdraft | 3,781 | - | ||||||
| Accounts payable and accrued liabilities | 417,466 | 115,673 | ||||||
| Deferred revenue | 1,510,827 | 1,035,185 | ||||||
| Interest payable | 309,180 | 204,915 | ||||||
| Notes payable, net of unamortized discount | 1,799,147 | 1,720,777 | ||||||
| Convertible notes payable, net of unamortized discount | 1,942,774 | 993,931 | ||||||
| Due to a related party | 277,033 | 247,366 | ||||||
| License fee payable | ||||||||
| Operating lease liability | 118,848 | 112,322 | ||||||
| Finance lease liability | 41,914 | 72,768 | ||||||
| Total Current Liabilities | 6,420,970 | 4,502,937 | ||||||
| Series B Preferred Stock, shares designated; $ par value; Stated value $; and shares issued and outstanding, net of discount as of June 30, 2022 and December 31, 2021, respectively | - | 278,811 | ||||||
| Notes payable, net of unamortized discount - non-current | 1,734,439 | 1,770,989 | ||||||
| Convertible notes payable, net of unamortized discount - non-current | 98,488 | 22,357 | ||||||
| Deferred revenues - non-current | 1,071,761 | 573,411 | ||||||
| Operating lease liability - non-current | 64,072 | 125,640 | ||||||
| Finance lease liability - non-current | - | 10,341 | ||||||
| Total Liabilities | 9,389,730 | 7,284,486 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock: authorized; $ par value Series A Preferred Stock, shares designated; $ par value; and shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | 150 | 150 | ||||||
| Common stock: authorized; $ par value and shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | 954 | 122 | ||||||
| Additional paid in capital | 40,842,698 | 37,810,380 | ||||||
| Accumulated deficit | (45,978,192 | ) | (42,033,887 | ) | ||||
| Total Stockholders’ Deficit | (5,134,390 | ) | (4,223,235 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 4,255,340 | $ | 3,061,251 | ||||
See the accompanying Notes,notes, which are an integral part of these unaudited Consolidated Financial Statementsconsolidated financial statements.
| F-2 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
| September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
| Revenue | $ | 1,495,059 | $ | 700,275 | $ | 3,095,279 | $ | 1,644,087 | $ | 750,989 | $ | 762,352 | $ | 1,363,505 | $ | 1,600,220 | ||||||||||||||||
| Cost of revenue | 148,721 | 108,363 | 412,545 | 161,749 | 78,593 | 96,830 | 278,272 | 263,824 | ||||||||||||||||||||||||
| Gross profit | 1,346,338 | 591,912 | 2,682,734 | 1,482,338 | 672,396 | 665,522 | 1,085,233 | 1,336,396 | ||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||
| General and administrative | 1,061,178 | 858,205 | 3,806,139 | 3,949,635 | 2,116,220 | 1,311,396 | 3,089,782 | 2,744,961 | ||||||||||||||||||||||||
| Sales and marketing | 89,175 | 3,010 | 233,819 | 151,221 | 59,635 | 49,220 | 180,030 | 144,644 | ||||||||||||||||||||||||
| Research and development | ||||||||||||||||||||||||||||||||
| Total operating expenses | 1,150,353 | 861,215 | 4,039,958 | 4,100,856 | 2,175,855 | 1,360,616 | 3,269,812 | 2,889,605 | ||||||||||||||||||||||||
| Net income (loss) from operations | 195,985 | (269,303 | ) | (1,357,224 | ) | (2,618,518 | ) | |||||||||||||||||||||||||
| Loss from operations | (1,503,459 | ) | (695,094 | ) | (2,184,579 | ) | (1,553,209 | ) | ||||||||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||||||||
| Interest expense | (1,101,910 | ) | (618,934 | ) | (2,679,198 | ) | (1,691,099 | ) | (942,753 | ) | (671,862 | ) | (2,037,069 | ) | (1,577,288 | ) | ||||||||||||||||
| Loss on impairment of intangible asset | ||||||||||||||||||||||||||||||||
| Gain on contingent liability | ||||||||||||||||||||||||||||||||
| Loss on settlement of debt | - | (191,833 | ) | (227,501 | ) | (245,833 | ) | |||||||||||||||||||||||||
| Gain (loss) on settlement of debt | - | - | - | (227,501 | ) | |||||||||||||||||||||||||||
| Change in fair value of derivative liability | (68,199 | ) | (420,070 | ) | (431,853 | ) | (9,698,885 | ) | - | (178,398 | ) | (57,883 | ) | (363,654 | ) | |||||||||||||||||
| Total other expense | (1,170,109 | ) | (1,230,837 | ) | (3,338,552 | ) | (11,635,817 | ) | (942,753 | ) | (850,260 | ) | (2,094,952 | ) | (2,168,443 | ) | ||||||||||||||||
| Loss before income taxes | (974,124 | ) | (1,500,140 | ) | (4,695,776 | ) | (14,254,335 | ) | (2,446,212 | ) | (1,545,354 | ) | (4,279,531 | ) | (3,721,652 | ) | ||||||||||||||||
| Provision for income taxes | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Net loss | $ | (974,124 | ) | $ | (1,500,140 | ) | $ | (4,695,776 | ) | $ | (14,254,335 | ) | $ | (2,446,212 | ) | $ | (1,545,354 | ) | $ | (4,279,531 | ) | $ | (3,721,652 | ) | ||||||||
| Dividend on Series B Preferred Stock | (6,324 | ) | - | (15,765 | ) | - | - | (5,492 | ) | (104,631 | ) | (9,441 | ) | |||||||||||||||||||
| Net loss attributable to common stockholders | $ | (980,448 | ) | $ | (1,500,140 | ) | $ | (4,711,541 | ) | $ | (14,254,335 | ) | $ | (2,446,212 | ) | $ | (1,550,846 | ) | $ | (4,384,162 | ) | $ | (3,731,093 | ) | ||||||||
| Basic and diluted loss per Common Share | $ | (1.25 | ) | $ | (7.77 | ) | $ | (6.63 | ) | $ | (182.64 | ) | $ | (3.25 | ) | $ | (16.90 | ) | $ | (9.62 | ) | $ | (44.33 | ) | ||||||||
| Basic and diluted weighted average number of common shares outstanding | 779,813 | 193,007 | 708,058 | 78,048 | 753,561 | 91,430 | 444,824 | 83,948 | ||||||||||||||||||||||||
See the accompanying Notes,notes, which are an integral part of these unaudited Consolidated Financial Statementsconsolidated financial statements.
| F-3 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
ForSix months ended June 30, 2022
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Series A | Additional | Total | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance - December 31, 2021 | 150,000 | $ | 150 | 122,044 | $ | 122 | $ | 37,810,380 | $ | (42,033,887 | ) | $ | (4,223,235 | ) | ||||||||||||||
| Cumulative-effect adjustment from adoption of ASU 2020-06 | - | - | - | - | (517,500 | ) | 439,857 | (77,643 | ) | |||||||||||||||||||
| Common stock issued for acquisition of Centurion assets | - | - | 380,952 | 381 | 2,475,807 | - | 2,476,188 | |||||||||||||||||||||
| Common stock issued for conversion of preferred stock | (108 | ) | - | 108,000 | 108 | (108 | ) | - | ||||||||||||||||||||
| Common stock issued for conversion of debt | - | - | 165,273 | 165 | 29,160 | - | 29,325 | |||||||||||||||||||||
| Common stock issued in conjunction with convertible notes | - | - | 18,170 | 18 | 140,918 | - | 140,936 | |||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | - | 6,631 | 7 | (7 | ) | - | - | ||||||||||||||||||||
| Common stock issued for service | - | - | 153,491 | 153 | 844,048 | - | 844,201 | |||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | - | 57,883 | - | 57,883 | ||||||||||||||||||||||
| Warrant issued in conjunction with debts | - | - | - | 47,628 | - | 47,628 | ||||||||||||||||||||||
| Stock-based compensation | - | - | - | (45,511 | ) | - | (45,511 | ) | ||||||||||||||||||||
| Net loss | - | - | - | - | (4,384,162 | ) | (4,384,162 | ) | ||||||||||||||||||||
| Balance - June 30, 2022 | 149,892 | $ | 150 | 954,561 | $ | 954 | $ | 40,842,698 | $ | (45,978,192 | ) | $ | (5,134,390 | ) | ||||||||||||||
Three months ended June 30, 2022
| Series A | Additional | Total | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance - March 31, 2022 | 150,000 | $ | 150 | 148,367 | $ | 148 | $ | 37,353,357 | $ | (43,531,980 | ) | $ | (6,178,325 | ) | ||||||||||||||
| Common stock issued for acquisition of Centurion assets | - | - | 380,952 | 381 | 2,475,807 | - | 2,476,188 | |||||||||||||||||||||
| Common stock issued for conversion of preferred stock | (108 | ) | - | 108,000 | 108 | (108 | ) | - | - | |||||||||||||||||||
| Common stock issued for conversion of debt | - | - | 151,200 | 151 | 1,361 | - | 1,512 | |||||||||||||||||||||
| Common stock issued for service | - | - | 153,491 | 153 | 844,048 | - | 844,201 | |||||||||||||||||||||
| Common stock issued in conjunction with convertible notes | - | - | 12,551 | 13 | 78,431 | - | 78,444 | |||||||||||||||||||||
| Warrant issued in conjunction with debts | - | - | - | - | 47,628 | - | 47,628 | |||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 42,174 | - | 42,174 | |||||||||||||||||||||
| Adjustment of reverse stock split | - | - | - | - | ||||||||||||||||||||||||
| Net loss | - | - | (2,446,212 | ) | (2,446,212 | ) | ||||||||||||||||||||||
| Balance - June 30, 2022 | 149,892 | 150 | 954,561 | 954 | 40,842,698 | (45,978,192 | ) | (5,134,390 | ) | |||||||||||||||||||
See the Nineaccompanying notes, which are an integral part of these unaudited consolidated financial statements.
| F-4 |
Six Months Ended SeptemberJune 30, 2021
| Total | ||||||||||||||||||||||||||||
Series A Preferred Stock | Common Stock | Additional Paid in | Accumulated | Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance - December 31, 2020 | 150,000 | $ | 150 | 522,006 | $ | 522 | $ | 32,027,240 | $ | (35,518,584 | ) | $ | (3,490,672 | ) | ||||||||||||||
| Common stock issued for cash | - | - | 83,336 | 83 | 846,718 | - | 846,801 | |||||||||||||||||||||
| Common stock issued to settle debt | ||||||||||||||||||||||||||||
| Common stock issued to settle debt, shares | ||||||||||||||||||||||||||||
| Stock issuable for asset purchase | ||||||||||||||||||||||||||||
| Stock issuable for asset purchase, shares | ||||||||||||||||||||||||||||
| Issuance of restricted stock | ||||||||||||||||||||||||||||
| Issuance of restricted stock, shares | ||||||||||||||||||||||||||||
| Stock subscriptions | ||||||||||||||||||||||||||||
| Share exchange with related party for Data443 additional share issuable | ||||||||||||||||||||||||||||
| Cancellation of share due to settlement of lawsuit | ||||||||||||||||||||||||||||
| Cancellation of share due to settlement of lawsuit, shares | ||||||||||||||||||||||||||||
| Common stock issued for asset purchase | ||||||||||||||||||||||||||||
| Common stock issued for asset purchase, shares | ||||||||||||||||||||||||||||
| Beneficial conversion feature | ||||||||||||||||||||||||||||
| Preferred stock issued for service - related party | ||||||||||||||||||||||||||||
| Preferred stock issued for service - related party, shares | ||||||||||||||||||||||||||||
| Common stock issued for conversion of preferred stock | - | - | 71,678 | 72 | 624,914 | 624,986 | ||||||||||||||||||||||
| Preferred stock issued for service | ||||||||||||||||||||||||||||
| Preferred stock issued for service , shares | ||||||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | - | 115,860 | 116 | 1,601,405 | - | 1,601,521 | |||||||||||||||||||||
| Common stock issued in conjunction with convertible note | - | - | 11,298 | 11 | 133,652 | - | 133,663 | |||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | - | 8,923 | 9 | (9 | ) | - | - | ||||||||||||||||||||
| Warrant issued in conjunction with debts | - | - | - | - | 1,075,660 | - | 1,075,660 | |||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | - | - | 139,067 | - | 139,067 | |||||||||||||||||||||
| Stock issued for acquisition | ||||||||||||||||||||||||||||
| Stock issued for acquisition , shares | ||||||||||||||||||||||||||||
| Settlement of stock subscriptions | - | - | - | - | - | - | - | |||||||||||||||||||||
| Settlement of stock subscriptions, shares | ||||||||||||||||||||||||||||
| Issuance of restricted stock | ||||||||||||||||||||||||||||
| Warrants on stock subscriptions | ||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 9,793 | 10 | 785,747 | - | 785,757 | |||||||||||||||||||||
| Adjustment of reverse stock split | - | - | 6,624 | 7 | (7 | ) | - | - | ||||||||||||||||||||
| Net loss | - | - | - | - | - | (4,711,541 | ) | (4,711,541 | ) | |||||||||||||||||||
| Balance - September 30, 2021 | 150,000 | $ | 150 | 829,518 | $ | 830 | $ | 37,234,387 | $ | (40,230,125 | ) | $ | (2,994,758 | ) | ||||||||||||||
| Total | ||||||||||||||||||||||||||||
Series A Preferred Stock | Common Stock | Additional Paid in | Accumulated | Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance - December 31, 2020 | 150,000 | $ | 150 | 522,006 | $ | 522 | $ | 32,027,240 | $ | (35,518,584 | ) | $ | (3,490,672 | ) | ||||||||||||||
| Common stock issued for cash | - | - | 83,336 | 83 | 846,718 | - | 846,801 | |||||||||||||||||||||
| Common stock issued for conversion of preferred stock | - | - | 14,533 | 15 | 312,908 | 312,923 | ||||||||||||||||||||||
| Common stock issued for conversion of debt | - | - | 101,748 | 102 | 1,523,156 | - | 1,523,258 | |||||||||||||||||||||
| Common stock issued in conjunction with convertible note | - | - | 2,863 | 3 | 88,735 | - | 88,738 | |||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | - | 8,923 | 9 | (9 | ) | - | - | ||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | - | - | 139,067 | - | 139,067 | |||||||||||||||||||||
| Stock-based compensation | - | - | 9,168 | 9 | 680,435 | - | 680,444 | |||||||||||||||||||||
| Adjustment of reverse stock split | - | - | 669 | - | - | - | - | |||||||||||||||||||||
| Net loss attributable to common stockholders | - | - | - | - | - | (3,731,093 | ) | (3,731,093 | ) | |||||||||||||||||||
| Balance - June 30, 2021 | 150,000 | $ | 150 | 743,246 | $ | 743 | $ | 35,618,250 | $ | (39,249,677 | ) | $ | (3,630,534 | ) | ||||||||||||||
For the Three Months Ended SeptemberJune 30, 2021
Series A Preferred Stock | Common Stock | Additional Paid in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance - June 30, 2021 | 150,000 | 150 | 743,246 | 743 | 35,618,250 | (39,249,677 | ) | (3,630,534 | ) | |||||||||||||||||||
| Common stock issued for conversion of debt | - | - | 14,112 | 14 | 78,249 | - | 78,263 | |||||||||||||||||||||
| Common stock issued for conversion of preferred stock | - | - | 57,145 | 57 | 312,006 | - | 312,063 | |||||||||||||||||||||
| Common stock issued in conjunction with convertible note | - | - | 8,435 | 8 | 44,917 | - | 44,925 | |||||||||||||||||||||
| Warrant issued in conjunction with debts | - | - | - | - | 1,075,660 | - | 1,075,660 | |||||||||||||||||||||
| Stock-based compensation | - | - | 625 | 1 | 105,312 | - | 105,313 | |||||||||||||||||||||
| Adjustment of reverse stock split | - | - | 5,955 | 7 | (7 | ) | - | - | ||||||||||||||||||||
| Net loss | - | - | - | - | (980,448 | ) | (980,448 | ) | ||||||||||||||||||||
| Balance - September 30, 2021 | 150,000 | $ | 150 | 829,518 | $ | 830 | $ | 37,234,387 | $ | (40,230,125 | ) | $ | (2,994,758 | ) | ||||||||||||||
| Series A | Additional | Total | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance - March 31, 2021 | 150,000 | 150 | 721,032 | 721 | 34,864,967 | (37,698,831 | ) | (2,832,993 | ) | |||||||||||||||||||
| Beginning balance, value | 150,000 | 150 | 721,032 | 721 | 34,864,967 | (37,698,831 | ) | (2,832,993 | ) | |||||||||||||||||||
| Cash received for issued stock | - | - | - | - | 193,196 | - | 193,196 | |||||||||||||||||||||
| Common stock issued for conversion of preferred stock | - | - | 8,934 | 9 | 144,707 | - | 144,716 | |||||||||||||||||||||
| Common stock issued for exercised cashless warrant | 8,923 | 9 | (9 | ) | - | - | ||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | 139,067 | - | 139,067 | |||||||||||||||||||||||
| Stock-based compensation | - | - | 3,688 | 4 | 276,322 | - | 276,326 | |||||||||||||||||||||
| Adjustment of reverse stock split | - | - | 669 | - | - | - | - | |||||||||||||||||||||
| Net loss attributable to common stockholders | - | - | - | - | (1,550,846 | ) | (1,550,846 | ) | ||||||||||||||||||||
| Balance - June 30, 2021 | 150,000 | 150 | 743,246 | 743 | 35,618,250 | (39,249,677 | ) | (3,630,534 | ) | |||||||||||||||||||
| Ending balance, value | 150,000 | 150 | 743,246 | 743 | 35,618,250 | (39,249,677 | ) | (3,630,534 | ) | |||||||||||||||||||
See the accompanying Notes, which are an integral part of these unaudited Consolidated Financial Statements
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
For the Nine Months Ended September 30, 2020
| Total | ||||||||||||||||||||||||||||
Series A Preferred Stock | Common Stock | Additional Paid in | Accumulated | Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance - December 31, 2019 | 1,334 | $ | 1 | 4,846 | $ | 5 | $ | 15,214,458 | $ | (21,610,915 | ) | $ | (6,396,451 | ) | ||||||||||||||
| Preferred stock issued for service | 4,666 | 5 | - | - | 158,639 | 158,644 | ||||||||||||||||||||||
| Common stock issued for conversion of debt | - | - | 278,294 | 278 | 12,511,847 | - | 12,512,125 | |||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | - | 12,650 | 13 | (13 | ) | - | - | ||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | - | - | 300,387 | - | 300,387 | |||||||||||||||||||||
| Stock issued for acquisition | - | - | 1,232 | 1 | (1 | ) | - | - | ||||||||||||||||||||
| Settlement of stock subscriptions | 144,000 | 144 | 748 | 1 | (145 | ) | - | - | ||||||||||||||||||||
| Issuance of restricted stock | - | - | - | - | - | - | - | |||||||||||||||||||||
| Warrants on stock subscriptions | - | - | - | - | - | - | - | |||||||||||||||||||||
| Stock-based compensation | - | - | 6,218 | 6 | 473,930 | - | 473,936 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (14,254,335 | ) | (14,254,335 | ) | |||||||||||||||||||
| Balance - September 30, 2020 | 150,000 | $ | 150 | 303,988 | $ | 304 | $ | 28,659,102 | $ | (35,865,250 | ) | $ | (7,205,694 | ) | ||||||||||||||
For the Three Months Ended September 30, 2020
Series A Preferred Stock | Common Stock | Additional Paid in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance - June 30, 2020 | 1,334 | 1 | 80,054 | 80 | 20,242,548 | (34,365,110 | ) | (14,122,481 | ) | |||||||||||||||||||
| Balance | 1,334 | 1 | 80,054 | 80 | 20,242,548 | (34,365,110 | ) | (14,122,481 | ) | |||||||||||||||||||
| Settlement of stock subscriptions | 144,000 | 144 | - | - | (144 | ) | - | - | ||||||||||||||||||||
| Preferred stock issued for service | 4,666 | 5 | - | - | 158,639 | 158,644 | ||||||||||||||||||||||
| Common stock issued for conversion of debt | - | - | 211,284 | 211 | 8,182,755 | - | 8,182,966 | |||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | - | 12,650 | 13 | (13 | ) | - | - | ||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | - | - | 300,387 | - | 300,387 | |||||||||||||||||||||
| Stock-based compensation | - | - | - | - | (225,070 | ) | - | (225,070 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | (1,500,140 | ) | (1,500,140 | ) | ||||||||||||||||||||
| Balance - September 30, 2020 | 150,000 | $ | 150 | 303,988 | $ | 304 | $ | 28,659,102 | $ | (35,865,250 | ) | $ | (7,205,694 | ) | ||||||||||||||
| Balance | 150,000 | $ | 150 | 303,988 | $ | 304 | $ | 28,659,102 | $ | (35,865,250 | ) | $ | (7,205,694 | ) | ||||||||||||||
See the accompanying Notes, which are an integral part of these unaudited Consolidated Financial Statements
| F-5 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (4,695,776 | ) | $ | (14,254,335 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Change in fair value of derivative liability | 431,853 | 9,698,885 | ||||||
| Loss on impairment of asset | ||||||||
| Gain on contingent liability | ||||||||
| Loss on settlement and extinguishment of debt | ||||||||
| Loss on settlement of debt | 227,501 | 245,833 | ||||||
| Stock-based compensation expense | 785,757 | 632,580 | ||||||
| Depreciation and amortization | 832,824 | 1,222,485 | ||||||
| Amortization of debt discount | 2,356,631 | 1,309,125 | ||||||
| Bad debt expense | - | 50,800 | ||||||
| Lease liability amortization | (19,660 | ) | 16,564 | |||||
| Penalty interest | 65,838 | 25,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 34,922 | (64,221 | ) | |||||
| Inventory | ||||||||
| Prepaid expenses and other assets | (10,638 | ) | 86 | |||||
| Accounts payable and accrued liabilities | (193,302 | ) | (305,423 | ) | ||||
| Deferred revenue | 127,197 | 515,247 | ||||||
| Payroll liability | - | 82,227 | ||||||
| Accrued interest | 130,442 | 251,786 | ||||||
| Due to related parties | ||||||||
| Accrued dividend | (15,765 | ) | - | |||||
| Accrued consulting expense | ||||||||
| Deposit | - | (10,496 | ) | |||||
| Net Cash provided by (used in) Operating Activities | 57,824 | (583,857 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of intellectual property | - | (190,000 | ) | |||||
| Purchase of property and equipment | (138,331 | ) | (95,425 | ) | ||||
| Net Cash used in Investing Activities | (138,331 | ) | (285,425 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of convertible notes payable | 642,000 | 1,352,250 | ||||||
| Proceeds from issuance of common stock | 846,801 | - | ||||||
| Proceeds from issuance of series B Preferred Stock | 390,000 | - | ||||||
| Finance lease payments | (66,901 | ) | (52,326 | ) | ||||
| Proceeds from issuance of notes payable | 3,712,775 | 1,168,664 | ||||||
| Repayment of notes payable | (3,953,371 | ) | (685,295 | ) | ||||
| Proceeds from related parties | 365,873 | 241,942 | ||||||
| Repayment to related parties | (537,874 | ) | (691,911 | ) | ||||
| Net Cash provided by Financing Activities | 1,399,303 | 1,333,324 | ||||||
| Net change in cash | 1,318,796 | 464,042 | ||||||
| Cash, beginning of period | 58,783 | 18,673 | ||||||
| Cash, end of period | $ | 1,377,579 | $ | 482,715 | ||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | 134,157 | $ | 65,063 | ||||
| Cash paid for taxes | $ | - | $ | - | ||||
| Non-cash Investing and Financing transactions: | ||||||||
| Settlement of stock subscriptions | $ | - | $ | 1,640 | ||||
| Intangible assets acquired through issuance of accounts receivable | ||||||||
| Intangible assets acquired through license fee payable | ||||||||
| Common stock issued for purchase of intangibles | $ | - | $ | 2,466 | ||||
| Common stock issued for exercised cashless warrant | $ | 9 | $ | 25,300 | ||||
| Settlement of accrued interest through issuance of convertible notes payable | ||||||||
| Settlement of series B preferred stock through issuance of common stock | $ | 624,986 | $ | - | ||||
| Settlement of convertible notes payable through issuance of common stock | $ | 1,601,521 | $ | 2,963,994 | ||||
| Common stock issued in conjunction with convertible note | $ | 133,663 | $ | - | ||||
| Warrant issued in conjunction with debts | $ | 1,075,660 | $ | - | ||||
| Resolution of derivative liability upon exercise of warrant | $ | 139,067 | $ | 300,389 | ||||
| Resolution of derivative liability upon conversion of debt | $ | - | $ | 9,548,131 | ||||
| Beneficial conversion feature | ||||||||
| Equipment paid by capital lease | $ | - | $ | 159,096 | ||||
| Increase in ROU asset and operating lease liability | ||||||||
| Derivative liability recognized as debt discount | $ | 340,000 | $ | 792,175 | ||||
| Cancellation of common stock | ||||||||
| Issuance of restricted stock | ||||||||
| Settlement of convertible notes payable through issuance of preferred common stock | $ | 65,600 | $ | - | ||||
| Accounts payable for purchase of intellectual property | $ | - | $ | 80,000 | ||||
| Issuance of convertible notes for repayment of due to related party | $ | - | $ | 150,000 | ||||
| Adjustment of reverse stock split | ||||||||
| Reclassification of APIC and Derivative | ||||||||
| Settlement of stock subscriptions | ||||||||
| Note payable issued for settlement of License fee payable | $ | 1,404,000 | $ | - | ||||
| 2022 | 2021 | |||||||
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (4,279,531 | ) | $ | (3,721,652 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Change in fair value of derivative liability | 57,883 | 363,654 | ||||||
| (Gain) loss on settlement of debt | - | 227,501 | ||||||
| Stock-based compensation expense | 798,690 | 680,444 | ||||||
| Loss on impairment of intangible asset | - | - | ||||||
| Depreciation and amortization | 540,714 | 554,557 | ||||||
| Amortization of debt discount | 1,549,752 | 1,448,308 | ||||||
| Bad debt | ||||||||
| Lease liability amortization | (14,958 | ) | (13,107 | ) | ||||
| Penalty interest | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (209,938 | ) | 22,233 | |||||
| Inventory | ||||||||
| Prepaid expenses and other assets | 42,852 | (24,425 | ) | |||||
| Accounts payable and accrued liabilities | 308,642 | 3,616 | ||||||
| Deferred revenue | 973,992 | (428,116 | ) | |||||
| Payroll liability | ||||||||
| Accrued interest | 105,577 | 63,912 | ||||||
| Deposit | 10,414 | - | ||||||
| Net Cash used in Operating Activities | (115,911 | ) | (823,075 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Advance payment for acquisition | (250,000 | ) | - | |||||
| Purchase of intellectual property | ||||||||
| Purchase of property and equipment | (96,960 | ) | (79,020 | ) | ||||
| Net Cash used in Investing Activities | (346,960 | ) | (79,020 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Bank overdraft | 3,781 | - | ||||||
| Proceeds from issuance of convertible notes payable | 1,207,800 | 100,000 | ||||||
| Repayment of convertible notes payable | (758,346 | ) | - | |||||
| Proceeds from issuance of common stock | - | 846,801 | ||||||
| Proceeds from issuance of Series B Preferred Stock | 75,000 | 250,000 | ||||||
| Redemption of Series B Preferred Stock | (487,730 | ) | - | |||||
| Finance lease payments | (41,195 | ) | (43,931 | ) | ||||
| Proceeds from issuance of notes payable | 1,186,453 | 2,574,647 | ||||||
| Repayment of notes payable | (1,957,492 | ) | (2,734,275 | ) | ||||
| Proceeds from related parties | 116,238 | 271,464 | ||||||
| Repayment to related parties | (86,571 | ) | (414,187 | ) | ||||
| Net Cash provided by (used in) Financing Activities | (742,062 | ) | 850,519 | |||||
| Net change in cash | (1,204,933 | ) | (51,576 | ) | ||||
| Cash, beginning of period | 1,204,933 | 58,783 | ||||||
| Cash, end of period | $ | - | $ | 7,207 | ||||
See the accompanying Notes,notes, which are an integral part of these unaudited Consolidated Financial Statementsconsolidated financial statements.
| F-6 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJUNE 30, 20212022
NOTE 1: GENERALSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Data443 Risk Mitigation, Inc. (the “Company”, “we”, “us” and “our”) was incorporated as a Nevada corporation on May 4, 1998. On October 15, 2019, the Company changed its name from LandStar, Inc. to Data443 Risk Mitigation, Inc. within the State of Nevada.
We are in the data security and privacy business, operating as a software and services provider. We provide software products, services, and solutions for the marketplace that are designed to protect, manage, analyze, alert, and secure enterprise data via the cloud, hybrid, and on-premises architectures. Our suite of security products focus on the protection of: sensitive files and emails; confidential customer, patient, and employee data; financial records; strategic and product plans; intellectual property; and any other data requiring security, allowing our clients to create, share, and protect their data wherever it is stored.
We deliver solutions and capabilities via all technical architectures,that businesses can use in conjunction with their use of established cloud vendors such as Microsoft® Azure, Google® Cloud Platform (GCP) and in formats designed for each client. LicensingAmazon® Web Services (AWS), as well as with on-premises databases and subscription models are available to conform to customer purchasing requirements. Our solutions are driven by several proprietary technologiesdatabase applications with virtualization platforms, such as those hosted or configured using VMWare®, Citrix® and methodologies that we have developed or acquired, giving us our primary competitive advantage.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements as of September 30, 2021 include the accounts of the Company and its wholly-owned subsidiary, Data 443 Risk Mitigation, Inc., a North Carolina operating company, and the operations of Myriad Software Productions, LLC through September 2018 when it was liquidated. Prior to the acquisition of Data 443 Risk Mitigation, Inc. in North Carolina and the assets of Myriad Software Productions, LLC in 2018, these two entities were controlled by our sole director and officer, Jason Remillard. On November 17, 2017, Mr. Remillard acquired control of LandStar, Inc. through his purchase of all the outstanding Series A preferred shares of the Company, and as a result, these two entities became common controlled entities that require consolidation of results with the reporting company, LandStar, Inc., from the time common control occurred. All intercompany accounts and activities have been eliminated. These consolidated financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”)Oracle® clouds/products).
On January 19, 2022, we entered into an Asset Purchase Agreement with Centurion Holdings I, LLC (“Centurion”) to acquire the intellectual property rights and certain assets collectively known as Centurion SmartShield Home and SmartShield Enterprise, patented technology that protects and recovers devices in the event of ransomware attacks. The total purchase price of $3,400,000 consists of: (i) a $250,000 cash payment at closing; (ii) a $2,900,000 promissory note issued by Data443 in favor of Centurion (“Centurion Note”); and (iii) $250,000 in the form of a contingent payment. The Centurion Note matures January 19, 2027 but provides that Data443’s repayment obligation would accelerate on the occurrence of events. One of those events was a financing event that did not occur within the originally anticipated timeframe. If that event had occurred, then Data443’s repayment obligation would have been to repay the balance of the outstanding principal and interest as follows: (i) $500,000 of the then-outstanding amount due in cash; and (ii) the remaining balance, at Data443’s option, in Common Stock or a combination of Common Stock and cash, with the number of shares of Common Stock to be determined according to a specified formula. In April 2022, Data443 and Centurion agreed that, even though the trigger for this acceleration event did not occur, Data443 would issue shares of Common Stock to Centurion in an amount then-equivalent to $2,400,000, as partial repayment of the obligation due under the Centurion Note. The number of shares of Common Stock Data443 issued to Centurion on April 20, 2022, was . Because Data443 still has some repayment obligations to fulfill under the Centurion Note, as of the filing date of these financial statements, the acquisition that is the subject of the Centurion Asset Purchase Agreement is still not completed.
Interim Financial StatementsBasis of Presentation
These unaudited consolidated financial statements have been prepared in accordance U.S. GAAPrules and regulations of the Securities and Exchange Commission (“SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, we have included all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 20202021 and notes thereto and other pertinent information contained in our Form 10-K the Company hasas filed with the Securities and Exchange Commission (the “SEC”)SEC on March 23, 2021.31, 2022. The results of operations for the ninesix months ended SeptemberJune 30, 2021,2022, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2021.2022.
Basis of Consolidation
The accompanying unaudited consolidated financial statements as of June 30, 2022 include our accounts and those of our wholly-owned subsidiary, Data 443 Risk Mitigation, Inc., a North Carolina operating company. These unaudited consolidated financial statements have been prepared on the accrual basis of accounting in accordance with GAAP.
| F-7 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
Employees - The Company accounts– We account for share-based compensation under the fair value method which requires all such compensation to employees, including the grant of employee stock options, to be calculated based on its fair value at the measurement date (generally the grant date), and recognized in the consolidated statement of operations over the requisite service period.
Nonemployees - During June 2018,Under the requirements of the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“(“ASU 2018-07”) to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees. The Company elected to adopt ASU 2018-07 early. Under the requirements of ASU 2018-07, the Company accounts, we account for share-based compensation to non-employees under the fair value method which requires all such compensation to be calculated based on the fair value at the measurement date (generally the grant date), and recognized in the statement of operations over the requisite service period.
The CompanyWe recorded approximately $in share-based compensation expense for the ninesix months ended SeptemberJune 30, 2021,2022, compared to $in share-based compensation expense for the ninesix months ended SeptemberJune 30, 2020.2021. Determining the appropriate fair value model and the related assumptions requires judgment. During the ninesix months ended SeptemberJune 30, 2021,2022, the fair value of each option grant was estimated using a Black-Scholes option-pricing model. The expected volatility represents the historical volatility of the Company’sour publicly traded common stock. Due to limited historical data, the Company calculateswe calculate the expected life based on the mid-point between the vesting date and the contractual term which is in accordance with the simplified method. The expected term for options granted to nonemployees is the contractual life. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of stock options. The Company hasWe have not paid and doesdo not anticipate paying cash dividends on itsour shares of common stock;Common Stock; therefore, the expected dividend yield is assumed to be zero.
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method and as if converted method. Dilutive potential common shares include outstanding stock options, warrant and convertible notes.
SCHEDULE OF ANTI-DILUTIVE BASIC AND DILUTED EARNINGS PER SHARE
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| (Shares) | (Shares) | |||||||
| Series A Preferred Stock | 150,000,000 | 150,000,000 | ||||||
| Stock options | 12,471 | 5,664 | ||||||
| Warrants | 254,134 | 165,252 | ||||||
| Convertible notes | - | 10,289 | ||||||
| Preferred B stock | 18,535 | - | ||||||
| Total | 150,285,150 | 150,181,205 | ||||||
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
| 2022 | 2021 | |||||||
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| (Shares) | (Shares) | |||||||
| Series A Preferred Stock | 149,892,000 | 150,000,000 | ||||||
| Stock options | 1,029 | 1,559 | ||||||
| Warrants | 158,441 | - | ||||||
| Convertible notes | - | 13,183 | ||||||
| Preferred B stock | - | 2,517 | ||||||
| Total | 150,051,470 | 150,017,259 | ||||||
COVID-19
In March 2020, the World Health Organization (“WHO”) declared the novel coronavirus COVID-19 (“COVID-19”) a global pandemic. The pandemic adversely affected workforces, economies, and financial markets globally in 2020 and, until contained, is still expected to disrupt general business operations. The COVID-19 pandemic and the measures taken by many governments around the world in response could in the future meaningfully impact our business, results of operations and financial condition. The Company isWe are currently unable to predict the duration of that impact but continuescontinue to monitor itsour accounting estimates of the carrying value of certain assets and liabilities relating to itsour leases and will continue to do so as additional information is obtained or new events occur. Actual results could differ from our estimates and judgments, and any such differences may be material to our financial statements.
| F-8 |
Recently IssuedAdopted Accounting PronouncementsGuidance
In August 2020, the FASB issued ASU 2020-06, ASC Subtopic 470-20 “Debt—Debt with “ConversionConversion and Other Options” and ASC subtopic 815-40 “Hedging—Contracts in Entity’s Own Equity”. The standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting; and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the impact of theDue to adoption of this standardaccounting policy on its consolidated financial statements.January 1, 2022, we recognized a cumulative effect adjustment to increase the opening retained earnings as of January 1, 2022 by $439,857.
On June 16, 2016, the FASB completed its Financial Instruments—Credit Losses project by issuingRecently Issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The new guidance requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
The new guidance; (i) eliminates the probable initial recognition threshold in current GAAP and, instead, reflects an organization’s current estimate of all expected credit losses over the contractual term of its financial assets, (ii) broadens the information that an entity can consider when measuring credit losses to include forward-looking information, (iii) increases usefulness of the financial statements by requiring timely inclusion of forecasted information in forming expectations of credit losses, (iv) increases comparability of purchased financial assets with credit deterioration (PCD assets) with other purchased assets that do not have credit deterioration as well as originated assets because credit losses that are expected will be recorded through an allowance for credit losses for all assets, (v) increases users’ understanding of underwriting standards and credit quality trends by requiring additional information about credit quality indicators by year of origination (vintage), and (vi) aligns the income statement recognition of credit losses, for available-for-sale debt securities, with the reporting period in which changes occur by recording credit losses (and subsequent changes in credit losses) through an allowance rather than a write down.
The new guidance affects organizations that hold financial assets and net investments in leases that are not accounted for at fair value with changes in fair value reported in net income. It affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.
For public business entities that meet the definition of a U.S. Securities and Exchange (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, it is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application is permitted.
Pronouncements
The Company has
We have considered all other recently issued accounting pronouncements and doesdo not believe the adoption of such pronouncements will have a material impact on itsour consolidated financial statements.
NOTE 2: LIQUIDITY AND GOING CONCERN
The accompanying consolidated financial statements have been prepared (i) in accordance with accounting principles generally accepted in the United States, and (ii) assuming that the Companywe will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilitiesconcern. As reflected in the normal coursefinancial statements, we have incurred significant current period losses and negative cash flows from operating activities, and we have negative working capital and an accumulated deficit. We have relied upon loans and issuances of business. The Company has only recently startedour equity to generate significant income. The Company is subject to the risks and uncertainties associated with a business with a limited history of substantive revenue, as well as limitations on its operating capital resources.fund our operations. These matters,conditions, among others, raise substantial doubt about the ability of the Company to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern. In light of these matters, the Company’s ability to continue as a going concern is dependent upon the Company’s ability to raise capital and generate revenue and profits in the future.
During 2018, the Company made two product acquisitions, ClassiDocs®, and ARALOC®, and completed the acquisition of one entity, Data443 Risk Mitigation, Inc. (“Data443”), the North Carolina operating company. During 2019, the Company completed the acquisition of selected assets of DataExpress™; and, completed a transaction under which the Company licensed the assets of ArcMail™. During the period ending September 30, 2020, the Company has completed the acquisition of selected assets of FileFacets™, and selected assets of Intelly WP™. The Company is actively seeking new products and entities to acquire, with several candidates identified. The Company has developed, and continues to develop, large scale relationships with cyber security, marketing and product organizations, and to market and promote ClassiDocs® and other products the Company may develop or acquire. As of September 30, 2021, the Company had negative net working capital; an accumulated deficit; and, had reduced its operating losses.
We continue to monitor the effects COVID-19 could have on our operations and liquidity including our ability to collect account receivable timely from our customers due to the economic impacts COVID-19 could have on the general economy. COVID-19 has also impacted our ability to travel, meet distribution partners in their offices, present at tradeshows, and perform other enterprise-related sales functions. While most customers have returned to their pre-pandemic “normal” office working conditions, a number have yet to do so. These continued operating conditions have impacted our ability to execute and deploy some of our normal sales and marketing activities. While we are not unique in this position, these factors, among others, raise some doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters, include raising additional debt or equity financing, the terms of which might not be acceptable. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
NOTE 3: PROPERTY AND EQUIPMENT
The following table summarizes the components of the Company’sour property and equipment as of the dates presented:
SUMMARY OF COMPONENTS OF PROPERTY AND EQUIPMENT
| September 30, | December 31, | June 30, | December 31, | |||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
| Furniture and Fixtures | $ | 2,991 | $ | 2,991 | $ | 2,991 | $ | 2,991 | ||||||||
| Computer Equipment | 559,654 | 421,323 | 656,613 | 559,654 | ||||||||||||
| 562,645 | 424,314 | |||||||||||||||
| Property and equipment, gross | 659,604 | 562,645 | ||||||||||||||
| Accumulated depreciation | (208,223 | ) | (99,965 | ) | (354,408 | ) | (274,239 | ) | ||||||||
| Property and equipment, net of accumulated depreciation | $ | 354,422 | $ | 324,349 | $ | 305,196 | $ | 288,406 | ||||||||
Depreciation expense for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, was $108,25880,170 and $54,22671,513, respectively.
During the ninesix months years ended SeptemberJune 30, 2022 and 2021, and 2020, the Companywe purchased property and equipment of $138,331 96,960and $95,42579,020, respectively.
| F-9 |
NOTE 4: INTELLECTUAL PROPERTY
The following table summarizes the components of the Company’sour intellectual property as of the dates presented:
SCHEDULE OF INTELLECTUAL PROPERTY
| September 30, | December 31, | |||||||||||||||
| 2021 | 2020 | June 30, 2022 | December 31, 2021 | |||||||||||||
| Intellectual property: | ||||||||||||||||
| Word press GDPR rights | $ | 46,800 | $ | 46,800 | $ | 46,800 | $ | 46,800 | ||||||||
| ARALOC™ | 1,850,000 | 1,850,000 | ||||||||||||||
| ArcMail License | 1,445,000 | 1,445,000 | ||||||||||||||
| DataExpressTM | 1,388,051 | 1,388,051 | ||||||||||||||
| FileFacetsTM | 135,000 | 135,000 | ||||||||||||||
| ARALOC® | 1,850,000 | 1,850,000 | ||||||||||||||
| ArcMail® | 1,445,000 | 1,445,000 | ||||||||||||||
| DataExpress® | 1,388,051 | 1,388,051 | ||||||||||||||
| FileFacets® | 135,000 | 135,000 | ||||||||||||||
| IntellyWP™ | 135,000 | 135,000 | 60,000 | 60,000 | ||||||||||||
| Resilient Network Systems | 305,000 | 305,000 | 305,000 | 305,000 | ||||||||||||
| 5,304,851 | 5,304,851 | |||||||||||||||
| Intellectual property | 5,229,851 | 5,229,851 | ||||||||||||||
| Accumulated amortization | (3,718,510 | ) | (2,993,944 | ) | (4,420,576 | ) | (3,960,032 | ) | ||||||||
| Intellectual property, net of accumulated amortization | $ | 1,586,341 | $ | 2,310,907 | $ | 809,275 | $ | 1,269,819 | ||||||||
The CompanyWe recognized amortization expense of $724,566460,544 and $1,168,259 483,044for the ninesix months ended SeptemberJune 30, 2022, and 2021, and 2020, respectively.
Based on the carrying value of definite-lived intangible assets as of SeptemberJune 30, 2021,2022, we estimate our amortization expense for the next five years will be as follows:
SCHEDULE OF FUTURE AMORTIZATION EXPENSE OF INTANGIBLE ASSETS
| Amortization | ||||
| Year Ended December 31, | Expense | |||
| 2021 (excluding the nine months ended September 30, 2021) | $ | 241,522 | ||
| 2022 | 860,484 | |||
| 2023 | 441,585 | |||
| 2024 | 27,000 | |||
| Thereafter | 15,750 | |||
| Thereafter | 15,750 | |||
| Intellectual property, net of accumulated amortization | 1,586,341 | |||
| Amortization | ||||
| Year Ended December 31, | Expense | |||
| 2022 (excluding the six months ended June 30, 2022) | $ | 354,940 | ||
| 2023 | 411,585 | |||
| 2024 | 27,000 | |||
| Thereafter | 15,750 | |||
| Total | $ | 809,275 | ||
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
NOTE 5: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table summarizes the components of the Company’sour accounts payable and accrued liabilities as of the dates presented:
SUMMARY OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| September 30, | December 31, | |||||||||||||||
| 2021 | 2020 | June 30, | December 31, | |||||||||||||
| 2022 | 2021 | |||||||||||||||
| Accounts payable | $ | 101,808 | $ | 178,319 | $ | 264,105 | $ | 75,628 | ||||||||
| Payroll liabilities | 81,440 | 102,793 | ||||||||||||||
| Credit cards | 15,050 | 31,918 | 61,461 | 28,492 | ||||||||||||
| Accrued dividend - preferred stock | 6,618 | 484 | - | 6,849 | ||||||||||||
| Accrued liabilities | - | 87,500 | 91,900 | 4,704 | ||||||||||||
| Credit cards and accrued liabilities | 222,695 | |||||||||||||||
| Accounts payable and accrued liabilities | $ | 204,916 | $ | 401,014 | $ | 417,466 | $ | 115,673 | ||||||||
NOTE 6: DEFERRED REVENUE
For the ninesix months ended SeptemberJune 30, 20212022 and as of December 31, 2020,2021, changes in deferred revenue were as follows:
SUMMARY OF CHANGES IN DEFERRED REVENUE
| September 30, | December 31, | June 30, | December 31, | |||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
| Balance, beginning of period | $ | 1,518,163 | $ | 953,546 | $ | 1,608,596 | $ | 1,518,163 | ||||||||
| Deferral of revenue | 2,153,640 | 2,961,749 | 2,182,504 | 2,581,801 | ||||||||||||
| Recognition of deferred revenue | (2,026,443 | ) | (2,397,132 | ) | (1,208,512 | ) | (2,491,368 | ) | ||||||||
| Balance, end of period | $ | 1,645,360 | $ | 1,518,163 | $ | 2,582,588 | $ | 1,608,596 | ||||||||
| F-10 |
As of SeptemberJune 30, 20212022 and December 31, 2020,2021, deferred revenue is classified as follows:
SCHEDULE OF DEFERRED REVENUE
| September 30, | December 31, | June 30, | December 31, | |||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
| Current | $ | 1,134,535 | $ | 1,478,430 | $ | 1,510,827 | $ | 1,035,185 | ||||||||
| Non-current | 510,825 | 39,733 | 1,071,761 | 573,411 | ||||||||||||
| Deferred revenue | $ | 1,645,360 | $ | 1,518,163 | $ | 2,582,588 | $ | 1,608,596 | ||||||||
NOTE 7: LEASES
Operating lease
We have atwo noncancelable operating leaseleases for our office facilityfacilities, one that we entered into January 2019 and that expires April 10, 2024 and another that we entered into in April 2022 and that expires April 30, 2024.The Each operating lease has a renewal optionsoption and a rent escalation clauses.clause. We relocated to the expanded square footage of the premises that are the subject of the April 2022 lease to support our growing operations, and entered into a commission agreement with the landlord of the building to sublet the premises that are the subject of the January 2019 lease.
We recognized total lease expense of approximately $83,339 and $76,564 24,000for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, primarily related to operating lease costs paid to lessors from operating cash flows. As of SeptemberJune 30, 20212022 and December 31, 2020, the Company2021, we recorded a security deposit of $10,000. We entered into our operating lease in January 2019. On July 1, 2020, the Company renegotiated the office lease to obtain rent expense relief for the months of April 2020 – December 2020.
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
FutureAt June 30, 2022, future minimum lease payments under operating leases that have initial noncancelable lease terms in excess of one year at September 30, 2021 were as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER OPERATING LEASES
| Total | ||||
| Year Ended December 31, | ||||
| 2021 (excluding the nine months ended September 30, 2021) | $ | 30,900 | ||
| 2022 | 127,300 | |||
| 2023 | 131,150 | |||
| Thereafter | - | |||
| Thereafter | - | |||
| Total lease payment | 289,350 | |||
| Less: Imputed interest | (25,592 | ) | ||
| Operating lease liabilities | 263,758 | |||
| Operating lease liability – current | 109,193 | |||
| Operating lease liability - non-current | $ | 154,565 | ||
| Total | ||||
| Year Ended December 31, | ||||
| 2022 (excluding the six months ended June 30, 2022) | 63,650 | |||
| 2023 | 131,150 | |||
| Thereafter | - | |||
| Total lease payment | 194,800 | |||
| Less: Imputed interest | (11,880 | ) | ||
| Operating lease liabilities | 182,920 | |||
| Operating lease liability - current | 118,848 | |||
| Operating lease liability - non-current | $ | 64,072 | ||
The following summarizes other supplemental information about the Company’sour operating leaseleases as of SeptemberJune 30, 2021:
2022:
SCHEDULE OF OTHER SUPPLEMENTAL INFORMATION UNDER OPERATING LEASE
| Weighted average discount rate | 8 | % | ||||
| Weighted average remaining lease term (years) | 1.54 |
Finance leaseFinancing leases
The Company leasesWe lease computer and hardware under non-cancellable capital lease arrangements.leases. The term of those capital leases is 3years and annual interest rate is 12%12%. At SeptemberJune 30, 20212022 and December 31, 2020,2021, the capital lease obligations included in current liabilities were $80,989 41,914and $87,90172,768, respectively, and capital lease obligations included in long-term liabilities were $25,784 0and $106,74410,341, respectively. As of SeptemberJune 30, 20212022 and December 31, 2020, the Company2021, we recorded a security deposit of $10,944.
| F-11 |
At SeptemberJune 30, 2021,2022, future minimum lease payments under the finance lease obligations, are as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER FINANCE LEASES
| Total | ||||
| 2021 (excluding the nine months ended September 30, 2021) | $ | 26,633 | ||
| 2022 | 78,379 | |||
| 2023 | 10,496 | |||
| Thereafter | - | |||
| Thereafter | - | |||
| Total finance lease payment | 115,508 | |||
| Less: Imputed interest | (8,735 | ) | ||
| Finance lease liabilities | 106,773 | |||
| Finance lease liability | 80,989 | |||
| Finance lease liability - non-current | $ | 25,784 | ||
| Total | ||||
| 2022 (excluding the six months ended June 30, 2022) | $ | 33,285 | ||
| 2023 | 10,496 | |||
| Thereafter | - | |||
| Total finance lease payment | 43,781 | |||
| Less: Imputed interest | (1,867 | ) | ||
| Finance lease liabilities | 41,914 | |||
| Finance lease liability | 41,914 | |||
| Finance lease liability - non-current | $ | - | ||
As of SeptemberJune 30, 20212022 and December 31 2020,2021, finance lease assets are included in property and equipment as follows:
SCHEDULE OF FINANCE LEASE ASSETS
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Finance lease assets | $ | 267,284 | $ | 267,284 | ||||
| Accumulated depreciation | (126,486 | ) | (87,337 | ) | ||||
| Finance lease assets, net of accumulated depreciation | $ | 140,798 | $ | 179,947 | ||||
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Finance lease assets | $ | 267,284 | $ | 267,284 | ||||
| Accumulated depreciation | (231,156 | ) | (192,928 | ) | ||||
| Finance lease assets, net of accumulated depreciation | $ | 36,128 | $ | 74,356 | ||||
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
NOTE 8: CONVERTIBLE NOTES PAYABLE
Convertible notes payable consists of the following:
SCHEDULE OF CONVERTIBLE NOTES PAYABLE
| September 30, | December 31, | June 30, | December 31, | |||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
| Convertible Notes - Issued in fiscal year 2020 | 100,000 | 1,526,000 | 98,488 | 100,000 | ||||||||||||
| Convertible Notes - Issued in fiscal year 2021 | 738,563 | - | 851,851 | 1,607,857 | ||||||||||||
| 838,563 | 1,526,000 | |||||||||||||||
| Convertible Notes - Issued in fiscal year 2022 | 1,291,735 | - | ||||||||||||||
| Convertible notes payable, Gross | 2,242,074 | 1,707,857 | ||||||||||||||
| Less debt discount and debt issuance cost | (234,585 | ) | (282,232 | ) | (200,812 | ) | (691,569 | ) | ||||||||
| 603,978 | 1,243,768 | |||||||||||||||
| Convertible notes payable | 2,041,262 | 1,016,288 | ||||||||||||||
| Less current portion of convertible notes payable | (586,663 | ) | (1,241,412 | ) | 1,942,774 | 993,931 | ||||||||||
| Long-term convertible notes payable | $ | 17,315 | $ | 2,356 | $ | 98,488 | $ | 22,357 | ||||||||
During the ninesix months ended SeptemberJune 30, 2022 and the year ended 2021, and 2020, the Companywe recognized interest expense of $90,421 374,938and $249,90714,556, respectively, and amortization of debt discount, included in interest expense of $379,890 636,010and $1,126,906335,663, respectively.
Conversion
During the ninesix months ended SeptemberJune 30, 2021, the Company2022, we converted notes with principal amounts and accrued interest of $1,370,15029,325 into shares of common stock. The corresponding derivative liability of $57,883at the date of conversion of $231,371 was credited to additional paid in capital.
| F-12 |
Convertible notes payable consists of the following:
Promissory Notes - Issued in fiscal year 2020
During the twelve months ended December 31,In 2020, the Companywe issued a total of $2,466,500 ofconvertible promissory notes with principal amounts totaling $100,000. The 2020 Promissory Notes have the following terms:key provisions:
| ● | Terms | ||
| ● | Annual interest rates of | ||
| ● | Conversion |
Promissory Notes - Issued during first nine months ofin fiscal year 2021
During the nine months ended September 30,In 2021, the Companywe issued convertible promissory notes ofwith principal amounts totaling $697,000 1,696,999for, which resulted in cash proceeds of $642,000 1,482,000after deducting financing feefees of $55,000 214,999with were deducted. The 2021 Convertible Notes have the following terms;key provisions:
| ● | Terms ranging from 90days to 12months. | |
| ● | Annual interest rates of | |
| ● | Convertible at the option of the holders after varying dates. | |
| ● | Conversion |
The 2021 Convertible Notes also were associated with the following:
| ● | The issuance of shares of Common Stock valued at $133,663. | |
| ● | The issuance of 117,992 warrants to purchase shares of Common Stock with an exercise price a range from $7.44 to 36.00. The term in which the warrants can be exercised is 5 years from issue date. (Note 12) |
During the six months ended June 30, 2022, in connection with the 2021 Convertible Notes, we repaid principal in the amount of $729,506 and interest expense of $319,743.
Promissory Notes - Issued in fiscal year 2022
During the six months ended June 30, 2022, we issued convertible promissory notes with principal amounts totaling $1,320,575, which resulted in cash proceeds of $1,207,800 after deducting financing fee of $57,313 were deducted. The 2022 Convertible Notes have the following key provisions:
| ● | Terms ranging from 9 to 12 months. | |
| ● | Annual interest rates of 9% to 12%. | |
| ● | Convertible at the option of the | |
| ● | Conversion price based on a formula corresponding to a discount (20% or 39% discount) off the lowest trading price of our Common Stock for the 20 |
During the six months ended June 30, 2022, the 2022 Convertible Notes also were associated with the following:
| ● |
In connection with the adoption of ASU 2020-06 on January 1, 2022, we reclassified $517,500, previously allocated to the conversion feature, from additional paid-in capital to convertible notes on our balance sheet. The reclassification was recorded to combine the two legacy units of account into a single instrument classified as a liability. As of January 1, 2022, we also recognized a cumulative effect adjustment of $439,857 to accumulated deficit on our balance sheet, that was primarily driven by the derecognition of interest expense related to the accretion of the debt discount as required under the legacy accounting guidance. Under ASU 2020-06, we will no longer incur non-cash interest expense related to the accretion of the debt discount associated with the embedded conversion option.
| F-13 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
NOTE 9: DERIVATIVE LIABILITIES
The CompanyWe analyzed the conversion option for derivative accounting consideration under ASC 815, Derivatives and Hedging, and hedging, and determined that the instrument should be classified as a liability since the conversion option becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item.
The CompanyWe determined our derivative liabilities to be a Level 3 fair value measurement during the year based on management’s estimate of the expected future cash flows required to settle the liabilities, and used the Binomial pricing model to calculate the fair value as of SeptemberJune 30, 2021.2022. As of the nine month periodsix months ended SeptemberJune 30, 2021,2022, there were no derivative liabilities. The Binomial model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note and warrant is estimated using the Binomial valuation model.
For the ninesix months ended SeptemberJune 30, 20212022 and 2020,year ended December 31, 2021, the estimated fair values of the liabilities measured on a recurring basis are as follows:
The CompanyWe valued the conversion feature using the Binomial pricing model. The fair value of the derivative liability for all the notes and convertible preferred stock that became convertible, including the notes and convertible preferred stock issued in prior years, during the ninesix months ended SeptemberJune 30, 20212022 amounted to $727,76757,883, and $340,000 of the value assigned to the derivative liability was recognized as a debt discount to the notes, while the balance of $384,767 was recognized as a “day 1” derivative loss.
For the ninesix months SeptemberJune 30, 20212022 and year ended December 31, 2020,2021, the estimated fair values of the liabilities measured on a recurring basis are as follows:
SCHEDULE OF FAIR VALUE OF LIABILITIES MEASURED ON RECURRING BASIS
| Nine months Ended | Year Ended | Six months ended | Year ended | |||||||||||||
| September 30, | December 31, | June 30, | December 31, | |||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
| Expected term | 0.48 - 1.94 years | 0.02 - 5.00 years | 0.51 years | 0.48 - 5.00 years | ||||||||||||
| Expected average volatility | 160%- 302 | % | 187%- 464 | % | 134 | % | 160%- 302% | |||||||||
| Expected dividend yield | 0 | 0 | - | - | ||||||||||||
| Risk-free interest rate | 0.04% - 0.16 | % | 0.01% - 1.57 | % | 59 | % | 0.04% - 1.24% | |||||||||
The following table summarizes the changes in the derivative liabilities during the nine months ended September 30, 2021 and 2020:
SCHEDULE OF CHANGES IN DERIVATIVE LIABILITIES
The aggregate loss on derivatives during the ninesix months ended SeptemberJune 30, 20212022 and 20202021 was $431,853 57,883and $9,698,885363,654, respectively.
| F-14 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
NOTE 10: NOTES PAYABLE
Notes payable consists of the following:
SCHEDULE OF NOTES PAYABLE
| September 30, | December 31, | |||||||||||||
| 2021 | 2020 | Maturity | Interest Rate | |||||||||||
| 10% Promissory note - originated in October 2019 | $ | 25,060 | $ | 25,060 | Due on demand | 10.0 | % | |||||||
| Promissory note - originated in October 2019 | 25,060 | 25,060 | Due on demand | 10.0 | % | |||||||||
| Promissory note - originated in April 2020 | 10,000 | 10,000 | Due on demand | No interest | ||||||||||
| Paycheck Protection Program Promissory note - originated in April 2020 (1) | 339,000 | 339,000 | 2 years | 1.0 | % | |||||||||
| Economic Injury Disaster Loan - originated in May 2020 (2,4) | 500,000 | 150,000 | 30 years | 3.75 | % | |||||||||
| Promissory note - originated in June 2020 | - | 43,356 | $3,942.86 daily payment | 16.0 | % | |||||||||
| Promissory note - originated in September 2020 | 58,025 | 80,730 | $2,873.89 monthly payment for 36 months | 14.0 | % | |||||||||
| Promissory note - originated in October 2020 | - | 158,169 | $2,293.31 daily payment | 25.0 | % | |||||||||
| Promissory note - originated in November 2020 | - | 170,886 | $4,497.00 daily payment | 25.0 | % | |||||||||
| Promissory note - originated in November 2020 | - | 394,846 | $6,999.00 daily payment | 25.0 | % | |||||||||
| Promissory note - originated in December 2020 | 37,287 | 50,030 | $1,854.41 monthly payment for 36 months | 8.0 | % | |||||||||
| Promissory note - originated in February 2021(3) | 1,344,000 | - | 5 years | 4.0 | % | |||||||||
| Promissory note - originated in January 2021 | 55,168 | - | $2,675.89 monthly payment for 36 months | 18.0 | % | |||||||||
| Promissory note - originated in April 2021 | 832,000 | - | 1 year | 12 | % | |||||||||
| Promissory note - originated in April 2021 | 132,559 | - | $8,284.92 daily payment | 24 | % | |||||||||
| Promissory note - originated in July 2021 | 282,000 | - | 1 year | 12 | % | |||||||||
| Promissory note - originated in August 2021 | 301,106 | - | $4,842.5 daily payment | 49 | % | |||||||||
| Promissory note - originated in September 2021 | 58,554 | - | $1,383.56 monthly payment for 60 months | 28 | % | |||||||||
| 3,999,819 | 1,447,137 | |||||||||||||
| Less debt discount and debt issuance cost | (956,627 | ) | (289,332 | ) | ||||||||||
| 3,043,192 | 1,157,805 | |||||||||||||
| Less current portion of promissory notes payable | 1,225,672 | 585,310 | ||||||||||||
| Long-term promissory notes payable | $ | 1,817,520 | $ | 572,494 | ||||||||||
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
| June 30, | December 31, | Interest | ||||||||||||
| 2022 | 2021 | Maturity | Rate | |||||||||||
| Economic Injury Disaster Loan - originated in May 2020 (1, 3) | $ | 500,000 | $ | 500,000 | 30 years | 3.75 | % | |||||||
| Promissory note - originated in September 2020 | 35,319 | 50,456 | $2,873.89 monthly payment for 36 months | 14.0 | % | |||||||||
| Promissory note - originated in December 2020 | 24,543 | 33,039 | $1,854.41 monthly payment for 36 months | 8.0 | % | |||||||||
| Promissory note - originated in January 2021 | 35,413 | 48,583 | $2,675.89 monthly payment for 36 months | 18.0 | % | |||||||||
| Promissory note - originated in February 2021 (2) | 1,305,374 | 1,328,848 | 5 years | 4.0 | % | |||||||||
| Promissory note - originated in April 2021 | 693,333 | 832,000 | 1 year | 12 | % | |||||||||
| Promissory note - originated in July 2021 | 282,000 | 282,000 | 1 year | 12 | % | |||||||||
| Promissory note - originated in September 2021 | 49,621 | 55,576 | $1,383.56 monthly payment for 60 months | 28 | % | |||||||||
| Promissory note - originated in December 2021 | - | 406,300 | $20,050 weekly payment | 49 | % | |||||||||
| Promissory note - originated in December 2021 | - | 241,716 | $10,071.45 weekly payment | 4.94 | % | |||||||||
| Promissory note - originated in December 2021 | - | 189,975 | $2,793.75 daily payment | 7 | % | |||||||||
| Promissory note - originated in March 2022 | 233,980 | - | $20,995 weekly payment | 49 | % | |||||||||
| Promissory note - originated in March 2022 | 62,357 | - | $642.86 daily payment | 15 | % | |||||||||
| Promissory note - originated in April 2022 | 81,726 | - | $1,695.41 monthly payment for 36 months | 16.0 | % | |||||||||
| Promissory note - originated in April 2022 | 127,395 | - | $2,235 daily payment | 15 | % | |||||||||
| Promissory note - originated in April 2022 | 68,913 | - | $1,862.50 daily payment | 5 | % | |||||||||
| Promissory note - originated in April 2022 | 284,088 | - | $7,250 daily payment | 25 | % | |||||||||
| Promissory note - originated in June 2022 | 67,455 | - | $1,873.75 daily payment | 25 | % | |||||||||
| 3,851,517 | 3,968,491 | |||||||||||||
| Less debt discount and debt issuance cost | (317,931 | ) | (476,727 | ) | ||||||||||
| 3,533,586 | 3,491,766 | |||||||||||||
| Less current portion of promissory notes payable | 1,799,147 | 1,720,777 | ||||||||||||
| Long-term promissory notes payable | $ | 1,734,439 | $ | 1,770,989 | ||||||||||
| (1) | ||
| (2) | We received a second advance under the EIDL program in fiscal year 2021. | |
| (3) | On February 12, 2021, | |
During the ninesix months ended SeptemberJune 30, 2022 and 2021, and 2020, the Companywe recognized interest expense of $202,657 113,693and $22,77557,209, and amortization of debt discount, included in interest expense of $1,721,983 625,621and $182,219995,066, respectively.
During the six months ended June 30, 2022 and 2021, we issued a total of $1,840,518 and $3,641,037, less discount of $654,065 and $1,066,393, and repaid $1,957,492 and $2,734,275, respectively.
| F-15 |
NOTE 11: COMMITMENTS AND CONTINGENCIES
The Company accountsWe account for contingent liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 450, Contingencies. This guidancestandard requires management to assess potential contingent liabilities that may exist as of the date of the financial statements to determine the probability and amount of loss that may have occurred, which inherently involves an exercise of judgment. If the assessment of a contingency indicates that 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’sour 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, and an estimate of the range of possible losses, if determinable and material, would be disclosed.disclosed in our financial statements. For loss contingencies considered remote, no accrual or disclosures arewe generally made.would neither accrue any estimated liability nor disclose the nature of the contingent liability in our financial statements. Management has assessed potential contingent liabilities as of SeptemberJune 30, 2021,2022, and based on that assessment, there are no probable loss contingencies requiring accrual or establishment of a reserve.
DMB Note Collection Action
On June 17, 2021, DMB Group, LLC (“DMB”) filed a lawsuit against our wholly-owned subsidiary, the North Carolina operating company Data443 Risk Mitigation, Inc., a North Carolina corporation, the Company’s wholly-owned subsidiary (the “Subsidiary”), June 17, 2021 in County Court in Denton County, Texas, naming the Subsidiary as the defendant (the “Complaint”). DMB claimed a breach of the note issued to it on or around 16 September 2019 in the original principal amount of $940,000 (the “DMB Note”). The DMB Note was issued by the Subsidiary in connection with the Subsidiary’s acquisition of assets from DMB. DMB claims that the Subsidiary is delinquent on its payments under the DMB Note and is therefore in default under the DMB Note. The Company has already accounted for the liability owed under the DMB Note.defendant. The matter was settled on September 2021 by mutual agreement of the involved parties. The Subsidiary will make payment ofhas made all payments required pursuant to the remaining amount due undersettlement and the DMB Note over the next six months. This matter is now considered closed.
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021 The Court granted our motions for nonsuit and dismissal with prejudice on orders entered May 4 and May 5, 2022.
Employment Related Claims
The Company viewsWe view most legal proceedings involving claims of former employees as routine litigation incidental to the business, and therefore not material. The Company is currently involved in two such matters with former employees. One matter involves three former employees, and that matter has been resolved and settled. The other matter involves one former employee who is seeking additional compensation. In response, the Company believes that the former employee was terminated “for cause” and is owed no further consideration or compensation. The Company intends to vigorously dispute the claim.
Litigation
In the ordinary course of business, we are involved in a number of lawsuits incidental to our business, including litigation related to intellectual property, employees, and commercial matters. Although it is difficult to predict the ultimate outcome of these cases, management believes that any ultimate liability would not have a material adverse effect on our consolidated financial condition or results of operations. However, an unforeseen unfavorable development in any of these cases could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows in the period in which it is recorded.
NOTE 12: CAPITAL STOCK AND REVERSE STOCK SPLIT
Changes in Authorized Shares
On February 19, 2021 the written consentMarch 7, 2022, we filed an amendment to our Articles of the holdersIncorporation to effect a 1-for-8 reverse stock split of a majority of the voting power of theour issued and outstanding capital stock of the Company as of the Record Date (the “Consenting Stockholders”) approved the following corporate actions:
On April 21, 2021, the Company increased the number of authorized shares of common stock from billion to billion in order to satisfy the share reserve requirement under a financing closed on April 23, 2021.
On June 10, 2021, the Company filed a Certificate of Amendment to the Articles of Incorporation (the “Certificate of Amendment”) which served to (i) reduce the number of authorizedand preferred shares, of common stock to one billion (each with $); and, (ii) effect a reverse stock split (the “Reverse Stock Split”) of its issued common stock in a ratio of 1-for-2,000. The preferred stock of the Company was not changed. The 1-for-2,000 Reverse Stock split was processed by FINRA and became effective at the start of trading on July 1, 2021. As a result of the Reverse Stock Split, every 2,000 shares of the Company’s issued and outstanding common stock, par value $0.001 per share, were converted into one (1) share of common stock, par value $0.001 per share. No fractional shares will be issued in connection with the Reverse Stock Split. Stockholders who otherwise would be entitled to receive fractional shares because they hold a number of pre-Reverse Stock Split shares of the Company’s common stock not evenly divisible by 2,000 will have the number of post-Reverse Stock Split shares of the Company’s common stock to which they are entitled rounded up to the nearest whole number of shares of the Company’s common stock.No stockholders will receive cash in lieu of fractional shares.
value. All per share amounts and number of shares, in the consolidated financial statements and related notes have been retroactively adjusted to reflect the reverse stock split
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021split.
Preferred Stock
As of June 30, 2022, we are authorized to issue shares of preferred stock with a par value of $, of which shares have been designated as Series A, and shares have been designated as Series B.
Series A Preferred Stock
As of September 30, 2021 and December 31, 2020, shares of Series A were issued and outstanding. Each share of Series A was (i) convertible into shares of common stock, and (ii) entitled to vote 15,000 shares of common stock on all matters submitted to a vote by shareholders voting common stock.All issued and outstanding shares of Series A Preferred Stock are held by Mr. Jason Remillard, Presidentour Chief Executive Officer.
During the six months ended June 30, 2022, shares of Series A preferred stock were converted into shares of Common Stock.
As of June 30, 2022 and CEODecember 31, 2021, and shares of the Company.Series A were issued and outstanding, respectively.
| F-16 |
Series B Preferred Stock
As of September 30, 2021 and December 31, 2020, 28,175 and shares of Series B were issued and outstanding, respectively. Each share of Series B (i) has a stated value of Ten Dollars ($10.00)10.00) per share; (ii) areis convertible into common stockCommon Stock at a price per share equal to sixty one percent (61%) of the lowest price for the Company’s common stockour Common Stock during the twenty (20) daydays of trading preceding the date of the conversion; (iii) earnearns dividends at the rate of nine percent (9%(9%) per annum; and, (iv) generally havehas no voting rights.
During the ninesix months ended SeptemberJune 30, 2021, the Company2022, we issued a total of shares of Series B preferred stock as followsfor $78,750, less $3,750 financing fees.
During the ninesix months ended SeptemberJune 30, 2021,2022, we redeemed shares of seriesSeries B preferred stock, were converted into representing all outstanding shares of our common stock.Series B preferred stock, for $487,730.
Common StockDuring the six months ended June 30, 2022, we recorded an accrued dividend of $104,631, and amortization of debt discount, included in interest expense of $22,439.
As of SeptemberJune 30, 2022 and December 31, 2021, the Company is and shares of Series B were issued and outstanding, respectively.
Common Stock
As of June 30, 2022, we are authorized to issue shares of common stockCommon Stock with a par value of $. All shares have equal voting rights, are non-assessable, and have one vote per share. The total number of shares of Company common stock issued and outstanding as of September 30, 2021 and December 31, 2020, respectively, was and shares, respectively.
During the ninesix months ended SeptemberJune 30, 2021, the Company2022, we issued common stockCommon Stock as follows:
| ● | ||
| ● | ||
|
| |
| ● | ||
| ● | shares issued for conversion of Series | |
| ● | ||
| ● | shares issued as a loan fee in connection with the issuance of promissory | |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SeptemberAs of June 30, 2022 and December 31, 2021, and shares of Common Stock were issued and outstanding, respectively.
Warrants
During the nine months ended September 30, the Company issued the following warrants: (i) to acquire shares of the Company’s common stock pursuant at an exercise price of $, with a cashless exercise option. any warrants; (ii) to acquire shares of the Company’s common stock at an exercise price of $, exercisable only in the event of a default under that certain Senior Secured Promissory Note issued on 23 April 2021 in the original principal amount of $832,000; (iii) to acquire shares of the Company’s common stock at an exercise price of $, exercisable only in the event of a default under that certain Senior Secured Promissory Note issued on July 27, 2021 in the original principal amount of $282,000; and, (iv) to acquire shares of the Company’s common stock at an exercise price of $, exercisable only in the event of a default under that certain Convertible Promissory Note issued on September 28, 2021 in the original principal amount of $282,000.
A summary of activity during the ninesix months ended SeptemberJune 30, 20212022 follows:
SCHEDULE OF WARRANTS ACTIVITY
| Warrants Outstanding | ||||||||
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
| Outstanding, December 31, 2021 | 146,842 | $ | 27.86 | |||||
| Granted | 19,166 | 6.00 | ||||||
| Exercised | (7,567 | ) | - | |||||
| Forfeited/canceled | - | - | ||||||
| Outstanding, June 30, 2022 | 158,441 | $ | 22.07 | |||||
During the six months ended June 30, 2022, warrants were exercised cashless and we issued 6,631 shares of Common Stock.
| Warrants Outstanding | ||||||||
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
| Outstanding, December 31, 2020 | 50,000 | $ | 20.00 | |||||
| Granted | 213,164 | 7.29 | ||||||
| Reset feature | - | - | ||||||
| Exercised | (9,030 | ) | 5.80 | |||||
| Forfeited/canceled | - | - | ||||||
| Outstanding, September 30, 2021 | 254,134 | $ | 9.84 | |||||
| F-17 |
The following table summarizes information relating to outstanding and exercisable warrants as of SeptemberJune 30, 2021:
2022:
SCHEDULE OF OUTSTANDING AND EXERCISABLE WARRANTS
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||
| Weighted Average Remaining | Weighted | |||||||||||||||
Number of Shares | Contractual life (in years) | Average Exercise Price | Number of Shares | Weighted Average Exercise Price | ||||||||||||
| $ | 20.00 | - | $ | - | ||||||||||||
| $ | 15.00 | - | $ | - | ||||||||||||
| $ | 4.50 | - | $ | - | ||||||||||||
| $ | 4.50 | - | $ | - | ||||||||||||
| Exercisable Warrants Outstanding | ||||||||
| Weighted Average Remaining | ||||||||
Number of Shares | Contractual life (in years) | Weighted Average Exercise Price | ||||||
| 6,250 | $ | 160.00 | ||||||
| 6,934 | $ | 120.00 | ||||||
| 15,666 | $ | 36.00 | ||||||
| 2,917 | $ | 36.00 | ||||||
| 32,837 | $ | 9.88 | ||||||
| 74,671 | $ | 7.44 | ||||||
| 19,166 | $ | 6.00 | ||||||
| 158,441 | $ | 22.07 | ||||||
Stock Options
During the ninethree months ended SeptemberJune 30, 2021, the Company2022, we granted options for the purchase of the Company’s common stockour Common Stock to certain employees consultants and advisors as consideration for services rendered. The terms of the stock option grants are determined by the Company’sour Board of Directors. The Company’sDirectors consistent our 2019 Omnibus Stock Incentive Plan which the Board adopted May 16, 2019. Our stock options generally vest upon the anniversary date of the grant and have a maximum term of .
2022:
SCHEDULE OF STOCK OPTION ACTIVITY
| Options | Weighted-Average | |||||||
| Outstanding | Exercise Price | |||||||
| Balance as of December 31, 2020 | 5,875 | $ | 96.99 | |||||
| Grants | 6,596 | 40.81 | ||||||
| Exercised | - | - | ||||||
| Cancelled | - | - | ||||||
| Balance as of September 30, 2021 | 12,471 | $ | 67.28 | |||||
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
The weighted average grant date fair value of stock options granted during the nine months ended September 30, 2021 was $. The total fair value of stock options that granted during the nine months ended September 30, 2021 was approximately $. The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions for stock options granted during the nine months ended September 30, 2021:
| Expected term (years) | years | |||
| Expected stock price volatility | % | |||
| Weighted-average risk-free interest rate | % | |||
| Expected dividend | $ |
Volatility is a measure of the amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company estimates expected volatility giving primary consideration to the historical volatility of its common stock. The risk-free interest rate is based on the published yield available on U.S. Treasury issues with an equivalent term remaining equal to the expected life of the stock option. The expected lives of the stock options represent the estimated period of time until exercise or forfeiture and are based on the simplified method of using the mid-point between the vesting term and the original contractual term.
| Options Outstanding | Weighted-Average Exercise Price | |||||||
| Balance as of December 31, 2021 | 2,121 | $ | 467.76 | |||||
| Grants | - | - | ||||||
| Exercised | - | - | ||||||
| Cancelled | (1,092 | ) | 134.40 | |||||
| Balance as of June 30, 2022 | 1,029 | $ | 481.46 | |||||
2022:
SCHEDULE OF STOCK OPTIONS VESTED AND EXPECTED TO VEST
| Weighted-Average | ||||||||||||||||||||||||
| Number of | Remaining Contractual Life | Weighted- Average | Number of Options | Weighted-Average Remaining Contractual Life (In Years) | Weighted- Average Exercise Price | |||||||||||||||||||
| Options | (In Years) | Exercise Price | Number of Options | Weighted-Average Remaining Contractual Life (In Years) | Weighted- Average Exercise Price | |||||||||||||||||||
| Outstanding | 12,471 | $ | 67.28 | 1,029 | $ | 481.46 | ||||||||||||||||||
| Exercisable | 1,948 | $ | 222.66 | 585 | $ | 735.99 | ||||||||||||||||||
| Expected to vest | 10,523 | $ | 38.52 | 444 | $ | 303.82 | ||||||||||||||||||
As of SeptemberJune 30, 20212022 and December 31, 2020,2021, there was $and $, respectively, of total unrecognized compensation costcosts related to non-vested share-based compensation arrangements which is expectedwe expect to be recognized within the next year.12 months.
| F-18 |
Restricted Stock Awards
During the nine months ended September 30, 2021, the Company issued restricted stock awards for shares of common stock which have been reserved for the holders of the awards. Restricted stock awards were issued to certain consultants and advisors as consideration for services rendered. The terms of the restricted stock units are determined by the Company’s Board of Directors. The Company’s restricted stock shares generally vest over a period of one year and have a maximum term of ten years.
SCHEDULE OF RESTRICTED STOCK ACTIVITY
| Weighted-Average | ||||||||
| Shares | Fair Value | |||||||
| Balance as of December 31, 2021 | 1,370 | $ | 639.22 | |||||
| Shares of restricted stock granted | - | - | ||||||
| Exercised | - | - | ||||||
| Cancelled | - | - | ||||||
| Balance as of June 30, 2022 | 1,370 | $ | 639.22 | |||||
SCHEDULE OF RESTRICTED STOCK ACTIVITYAWARD
| Weighted-Average | ||||||||
| Shares | Fair Value | |||||||
| Balance as of December 31, 2020 | 7,356 | 93.61 | ||||||
| Shares of restricted stock granted | 4,501 | 51.40 | ||||||
| Exercised | - | - | ||||||
| Cancelled | - | - | ||||||
| Balance as of September 30, 2021 | 11,857 | 77.59 | ||||||
SCHEDULE OF RESTRICTED STOCK AWARD
| September 30, | December 31, | |||||||
| Number of Restricted Stock Awards | 2021 | 2020 | ||||||
| Vested | 7,046 | 226 | ||||||
| Non-vested | 4,811 | 7,130 | ||||||
As of September 30, 2021 and December 31, 2020, there was $and $, respectively, of total unrecognized compensation cost related to non-vested share-based compensation, which is expected to be recognized over the next year.
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
| Number of Restricted Stock Awards | June 30, 2022 | December 31, 2021 | ||||||
| Vested | 1,370 | 1,370 | ||||||
| Non-vested | - | - | ||||||
NOTE 14: RELATED PARTY TRANSACTIONS
Jason Remillard is our Chief Executive Officerpresident and chief executive officer and the sole director. Through his ownership of Series A Preferred Shares, Mr. Remillard has voting control over all matters to be submitted to a vote of our shareholders.
On September 16, 2019, the Companywe entered into an Asset Purchase Agreement with DMBGroup,DMB Group, LLC (“DMB Group”Group”). A significant part of the purchase price was in the form of the Company’s common stock.our Common Stock. As a direct result of this transaction and the Company’s common stockour Common Stock issued to DMB Group, we determined that DMB Group was a related party. Amounts owed to DMBGroup,DMB Group, including the note payable of $940,000and member loans of $97,689were recorded as amounts due to a related party. During the ninethree months ended SeptemberJune 30, 2021, the Company2022, we repaid a note payable of $159,731 124,985including interest expense of $6,9151,240. As of SeptemberJune 30, 20212022 and December 31, 2020, the Company2021, we had recorded a liability to DMBGroupDMB Group totaling $245,652 0and $405,382123,745, respectively.
During the ninesix months ended SeptemberJune 30, 2021, the Company borrowed $231,150 2022, we received cash from our CEO, our CEO paid operating expensesChief Executive Officer of $134,723 116,238on behalf of the Company and the Company repaid $378,143 86,571to our CEO.
Chief Executive Officer.
As of SeptemberJune 30, 20212022 and December 31, 2020, the Company2021, we had due to related party transactions in the amounts of $389,229 277,033and $561,230247,366, respectively.
NOTE 15: SUBSEQUENT EVENTS
SubsequentIn accordance with ASC 855-10, “Subsequent Events”, we analyzed our operations subsequent to SeptemberJune 30, 2021, and through2022 to August 15, 2022, the date when these interim consolidated financial statements were approved for issuance,issued. Our Management determined that there were no reportable events that occurred during that subsequent period to be disclosed or recorded.
Management evaluated all additional events subsequent to the balance sheet date through to March 31, 2022, the date the consolidated financial statements were available to be issued, and determined the following transactions occurred:items:
●
|
| |
| ● | The Company fully redeemed all outstanding shares of Series B Preferred stock for $487,730 – leaving outstanding Preferred B shares issued as of the time of this report | |
| ● | The Company issued convertible notes a total of $959,313 with shares of common stock, which the term of notes is 1 year and annual interest rate is 9%. Notes are convertible at the option of the holders after 6 months of issuance date of the note and conversion price are Conversion prices are based on the discounted (39% or 20% discount) lowest trading prices of the Company’s shares during 20 periods prior to conversion. Certain note has a floor price of $0.01. | |
| ● | On | |
| ||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and StockholdersStockholder’s
Data443 Risk Mitigation Inc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Data443 Risk Mitigation, Inc (“the Company”),Inc. (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for each of the year thenyears in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”)financial statements). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for each of the yearyears in the period ended December 31, 2020,2021, in conformity with U.S.accounting principles generally accepted accounting principles.in the United States of America.
Retrospective Common Stock Split AdjustmentGoing Concern Assessment
We also have audited the adjustments to the December 31, 2019 financial statements to retrospectively apply a common stock split, as described in Note 16. In our opinion such adjustments are appropriate and have been properly applied. We were not engaged to audit, review or apply any procedures to the December 31, 2019 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the December 31, 2019 financial statements taken as a whole.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 3 to the financial statements, the Company has suffered recurring losses from operations and has working capital and stockholders’ deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
/S/ TPS Thayer, LLC
TPS Thayer, LLC
We have served as the Company’s auditor since 2020
Sugar Land, Texas
December 6, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Data443 Risk Mitigation, Inc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Data443 Risk Mitigation, Inc (formerly known as Landstar, Inc.) (“the Company”), as of December 31, 2019 and 2018, and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the year then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatementsmisstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of a MatterTPS Thayer, LLC
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has limited working capital deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ Thayer O’Neal Company, LLC
Thayer O’Neal Company, LLC
We have served as the Company’s auditor from 2018since 2020.
Sugar Land, Texas
April 17, 2020March 31, 2022
DATA443 RISK MITIGATION, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | 58,783 | $ | 18,673 | ||||
| Accounts receivable | 136,503 | 63,556 | ||||||
| Inventory | - | 8,301 | ||||||
| Prepaid expense and other current assets | - | 807 | ||||||
| Total current assets | 195,286 | 91,337 | ||||||
| Property and equipment, net | 324,349 | 100,127 | ||||||
| Operating lease right-of-use assets, net | 248,237 | 395,388 | ||||||
| Intellectual property, net of accumulated amortization | 2,310,907 | 3,141,938 | ||||||
| Deposits | 31,440 | 20,944 | ||||||
| Total Assets | $ | 3,110,219 | $ | 3,749,734 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 401,014 | $ | 408,195 | ||||
| Deferred revenue | 1,478,430 | 728,749 | ||||||
| Interest payable | 62,212 | 59,979 | ||||||
| Notes payable | 585,310 | 165,120 | ||||||
| Convertible notes payable, net of unamortized discount | 1,241,412 | 3,212,786 | ||||||
| Derivative liability | - | 2,601,277 | ||||||
| Due to a related party | 561,230 | 1,103,314 | ||||||
| License fee payable | 1,094,691 | 1,094,691 | ||||||
| Operating lease liability | 100,170 | 86,372 | ||||||
| Finance lease liability | 90,565 | 34,425 | ||||||
| Total Current Liabilities | 5,615,034 | 9,494,908 | ||||||
| Series B Preferred Stock, shares designated; $ par value; Stated value $ and shares issued and outstanding, net of discount, respectively | 50,203 | - | ||||||
| Notes payable - non-current | 572,495 | - | ||||||
| Convertible notes payable, net of unamortized discount – non-current | 2,356 | - | ||||||
| Deferred revenues - non-current | 39,733 | 224,797 | ||||||
| Operating lease liability - non-current | 237,961 | 373,000 | ||||||
| Finance lease liability - non-current | 83,109 | 53,480 | ||||||
| Total Liabilities | 6,600,891 | 10,146,185 | ||||||
| Commitments and Contingencies | - | - | ||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock: authorized; $ par value Series A Preferred Stock, shares designated; $par value; and shares issued and outstanding, respectively | 150 | 1 | ||||||
| Preferred stock value | 150 | 1 | ||||||
| Common stock: authorized; $par value 522,045 and shares issued and outstanding, respectively | 522 | 5 | ||||||
| Additional paid in capital | 32,027,240 | 15,214,458 | ||||||
| Accumulated deficit | (35,518,584 | ) | (21,610,915 | ) | ||||
| Total Stockholders’ Deficit | (3,490,672 | ) | (6,396,451 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 3,110,219 | $ | 3,749,734 | ||||
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | 1,204,933 | $ | 58,783 | ||||
| Accounts receivable, net | 21,569 | 136,503 | ||||||
| Prepaid expense and other current assets | 70,802 | - | ||||||
| Total current assets | 1,297,304 | 195,286 | ||||||
| Property and equipment, net | 288,406 | 324,349 | ||||||
| Operating lease right-of-use assets, net | 174,282 | 248,237 | ||||||
| Intellectual property, net of accumulated amortization | 1,269,819 | 2,310,907 | ||||||
| Deposits | 31,440 | 31,440 | ||||||
| Total Assets | $ | 3,061,251 | $ | 3,110,219 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 115,673 | $ | 401,014 | ||||
| Deferred revenue | 1,035,185 | 1,478,430 | ||||||
| Interest payable | 204,915 | 62,212 | ||||||
| Notes payable, net of unamortized discount | 1,720,777 | 585,310 | ||||||
| Convertible notes payable, net of unamortized discount | 993,931 | 1,241,412 | ||||||
| Due to a related party | 247,366 | 561,230 | ||||||
| License fee payable | - | 1,094,691 | ||||||
| Operating lease liability | 112,322 | 100,170 | ||||||
| Finance lease liability | 72,768 | 90,565 | ||||||
| Total Current Liabilities | 4,502,937 | 5,615,034 | ||||||
| Series B Preferred Stock, shares designated; $ par value; Stated value $; and shares issued and outstanding, net of discount, respectively | 278,811 | 50,203 | ||||||
| Notes payable, net of unamortized discount - non-current | 1,770,989 | 572,495 | ||||||
| Convertible notes payable, net of unamortized discount - non-current | 22,357 | 2,356 | ||||||
| Deferred revenues - non-current | 573,411 | 39,733 | ||||||
| Operating lease liability - non-current | 125,640 | 237,961 | ||||||
| Finance lease liability - non-current | 10,341 | 83,109 | ||||||
| Total Liabilities | 7,284,486 | 6,600,891 | ||||||
| Commitments and contingencies | - | - | ||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock: authorized; $ par value | ||||||||
| Series A Preferred Stock, shares designated; $ par value; shares issued and outstanding, respectively | 150 | 150 | ||||||
| Common stock: authorized; $ par value | ||||||||
| and shares issued and outstanding, respectively | 122 | 66 | ||||||
| Common stock: 125,000,000 authorized; $0.001 par value 122,044 and 65,308 shares issued and outstanding, respectively | 122 | 66 | ||||||
| Additional paid in capital | 37,810,380 | 32,027,696 | ||||||
| Accumulated deficit | (42,033,887 | ) | (35,518,584 | ) | ||||
| Total Stockholders’ Deficit | (4,223,235 | ) | (3,490,672 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 3,061,251 | $ | 3,110,219 | ||||
See the accompanying Notes, which are an integral part of these Consolidated Financial Statements
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Year Ended | Years Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Revenue | $ | 2,474,627 | $ | 1,453,413 | $ | 3,609,494 | $ | 2,474,627 | ||||||||
| Cost of revenue | 303,515 | 117,106 | 546,888 | 303,515 | ||||||||||||
| Gross profit | 2,171,112 | 1,336,307 | 3,062,606 | 2,171,112 | ||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 5,830,703 | 4,796,652 | 5,433,113 | 5,830,703 | ||||||||||||
| Sales and marketing | 240,894 | 469,529 | 266,732 | 240,894 | ||||||||||||
| Research and development | - | 4,205 | ||||||||||||||
| Total operating expenses | 6,071,597 | 5,270,386 | 5,699,845 | 6,071,597 | ||||||||||||
| Net loss from operations | (3,900,485 | ) | (3,934,079 | ) | (2,637,239 | ) | (3,900,485 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | (2,517,947 | ) | (1,761,823 | ) | (3,334,413 | ) | (2,517,947 | ) | ||||||||
| Loss on impairment of intangible asset | - | (1,328,638 | ) | (75,000 | ) | - | ||||||||||
| Gain on contingent liability | - | 450,000 | ||||||||||||||
| Loss on settlement and extinguishment of debt | (82,337 | ) | (1,271,329 | ) | ||||||||||||
| Gain (loss) on settlement of debt | 186,156 | (82,337 | ) | |||||||||||||
| Change in fair value of derivative liability | (7,406,416 | ) | 7,238,498 | (614,658 | ) | (7,406,416 | ) | |||||||||
| Total other income (expense) | (10,006,700 | ) | 3,326,708 | |||||||||||||
| Total other expense | (3,837,915 | ) | (10,006,700 | ) | ||||||||||||
| Loss before income taxes | (13,907,185 | ) | (607,371 | ) | (6,475,154 | ) | (13,907,185 | ) | ||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net loss | $ | (13,907,185 | ) | $ | (607,371 | ) | $ | (6,475,154 | ) | $ | (13,907,185 | ) | ||||
| Dividend on Series B Preferred Stock | (484 | ) | - | (40,149 | ) | (484 | ) | |||||||||
| Net loss attributable to common stockholders | $ | (13,907,669 | ) | $ | (607,371 | ) | $ | (6,515,303 | ) | $ | (13,907,669 | ) | ||||
| Basic and diluted loss per Common Share | $ | (82.92 | ) | $ | (132.07 | ) | $ | (68.37 | ) | $ | (663.41 | ) | ||||
| Basic and diluted weighted average number of common shares outstanding | 167,715 | 4,599 | 94,708 | 20,964 | ||||||||||||
See the accompanying Notes, which are an integral part of these Consolidated Financial Statements
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | |||||||||||||||||||||||||||||||||||||||||||
| Series A | Additional | Total Stockholders’ | Series A | Additional | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | Equity | Preferred Stock | Common Stock | Paid in | Accumulated | Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | |||||||||||||||||||||||||||||||||||||||||||
| Balance - December 31, 2018 | 1,334 | $ | 1 | 3,409 | $ | 3 | $ | 8,696,166 | $ | (21,003,544 | ) | $ | (12,307,374 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Common stock issued to settle debt | - | - | 1,000 | 1 | 3,204,999 | - | 3,205,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issuable for asset purchase | - | - | - | - | 1,350,000 | - | 1,350,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of stock subscriptions | - | - | 168 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock | - | - | 118 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Warrants on stock subscriptions | - | - | - | - | 83,334 | - | 83,334 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | - | - | 279 | 1 | 499,999 | - | 500,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | - | - | 869,960 | - | 869,960 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock subscriptions | - | - | - | - | 440,000 | - | 440,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share exchange with related party for Data443 additional share issuable | - | - | - | - | 70,000 | - | 70,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment of reverse stock split | - | - | 877 | 1 | (1 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Cancellation of share due to settlement of lawsuit | - | - | (1,000 | ) | (1 | ) | 1 | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for service - related party | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for service - related party, shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of debt, shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for exercised cashless warrant | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for exercised cashless warrant, shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for asset purchase | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for asset purchase, shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (607,371 | ) | (607,371 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance - December 31, 2019 | 1,334 | $ | 1 | 4,851 | $ | 5 | $ | 15,214,458 | $ | (21,610,915 | ) | $ | (6,396,451 | ) | 1,334 | $ | 1 | 604 | $ | 1 | $ | 15,214,462 | $ | (21,610,915 | ) | $ | (6,396,451 | ) | ||||||||||||||||||||||||||||
| Balance, value | 1,334 | $ | 1 | 4,851 | $ | 5 | $ | 15,214,458 | $ | (21,610,915 | ) | $ | (6,396,451 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for service - related party | 4,666 | 5 | - | - | 158,639 | - | 158,644 | 4,666 | 5 | - | - | 158,639 | 158,644 | |||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for cash | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for cash, shares | 753 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series B preferred stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series B preferred stock, shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | - | 406,475 | 406 | 14,359,040 | - | 14,359,446 | - | - | 50,847 | 51 | 14,359,395 | - | 14,359,446 | ||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in conjunction with convertible notes | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in conjunction with convertible notes, shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | - | 19,006 | 19 | (19 | ) | - | - | - | - | 2,377 | 2 | (2 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||
| Warrant issued in conjunction with debts | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for asset purchase | - | - | 70,388 | 70 | 179,930 | - | 180,000 | - | - | 8,802 | 9 | 179,991 | - | 180,000 | ||||||||||||||||||||||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | - | - | 406,856 | - | 406,856 | - | - | - | - | 406,856 | - | 406,856 | ||||||||||||||||||||||||||||||||||||||||||
| Settlement of stock subscriptions | 144,000 | 144 | 750 | 1 | (145 | ) | - | - | 144,000 | 144 | 97 | - | (144 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 20,575 | 21 | 1,190,981 | - | 1,191,002 | - | - | 2,581 | 3 | 1,190,999 | - | 1,191,002 | ||||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature | - | - | - | - | 517,500 | - | 517,500 | - | - | - | - | 517,500 | - | 517,500 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (13,907,669 | ) | (13,907,669 | ) | - | - | - | - | - | (13,907,669 | ) | (13,907,669 | ) | ||||||||||||||||||||||||||||||||||||||
| Balance - December 31, 2020 | 150,000 | $ | 150 | 522,045 | $ | 522 | $ | 32,027,240 | $ | (35,518,584 | ) | $ | (3,490,672 | ) | 150,000 | $ | 150 | 65,308 | $ | 66 | $ | 32,027,696 | $ | (35,518,584 | ) | $ | (3,490,672 | ) | ||||||||||||||||||||||||||||
| Balance, value | 150,000 | $ | 150 | 522,045 | $ | 522 | $ | 32,027,240 | $ | (35,518,584 | ) | $ | (3,490,672 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for cash | - | - | 10,419 | 10 | 846,791 | - | 846,801 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series B preferred stock | - | - | 18,024 | 18 | 827,088 | 827,106 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | - | 24,536 | 25 | 1,842,828 | - | 1,842,853 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in conjunction with convertible notes | - | - | 1,414 | 1 | 133,662 | - | 133,663 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | - | 1,116 | 1 | (1 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Warrant issued in conjunction with debts | - | - | - | - | 1,024,780 | - | 1,024,780 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | - | - | 139,067 | - | 139,067 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | 1,227 | 1 | 968,469 | - | 968,470 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (6,515,303 | ) | (6,515,303 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance - December 31, 2021 | 150,000 | $ | 150 | 122,044 | $ | 122 | $ | 37,810,380 | $ | (42,033,887 | ) | $ | (4,223,235 | ) | ||||||||||||||||||||||||||||||||||||||||||
See the accompanying Notes, which are an integral part of these Consolidated Financial Statements
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Year Ended | Years Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
| Net loss | $ | (13,907,669 | ) | $ | (607,371 | ) | $ | (6,475,154 | ) | $ | (13,907,185 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
| Change in fair value of derivative liability | 7,406,416 | (7,238,498 | ) | 614,658 | 7,406,416 | |||||||||||
| Loss on impairment of asset | - | 1,328,638 | ||||||||||||||
| Gain on contingent liability | - | (450,000 | ) | |||||||||||||
| Loss on settlement and extinguishment of debt | 82,337 | 1,206,329 | ||||||||||||||
| (Gain) loss on settlement of debt | (186,156 | ) | 82,337 | |||||||||||||
| Stock-based compensation expense | 1,349,646 | 869,960 | 968,470 | 1,349,646 | ||||||||||||
| Loss on impairment of intangible asset | 75,000 | - | ||||||||||||||
| Depreciation and amortization | 1,487,305 | 1,498,137 | 1,140,362 | 1,487,305 | ||||||||||||
| Amortization of debt discount | 2,110,645 | 1,460,309 | 2,906,645 | 2,110,645 | ||||||||||||
| Bad debt | 50,800 | 103,020 | 36,456 | 50,800 | ||||||||||||
| Lease liability amortization | 25,910 | 63,984 | (26,214 | ) | 25,910 | |||||||||||
| Penalty interest | 25,000 | - | 60,133 | 25,000 | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable | (123,747 | ) | (596,873 | ) | 78,478 | (123,747 | ) | |||||||||
| Inventory | 8,301 | (8,301 | ) | - | 8,301 | |||||||||||
| Prepaid expenses and other assets | 807 | (20,251 | ) | (70,802 | ) | 807 | ||||||||||
| Accounts payable and accrued liabilities | (161,104 | ) | 310,995 | (291,922 | ) | (161,588 | ) | |||||||||
| Deferred revenue | 564,617 | 924,595 | 90,433 | 564,617 | ||||||||||||
| Payroll liability | 73,923 | 28,870 | - | 73,923 | ||||||||||||
| Accrued interest | 258,830 | 248,256 | 224,073 | 258,830 | ||||||||||||
| Due to related parties | - | 137,264 | ||||||||||||||
| Accrued consulting expense | - | (87,500 | ) | |||||||||||||
| Deposit | (10,496 | ) | - | - | (10,496 | ) | ||||||||||
| Net Cash used in Operating Activities | (758,479 | ) | (828,437 | ) | ||||||||||||
| Net Cash (used in) Operating Activities | (855,540 | ) | (758,479 | ) | ||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
| Purchase of intellectual property | (315,000 | ) | (269,309 | ) | - | (315,000 | ) | |||||||||
| Purchase of property and equipment | (146,400 | ) | (10,629 | ) | (138,331 | ) | (146,400 | ) | ||||||||
| Net Cash used in Investing Activities | (461,400 | ) | (279,938 | ) | (138,331 | ) | (461,400 | ) | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
| Proceeds from issuance of convertible notes payable | 1,502,250 | 676,000 | 1,482,000 | 1,502,250 | ||||||||||||
| Repayment of convertible notes payable | (45,000 | ) | - | |||||||||||||
| Proceeds from issuance of common stock | - | 940,000 | 846,801 | - | ||||||||||||
| Proceeds from issuance of series B Preferred Stock | 50,000 | - | ||||||||||||||
| Proceeds from issuance of Series B Preferred Stock | 525,000 | 50,000 | ||||||||||||||
| Redemption of Series B Preferred Stock | (63,999 | ) | - | |||||||||||||
| Finance lease payments | (73,327 | ) | (20,284 | ) | (90,565 | ) | (73,327 | ) | ||||||||
| Proceeds from issuance of notes payable | 2,147,996 | 215,120 | 4,377,226 | 2,147,996 | ||||||||||||
| Repayment of notes payable | (1,689,846 | ) | (650,000 | ) | (4,577,578 | ) | (1,689,846 | ) | ||||||||
| Proceeds from related parties | 299,173 | 12,900 | 366,943 | 299,173 | ||||||||||||
| Repayment to related parties | (976,257 | ) | (371,623 | ) | (680,807 | ) | (976,257 | ) | ||||||||
| Net Cash provided by Financing Activities | 1,259,989 | 802,113 | 2,140,021 | 1,259,989 | ||||||||||||
| Net change in cash | 40,110 | (306,262 | ) | 1,146,150 | 40,110 | |||||||||||
| Cash, beginning of year | 18,673 | 324,935 | 58,783 | 18,673 | ||||||||||||
| Cash, end of year | $ | 58,783 | $ | 18,673 | $ | 1,204,933 | $ | 58,783 | ||||||||
| Supplemental cash flow information | ||||||||||||||||
| Cash paid for interest | $ | 83,347 | $ | 26,161 | $ | 152,643 | $ | 83,347 | ||||||||
| Cash paid for taxes | $ | - | $ | - | $ | - | $ | - | ||||||||
| Non-cash Investing and Financing transactions: | ||||||||||||||||
| Intangible assets acquired through issuance of accounts receivable | $ | - | $ | 410,000 | ||||||||||||
| Intangible assets acquired through license fee payable | $ | - | $ | 1,445,000 | ||||||||||||
| Settlement of stock subscriptions | $ | - | $ | 1,640 | ||||||||||||
| Common stock issued for purchase of intangibles | $ | 180,000 | $ | 1,350,000 | $ | - | $ | 180,000 | ||||||||
| Settlement of stock subscriptions | $ | 1,640 | $ | - | ||||||||||||
| Common stock issued for exercised cashless warrant | $ | 38,012 | $ | - | $ | 1 | $ | 38,012 | ||||||||
| Settlement of accrued interest through issuance of convertible notes payable | $ | - | $ | - | ||||||||||||
| Settlement of series B preferred stock through issuance of common stock | $ | 827,106 | $ | - | ||||||||||||
| Settlement of convertible notes payable through issuance of common stock | $ | 3,811,434 | $ | 75,000 | $ | 1,842,853 | $ | 3,811,434 | ||||||||
| Common stock issued in conjunction with convertible note | $ | 133,663 | $ | - | ||||||||||||
| Warrant issued in conjunction with debts | $ | 1,024,780 | $ | - | ||||||||||||
| Resolution of derivative liability upon exercise of warrant | $ | 406,856 | - | $ | 139,067 | $ | 406,856 | |||||||||
| Resolution of derivative liability upon conversion of debt | $ | 10,548,012 | 3,130,000 | $ | 531,700 | $ | 10,548,012 | |||||||||
| Beneficial conversion feature | $ | 517,500 | $ | - | $ | - | $ | 517,500 | ||||||||
| Equipment paid by capital lease | $ | 159,096 | $ | 108,189 | $ | - | $ | 159,096 | ||||||||
| Increase in ROU asset and operating lease liability | $ | - | $ | 469,016 | ||||||||||||
| Derivative liability recognized as debt discount | $ | 947,175 | $ | 606,000 | $ | 390,000 | $ | 947,175 | ||||||||
| Cancellation of common stock | $ | - | $ | 2,000 | ||||||||||||
| Settlement of stock subscriptions | $ | - | $ | 336 | ||||||||||||
| Issuance of restricted stock | $ | - | $ | 237 | ||||||||||||
| Settlement of convertible notes payable through issuance of series B preferred stock | $ | 65,600 | $ | - | ||||||||||||
| Accounts payable for purchase of intellectual property | $ | 80,000 | $ | - | $ | - | $ | 80,000 | ||||||||
| Issuance of convertible notes for repayment of due to related party | $ | 150,000 | $ | - | $ | - | $ | 150,000 | ||||||||
| Reclassification of APIC and Derivative | $ | - | $ | 83,334 | ||||||||||||
| Note payable issued for settlement of License fee payable | $ | 1,004,880 | $ | - | ||||||||||||
See the accompanying Notes, which are an integral part of these Consolidated Financial Statements
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020 and 2019
NOTE 1: BUSINESS DESCRIPTION
Data443 Risk Mitigation, Inc. (the “Company”) was incorporated as a Nevada corporation on May 4, 1998. On October 15, 2019, the Company changed its name from LandStar, Inc. to Data443 Risk Mitigation, Inc. within the state of Nevada.
Reverse Stock Splits
Effective March 7, 2022 and July 1, 2021, we effected an 8 for 1 and 2,000 for 1 reverse stock split, respectively, of our issued and outstanding common stock (the “Reverse Stock Splits”).All references to shares of our common stock in this Prospectus refers to the number of shares of common stock after giving retrospective effect to these Reverse Stock Splits (unless otherwise indicated).
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements as of December 31, 20202021 include the accounts of the Company and its wholly-owned subsidiary, Data 443 Risk Mitigation, Inc., a North Carolina operating company, and the operations of Myriad Software Productions, LLC through September 2018 when it was liquidated. Prior to the acquisition of Data 443 Risk Mitigation, Inc. in North Carolina and the assets of Myriad Software Productions, LLC in 2018, these two entities were controlled by our current sole director and officer, Jason Remillard. On November 17, 2017, Mr. Remillard acquired control of LandStar, Inc. through his purchase of all the outstanding Series A preferred shares of the Company, and as a result, these two entities became common controlled entities that require consolidation of results with the reporting company, LandStar, Inc., from the time common control occurred. All intercompany accounts and activities have been eliminated. These consolidated financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020Certain prior year amounts have been reclassified to conform to the current presentation. These reclassifications had no impact on net earnings (loss) or and 2019financial position.
Revenue Recognition
The Company derives revenue primarily from contracts for subscription to access our SaaS platforms and, to a much lesser degree, ancillary services provided in connection with subscription services. The Company’s contracts include the performance obligations that require us to provide access to the platforms, usually on an annual subscription. The Company’s contracts are for subscriptions to DataExpressTM, ArcMail,our data classification, movement, governance, encryption, access control and ARALOCTM, hosting of the platformsdistribution software and related services. Custom work forWe also perform professional services consulting with specific deliverables is documented in themanaged primarily by statements of work. Customers maytypically enter into our services subscription and various statements of work concurrently or consecutively.concurrently. Most of the Company’s performance obligations are not considered to be distinct from the subscriptionsubscriptions to DataExpressTM, ArcMail, and ARALOCTM,our software or hosting of the platformplatforms and related services and are combined into a single performance obligation. New statements of work and modifications of contracts are reviewed each reporting period and to assess the nature and characteristics of the new or modified performance obligations on a contract by contract basis.
Revenue related to contracts with customers is evaluated utilizing the following steps: (i) Identify the contract, or contracts, with a customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; (v) Recognize revenue when the Company satisfies a performance obligation.
| F-25 |
Cash and Cash Equivalents
For purposes of balance sheet presentation and reporting of cash flows, the Company considers all unrestricted demand deposits, money market funds and highly liquid debt instruments with an original maturity of less than 90 days to be cash and cash equivalents. The Company had 0no cash equivalents at December 31, 20202021 and 2019.2020.
Accounts Receivable
Accounts receivable are recorded in accordance with ASC 310, “Receivables.” Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company does 0t currently have any amount recorded as an allowance for doubtful accounts. Based on management’s estimate and based on all accounts being current, the Company has not deemed it necessary to reserve for doubtful accounts at this time.
Deferred Revenue
Deferred revenue mostly consists of service subscriptions received from users in advance of revenue recognition. The increase in the deferred revenue balance for the year ended December 31, 2021 and 2020 was driven by cash payments from customers in advance of satisfying our performance obligations, offset by revenue recognized that was included in the deferred revenue balance at the beginning of the period.
Convertible Financial Instruments
The Company bifurcates conversion options from their host instruments and accounts for them as free-standing derivative financial instruments if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable U.S. GAAP.
When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, discounts are recorded for the intrinsic value of conversion options embedded in the instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the instrument.
Common stock purchase warrants and derivative financial instruments - Common stock purchase warrants and other derivative financial instruments are classified as equity if the contracts (1) require physical settlement or net-share settlement, or (2) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). Contracts which (1) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (2) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (3) that contain reset provisions that do not qualify for the scope exception are classified as liabilities. The Company assesses classification of its common stock purchase warrants and other derivatives at each reporting date to determine whether a change in classification between equity and liabilities is required.
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
Beneficial Conversion Feature - The issuance of the convertible debt described in Note 9, below, generated a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, resulting in a discount on the convertible debt (recorded as a component of additional paid-in capital). The discount is amortized to interest expense over the term of the convertible debt.
| F-26 |
Employees - The Company accounts for share-based compensation under the fair value method which requires all such compensation to employees, including the grant of employee stock options, to be calculated based on its fair value at the measurement date (generally the grant date), and recognized in the consolidated statement of operations over the requisite service period.
Nonemployees - During June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”) to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees. The Company elected to adopt ASU 2018-07 early. Under the requirements of ASU 2018-07, the Company accounts for share-based compensation to non-employees under the fair value method which requires all such compensation to be calculated based on the fair value at the measurement date (generally the grant date), and recognized in the statement of operations over the requisite service period.
The Company recorded approximately $ in share-based compensation expense for the year ended December 31, 2021, compared to approximately $ in share-based compensation expense for the year ended December 31, 2020, compared to approximately $ in share-based compensation expense for the year ended December 31, 2019.2020.
Determining the appropriate fair value model and the related assumptions requires judgment. During the year ended December 31, 2021 and 2020, the fair value of each option grant was estimated using a Black-Scholes option-pricing model.
The expected volatility represents the historical volatility of the Company’s publicly traded common stock. Due to limited historical data, the Company calculates the expected life based on the mid-point between the vesting date and the contractual term which is in accordance with the simplified method. The expected term for options granted to nonemployees is the contractual life. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of stock options. The Company has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero.
Income Taxes
The asset and liability method is used in the Company’s accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.
Deferred tax assets and liabilities are determined based on the temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. In estimating future tax consequences, all expected future events are considered other than enactment of changes in the tax law or rates.
The Company adopted ASC 740 “Income Taxes,” which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits.
| F-27 |
The determination of recording or releasing tax valuation allowance is made, in part, pursuant to an assessment performed by management regarding the likelihood that the Company will generate future taxable income against which benefits of its deferred tax assets may or may not be realized.
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
Intellectual Property
The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed on a straight-line basis over the estimated periods benefited. Patents, technology and other intangibles with contractual terms are generally amortized over their respective legal or contractual lives. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.
Long-Lived Assets
Long-lived assets are evaluated for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted future cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value.
Property and Equipment
Property and equipment, consisting mostly of computer equipment, and software, is recorded at cost reduced by accumulated depreciation and impairment, if any. Depreciation expense is recognized over the assets’ estimated useful lives of three - seven years years using the straight-line method. Major additions and improvements are capitalized as additions to the property and equipment accounts, while replacements, maintenance and repairs that do not improve or extend the life of the respective assets, are expensed as incurred. Estimated useful lives are periodically reviewed and, when appropriate, changes are made prospectively. When certain events or changes in operating conditions occur, asset lives may be adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts.
Fair Value Measurements
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined as follows:
| ● | Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; | |
| ● | Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and | |
| ● | Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. |
The Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, note payable, due to related parties and accrued liabilities, are carried at historical cost. At December 31, 20202021 and 2019,2020, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments. Management determined that liabilities created by beneficial conversion features associated with the issuance of certain convertible notes payable (see Note 8), meet the criteria of derivatives and are required to be measured at fair value. The fair value of these derivative liabilities was determined during the year based on management’s estimate of the expected future cash flows required to settle the liabilities. As of the end of year, at December 31, 2021 and 2020, there were no derivative liabilities due to a combination of all convertible notes being either (i) converted into common stock; or, (ii) amended to have a fixed conversion price. This valuation technique involves management’s estimates and judgment based on unobservable inputs and is classified in level 3.
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method and as if converted method. Dilutive potential common shares include outstanding stock options, warrant and convertible notes.
SCHEDULE OF ANTI-DILUTIVE BASIC AND DILUTED EARNINGS PER SHARE
| Year Ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| (Shares) | (Shares) | |||||||
| Series A Preferred Stock | 150,000,000 | 1,334,000 | ||||||
| Stock options | 5,875 | 188 | ||||||
| Warrants | - | 937 | ||||||
| Convertible notes | 130,357 | 2,139 | ||||||
| Total | 150,136,232 | 1,337,264 | ||||||
| Years Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| (Shares) | (Shares) | |||||||
| Series A Preferred Stock | 150,000,000 | 150,000,000 | ||||||
| Stock options | 2,121 | 734 | ||||||
| Warrants | 146,842 | - | ||||||
| Convertible notes | - | 16,295 | ||||||
| Preferred B stock | 3,955 | 63 | ||||||
| Total | 150,152,918 | 150,017,092 | ||||||
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities - current, and operating lease liabilities - noncurrent on the balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Segments
Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company operates and manages its business as 1one operating segment and all of the Company’s revenues and operations are currently in the United States.
Recently Issued Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company, the new standard will be effective on January 1, 2020. ASU 2018-13 modifies prior disclosure requirements for fair value measurement. ASU 2018-13 removes certain disclosure requirements related to the fair value hierarchy, such as removing the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2, modifies existing disclosure requirements related to measurement uncertainty, and adds new disclosure requirements, such as disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurement. The impact of this new standard on the Company’s consolidated financial statements is not material.
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
In August 2018, the FASB issued ASU No. 2018-15, Internal-Use Software (Subtopic 350-40)—Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (“ASU 2018-15”). ASU 2018-15 is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company, the new standard will be effective on January 1, 2020. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license), by requiring a customer in a cloud computing arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. The impact of this new standard on the Company’s consolidated financial statements has not been material.
We adopted recently issued accounting pronouncements in 2019, and we believe that none had a significant impact on our financial position, balance sheet, results of operations, or cash flow, except for ASC Update No. 2016-02—Leases, which requires organizations to recognize lease assets and lease liabilities on the balance sheet for leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. Data443 adopted ASU 2016-02 in the first quarter of 2019. See Note 5 for more complete details on balances at December 31, 2020.
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We will adopt the new standard effective January 1, 2021 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, ASC Subtopic 470-20 “Debt—Debt with “Conversion and Other Options” and ASC subtopic 815-40 “Hedging—Contracts in Entity’s Own Equity”. The standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting; and, (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements.
| F-29 |
The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its consolidated financial statements.
NOTE 3: LIQUIDITY AND GOING CONCERN
The accompanying consolidated financial statements have been prepared (i) in accordance with accounting principles generally accepted in the UnitedUnitd States, and (ii) assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has not generated significant income to date. The Company is subject to the risks and uncertainties associated with a business with no substantive revenue, as well as limitations on its operating capital resources. These matters, among others, raise substantial doubt about the ability of the Company to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern. In light of these matters, the Company’s ability to continue as a going concern is dependent upon the Company’s ability to raise capital and generate revenue and profits in the future.
During 2018, the Company made two product acquisitions, ClassiDocs™, and ARALOC™, and completed the acquisition of one entity, Data443 Risk Mitigation, Inc. (“Data443”), the North Carolina operating company. During 2019, the Company completed the acquisition of selected assets of DataExpress™; and, completed a transaction under which the Company licensed the assets of ArcMail™. During the period ending September 30, 2020, the Company has completed the acquisition of selected assets of FileFacets™, and selected assets of Intelly WP™. The Company is actively seeking new products and entities to acquire, with several candidates identified. The Company has developed, and continues to develop, large scale relationships with cyber security, marketing and product organizations, and to market and promote ClassiDocs and other products the Company may develop or acquire. As of December 31, 2020,2021, the Company had negative net working capital; an accumulated deficit; and, had reduced its operating losses. Subsequent to the year ended December 31, 2020, in order to meet capital requirements the Company raised net proceeds of (i) $110,000 from the sale of Series B Preferred Stock; (ii) $490,000 from the sale of its Common Stock; and, (iii) $114,500 from the sale of a promissory note. See Note 16, “Subsequent Events”, for further details.
We continue to monitor the effects COVID-19 could have on our operations and liquidity including our ability to collect account receivable timely from our customers due to the economic impacts COVID-19 could have on the general economy. COVID-19 has also impacted our ability to travel, meet distribution partners in their offices, present at tradeshows, and perform other enterprise-related sales functions. Many customers have still yet to return to their pre-pandemic “normal” office working conditions. These continued operating conditions have impacted our ability to execute and deploy some of our normal sales and marketing activities. While we are not unique in this position, these factors, among others, raise some doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
NOTE 4: PROPERTY AND EQUIPMENT
The following table summarizes the components of the Company’s property and equipment as of the dates presented:
SUMMARY OF COMPONENTS OF PROPERTY AND EQUIPMENT
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Furniture and Fixtures | $ | 2,991 | $ | 2,991 | ||||
| Computer Equipment | 559,654 | 421,323 | ||||||
| 562,645 | 424,314 | |||||||
| Accumulated depreciation | (274,239 | ) | (99,965 | ) | ||||
| Property and equipment, net of accumulated depreciation | $ | 288,406 | $ | 324,349 | ||||
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Furniture and Fixtures | $ | 2,991 | $ | 2,991 | ||||
| Computer Equipment | 421,323 | 115,827 | ||||||
| Property and equipment, gross | 424,314 | 118,818 | ||||||
| Accumulated depreciation | (99,965 | ) | (18,691 | ) | ||||
| Property and equipment, net of accumulated depreciation | $ | 324,349 | $ | 100,127 | ||||
| F-30 |
Depreciation expense for the years ended December 31, 20202021 and 2019,2020, was $81,274174,274 and $18,69181,274, respectively.respectively, and recorded in general and administrative expenses.
During the years ended December 31, 20202021 and 2019,2020, the Company acquired property and equipment of $305,496138,331 and $10,629146,400, respectively.
NOTE 5: INTELLECTUAL PROPERTY
On February 7, 2019, the Company entered into an Exclusive License and Management Agreement (the “License Agreement”) with WALA, INC., which conducts business under the name ArcMail Technology (“ArcMail”). Under the License Agreement, the Company was granted the exclusive right and license to receive all benefits from the marketing, selling and licensing, of the ArcMail business products, including, without limitation, the good will of the business. The term of the License Agreement is twenty-seven (27) months, with the following payments to be made by the Company to ArcMail: (i) $200,000 upon signing the License Agreement; (ii) monthly payments starting 30 days after the execution of the License Agreement in the amount of $25,000 per month during months 1-6; (iii) monthly payments in the amount of $30,000 per month during months 7-17; and (iii) in month 18, final payment in the amount of $765,000. As of December 31, 2019, the balance of payments due under the License Agreement was $1,094,691. In connection with the execution of the License Agreement, two other agreements were also executed: (a) a Stock Purchase Rights Agreement, under which the Company has the right, though not the obligation, to acquire 100% of the issued and outstanding shares of stock of ArcMail from Rory Welch, the CEO of ArcMail (the right can be exercised over a period of 27 months); and (b) a Business Covenants Agreement, under which ArcMail and Mr. Welch agreed to not compete with the Company’s use of the ArcMail business under the License Agreement for a period of twenty-four (24) months. Mr. Welch shall continue to serve as ArcMail’s CEO. The Company has not purchased any outstanding shares under the Stock Purchase Rights Agreement. As of September 30, 2020, the Company terminated all agreements with Mr. Welch and ArcMail. The Company continued to use all assets under the License Agreement and was finalizing an agreement with the creditors of Mr. Welch and ArcMail (the creditors have taken ownership of the assets) for the Company’s continued use of all assets. Subsequent to the year end, the Company reached the agreement and issued notes payable of $1,404,000 to settle license fee payable of $1,094,691. It was considered as an unrecognized subsequent event for the extinguishment of debt.
On September 16, 2019, the Company entered into an Asset Purchase Agreement (the “APA”) with DMBGroup, LLC (“DMB”) to acquire certain assets collectively known as DataExpress™, a software platform for secure sensitive data transfer within the hybrid cloud. The total purchase price of approximately $2.8 million consists of: (i) a $410,000 cash payment at closing; (ii) a promissory note in the amount of $940,000, payable in the amount of $41,661 over 24 monthly payments starting on October 15, 2019, accruing at a rate of 6% per annum; (iii) assumption of approximately $98,000 in liabilities and, (iv) approximately shares of our common stock, representing $1,350,000.
During the year ended December 31, 2020 and 2019, the Company recorded impairment loss of $0 and $1,328,638, respectively. During the year ended December 31, 2019, we determined that the implied fair value of the intellectual property of DataExpress™ was substantially below the carrying value of the asset. This determination was based upon estimating the future income over the useful life of the asset and discounting it using an internal rate of return. Accordingly, we recognized an impairment loss of $1,328,638. This was based upon the following facts: (i) impairment loss is the difference of the purchase cost for DataExpress™ and the estimated fair value of DataExpress™; (ii) DataExpress™ fair value was determined using an income approach model; (iii) fair value of consideration paid by the Company was $2,716,689 at acquisition date; (iv) December 31, 2019 book value (after amortization) was $2,490,298; (v) fair value of DataExpress™ at December 31, 2019 valuation date was determined to be $1,161,660; and, (vi) December 31, 2019 impairment loss was $1,328,638 (book value less estimated fair value of DataExpress™).
On August 13, 2020, the Company entered into an Asset Purchase Agreement to acquire certain assets collectively known as FileFacets™, a Software-as-a-Service (SaaS) platform that performs sophisticated data discovery and content search of structured and unstructured data within corporate networks, servers, content management systems, email, desktops and laptops. The total purchase price was $135,000, which amount was paid in full at the closing of the transaction.
On September 21, 2020, the Company entered into an Asset Purchase Agreement with the owners of a business known as IntellyWP™, to acquire the intellectual property rights and certain assets collectively known as IntellyWP™, an Italy-based developer that produces WordPress plug-ins that enhance the overall user experience for webmaster and end users. The total purchase price of $135,000 consists of: (i) a $55,000 cash payment at closing; (ii) a cash payment of $40,000 upon completion of certain training; and, (iii) a cash payment of $40,000 upon the Company collecting $25,000 from the assets acquired in the subject transaction.
On October 8, 2020, the Company entered into an Asset Purchase Agreement with Resilient Network Systems, Inc. (“RNS”) to acquire the intellectual property rights and certain assets collectively known as Resilient Networks™, a Silicon Valley based SaaS platform that performs SSO and adaptive access control “on the fly” with sophisticated and flexible policy workflows for authentication and authorization. The total purchase price of $305,000 consists of: (i) a $125,000 cash payment at closing; and, (ii) the issuance of 9,57519,148,936 shares of our common stock to RNS.
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
The following table summarizes the components of the Company’s intellectual property as of the dates presented:
SCHEDULE OF INTELLECTUAL PROPERTY
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Intellectual property: | ||||||||
| Word press GDPR rights | $ | 46,800 | $ | 46,800 | ||||
| ARALOC® | 1,850,000 | 1,850,000 | ||||||
| ArcMail License | 1,445,000 | 1,445,000 | ||||||
| DataExpress® | 1,388,051 | 1,388,051 | ||||||
| FileFacetsTM | 135,000 | 135,000 | ||||||
| IntellyWP™ | 135,000 | 135,000 | ||||||
| Resilient Network Systems | 305,000 | 305,000 | ||||||
| Intellectual property | 5,304,851 | 5,304,851 | ||||||
| Accumulated amortization | (3,960,032 | ) | (2,993,944 | ) | ||||
| Impairment | (75,000 | ) | ||||||
| Intellectual property, net of accumulated amortization | $ | 1,269,819 | $ | 2,310,907 | ||||
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Intellectual property: | ||||||||
| Word press GDPR rights | $ | 46,800 | $ | 46,800 | ||||
| ARALOC™ | 1,850,000 | 1,850,000 | ||||||
| ArcMail License | 1,445,000 | 1,445,000 | ||||||
| DataExpressTM | 1,388,051 | 1,388,051 | ||||||
| FileFacetsTM | 135,000 | - | ||||||
| IntellyWP™ | 135,000 | - | ||||||
| Resilient Network Systems | 305,000 | - | ||||||
| Intellectual property | 5,304,851 | 4,729,851 | ||||||
| Accumulated amortization | (2,993,944 | ) | (1,587,913 | ) | ||||
| Intellectual property, net of accumulated amortization | $ | 2,310,907 | $ | 3,141,938 | ||||
| F-31 |
The Company recognized amortization expense of approximately $1,406,031966,088 and $1,479,4461,406,031 for the years ended December 31, 2021 and 2020, respectively, recorded as general and 2019, respectively.administrative expense.
During the years ended December 31, 2021 the Company determined that IntellyWPTM should be impaired because of the reduction in sales from this service. Accordingly, the Company estimated the undiscounted future cash flows to be generated by IntellyWPTM to be an immaterial amount, which was less than the carrying amount of IntellyWPTM of $75,000. This resulted in a $75,000 write-down of the assets, which was reflected as a separate line item in the income statement.
Based on the carrying value of definite-lived intangible assets as of December 31, 2020,2021, we estimate our amortization expense for the next five years will be as follows:
SCHEDULE OF FUTURE AMORTIZATION EXPENSE OF INTANGIBLE ASSETS
| Amortization | Amortization | |||||||
| Year Ended December 31, | Expense | Expense | ||||||
| 2021 | $ | 966,088 | ||||||
| 2022 | 860,484 | 815,484 | ||||||
| 2023 | 441,584 | 411,585 | ||||||
| 2024 | 27,000 | 27,000 | ||||||
| Thereafter | 15,750 | 15,750 | ||||||
| Total | 2,310,907 | 1,269,819 | ||||||
NOTE 6: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table summarizes the components of the Company’s accounts payable and accrued liabilities as of the dates presented:
SUMMARY OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| December 31, | December 31, | December 31, | December 31, | |||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Accounts payable | $ | 178,319 | $ | 339,882 | $ | 75,628 | $ | 178,319 | ||||||||
| Credit cards and accrued liabilities | 222,695 | 68,313 | ||||||||||||||
| Payroll liabilities | - | 102,793 | ||||||||||||||
| Credit cards | 28,492 | 31,918 | ||||||||||||||
| Accrued dividend - preferred stock | 6,849 | 484 | ||||||||||||||
| Accrued liabilities | 4,704 | 87,500 | ||||||||||||||
| Accounts payable and accrued liabilities | $ | 401,014 | $ | 408,195 | $ | 115,673 | $ | 401,014 | ||||||||
NOTE 7: DEFERRED REVENUE
ChangesFor the years ended December 31, 2021 and 2020, changes in deferred revenue were as follows:
SUMMARY OF CHANGES IN DEFERRED REVENUE
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Balance, beginning of year | $ | 1,518,163 | $ | 953,546 | ||||
| Deferral of revenue | 2,581,801 | 2,961,749 | ||||||
| Recognition of deferred revenue | (2,491,368 | ) | (2,397,132 | ) | ||||
| Balance, end of year | $ | 1,608,596 | $ | 1,518,163 | ||||
| F-32 |
As of December 31, 2021 and 2020, is classified as follows:
SUMMARY OF DEFERRED REVENUE
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Balance, beginning of period | $ | 953,546 | $ | 28,951 | ||||
| Deferral of revenue | 2,961,749 | 2,418,820 | ||||||
| Recognition of deferred revenue | (2,397,132 | ) | (1,494,225 | ) | ||||
| Balance, end of period | $ | 1,518,163 | $ | 953,546 | ||||
| Current | $ | 1,478,430 | $ | 728,749 | ||||
| Non-current | 39,733 | 224,797 | ||||||
| $ | 1,518,163 | $ | 953,546 | |||||
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Current | $ | 1,035,185 | $ | 1,478,430 | ||||
| Non-current | 573,411 | 39,733 | ||||||
| Deferred revenue | $ | 1,608,596 | $ | 1,518,163 | ||||
NOTE 8: LEASES
Operating lease
We have noncancelable operating leases for our office facility that expire in 20242024.. The operating lease has renewal options and rent escalation clauses. On July 1, 2020, the Company renegotiated the office lease to obtain rent expense relief for the months of April 2020 – December 2020.
Lease right-of-use assets represent the right to use an underlying asset pursuant to the lease for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Lease right-of-use assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our estimated incremental borrowing rate generally applicable to the location of the lease right-of-use asset, unless an implicit rate is readily determinable. We combine lease and certain non-lease components in determining the lease payments subject to the initial present value calculation. Lease right-of-use assets include upfront lease payments and exclude lease incentives, if applicable. When lease terms include an option to extend the lease, we have not assumed the options will be exercised.
Lease expense for operating leases generally consist of both fixed and variable components. Expense related to fixed lease payments are recognized on a straight-line basis over the lease term. Variable lease payments are generally expensed as incurred, where applicable, and include agreed-upon changes in rent, certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease. Leases with an initial term of twelve months or less are not recorded on the balance sheet. We recognized total lease expense of approximately $100,91097,385 and $111,484100,910 for the yearyears ended December 31, 20202021 and 2019,2020, respectively, primarily related to operating lease costs paid to lessors from operating cash flows. As of December 31, 20202021 and 2019,2020, the Company recorded security deposit of $10,000. We entered into our operating lease in January 2019.
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
Future minimum lease payments under operating leases that have initial noncancelable lease terms in excess of one year at December 31, 20202021 were as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER OPERATING LEASES
| Total | ||||
| Year Ended December 31, | ||||
| 2022 | 127,300 | |||
| 2023 | 131,150 | |||
| Thereafter | - | |||
| Total lease payment | 258,450 | |||
| Less: Imputed interest | (20,488 | ) | ||
| Operating lease liabilities | 237,962 | |||
| Operating lease liability - current | 112,322 | |||
| Operating lease liability - non-current | $ | 125,640 | ||
| Total | ||||
| Year Ended December 31, | ||||
| 2021 | $ | 123,600 | ||
| 2022 | 127,300 | |||
| 2023 | 131,150 | |||
| Thereafter | - | |||
| Total lease payment | 382,050 | |||
| Less: Imputed interest | (43,919 | ) | ||
| Operating lease liabilities | 338,131 | |||
| Operating lease liability – current | 100,170 | |||
| Operating lease liability - non-current | $ | 237,961 | ||
| F-33 |
The following summarizes other supplemental information about the Company’s operating lease as of December 31, 2020:2021:
SCHEDULE OF OTHER SUPPLEMENTAL INFORMATION UNDER OPERATING LEASE
| Weighted average discount rate | 8 | % | ||
| Weighted average remaining lease term (years) |
Finance lease
The Company leases computer and hardware under non-cancellable capital lease arrangements. The term of those capital leases is 3years and annual interest rate is 12%. At December 31, 20202021 and 2019,2020, capital lease obligations included in current liabilities were $90,56572,768 and $34,42590,565, respectively, and capital lease obligations included in long-term liabilities were $83,10910,341 and $53,48083,109, respectively. As of December 31, 20202021 and 2019,2020, the Company recorded security deposit of $10,944. During the years ended December 31, 2021 and 2020, the Company paid interest expense of $15,967 and $22,892, respectively.
At December 31, 2020,2021, future minimum lease payments under the finance lease obligations, are as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER FINANCE LEASES
| Total | ||||
| 2021 | $ | 106,532 | ||
| 2022 | 78,379 | |||
| 2023 | 10,496 | |||
| Thereafter | - | |||
| Total finance lease payment | 195,407 | |||
| Less: Imputed interest | (21,733 | ) | ||
| Finance lease liabilities | 173,674 | |||
| Finance lease liability – current | 90,565 | |||
| Finance lease liability - non-current | $ | 83,109 | ||
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
| Total | ||||
| 2022 | 78,379 | |||
| 2023 | 10,496 | |||
| Thereafter | - | |||
| Total finance lease payment | 88,875 | |||
| Less: Imputed interest | (5,766 | ) | ||
| Finance lease liabilities | 83,109 | |||
| Finance lease liability | 72,768 | |||
| Finance lease liability - non-current | $ | 10,341 | ||
As of December 31, 20202021 and December 31, 2019,2020, finance lease assets are included in property and equipment as follows:
SCHEDULE OF FINANCE LEASE ASSETS
| December 31, | December 31, | December 31, | December 31, | |||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Finance lease assets | $ | 267,284 | $ | 109,280 | $ | 267,284 | $ | 267,284 | ||||||||
| Accumulated depreciation | (87,337 | ) | (17,672 | ) | (192,928 | ) | (87,337 | ) | ||||||||
| Finance lease assets, net of accumulated depreciation | $ | 179,947 | $ | 91,608 | $ | 74,356 | $ | 179,947 | ||||||||
NOTE 9: CONVERTIBLE NOTES PAYABLE
Convertible notes payable consists of the following:
SCHEDULE OF CONVERTIBLE NOTES PAYABLE
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Convertible Notes - Issued in fiscal year 2020 | 100,000 | 1,526,000 | ||||||
| Convertible Notes - Issued in fiscal year 2021 | 1,607,857 | - | ||||||
| 1,707,857 | 1,526,000 | |||||||
| Less debt discount and debt issuance cost | (691,569 | ) | (282,232 | ) | ||||
| 1,016,288 | 1,243,768 | |||||||
| Less current portion of convertible notes payable | 993,931 | 1,241,412 | ||||||
| Long-term convertible notes payable | $ | 22,357 | $ | 2,356 | ||||
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Convertible Notes - originated in September 2018 | $ | - | $ | 1,700,000 | ||||
| Convertible Notes - originated in October 2018 | - | 444,150 | ||||||
| Convertible Notes - originated in October 2018 | - | 608,850 | ||||||
| Convertible Notes - originated in April 2019 | - | 600,000 | ||||||
| Convertible Notes - originated in June 2019 | - | 63,000 | ||||||
| Convertible Notes - originated in November 2019 | - | 38,000 | ||||||
| Convertible Notes - originated in December 2019 | - | 38,000 | ||||||
| Convertible Notes - Issued in fiscal year 2020 | 1,526,000 | - | ||||||
| 1,526,000 | 3,492,000 | |||||||
| Less debt discount and debt issuance cost | (282,232 | ) | (279,214 | ) | ||||
| 1,243,768 | 3,212,786 | |||||||
| Less current portion of convertible notes payable | 1,243,768 | 3,212,786 | ||||||
| Long-term convertible notes payable | $ | - | $ | - | ||||
| F-34 |
During the years ended December 31, 20202021 and 2019,2020, the Company recognized interest expense of $274,857131,623 and $246,914274,857, and amortization of debt discount, included in interest expense of $1,576,907478,582 and $1,460,3091,576,907, respectively.
Replacement of note
During the twelve monthsyear ended December 31, 2020, the Company assigned a portion of note with outstanding principal amounts of $150,000 to a lender. Our CEO paid $135,000 to repay a principal amount of $81,000 on behalf of the company. As a result, the Company recorded due to related party of $135,000 and loss on settlement of debt of $54,000.
Effective September 30, 2020, the Company exchanged (i) its convertible promissory note originally issued on March 20, 2020 in the amount of $125,000(referred (referred to herein as the Granite Note); and, (ii) the Common Stock Purchase Warrant dated 18 March 2020 for the issuance of one hundred twenty-fivesixteen () shares of Company Common Stock (the “Granite Warrant”) for the issuance of a new convertible promissory note issued in favor of Blue Citi LLC in the amount of $325,000(the (the “Exchange Note”). Both the Granite Note and the Granite Warrant were cancelled as a result of the exchange and the issuance of the Exchange Note. Terms of the Exchange Note include, without limitation, the following:
| a. | Principal balance of $325,000, which includes all accrued and unpaid interest on the Granite Note; | |
| b. | No further interest shall accrue so long as there is no event of default; | |
| c. | Conversions into common stock under the Exchange Note shall be effected at the lowest closing stock price during the five (5) days preceding any conversion, with -0- discount and a conversion price not below $ | |
| d. | No prepayment premiums or penalties; and | |
| e. | Maturity date of September 30, 2021 |
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
Effective November 17, 2020, the Company entered into a Settlement and Release Agreement (the “Settlement Agreement”) with an existing lender to, among things, settle all dispute regarding a convertible promissory note, and exchanged that note for a newly issued note. The disputed note, referred to herein as the “Smea2z Note”, was originally issued on October 23, 2018 in favor of Smea2z LLC in the original principal amount of Two Hundred Twenty Thousand Dollars ($220,000). Subsequent to the issuance of the Smea2z Note, a series of agreements were executed which amended various terms and conditions of the Smea2z Note, resulting in, among other things, a purported principal balance of Six Hundred Thousand Eight Hundred Fifty Dollars ($608,850). As a result of the Settlement Agreement, the Smea2z Note was cancelled, and a new note was issued (the “Exchange Note”) in exchange for the Smea2z Note. The Exchange Note was issued as of November 17, 2020 in the reduced original principal amount of Four Hundred Thousand Dollars ($400,000). The Exchange Note further provides as follows:
| a. | No further interest shall accrue so long as there is no event of default; | ||
| b. | Maturity date remains the same: 30 June 2021 | ||
| c. | No right to prepay; | ||
| d. | Conversion price is fixed at $ | ||
| e. | Typical events of default for such a note, as well as a default in the event the closing price for the Company’s common stock is less than | ||
| f. | Leak out provision: |
| F-35 |
| 1. | One conversion per week, for no more than forty million shares; | ||
| 2. | If the trading volume for the Company’s common stock exceeds |
Effective November 18, 2020, the Company entered into an agreement with three existing investors in the Company (the
(the “Warrant Holders”), each of which was the holder of warrants issued the Company. The total number of warrants (collectively, the “Exchanged Warrants”) held by the Warrant Holders totaled 30939. The Company and the Warrant Holders agreed to exchange the Exchanged Warrants for three newly issued promissory notes (the “Warrant Exchange Notes”). As a result of the exchange, the Exchanged Warrants were cancelled and of no further force and effect. The Warrants Exchange Notes were issued as of November 18, 2020, in the total original principal amount of One Hundred Thousand Dollars ($100,000). The Warrant Exchange Notes further provide as follows: (i) interest accrues at 5% per annum; (ii) maturity date of November 18, 2025; (iii) no right to prepay; (iv) fixed conversion price of $0.01160; and, (v) typical events of default for such a note.
Settlement of note and accrued interest
Convertible note in the original principal amount of $25,000 issued on July 1, 2020 and accrued interest of replacement of notes of $56,808 were nullified in full and were to be deemed to be zero, and be of no further force and effect. As a result, the Company recorded a gain on settlement of debt of $81,808.
Conversion
During the year ended December 31, 2021, the Company converted notes with principal amounts and accrued interest of $1,450,150 into shares of common stock. The corresponding derivative liability at the date of conversion of $392,703 was credited to additional paid in capital.
During the year ended December 31, 2020, the Company converted notes with principal amounts and accrued interest of $3,811,434 into shares of common stock. The corresponding derivative liability at the date of conversion of $10,548,012 was credited to additional paid in capital.
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
Convertible notes payable consists of the following:
Promissory Notes - Issued in fiscal year 2018
On December 31, 2019, the Company entered into an Amendment and Forbearance Agreement with note holders of the 2018 notes. Under this agreement, note holders agreed to forbear from enforcing its rights under the note with regard to certain possible events of default, and further agreed to amend the note as follows:
As a result of an amendment and forbearance agreement, the Company recognized the settlement of original debt and recorded loss on settlement of debt of $1,206,329 during the year ended December 31, 2019.
As of December 31, 2020, there were no outstanding notes that were issued in fiscal year 2018.
Promissory Notes - Issued in fiscal year 2019
During the year ended December 31, 2019, the Company issued a total of $739,000 of notes with the following terms:
The notes include original issue discounts and financing costs totaling to $63,000 and the Company received cash of $676,000.
As of December 31, 2020, there were no outstanding notes that were issued in fiscal year 2019.
Promissory Notes - Issued in fiscal year 2020
During the twelve months ended December 31, 2020, the Company issued a total of $2,466,500 of notes with the following terms:
| ● | Terms ranging from 5 months to 60 months. | |
| ● | Annual interest rates of 0% - 25%. | |
| ● | Convertible at the option of the holders at issuance date, after maturity date or 6 months after issuance date. | |
| ● | Conversion prices are typically based on the discounted (25% to 50% discount) average closing prices or lowest trading prices of the Company’s shares during various periods prior to conversion. Certain note has a fixed conversion price ranging from |
The Company determined that the conversion features, in the convertible notes, met the definition of a liability in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own Stock and therefore bifurcated the embedded conversion options once the notes become convertible and accounted for it as a derivative liability. The fair value of the conversion feature was recorded as a debt discount and amortized to interest expense over the term of the note.
The Company valued the conversion feature using the Binomial pricing model. The fair value of the derivative liability for all the notes that became convertible, including the notes issued in prior years, during the twelve months ended December 31, 2020 amounted to $10,854,214, and $947,175 of the value assigned to the derivative liability was recognized as a debt discount to the notes, while the balance of $9,907,039was recognized as a “day 1” derivative loss.
| F-36 |
As of December 31, 2020,2021, $1,526,000100,000 notes that were issued in fiscal year 2020 were outstanding.
Promissory Notes - Issued in fiscal year 2021
During the year ended December 31, 2021, the Company issued convertible notes of $1,696,999 for cash proceeds of $1,482,000 after deducting financing fee of $214,999 with the following terms;
| ● | Terms ranging from 90 days to 12 months. | |
| ● | Annual interest rates of 5% to 12%. | |
| ● | Convertible at the option of the holders after varying dates. | |
| ● | Conversion prices are typically based on the discounted (39% discount) average closing prices or lowest trading prices of the Company’s shares during 20 periods prior to conversion. | |
| ● | shares of common stock valued at $133,663 issued in conjunction with convertible notes. | |
| ● | warrants to purchase shares of common stock with an exercise price a range from $7.44 to 36.00 granted in conjunction with convertible notes. The term of warrant is 5 years from issue date. (Note 12) |
As of December 31, 2021, $1,607,857 notes that were issued in fiscal year 2021 were outstanding.
NOTE 10: DERIVATIVE LIABILITIES
The Company analyzed the conversion option for derivative accounting consideration under ASC 815, Derivatives and Hedging, and hedging, and determined that the instrument should be classified as a liability since the conversion option becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item.
The Company determined our derivative liabilities to be a Level 3 fair value measurement during the year based on management’s estimate of the expected future cash flows required to settle the liabilities, and used the Binomial pricing model to calculate the fair value as of December 31, 2020.2021. As of the end of year, at December 31, 20202021 there were no derivative liabilities. The Binomial model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note and warrant is estimated using the Binomial valuation model.
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
For the years ended December 31, 20202021 and, 2019,2020, the estimated fair values of the liabilities measured on a recurring basis are as follows:
SCHEDULE OF FAIR VALUE OF LIABILITIES MEASURED ON RECURRING BASIS
| Year Ended | Year Ended | Year ended | Year ended | |||||||||||||
| December 31, | December 31, | December 31, | December 31, | |||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Expected term | 0.02 - 5.00 years | 0.25 - 5.00 years | 0.48 - 5.00 years | 0.25 - 5.00 years | ||||||||||||
| Expected average volatility | 187%- 464 | % | 160%- 305 | % | 160%- 302 | % | 187%- 464 | % | ||||||||
| Expected dividend yield | 0 | 0 | - | - | ||||||||||||
| Risk-free interest rate | 0.01% - 1.57 | % | 1.55% - 2.50 | % | 0.04% - 1.24 | % | 0.01% - 1.57 | % | ||||||||
The following table summarizes the changes in the derivative liabilities during the years ended December 31, 20202021 and 2019:2020:
SCHEDULE OF CHANGES IN DERIVATIVE LIABILITIES
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||
| Derivative liability as of December 31, 2018 | $ | 12,447,109 | ||||||
| Addition of new derivatives recognized as debt discounts | 606,000 | |||||||
| Addition of new derivatives recognized as day-one loss | 1,544,785 | |||||||
| Derivative liabilities settled upon conversion of convertible note | (3,130,000 | ) | ||||||
| Reclassification from APIC to derivative due to tainted instruments | 167,544 | |||||||
| Reclassification to APIC from derivative due to not tainted instruments | (250,878 | ) | ||||||
| Change in derivative liabilities recognized as loss on derivative | (8,783,283 | ) | ||||||
| Derivative liability as of December 31, 2019 | $ | 2,601,277 | $ | 2,601,277 | ||||
| Derivative liability as of December 31, 2019 | $ | 2,601,277 | ||||||
| Addition of new derivatives recognized as debt discounts | 947,175 | 947,175 | ||||||
| Addition of new derivatives recognized as day-one loss | 9,907,039 | 9,907,039 | ||||||
| Derivative liabilities settled upon conversion of convertible note | (10,954,868 | ) | (10,954,868 | ) | ||||
| Change in derivative liabilities recognized as loss on derivative | (2,500,623 | ) | (2,500,623 | ) | ||||
| Derivative liability as of December 31, 2020 | $ | - | $ | - | ||||
| Addition of new derivatives recognized as debt discounts | 390,000 | |||||||
| Addition of new derivatives recognized as day-one loss | 559,939 | |||||||
| Derivative liabilities settled upon conversion of convertible note | (1,004,658 | ) | ||||||
| Change in derivative liabilities recognized as loss on derivative | 54,719 | |||||||
| Derivative liability as of December 31, 2021 | $ | - | ||||||
The aggregate gain (loss)loss on derivatives during the years ended December 31, 2021 and 2020 and 2019 was ($$7,406,416614,658) and $7,238,4987,406,416, respectively.
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
NOTE 11: NOTES PAYABLE
Notes payable consists of the following:
SCHEDULE OF NOTES PAYABLE
| December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||||||||
| 2020 | 2019 | Maturity | Interest Rate | 2021 | 2020 | Maturity | Interest Rate | |||||||||||||||||||||
| 10% Promissory note - originated in October 2019 | $ | 25,060 | $ | 25,060 | Due on demand | 10.0 | % | $ | - | $ | 25,060 | Due on demand | 10.0 | % | ||||||||||||||
| Promissory note - originated in October 2019 | 25,060 | 25,060 | Due on demand | 10.0 | % | - | 25,060 | Due on demand | 10.0 | % | ||||||||||||||||||
| Promissory note - originated in November 2019 | - | 115,000 | Due on August 19, 2020 | 10.0 | % | |||||||||||||||||||||||
| Promissory note - originated in April 2020 | 10,000 | - | Due on demand | NaN interest | - | 10,000 | Due on demand | No interest | ||||||||||||||||||||
| Paycheck Protection Program Promissory note - originated in April 2020 (1) | 339,000 | - | 2 years | 1.0 | % | - | 339,000 | 2 years | 1.0 | % | ||||||||||||||||||
| Economic Injury Disaster Loan - originated in May 2020 (2) | 150,000 | - | 30 years | 3.75 | % | 500,000 | 150,000 | 30 years | 3.75 | % | ||||||||||||||||||
| Promissory note - originated in June 2020 | 43,356 | - | $3,942.86 daily payment | 16.0 | % | - | 43,356 | $3,942.86 daily payment | 16.0 | % | ||||||||||||||||||
| Promissory note - originated in September 2020 | 80,730 | - | $2,873.89 monthly payment for 36 months | 14.0 | % | 50,456 | 80,730 | $2,873.89 monthly payment for 36 months | 14.0 | % | ||||||||||||||||||
| Promissory note - originated in October 2020 | 158,169 | - | $2,293.31 daily payment | 25.0 | % | - | 158,169 | $2,293.31 daily payment | 25.0 | % | ||||||||||||||||||
| Promissory note - originated in November 2020 | 170,886 | - | $4,497.00 daily payment | 25.0 | % | - | 170,886 | $4,497.00 daily payment | 25.0 | % | ||||||||||||||||||
| Promissory note - originated in November 2020 | 394,846 | - | $6,999.00 daily payment | 25.0 | % | - | 394,846 | $6,999.00 daily payment | 25.0 | % | ||||||||||||||||||
| Promissory note - originated in December 2020 | 50,030 | - | $1,854.41 monthly payment for 36 months | 8.0 | % | 33,039 | 50,031 | $1,854.41 monthly payment for 36 months | 8.0 | % | ||||||||||||||||||
| Promissory note - originated in January 2021 | 48,583 | - | $2,675.89 monthly payment for 36 months | 18.0 | % | |||||||||||||||||||||||
| Promissory note - originated in February 2021 | 1,328,848 | - | 5 years | 4.0 | % | |||||||||||||||||||||||
| Promissory note - originated in April 2021 | 832,000 | - | 1 year | 12 | % | |||||||||||||||||||||||
| Promissory note - originated in April 2021 | - | - | $8,284.92 daily payment | 24 | % | |||||||||||||||||||||||
| Promissory note - originated in July 2021 | 282,000 | - | 1 year | 12 | % | |||||||||||||||||||||||
| Promissory note - originated in August 2021 | - | - | $4,842.5 daily payment | 49 | % | |||||||||||||||||||||||
| Promissory note - originated in September 2021 | 55,576 | - | $1,383.56 monthly payment for 60 months | 28 | % | |||||||||||||||||||||||
| Promissory note - originated in December 2021 | 406,300 | - | $20,050 weekly payment | 49 | % | |||||||||||||||||||||||
| Promissory note - originated in December 2021 | 241,714 | - | $10,071.45 weekly payment | 4.94 | % | |||||||||||||||||||||||
| Promissory note - originated in December 2021 | 189,975 | - | $2,793.75 daily payment | 7 | % | |||||||||||||||||||||||
1,447,137 | 165,120 | 3,968,491 | 1,447,137 | |||||||||||||||||||||||||
| Less debt discount and debt issuance cost | (289,332 | ) | - | (476,727 | ) | (289,332 | ) | |||||||||||||||||||||
1,157,805 | 165,120 | 3,491,764 | 1,157,805 | |||||||||||||||||||||||||
| Less current portion of promissory notes payable | 585,310 | - | 1,720,777 | 585,310 | ||||||||||||||||||||||||
| Long-term promissory notes payable | $ | 572,495 | $ | 165,120 | $ | 1,770,989 | $ | 572,495 | ||||||||||||||||||||
| (1) | In response to the Coronavirus (COVID-19) pandemic, the US Government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. The CARES Act provides fast and direct economic assistance for entrepreneurs and small businesses through the US Small Business Administration (“SBA”). |
During the period,year ended 2020, the Company received a loan issued under the CARES Act program - Paycheck Protection Program (“PPP”). This loan program provides small businesses with funds to pay up to 8eight (8) weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.
| F-38 |
Under the PPP, the Company may apply to have certain amounts forgiven under the direction of the Administrator of the SBA providing that the Company satisfies certain criteria. Repayment of the PPP loan will commence earlier of when the SBA remits the forgiveness amount to the lender or the Maturity Date.
During the year ended December 31, 2021, PPP loan was fully forgiven.
| (2) | The Company received an advance under the Economic Injury Disaster Loan (EIDL) program. |
As the Company received an EIDL advance and a PPP loan, the EIDL advance portion will be applied against the PPP forgiveness amount as repayment to the SBA upon approval of the PPP forgiveness application.
During the yearyears ended December 31, 2021 and 2020, the Company recognized interest expense of $260,155 and $34,331, and amortization of debt discount, included in interest expense of $2,082,875 and $534,535, respectively.
During the years ended December 31, 20202021 and 2019,2020, the Company issued a total of $4,375,8646,094,051 and $215,1202,971,864, less discount of $823,8681,716,825 and $0823,868 and repaid $1,689,8454,577,578 and $650,0001,689,846, respectively.
During the year ended December 31, 2021, debts and accrued interest of $413,657 were forgiven and the Company recorded a gain on settlement of debt.
NOTE 12: CAPITAL STOCK AND REVERSE STOCK SPLIT
Changes in Authorized Shares
On October 14, 2019, the Company filed an amendment to its Articles of Incorporation to effect a 1-for-750 reverse stock split of its issued and outstanding shares of common and preferred shares, each with $ par value. All per share amounts and number of shares, in the consolidated financial statements and related notes have been retroactively adjusted to reflect the reverse stock split.
On March 5, 2020, the Company amended its Articles of Incorporation to increase the number of shares of authorized common stock to .
On April 15, 2020, the Company amended its Articles of Incorporation to increase the number of shares of authorized common stock to .
On August 17, 2020, the Company amended its Articles of Incorporation to increase the number of shares of authorized common stock to .
On November 25, 2020 the Company filed a Certificate of Designation to authorize and create its Series B Preferred shares, consisting of shares, $ par value.
On December 15, 2020 the Company amended its Articles of Incorporation to increase the number of shares of authorized common stock to .
On July 1, 2021, we effected a 1-for-2,000 reverse stock split of our issued and outstanding common stock.
On March 7, 2022, the Company filed an amendment to its Articles of Incorporation to effect a 1-for-8 reverse stock split of its issued and outstanding shares of common and preferred shares, each with $ par value. All per share amounts and number of shares, in the consolidated financial statements and related notes have been retroactively adjusted to reflect the reverse stock split.
Preferred Stock
As of December 31, 2020,2021, the Company is authorized to issue shares of preferred stock with a par value of $, of which shares have been designated as Series A, and shares have been designated as Series B.
As of December 31, 2021 and 2020, and December 31, 2019, and shares of Series A were issued and outstanding, respectively.outstanding. Each share of Series A was (i) convertible into shares of common stock, and (ii) entitled to vote 15,000 shares of common stock on all matters submitted to a vote by shareholders voting common stock. stock. All issued and outstanding shares of Series A Preferred Stock are held by Mr. Jason Remillard, sole director of the Company. During the year ended December 31, 2020, the Company issued a total of shares of Series A preferred stock to Mr. Remillard.
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
As of December 31, 2021 and 2020, and December 31, 2019, and -- shares of Series B were issued and outstanding, respectively. Each share of Series B (i) has a stated value of Ten Dollars ($10.00) per share; (ii) are convertible into common stock at a price per share equal to sixty one percent (61%) of the lowest price for the Company’s common stock during the twenty (20) day of trading preceding the date of the conversion; (iii) earn dividends at the rate of nine percent (9%(9%) per annum; and, (iv) generally have no voting rights.rights.
During the year ended December 31, 2021, the Company issued a total of shares of Series B preferred stock as follows
| ● | shares for $, less $ financing fees. | |
| ● | shares in exchange for convertible note and accrued dividend of $65,600. |
During the year ended December 31, 2020, the Company issued a total of shares of Series B preferred stock to Geneva Roth Remark Holdings, Inc.for $50,000, less $3,000 financing fee.
| F-39 |
During the years ended December 31, 2021 and 2020, the Company recorded accrued dividend of $40,149 and $484, and amortization of debt discount, included in interest expense of $345,188 and $203, respectively.
During the year ended December 31, 2021, shares of series B preferred stock were converted into shares of our common stock and the Company redeemed shares of series B preferred stock for $63,999.
Common Stock
As of December 31, 2020,2021, the Company is authorized to issue 1,800,000,000125,000,000 shares of common stock with a par value of $. All shares have equal voting rights, are non-assessable, and have one vote per share. The total number of shares of Company common stock issued and outstanding as of December 31, 2021 and 2020, respectively, was andshares, respectively.
On January 6, 2022, the Company reduced the number of authorized shares of common stock to shares of common stock.
During the year ended December 31, 2019, respectively, was 522,045 and shares, respectively.2021, the Company issued common stock as follows:
| ● | shares issued for conversion of debt; | |
| ● | shares issued for cash of $, less financing cost of $10,000, less an additional financing discount of $143,199; | |
| ● | shares issued for service; | |
| ● | 1,116 shares issued upon the cash-less exercise of warrants; | |
| ● | shares issued for conversion of Series B preferred stock; | |
| ● | shares issued as a loan fee in connection with the issuance of promissory notes; and |
During the year ended December 31, 2020, the Company issued common stock as follows,
| ● | shares issued for conversion of debt | |
| ● | ||
| shares issued for the settlement of stock subscription | ||
| ● | shares issued pursuance to S-8, of which shares were issued to Mr. Remillard, who has not sold any of his shares (common or preferred) | |
| ● | shares issued for compensation to our former CFO (who has since sold all of his shares) | |
| ● | ||
| ● | shares issued for the settlement of stock payable of acquisition DataExpress™ | |
| ● | shares issued for asset purchase | |
| ● | shares issued for service |
Warrants
The Company identified conversion features embedded within warrants issued during the periodyear ended December 31, 2020. The Company has determined that the conversion feature of the Warrants represents an embedded derivative since the conversion price includes a reset provision which could cause adjustments upon conversion. During the year ended December 31, 2020, 16521 warrants were granted, for a period of five years from issuance, at price of $1,0008,000 per share. However, as of September 30, 2020, 16 of these original warrants, as reset, were completely cancelled and are all null and void in all respects as part of the consideration for the issuance of the Exchange Note.
As a result of the reset features, the warrants increased by 183,35322,919 for the periodyear ended December 31, 2020, and the total warrants exercisable into shares of common stock at a weighted average exercise price of $ per share as of December 31, 2020. The reset feature of warrants was effective at the time that a separate convertible instrument with lower exercise price was issued. We accounted for the issuance of the Warrants as a derivative.
During the year ended December 31, 2020, the Company entered into an agreement with three existing investors in the Company (the “Holders”), each of which was the holder of warrants issued the Company. The total number of warrants (collectively, the “Warrants”) held by the Holders totaled 165,1252. The Company and the Holders agreed to exchange the Warrants for three newly issued convertible promissory notes. As a result of the exchange, the Company recorded loss on settlement of $100,000.
| F-40 |
On December 11, 2020, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Triton Funds LP, a Delaware limited partnership (“Triton”). Pursuant to the Purchase Agreement, subject to certain conditions set forth in the Purchase Agreement, Triton is obligated to purchase up to One Million Dollars ($1,000,000) of the Company’s common stock from time-to-time. The Company also granted to Triton warrants to purchase 50,0006,250 shares of the Company’s Common Stock. The exercise price for the warrants is $20160 per share, and may be exercised at any time, in whole or in part, prior to December 11, 2025. The Warrant Agreement provides for certain adjustments that may be made to the exercise price and the number of shares issuable upon exercise due to future corporate events. The Warrant Agreement also contains a limited cashless exercise feature, providing for the cashless exercise of 10,0001,250 shares only upon the Company’s failure to secure the effectiveness of the Registration Statement, which is to include all shares under the Warrant Agreement.
During the year ended December 31, 2021, the Company issued the following warrants: (i) to acquire shares of the Company’s common stock pursuant at an exercise price of $120, with a cashless exercise option; (ii) to acquire shares of the Company’s common stock at an exercise price of $120, exercisable only in the event of a default under that certain Senior Secured Promissory Note issued on 23 April 2021 in the original principal amount of $832,000; (iii) to acquire shares of the Company’s common stock at an exercise price of $36, exercisable only in the event of a default under that certain Senior Secured Promissory Note issued on July 27, 2021 in the original principal amount of $282,000; (iv) to acquire shares of the Company’s common stock at an exercise price of $36, exercisable only in the event of a default under that certain Convertible Promissory Note issued on September 28, 2021 in the original principal amount of $282,000; (v) to acquire shares of the Company’s common stock at an exercise price of $36, exercisable only in the event of a default under that certain Convertible Promissory Note issued on October 19, 2021 in the original principal amount of $444,444 and, (vi) to acquire shares of the Company’s common stock at an exercise price of $7.44, exercisable only in the event of a default under that certain Convertible Promissory Note issued on December 21, 2021 in the original principal amount of $555,555.
A summary of activity during the period ended December 31, 20202021 follows:
SUMMARYSCHEDULE OF WARRANTS ACTIVITY
| Warrants Outstanding | ||||||||
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
| Outstanding, December 31, 2018 | $ | |||||||
| Granted | ||||||||
| Reset feature | ||||||||
| Exercised | ||||||||
| Forfeited/canceled | ||||||||
| Outstanding, December 31, 2019 | $ | |||||||
| Outstanding, December 31, 2019 | $ | |||||||
| Granted | ||||||||
| Reset feature | ||||||||
| Exercised | ) | |||||||
| Forfeited/canceled | ) | |||||||
| Outstanding, December 31, 2020 | $ | |||||||
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
| Outstanding, December 31, 2019 | 117 | $ | 7,862.34 | |||||
| Granted | 6,271 | 227.20 | ||||||
| Reset feature | 22,919 | 81.60 | ||||||
| Exercised | (2,416 | ) | 81.60 | |||||
| Forfeited/canceled | (20,641 | ) | 51.20 | |||||
| Outstanding, December 31, 2020 | 6,250 | $ | 20.00 | |||||
| Granted | 141,721 | 22.18 | ||||||
| Reset feature | - | - | ||||||
| Exercised | (1,129 | ) | 5.80 | |||||
| Forfeited/canceled | - | - | ||||||
| Outstanding, December 31, 2021 | 146,842 | $ | 27.86 | |||||
The following table summarizes information relating to outstanding and exercisable warrants as of December 31, 2020:2021:
SCHEDULE OF OUTSTANDING AND EXERCISABLE WARRANTS
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||
| Number of | Weighted Average Remaining Contractual life | Weighted Average | Number of | Weighted Average | ||||||||||||
| Shares | (in years) | Exercise Price | Shares | Exercise Price | ||||||||||||
| $ | $ | |||||||||||||||
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||||
Number of Shares | Weighted Average Remaining Contractual life | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | ||||||||||||||
| $ | 160.00 | - | $ | - | ||||||||||||||
| $ | 120.00 | - | $ | - | ||||||||||||||
| $ | 46.40 | - | $ | - | ||||||||||||||
| $ | 36.00 | - | $ | - | ||||||||||||||
| $ | 36.00 | - | $ | - | ||||||||||||||
| $ | 25.60 | - | $ | - | ||||||||||||||
| $ | 7.44 | - | $ | - | ||||||||||||||
| F-41 |
NOTE 13: INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows as of December 31:
SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES
| December 31, | December 31, | December 31, | December 31, | |||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Non-operating loss carryforward | $ | 4,014,000 | $ | 3,016,000 | $ | 4,685,000 | $ | 4,014,000 | ||||||||
| Valuation allowance | (4,014,000 | ) | (3,016,000 | ) | (4,685,000 | ) | (4,014,000 | ) | ||||||||
| Net deferred tax asset | $ | - | $ | - | $ | - | $ | - | ||||||||
The Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets. During 20202021 the valuation allowance increased by $998,000671,000. The Company has net operating and economic loss carry-forwards of approximately $15,754,00019,072,000 available to offset future federal and state taxable income.
A reconciliation between expected income taxes, computed at the federal income tax rate of 21% applied to the pretax accounting loss, and our blended state income tax rate of 2.0%, and the income tax net expense included in the consolidated statements of operations for the years ended December 31, 20202021 and 20192020 is as follows:
SCHEDULE OF STATUTORY FEDERAL INCOME TAX RATE LOSSES BEFORE INCOME TAX
| 2021 | 2020 | |||||||||||||||
| Year Ended | Years Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Loss for the year | $ | (13,907,185 | ) | $ | (607,371 | ) | $ | (6,475,154 | ) | $ | (13,907,185 | ) | ||||
| Income tax (recovery) at statutory rate | $ | (2,921,000 | ) | $ | (128,000 | ) | $ | (1,360,000 | ) | $ | (2,921,000 | ) | ||||
| State income tax expense, net of federal tax effect | (270,000 | ) | (12,000 | ) | (130,000 | ) | (270,000 | ) | ||||||||
| Permanent difference and other | 2,201,000 | (1,100,000 | ) | 819,000 | 2,201,000 | |||||||||||
| Change in valuation allowance | 998,000 | 1,240,000 | 671,000 | 990,000 | ||||||||||||
| Income tax expense per books | $ | - | $ | - | $ | - | $ | - | ||||||||
The effective tax rate of 0% differs from our statutory rate of 21% primarily due to the effect of non-deductible income and expenses. Tax returns for the years ended 2013 – 2020,2021, are subject to review by the tax authorities.
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
Stock Options
During the years ended December 31, 20202021 and 2019,2020, the Company granted options for the purchase of the Company’s common stock to certain employees, consultants and advisors as consideration for services rendered. The terms of the stock option grants are determined by the Company’s Board of Directors. The Company’s stock options generally vest upon the one-year anniversary date of the grant and have a maximum term of .
| F-42 |
SCHEDULE OF STOCK OPTION ACTIVITY
| Weighted-Average | ||||||||
| Options Outstanding | Exercise Price | |||||||
| Balance as of December 31, 2019 | 24 | $ | 29,760.00 | |||||
| Grants | 782 | 398.46 | ||||||
| Exercised | (8 | ) | 33,833.25 | |||||
| Cancelled | (63 | ) | 1,824.72 | |||||
| Balance as of December 31, 2020 | 735 | $ | 775.93 | |||||
| Grants | 1,386 | 304.44 | ||||||
| Exercised | - | - | ||||||
| Cancelled | - | - | ||||||
| Balance as of December 31, 2021 | 2,121 | $ | - | |||||
| Options Outstanding | Weighted-Average Exercise Price | |||||||
| Balance as of December 31, 2018 | $ | |||||||
| Grants of stock options | ||||||||
| Cancelled stock options | ) | |||||||
| Balance as of December 31, 2019 | $ | |||||||
| Balance as of December 31, 2019 | $ | |||||||
| Grants | ||||||||
| Exercised | ) | |||||||
| Cancelled | ) | |||||||
| Balance as of December 31, 2020 | $ | |||||||
The weighted average grant date fair value of stock options granted during the yearyears ended December 31, 20202021 and 20192020 was $ and $, respectively. The total fair value of stock options that granted during the year ended December 31, 20202021 and 20192020 was approximately $ and $, respectively. The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions for stock options granted during the year ended December 31, 20202021 and 2019:2020:
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Expected term (years) | ||||||||||||||||
| Expected stock price volatility | % | % | 296.25 | % | 316.43 | % | ||||||||||
| Weighted-average risk-free interest rate | % | % | 0.62 | % | 0.40 | % | ||||||||||
| Expected dividend | $ | $ | $ | 0.00 | $ | 0.00 | ||||||||||
Volatility is a measure of the amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company estimates expected volatility giving primary consideration to the historical volatility of its common stock. The risk-free interest rate is based on the published yield available on U.S. Treasury issues with an equivalent term remaining equal to the expected life of the stock option. The expected lives of the stock options represent the estimated period of time until exercise or forfeiture and are based on the simplified method of using the mid-point between the vesting term and the original contractual term.
SCHEDULE OF STOCK OPTIONS VESTED AND EXPECTED TO VEST
| Weighted-Average | ||||||||||||||||||||||||
| Weighted-Average Number of | Remaining Contractual Life | Weighted- Average | Number of | Remaining Contractual Life | Weighted-Average | |||||||||||||||||||
| Options | (In Years) | Exercise Price | Options | (In Years) | Exercise Price | |||||||||||||||||||
| Outstanding | $ | 2,121 | $ | 467.76 | ||||||||||||||||||||
| Exercisable | $ | 344 | $ | 1,368.32 | ||||||||||||||||||||
| Expected to vest | $ | 1,777 | $ | 293.51 | ||||||||||||||||||||
As of December 31, 20202021 and December 31, 2019,2020, there was $ and $, respectively, of total unrecognized compensation cost related to non-vested stock-based compensation arrangements which is expected to be recognized within the next year.
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
Restricted Stock Awards
During the years ended December 31, 20202021 and 2019,2020, the Company issued restricted stock awards for shares of common stock which have been reserved for the holders of the awards. Restricted stock awards were issued to certain consultants and advisors as consideration for services rendered. The terms of the restricted stock units are determined by the Company’s Board of Directors. The Company’s restricted stock shares generally vest over a period of and have a maximum term of .
SCHEDULE OF RESTRICTED STOCK ACTIVITY
| Weighted-Average | ||||||||
| Shares | Fair Value | |||||||
| Balance as of December 31, 2019 | 32 | 15,449.60 | ||||||
| Shares of restricted stock granted | 892 | 253.15 | ||||||
| Exercised | - | - | ||||||
| Cancelled | (1 | ) | 9,600.00 | |||||
| Balance as of December 31, 2020 | 923 | 748.89 | ||||||
| Shares of restricted stock granted | 447 | 413.33 | ||||||
| Exercised | - | - | ||||||
| Cancelled | - | - | ||||||
| Balance as of December 31, 2021 | 1,370 | 639.22 | ||||||
| Weighted-Average | ||||||||
| Shares | Fair Value | |||||||
| Balance as of December 31, 2018 | $ | |||||||
| Shares of restricted stock granted | ||||||||
| Exercised | ) | |||||||
| Cancelled | ) | |||||||
| Balance as of December 31, 2019 | ||||||||
| Balance as of December 31, 2019 | ||||||||
| Shares of restricted stock granted | ||||||||
| Exercised | ||||||||
| Cancelled | ) | |||||||
| Balance as of December 31, 2020 | ||||||||
SCHEDULE OF RESTRICTED STOCK AWARD
| December 31, | December 31, | December 31, | December 31, | |||||||||||||
| Number of Restricted Stock Awards | 2020 | 2019 | 2021 | 2020 | ||||||||||||
| Vested | 1,370 | 29 | ||||||||||||||
| Non-vested | - | 894 | ||||||||||||||
As of December 31, 20202021 and December 31, 2019,2020, there was $ and $, respectively, of total unrecognized compensation cost related to non-vested stock-based compensation, which is expected to be recognized over the next year.
NOTE 15:INTEREST EXPENSE
For the years ended December 31, 2021 and 2020, the Company recorded interest expense as follows:
SUMMARY OF INTEREST EXPENSE
| Year ended | Year ended | |||||||
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Interest expense - convertible notes | $ | 131,623 | $ | 274,857 | ||||
| Interest expense - notes payable | 260,155 | 34,331 | ||||||
| Interest expense - notes payable - related party | 9,992 | 35,096 | ||||||
| Finance lease | 15,967 | 22,892 | ||||||
| Other | 10,031 | 37,126 | ||||||
| Amortization of debt discount | 2,906,645 | 2,110,645 | ||||||
| Total Interest Expense | $ | 3,334,413 | $ | 2,514,947 | ||||
NOTE 16: RELATED PARTY TRANSACTIONS
Jason Remillard is our Chief Executive Officer and sole director. Through his ownership of Series A Preferred Shares, Mr. Remillard has voting control over all matters to be submitted to a vote of our shareholders.
In January 2018 the Company acquired substantially all of the assets of Myriad Software Productions, LLC, which is owned 100% by Mr. Remillard. Those assets were comprised of the software program known as ClassiDocs, and all intellectual property associated therewith. This acquisition changed the Company’s status to no longer being a “shell” under applicable securities rules. In consideration for the acquisition, the Company agreed to a purchase price of $1,500,000 comprised of: (i) $50,000 paid at closing; (ii) $250,000 in the form of our promissory note; and (iii) $1,200,000 in shares of our common stock, valued as of the closing, which equated to shares of our common stock. The shares were issued in the form of shares of the Company’s Series A preferred stock as part of the consideration under the Share Settlement Agreement dated August 14, 2020.
On September 16, 2019, the Company entered into an Asset Purchase Agreement with DMBGroup, LLC, as discussed in Note 4.LLC. Amounts owed to DMBGroup, LLC including the note payable of $940,000 and member loans of $97,689 were recorded as amounts due to a related party. During the year ended December 31, 2021 and 2020, the Company repaid note payable of $281,638 and $458,275 including interest expense of $9,992 and $35,096., respectively. As of December 31, 2021 and 2020, and December 31, 2019, the companyCompany had recorded a liability to DMBGroup totaling $405,382123,745 and $828,561405,382, respectively.
During the year ended December 31, 2021, the Company borrowed $231,150 from our CEO, our CEO paid operating expenses of $135,793 on behalf of the Company and the Company repaid $399,169 to our CEO. During the year ended December 31, 2020, our CEO paid operating expenses of $299,173 on behalf of the Company and the Company repaid $303,079 to our CEO. During the year ended December 31, 2019, the Company borrowed $12,900 from our CEO and repaid $162,495, and our CEO paid operating expenses of $137,264 on behalf of the Company.
| F-44 |
��
During the year ended December 31, 2020, our CEO repaid $135,000 to purchase convertible note of $81,000 and a prepayment penalty of $54,000. As a result, the Company recorded $54,000 as loss on settlement of debt.
During the year ended December 31, 2020 we issued to our CEO a total of shares of Series A preferred stock.
As of December 31, 20202021 and December 31, 2019,2020, the Company had due to related party of $561,230247,366 and $1,103,314561,230, respectively, which arose from the DMB transaction to acquire DataExpress™.
DATA443 RISK MITIGATION, INC.NOTE 17: SUBSEQUENT EVENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
NOTE 16: SUBSEQUENT RETROSPECTIVE STOCK SPLIT
In connection with the Company’s application to list its common stock on Nasdaq, on June 10, 2021, the Company filed a Certificate of AmendmentManagement evaluated all additional events subsequent to the Articles of Incorporation (the “Certificate of Amendment”) which servedbalance sheet date through to (i) reduceMarch 31, 2022, the number of authorized shares of common stock from 1.8 billion (1,800,000,000) to 1 billion (1,000,000,000); and, (ii) effect a reverse stock split (the “Reverse Stock Split”) of its issued common stock in a ratio of 1-for-2,000. The preferred stock of the Company was not changed. The 1-for-2,000 Reverse Stock split was processed by FINRA and became effective at the start of trading on July 1, 2021. As a result of the Reverse Stock Split, every 2,000 shares of the Company’s issued and outstanding common stock, par value $0.001 per share, were converted into one (1) share of common stock, par value $0.001 per share. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would be entitled to receive fractional shares because they hold a number of pre-Reverse Stock Split shares of the Company’s common stock not evenly divisible by 2,000 had the number of post-Reverse Stock Split shares of the Company’s common stock to which they are entitled rounded up to the nearest whole number of shares of the Company’s common stock. No stockholders received cash in lieu of fractional shares.
All share and per share amounts (other than authorized shares) indate the consolidated financial statements were available to be issued, and related notes thereto have been retroactively adjusted for all periods presented to give effect todetermined the Reverse Stock Split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.
NOTE 17: SUBSEQUENT EVENTSfollowing items:
Subsequent to December 31, 2020, the following transactions occurred:
| ● | ||
| ● | The Company fully redeemed all outstanding shares of Series B Preferred stock for $487,730 – leaving outstanding Preferred B shares issued as of the time of this report | |
| ● | The Company issued convertible notes a total of $959,313 with shares of common stock, which the term of notes is 1 year and annual interest rate is 9%. Notes are convertible at the option of the holders after 6 months of issuance date of the note and conversion price are Conversion prices are based on the discounted (39% or 20% discount) lowest trading prices of the Company’s shares during 20 periods prior to conversion. Certain note has a floor price of $0.01. | |
| ● | On January | |
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
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DATA443 RISK MITIGATION, INC.
2,891,566 Units
Each Unit Consisting of
One Share of Common Stock and
One Warrant to Purchase One Share of Common Stock
Prospectus
, 20212022
Sole Book Running Manager
MAXIM GROUP LLC
_______, 2021
DATA443 RISK MITIGATION, INC.
DAWSON JAMES SECURITIES, INC.
Through and including , 20212022 (90-days after the date of this Prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses paid or payable by us in connection with the issuance and distribution of the securities being registered. We will bear all of the below fees and expenses, which are inclusive of the fees and expenses incidental to the registration of the Selling Stockholder Shares. All amounts shown are estimates, except for the SEC registration fee and the FINRA filing fee.
Amount Paid or to be Paid | Amount Paid or to be Paid | |||||||
| SEC registration fee | $ | 3,115.90 | $ | 3,115.90 | ||||
| Nasdaq listing fees | 50,000 | 50,000 | ||||||
| FINRA filing fee | 10,000 | 10,000 | ||||||
| Legal fees expenses | 250,000 | 250,000 | ||||||
| Accounting fees and expenses | 60,000 | 60,000 | ||||||
| Transfer agent and warrant agent fees expenses | 10,000 | |||||||
| Transfer agent and Warrant Agent fees expenses | 10,000 | |||||||
| Miscellaneous expenses | 5,000 | 5,000 | ||||||
| Total | $ | 388,115.90 | $ | 388,115.90 | ||||
Item 14. Indemnification of Directors and Officers
Under our Amended and Restated Bylaws, every person who was or is a party to, or is threatened to be made a party to, or is involved in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, by reason of the fact that he is or was a director or officer of the Registrant, or is or was serving at the request of the Registrant as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust, or other enterprise, shall be indemnified and held harmless to the fullest extent legally permissible under the laws of the State of Nevada from time to time against all expenses, liability, and loss (including attorneys’ fees judgments, fines, and amounts paid or to be paid in settlement) reasonably incurred or suffered by him in connection therewith. Such right of indemnification shall be a contract right, which may be enforced in any manner desired by such person. The expenses of officers and directors incurred in defending a civil or criminal action, suit, or proceeding must be paid by the Registrant as they are incurred and in advance of the final disposition of the action, suit, or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by us. Such right of indemnification shall not be exclusive of any other right which such directors, officers, or representatives may have or hereafter acquire, and, without limiting the generality of such statement, they shall be entitled to their respective rights of indemnification under any bylaw, agreement, vote of shareholders, provision of law, or otherwise.
Without limiting the application of the foregoing, our board of directors may adopt bylaws from time to time with respect to indemnification, to provide at all times the fullest indemnification permitted by the laws of the State of Nevada, and may cause the Registrant to purchase and maintain insurance on behalf of any person who is or was a director or officer of the Registrant, or is or was serving at the request of the Registrant as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust, or other enterprise against any liability asserted against such person and incurred in any such capacity or arising out of such status, whether or not the Registrant would have the power to indemnify such person. The indemnification provided shall continue as to a person who has ceased to be a director, officer, employee, or agent, and shall inure to the benefit of the heirs, executors and administrators of such person.
| II-1 |
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
We have not entered into any agreements with our directors and executive officers that require us to indemnify these persons against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred (including expenses of a derivative action) in connection with any proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that the person is or was a director or officer of the Registrant or any of our affiliated enterprises. We have an insurance policy covering our officers and directors with respect to certain liabilities, including liabilities arising under the Securities Act, or otherwise.
Item 15. Recent Sales of Unregistered Securities
The following information represents securities sold by the Company withinDuring the past three years, we have issued securities in the following transactions, each of which were not registered underwas exempt from the registration requirements of the Securities Act. Included are salesExcept for the shares of reacquiredour common stock that were issued upon the conversion of convertible indebtedness, all of the below-referenced securities as well as new issues, securitieswere issued in exchange for property, services, or other securities, and new securities resulting from the modification of outstanding securities. The information provided below does not give effectpursuant to the proposed reverse stock split describedexemption from registration under Section 4(a)(2) of the Securities Act and are deemed to be restricted securities for purposes of the Securities Act. There were no underwriters or placement agents employed in connection with any of these transactions. Use of the accompanying prospectus.exemption provided in Section 4(a)(2) for transactions not involving a public offering is based on the following facts:
| ● | ||
| ● | ||
| ● | ||
| ● | ||
The shares of our common stock that were issued upon the conversion of our preferred stock and convertible indebtedness were issued pursuant to the exemption from registration under Section 3(a)(9) of the Securities Act and are deemed to be restricted securities for purposes of the Securities Act.
On June 10, 2021, we effected a reverse stock split of its issued common stock in a ratio of 2000-for-1(the “First Reverse Stock Split”). On March 7, 2022, we effected a reverse stock split of its issued common stock in a ratio of 8-for-1 (the “Second Reverse Stock Split” and, together with the First Reverse Stock Split, the “Reverse Stock Splits”). The number of shares of common stock issued or issuable in each transaction, and the price per share of common stock in each transaction, has been adjusted to give effect to the Reverse Stock Splits.
| II-2 |
| ● | On April 15, 2019, |
| ● | On June 12, 2019, |
| ● | On December 19, 2019, |
| ● | On January 15, 2019, | |
| ● | On September 16, 2019, |
| ● | Effective December 31, 2019, | |
| ● | Effective December 31, 2019, |
| ● | Effective December 31, 2019, | |
| ● | On January 3, 2020, | |
| ● | On January 6, 2020, | |
| ● | On January 13, 2020, | |
| ● | On January 17, 2020, | |
| ● | On January 21, 2020, | |
| ● | On January 27, 2020, |
| ● | On January 29, 2020, | |
| ● | On February 3, 2020, | |
| ● | On February 11, 2020, | |
| ● | On February 12, 2020, | |
| ● | On February 21, 2020, | |
| ● | On March 02, 2020, | |
| ● | On March 05, 2020, | |
| ● | On March 10, 2020, | |
| ● | On March 16, 2020, | |
| ● | On March 18, 2020, | |
| ● | On March 19, 2020, | |
| ● | On March 20, 2020, |
| ● | On March 26, 2020, | |
| ● | On March 27, 2020, | |
| ● | On April 01, 2020, | |
| ● | On April 02, 2020, | |
| ● | On April 02, 2020, | |
| ● | On April 03, 2020, | |
| ● | On April 14, 2020, | |
| ● | On April 16, 2020, | |
| ● | On April 17, 2020, | |
| ● | On April 22, 2020, |
| II-4 |
| ● | On April 27, 2020, | |
| ● | On April 28, 2020, | |
| ● | On April 28, 2020, | |
| ● | On May 02, 2020, | |
| ● | On May 06, 2020, we converted $10,080 of | |
| ● | On May 06, 2020, | |
| ● | On May 07, 2020, |
| ● | On May 12, 2020, | |
| ● | On May 14, 2020, | |
| ● | On May 19, 2020, | |
| ● | On May 21, 2020, | |
| ● | On May 26, 2020, | |
| ● | On May 26, 2020, | |
| ● | On May 26, 2020, | |
| ● | On May 28, 2020, | |
| ● | On May 29, 2020, | |
| ● | On June 02, 2020, | |
| ● | On June 04, 2020, | |
| ● | On June 05, 2020, | |
| ● | On June 09, 2020, | |
| ● | On June 10, 2020, | |
| ● | On June 10, 2020, | |
| ● | On June 11, 2020, |
| ● | On June 12, 2020, | |
| ● | On June 12, 2020, |
| II-5 |
| ● | On June 16, 2020, we converted $24,900 of | |
| ● | On June 16, 2020, | |
| ● | On June 17, 2020, | |
| ● | On June 19, 2020, | |
| ● | On June 23, 2020, | |
| ● | On June 23, 2020, | |
| ● | On June 24, 2020, | |
| ● | On June 24, 2020, | |
| ● | On June 25, 2020, | |
| ● | On June 25, 2020, | |
| ● | On June 26, 2020, | |
| ● | On June 29, 2020, | |
| ● | On July 01, 2020, |
| ● | Effective July 01, 2020, | |
| ● | Effective July 01, 2020, | |
| ● | Effective July 01, 2020, | |
| ● | Effective July 01, 2020, | |
| ● | Effective July 01, 2020, |
| II-6 |
| ● | On July 01, 2020, | |
| ● | On July 06, 2020, | |
| ● | On July 10, 2020, |
| ● | On July 10, 2020, | |
| ● | On July 16, 2020, | |
| ● | On July 17, 2020, | |
| ● | On July 20, 2020, | |
| ● | On July 21, 2020, | |
| ● | On July 22, 2020, | |
| ● | On July 23, 2020, | |
| ● | On July 23, 2020, | |
| ● | On July 27, 2020, | |
| ● | On July 27, 2020, | |
| ● | Effective July 28, 2020, | |
| ● | On July 29, 2020, | |
| ● | On July 29, 2020, | |
| ● | On July 31, 2020, |
| ● | On August 03, 2020, | |
| ● | Effective August 03, 2020, |
AFT Note: maturity date extended to June 30, 2021.
Credit Line Note: (i) add the same prepayment premiums as under the August Blue Citi Note; and, (ii) six (6) months to prepay the Credit Line Note commencing on August 03, 2020.
July Blue Citi Note: (i) six (6) months to prepay the July Blue Citi Note; and, (ii) no prepayment premiums.
The conversion of all convertible promissory notes held by Blue Citi shall be covered by a single account of reserved shares with the transfer agent for the Company.
| ● | On August 14, 2020, | |
| ● | On August 19, 2020, | |
| ● | On August 21, 2020, | |
| ● | On August 21, 2020, | |
| ● | On August 21, 2020, | |
| ● | On August 24, 2020, | |
| ● | On August 24, 2020, | |
| ● | On August 27, 2020, | |
| ● | On August 31, 2020, | |
| ● | On September 01, 2020, | |
| ● | On September 02, 2020, | |
| ● | On September 09, 2020, |
| ● | On September 10, 2020, | |
| ● | On September 14, 2020, | |
| ● | On September 15, 2020, | |
| ● | On September 17, 2020, | |
| ● | On September 18, 2020, | |
| ● | On September 22, 2020, | |
| ● | On September 29, 2020, | |
| ● | Effective September 30, 2020, |
The issuance was exempt under Section 4(a)(2) of the Securities Act.
| ● | On October 02, 2020, |
| ● | On October | |
| ● | On October 07, 2020, | |
| ● | On October 08, | |
| ● | On October 21, 2020, | |
| ● | On November | |
| ● | On November 16, 2020, | |
| ● | On November 17, 2020, | |
| ● | On November 18, 2020, |
| ● | On November 23, 2020, |
| II-9 |
| ● | On November 25, 2020, | |
| ● | On December 02, 2020, | |
| ● | On December 08, 2020, | |
| ● | On December 11, 2020, | |
| ● | On December 15, 2020, we converted $30,000 of a promissory note into 4,688 shares of | |
| ● | On December 15, 2020, | |
| ● | On December 17, 2020, | |
| ● | On December 29, 2020, | |
| ● | On January 04, 2021, | |
| ● | On January 06, 2021, | |
| ● | On January 25, 2021, pursuant to the terms and conditions of a Note Purchase Agreement, |
| ● | On January 27, 2021, | |
| ● | On January 28, 2021, | |
| ● | On February | |
| ● | On February 03, 2021, | |
| ● | On February 03, 2021, | |
| ● | Effective February 08, 2021, |
With regard to each of the respective Blue Citi Notes, the Company and Blue Citi further agreed as follows:
| ● | On February 09, 2021, |
| II-10 |
| ● | On February 10, 2021, | |
| ● | Effective February 12, 2021, we finalized and closed with Geneva Roth Remark Holdings, Inc. (“Geneva Roth”) | |
| ● | On February 19, 2021, | |
| ● | On February 19, 2021, | |
| ● | On February 19, 2021, we issued 7,800 shares of | |
| ● | On February 19, 2021, | |
| ● | On February 24, 2021, | |
| ● | On February 25, 2021, | |
| ● | On March 15, 2021, | |
| ● | On March 16, 2021, | |
| ● | On | |
| ● | On April 22, 2021, we issued 8,923 shares of our common stock upon the cashless exercise of a warrant. | |
| ● | On April 23, |
| II-11 |
| ● | On May 13, 2021, | |
| ● | On May 21, 2021, | |
| ● | On June 01, 2021, |
| ● | On July 07, 2021, | |
| ● | On July 12, 2021, | |
| ● | On July 16, 2021, | |
| ● | On July 30, 2021, | |
| ● | On August 05, 2021, | |
| ● | On August 13, 2021, |
| II-12 |
| ● | On August 13, 2021, |
| ● | On August 18, 2021, | |
| ● | On August 23, 2021, we converted 2,500 shares of our Series B Preferred Stock into 10,446 shares of our common stock. | |
| ● | On August | |
| ● | On August 30, 2021, | |
| ● | On September 10, | |
| ● | On September 22, 2021, | |
| ● | On September 27, 2021, |
| II-13 |
| ● | On September 28, 2021, | |
| ● | On October | |
| ● | On October 19, 2021, | |
| ● | On October 19, 2021, | |
| ● | On October 27, 2021, | |
| ● | On November | |
| ● | On November 15, 2021, | |
| ● | On November 18, 2021, | |
| ● | On December |
| II-14 |
| ● | On February 8, 2022, a noteholder converted $27,812 of convertible debt into 6,091 shares of the Company’s common stock due to a conversion of promissory notes. | |
| ● | On February 11, 2022, noteholders converted $47,997 of convertible debt into 4,150 shares of the Company’s common stock due to a conversion of promissory notes. | |
| ● | On February 28, 2022, a noteholder converted 6,631 of warrants into 6,631 shares of the Company’s common stock. | |
| ● | On March 1, 2022, a noteholder converted $14,496 of convertible debt into 1,469 shares of the Company’s common stock due to a conversion of promissory notes. | |
| ● | On April 7, 2022, we issued 2,402 shares of our common stock to Root Ventures, LLC pursuant to an agreement with Root Ventures, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On April 7, 2022, we issued 1,852 shares of our common stock to One44 Capital, LLC pursuant to an agreement with One44 Capital, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On April 7, 2022, we issued 933 shares of our common stock to GS Capital Partners, LLC pursuant to an agreement with GS Capital Partners, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On April 7, 2022, we issued 6,431 shares of our common stock to Westland Properties, LLC pursuant to an agreement with Westland Properties, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On April 7, 2022, we issued 2,402 shares of our common stock to Fast Capital, LLC pursuant to an agreement with Fast Capital, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On April 20, 2022, we issued 380,952 shares of our common stock to Centurion Holdings I, LLC pursuant to an agreement with Centurion Holdings I, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On May 3, 2022, we issued 75,200 shares of our common stock to SJSS Investments pursuant to an agreement with SJSS Investments. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On May 3, 2022, we issued 76,000 shares of our common stock to Allan S. Brantley pursuant to an agreement with Allan S. Brantley. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On July 26, 2022, we issued 31,019 shares of our common stock to One44 Capital, LLC pursuant to an agreement with One44 Capital, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On August 18, 2022, we issued 27,322 shares of our common stock to Fast Capital, LLC pursuant to an agreement with Fast Capital, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On August 19, 2022, we issued 23,460 shares of our common stock to Allan S. Brantley pursuant to an agreement with Allan S. Brantley. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On September 14, 2022, we issued 11,111 shares of our common stock to Red Road Holdings Corporation pursuant to an agreement with Red Road Holdings Corporation. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On September 21, 2022, we issued 30,700 shares of our common stock to SJSS Investments pursuant to an agreement with SJSS Investments. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On October 9, 2022, we issued 26,748 shares of our common stock to Red Road Holdings Corporation pursuant to an agreement with Red Road Holdings Corporation. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | Between August 29, 2022, and November 3, 2022, we issued 906,000 shares of our common stock to certain accredited investors pursuant to a private placement offering. The issuance was exempt under Section 4(a)(2) of the Securities Act and by Rule 506 of Regulation D. |
Item 16. Exhibits and Financial Statement Schedules
| (a) | Exhibits |
The following documents are filed as exhibits to this registration statement:
| * | Filed herewith. |
| † | Indicates management contract or compensatory plan or arrangement |
| + | To be filed by amendment. |
| (b) | Financial Statement Schedules |
All schedules have been omitted because the information required to be set forth in the schedules is either not applicable or is shown in the financial statements or notes thereto.
Item 17. Undertakings
| (a) | The undersigned registrant hereby undertakes as follows: |
| (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| (i) | To include any Prospectus required by Section 10(a)(3) of the Securities Act of 1933; | |
| (ii) | To reflect in the Prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of Prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; | |
| (iii) | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
| (2) | That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. | |
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. | |
| (4) | That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each Prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than Prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or Prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or Prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or Prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. | |
| (5) | That, for the purpose of determining any liability under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
| (i) | Any preliminary Prospectus or Prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; | |
| (ii) | Any free writing Prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; | |
| (iii) | The portion of any other free writing Prospectus relating to the offering containing material information about the undersigned registrant or our securities provided by or on behalf of the undersigned registrant; and | |
| (iv) | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
| (b) | Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the undersigned pursuant to the foregoing provisions, or otherwise, the undersigned has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the undersigned of expenses incurred or paid by a director, officer or controlling person of the undersigned in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the undersigned will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Morrisville, State of North Carolina, on the 6th7th day of December, 2021.November 2022.
| DATA443 RISK MITIGATION, INC. | ||
| By: | /s/ Jason Remillard | |
| Jason Remillard | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | ||
| /s/ Jason Remillard | President, Chief Executive Officer and Director | |||
| Jason Remillard | (principal executive officer) | |||
| /s/ | Vice President and Chief Financial Officer |
| ||
November 7, 2022 | ||||
| Greg McCraw | (principal financial and accounting officer) |