ATDS 10-K
Data443 Risk Mitigation, Inc. (ATDS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
For
the fiscal year ended:
or
For the transition period from _______ to _______
Commission
file number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices, Zip Code)
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange On Which Registered | ||
| N/A | N/A | N/A |
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act.
Yes
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
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Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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 ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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☐
Aggregate
market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2021: $
The number of shares of registrant’s common stock outstanding as of March 28, 2022 was .
DOCUMENTS INCORPORATED BY REFERENCE
OTHER INFORMATION
As used in this Annual Report on Form 10-K, the terms “we”, “us”, “our”, “ATDS”, the “registrant”, and the “Company” refer to DATA443 RISK MITIGATION, INC., a Nevada corporation, unless otherwise stated. “SEC” and the “Commission” refers to the Securities and Exchange Commission.
DATA443 RISK MITIGATION, INC.
FORM 10-K
DECEMBER 31, 2021
TABLE OF CONTENTS
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information, this Annual Report on Form 10-K (the “Annual Report”) contains forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements are based on management’s current expectations, assumptions, and beliefs concerning future developments and their potential effect on our business, and are subject to risks and uncertainties that could negatively affect our business, operating results, financial condition, and stock price. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will,” “would”, “if, “shall”, “might”, “will likely result, “projects”, “goal”, “objective”, or “continues”, or the negative of these terms or other comparable terminology, although the absence of these words does not necessarily mean that a statement is not forward-looking. Additionally, statements concerning future matters such as our business strategy, development of new products, sales levels, expense levels, cash flows, future commercial and financing matters, future partnering opportunities and other statements regarding matters that are not historical are forward-looking statements.
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 Annual Report, which include, but are not limited to, the following:
| ● | we will need additional capital to fund our operations; | |
| ● | there is 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 founder & chief executive officer, Jason Remillard; | |
| ● | our common stock is currently quoted on the OTC Pink and is thinly-traded, reducing your ability to liquidate your investment in us; | |
| ● | we have 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 current sole director and chief executive officer has the ability to control all matters submitted to stockholders for approval, which limits minority stockholders’ ability to influence corporate affairs; and | |
| ● | the other risks described in “Risk Factors”. |
The risks described above should not be construed as exhaustive and should be read with the other cautionary statements in this Annual Report.
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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 Annual Report. The matters summarized under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business”, and elsewhere in this Annual Report 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 Annual Report, those results or developments may not be indicative of results or developments in subsequent periods.
We operate in a very competitive and rapidly-changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report to conform these statements to actual results or to changes in our expectations. You should, however, review the risks we describe in the reports we will file from time to time with the SEC after the date of this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report.
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.
CERTAIN REFERENCES AND NAMES OF OTHERS USED HEREIN
This Annual Report may contain additional trade names, trademarks, and service marks of others, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.
PART I
Item 1. Business.
Business History
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.
In or around July 2017, 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 Company’s outstanding Series A Convertible Preferred Shares (the “Series A Shares”). Mr. Remillard, at that time, was appointed as our sole director and sole officer of Data443.
In January 2018, the Company 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.
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In June 2018, after careful analysis and in reliance upon professional advisors we retained, it was determined that the Merger had 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 June 2018, we acquired all of the issued and outstanding securities 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, the Company 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 April 21, 2021, 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 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 February 12, 2021, and effective January 31, 2021 the Company terminated each of the ArcMail Agreements and 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 does not intend to 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, which are filed as exhibits to this Annual Report.
On June 10, 2021, the Company effected the following actions:
(1) Amendment of our articles of incorporation (the “Articles of Incorporation”) to decrease 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 filed on February 23, 2021 (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 would 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 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.
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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 (excluding legal fees of 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, which shares were registered under the Company’s Registration on Form S-1 initially flied on June 4, 2021 and subsequently amended on December 7, 2021. 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 June 30, 2021.
A 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.
On January 5, 2022, the Company filed a Certificate of Amendment to the Articles of Incorporation (the “Certificate of Amendment”) which (i) reduced the number of authorized shares of common stock to one hundred twenty-five million (125,000,000); and, (ii) effected a reverse stock split (the “1-for-8 Reverse Stock Split”) of its issued common stock in a ratio of 1-for-8. The preferred stock of the Company was not changed. The 1-for-8 Reverse Stock split was processed by FINRA and became effective at the start of trading on March 8, 2022. As a result of the 1-for-8 Reverse Stock Split, each 8 shares of the Company’s issued and outstanding common stock, was converted into one (1) share of common stock. No fractional shares were issued in connection with the 1-for8 Reverse Stock Split. Stockholders who otherwise would be entitled to receive fractional shares because they hold a number of pre-1-for-8 Reverse Stock Split shares of the Company’s common stock not evenly divisible by 8 had the number of post-1-for-8 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 Annual Report reflects such assumed reverse stock split.
On January 19, 2022, the Company 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) the $2,900,00 promissory note issued by Data443 in favor of Centurion; and (iii) $250,000 in the form of a contingent payment.
Business Overview
The Company believes that it 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% of the Fortune 500, the Company provides the visibility and control needed to protect at-scale, obtain compliance objectives, and enhance operational efficiencies. Our clients include leading brand name enterprises in a diverse set of industries, including financial services, healthcare, manufacturing, retail, technology, and telecommunications.
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The mounting threat landscape has accelerated security adoption rates and our extensive portfolio of data security and privacy products provide a holistic methodology to data privacy as a new security standard. Our offering is anchored in privacy management, equipping organizations with a seamless approach to safeguarding their data, protecting against attacks, and mitigating the most critical risks.
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.
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, according to the latest forecast from Gartner, Inc. In 2019, the 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 of data created in the world will grow to 163 Zettabytes (or 151 trillion gigabytes) in 2025, representing a nearly tenfold increase from the amount created 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.
We believe that the functionalities offered by our programs and services position us to benefit from this growing market. Further, 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.
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Our Products
Each of our major product lines provides features and functionality which we believe enable our clients to fully secure the value of their data. This architecture extends through modular functionalities, giving our clients the flexibility to select the features 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, the products and services offered by the Company are now marketed under the following names:
| ● | Data443® Ransomware Recovery Manager™, built for the modern enterprise, its capabilities are designed to recover a workstation immediately upon infection to the last known business-operable state, without any end user or IT administrator efforts or involvement. | |
| ● | Data Identification Manager™ (previously marketed as ClassiDocs™ and FileFacets®), the Company’s award-winning data classification and governance technology, which supports CCPA, LGPD and GDPR compliance in 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. | |
| ● | Data Archive Manager™ (previously marketed as ArcMail®), a leading provider of simple, secure and cost-effective enterprise data retention management, archiving and management solutions. | |
| ● | Sensitive Content Manager™ (previously marketed as ARALOC™), a market leading secure, cloud-based platform for the management, protection and distribution of digital content to the desktop and mobile devices, which protects an organization’s confidential content and intellectual property assets from leakage—malicious or accidental—without impacting collaboration between all stakeholders. | |
| ● | Data Placement Manager™ (previously marketed as DATAEXPRESS®), a leading data transport, transformation and delivery product trusted by leading financial organizations worldwide; | |
| ● | Access Control Manager™ (previously marketed as Resilient Access™), enables fine-grained access controls across myriad platforms at scale for internal client systems and commercial public cloud platforms like Salesforce, Box.Net, Google G Suite, Microsoft OneDrive and others. | |
| ● | Data Identification Manager™ (previously marketed as ClassiDocs for Blockchain), provides an active implementation for the Ripple XRP that protects blockchain transactions from inadvertent disclosure and data leaks. | |
| ● | Data443® Global Privacy Manager™, the privacy compliance and consumer loss mitigation platform which is integrated with ClassiDocs™ to do the delivery portions of GDPR and CCPA as well as process Data Privacy Access Requests—removal request—with inventory by ClassiDocs™; enables the full lifecycle of Data Privacy Access Requests, Remediation, Monitoring and Reporting. | |
| ● | IntellyWP, a leading purveyor of user experience enhancement products for webmasters for the world’s largest content management platform, WordPress. | |
| ● | Data443® Chat History Scanner, which scans chat messages for compliance, security, PII, PI, PCI & custom keywords. | |
| ● | GDPR Framework, CCPA Framework, and LGPD Framework WordPress Plugins, with over 30,000 active site owners combined, helps organizations of all sizes to comply with European, California and Brazilian privacy rules and regulations. |
Our Growth Strategy
Our objective is to be a leading provider of data security products and services. The following are key elements of our growth strategy:
Acquisitions. We intend to aggressively pursue acquisitions of other cybersecurity software and services providers focused on the data security sector. We target companies with a steady client base, as well as companies with complementary product offerings.
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Research & Development; Innovation. We intend to increase our spending on research and development in order to drive innovation to improve existing products and to deliver new products. We intend to work towards proactively identifying and solving the data security needs of our clients.
Grow Our Customer Base. We believe that the continued rise in enterprise data and increased cybersecurity concerns will increase demand for our services and products. We intend to capitalize on this demand by targeting new customers.
Expand Our Sales Force. Continuing to expand our salesforce will be essential to achieving our customer base expansion goals. 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 compliance with the GDPR. We believe that a focus on international markets will be a key component of our growth strategy.
Our Customers
Our current customer base is comprised primarily of customers purchasing ARALOC, ArcMail, DataExpress, and ClassiDocs products. Our customers vary greatly in size, ranging from small and medium businesses to large enterprises.
Services
Maintenance and Support
Our intended customers will typically purchase software maintenance and support as part of their initial purchase of our products. These maintenance agreements provide customers the right 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 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.
Sales and Marketing
Sales
We intend to sell the majority of our products and services directly to our end users/clients. We will also propose to effect sales through a network of channel partners, which in turn, sell the products they purchase from us. We have a highly-trained professional sales force that is responsible for overall market development, including the management of the relationships with our channel partners and supporting channel partners.
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. Our internal marketing organization will be responsible for 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 site and social media outlets.
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Seasonality
Our business is not subject to seasonality.
Research and Development
While currently limited, our planned research and development efforts is expected to focus on improving and enhancing our existing products and services, as well as developing new products, features and functionality. We plan to regularly release new versions of our products which incorporate new features and enhancements to existing ones.
Intellectual Property
The Company requires key employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting relationship. The Company also requires relevant employees to assign all rights to any inventions made or conceived during their employment with the Company to the Company. In addition, the Company requires individuals 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 of our intellectual property. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States.
We currently make use of a number of trademarks in our business, including, without limitation, the following:
| ● | ClassiDocs® | |
| ● | ARALOC® | |
| ● | DataExpress™ |
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 expiry dates for the federal trademark on the three trademarks we make use of in our business are as follows:
ClassiDocs: Expires September 14, 2027
ARALOC: September 14, 2027
DataExpress: September 14, 2027
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 our competitive advantage by offering quality at a competitive price, 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.
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Employees
As of March 28, 2022, we had 26 employees and 4 independent contractors, of which one was considered to be part of our management team; our CEO, Jason Remillard. We have not experienced any work stoppages, and we consider our relations with our employees to be good. The Company believes that it will be successful in attracting experienced and capable personnel. The Company’s 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.
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. 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, or the Sarbanes-Oxley Act; | |
| ● | we are not required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or the PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis); | |
| ● | 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 events occur before the end of such five-year period, including if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period, we will cease to be an emerging growth company.
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 compare our financial statements with the financial statements of a public company that is not an emerging growth company, or the financial statements of an emerging growth company that has opted out of using the extended transition period.
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Available Information
The Company expects 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. Any materials filed by the Company with the SEC may be read on the website maintained by the SEC that contains annual, quarterly and current reports, proxy statements and other information that issuers file electronically with the SEC. The Internet address of the SEC’s website is http://www.sec.gov. The Company also makes our reports, amendments thereto, and other information available, free of charge, on our website at www.data443.com. Our corporate offices are located at 101 J Morris Commons Lane, Suite 105, Morrisville, North Carolina 27560. Our telephone number is 919-858-6542.
Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as other information in this Annual Report, before deciding whether to invest in the shares of our common stock. The occurrence of any of the events described below could have a material adverse effect on our business, financial condition or results of operations. In the case of such an event, the trading price of our common stock may decline and you may lose all or part of your investment.
Risks Related to Our Business and Industry
We will require additional funds in the future to achieve our current business strategy and an inability to obtain funding could cause our business to fail.
We will need to raise additional funds through public or private debt or equity sales in order to fund our future operations and fulfill contractual obligations in the future. These financings may not be available when needed. Even if these financings are available, they may be on terms that we deem unacceptable or 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 could have an adverse effect on our ability to implement our current business plan and develop our products, and as a result, could 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 we do not raise additional capital from conventional sources, we may need to scale back the implementation of our business plan.
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.
Our industry is categorized by rapid technological progression, ever increasing innovation, changes in customer requirements, legal and regulatory compliance mandates, and frequent new product introductions. 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 clients in all aspects of data security, we will need to constantly improve our current assets in order to keep up with technological advances that are 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 or expand the functionality of our current products 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 to do so, our business may be adversely affected and we may have to cease operations altogether.
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We will face intense competition in our market, especially from larger, well established companies, and we may lack sufficient financial and other resources to maintain and improve our competitive position.
The market for data security and 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 identity and data governance issues. We also compete with IT equipment vendors and systems management solution providers whose products and services address identity and data governance requirements. Our principal competitors vary depending on the product. Many of our existing competitors have, and some of our potential competitors could have, substantial competitive advantages, such as:
| ● | greater name recognition and longer operating histories; | |
| ● | more comprehensive and varied products and services; | |
| ● | broader product offerings and market focus; | |
| ● | greater resources to develop technologies or make acquisitions; | |
| ● | more expansive intellectual property portfolios; | |
| ● | broader distribution and established relationships with distribution partners and customers; | |
| ● | greater customer support resources; and | |
| ● | substantially greater financial, technical, and other resources. |
Our 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 offerings to provide data security and data governance solutions that more closely compete with our offerings. Potential customers may also prefer to purchase, or incrementally add solutions, from their existing suppliers rather than a new or additional supplier regardless of product performance or 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 than they individually had offered. 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 it more difficult for us to compete effectively. In addition, continued industry consolidation may adversely impact customers’ perceptions of the viability of small 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 by our competitors or continuing market consolidation. These competitive pressures in our market or our potential 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, 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 officer and president, Jason Remillard, to successfully manage our company, to execute on our business plan, and to identify and pursue new opportunities and product innovations. The loss of services of Mr. Remillard could significantly delay or prevent the achievement of our development and strategic objectives and adversely affect our business.
Our Chief Financial Officer is a consultant who works with other companies and may allocate his time to such other businesses. This could have a negative impact on our ability to implement our plan of operation.
Our Chief Financial Officer, Nanuk Warman, is a consultant who works with other companies and may not commit his full time to our affairs, which may result in a conflict of interest in allocating his time between our business and the other businesses. Mr. Warman intends to spend at least 10-20 hours per week working on our matters. Mr. Warman is not obligated to contribute any specific number of hours per week to our affairs. If other business affairs require Mr. Warman to devote more time to other affairs, it could limit his time spent on our affairs and could negatively impact our ability to implement our business plan.
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If we are unable to attract new customers and 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 may grow more slowly than expected, and our business may be harmed.
Our future growth also depends upon expanding sales of our products to existing customers and their organizations. 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 will result in increased sales to existing customers and additional revenues. If our efforts are not successful, our business may suffer.
If we are unable to maintain successful relationships with our channel partners, our business could be adversely affected.
We intend to rely on channel partners, such as distribution partners and resellers, to sell licenses and support and maintenance agreements. 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, 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, or other cyber-risks could expose us to significant liability and cause our business and reputation to suffer.
Our operations involve transmission and processing of our customers’ confidential, proprietary, and sensitive information. We have legal and contractual obligations to protect the confidentiality and appropriate use of customer data. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks as a result of third 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, could expose us to substantial litigation expenses and damages, indemnity and other contractual obligations, government fines and penalties, mitigation expenses and other liabilities. We have been subject to attempted cyber-attacks in the past, and expect to be subject to such attacks in the future. We are continuously working to improve our information technology systems, together with creating 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 order to mitigate the risk of attack and to ensure our readiness 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.
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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. We attempt to protect our intellectual property under patent, trademark, copyright and trade secret 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, 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 a patent does not guarantee that we have an absolute right to practice the patented invention.
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, with respect to consultants and service providers, their engagement to develop such intellectual property), but 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 adequately protect our intellectual property.
The data security, cyber-security, 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, 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 use 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.
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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 uncertain 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 that either legally or contractually apply to us. Because the interpretation and application of privacy and data protection laws are still 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 be 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 do not generally face in the United States. These risks include:
| ● | 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 result in restatements of, and irregularities in, financial statements; | |
| ● | competition from bigger and stronger companies in the new markets; | |
| ● | laws imposing heightened restrictions on data usage and increased penalties for failure to comply with applicable laws, particularly in the EU; | |
| ● | 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 value added tax systems, restrictions on the repatriation of earnings and changes in tax rates; | |
| ● | uncertainty around how the United Kingdom’s decision to exit the EU will impact its access to the European Union Single Market, the related regulatory environment, the global economy, and the resulting impact on our business; and | |
| ● | 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.
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.
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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.
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, 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 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 delay in the manufacture, deployment or shipment of our products, 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.
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 been 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. 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, expand our customer base and provide access to new markets and 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 any or all of our potential acquisitions; | |
| ● | 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.
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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.
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. These benefits may not be achieved within the anticipated time frame, or at all.
The JOBS Act allows us to postpone the date by which it must comply with certain laws and regulations intended to protect investors and to reduce the amount of information provided 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 “emerging growth company” and so long as we qualify as an “emerging growth company,” we will be, among other things:
| ● | exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which requires that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting; | |
| ● | exempt from the “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and certain disclosure requirements of the Dodd-Frank Act relating to compensation of our chief executive officer; | |
| ● | permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Exchange Act and instead provide a reduced level of disclosure concerning executive compensation; and | |
| ● | exempt from any rules that may be adopted by the Public Company Accounting Oversight Board (the “PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements. |
We currently intend to take advantage of all of the reduced regulatory and reporting requirements that will be available to it so long as we qualify as an “emerging growth company”. We have elected not to opt out 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. We will remain an “emerging growth company” for up to five years, although we will lose that status sooner if our revenues exceed $1 billion, if we issue 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 us and the market price of our common stock may be adversely affected.
We are also currently a “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 and have a public float of less than $250 million and annual revenues of less than $100 million during the most recently completed fiscal year. In the event that we are still considered a “smaller reporting company,” at such time are we cease being an “emerging growth company,” 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 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.
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Failure to remediate weakness in internal accounting controls could result in material misstatements in our financial statements.
Our management has identified 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 December 31, 2021. We do not expect to be able to remediate this weakness until after this 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.
If we fail to implement proper 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.
We must ensure that we have adequate internal financial and accounting 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 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 that we are unable to produce accurate financial statements may materially adversely affect our stock price.
We have no independent directors, no board committees. This may hinder our board of directors’ effectiveness in fulfilling the typical functions of a board and of committees thereof.
Currently, we have no independent directors, nor do we have an audit committee, compensation committee or nominating and corporate governance committee at this time. An independent board and audit committees, compensation committees and nominating and corporate governance committees with independent directors play a crucial role in the corporate governance process, assessing a company’s processes relating to its risks and control environment, overseeing financial reporting, preventing self-dealing by company executives and evaluating internal and independent audit processes. The lack of an independent board or committees prevents the board of directors from being independent from management in its judgments and decisions and its ability to pursue the board’s responsibilities without undue influence. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified, independent directors, the management of our business could be compromised. In addition, our sole director is not a “financial expert”.
We have recently incurred secured debt, which could have important consequences to you.
The terms of the secured debt we recently incurred could result in the following, among other, adverse consequences:
| ● | limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate requirements; | |
| ● | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and | |
| ● | place us at a competitive disadvantage compared to competitors that may have proportionately less debt and greater financial resources. |
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 meet our debt service and 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.
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Risks Related to Ownership of Our Securities
Our common stock is currently quoted on the OTC Pink under the trading symbol “ATDS.” However, trading in 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 Pink 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 for our common stock in the future.
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.
The existence of shares of common stock issuable upon conversion of outstanding shares of our Series A Shares 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 stockholders 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, trading in our stock may be limited and you may not be able to liquidate 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 liquidate at a price that reflects the value of the business. As a result, holders of our securities may not find purchasers for our securities should they desire to sell them. Consequently, 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.
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 December 31, 2021, we had an accumulated deficit of $42,033,887. 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, if 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.
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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, 2021 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 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, and because 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 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:
| ● | 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. |
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.
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 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.
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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; the preferred stock consists of two series, one of which is designated as Series A Shares. The holders of Series A Shares are entitled to vote on all matters submitted to holders of common stock at a conversion ratio of 15,000 votes for each share of Series A Shares.
As a result of the rights our preferred stockholders have, we may not be able to undertake certain corporate transactions, including equity or debt offerings 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 provisions 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 intend to pay cash dividends.
We have never paid cash dividends on any of our capital 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 board 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 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, Jason Remillard, holds 150,000 shares of our Series A Shares (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 company on terms that other stockholders may desire, which could deprive our stockholders from receiving a premium for their common 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 Articles 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 board of directors 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 board of directors.
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We will incur increased 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, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules subsequently implemented by the SEC have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Complying with these laws and regulations requires the time and attention of our board of directors and management, and increases our expenses. We estimate that we will incur approximately $150,000 to $200,000 in 2022 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 Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board; | |
| ● | 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 expensive and much greater than that of a privately-held company, 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 makes 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 that these convertible instruments are converted into shares of common stock outstanding stock, or that we make additional issuances of 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 investors or the then current market price.
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We may, in the future, issue additional shares of our common stock, which may have a dilutive effect on our current stockholders.
Our Articles authorizes the issuance of one hundred twenty-five million (125,000,000) shares of common stock, of which 146,898 shares were issued and outstanding as of March 28, 2022. The future issuance of our common stock may result in substantial dilution in the percentage of our common stock held by our then 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.
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 the Nasdaq Capital Market. In addition, to maintain a listing on the 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 governance 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 would 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.
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 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, will 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 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.
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Public health threats or outbreaks of communicable diseases could have a material adverse effect on the Company’s operations and overall financial performance.
The Company 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’s 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 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 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 revaluate decisions to purchase our product or to delay their purchasing decisions, which could lengthen our sales cycles.
We have a significant number of customers, many of which are 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.
If we are unable to attract new customers and expand sales to existing customers, both domestically and internationally, our growth could be slower than we expect, and our business may be harmed.
Our success will depend, in part, 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 with 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.
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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.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The Company’s corporate office is located at 101 J Morris Commons Lane, Suite 105, Morrisville, North Carolina 27560. In January 2019, Data443, a wholly-owned subsidiary of the Company, entered into a five year lease for approximately 5,000 square feet of office space at this address. The Company believes that the office facilities are sufficient for the foreseeable future and this arrangement will remain until we determine there is a need for a change.
Items 3. 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.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is currently quoted on the OTC Pink under the trading symbol “ATDS”.
For the periods indicated, the following table sets forth the high and low bid prices per share of common stock based on inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. All per share amounts are adjusted for the reverse stock split of 1-for-8 shares of common stock, which became effective on March 8, 2022.
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| 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 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 | ||||
Penny Stock Rules
The Securities and Exchange Commission has also adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system).
A purchaser is purchasing penny stock which limits the ability to sell the stock. Our shares constitute penny stock under the Securities and Exchange Act. The shares will remain penny stocks for the foreseeable future. The classification of penny stock makes it more difficult for a broker-dealer to sell the stock into a secondary market, which makes it more difficult for a purchaser to liquidate his/her investment. Any broker-dealer engaged by the purchaser for the purpose of selling his or her shares in us will be subject to Rules 15g-1 through 15g-10 of the Securities and Exchange Act. Rather than creating a need to comply with those rules, some broker-dealers will refuse to attempt to sell penny stock.
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document, which:
| ● | contains a description of the nature and level of risk in the market for penny stock in both public offerings and secondary trading; | |
| ● | contains a brief, clear, narrative description of a dealer market, including “bid” and “ask” price for the penny stock and the significance of the spread between the bid and ask price; | |
| ● | contains a toll-free telephone number for inquiries on disciplinary actions; | |
| ● | defines significant terms in the disclosure document or in the conduct of trading penny stocks; and | |
| ● | contains such other information and is in such form (including language, type, size and format) as the SEC shall require by rule or regulation. |
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, to the customer:
| ● | the bid and offer quotations for the penny stock; | |
| ● | the compensation of the broker-dealer and its salesperson in the transaction; | |
| ● | the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and | |
| ● | monthly account statements showing the market value of each penny stock held in the customer’s account. |
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In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements will have the effect of reducing the trading activity in the secondary market for our stock because it will be subject to these penny stock rules. Therefore, stockholders may have difficulty selling their securities.
Reports
We are subject to certain filing requirements and will furnish annual financial reports to our stockholders, audited by our independent registered public accounting firm, and will furnish un-audited quarterly financial reports in our quarterly reports filed electronically with the SEC. All reports and information filed by us can be found at the SEC website, www.sec.gov.
Transfer Agent
The Company has retained Madison Stock Transfer Inc., with an address of 2500 Coney Island Ave, Sub Level Brooklyn, New York 11223, with a telephone number of 718-627-4453, as its transfer agent.
Number of Equity Security Holders
As of March 28, 2022, there were 503 holders of record of our common stock. This does not include beneficial owners holding common stock in street name. As such, the number of beneficial holders of our shares could be substantially larger than the number of stockholders of record.
Dividend Policy
Holders of our common stock are entitled to receive dividends as may be declared from time to time by our board of 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.
Recent Sales of Unregistered Securities
The following information represents securities sold by the Company within the past three years which were not registered under the Securities Act. Included are sales of reacquired securities, as well as new issues, securities 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 effect to the proposed reverse stock split described in the accompanying prospectus.
The issuance was exempt under Section 4(a)(2) of the Securities Act.
| ● | On January 4, 2021, the Company converted $45,390 of a promissory note into 742 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On January 6, 2021, the Company issued 475 shares of its Series B Preferred Stock in exchange for $35,000 of net proceeds from an investor. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On January 25, 2021, pursuant to the terms and conditions of a Note Purchase Agreement, the Company issued a Convertible Promissory Note (the “Quick Capital Note”) in the aggregate principal amount of $114,500, and received gross proceeds of $100,000 from the lender, Quick Capital, LLC (“Quick Capital”). The proceeds will be used for general corporate purposes. The Quick Capital Note (i) has a one-time interest charge of five percent (5%); (ii) is due and payable 90-days from issuance; and, (iii) can be converted into shares of the Company’s common stock upon an event of default, at a conversion price equal to the lesser of: (a) $0.01, or (b) 61% multiplied by the average of the two lowest trading prices for our Common Stock during the 20-days prior to the date of the conversion. In connection with, and as a condition to, the issuance of the Quick Capital Note, the Company also issued 358 shares of its common stock to Quick Capital. The Quick Capital Note and the shares of common stock were issued in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state laws. |
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| ● | On January 27, 2021, the Company converted $45,150 of a promissory note into 784 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On January 28, 2021, the Company issued 125 shares of its common stock to a consultant pursuant to an agreement with the consultant. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On February 3, 2021, the Company issued 79 shares of its common stock to a member of the Company’s Advisory Board. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On February 9, 2021, the Company converted $120,000 of a promissory note into 2,143 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On February 10, 2021, the Company converted $200,000 of a promissory note into 2,500 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | Effective February 12, 2021 Geneva Roth Remark Holdings, Inc. (“Geneva Roth”) and the Company finalized and closed the Securities Exchange Agreement (the “Geneva Exchange Agreement”). Geneva Roth was the holder of that certain Convertible Promissory Note in the original principal amount of Sixty Three Thousand Dollars ($63,000) dated September 10, 2020, with a maturity date of September 10, 2021 (the “Geneva Roth Note”). Pursuant to the Geneva Exchange Agreement, and solely in exchange for the Geneva Roth Note, Geneva Roth exchanged the Geneva Roth Note for six thousand five hundred sixty (6,560) shares of our Series B Preferred Stock. The Geneva Roth Note was thereafter cancelled and of no further force and effect. The issuance was exempt under Section 4(a)(2) and 3(a)(9) of the Securities Act. | |
| ● | On February 19, 2021, the Company converted $200,000 of a promissory note into 1,250 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On February 19, 2021, the Company converted $150,000 of a promissory note into 938 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On February 19, 2021, the Company issued 7,800 shares of its Series B Preferred Stock in exchange for $75,000 of net proceeds from an investor. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On February 19, 2021, the Company converted $100,000 of a promissory note into 1,250 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On February 24, 2021, the Company converted $200,000 of a promissory note into 2,500 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On February 25, 2021, the Company converted $325,000 of a promissory note into 1,355 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On March 15, 2021, the Company converted 4,500 shares of its Series B Preferred Stock into 481 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On March 16, 2021, the Company converted 2,060 shares of its Series B Preferred Stock into 220 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. |
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| ● | On March 24, 2021, the Company issued 5,300 shares of its Series B Preferred Stock in exchange for $50,000 of net proceeds from an investor. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On March 31, 2021, the Company issued 607 shares of its common stock to Maxim Partners LLC pursuant to an agreement with Maxim Partners LLC.. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On April 22, 2021 the Company issued 1,116 shares of its common stock upon the cashless exercise of a warrant. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On May 13, 2021, the Company issued 5,375 shares of its Series B Preferred Stock in exchange for $50,000 of net proceeds from an investor. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On May 21, 2021, the Company issued 383 shares of its common stock to Maxim Partners LLC pursuant to an agreement with Maxim Partners LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On June 1, 2021, the Company converted 5,300 shares of its Series B Preferred Stock into 1,117 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On July 6, 2021, the Company issued 4,375 shares of its Series B Preferred Stock in exchange for $40,000 of net proceeds from an investor. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On July 12, 2021, the Company converted 1,800 shares of its Series B Preferred Stock into 785 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On July 16, 2021, the Company converted 2,000 shares of its Series B Preferred Stock into 963 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On August 5, 2021 the Company entered into and closed a financing transaction pursuant to the terms and conditions of a Purchase Agreement with Geneva. Pursuant to the Purchase Agreement, Geneva purchased from the Company five thousand three hundred seventy five (5,375) shares of the Company’s Series B Preferred stock at a total purchase price of $53,750. Geneva delivered gross proceeds of $50,000.00 to the Company (excluded were legal fees and a transaction fee charged by Geneva). Terms and conditions for the Company’s Series B Preferred Stock are summarized above. | |
| ● | On August 13, 2021, the Company closed a financing transaction pursuant to the terms and conditions of a Securities Purchase Agreement (the “GS Purchase Agreement”) with GS Capital Partners, LLC (“GS”). Pursuant to the GS Purchase Agreement, GS purchased from the Company a Convertible Promissory Note (the “GS Note”) in the aggregate principal amount of $157,500 (the “Principal Amount”), and delivered gross proceeds of $150,000.00 (excluded were legal fees and a transaction fee charged by GS). Interest on the Principal Amount of the GS Note accrues at the rate of 9% per annum. Repayment of all amounts due under the GS Note shall be tendered on the 12-month anniversary of the GS Note. The GS Note may be prepaid in whole at any time during the first 6-months with a prepayment penalty. No prepayment is allowed after 6-months. The GS Note can be converted by GS into shares of the Company’s common stock at any time following 180-days after issuance of the GS Note. The conversion price is equal to 61% of the lowest trading price during the 20 consecutive trading days immediately preceding the date of conversion. The conversion price is subject to adjustment for stock splits, reverse stock splits, stock dividends, and other similar transactions and terms. As additional consideration for the purchase of the GS Note the Company also issued to GS 331 shares of the Company’s common stock. | |
| ● | On August 13, 2021, the Company closed a financing transaction pursuant to the terms and conditions of a Securities Purchase Agreement (the “One44 Purchase Agreement”) with One44 Capital LLC (“One44”). Pursuant to the One44 Purchase Agreement, One44 purchased from the Company a Convertible Promissory Note (the “One44 Note”) in the aggregate principal amount of $157,500 (the “Principal Amount”), and delivered gross proceeds of $150,000.00 (excluded were legal fees and a transaction fee charged by One44). Interest on the Principal Amount of the One44 Note accrues at the rate of 9% per annum. Repayment of all amounts due under the One44 Note shall be tendered on the 12-month anniversary of the One44 Note. The One44 Note may be prepaid in whole at any time during the first 6-months with a prepayment penalty. No prepayment is allowed after 6-months. The One44 Note can be converted by One44 into shares of the Company’s common stock at any time following 180-days after issuance of the One44 Note. The conversion price is equal to 61% of the lowest trading price during the 20 consecutive trading days immediately preceding the date of conversion. The conversion price is subject to adjustment for stock splits, reverse stock splits, stock dividends, and other similar transactions and terms. As additional consideration for the purchase of the One44 Note the Company also issued to One44 331 shares of the Company’s common stock. |
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| ● | On August 18, 2021, the Company closed a financing transaction pursuant to the terms and conditions of a Securities Purchase Agreement (the “Fast Capital Purchase Agreement”) with Fast Capital, LLC (“Fast Capital”). Pursuant to the Fast Capital Purchase Agreement, Fast Capital purchased from the Company a Convertible Promissory Note (the “Fast Capital Note”) in the aggregate principal amount of $157,500 (the “Principal Amount”), and delivered gross proceeds of $150,000.00 (excluded were legal fees and a transaction fee charged by Fast Capital). Interest on the Principal Amount of the Fast Capital Note accrues at the rate of 9% per annum. Repayment of all amounts due under the Fast Capital Note shall be tendered on the 12-month anniversary of the Fast Capital Note. The Fast Capital Note may be prepaid in whole at any time during the first 6-months with a prepayment penalty. No prepayment is allowed after 6-months. The Fast Capital Note can be converted by Fast Capital into shares of the Company’s common stock at any time following 180-days after issuance of the Fast Capital Note. The conversion price is equal to 61% of the lowest trading price during the 20 consecutive trading days immediately preceding the date of conversion. The conversion price is subject to adjustment for stock splits, reverse stock splits, stock dividends, and other similar transactions and terms. As additional consideration for the purchase of the Fast Capital Note the Company also issued to Fast Capital 394 shares of the Company’s common stock. | |
| ● | On August 23, 2021, the Company converted 2,500 shares of its Series B Preferred Stock into 1,306 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On August 24, 2021, the Company converted 3,000 shares of its Series B Preferred Stock into 1,567 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On August 30, 2021, the Company converted 2,300 shares of its Series B Preferred Stock into 1,226 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On September 10, 2021 the Company entered into and closed a financing transaction pursuant to the terms and conditions of a Purchase Agreement with Geneva. Pursuant to the Purchase Agreement, Geneva purchased from the Company five thousand three hundred seventy five (5,375) shares of the Company’s Series B Preferred stock at a total purchase price of $53,750. Geneva delivered gross proceeds of $50,000.00 to the Company (excluded were legal fees and a transaction fee charged by Geneva). Terms and conditions for the Company’s Series B Preferred Stock are summarized above. | |
| ● | On September 22, 2021, the Company converted $30,000 of a promissory note into 1,764 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On September 27, 2021, the Company converted 2,000 shares of its Series B Preferred Stock into 1,298 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On October 4, 2021, the Company converted 3,300 shares of its Series B Preferred Stock into 2,317 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On October 19, 2021, the Company converted $30,000 of a promissory note into 2,536 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On October 27, 2021 the Company entered into and closed a financing transaction pursuant to the terms and conditions of a Purchase Agreement with Geneva. Pursuant to the Purchase Agreement, Geneva purchased from the Company five thousand three hundred seventy five (5,375) shares of the Company’s Series B Preferred stock at a total purchase price of $53,750. Geneva delivered gross proceeds of $50,000.00 to the Company (excluded were legal fees and a transaction fee charged by Geneva). Terms and conditions for the Company’s Series B Preferred Stock are summarized above. | |
| ● | On November 8, 2021, the Company converted $30,000 of a promissory note into 3,036 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. |
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| ● | On November 15, 2021, the Company converted 2,000 shares of its Series B Preferred Stock into 2,255 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On November 18, 2021, the Company converted 3,375 shares of its Series B Preferred Stock into 4,489 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On December 1, 2021 the Company entered into and closed a financing transaction pursuant to the terms and conditions of a Purchase Agreement with Geneva. Pursuant to the Purchase Agreement, Geneva purchased from the Company four thousand eight hundred seventy five (4,875) shares of the Company’s Series B Preferred stock at a total purchase price of $48,750. Geneva delivered gross proceeds of $45,000.00 to the Company (excluded were legal fees and a transaction fee charged by Geneva). Terms and conditions for the Company’s Series B Preferred Stock are summarized above. | |
| ● | On December 7, 2021, the Company converted $20,000 of a promissory note into 4,480 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. |
Repurchase of Equity Securities
None.
Information About Our Equity Compensation Plans
The information required under this heading is incorporated herein by reference to the applicable information set forth in Item 12 of this Annual Report on Form 10-K.
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our results of operations and financial condition for fiscal years ended December 31, 2021 and 2020, should be read in conjunction with our consolidated financial statements and the related notes and the other financial information that are included elsewhere in this Annual Report. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and “Business” sections in this Annual Report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
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On January 5, 2022, 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 January 6, 2022, 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 January 6, 2022 (the “Certificate of Change”). The Certificate of Change (i) reduced the number of authorized shares of common stock to one hundred twenty-five million (125,000,000); and, (ii) effected a reverse stock split (the “Reverse Stock Split”) of its issued common stock in a ratio of 1-for-8. The preferred stock of the Company was not changed. Trading of our common stock began on a split-adjusted basis on March 8, 2022. All common stock and per share data have been retroactively adjusted for the impact of the split.
Overview
CARES Act
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. There are several different provisions with 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 Company has had this liability forgiven as part of the program.
The Company also received a $150,000 loan (the “EID Loan”) from the U.S. Small Business Administration (the “SBA”) under the SBA’s Economic Injury Disaster Loan program. The Company received the loan proceeds on or around May 27, 2020. 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 Company in connection with the EID Loan contains events of default and other provisions customary for a loan of this type.
The Company 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 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 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 Authorization and Agreement and the Note executed by the Company in connection with the Second EID Loan contains events of default and other provisions customary for a loan of this type.
Outlook
Our continued objective is to further integrate our growing suite of proven industry leading data security and privacy offerings and deliver the combined offering to our growing stable of enterprise and medium-sized clients directly and via our partner channel. Data privacy concerns continue to grow lockstep with security breaches and ongoing expansion of data storage, consumption and spread of telework, telehealth and remote learning requirements.
We have utilized, and expect to continue to utilize, acquisitions to contribute to our long-term growth objectives. During fiscal 2020 we hope to continue to acquire complimentary business assets and client bases. Some of the key element to our growth strategy include, without limitation:
| ● | Improve and extend our technological capabilities, domestically and internationally. | |
| ● | Further integrate our product offerings to provide an unmatched data privacy platform. | |
| ● | Focus on underserved markets, such as sports teams (at all levels) and medium-sized businesses. | |
| ● | Deliver capabilities via unconventional channels, including open-source and “freemium” and trial subscription models. |
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| ● | Leverage our existing relationships for professional references, association and internal private industry level promotional events and other high-value and successful product positional activities. | |
| ● | Be prepared to capture and execute on opportunities in the acquisition marketplace. | |
| ● | Continued focus on net bookings with minimum long-term contract value. | |
| ● | Improve SaaS Services with high increasing ‘attach’ rate for additional capabilities. | |
| ● | Increase year-over-year conversions from perpetual one-time contract sales to multiyear recurring subscription revenue agreements. |
While we report primarily income based on recognized and deferred revenue, another measurement internally for the business is booked revenues. Management utilizes this measure to track numerous indicators such as: contract value growth; initial contract value per customer; and, certain other values that 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 into 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.
Results of Operations for the Year Ended December 31, 2021 Compared to the Year Ended 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 multi-year renewals and new contracts that are subscription-based. Our Enhanced File Transfer capabilities continue to grow and our customers’ reliance on them are becoming more focused and centralized. This reliance powers incredible 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, is now quickly migrating to our cloud-based facilities we invested in other the past few years . Our hosting model contributes higher margins, recurring 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 within the company. 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, 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 decrease in general and administrative expense was primarily due to a decrease in amortization and stock-based compensation offset by an increase insurance and conference expense.
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 expense was primarily due to an increase in advertising and marketing expenses.
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 asset, 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 about our company as of December 31, 2021 and 2020, respectively.
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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 | )% | ||||||
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 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, 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 $875,789 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, 2020, we had current liabilities of $3,815,945. The Company’s accumulated deficit as of December 31, 2021 was $42,111,274.
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 $5,638,809. The Company’s accumulated deficit as of December 31, 2020 was $35,542,359.
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 implemented 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 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 the Company.
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.
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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 | ||||||
Operating Activities
During the year ended December 31, 2021, our Company 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. 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.
Going Concern
The consolidated financial statements accompanying this Annual Report have been prepared on a going concern basis, which implies that our company will continue to realize its assets and discharge its liabilities and commitments in the normal course of business. Our Company has generated very 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 December 31, 2021, our Company has an accumulated deficit 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 year ended 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.
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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 Company will be able to raise any additional capital.
Management’s Plans
Our plan is to continue to grow our business through strategic acquisitions, and then expand selling across our subsidiaries and affiliated companies. We continue to focus heavily on our renewals business that we 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 to be significantly less if we are able to be listed on a major stock exchange. We also expect our equity components to have more value as part of our acquisitions and by virtue be less costly for The Company.
Off-Balance Sheet Arrangements
There are 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.
Contractual Obligations
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information under this Item.
Critical Accounting Policies
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of income and expense during the reporting periods presented.
Our critical estimates include revenue recognition and intangible assets. Although we believe that these 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 application of these policies does not require us to make significant estimates or judgments that are difficult or subjective.
The critical accounting policies used by management and the methodology for its estimates and assumptions are as follows:
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.
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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.
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 Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information under this Item.
Item 8. Financial Statements and Supplemental Data.
The information required by this Item is incorporated herein by reference to the consolidated financial statements and supplementary data set forth in Item 15. Exhibits, Financial Statement Schedules of Part IV of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on its evaluation, management concluded as of December 31, 2021 that our disclosure controls and procedures were not effective because of material weaknesses in our internal control over financial reporting, described below in Management’s Report on Internal Control Over Financial Reporting. Notwithstanding the identified material weaknesses, management believes the consolidated financial statements included in this Annual Report on Form 10-K fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
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Management’s Report on Internal Control Over Financial Reporting
Our Principal Executive Officer and Principal Financial Officer, our responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. An evaluation was performed of the effectiveness of the Company’s internal control over financial reporting. The evaluation was based on the framework in 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on our evaluation under the criteria set forth in 2013 Internal Control — Integrated Framework, our management concluded that, as of December 31, 2021 our internal control over financial reporting was not effective because of the identification of material weaknesses described as follows:
| ● | We did not have controls designed to validate the completeness and accuracy of underlying data used in the determination of accounting transactions. Accordingly, we believe we have a material weakness because there is a reasonable possibility that a material misstatement to the interim or annual consolidated financial statements would not be prevented or detected on a timely basis. | |
| ● | We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. | |
| ● | We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. | |
| ● | We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting. | |
| ● | We do not have a functioning audit committee or outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. |
Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting
Management of the Company is committed to improving its internal controls and intends to (i) continue to use third party specialists to address shortfalls in staffing and to assist the Company with accounting and finance responsibilities; (ii) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel; (iii) seek to add a full-time Chief Financial Officer to replace Mr. Remillard when the Company has adequate financial resources; and, (iv) appoint outside directors and audit committee members in the future.
Management has discussed the material weaknesses noted above with our independent registered public accounting firm. Due to the nature of these material weaknesses, it is reasonably possible that misstatements which could be material to the annual or interim consolidated financial statements could occur that would not be prevented or detected during our financial close and reporting process.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.
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Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our last fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosures Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers
Each of our directors holds office until the next annual meeting of our stockholders or until his or her successor has been elected and qualified, or until his or her earlier death, resignation, or removal. Our executive officers are appointed by our Board and serve until their respective successors are elected and appointed and qualify until their earlier resignation or removal from office.
Our current directors and executive officers, their ages, positions held, and duration of such, are as follows:
| Name | Position held with Our Company | Age | Date First Elected or Appointed | |||
| Jason Remillard | President; Chief Executive Officer; Chairman; Chief Financial Officer; Secretary | 48 | November 2017 | |||
| Nanuk Warman | Chief Financial Officer | 49 | December 2021 |
Business Experience
Jason Remillard
Jason Remillard is our President, Chief Executive Officer, and Director, 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, 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-security and IT operations capabilities. He has had a 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.
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Immediately prior to forming Data443, Mr. Remillard focused on building an award-winning data privacy and compliance product – 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 serve as VP of Security Architecture and Engineering for Deutsche Bank 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 as a management consultant for IBM Corporation, he has also developed, marketed, and successfully managed five other startups in the cyber security 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.
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 VP 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, Mr. Remillard lends himself to be an ideal candidate to head the Company and serve on the Board.
Mr. Remillard devotes one hundred percent (100%) of his time to us. Based upon his experience and expertise in the data security space, we believe Mr. Remillard is an ideal candidate to head the Company and serve on our Board of Directors.
Nanuk Warman
Effective December 3, 2021, Nanuk Warman, CPA, CMA, CFA was appointed Chief Financial Officer of the Company.
Mr. Warman, 49, has more than 23 years of experience in corporate accounting and finance for US and Canadian publicly listed companies, specializing in US GAAP and IFRS financial reporting requirements. He has been the Managing partner of PubCo Reporting, Inc. since 2010, and has extensive experience in the areas of complex debt and equity transaction accounting, mergers and acquisitions and reverse mergers.
Mr. Waman has worked with the Company for the past three years as an independent consultant and has extensive knowledge of the Company’s business and financial history.
Family Relationships
There are no family relationships between any of our officers and directors.
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.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our directors, executive officers, and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers, and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish us with copies of all reports filed by them in compliance with Section 16(a). We are required to disclose delinquent filings of reports by such persons.
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Based solely on our review of certain reports filed with the SEC pursuant to Section 16(a) of the Exchange Act, we believe that all Section 16(a) filing requirements applicable to our executive officers, directors, and 10% or greater beneficial stockholders were met during the fiscal years ended December 31, 2021 and 2020, except as follows:
Jason Remillard, CEO of the Company, failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the 2020 fiscal year. Mr. Remillard entered into two transactions that were not reported on a timely basis, via the filing of a Form 4 or Form 5 in the 2020 fiscal year. Mr. Remillard will report each of such transactions on Form 5 within 10 days following the date of filing of this Annual Report.
Corporate Governance
Board Committees and Charters
Our board of directors does not maintain a separate audit, nominating and corporate governance or compensation committee. Functions customarily performed by such committees are performed by our board of directors as a whole. We do not currently have an “audit committee financial expert” since we currently do not have an audit committee.
Code of Business Conduct
The Company has adopted a code of ethics that applies to the its Chief Executive Officer and our Chief Financial Officer, who is our Principal Accounting Officer. We will provide any person a copy of our code of ethics without charge upon request to 101 J Morris Commons Lane, Suite 105, Morrisville, North Carolina 27560, Attention: Jason Remillard.
Board Diversity
While we do not have a formal policy on diversity, our board of directors considers diversity to include the skill set, background, reputation, type and length of business experience of our board of directors members, as well as, a particular nominee’s contributions to that mix. Our board of directors believes that diversity brings a variety of ideas, judgments, and considerations that can benefit our stockholders and us.
Stockholder Communications
We do not have a formal policy regarding communications with our board of directors, or for the consideration of director candidates recommended by stockholders. To date, no stockholders have made any such recommendations.
Item 11. Executive 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. |
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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 year ended December 31, 2021.
| Stock | Option | All Other | ||||||||||||||||||||||
| Fiscal | Salary | Awards | Awards | Compensation | Total | |||||||||||||||||||
| Name and Principal Position | Year | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||
| Jason Remillard | 2021 | 201,441 | - | 6,834 | - | 201,441 | ||||||||||||||||||
| 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. Remillard served as our Chief Financial Officer from January 24, 2020 until December 3, 2021.
(2) Mr. Warman serves as our Chief Financial Officer since December 3, 2021.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information regarding outstanding stock options and stock awards held by our Named Executive Officers as of December 31, 2021:
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options: Exercisable | Number of Securities Underlying Unexercised Options: Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options | Option Exercise Price | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested | Market Value of Shares or Units of Stock That Have Not Vested | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested | |||||||||||||||||||||||||||
| Jason Remillard | 3 | - | - | $ | 62,400 | December 30, 2028 | - | - | - | - | ||||||||||||||||||||||||||
| - | 18 | - | $ | 10,062 | February 9, 2031 | - | - | - | - | |||||||||||||||||||||||||||
| - | - | - | - | - | 18 | $ | 157 | - | - | * | ||||||||||||||||||||||||||
Employment Agreements
Jason M. Remillard Employment Agreement
Effective March 1, 2019, Mr. Remillard and the Company entered into an employment agreement (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 the Company as President and Chief Executive Officer. Under the Remillard Employment Agreement, Mr. Remillard’s receives a base salary of $180,000 annually. Mr. Remillard is also entitled to receive restricted stock awards (“RSAs”) every six months until such time as Mr. Remillard is no longer employed by the Company. Each RSA consists of a number of shares of the Company’s common stock equal to the value of $45,000 under the Company’s 2019 Omnibus Incentive Plan (the “2019 Plan”). The RSAs vest in full six months from date of grant.
Each quarter, Mr. Remillard is also entitled to receive incentive stock options to purchase common stock of the Company up to a value of $35,000, in accordance with the vesting schedule determined by the administrator of the 2019 Plan.
Under the Remillard Employment Agreement, Mr. Remillard is entitled to participate in all employee benefit programs that the Company establishes and makes available to its employees from time to time, including the Company’s health and dental plans.
Nanuk Warman Employment Agreement
Effective December 3, 2021, Mr. Warman and the Company entered into an employment agreement (the “Warman Agreement”) providing for an initial term of one month beginning on December 1, 2021 with successive three-month automatic renewals unless either part modifies or terminates such agreement in accordance with the provisions thereof.
The Warman Agreement provides that Mr. Warman will be employed by the Company as a contractor, and his employment may be terminated by him or the Company at any time. Mr. Warman will receive $10,000 per month and additionally, subject to the Board’s approval, Mr. Warman will be granted an incentive stock option to purchase on a quarterly basis up to $30,000 worth of shares of the Company’s common stock, vesting 100% on the second anniversary of the grant date. Options shall be subject to, and governed by, the applicable option plans and agreements. Additionally, Mr. Warman is entitled to receive incentive stock options to purchase common stock of the Company up to a value of $50,000, vesting 100% on the second anniversary of the grant date.
The Warman Agreement will terminate five days following (a) receipt by Mr. Warman of written notice by the Company to terminate the Warman Agreement with Cause, (b) receipt by Mr. Warman of written notice by the Company to terminate the Warman Agreement without Cause, (c) receipt by the Company of written notice by Mr. Warman to terminate the Warman Agreement with Cause, or (d) receipt by the Company of written notice by Mr. Warman to terminate the Warman Agreement without Cause. Whether termination is initiated by the Company or Mr. Warman, the day of termination shall be five days after written notice is given.
For the purpose of the Warman Agreement the term “Cause” shall mean:
As to Mr. Warman:
| i) | Mr. Warman breaches a material term of the Warman Agreement; | |
| ii) | Mr. Warman fails any current or future background check; or | |
| iii) | Mr. Warman files a petition in a court of bankruptcy or is adjudicated a bankrupt. |
As to the Company:
| i) | If the Company breaches the Warman Agreement or (1) fails to make any cash payment to Mr. Warman as set forth in such agreement, (2) fails to issue the equity compensation to Mr. Warman as set forth in such agreement, or (3) fails to provide information requested by Mr. Warman necessary for the Mr. Warman to provide agreed upon services to the Company; | |
| ii) | If the Company ceases business: | |
| iii) | If the Company sells a controlling interest to a third party, or agrees to a consolidation or merger of itself with or into another corporation, or sells substantially all of its assets to another corporation, entity or individual; | |
| iv) | If the Company has a receiver appointed for its business or assets, or otherwise becomes insolvent or unable to timely satisfy its obligations in the ordinary course of business, or if the Company makes a general assignment for the benefit of creditors, has instituted against it any bankruptcy proceeding for reorganization for rearrangement of its financial affairs, files a petition in a court of bankruptcy, or is adjudicated a bankrupt; or | |
| v) | If any of the disclosures made by the Company herein, or its officers, directors, or designated representatives, to the Securities Exchange Commission, to the Company’s PCAOB auditor, or to the press, or to an individual or audience in an investor or trade presentation, or subsequent hereto, are determined to be materially false or misleading. |
Mr. Warman is an independent contractor and not an employee of the Company. Mr. Warman will not be eligible for any employee benefits, and the Company will not make deductions from Mr. Warman’s remuneration for taxes (except as otherwise required by applicable law or regulation). The full text of the Warman Agreement has been filed as an exhibit to this Annual Report.
Director Compensation
Our board of directors does not currently receive any consideration for their services as members of our board of directors. Our board of directors reserves the right in the future to award the members of the board of directors cash or stock based consideration for their services to us, which awards, if granted shall be in the sole determination of the board of directors.
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Executive Compensation Philosophy
Our board of directors 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 based compensation to certain executives, which is intended to align the performance of our executives with our long-term business strategies. Additionally, while our board of directors has not granted any performance base stock options to date, the board of directors reserves the right to grant such options in the future, if the board of directors in its sole determination believes such grants would be in our best interests.
Incentive Bonus
Our board of directors may grant incentive bonuses to our executive officers and/or future executive officers in its sole discretion, if the board of directors 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 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 board of directors. We do not currently have any immediate plans to grant any additional awards.
Our 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. The 2019 Plan permits the granting of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and dividend equivalent rights to eligible employees, directors and consultants. We grant options to purchase shares of 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of March 28 2022, certain information with regard to the record and beneficial ownership of the Company’s common stock by (i) each person known to the Company to be the record or beneficial owner of more than 5% of the Company’s common stock, (ii) each director of the Company, (iii) each of the named executive officers, and (iv) all executive officers and directors of the Company as a group.
Beneficial ownership is determined in accordance with the rules of the 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 determining the percent of common stock owned by a person or entity as of the date of this Annual Report (a) the numerator is 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 the sum of (i) the total shares of common stock outstanding as of the date of this Annual Report, which is 146,898 shares, and (ii) the total number of shares of common stock 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.
| Number of Shares | Percentage of | |||||||
| Name & Address (1) | Beneficially Owned (2) | Outstanding Shares (2) | ||||||
| Executive Officers & Directors | ||||||||
| Jason Remillard | 13,955 | 9.50 | %(3) | |||||
| Nanuk Warman | - | - | ||||||
| All current executive officers and directors as a group (2 people) | 13,955 | 9.50 | %(3) | |||||
| 5% Stockholders | ||||||||
| Jason Remillard | 13,955 | 9.50 | %(3) | |||||
| (1) | The mailing address for each officer and director is c/o Data443 Risk Mitigation, Inc., 101 J Morris Commons Lane, Suite 105, Morrisville, North Carolina 27560. |
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| (2) | Includes (i) 150,000,000 shares which would be issued to Mr. Remillard upon conversion of his Series A Shares; (ii) three options to purchase shares of common stock; and, (iii) 379 shares of common stock currently owned by Mr. Remillard. | |
| (3) | Mr. Remillard does not have the right to convert Series A Shares to common stock if he would beneficially own in excess of 9.50% of the number of shares of our common stock outstanding immediately after giving effect to the conversion, and the percentages set forth give effect to such limitation. |
Changes in Control
We are not aware of any arrangements that may result in “changes in control” as that term is defined by the provisions of Item 403 of Regulation S.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Certain Relationships and Related Transactions
Jason Remillard is our Chief Executive Officer and sole director. Through his ownership of Series A Shares, Mr. Remillard has voting control over all matters to be submitted to a vote of our stockholders.
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 100 shares of our common stock. The shares were issued in the form of 144,000 shares of the Company’s Series A Shares 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. 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, the Company had recorded a liability to DMBGroup totaling $123,745 and $405,382, 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, 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 148,666 shares of Series A Shares.
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As of December 31, 2021 and 2020, the Company had due to related party of $247,366 and $561,230, respectively, which arose from the DMB transaction to acquire DataExpress™.
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, such as those described above, with our executive officer(s), Director(s) 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. On a moving forward basis, our director will continue to approve any related party transaction.
Director Independence
Our Board of Directors is currently composed of a single member, Jason Remillard, who does not qualify as an independent director in accordance with the published listing requirements of the NASDAQ Global Market. The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director, nor any of his family members has engaged in various types of business dealings with us. In addition, our board of directors has not made a subjective determination as to each director that no relationships exist which, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, though such subjective determination is required by the NASDAQ rules. Had our board of directors made these determinations, our board of directors would have reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management.
Item 14. Principal Accountant Fees and Services.
The following table provides information regarding the fees billed to us by TPS Thayer in the years ended December 31, 2021 and 2020. All fees described below were approved by Board:
| For the years ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Audit Fees (1) | $ | 68,000 | $ | 76,000 | ||||
| Audit Related Fees (2) | - | - | ||||||
| Tax Fees (3) | - | - | ||||||
| All Other Fees (4) | - | - | ||||||
| Total Fees: | $ | 68,000 | $ | 76,000 | ||||
| (1) | Audit Fees include fees for services rendered for the audit of our consolidated financial statements, included in our Annual Report on Form 10-K. |
| (2) | Audit Related Fess consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting. |
| (3) | Tax Fees consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice. |
| (4) | All Other Fees consists of fees for other miscellaneous items. |
| 47 |
Pre-Approval Policies and Procedures
The policy of our Board is to pre-approve all audit and permissible non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax services, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The independent auditor and management are required to periodically report to the Board regarding the extent of services provided by the independent auditor in accordance with this pre-approval. Any proposed services not included within the list of pre-approved services or any proposed services that will cause the Company to exceed the pre-approved aggregate amount requires specific pre-approval by the Board.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
| (a) | The following documents are filed as part of this Annual Report on Form 10-K: | |
| (1) | Financial Statements – See Index on page F-1 of this report | |
| (b) | The following exhibits are filed herewith as a part of this report |
| 48 |
| 49 |
† Indicates management contract or compensatory plan or arrangement
* Filed herewith.
** Furnished herewith.
Item 16. Form 10-K Summary
None.
| 50 |
DATA443 RISK MITIGATION, INC.
Consolidated Financial Statements
Contents
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder’s
Data443 Risk Mitigation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Data443 Risk Mitigation, Inc. (the Company) as of December 31, 2021 and 2020, and the related statements of operations, stockholders’ deficit, and cash flows for each of the years in the period ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Assessment
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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits 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 misstatement 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.
We have served as the Company’s auditor since 2020.
March 31, 2022
| F-2 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expense and other current assets | - | |||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Intellectual property, net of accumulated amortization | ||||||||
| Deposits | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Deferred revenue | ||||||||
| Interest payable | ||||||||
| Notes payable, net of unamortized discount | ||||||||
| Convertible notes payable, net of unamortized discount | ||||||||
| Due to a related party | ||||||||
| License fee payable | - | |||||||
| Operating lease liability | ||||||||
| Finance lease liability | ||||||||
| Total Current Liabilities | ||||||||
| Series B Preferred Stock, shares designated; $ par value; Stated value $; and shares issued and outstanding, net of discount, respectively | ||||||||
| Notes payable, net of unamortized discount - non-current | ||||||||
| Convertible notes payable, net of unamortized discount - non-current | ||||||||
| Deferred revenues - non-current | ||||||||
| Operating lease liability - non-current | ||||||||
| Finance lease liability - non-current | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies | - | - | ||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock: authorized; $ par value | ||||||||
| Series A Preferred Stock, shares designated; $ par value; shares issued and outstanding, respectively | ||||||||
| Common stock: authorized; $ par value | ||||||||
| and shares issued and outstanding, respectively | 122 | 66 | ||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
See the accompanying Notes, which are an integral part of these Consolidated Financial Statements
| F-3 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenue | $ | $ | ||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| General and administrative | ||||||||
| Sales and marketing | ||||||||
| Total operating expenses | ||||||||
| Net loss from operations | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Loss on impairment of intangible asset | ( | ) | - | |||||
| Gain (loss) on settlement of debt | ( | ) | ||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ||||
| Total other expense | ( | ) | ( | ) | ||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Provision for income taxes | - | - | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Dividend on Series B Preferred Stock | ( | ) | ( | ) | ||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per Common Share | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted weighted average number of common shares outstanding | ||||||||
See the accompanying Notes, which are an integral part of these Consolidated Financial Statements
| F-4 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Series A | Additional | Total Stockholders’ | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance - December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Preferred stock issued for service - related party | - | - | ||||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | - | - | |||||||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | - | ( | ) | - | - | ||||||||||||||||||||||
| Common stock issued for asset purchase | - | - | - | |||||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | - | - | - | |||||||||||||||||||||||
| Settlement of stock subscriptions | - | ( | ) | - | - | |||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||
| Beneficial conversion feature | - | - | - | - | - | |||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance - December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Common stock issued for cash | - | - | - | |||||||||||||||||||||||||
| Common stock issued for conversion of Series B preferred stock | - | - | ||||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | - | - | |||||||||||||||||||||||||
| Common stock issued in conjunction with convertible notes | - | - | - | |||||||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | - | ( | ) | - | - | ||||||||||||||||||||||
| Warrant issued in conjunction with debts | - | - | - | - | - | |||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | - | - | - | |||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
See the accompanying Notes, which are an integral part of these Consolidated Financial Statements
| F-5 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Change in fair value of derivative liability | ||||||||
| (Gain) loss on settlement of debt | ( | ) | ||||||
| Stock-based compensation expense | ||||||||
| Loss on impairment of intangible asset | - | |||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Bad debt | ||||||||
| Lease liability amortization | ( | ) | ||||||
| Penalty interest | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | - | |||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ( | ) | ( | ) | ||||
| Deferred revenue | ||||||||
| Payroll liability | - | |||||||
| Accrued interest | ||||||||
| Deposit | - | ( | ) | |||||
| Net Cash (used in) Operating Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of intellectual property | - | ( | ) | |||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net Cash used in Investing Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of convertible notes payable | ||||||||
| Repayment of convertible notes payable | ( | ) | - | |||||
| Proceeds from issuance of common stock | - | |||||||
| Proceeds from issuance of Series B Preferred Stock | ||||||||
| Redemption of Series B Preferred Stock | ( | ) | - | |||||
| Finance lease payments | ( | ) | ( | ) | ||||
| Proceeds from issuance of notes payable | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Proceeds from related parties | ||||||||
| Repayment to related parties | ( | ) | ( | ) | ||||
| Net Cash provided by Financing Activities | ||||||||
| Net change in cash | ||||||||
| Cash, beginning of year | ||||||||
| Cash, end of year | $ | $ | ||||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Non-cash Investing and Financing transactions: | ||||||||
| Settlement of stock subscriptions | $ | $ | ||||||
| Common stock issued for purchase of intangibles | $ | $ | ||||||
| Common stock issued for exercised cashless warrant | $ | $ | ||||||
| Settlement of series B preferred stock through issuance of common stock | $ | $ | ||||||
| Settlement of convertible notes payable through issuance of common stock | $ | $ | ||||||
| Common stock issued in conjunction with convertible note | $ | $ | ||||||
| Warrant issued in conjunction with debts | $ | $ | ||||||
| Resolution of derivative liability upon exercise of warrant | $ | $ | ||||||
| Resolution of derivative liability upon conversion of debt | $ | $ | ||||||
| Beneficial conversion feature | $ | $ | ||||||
| Equipment paid by capital lease | $ | $ | ||||||
| Derivative liability recognized as debt discount | $ | $ | ||||||
| Settlement of convertible notes payable through issuance of series B preferred stock | $ | $ | ||||||
| Accounts payable for purchase of intellectual property | $ | $ | ||||||
| Issuance of convertible notes for repayment of due to related party | $ | $ | ||||||
| Note payable issued for settlement of License fee payable | $ | $ | ||||||
See the accompanying Notes, which are an integral part of these Consolidated Financial Statements
| F-6 |
DATA443 RISK MITIGATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
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
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements as of December 31, 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”).
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
Certain prior year amounts have been reclassified to conform to the current presentation. These reclassifications had no impact on net earnings (loss) or and financial 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 our data classification, movement, governance, encryption, access control and distribution software and related services. We also perform professional services consulting with specific deliverables managed primarily by statements of work. Customers typically enter into our services subscription and various statements of work concurrently. Most of the Company’s performance obligations are not considered to be distinct from the subscriptions to our software or hosting platforms 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-7 |
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
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.
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.
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-8 |
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.
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.
| F-9 |
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.
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, is recorded at cost reduced by accumulated depreciation and impairment,
if any. Depreciation expense is recognized over the assets’ estimated useful lives of -
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, 2021 and 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.
| F-10 |
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.
| Years Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| (Shares) | (Shares) | |||||||
| Series A Preferred Stock | ||||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Convertible notes | ||||||||
| Preferred B stock | ||||||||
| Total | ||||||||
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
Recently Issued Accounting Pronouncements
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-11 |
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 Unitd 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, 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. 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.
NOTE 4: PROPERTY AND EQUIPMENT
The following table summarizes the components of the Company’s property and equipment as of the dates presented:
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Furniture and Fixtures | $ | $ | ||||||
| Computer Equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net of accumulated depreciation | $ | $ | ||||||
| F-12 |
Depreciation
expense for the years ended December 31, 2021 and 2020, was $
During
the years ended December 31, 2021 and 2020, the Company acquired property and equipment of $
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”).
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 $
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 $
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 $
The following table summarizes the components of the Company’s intellectual property as of the dates presented:
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Intellectual property: | ||||||||
| Word press GDPR rights | $ | $ | ||||||
| ARALOC™ | ||||||||
| ArcMail License | ||||||||
| DataExpressTM | ||||||||
| FileFacetsTM | ||||||||
| IntellyWP™ | ||||||||
| Resilient Network Systems | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Impairment | (75,000 | ) | ||||||
| Intellectual property, net of accumulated amortization | $ | $ | ||||||
| F-13 |
The
Company recognized amortization expense of approximately $
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 $
Based on the carrying value of definite-lived intangible assets as of December 31, 2021, we estimate our amortization expense for the next five years will be as follows:
| Amortization | ||||
| Year Ended December 31, | Expense | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
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:
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Accounts payable | $ | $ | ||||||
| Payroll liabilities | - | |||||||
| Credit cards | ||||||||
| Accrued dividend - preferred stock | ||||||||
| Accrued liabilities | ||||||||
| $ | $ | |||||||
NOTE 7: DEFERRED REVENUE
For the years ended December 31, 2021 and 2020, changes in deferred revenue were as follows:
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Balance, beginning of year | $ | $ | ||||||
| Deferral of revenue | ||||||||
| Recognition of deferred revenue | ( | ) | ( | ) | ||||
| Balance, end of year | $ | $ | ||||||
| F-14 |
As of December 31, 2021 and 2020, is classified as follows:
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Current | $ | $ | ||||||
| Non-current | ||||||||
| $ | $ | |||||||
NOTE 8: LEASES
Operating lease
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 $
Future minimum lease payments under operating leases that have initial noncancelable lease terms in excess of one year at December 31, 2021 were as follows:
| Total | ||||
| Year Ended December 31, | ||||
| 2022 | ||||
| 2023 | ||||
| Thereafter | - | |||
| Less: Imputed interest | ( | ) | ||
| Operating lease liabilities | ||||
| Operating lease liability - current | ||||
| Operating lease liability - non-current | $ | |||
| F-15 |
The following summarizes other supplemental information about the Company’s operating lease as of December 31, 2021:
| Weighted average discount rate | % | |||
| 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
At December 31, 2021, future minimum lease payments under the finance lease obligations, are as follows:
| Total | ||||
| 2022 | ||||
| 2023 | ||||
| Thereafter | - | |||
| Less: Imputed interest | ( | ) | ||
| Finance lease liabilities | ||||
| Finance lease liability | ||||
| Finance lease liability - non-current | $ | |||
As of December 31, 2021 and 2020, finance lease assets are included in property and equipment as follows:
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Finance lease assets | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Finance lease assets, net of accumulated depreciation | $ | $ | ||||||
NOTE 9: CONVERTIBLE NOTES PAYABLE
Convertible notes payable consists of the following:
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Convertible Notes - Issued in fiscal year 2020 | ||||||||
| Convertible Notes - Issued in fiscal year 2021 | ||||||||
| Less debt discount and debt issuance cost | ( | ) | ( | ) | ||||
| Less current portion of convertible notes payable | ||||||||
| Long-term convertible notes payable | $ | $ | ||||||
| F-16 |
During
the years ended December 31, 2021 and 2020, the Company recognized interest expense of $
Replacement of note
During
the year ended December 31, 2020, the Company assigned a portion of note with outstanding principal amounts of $
Effective
September 30, 2020, the Company exchanged (i) its convertible promissory note originally issued on March 20, 2020 in the amount of $
| a. | Principal
balance of $ | |
| b. | No further interest shall accrue so long as there is no event of default; | |
| c. | ||
| d. | No prepayment premiums or penalties; and | |
| e. | Maturity
date of |
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 ($
| a. | No further interest shall accrue so long as there is no event of default; | |
| b. | Maturity
date remains the same: | |
| c. | No right to prepay; | |
| d. | Conversion
price is fixed at $ | |
| e. | ||
| f. | Leak out provision: |
| F-17 |
| 1. | One conversion per week, for no more than forty million shares; | ||
| 2. | If the trading volume for the Company’s common stock exceeds fifty million shares on any day, a second conversion may be exercised during that week, again for no more than forty million shares (a total of eighty million shares for that week). Notes were fully converted in February 2021 |
Effective November 18, 2020, the Company entered into an agreement with three existing investors in the Company
(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
Settlement of note and accrued interest
Convertible note in the original principal amount
of $
Conversion
During
the year ended December 31, 2021, the Company converted notes with principal amounts and accrued interest of $
During
the year ended December 31, 2020, the Company converted notes with principal amounts and accrued interest of $
Convertible notes payable consists of the following:
Promissory Notes - Issued in fiscal year 2020
During
the twelve months ended December 31, 2020, the Company issued a total of $
| ● | Terms
ranging from | |
| ● | Annual
interest rates of | |
| ● | ||
| ● |
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 $
| F-18 |
As
of December 31, 2021, $
Promissory Notes - Issued in fiscal year 2021
During
the year ended December 31, 2021, the Company issued convertible notes of $
| ● | Terms
ranging from | |
| ● | Annual
interest rates of | |
| ● | ||
| ● | ||
| ● |
shares of common stock valued at $ | |
| ● |
warrants to purchase shares of common stock with an exercise price a range from $ |
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, 2021. As of the end of year, at December 31, 2021 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 years ended December 31, 2021 and, 2020, the estimated fair values of the liabilities measured on a recurring basis are as follows:
| Year ended | Year ended | |||||||
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Expected term | ||||||||
| Expected average volatility | % | % | ||||||
| Expected dividend yield | ||||||||
| Risk-free interest rate | % | % | ||||||
The following table summarizes the changes in the derivative liabilities during the years ended December 31, 2021 and 2020:
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||
| Derivative liability as of December 31, 2019 | $ | |||
| Addition of new derivatives recognized as debt discounts | ||||
| Addition of new derivatives recognized as day-one loss | ||||
| Derivative liabilities settled upon conversion of convertible note | ( | ) | ||
| Change in derivative liabilities recognized as loss on derivative | ( | ) | ||
| Derivative liability as of December 31, 2020 | $ | |||
| Addition of new derivatives recognized as debt discounts | ||||
| Addition of new derivatives recognized as day-one loss | ||||
| Derivative liabilities settled upon conversion of convertible note | ( | ) | ||
| Change in derivative liabilities recognized as loss on derivative | ||||
| Derivative liability as of December 31, 2021 | $ | |||
The
aggregate loss on derivatives during the years ended December 31, 2021 and 2020 was $
| F-19 |
NOTE 11: NOTES PAYABLE
Notes payable consists of the following:
| December 31, | December 31, | |||||||||||||
| 2021 | 2020 | Maturity | Interest Rate | |||||||||||
| 10% Promissory note - originated in October 2019 | $ | $ | % | |||||||||||
| Promissory note - originated in October 2019 | % | |||||||||||||
| Promissory note - originated in April 2020 | interest | |||||||||||||
| Paycheck Protection Program Promissory note - originated in April 2020 (1) | % | |||||||||||||
| Economic Injury Disaster Loan - originated in May 2020 (2) | % | |||||||||||||
| Promissory note - originated in June 2020 | $ | % | ||||||||||||
| Promissory note - originated in September 2020 | $ | % | ||||||||||||
| Promissory note - originated in October 2020 | $ | % | ||||||||||||
| Promissory note - originated in November 2020 | $ | % | ||||||||||||
| Promissory note - originated in November 2020 | $ | % | ||||||||||||
| Promissory note - originated in December 2020 | $ | % | ||||||||||||
| Promissory note - originated in January 2021 | $ | % | ||||||||||||
| Promissory note - originated in February 2021 | % | |||||||||||||
| Promissory note - originated in April 2021 | % | |||||||||||||
| Promissory note - originated in April 2021 | $ | % | ||||||||||||
| Promissory note - originated in July 2021 | % | |||||||||||||
| Promissory note - originated in August 2021 | $ | % | ||||||||||||
| Promissory note - originated in September 2021 | $ | % | ||||||||||||
| Promissory note - originated in December 2021 | $ | % | ||||||||||||
| Promissory note - originated in December 2021 | $ | % | ||||||||||||
| Promissory note - originated in December 2021 | $ | % | ||||||||||||
| Less debt discount and debt issuance cost | ( | ) | ( | ) | ||||||||||
| Less current portion of promissory notes payable | ||||||||||||||
| Long-term promissory notes payable | $ | $ | ||||||||||||
| (1) |
During the 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 eight (8) weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.
| F-20 |
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) |
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 years ended December 31, 2021 and 2020, the Company recognized interest expense of $
During
the years ended December 31, 2021 and 2020, the Company issued a total of $
During
the year ended December 31, 2021, debts and accrued interest of $
NOTE 12: CAPITAL STOCK AND REVERSE STOCK SPLIT
Changes in Authorized Shares
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
On
March 7, 2022, the Company filed an amendment to its Articles of Incorporation to effect a
Preferred Stock
As of December 31, 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, shares of Series A were issued and outstanding. Each share of Series A was (i) convertible into shares of common stock, and (ii)
As
of December 31, 2021 and 2020, and shares of Series B were issued and outstanding, respectively.
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 $ |
During
the year ended December 31, 2020, the Company issued shares of Series B preferred stock for $
| F-21 |
During
the years ended December 31, 2021 and 2020, the Company recorded accrued dividend of $
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 $
Common Stock
As
of December 31, 2021, the Company is authorized to issue
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, 2021, the Company issued common stock as follows:
| ● | shares issued for conversion of debt; | |
| ● |
shares issued for cash of $, less financing cost of $ | |
| ● | shares issued for service; | |
| ● | ||
| ● | 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 year 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,
As
a result of the reset features, the warrants increased by
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
| F-22 |
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 ($
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 $
A summary of activity during the period ended December 31, 2021 follows:
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
| Outstanding, December 31, 2019 | $ | |||||||
| Granted | ||||||||
| Reset feature | ||||||||
| Exercised | ( | ) | ||||||
| Forfeited/canceled | ( | ) | ||||||
| Outstanding, December 31, 2020 | $ | |||||||
| Granted | ||||||||
| Reset feature | ||||||||
| Exercised | ( | ) | ||||||
| Forfeited/canceled | ||||||||
| Outstanding, December 31, 2021 | $ | |||||||
The following table summarizes information relating to outstanding and exercisable warrants as of December 31, 2021:
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||||
Number of Shares | Weighted Average Remaining Contractual life | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | ||||||||||||||
| $ | $ | |||||||||||||||||
| $ | $ | |||||||||||||||||
| $ | $ | |||||||||||||||||
| $ | $ | |||||||||||||||||
| $ | $ | |||||||||||||||||
| $ | $ | |||||||||||||||||
| $ | $ | |||||||||||||||||
| F-23 |
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:
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Non-operating loss carryforward | $ | $ | ||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| 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 2021 the valuation allowance increased by $
A
reconciliation between expected income taxes, computed at the federal income tax rate of
| Years Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Loss for the year | $ | ( | ) | $ | ( | ) | ||
| Income tax (recovery) at statutory rate | $ | ( | ) | $ | ( | ) | ||
| State income tax expense, net of federal tax effect | ( | ) | ( | ) | ||||
| Permanent difference and other | ||||||||
| Change in valuation allowance | ||||||||
| Income tax expense per books | $ | $ | ||||||
The
effective tax rate of
Stock Options
During the years ended December 31, 2021 and 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 and have a maximum term of .
| F-24 |
| Weighted-Average | ||||||||
| Options Outstanding | Exercise Price | |||||||
| Balance as of December 31, 2019 | $ | |||||||
| Grants | ||||||||
| Exercised | ( | ) | ||||||
| Cancelled | ( | ) | ||||||
| Balance as of December 31, 2020 | $ | |||||||
| Grants | ||||||||
| Exercised | ||||||||
| Cancelled | ||||||||
| Balance as of December 31, 2021 | $ | |||||||
The weighted average grant date fair value of stock options granted during the years ended December 31, 2021 and 2020 was $ and $, respectively. The total fair value of stock options that granted during the year ended December 31, 2021 and 2020 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, 2021 and 2020:
| 2021 | 2020 | |||||||
| Expected term (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.
| Weighted-Average | ||||||||||||
| Number of | Remaining Contractual Life | Weighted-Average | ||||||||||
| Options | (In Years) | Exercise Price | ||||||||||
| Outstanding | $ | |||||||||||
| Exercisable | $ | |||||||||||
| Expected to vest | $ | |||||||||||
As of December 31, 2021 and 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.
| F-25 |
Restricted Stock Awards
During the years ended December 31, 2021 and 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 .
| Weighted-Average | ||||||||
| Shares | Fair Value | |||||||
| Balance as of December 31, 2019 | ||||||||
| Shares of restricted stock granted | ||||||||
| Exercised | ||||||||
| Cancelled | ( | ) | ||||||
| Balance as of December 31, 2020 | ||||||||
| Shares of restricted stock granted | ||||||||
| Exercised | ||||||||
| Cancelled | ||||||||
| Balance as of December 31, 2021 | ||||||||
| December 31, | December 31, | |||||||
| Number of Restricted Stock Awards | 2021 | 2020 | ||||||
| Vested | ||||||||
| Non-vested | ||||||||
As of December 31, 2021 and 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:
| 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 | ||||||
| $ | 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
On
September 16, 2019, the Company entered into an Asset Purchase Agreement with DMBGroup, LLC. Amounts owed to DMBGroup, LLC including
the note payable of $
During
the year ended December 31, 2021, the Company borrowed $
| F-26 |
During
the year ended December 31, 2020, our CEO repaid $
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, 2021 and 2020, the Company had due to related party of $
NOTE 17: SUBSEQUENT EVENTS
Subsequent to December 31, 2021, the following transactions occurred:
| ● | The
Company issued shares of Series B Preferred stock for $ | |
| ● | The
Company fully redeemed all outstanding shares of Series B Preferred stock for $ | |
| ● | The
Company issued convertible notes a total of $ | |
| ● | On
January 19, 2022, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Centurion Holdings
I, LLC, a Missouri limited liability company (“Centurion”) and certain other parties. Pursuant to the Purchase Agreement,
Centurion sold, transferred, assigned, conveyed and delivered to the Company, and the Company purchased from Centurion, all right,
title, and interest in and to certain assets in the Purchase Agreement (the “Assets”). In exchange for the Assets, the
Company paid to Centurion (i) $ |
| F-27 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DATED: March 31, 2022 | DATA443 RISK MITIGATION, INC. | |
| BY: | /s/ Jason Remillard | |
| Jason Remillard, | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| NAME | TITLE | DATED | ||
| /s/ Jason Remillard | Chairman of the Board; | March 31, 2022 | ||
| Jason Remillard | Chief Executive Officer | |||
| /s/ Nanuk Warman | Chief Financial Officer | March 31, 2022 | ||
| Nanuk Warman |
| 51 |