Data443 Risk Mitigation, Inc 10-Q for FY2021 Q3
Data443 Risk Mitigation, Inc. (ATDS)
About this 10-Q
Data443 Risk Mitigation, Inc filed this 10-Q on October 26, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.5M
- up 113.5% from $700.28K a year earlier
- Net loss
- $974.12K
- compared with a net loss of $1.5M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
OR
For the transition period from ________ to ________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State of incorporation) |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and, (2) has been subject to such filing requirements for the past 90 days.
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 is a shell company (as defined in Rule 12b-2 of the Act).
Yes
☐
The outstanding number of shares of common stock as of October 26, 2021 was: .
Documents incorporated by reference: None
DATA443 RISK MITIGATION, INC.
FORM 10-Q
TABLE OF CONTENTS
| 1 |
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DATA443 RISK MITIGATION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, | 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 | ||||||||
| Derivative liability | - | |||||||
| Due to a related party | ||||||||
| License fee payable | - | |||||||
| Operating lease liability | ||||||||
| Finance lease liability | ||||||||
| Total Current Liabilities | ||||||||
| Commitments and contingencies | - | - | ||||||
| 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 | ||||||||
| 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 | ||||||||
| 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 unaudited Consolidated Financial Statements
| 2 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Net income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| 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 unaudited Consolidated Financial Statements
| 3 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
For the Nine Months Ended September 30, 2021
| Total | ||||||||||||||||||||||||||||
|
Series A Preferred Stock | Common Stock | Additional Paid in | Accumulated | Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance - December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Common stock issued for cash | - | |||||||||||||||||||||||||||
| Common stock issued for conversion of preferred stock | - | |||||||||||||||||||||||||||
| Preferred stock issued for service | ||||||||||||||||||||||||||||
| Preferred stock issued for service , shares | ||||||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | |||||||||||||||||||||||||||
| Common stock issued in conjunction with convertible note | - | |||||||||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | ( | ) | |||||||||||||||||||||||||
| Warrant issued in conjunction with debts | - | - | ||||||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | ||||||||||||||||||||||||||
| Stock issued for acquisition | ||||||||||||||||||||||||||||
| Stock issued for acquisition , shares | ||||||||||||||||||||||||||||
| Settlement of stock subscriptions | - | - | ||||||||||||||||||||||||||
| Settlement of stock subscriptions, shares | ||||||||||||||||||||||||||||
| Issuance of restricted stock | ||||||||||||||||||||||||||||
| Warrants on stock subscriptions | ||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||
| Adjustment of reverse stock split | - | ( | ) | |||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance - September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
For the Three Months Ended September 30, 2021
|
Series A Preferred Stock | Common Stock | Additional Paid in | Accumulated |
Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance - June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | |||||||||||||||||||||||||||
| Common stock issued for conversion of preferred stock | - | |||||||||||||||||||||||||||
| Common stock issued in conjunction with convertible note | - | |||||||||||||||||||||||||||
| Warrant issued in conjunction with debts | - | - | ||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||
| Adjustment of reverse stock split | - | ( | ) | |||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance - September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
See the accompanying Notes, which are an integral part of these unaudited Consolidated Financial Statements
| 4 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
For the Nine Months Ended September 30, 2020
| Total | ||||||||||||||||||||||||||||
|
Series A Preferred Stock | Common Stock | Additional Paid in | Accumulated | Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance - December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Preferred stock issued for service | - | |||||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | |||||||||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | ( | ) | |||||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | ||||||||||||||||||||||||||
| Stock issued for acquisition | - | ( | ) | |||||||||||||||||||||||||
| Settlement of stock subscriptions | ( | ) | ||||||||||||||||||||||||||
| Issuance of restricted stock | - | - | ||||||||||||||||||||||||||
| Warrants on stock subscriptions | - | - | ||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance - September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
For the Three Months Ended September 30, 2020
|
Series A Preferred Stock | Common Stock | Additional Paid in | Accumulated |
Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance - June 30, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||
| ( | ) | ( | ) | |||||||||||||||||||||||||
| Settlement of stock subscriptions | - | ( | ) | |||||||||||||||||||||||||
| Preferred stock issued for service | - | |||||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | |||||||||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | ( | ) | |||||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | ||||||||||||||||||||||||||
| Stock-based compensation | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance - September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
See the accompanying Notes, which are an integral part of these unaudited Consolidated Financial Statements
| 5 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Change in fair value of derivative liability | ||||||||
| Loss on settlement of debt | ||||||||
| Stock-based compensation expense | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Bad debt expense | ||||||||
| Lease liability amortization | ( | ) | ||||||
| Penalty interest | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ( | ) | ( | ) | ||||
| Deferred revenue | ||||||||
| Payroll liability | ||||||||
| Accrued interest | ||||||||
| Accrued dividend | ( | ) | ||||||
| Deposit | ( | ) | ||||||
| Net Cash provided by (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 | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Proceeds from issuance 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 period | ||||||||
| Cash, end of period | $ | $ | ||||||
| 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 | $ | $ | ||||||
| Equipment paid by capital lease | $ | $ | ||||||
| Derivative liability recognized as debt discount | $ | $ | ||||||
| Settlement of convertible notes payable through issuance of preferred common 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 unaudited Consolidated Financial Statements
| 6 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
NOTE 1: GENERAL
Description of Business
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.
We are in the data security and privacy business, operating as a software and services provider. We provide software products, services, and solutions for the marketplace that are designed to protect, manage, analyze, alert, and secure enterprise data via the cloud, hybrid, and on-premises architectures. Our suite of security products focus on the protection of: sensitive files and emails; confidential customer, patient, and employee data; financial records; strategic and product plans; intellectual property; and any other data requiring security, allowing our clients to create, share, and protect their data wherever it is stored.
We deliver solutions and capabilities via all technical architectures, 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.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements as of September 30, 2021 include the accounts of the Company and its wholly-owned subsidiary, Data 443 Risk Mitigation, Inc., a North Carolina operating company, and the operations of Myriad Software Productions, LLC through September 2018 when it was liquidated. Prior to the acquisition of Data 443 Risk Mitigation, Inc. in North Carolina and the assets of Myriad Software Productions, LLC in 2018, these two entities were controlled by our sole director and officer, Jason Remillard. On November 17, 2017, Mr. Remillard acquired control of LandStar, Inc. through his purchase of all the outstanding Series A preferred shares of the Company, and as a result, these two entities became common controlled entities that require consolidation of results with the reporting company, LandStar, Inc., from the time common control occurred. All intercompany accounts and activities have been eliminated. These consolidated financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
Interim Financial Statements
These unaudited consolidated financial statements have been prepared in accordance U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2020 and notes thereto and other pertinent information contained in our Form 10-K the Company has filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2021. The results of operations for the nine months ended September 30, 2021, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2021.
| 7 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
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 nine months ended September 30, 2021, compared to $ in share-based compensation expense for the nine months ended September 30, 2020. Determining the appropriate fair value model and the related assumptions requires judgment. During the nine months ended September 30, 2021, 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.
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method and as if converted method. Dilutive potential common shares include outstanding stock options, warrant and convertible notes.
SCHEDULE OF ANTI-DILUTIVE BASIC AND DILUTED EARNINGS PER SHARE
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| (Shares) | (Shares) | |||||||
| Series A Preferred Stock | ||||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Convertible notes | ||||||||
| Preferred B stock | ||||||||
| Total | ||||||||
| 8 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
COVID-19
In March 2020, the World Health Organization (“WHO”) declared the novel coronavirus COVID-19 (“COVID-19”) a global pandemic. The pandemic adversely affected workforces, economies, and financial markets globally in 2020 and, until contained, is still expected to disrupt general business operations. The COVID-19 pandemic and the measures taken by many governments around the world in response could in the future meaningfully impact our business, results of operations and financial condition. The Company is currently unable to predict the duration of that impact but continues to monitor its accounting estimates of the carrying value of certain assets and liabilities relating to its leases and will continue to do so as additional information is obtained or new events occur. Actual results could differ from our estimates and judgments, and any such differences may be material to our financial statements.
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.
On June 16, 2016, the FASB completed its Financial Instruments—Credit Losses project by issuing Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The new guidance requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
The new guidance; (i) eliminates the probable initial recognition threshold in current GAAP and, instead, reflects an organization’s current estimate of all expected credit losses over the contractual term of its financial assets, (ii) broadens the information that an entity can consider when measuring credit losses to include forward-looking information, (iii) increases usefulness of the financial statements by requiring timely inclusion of forecasted information in forming expectations of credit losses, (iv) increases comparability of purchased financial assets with credit deterioration (PCD assets) with other purchased assets that do not have credit deterioration as well as originated assets because credit losses that are expected will be recorded through an allowance for credit losses for all assets, (v) increases users’ understanding of underwriting standards and credit quality trends by requiring additional information about credit quality indicators by year of origination (vintage), and (vi) aligns the income statement recognition of credit losses, for available-for-sale debt securities, with the reporting period in which changes occur by recording credit losses (and subsequent changes in credit losses) through an allowance rather than a write down.
The new guidance affects organizations that hold financial assets and net investments in leases that are not accounted for at fair value with changes in fair value reported in net income. It affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.
For public business entities that meet the definition of a U.S. Securities and Exchange (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, it is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application is permitted.
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 2: LIQUIDITY AND GOING CONCERN
The accompanying consolidated financial statements have been prepared (i) in accordance with accounting principles generally accepted in the United States, and (ii) assuming that the 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 only recently started to generate significant income. The Company is subject to the risks and uncertainties associated with a business with a limited history of substantive revenue, as well as limitations on its operating capital resources. 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 September 30, 2021, the Company had negative net working capital; an accumulated deficit; and, had reduced its operating losses.
We continue to monitor the effects COVID-19 could have on our operations and liquidity including our ability to collect account receivable timely from our customers due to the economic impacts COVID-19 could have on the general economy. COVID-19 has also impacted our ability to travel, meet distribution partners in their offices, present at tradeshows, and perform other enterprise-related sales functions. While most customers have returned to their pre-pandemic “normal” office working conditions, a number have yet to do so. These continued operating conditions have impacted our ability to execute and deploy some of our normal sales and marketing activities. While we are not unique in this position, these factors, among others, raise some doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| 9 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
NOTE 3: PROPERTY AND EQUIPMENT
The following table summarizes the components of the Company’s property and equipment as of the dates presented:
SUMMARY OF COMPONENTS OF PROPERTY AND EQUIPMENT
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Furniture and Fixtures | $ | $ | ||||||
| Computer Equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net of accumulated depreciation | $ | $ | ||||||
Depreciation expense for the nine months ended
September 30, 2021 and 2020, was $
During the nine months years ended September 30,
2021 and 2020, the Company purchased property and equipment of $
NOTE 4: INTELLECTUAL PROPERTY
The following table summarizes the components of the Company’s intellectual property as of the dates presented:
SCHEDULE OF INTELLECTUAL PROPERTY
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Intellectual property: | ||||||||
| Word press GDPR rights | $ | $ | ||||||
| ARALOC™ | ||||||||
| ArcMail License | ||||||||
| DataExpressTM | ||||||||
| FileFacetsTM | ||||||||
| IntellyWP™ | ||||||||
| Resilient Network Systems | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Intellectual property, net of accumulated amortization | $ | $ | ||||||
The Company recognized amortization expense of
$
Based on the carrying value of definite-lived intangible assets as of September 30, 2021, we estimate our amortization expense for the next five years will be as follows:
SCHEDULE OF FUTURE AMORTIZATION EXPENSE OF INTANGIBLE ASSETS
| Amortization | ||||
| Year Ended December 31, | Expense | |||
| 2021 (excluding the nine months ended September 30, 2021) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| Intellectual property, net of accumulated amortization | ||||
| 10 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
NOTE 5: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table summarizes the components of the Company’s accounts payable and accrued liabilities as of the dates presented:
SUMMARY OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Accounts payable | $ | $ | ||||||
| Payroll liabilities | ||||||||
| Credit cards | ||||||||
| Accrued dividend - preferred stock | ||||||||
| Accrued liabilities | - | |||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
NOTE 6: DEFERRED REVENUE
For the nine months ended September 30, 2021 and as of December 31 2020, changes in deferred revenue were as follows:
SUMMARY OF CHANGES IN DEFERRED REVENUE
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Balance, beginning of period | $ | $ | ||||||
| Deferral of revenue | ||||||||
| Recognition of deferred revenue | ( | ) | ( | ) | ||||
| Balance, end of period | $ | $ | ||||||
As of September 30, 2021 and December 31, 2020, is classified as follows:
SCHEDULE OF DEFERRED REVENUE
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Current | $ | $ | ||||||
| Non-current | ||||||||
| Deferred revenue | $ | $ | ||||||
NOTE 7: LEASES
Operating lease
We recognized total lease expense of approximately
$
| 11 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
Future minimum lease payments under operating leases that have initial noncancelable lease terms in excess of one year at September 30, 2021 were as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER OPERATING LEASES
| Total | ||||
| Year Ended December 31, | ||||
| 2021 (excluding the nine months ended September 30, 2021) | $ | |||
| 2022 | ||||
| 2023 | ||||
| Thereafter | - | |||
| Total lease payment | ||||
| Less: Imputed interest | ( | ) | ||
| Operating lease liabilities | ||||
| Operating lease liability – current | ||||
| Operating lease liability - non-current | $ | |||
The following summarizes other supplemental information about the Company’s operating lease as of September 30, 2021:
SCHEDULE OF OTHER SUPPLEMENTAL INFORMATION UNDER OPERATING LEASE
| 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 September 30, 2021, future minimum lease payments under the finance lease obligations, are as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER FINANCE LEASES
| Total | ||||
| 2021 (excluding the nine months ended September 30, 2021) | $ | |||
| 2022 | ||||
| 2023 | ||||
| Thereafter | - | |||
| Total finance lease payment | ||||
| Less: Imputed interest | ( | ) | ||
| Finance lease liabilities | ||||
| Finance lease liability | ||||
| Finance lease liability - non-current | $ | |||
As of September 30, 2021 and December 31 2020, finance lease assets are included in property and equipment as follows:
SCHEDULE OF FINANCE LEASE ASSETS
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Finance lease assets | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Finance lease assets, net of accumulated depreciation | $ | $ | ||||||
| 12 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
NOTE 8: CONVERTIBLE NOTES PAYABLE
Convertible notes payable consists of the following:
SCHEDULE OF CONVERTIBLE NOTES PAYABLE
| September 30, | December 31, | |||||||
| 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 | $ | $ | ||||||
During the nine months
ended September 30, 2021 and 2020, the Company recognized interest expense of $
Conversion
During the nine months ended September 30, 2021,
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 | |
| ● | ||
| ● |
Promissory Notes - Issued during first nine months of fiscal year 2021
During the nine months ended September 30, 2021,
the Company issued convertible notes of $
| ● | Terms ranging from | |
| ● | Annual interest rates of | |
| ● | ||
| ● | ||
| ● | shares of common stock valued at $ |
| 13 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
NOTE 9: 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 September 30, 2021. As of the nine month period ended September 30, 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 nine months ended September 30, 2021 and 2020, the estimated fair values of the liabilities measured on a recurring basis are as follows:
The Company valued the conversion feature using the
Binomial pricing model. The fair value of the derivative liability for all the notes and convertible preferred stock that became convertible,
including the notes and convertible preferred stock issued in prior years, during the nine months ended September 30, 2021 amounted to
$
For the nine months September 30, 2021 and year ended December 31, 2020, the estimated fair values of the liabilities measured on a recurring basis are as follows:
SCHEDULE OF FAIR VALUE OF LIABILITIES MEASURED ON RECURRING BASIS
| Nine months Ended | Year Ended | |||||||
| September 30, | 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 nine months ended September 30, 2021 and 2020:
SCHEDULE OF CHANGES IN DERIVATIVE LIABILITIES
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||
| 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 | ( | ) | ||
| Reclassification to common stock payable | ( | ) | ||
| Change in derivative liabilities recognized as loss on derivative | ||||
| Derivative liability as of September 30, 2021 | $ | |||
The
aggregate loss on derivatives during the nine months ended September 30, 2021 and 2020 was $
| 14 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
NOTE 10: NOTES PAYABLE
Notes payable consists of the following:
SCHEDULE OF NOTES PAYABLE
| September 30, | December 31, | |||||||||||||
| 2021 | 2020 | Maturity | Interest Rate | |||||||||||
| 10% Promissory note - originated in October 2019 | $ | $ | % | |||||||||||
| Promissory note - originated in October 2019 | % | |||||||||||||
| Promissory note - originated in April 2020 | No interest | |||||||||||||
| Paycheck Protection Program Promissory note - originated in April 2020 (1) | % | |||||||||||||
| Economic Injury Disaster Loan - originated in May 2020 (2,4) | % | |||||||||||||
| 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 February 2021(3) | % | |||||||||||||
| Promissory note - originated in January 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 | $ | % | ||||||||||||
| Less debt discount and debt issuance cost | ( | ) | ( | ) | ||||||||||
| Less current portion of promissory notes payable | ||||||||||||||
| Long-term promissory notes payable | $ | $ | ||||||||||||
| 15 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
| (1) | In response to the Coronavirus (COVID-19) pandemic, the US Government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. The CARES Act provides fast and direct economic assistance for entrepreneurs and small businesses through the US Small Business Administration (“SBA”). | |
| During the period, 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 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. | ||
| Under the PPP, the Company has applied to have certain amounts forgiven under the direction of the Administrator of the SBA as the Company believes it has satisfied 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. | ||
| (2) | The Company received an advance under the Economic Injury Disaster Loan (EIDL) program. | |
| As the Company received an EIDL advance and a PPP loan, the EIDL advance portion will be applied against the PPP forgiveness amount as repayment to the SBA upon approval of the Company’s PPP forgiveness application. | ||
| (3) | On
February 12, 2021, the Company issued notes payable of $ | |
| (4) | The Company received a second advance under the EIDL program. |
During the nine months ended September
30, 2021 and 2020, the Company recognized interest expense of $
NOTE 11: COMMITMENTS AND CONTINGENCIES
The Company accounts for contingent liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 450, Contingencies. This guidance requires management to assess potential contingent liabilities that may exist as of the date of the financial statements to determine the probability and amount of loss that may have occurred, which inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. For loss contingencies considered remote, no accrual or disclosures are generally made. Management has assessed potential contingent liabilities as of September 30, 2021, and based on that assessment there are no probable loss contingencies requiring accrual or establishment of a reserve.
DMB Note Collection Action
DMB
Group, LLC (“DMB”) filed a lawsuit against Data443 Risk Mitigation, Inc., a North Carolina corporation, the Company’s
wholly-owned subsidiary (the “Subsidiary”), June 17, 2021 in County Court in Denton County, Texas, naming the Subsidiary
as the defendant (the “Complaint”). DMB claimed a breach of the note issued to it on or around 16 September 2019 in
the original principal amount of $
| 16 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
Employment Related Claims
The Company views most legal proceedings involving claims of former employees as routine litigation incidental to the business, and therefore not material. The Company is currently involved in two such matters with former employees. One matter involves three former employees, and that matter has been resolved and settled. The other matter involves one former employee who is seeking additional compensation. In response, the Company believes that the former employee was terminated “for cause” and is owed no further consideration or compensation. The Company intends to vigorously dispute the claim.
Litigation
In the ordinary course of business, we are involved in a number of lawsuits incidental to our business, including litigation related to intellectual property, employees, and commercial matters. Although it is difficult to predict the ultimate outcome of these cases, management believes that any ultimate liability would not have a material adverse effect on our consolidated financial condition or results of operations. However, an unforeseen unfavorable development in any of these cases could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows in the period in which it is recorded.
NOTE 12: CAPITAL STOCK AND REVERSE STOCK SPLIT
Changes in Authorized Shares
On February 19, 2021 the written consent of the holders of a majority of the voting power of the outstanding capital stock of the Company as of the Record Date (the “Consenting Stockholders”) approved the following corporate actions:
| (1) | Amendment
of our articles of incorporation (the “Articles of Incorporation”) to provide for a decrease in the authorized shares
of the Company’s Common Stock from to a number of not less than | |
| (2) | That
the Board be authorized to implement through the amendment to our Articles of Incorporation a reverse stock split of the Company’s
Common Stock by a ratio of |
On April 21, 2021, the Company increased the number of authorized shares of common stock from billion to billion in order to satisfy the share reserve requirement under a financing closed on April 23, 2021.
On
June 10, 2021, the Company filed a Certificate of Amendment to the Articles of Incorporation (the “Certificate of Amendment”)
which served to (i) reduce the number of authorized shares of common stock to one billion (
All per share amounts and number of shares in the consolidated financial statements and related notes have been retroactively adjusted to reflect the reverse stock split
| 17 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
Preferred Stock
Series A Preferred Stock
As
of September 30, 2021 and December 31, 2020, shares of Series A were issued and outstanding. Each share of Series A was (i) convertible
into shares of common stock, and (ii)
Series B Preferred Stock
As
of September 30, 2021 and December 31, 2020, and shares of Series B were issued and outstanding, respectively. Each share
of Series B (i) has a stated value of Ten Dollars ($
During the nine months ended September 30, 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 interest of $ |
During the nine months ended September 30, 2021, shares of series B preferred stock were converted into shares of our common stock.
Common Stock
As of September 30, 2021, the Company is authorized to issue shares of common stock with a par value of $. All shares have equal voting rights, are non-assessable, and have one vote per share. The total number of shares of Company common stock issued and outstanding as of September 30, 2021 and December 31, 2020, respectively, was and shares, respectively.
During the nine months ended September 30, 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 | |
| ● | shares issued for adjustment of reverse stock split |
| 18 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
Warrants
During the nine months ended September 30, the Company
issued the following warrants: (i) to acquire shares of the Company’s common stock pursuant at an exercise price of $,
with a cashless exercise option. any warrants; (ii) to acquire shares of the Company’s common stock at an exercise price
of $, exercisable only in the event of a default under that certain Senior Secured Promissory Note issued on 23 April 2021 in the
original principal amount of $
A summary of activity during the nine months ended September 30, 2021 follows:
SCHEDULE OF WARRANTS ACTIVITY
| Warrants Outstanding | ||||||||
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
| Outstanding, December 31, 2020 | $ | |||||||
| Granted | ||||||||
| Reset feature | ||||||||
| Exercised | ( | ) | ||||||
| Forfeited/canceled | ||||||||
| Outstanding, September 30, 2021 | $ | |||||||
The following table summarizes information relating to outstanding and exercisable warrants as of September 30, 2021:
SCHEDULE OF OUTSTANDING AND EXERCISABLE WARRANTS
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||
| Weighted Average Remaining | Weighted | |||||||||||||||
|
Number of Shares | Contractual life (in years) |
Average Exercise Price |
Number of Shares |
Weighted Average Exercise Price | ||||||||||||
| $ | $ | |||||||||||||||
| $ | $ | |||||||||||||||
| $ | $ | |||||||||||||||
| $ | $ | |||||||||||||||
Stock Options
During the nine months ended September 30, 2021, 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 anniversary date of the grant and have a maximum term of .
SCHEDULE OF STOCK OPTION ACTIVITY
| Options | Weighted-Average | |||||||
| Outstanding | Exercise Price | |||||||
| Balance as of December 31, 2020 | $ | |||||||
| Grants | ||||||||
| Exercised | ||||||||
| Cancelled | ||||||||
| Balance as of September 30, 2021 | $ | |||||||
| 19 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
The weighted average grant date fair value of stock options granted during the nine months ended September 30, 2021 was $. The total fair value of stock options that granted during the nine months ended September 30, 2021 was approximately $. The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions for stock options granted during the nine months ended September 30, 2021:
| Expected term (years) | years | |||
| Expected stock price volatility | % | |||
| Weighted-average risk-free interest rate | % | |||
| Expected dividend | $ |
Volatility is a measure of the amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company estimates expected volatility giving primary consideration to the historical volatility of its common stock. The risk-free interest rate is based on the published yield available on U.S. Treasury issues with an equivalent term remaining equal to the expected life of the stock option. The expected lives of the stock options represent the estimated period of time until exercise or forfeiture and are based on the simplified method of using the mid-point between the vesting term and the original contractual term.
SCHEDULE OF STOCK OPTIONS VESTED AND EXPECTED TO VEST
| Weighted-Average | ||||||||||||
| Number of | Remaining Contractual Life | Weighted- Average | ||||||||||
| Options | (In Years) | Exercise Price | ||||||||||
| Outstanding | $ | |||||||||||
| Exercisable | $ | |||||||||||
| Expected to vest | $ | |||||||||||
As of September 30, 2021 and December 31, 2020, there was $ and $, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements which is expected to be recognized within the next year.
Restricted Stock Awards
During the nine months ended September 30, 2021, the Company issued restricted stock awards for shares of common stock which have been reserved for the holders of the awards. Restricted stock awards were issued to certain consultants and advisors as consideration for services rendered. The terms of the restricted stock units are determined by the Company’s Board of Directors. The Company’s restricted stock shares generally vest over a period of one year and have a maximum term of ten years.
SCHEDULE OF RESTRICTED STOCK ACTIVITY
| Weighted-Average | ||||||||
| Shares | Fair Value | |||||||
| Balance as of December 31, 2020 | ||||||||
| Shares of restricted stock granted | ||||||||
| Exercised | ||||||||
| Cancelled | ||||||||
| Balance as of September 30, 2021 | ||||||||
| September 30, | December 31, | |||||||
| Number of Restricted Stock Awards | 2021 | 2020 | ||||||
| Vested | ||||||||
| Non-vested | ||||||||
As of September 30, 2021 and December 31, 2020, there was $ and $, respectively, of total unrecognized compensation cost related to non-vested share-based compensation, which is expected to be recognized over the next year.
| 20 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
NOTE 14: 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.
On
September 16, 2019, the Company entered into an Asset Purchase Agreement with DMBGroup, LLC (“DMB Group”). A significant
part of the purchase price was in the form of the Company’s common stock. As a direct result of this transaction and the Company’s
common stock issued to DMB Group, we determined that DMB Group was a related party. Amounts owed to DMBGroup, including the note payable
of $
During the nine months ended
September 30, 2021, the Company borrowed $
As of September 30, 2021
and December 31, 2020, the Company had due to related party of $
NOTE 15: SUBSEQUENT EVENTS
Subsequent to September 30, 2021, and through the date these interim consolidated financial statements were approved for issuance, the following transactions occurred:
●
● |
On October 4, 2021, the Company converted shares of its Series B Preferred Stock into 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
$ | |
| ● | On
October 19, 2021, the Company closed a financing transaction pursuant to the terms and conditions of a Securities Purchase Agreement
(the “Purchase Agreement”) with Mast Hill Fund, L.P., a Delaware limited partnership (“Mast Hill”).
Pursuant to the Purchase Agreement, Mast Hill purchased from the Company a Promissory Note (the “Note”) in the
aggregate principal amount of $ |
| 21 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of the results of operations and financial condition for the nine months ended September 30, 2021 and 2020 should be read in conjunction with our consolidated financial statements, and the notes to those financial statements that are included elsewhere in this Quarterly Report.
All references to “Data443”, “we”, “our,” “us” and the “Company” in this Item 2 refer to Data443 Risk Mitigation, Inc., a Nevada corporation.
The discussion in this section contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “would” or “will” or the negative of these terms or other comparable terminology, but their absence does not mean that a statement is not forward-looking. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, which could cause our actual results to differ from those projected in any forward-looking statements we make. Several risks and uncertainties we face are discussed in more detail under “Risk Factors” in Part I, Item 1A of the Form 10 filed by the Company with the SEC on January 11, 2019, and in the Part I, Item 1A of the Form 10-K filed by the Company with the SEC on March 23, 2021, and in the discussion and analysis below. You should, however, understand that it is not possible to predict or identify all risks and uncertainties and you should not consider the risks and uncertainties identified by us to be a complete set of all potential risks or uncertainties that could materially affect us. You should not place undue reliance on the forward-looking statements we make herein because some or all of them may turn out to be wrong. We undertake no obligation to update any of the forward-looking statements contained herein to reflect future events and developments, except as required by law. The following discussion should be read in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q.
On February 19, 2021, we announced the approval of a reverse stock split of our common stock and a reduction in the number of authorized, each within a specified range, with a final decision to be made by our board of directors. On June 14, 2021, we were advised by the Nevada Secretary of State that it had accepted the Company’s filing of a Certificate of Amendment to the Articles of Incorporation, with a filing and effective date of June 11, 2021 (the “Certificate of Amendment”). The Certificate of Amendment (i) reduced the number of authorized shares of common stock to one billion (1,000,000,000); and, (ii) effected a reverse stock split (the “Reverse Stock Split”) of its issued common stock in a ratio of 1-for-2,000. The preferred stock of the Company was not changed. Trading of our common stock began on a split-adjusted basis on July 1, 2021. All common stock and per share data have been retroactively adjusted for the impact of the split.
Overview
Our company was incorporated as LandStar, Inc., a Nevada corporation, on May 4, 1998, for the purpose of purchasing, developing and reselling real property, with its principal focus on the development of raw land. From incorporation through December 31, 1998, we had no business operations and was a development-stage company. We did not purchase or develop any properties and decided to change our business plan and operations. On March 31, 1999, we acquired approximately 98.5% of the common stock of Rebound Rubber Corp. (“Rebound Rubber”) pursuant to a share exchange agreement with Rebound Rubber and substantially all of Rebound Rubber’s shareholders. The acquisition was effected by issuing 14,500,100 shares of common stock, which constituted 14.5% of the 100,000,000 of our authorized shares, and 50.6% of the 28,622,100 issued and outstanding shares on completion of the acquisition.
The share exchange with Rebound Rubber (and other transactions occurring in March 1999) resulted in a change of control and the appointment of new officers and directors. These transactions also changed our focus to the development and utilization of technology to de-vulcanize and reactivate recycled rubber for resale as a raw material in the production of new rubber products. Our business strategy was to sell the de-vulcanized material (and compounds using the materials) to manufacturers of rubber products.
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Prior to 2001 we had no revenues. In 2001 and 2002 revenues were derived from management services rendered to a rubber recycling company.
In August 2001, we amended our Articles of Incorporation to authorize 500,000,000 shares of common stock, $0.001 par value per share, and 150,000,000 shares of preferred stock, $0.01 par value per share. We may designate preferred stock into specific classes by action of our board of directors. In May 2008, our board of directors established a class of Convertible Preferred Series A (the “Series A”), authorizing 10,000,000 shares. When established, among other things, (i) each share of Series A was convertible into 1,000 shares of our common stock, and (ii) a holder of Series A was entitled to vote 1,000 shares of common stock for each share of Series A on all matters submitted to a vote by stockholders.
In September 2008, we amended our Articles of Incorporation to increase the number of authorized shares to 985,000,000, $0.001 par value per share, further amended the Articles in January 2009 to increase the number of authorized shares to 4,000,000,000, and in January 2010 amended our Articles to increase the number of authorized shares to 8,888,000,000.
We were effectively dormant for a number of years. In or around February 2014, there was a change in control whereby Kevin Hayes acquired 1,000,000 shares of the Series A and was appointed as our sole director and officer. In or around April 2017, there was another change in control when Mr. Hayes sold the 1,000,000 shares of Series A to Hybrid Titan Management, which then proceeded to assign the Series A to William Alessi. Mr. Alessi was then appointed as our sole director and officer. Mr. Alessi initiated legal action in his home state of North Carolina to confirm, among other things, his ownership of the Series A; his “control” over the company, and the status of creditors of the company. In or around June 2017, the court entered judgment in favor of Mr. Alessi, confirming his majority ownership and control of the company.
In or around July 2017, while under the majority ownership and management of Mr. Alessi, we sought to effect a merger transaction (the “Merger”) under which the company would be merged into Data443 Risk Mitigation, Inc., a North Carolina corporation (“Data443”). Data443 was originally formed under the name LandStar, Inc. The name of the North Carolina corporation was changed to Data443 in December 2017. In November 2017, our controlling interest was acquired by our current chief executive officer and sole board member, Jason Remillard, when he acquired all of the Series A shares from Mr. Alessi. In that same transaction, Mr. Remillard also acquired all of the shares of Data443 from Mr. Alessi. Mr. Remillard was then appointed as our sole director and sole officer and of Data443.
In January 2018, we acquired substantially all of the assets of Myriad Software Productions, LLC, which was owned 100% by Mr. Remillard. Those assets were comprised of the software program known as ClassiDocs®, and all intellectual property and goodwill associated therewith. As a result of the acquisition, the Company was no longer a “shell” under applicable securities rules. In consideration for the acquisition, we agreed to a purchase price of $1,500,000, comprised of: (i) $50,000 paid at closing; (ii) $250,000 in the form of a promissory note; and (iii) $1,200,000 in shares of our common stock, valued as of the closing, which equated to 1,200,000,000 shares of our common stock. The shares have not yet been issued and are not included as part of our issued and outstanding shares. However, these shares have been recorded as “Acquisition of ClassiDocs” included in additional paid in capital within our financial statements for the year ending December 31, 2019.
In April 2018, we amended the designation for our Series A by providing that a holder of Series A was entitled to (i) vote 15,000 shares of common stock for each share of Series A on all matters submitted to a vote by stockholders, and (ii) convert each share of Series A into 1,000 shares of our common stock.
In May 2018, the Company amended and restated its Articles of Incorporation. The total authorized number of shares is 8,888,000,000 shares of common stock, $0.001 par value per share, and 50,000,000 shares of preferred stock, $0.001 par value per share, designated in the discretion of our board of directors. The Series A remains in full force and effect.
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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, in fact, not been completed, and that the Merger was not in the best interests of the Company and its stockholders. As such, the Merger was legally terminated. In place of the Merger, in June 2018, we acquired all of the issued and outstanding shares of stock of Data443 (the “Share Exchange”). As a result of the Share Exchange, Data443 became our wholly-owned subsidiary, with both the Company and Data443 continuing to exist as corporate entities. As consideration in the Share Exchange, we agreed to issue to Mr. Remillard: (a) 100,000,000 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 100,000,000 shares of our common stock, provided that Data443 has at least an additional $1,000,000 in revenue by the Earn Out Date (not including revenue directly from acquisitions). None of the shares of our common stock to be issued to Mr. Remillard under the Share Exchange have been issued. As such, none of said shares are included as part of our issued and outstanding shares. However, these shares have been recorded as “Share exchange with related party for Data443 additional share issuable” included in additional paid in capital within our financial statements for the year ending December 31, 2019.
On or about June 29, 2018, we secured the rights to the WordPress GDPR Framework through our wholly-owned subsidiary Data443 for a total consideration of €40,001, or approximately $46,521, payable in four payments of approximately €10,000, with the first payment due at closing, and the remaining payments due at the end of July, August and September 2018. Upon issuance of the final payment, we gained the right to enter into an asset transfer agreement for the nominal cost of one euro (€1).
On or about October 22, 2018, we entered into an asset purchase agreement with Modevity, LLC (“Modevity”) to acquire certain assets collectively known as ARALOC®, a software-as-a service (“SaaS”) platform that provides cloud-based data storage, protection, and workflow automation. The acquired assets consist of intellectual and related intangible property including applications and associated software code, and trademarks. Access to books and records related to the customers and revenues Modevity created on the ARALOC® platform were also included in the asset purchase agreement. These assets were substantially less than the total assets of Modevity, and revenues from the platform comprised a portion of the overall sales of Modevity. We are required to create the technical capabilities to support the ongoing operation of this SaaS platform. A substantial effort on our part is needed to continue generating ARALOC® revenues through development of a sales force, as well as billing and collection processes. We paid Modevity (i) $200,000 in cash, (ii) $750,000, in the form of a 10-month promissory note, and (iii) 164,533,821 shares of our common stock.
On or around February 7, 2019, the Company entered into an Exclusive License and Management Agreement (the “License Agreement”) with Wala, Inc. (“Wala”). Under the License Agreement the Company was granted the exclusive right and license to receive all benefits from the marketing, selling, and licensing of the data archiving platform known as ArcMail and all assets related thereto (the “ArcMail Assets”). In connection with the License Agreement, the Company also executed (i) a Stock Rights Agreement, under which the Company had the right to acquire all shares of stock of Wala; and, (ii) a Business Covenants Agreement, under which Wala and its CEO agreed to not compete with the Company’s use of the ArcMail assets for a designated period of time. The License Agreement, Stock Rights Agreement, and Business Covenants Agreement are collectively referred to herein as the “ArcMail Agreements”).
On June 21, 2019, the Company filed an amendment to its articles of incorporation to increase the total number authorized shares of the Company’s common stock, par value $0.001 per share, from 8,888,000,000 shares to 15,000,000,000 shares.
On September 16, 2019, the Company entered into an Asset Purchase Agreement with DMBGroup, LLC to acquire certain assets collectively known as DataExpressTM, a software platform for secure sensitive data transfer within the hybrid cloud. The total purchase price of approximately $2.8 million consists of: (i) a $410,000 cash payment at closing; (ii) a promissory note in the amount of $940,000, payable in the amount of $41,661 over 24 monthly payments starting on October 15, 2019, accruing at a rate of 6% per annum; (iii) assumption of approximately $98,000 in liabilities and, (iv) approximately 2,465,753 shares of our common stock. As of December 31, 2019, these shares have not been issued and are recorded as “Stock issuable for asset purchase” included in additional paid in capital.
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On October 14, 2019, the Company filed an amendment to its Articles of Incorporation to change its name to Data443 Risk Mitigation, Inc., and to effect a 1-for-750 reverse stock split of its issued and outstanding shares of common and preferred shares, each with $0.001 par value, and to reduce the numbers of authorized common and preferred shares to 60,000,000 and 337,500, respectively. On October 28, 2019, the name change and the split and changes in authorized common and preferred shares was effected, resulting in approximately 7,282,678,714 issued and outstanding shares of the Company’s common stock to be reduced to approximately 9,710,239, and 1,000,000 issued and outstanding shares of the Company’s preferred shares to be reduced to 1,334 as of October 28, 2019. All per share amounts and number of shares, including the authorized shares, in the consolidated financial statements and related notes have been retroactively adjusted to reflect the reverse stock split and decrease in authorized common and preferred shares.
On March 05, 2020 the Company amended its Articles of Incorporation to increase the number of shares of authorized common stock to 250,000,000. On April 15, 2020 the Company further amended its Articles of Incorporation to increase the number of shares of authorized common stock to 750,000,000. On August 17, 2020 the Company again amended its Articles of Incorporation to increase the number of shares of authorized common stock to 1.5 billion. On November 25, 2020 the Company filed a Certificate of Designation to authorize and create its Series B Preferred shares, consisting of 80,000 shares. On December 15, 2020 the Company again amended its Articles of Incorporation to increase the number of shares of authorized common stock to 1.8 billion.
On August 13, 2020, the Company entered into an Asset Purchase Agreement to acquire certain assets collectively known as FileFacets™, a Software-as-a-Service (SaaS) platform that performs sophisticated data discovery and content search of structured and unstructured data within corporate networks, servers, content management systems, email, desktops and laptops. The total purchase price was $135,000, which amount was paid in full at the closing of the transaction.
On September 21, 2020, the Company entered into an Asset Purchase Agreement with the owners of a business known as IntellyWP™, to acquire the intellectual property rights and certain assets collectively known as IntellyWP™, an Italy-based developer that produces WordPress plug-ins that enhance the overall user experience for webmaster and end users. The total purchase price of $135,000 consists of: (i) a $55,000 cash payment at closing; (ii) a cash payment of $40,000 upon completion of certain training; and, (iii) a cash payment of $40,000 upon the Company collecting $25,000 from the assets acquired in the subject transaction.
On October 08, 2020, the Company entered into an Asset Purchase Agreement with Resilient Network Systems, Inc. (“RNS”) to acquire the intellectual property rights and certain assets collectively known as Resilient Networks™, a Silicon Valley based SaaS platform that performs SSO and adaptive access control “on the fly” with sophisticated and flexible policy workflows for authentication and authorization. The total purchase price of $305,000 consists of: (i) a $125,000 cash payment at closing; and, (ii) the issuance of 19,148,936 shares of our common stock to RNS.
On December 11, 2020, the Company entered into a Common Stock Purchase Agreement (“CSPA”) with Triton Funds, LP, a Delaware limited partnership (“Triton”), an unrelated third party. Triton agreed to invest $1 million in the Company in the form of common stock purchases. Subject to the terms and conditions set forth in the CSPA, the Company agreed to sell to Triton common shares of the Company having an aggregate value of One Million Dollars ($1,000,000). The price of the shares to be sold will be $0.006 per shares. Triton’s obligation to purchase securities is conditioned on certain factors including, but not limited, to the Company having an effective registration available for resale of the securities being purchased; a minimum closing price of $0.009 per share for the Company’s common stock on the delivery date for the shares; and, Triton’s ownership not exceeding 9.9% of the issued and outstanding shares of the Company at any time. The Company filed a registration statement on Form S-1 with the SEC on December 28, 2020. The S-1 was declared effective by the SEC as of January 26, 2021.
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On February 12, 2021, and effective January 31, 2021 the Company declared terminated each of the ArcMail Agreements. The Company has asserted numerous claims under the ArcMail Agreements. Further, Wala lost all rights to the ArcMail Assets through a foreclosure action brought by certain secured creditors of Wala (the “Wala Creditors”). The Company considers its relationship with Wala to be closed and will not pursue any further action in that regard.
On February 12, 2021 the Company closed its acquisition of the ArcMail Assets from the Wala Creditors pursuant to the terms and conditions of an Asset Sale Agreement executed by and between the Company and the Wala Creditors. The effective date of the Asset Sale Agreement and the acquisition was deemed to be January 31, 2021. Total purchase price (the “Purchase Price”) was One Million Four Hundred Four Thousand Dollars ($1,404,000), evidenced by three promissory notes in favor of the Wala Creditors in the total amount of the Purchase Price (the “Notes”). Payments under the Notes commence in 30-days and continue monthly thereafter for 60-months. The Notes are secured by a pledge of the ArcMail Assets as collateral under the terms of a Security Agreement in favor of the Wala Creditors. The foregoing descriptions of the Asset Sale Agreement; Notes; and, Security Agreement do not purport to be complete and are qualified in their entirety by the actual language contained in the Asset Sale Agreement, Notes, and Security Agreement, respectively.
On February 23, 2021, the Company filed with the SEC its Schedule 14C, Preliminary Information Statement, providing notice that the Board of Directors and the holders of a majority of our shares entitled to vote had approved and authorized the following actions:
(1) Amendment of our articles of incorporation (the “Articles of Incorporation”) to provide for a decrease in the authorized shares of the Company’s common stock from 1,800,000,000 to a number of not less than 10,000,000 and not more than 1,000,000,000 (the “Authorized Common Stock Reduction”), at any time prior to the one year anniversary of the filing of the Definitive Information Statement on Schedule 14C with respect to these actions the “Definitive Information Statement”), with the Board of Directors of the Company (the “Board”) having the discretion to determine whether or not the Authorized Common Stock Reduction is to be effected, and if effected, the exact number of the Authorized Common Stock Reduction within the above range.
(2) That the Board be authorized to implement through the amendment to our Articles of Incorporation a reverse stock split of the Company’s Common Stock by a ratio of not less than 1-for-10 and not more than 1-for-2,000, (the “Reverse Split”), at any time prior to the one year anniversary of the filing of the Definitive Information Statement, with the Board having the discretion to determine whether or not the Reverse Split is to be effected, and if effected, the exact ratio for the Reverse Split within the above range.
On April 21, 2021, the Company increased the number of authorized shares of common stock from 1.8 billion to 3.8 billion in order to satisfy the share reserve requirement under the Auctus financing closed on April 23, 2021, as described in the next paragraph.
On 23 April 2021, the Company entered into and closed a financing transaction pursuant to the terms and conditions of a Securities Purchase Agreement (the “Purchase Agreement”) with Auctus Fund, LLC, a Delaware limited liability company (“Auctus”). Pursuant to the Purchase Agreement, Auctus purchased from the Company a Senior Secured Promissory Note (the “Note”) in the aggregate principal amount of $832,000.00 (the “Principal Amount”), and delivered gross proceeds of $750,000.00 (excluded were legal fees for Auctus and a transaction fee charged by Auctus). The Note is secured by a security interest in the assets of the Company and its subsidiaries, pursuant to the terms and conditions of a Security Agreement (the “Security Agreement”). Timely payment under the Note is further secured by the issuance of Common Stock Purchase Warrant (the “Second Warrant”) to Auctus for 110,933,333 shares of the Company’s common stock at an exercise price of $0.0075, 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 110,933,333 shares of the Company’s common stock pursuant to a Common Stock Purchase Warrant (the “First Warrant”). Exercise price for the warrants is $0.0075, with a cashless exercise option. Both the First Warrant and the Second Warrant impose an obligation on the Company to reserve for issuance that number of shares of the Company’s common stock which is 5 times the number of shares issuable under both the First Warrant and the Second Warrant.
As of September 30, 2021, the Company had sold to Triton 166,666,667 shares of its common stock pursuant to the CSPA, and which shares were registered under the S-1. All sales occurred during the three month period ended March 31, 2021 and resulted in the receipt by the Company of net proceeds in the amount of $847,000 during the six months ended 30 June 2021, which is the final amount the Company will receive from the sale of these shares, which includes proceeds from two unrelated third party for shares of our common stock acquired from Triton.
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The 1-for-2,000 Reverse Stock split was processed by FINRA and became effective at the start of trading on 01 July 2021. As a result of the Reverse Stock Split, every 2,000 shares of the Company’s issued and outstanding common stock, par value $0.001 per share, were converted into one (1) share of common stock, par value $0.001 per share.
The Company is a leader in data security and privacy management (a critical element of IT security), providing solutions for All Things Data Security™, across the enterprise and in the cloud. Trusted by over 170 clients, including over 1% of the Fortune 500, the Company provides the necessary 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.
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.
Each of our major product lines provide features and functionality which enable our clients to fully secure the value of their data. This architecture easily 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. |
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| ● | 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®), the 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, enables organizations of all sizes to comply with European, California and Brazilian privacy rules and regulations. |
COVID-19 Update
The Company continues to closely monitor developments and is taking steps to mitigate the potential risks related to the COVID-19 pandemic to the Company, its employees and its customers. The extent to which the COVID-19 pandemic will impact our business and operations will depend on future developments that are highly uncertain. While in the near-term we may experience reductions in our billing and revenue growth rates, we are proactively managing expenditures, including reductions of non-critical and discretionary expenses, while preserving strategic investment in sales capacity and still seeking new acquisition targets and opportunities. To protect our employees while continuing to provide the services needed by our clients the Company continues to limit customer contact, and continues to minimize employee contact with other employees by having our employees work remotely while they shelter in place as required by local regulations. The dedication of our employees and their work ethic have allowed us to continue providing critical services to our customers during these challenging times.
Due to the pandemic, we have been forced to adapt and change the way we have historically operated. At the end of the first quarter, we temporarily closed our office and instructed our employees to work remotely as a precautionary measure intended to minimize the risk of the virus to them, our customers, partners and the communities in which we operate. Towards the end of the second quarter, we cautiously and gradually started to open our office. While we did not require employees to work from our office, we did ensure all required adjustments were made and all local regulations and recommendations were met to ensure the safety of our employees should they voluntarily choose to work from our office. As part of the move to remote work and virtual-only customer experience, we have had to postpone or cancel customer and industry events, as well as travel to visit potential customers, or conduct them virtually. We cannot predict with certainty the impact these changes may have on our sales.
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We believe that the impact of COVID-19 has increased the long-term opportunity to help our customers protect their data and detect threats, as well as achieve regulatory compliance. Nevertheless, in the early stages of the pandemic, we experienced some negative impact on our results of operations in the last two weeks of the first quarter of 2020, as we believe our customers’ focus turned primarily to the safety of their employees and to positioning themselves to operate under a work-from-home environment. However, since that time, we have seen companies pivot from that emergency mode to become more focused on the elevated risks associated with having a highly distributed workforce. Companies around the world now have the majority of their employees working from potentially vulnerable home networks, accessing critical on-premises data stores and infrastructure through VPNs and in cloud data stores. We believe this trend will continue in the long-term and that we are well positioned to capitalize on the opportunity ahead. As companies of all sizes and industries are increasingly facing cyberattacks, they understand that a data-centric approach to security is critical, and elevated risks are here for the long-term. This has caused increased customer engagement which has converted into new business and expansion of existing business.
We remain positioned to help our clients protect against data and infrastructure against cybercrime. This has resulted in increase in traffic to our website. During the second and third quarters of 2021, we saw greater interest in our products and services, with some of this interest converting into new business or the expansion of existing business. While we are encouraged by these trends, we continue to see corporate expenditures subject to elevated scrutiny in the current environment. We have also been unable to travel to meet with prospective new clients, which has impacted our ability to convert prospects into new clients. We anticipate that as the COVID-19 pandemic continues, it will continue to be challenging to estimate conversion rates of prospective business into actual new client.
Through September 30, 2021, there has not been a noticeable increase in accounts receivable for the Company. However, it is likely that if the COVID-19 pandemic persists and state stay-at-home orders remain in place, it is likely that more customers will be unable to keep their bills current. Further, while we have not yet experienced any interruption to our normal materials and supplies process, it is impossible to predict whether COVID-19 will cause future interruptions and delays.
Through September 30, 2021 we have not had any of our employees contract the COVID-19 virus. Should we have a significant number of our employees contract the COVID-19 virus it could have a negative impact on our ability to serve customers in a timely fashion.
For additional information on the potential effects of the COVID-19 pandemic on our business, financial condition and results of operations, see the “Risk Factors” section below in Part II, Item 1A of this Form 10-Q.
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 receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on our having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.
The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The promissory note issued in connection with the PPP Loan contains events of default and other provisions customary for a loan of this type.
The PPP Loan was used to retain our employees, as well as for other permitted uses under the terms and conditions of the PPP Loan. The Company has applied for forgiveness of the PPP Loan.
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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.
Recent Accounting Pronouncements
From time-to-time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other standard setting bodies, relating to the treatment and recording of certain accounting transactions. Unless otherwise discussed herein, management of the Company has determined that these recent accounting pronouncements will not have a material impact on the financial position or results of operations of the Company. For further discussion of recently issued and adopted accounting pronouncements, please see Note 1 to the consolidated financial statements included herein.
Critical Accounting Policies
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements which we have been prepared in accordance with U.S. generally accepted accounting principles. In preparing our consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material.
These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the consolidated financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.
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Actual results could differ from those estimates.
While our significant accounting policies are described in more detail in Note 2 of our consolidated Quarterly financial statements included in this Quarterly Report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements:
Assumption as a Going Concern
Management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. However, given our current financial position and lack of liquidity, there is substantial doubt about our ability to continue as a going concern.
Convertible Financial Instruments
The Company bifurcates conversion options from their host instruments and accounts for them as free standing derivative financial instruments if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable GAAP.
When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, discounts are recorded for the intrinsic value of conversion options embedded in the instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the instrument.
Beneficial Conversion Feature
The issuance of the convertible debt issued by the Company generated a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, resulting in a discount on the convertible debt (recorded as a component of additional paid in capital).
Fair Value of Financial Instruments
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined as follows:
| ● | 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 |
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| ● | Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. |
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.
Stock-Based Compensation
We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date. For non-employees, as per ASU No. 2018-7, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, remeasurement is not required. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by us in the same expense classifications in the consolidated statements of operations, as if such amounts were paid in cash. Also, refer to Note 1 – Summary of Significant Accounting Policies, in the consolidated financial statements that are included in this Annual Report.
Deferred Tax Assets and Income Taxes Provision
The Company adopted the provisions of paragraph 740-10-25-13 of the FASB Accounting Standards Codification. Paragraph 740-10-25-13 which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under paragraph 740-10-25-13, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Paragraph 740-10-25-13 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of paragraph 740-10-25-13.
The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its balance sheets and provides valuation allowances as management deems necessary.
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses and presently has no revenue-producing business; (b) general economic conditions; and, (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors.
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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 2021 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. | |
| ● | 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.
In December 2019, COVID-19 was reported in China; in January 2020 the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern;, and, in March 2020 the WHO declared it a pandemic. The long-term impact of COVID-19 on our operational and financial performance will depend on certain developments including the duration, spread, severity, and potential recurrence of the virus. Our future performance will also depend on the impact of COVID-19 on our customers, partners, employee productivity, and sales cycles, including as a result of travel restrictions. These potential developments are uncertain and cannot be predicted and as such, the extent to which COVID-19 will impact our business, operations, financial condition and results of operations over the long term is unknown. Furthermore, due to our shift to a predominantly subscription model, the effect of COVID-19 may not be fully reflected in our results of operations until future periods.
While we are actively managing our response to the COVID-19 pandemic, its impact on our year 2021 results and beyond is uncertain. We continue to conduct business as usual with modifications to employee travel, employee work locations, customer interactions, and cancellation of certain marketing events, among other things. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, and stockholders. The extent to which the COVID-19 pandemic may impact our longer-term operational and financial performance remains uncertain. Furthermore, due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods, if at all. The extent of the impact of the COVID-19 pandemic will depend on several factors, including the pace of reopening the economy around the world; the possible resurgence in the spread of the virus; the development cycle of therapeutics and vaccines; the impact on our customers and our sales cycles; the impact on our customer, employee, and industry events; and the effect on our vendors. Please see Item 1A, “Risk Factors,” in this Quarterly Report for a further description of the material risks we currently face, including the risks related to the COVID-19 pandemic.
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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020
Revenue
We recognized $1,495,000 and $3,095,000 of revenue during the three and nine months ended September 30, 2021, respectively, compared to $700,000 and $1,644,000 of revenue during the three and nine months ended September 30, 2020. We had net billings for the three and nine months ended September 30, 2021 of $1,832,000 and $3,011,000, respectively, compared to $835,000 and $2,370,000 in the prior year periods. Deferred revenues were $1,645,000 as of September 30, 2021, an increase of $127,000 from $1,518,000 as of December 31, 2020.
General and Administrative Expenses
General and administrative expenses for the three and nine months ended September 30, 2021 amounted to $1,061,000 and $3,806,000, respectively, as compared to $858,000 and $3,950,000 for the three and nine months ended September 30, 2020, respectively, which is an increase of $203,000, or 24%, and a decrease of $143,000, or 4%, respectively. The expenses for the nine months ended September 30, 2021 primarily consisted of management costs, costs to integrate assets we acquired and to expand sales, audit and review fees, filing fees, professional fees, and other expenses, including the re-classification of sales-related management expenses, in connection with the projected growth of the Company’s business, and professional fees and expenses related to the filing of the Company’s S-1 Registration Statement and application to list its common stock on Nasdaq. Expenses for the nine months ended September 30, 2020 consisted of primarily the same items, excluding same for the Company’s S-1 filing and Nasdaq application.
Sales and Marketing Expenses
Sales and marketing expense for the three and nine months ended September 30, 2021 amounted to $89,000 and $234,000, respectively, as compared to $3,000 and $151,000 for the three and nine months ended September 30, 2020, respectively, which is an increase of $86,000, or 2,863%, and $83,000, or 55%, respectively. The expenses for the nine months ended September 30, 2021 primarily consisted of sponsorship of major trade conferences, engaging tier-1 analyst coverage, and growing our sales operation, with some previously reported expenses (primarily management costs) reclassified to general and administrative expenses. Expenses for the nine months ended September 30, 2020 consisted of primarily the same items.
Net Income (Loss)
The net loss for the three and nine months ended September 30, 2021 was $974,000 and $4,496,000 as compared to a net loss of $1,500,000 and a net income of $14,254,000 for the three and nine months ended September 30, 2020, respectively. The net loss for the three and nine months ended September 30, 2021 was mainly derived from a loss on change in fair value of derivative liability of $68,000 and $432,000, respectively, associated with convertible notes payable and convertible preferred stock and gross margins of $1,346,000 and $2,683,000, respectively, offset in part by general and administrative, and sales and marketing expenses incurred.
The net loss for the three and nine months ended September 30, 2020 was mainly derived from a loss on change in fair value of derivative liability of $420,000 and $9,698,000, respectively, associated with convertible notes payable and gross margins of $592,000 and $1,482,000, respectively, offset in part by general and administrative, and sales and marketing expenses incurred.
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Provision for Income Tax
No provision for income taxes was recorded in either the three and nine months ended September 30, 2021 or 2020, as we have incurred taxable losses in both periods.
Related Party Transactions
The following individuals and entities have been identified as related parties based on their affiliation with our CEO and sole director, Jason Remillard:
Jason Remillard
Myriad Software Productions, LLC
The following amounts were owed to related parties, affiliated with the CEO and Chairman of the Board, at the dates indicated:
| September 30, 2021 | December 31, 2019 | |||||||
| Jason Remillard | $ | 143,578 | $ | 155,848 | ||||
CASH FLOW FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2020
Liquidity and Capital Resources
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of September 30, 2021, our principal sources of liquidity were cash of $1,378,000; trade accounts receivable of $102,000; and, other current assets of $11,000, as compared to cash or cash equivalents of $483,000; trade accounts receivable of $77,000, and other current assets of $9,000 as of September 30, 2020.
During the last two years, and through October 26, 2021 (the date of our Quarterly Report on Form 10-Q for the period ended September 30, 2021 was filed), we have faced an increasingly challenging liquidity situation that has impacted our ability to execute our operating plan. We started generating revenue in the fourth quarter of 2018, and we have continued to increase revenue through September 30, 2021 as we have actively sought to grow our business in the data security and data privacy markets. We have also been required to maintain our corporate existence; 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 our Company will be able to secure such funding on acceptable (or any) terms. During the nine months ended September 30, 2021 and 2020, we reported a loss from operations of $1,357,000 and $2,619,000, respectively; and, generated (used) cash flows from operating activities totaling $58,000 and ($584,000), respectively, for the same periods. We had a beginning cash balance of $59,000 as of January 01, 2021, and a beginning cash balance of $19,000 as of January 01, 2020.
As of September 30, 2021, we had assets of cash in the amount of $1,378,000 and other current assets in the amount of $112,000. As of September 30, 2021, we had current liabilities of $3,890,000. The Company’s accumulated deficit was $40,230,000, largely due to derivate liability treatments.
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As of September 30, 2020, we had assets of cash in the amount of $483,000 and other current assets in the amount of $86,000. As of September 30, 2020, we had current liabilities of $9,656,000. The Company’s accumulated deficit was $35,707,000, largely due to derivate liability treatments.
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 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 Securities Exchange Act, we will need investment of capital.
Management has determined that additional capital will be required in the form of equity or debt securities. There is no assurance that management will be able to raise capital on terms acceptable to the Company. We also continue to monitor the effects COVID-19 could have on our operations and liquidity including our ability to collect account receivable timely from our customers due to the economic impacts COVID-19 could have on the general economy. 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 shareholders will be reduced, shareholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock.
Investing Activities
During the nine months ended September 30, 2021, we used funds in investing activities of $138,000 to purchase property and equipment. During the nine months ended September 30, 2020, we used funds in investing activities of $285,000 to acquire intellectual property and purchase property and equipment.
Common Stock Reverse Split
On February 19, 2021, we announced the approval of a reverse stock split of our common stock and a reduction in the number of authorized, each within a specified range, with a final decision to be made by our board of directors. On June 14, 2021, we were advised by the Nevada Secretary of State that it had accepted the Company’s filing of a Certificate of Amendment to the Articles of Incorporation, with a filing and effective date of June 11, 2021 (the “Certificate of Amendment”). The Certificate of Amendment (i) reduced the number of authorized shares of common stock to one billion (1,000,000,000); and, (ii) effected a reverse stock split (the “Reverse Stock Split”) of its issued common stock in a ratio of 1-for-2,000. The preferred stock of the Company was not changed. Trading of our common stock began on a split-adjusted basis on July 1, 2021. All common stock and per share data have been retroactively adjusted for the impact of the split.
Financing Activities
During the nine months ended September 30, 2021 we raised net proceeds of $390,000 through the issuance of our Series B Convertible Stock in the gross amount of $417,750. We also raised net proceeds of $847,000 through the issuance of our common stock. We raised proceeds of $366,000 through loans from related parties and repaid $538,000 to related parties. We raised net proceeds of $642,000 through the issuance of our convertible note and net proceeds of $3,713,000 through the issuance of our notes payable, and repaid $3,953,000 on notes payable. By comparison, during the nine months ended September 30, 2020, we raised net proceeds of $1,352,250 through the issuance of our convertible promissory notes in the gross amount of $1,641,500. We also repaid $685,000 on notes payable. We raised proceeds of $242,000 through loans from related parties and repaid $692,000 to related parties.
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We are dependent upon the receipt of capital investment or other financing to fund our ongoing operations and to execute our business plan for growth in the data security market. 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 Quarterly 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 limited revenues since inception and has never paid any dividends and is unlikely to pay dividends or generate earnings in the immediate or foreseeable future. The continuation of our company as a going concern is dependent upon the ability of our company to obtain necessary financing to achieve our operating objectives, and the attainment of profitable operations. As of September 30, 2021, our Company has an accumulated deficit of $40,230,000. We do not have sufficient working capital to enable us to carry out our plan of operation for the next twelve months.
Due to the uncertainty of our ability to meet our current operating expenses and the capital expenses noted above in their report on the consolidated financial statements for the nine months ended September 30, 2021, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our consolidated financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.
The continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity or debt securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. There can be no assurance that the Company will be able to raise any additional capital.
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.
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. 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.
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information regarding this Item.
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management conducted an evaluation, with the participation of our Chief Executive Officer, who is our principal executive officer and our principal financial and accounting officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period by this Form 10-Q. Based on that evaluation, we concluded that because of the material weakness and significant deficiencies in our internal control over financial reporting described below, our disclosure controls and procedures were not sufficient as of September 30, 2021.
Management’s Report of Internal Control over Financial Reporting
Jason Remillard, as our Principal Executive Officer and Principal Financial Officer, is 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 September 30, 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. |
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Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting
Management of the Company is committed to improving its internal controls and will (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 immediate 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 Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our 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.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three month period ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. The ultimate amount of liability, if any, for any claims of any type (either alone or in the aggregate) may materially and adversely affect our financial condition, results of operations and liquidity. In addition, the ultimate outcome of any litigation is uncertain. Any outcome (including any for the actions described above), whether favorable or unfavorable, may materially and adversely affect us due to legal costs and expenses, diversion of management attention and other factors. We expense legal costs in the period incurred. We cannot assure you that additional contingencies of a legal nature or contingencies having legal aspects will not be asserted against us in the future, and these matters could relate to prior, current or future transactions or events.
DMB Group, LLC (“DMB”) filed a lawsuit against Data443 Risk Mitigation, Inc., a North Carolina corporation, the Company’s wholly-owned subsidiary (the “Subsidiary”), June 17, 2021 in County Court in Denton County, Texas, naming the Subsidiary as the defendant (the “Complaint”). DMB claimed a breach of the note issued to it on or around 16 September 2019 in the original principal amount of $940,000 (the “DMB Note”). The DMB Note was issued by the Subsidiary in connection with the Subsidiary’s acquisition of assets from DMB. DMB claims that the Subsidiary is delinquent on its payments under the DMB Note and is therefore in default under the DMB Note. The Company has already accounted for the liability owed under the DMB Note. The matter was settled on September 2021 by mutual agreement of the involved parties. The Subsidiary will make payment of the remaining amount due under the DMB Note over the next six months. This matter is now considered closed.
The Company views most legal proceedings involving claims of former employees as routine litigation incidental to the business, and therefore not material. The Company is currently involved in two such matters with former employees. One matter involves three former employees, and that matter has been resolved and settled. The other matter involves one former employee who is seeking additional compensation. In response, the Company believes that the former employee was terminated “for cause” and is owed no further consideration or compensation. The Company intends to vigorously dispute the claim.
We are not aware of any other pending or threatened litigation against us that in our view would have a material adverse effect on our business, financial condition, liquidity, or operating results. However, legal claims are inherently uncertain, and we cannot assure you that we will not be adversely affected in the future by legal proceedings.
| ITEM 1A. | RISK FACTORS |
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item. However, as a result of recent 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, including the ongoing outbreak of a respiratory illness caused by the 2019 novel coronavirus that was recently named by the World Health Organization as COVID-19, and other similar events, we have included the following additional Risk Factors:
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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.
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 reevaluate decisions to purchase our product or to delay their purchasing decisions, which could lengthen our sales cycles.
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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 2021 compared to the second quarter of 2021, there is no guarantee that for the long run our sales and marketing teams will be as successful or effective using these other communications channels as they try to build relationships. If we cannot provide the tools and training to our teams to efficiently do their jobs and satisfy customer demands, we may not be able to achieve anticipated revenue growth as quickly as expected.
Our future growth depends upon expanding sales of our products to existing customers and their organizations and receiving subscription and maintenance renewals. If our customers do not purchase additional licenses or capabilities, our revenues may grow more slowly than expected, may not grow at all, or may decline. There can be no assurance that our efforts would result in increased sales to existing customers (“upsells”) and additional revenues. If our efforts to upsell to our customers are not successful, our business would suffer. Our future growth also depends in part upon increasing our customer base, particularly those customers with potentially high customer lifetime values. Our ability to achieve significant growth in revenues in the future will depend, in large part, upon the effectiveness of our sales and marketing efforts, both domestically and internationally, and our ability to attract new customers. Our ability to attract new customers may be adversely affected by the continued COVID-19 pandemic. If we fail to attract new customers and maintain and expand those customer relationships, our revenues may be adversely affected, and our business will be harmed.
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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Our business is subject to the risks of fire, floods, outbreak of diseases and other natural catastrophic events, and to interruption by man-made problems such as power disruptions, computer viruses, data security breaches or terrorism.
A significant natural disaster, such as an earthquake, a fire, a flood, or significant power outage and other catastrophic events, including the occurrence of a contagious disease or illness, such as COVID-19, could have a material adverse impact on our business, results of operations, and financial condition. The outbreak of a contagious disease like COVID-19 has, among other things, prompted responses such as government-imposed travel restrictions, the grounding of flights, and the shutdown of workplaces. It is not possible at this time to estimate the impact that the COVID-19 pandemic could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. Natural disasters and other catastrophic events such as COVID-19, could affect our personnel, recovery of our assets, data centers, supply chain, manufacturing vendors, or logistics providers’ ability to provide materials and perform services such as manufacturing products or assisting with shipments on a timely basis. In addition, climate change could result in an increase in the frequency or severity of natural disasters. In the event that our or our service providers’ information technology systems or manufacturing or logistics abilities are hindered by any of the events discussed above, shipments could be delayed, resulting in missed financial targets, such as revenue and shipment targets, for a particular quarter. In addition, computer malware, viruses and computer hacking, fraudulent use attempts, and phishing attacks have become more prevalent in our industry, and our internal systems may be victimized by such attacks. Although we maintain incident management and disaster response plans, in the event of a major disruption caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and loss of critical data, and our insurance may not cover such events or may be insufficient to compensate us for the potentially significant losses we may incur. Acts of terrorism and other geopolitical unrest could also cause disruptions in our business or the business of our supply chain, manufacturers, logistics providers, partners, or customers or the economy as a whole. Any disruption in the business of our supply chain, manufacturers, logistics providers, partners or end-customers that impacts sales at the end of a fiscal quarter could have a significant adverse impact on our financial results. All of the aforementioned risks may be further increased if the disaster recovery plans for us and our suppliers prove to be inadequate. To the extent that any of the above should result 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.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following information represents securities sold by the Company during the period covered by this Quarterly Report, and the subsequent period, 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.
| ● | On July 07, 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. |
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| ● | On July 12, 2021, the Company converted 1,800 shares of its Series B Preferred Stock into 6,280 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 7,699 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On July 30, 2021, the Company 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 $282,000.00 (the “Principal Amount”), and delivered gross proceeds of $250,000.00 (excluded were legal fees for Auctus and a transaction fee charged by Auctus). The Note is secured by a security interest in the assets of the Company and its subsidiaries, pursuant to the terms and conditions of a Security Agreement (the “Security Agreement”). Timely payment under the Note is further secured by the issuance of Common Stock Purchase Warrant (the “Second Warrant”) to Auctus for 62,667 shares of the Company’s common stock at an exercise price of $4.50, 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 62,667 shares of the Company’s common stock pursuant to a Common Stock Purchase Warrant (the “First Warrant”). Exercise price for the warrants is $4.50, 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. | |
| ● | On August 05, 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.
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| ● | 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 2,643 shares of the Company’s common stock. |
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| ● | 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 2,642 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 3,150 shares of the Company’s common stock.
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| ● | On August 23, 2021, the Company converted 2,500 shares of its Series B Preferred Stock into 10,446 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 12,535 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act.
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| ● | On August 30, 2021, the Company converted 2,300 shares of its Series B Preferred Stock into 9,802 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On September 22, 2021, the Company converted $30,000 of a promissory note into 14,112 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. |
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| ● | On September 27, 2021, the Company converted 2,000 shares of its Series B Preferred Stock into 10,383 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On September 28, 2021, the Company closed a financing transaction pursuant to the terms and conditions of a Securities Purchase Agreement (the “Jefferson Street Purchase Agreement”) with Jefferson Street Capital, LLC (“Jefferson Street”). Pursuant to the Jefferson Street Purchase Agreement, Jefferson Street purchased from the Company a Convertible Promissory Note (the “Jefferson Street Note”) in the aggregate principal amount of $110,000 (the “Principal Amount”), and delivered gross proceeds of $100,000.00 (excluded were legal fees and a transaction fee charged by Jefferson Street). Interest on the Principal Amount of the Jefferson Street Note accrues at the rate of 10% per annum. Repayment of all amounts due under the Jefferson Street Note shall be tendered on the 9-month anniversary of the Jefferson Street Note. The Jefferson Street 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 Jefferson Street Note can be converted by Jefferson Street into shares of the Company’s common stock at any time following issuance at a fixed price of $3.50 per share. 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 Jefferson Street Note the Company also issued to Jefferson Street a common stock purchase warrant for 22,222 shares of the Company’s common stock at an exercise price of $4.50 per share. In connection with this transaction, the Company also paid to Moody Capital Solutions, Inc., a FINRA registered broker-dealer, a fee comprised of (i) $8,000 in cash; and, (ii) a common stock purchase warrant for 1,111 shares of the Company’s common stock at an exercise price of $4.50 per share. | |
| ● | On October 4, 2021, the Company converted 3,300 shares of its Series B Preferred Stock into 18,535 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 20,281 shares of its common stock. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On October 19, 2021, the Company closed a financing transaction pursuant to the terms and conditions of a Securities Purchase Agreement (the “Purchase Agreement”) with Mast Hill Fund, L.P., a Delaware limited partnership (“Mast Hill”). Pursuant to the Purchase Agreement, Mast Hill purchased from the Company a Promissory Note (the “Note”) in the aggregate principal amount of $444,444.00 (the “Principal Amount”), and delivered gross proceeds of $3650,000.00 (excluded were $40,000 in original issue discount; $28,000 as a fee paid to J.H. Darbie, a registered broker dealer; and, $7,000 in legal fees for Mast Hill). Timely payment under the Note is secured by the issuance of a Common Stock Purchase Warrant (the “Second Warrant”) to Mast Hill for 161,616 shares of the Company’s common stock at an exercise price of $3.20, 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. Repayment of all amounts due under the Note shall be tendered on the 12-month anniversary of the Note, though certain amounts are due earlier upon the closing certain designated investments. 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. Upon an event of default under the Note, Mast Hill may also convert all amounts due thereunder into shares of the Company’s common stock at a price of $4.00 per share. The Company also granted to Mast Hill warrants to acquire 161,616 shares of the Company’s common stock pursuant to a Common Stock Purchase Warrant (the “First Warrant”). Exercise price for the warrants is $3.20, with a cashless exercise option. The Note, 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 2 times the number of shares issuable under each of the respective three documents. |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5. | OTHER INFORMATION |
None.
| ITEM 6. | EXHIBITS |
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| (*) | Filed herewith. |
| (†) | Indicates a management contract or compensatory plan or arrangement. |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, our Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: October 26, 2021 | DATA443 RISK MITIGATION, INC. | |
| By: | /s/ Jason Remillard | |
| Name: | JASON REMILLARD | |
| Title: | Chief Executive Officer, (Principal Executive Officer) | |
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