0001493152-21-026340.txt : 20211026 0001493152-21-026340.hdr.sgml : 20211026 20211026170757 ACCESSION NUMBER: 0001493152-21-026340 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 90 CONFORMED PERIOD OF REPORT: 20210930 FILED AS OF DATE: 20211026 DATE AS OF CHANGE: 20211026 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Data443 Risk Mitigation, Inc. CENTRAL INDEX KEY: 0001068689 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 860914051 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-30542 FILM NUMBER: 211349523 BUSINESS ADDRESS: STREET 1: 101 J MORRIS COMMONS LANE, STREET 2: SUITE 105 CITY: MORRISVILLE STATE: NC ZIP: 27560 BUSINESS PHONE: 919-858-6542 MAIL ADDRESS: STREET 1: 101 J MORRIS COMMONS LANE, STREET 2: SUITE 105 CITY: MORRISVILLE STATE: NC ZIP: 27560 FORMER COMPANY: FORMER CONFORMED NAME: LandStar, Inc. DATE OF NAME CHANGE: 20181212 FORMER COMPANY: FORMER CONFORMED NAME: DATA443 RISK MITIGATION, INC. DATE OF NAME CHANGE: 20180409 FORMER COMPANY: FORMER CONFORMED NAME: LANDSTAR INC DATE OF NAME CHANGE: 20100909 10-Q 1 form10-q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2021

 

OR

 

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

 

For the transition period from ________ to ________

 

Commission File Number: 000-30542

 

DATA443 RISK MITIGATION, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   86-0914051

(State of

incorporation)

 

(I.R.S. Employer

Identification No.)

     

101 J Morris Commons Lane, Suite 105

Morrisville, North Carolina

  27560
(Address of principal executive offices)   (Zip Code)

 

(919) 858-6542

(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.

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
   
Non-accelerated filer Smaller reporting company
   
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Yes ☐ No

 

The outstanding number of shares of common stock as of October 26, 2021 was: 867,084.

 

Documents incorporated by reference: None

 

 

 

 
 

 

DATA443 RISK MITIGATION, INC.

FORM 10-Q

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
   
ITEM 1. Financial Statements 2
  Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (unaudited) 2
  Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020 (unaudited) 3
  Consolidated Statements of Stockholders’ Deficit for the three and nine months ended September 30, 2021 and 2020 (unaudited) 4
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited) 6
  Notes to the Unaudited Consolidated Financial Statements 7
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
     
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 38
     
ITEM 4. Controls and Procedures 38
     
PART II. OTHER INFORMATION  
     
ITEM 1. Legal Proceedings 40
     
ITEM 1A. Risk Factors 40
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
     
ITEM 3. Defaults Upon Senior Securities 46
     
ITEM 4. Mine Safety Disclosures 46
     
ITEM 5. Other Information 46
     
ITEM 6. Exhibits 46
     
  SIGNATURES 52

 

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  $1,377,579   $58,783 
Accounts receivable, net   101,581    136,503 
Prepaid expense and other current assets   10,638    - 
Total current assets   1,489,798    195,286 
           
Property and equipment, net   354,422    324,349 
Operating lease right-of-use assets, net   193,524    248,237 
Intellectual property, net of accumulated amortization   1,586,341    2,310,907 
Deposits   31,440    31,440 
Total Assets  $3,655,525   $3,110,219 
           
Liabilities and Stockholders’ Deficit          
Current Liabilities          
Accounts payable and accrued liabilities  $204,916   $401,014 
Deferred revenue   1,134,535    1,478,430 
Interest payable   119,203    62,212 
Notes payable, net of unamortized discount   1,225,672    585,310 
Convertible notes payable, net of unamortized discount   586,663    1,241,412 
Derivative liability   39,993    - 
Due to a related party   389,229    561,230 
License fee payable   -    1,094,691 
Operating lease liability   109,193    100,170 
Finance lease liability   80,989    90,565 
Total Current Liabilities   3,890,393    5,615,034 
           
Commitments and contingencies   -    - 
           
Series B Preferred Stock, 80,000 shares designated; $0.001 par value; Stated value $10.00 28,175 and 5,300 shares issued and outstanding, net of discount, respectively   233,881    50,203 
Notes payable, net of unamortized discount - non-current   1,817,520    572,495 
Convertible notes payable, net of unamortized discount - non-current   17,315    2,356 
Deferred revenues - non-current   510,825    39,733 
Operating lease liability - non-current   154,565    237,961 
Finance lease liability - non-current   25,784    83,109 
Total Liabilities   6,650,283    6,600,891 
           
Stockholders’ Deficit          
Preferred stock: 337,500 authorized; $0.001 par value Series A Preferred Stock, 150,000 shares designated; $0.001 par value; 150,000 shares issued and outstanding, respectively   150    150 
Common stock: 1,000,000,000 authorized; $0.001 par value 829,518 and 522,006 shares issued and outstanding, respectively   830    522 
Additional paid in capital   37,234,387    32,027,240 
Accumulated deficit   (40,230,125)   (35,518,584)
Total Stockholders’ Deficit   (2,994,758)   (3,490,672)
Total Liabilities and Stockholders’ Deficit  $3,655,525   $3,110,219 

 

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  $1,495,059   $700,275   $3,095,279   $1,644,087 
Cost of revenue   148,721    108,363    412,545    161,749 
Gross profit   1,346,338    591,912    2,682,734    1,482,338 
                     
Operating expenses                    
General and administrative   1,061,178    858,205    3,806,139    3,949,635 
Sales and marketing   89,175    3,010    233,819    151,221 
Total operating expenses   1,150,353    861,215    4,039,958    4,100,856 
                     
Net income (loss) from operations   195,985    (269,303)   (1,357,224)   (2,618,518)
                     
Other income (expense)                    
Interest expense   (1,101,910)   (618,934)   (2,679,198)   (1,691,099)
Loss on settlement of debt   -    (191,833)   (227,501)   (245,833)
Change in fair value of derivative liability   (68,199)   (420,070)   (431,853)   (9,698,885)
Total other expense   (1,170,109)   (1,230,837)   (3,338,552)   (11,635,817)
                     
Loss before income taxes   (974,124)   (1,500,140)   (4,695,776)   (14,254,335)
Provision for income taxes   -    -    -    - 
Net loss  $(974,124)  $(1,500,140)  $(4,695,776)  $(14,254,335)
                     
Dividend on Series B Preferred Stock   (6,324)   -    (15,765)   - 
Net loss attributable to common stockholders  $(980,448)  $(1,500,140)  $(4,711,541)  $(14,254,335)
                     
Basic and diluted loss per Common Share  $(1.25)  $(7.77)  $(6.63)  $(182.64)
Basic and diluted weighted average number of common shares outstanding   779,813    193,007    708,058    78,048 

 

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   150,000   $150    522,006   $522   $32,027,240   $(35,518,584)  $(3,490,672)
                                    
Common stock issued for cash   -    -    83,336    83    846,718    -    846,801 
Common stock issued for conversion of preferred stock   -    -    71,678    72    624,914         624,986 
Common stock issued for conversion of debt   -    -    115,860    116    1,601,405    -    1,601,521 
Common stock issued in conjunction with convertible note   -    -    11,298    11    133,652    -    133,663 
Common stock issued for exercised cashless warrant   -    -    8,923    9    (9)   -    - 
Warrant issued in conjunction with debts   -    -    -    -    1,075,660    -    1,075,660 
Resolution of derivative liability upon exercise of warrant   -    -    -    -    139,067    -    139,067 
Settlement of stock subscriptions   -    -    -    -    -    -    - 
Stock-based compensation   -    -    9,793    10    785,747    -    785,757 
Adjustment of reverse stock split   -    -    6,624    7    (7)   -    - 
Net loss   -    -    -    -    -    (4,711,541)   (4,711,541)
Balance - September 30, 2021   150,000   $150    829,518   $830   $37,234,387   $(40,230,125)  $(2,994,758)

 

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   150,000    150    743,246    743    35,618,250    (39,249,677)   (3,630,534)
Common stock issued for conversion of debt   -    -    14,112    14    78,249    -    78,263 
Common stock issued for conversion of preferred stock   -    -    57,145    57    312,006    -    312,063 
Common stock issued in conjunction with convertible note   -    -    8,435    8    44,917    -    44,925 
Warrant issued in conjunction with debts   -    -    -    -    1,075,660    -    1,075,660 
Stock-based compensation   -    -    625    1    105,312    -    105,313 
Adjustment of reverse stock split   -    -    5,955    7    (7)   -    - 
Net loss   -    -         -    -    (980,448)   (980,448)
Balance - September 30, 2021   150,000   $150    829,518   $830   $37,234,387   $(40,230,125)  $(2,994,758)

 

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   1,334   $1    4,846   $5   $15,214,458   $(21,610,915)  $(6,396,451)
Preferred stock issued for service   4,666    5    -    -    158,639         158,644 
Common stock issued for conversion of debt   -    -    278,294    278    12,511,847    -    12,512,125 
Common stock issued for exercised cashless warrant   -    -    12,650    13    (13)   -    - 
Resolution of derivative liability upon exercise of warrant   -    -    -    -    300,387    -    300,387 
Stock issued for acquisition   -    -    1,233    1    (1)   -    - 
Settlement of stock subscriptions   144,000    144    748    1    (145)   -    - 
Issuance of restricted stock   -    -    -    -    -    -    - 
Warrants on stock subscriptions   -    -    -    -    -    -    - 
Stock-based compensation   -    -    6,218    6    473,930    -    473,936 
Net loss   -    -    -    -    -    (14,254,335)   (14,254,335)
Balance - September 30, 2020   150,000   $150    303,988   $304   $28,659,102   $(35,865,250)  $(7,205,694)

 

For the Three Months Ended September 30, 2020

 

                  
  

Series A

Preferred Stock

   Common Stock   Additional Paid in   Accumulated  

Total

Stockholders’

 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                             
Balance - June 30, 2020   1,334    1    80,054    80    20,242,548    (34,365,110)   (14,122,481)
Settlement of stock subscriptions   144,000    144    -    -    (144)   -    - 
Preferred stock issued for service   4,666    5    -    -    158,639         158,644 
Common stock issued for conversion of debt   -    -    211,284    211    8,182,755    -    8,182,966 
Common stock issued for exercised cashless warrant   -    -    12,650    13    (13)   -    - 
Resolution of derivative liability upon exercise of warrant   -    -    -    -    300,387    -    300,387 
Stock-based compensation   -    -    -    -    (225,070)   -    (225,070)
Net loss   -    -         -    -    (1,500,140)   (1,500,140)
Balance - September 30, 2020   150,000   $150    303,988   $304   $28,659,102   $(35,865,250)  $(7,205,694)

 

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  $(4,695,776)  $(14,254,335)
Adjustments to reconcile net loss to net cash used in operating activities:          
Change in fair value of derivative liability   431,853    9,698,885 
Loss on settlement of debt   227,501    245,833 
Stock-based compensation expense   785,757    632,580 
Depreciation and amortization   832,824    1,222,485 
Amortization of debt discount   2,356,631    1,309,125 
Bad debt expense   -    50,800 
Lease liability amortization   (19,660)   16,564 
Penalty interest   65,838    25,000 
Changes in operating assets and liabilities:          
Accounts receivable   34,922    (64,221)
Prepaid expenses and other assets   (10,638)   86 
Accounts payable and accrued liabilities   (193,302)   (305,423)
Deferred revenue   127,197    515,247 
Payroll liability   -    82,227 
Accrued interest   130,442    251,786 
Accrued dividend   (15,765)   - 
Deposit   -    (10,496)
Net Cash provided by (used in) Operating Activities   57,824    (583,857)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of intellectual property   -    (190,000)
Purchase of property and equipment   (138,331)   (95,425)
Net Cash used in Investing Activities   (138,331)   (285,425)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of convertible notes payable   642,000    1,352,250 
Proceeds from issuance of common stock   846,801    - 
Proceeds from issuance of series B Preferred Stock   390,000    - 
Finance lease payments   (66,901)   (52,326)
Proceeds from issuance of notes payable   3,712,775    1,168,664 
Repayment of notes payable   (3,953,371)   (685,295)
Proceeds from related parties   365,873    241,942 
Repayment to related parties   (537,874)   (691,911)
Net Cash provided by Financing Activities   1,399,303    1,333,324 
           
Net change in cash   1,318,796    464,042 
Cash, beginning of period   58,783    18,673 
Cash, end of period  $1,377,579   $482,715 
           
Supplemental cash flow information          
Cash paid for interest  $134,157   $65,063 
Cash paid for taxes  $-   $- 
           
Non-cash Investing and Financing transactions:          
Settlement of stock subscriptions  $-   $1,640 
Common stock issued for purchase of intangibles  $-   $2,466 
Common stock issued for exercised cashless warrant  $9   $25,300 
Settlement of series B preferred stock through issuance of common stock  $624,986   $- 
Settlement of convertible notes payable through issuance of common stock  $1,601,521   $2,963,994 
Common stock issued in conjunction with convertible note  $133,663   $- 
Warrant issued in conjunction with debts  $1,075,660   $- 
Resolution of derivative liability upon exercise of warrant  $139,067   $300,389 
Resolution of derivative liability upon conversion of debt  $-   $9,548,131 
Equipment paid by capital lease  $-   $159,096 
Derivative liability recognized as debt discount  $340,000   $792,175 
Settlement of convertible notes payable through issuance of preferred common stock  $65,600   $- 
Accounts payable for purchase of intellectual property  $-   $80,000 
Issuance of convertible notes for repayment of due to related party  $-   $150,000 
Note payable issued for settlement of License fee payable  $1,404,000   $- 

 

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

 

Share-Based Compensation

 

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 $785,757 in share-based compensation expense for the nine months ended September 30, 2021, compared to $473,936 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 and Diluted Net Loss Per Common Share

 

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.

 

For the nine months ended September 30, 2021 and 2020, respectively, the following common stock equivalents were excluded from the computation of diluted net loss per share as the result of the computation was anti-dilutive:

 

   Nine Months Ended 
   September 30, 
   2021   2020 
   (Shares)   (Shares) 
Series A Preferred Stock   150,000,000    150,000,000 
Stock options   12,471    5,664 
Warrants   254,134    165,252 
Convertible notes   -    10,289 
Preferred B stock   18,535    - 
Total   150,285,150    150,181,205 

 

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:

 

   September 30,   December 31, 
   2021   2020 
Furniture and Fixtures  $2,991   $2,991 
Computer Equipment   559,654    421,323 
    562,645    424,314 
Accumulated depreciation   (208,223)   (99,965)
Property and equipment, net of accumulated depreciation  $354,422   $324,349 

 

Depreciation expense for the nine months ended September 30, 2021 and 2020, was $108,258 and $54,226, respectively.

 

During the nine months years ended September 30, 2021 and 2020, the Company purchased property and equipment of $138,331 and $95,425, respectively.

 

NOTE 4: INTELLECTUAL PROPERTY

 

The following table summarizes the components of the Company’s intellectual property as of the dates presented:

 

   September 30,   December 31, 
   2021   2020 
Intellectual property:          
Word press GDPR rights  $46,800   $46,800 
ARALOC™   1,850,000    1,850,000 
ArcMail License   1,445,000    1,445,000 
DataExpressTM   1,388,051    1,388,051 
FileFacetsTM   135,000    135,000 
IntellyWP™   135,000    135,000 
Resilient Network Systems   305,000    305,000 
    5,304,851    5,304,851 
Accumulated amortization   (3,718,510)   (2,993,944)
Intellectual property, net of accumulated amortization  $1,586,341   $2,310,907 

 

The Company recognized amortization expense of $724,566 and $1,168,259 for the nine months ended September 30, 2021, and 2020, respectively.

 

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:

   Amortization 
Year Ended December 31,  Expense 
2021 (excluding the nine months ended September 30, 2021)  $241,522 
2022   860,484 
2023   441,585 
2024   27,000 
Thereafter   15,750 
Intellectual property, net of accumulated amortization   1,586,341 

 

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:

 

   September 30,   December 31, 
   2021   2020 
         
Accounts payable  $101,808   $178,319 
Payroll liabilities   81,440    102,793 
Credit cards   15,050    31,918 
Accrued dividend - preferred stock   6,618    484 
Accrued liabilities   -    87,500 
Accounts payable and accrued liabilities   $204,916   $401,014 

 

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:

 

   September 30,   December 31, 
   2021   2020 
Balance, beginning of period  $1,518,163   $953,546 
Deferral of revenue   2,153,640    2,961,749 
Recognition of deferred revenue   (2,026,443)   (2,397,132)
Balance, end of period  $1,645,360   $1,518,163 

 

As of September 30, 2021 and December 31, 2020, is classified as follows:

 

   September 30,   December 31, 
   2021   2020 
Current  $1,134,535   $1,478,430 
Non-current   510,825    39,733 
Deferred revenue  $1,645,360   $1,518,163 

 

NOTE 7: LEASES

 

Operating lease

 

We have a noncancelable operating lease for our office facility that expires in 2024. The operating lease has renewal options and rent escalation clauses.

 

We recognized total lease expense of approximately $83,339 and $76,564 for the nine months ended September 30, 2021 and 2020, respectively, primarily related to operating lease costs paid to lessors from operating cash flows. As of September 30, 2021 and December 31, 2020, the Company recorded security deposit of $10,000. We entered into our operating lease in January 2019. On July 1, 2020, the Company renegotiated the office lease to obtain rent expense relief for the months of April 2020 – December 2020.

 

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:

 

   Total 
Year Ended December 31,     
2021 (excluding the nine months ended September 30, 2021)  $30,900 
2022   127,300 
2023   131,150 
Thereafter   - 
Total lease payment   289,350 
Less: Imputed interest   (25,592)
Operating lease liabilities   263,758 
      
Operating lease liability – current   109,193 
Operating lease liability - non-current  $154,565 

 

The following summarizes other supplemental information about the Company’s operating lease as of September 30, 2021:

 

Weighted average discount rate   8%
Weighted average remaining lease term (years)   2.29 

 

Finance lease

 

The Company leases computer and hardware under non-cancellable capital lease arrangements. The term of those capital leases is 3 years and annual interest rate is 12%. At September 30, 2021 and December 31, 2020, capital lease obligations included in current liabilities were $80,989 and $87,901, respectively, and capital lease obligations included in long-term liabilities were $25,784 and $106,744, respectively. As of September 30, 2021 and December 31, 2020, the Company recorded security deposit of $10,944.

 

At September 30, 2021, future minimum lease payments under the finance lease obligations, are as follows:

 

   Total 
     
2021 (excluding the nine months ended September 30, 2021)  $26,633 
2022   78,379 
2023   10,496 
Thereafter   - 
Total finance lease payment    115,508 
Less: Imputed interest   (8,735)
Finance lease liabilities   106,773 
      
Finance lease liability   80,989 
Finance lease liability - non-current  $25,784 

 

As of September 30, 2021 and December 31 2020, finance lease assets are included in property and equipment as follows:

 

   September 30,   December 31, 
   2021   2020 
Finance lease assets  $267,284   $267,284 
Accumulated depreciation   (126,486)   (87,337)
Finance lease assets, net of accumulated depreciation  $140,798   $179,947 

 

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:

 

   September 30,   December 31, 
   2021   2020 
Convertible Notes - Issued in fiscal year 2020   100,000    1,526,000 
Convertible Notes - Issued in fiscal year 2021   738,563    - 
    838,563    1,526,000 
Less debt discount and debt issuance cost   (234,585)   (282,232)
    603,978    1,243,768 
Less current portion of convertible notes payable   (586,663   (1,241,412
Long-term convertible notes payable  $17,315   $2,356 

 

During the nine months ended September 30, 2021 and 2020, the Company recognized interest expense of $90,421 and $249,907, respectively, and amortization of debt discount, included in interest expense of $379,890 and $1,126,906, respectively.

 

Conversion

 

During the nine months ended September 30, 2021, the Company converted notes with principal amounts and accrued interest of $1,370,150 into 115,859 shares of common stock. The corresponding derivative liability at the date of conversion of $231,371 was credited to additional paid in capital.

 

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 $2,466,500 of notes with the following terms:

 

  Terms ranging from 5 months to 60 months.
     
  Annual interest rates of 0% - 25%.
     
  Convertible at the option of the holders at issuance date, after maturity date or 6 months after issuance date.
     
  Conversion prices are typically based on the discounted (25% to 50% discount) average closing prices or lowest trading prices of the Company’s shares during various periods prior to conversion. Certain note has a fixed conversion price ranging from $0.001 to $0.007. Certain note has a fixed conversion price of $0.5 for a first 5 months Certain note allows the principal amount will increase by $15,000 and the discount rate of conversion price will decrease by 18% if the conversion price is less than $$0.01.

 

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 $697,000 for cash proceeds of $642,000 after deducting financing fee of $55,000 with the following terms;

 

  Terms ranging from 90 days to 12 months.
     
  Annual interest rates of 5% to 22%.
     
  Convertible at the option of the holders after varying dates.
     
  Conversion prices are typically based on the discounted (39% discount) average closing prices or lowest trading prices of the Company’s shares during 20 periods prior to conversion. Certain note has a fixed conversion price $3.50.
     
  11,298 shares of common stock valued at $133,663 issued in conjunction with convertible notes.

 

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 $727,767, and $340,000 of the value assigned to the derivative liability was recognized as a debt discount to the notes, while the balance of $384,767 was recognized as a “day 1” derivative loss.

 

For the 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:

 

 

    Nine months Ended    Year Ended 
    September 30,    December 31, 
    2021    2020 
Expected term   0.48 - 1.94 years     0.02 - 5.00 years  
Expected average volatility   160%- 302%   187%- 464%
Expected dividend yield   -    - 
Risk-free interest rate   0.04% - 0.16%    0.01% - 1.57%

  

The following table summarizes the changes in the derivative liabilities during the nine months ended September 30, 2021 and 2020:

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Derivative liability as of December 31, 2020  $- 
      
Addition of new derivatives recognized as debt discounts   340,000 
Addition of new derivatives recognized as day-one loss   384,767 
Derivative liabilities settled upon conversion of convertible note   (731,860)
Reclassification to common stock payable   (39,993)
Change in derivative liabilities recognized as loss on derivative   47,086 
Derivative liability as of September 30, 2021  $- 

  

The aggregate loss on derivatives during the nine months ended September 30, 2021 and 2020 was $431,853 and $9,698,885, respectively.

 

14
 

 

DATA443 RISK MITIGATION, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

 

NOTE 10: NOTES PAYABLE

 

Notes payable consists of the following: 

   September 30,   December 31,        
   2021   2020   Maturity  Interest Rate 
10% Promissory note - originated in October 2019  $25,060   $25,060   Due on demand   10.0%
Promissory note - originated in October 2019   25,060    25,060   Due on demand   10.0%
Promissory note - originated in April 2020   10,000    10,000   Due on demand   No interest 
Paycheck Protection Program Promissory note - originated in April 2020 (1)   339,000    339,000   2 years   1.0%
Economic Injury Disaster Loan - originated in May 2020 (2,4)   500,000    150,000   30 years   3.75%
Promissory note - originated in June 2020   -    43,356   $3,942.86 daily payment   16.0%
Promissory note - originated in September 2020   58,025    80,730   $2,873.89 monthly payment for 36 months   14.0%
Promissory note - originated in October 2020   -    158,169   $2,293.31 daily payment   25.0%
Promissory note - originated in November 2020   -    170,886   $4,497.00 daily payment   25.0%
Promissory note - originated in November 2020   -    394,846   $6,999.00 daily payment   25.0%
Promissory note - originated in December 2020   37,287    50,030   $1,854.41 monthly payment for 36 months   8.0%
Promissory note - originated in February 2021(3)   1,344,000    -   5 years   4.0%
Promissory note - originated in January 2021   55,168    -   $2,675.89 monthly payment for 36 months   18.0%
Promissory note - originated in April 2021   832,000    -   1 year   12%
Promissory note - originated in April 2021   132,559    -   $8,284.92 daily payment   24%
Promissory note - originated in July 2021   282,000    -   1 year   12%
Promissory note - originated in August 2021   301,106    -   $4,842.5 daily payment   49%
Promissory note - originated in September 2021   58,554    -   $1,383.56 monthly payment for 60 months   28%
    3,999,819    1,447,137         
Less debt discount and debt issuance cost   (956,627)   (289,332)        
    3,043,192    1,157,805         
Less current portion of promissory notes payable   1,225,672    585,310         
Long-term promissory notes payable  $1,817,520   $572,494         

 

 

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 $1,404,000 to settle license fee payable of $1,094,691. As a result, the Company recorded loss on settlement of debt of $309,309.
     
  (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 $202,657 and $22,775, and amortization of debt discount, included in interest expense of $1,721,983 and $182,219, respectively.

 

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 $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.

 

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 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 the actions envisioned under Preliminary Information Statement in Schedule 14C filed with the SEC on February 23 2021 (the “Definitive Information Statement”), with the Board of Directors of the Company (the “Board”) having the discretion to determine whether or not the Authorized Common Stock Reduction 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 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 (1,000,000,000); and, (ii) effect a reverse stock split (the “Reverse Stock Split”) of its issued common stock in a ratio of 1-for-2,000. The preferred stock of the Company was not changed. The 1-for-2,000 Reverse Stock split was processed by FINRA and became effective at the start of trading on July 1, 2021. As a result of the Reverse Stock Split, every 2,000 shares of the Company’s issued and outstanding common stock, par value $0.001 per share, were converted into one (1) share of common stock, par value $0.001 per share. No fractional shares will be issued in connection with the Reverse Stock Split. Stockholders who otherwise would be entitled to receive fractional shares because they hold a number of pre-Reverse Stock Split shares of the Company’s common stock not evenly divisible by 2,000 will have the number of post-Reverse Stock Split shares of the Company’s common stock to which they are entitled rounded up to the nearest whole number of shares of the Company’s common stock. No stockholders will receive cash in lieu of fractional shares.

 

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, 150,000 shares of Series A were issued and outstanding. Each share of Series A was (i) convertible into 1,000 shares of common stock, and (ii) entitled to vote 15,000 shares of common stock on all matters submitted to a vote by shareholders voting common stock. All issued and outstanding shares of Series A Preferred Stock are held by Mr. Jason Remillard, sole director of the Company.

 

Series B Preferred Stock

 

As of September 30, 2021 and December 31, 2020, 28,175 and 5,300 shares of Series B were issued and outstanding, respectively. Each share of Series B (i) has a stated value of Ten Dollars ($10.00) per share; (ii) are convertible into common stock at a price per share equal to sixty one percent (61%) of the lowest price for the Company’s common stock during the twenty (20) day of trading preceding the date of the conversion; (iii) earn dividends at the rate of nine percent (9%) per annum; and, (iv) generally have no voting rights.

 

During the nine months ended September 30, 2021, the Company issued a total of 41,775 shares of Series B preferred stock as follows

 

  41,375 shares for $390,000, less $24,750 financing fees.
     
  6,560 shares in exchange for convertible note and accrued interest of $65,600.

 

During the nine months ended September 30, 2021, 25,200 shares of series B preferred stock were converted into 71,678 shares of our common stock.

 

Common Stock

 

As of September 30, 2021, the Company is authorized to issue 1,000,000,000 shares of common stock with a par value of $0.001. 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 829,518 and 522,006 shares, respectively.

 

During the nine months ended September 30, 2021, the Company issued common stock as follows:

 

  115,860 shares issued for conversion of debt;
     
  83,336 shares issued for cash of $1,000,000, less financing cost of $10,000, less an additional financing discount of $143,199;
     
 

 

9,793 shares issued for service;

 

8,923 shares issued upon the cash-less exercise of warrants;

     
  71,678 shares issued for conversion of Series B preferred stock;
     
  11,298 shares issued as a loan fee in connection with the issuance of promissory notes; and
     
  6,624 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 55,467 shares of the Company’s common stock pursuant at an exercise price of $15.00, with a cashless exercise option. any warrants; (ii) to acquire 55,467 shares of the Company’s common stock at an exercise price of $15.00, exercisable only in the event of a default under that certain Senior Secured Promissory Note issued on 23 April 2021 in the original principal amount of $832,000; (iii) to acquire 125,334 shares of the Company’s common stock at an exercise price of $4.50, exercisable only in the event of a default under that certain Senior Secured Promissory Note issued on July 27, 2021 in the original principal amount of $282,000; and, (iv) to acquire 22,333 shares of the Company’s common stock at an exercise price of $4.50, exercisable only in the event of a default under that certain Convertible Promissory Note issued on September 28, 2021 in the original principal amount of $282,000.

 

A summary of activity during the nine months ended September 30, 2021 follows:

 

   Warrants Outstanding 
       Weighted Average 
   Shares   Exercise Price 
Outstanding, December 31, 2020   50,000   $20.00 
Granted   213,164    7.29 
Reset feature   -    - 
Exercised   (9,030)   5.80 
Forfeited/canceled   -    - 
Outstanding, September 30, 2021   254,134   $9.84 

  

The following table summarizes information relating to outstanding and exercisable warrants as of September 30, 2021:

 

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

 
50,000   4.20   $20.00    -   $- 
55,467   4.56   $15.00    -   $- 
125,334   4.82   $4.50    -   $- 
23,333   5.00   $4.50    -   $- 

  

NOTE 13: SHARE-BASED COMPENSATION

 

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 one-year anniversary date of the grant and have a maximum term of ten years.

 

The following summarizes the stock option activity for the nine months ended September 30, 2021:

 

   Options   Weighted-Average 
   Outstanding   Exercise Price 
Balance as of December 31, 2020   5,875   $96.99 
Grants   6,596    40.81 
Exercised   -    - 
Cancelled   -    - 
Balance as of September 30, 2021   12,471   $67.28 

  

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 $43.01. The total fair value of stock options that granted during the nine months ended September 30, 2021 was approximately $284,000. 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)   5.74 years 
Expected stock price volatility   296.17%
Weighted-average risk-free interest rate   0.64%
Expected dividend  $0.00 

 

Volatility is a measure of the amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company estimates expected volatility giving primary consideration to the historical volatility of its common stock. The risk-free interest rate is based on the published yield available on U.S. Treasury issues with an equivalent term remaining equal to the expected life of the stock option. The expected lives of the stock options represent the estimated period of time until exercise or forfeiture and are based on the simplified method of using the mid-point between the vesting term and the original contractual term.

 

The following summarizes certain information about stock options vested and expected to vest as of September 30, 2021:

 

       Weighted-Average     
   Number of   Remaining Contractual Life   Weighted- Average 
   Options   (In Years)   Exercise Price 
Outstanding   12,471    9.08   $67.28 
Exercisable   1,948    8.62   $222.66 
Expected to vest   10,523    9.16   $38.52 

  

As of September 30, 2021 and December 31, 2020, there was $333,206 and $211,661, 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.

 

The following summarizes the restricted stock activity for the nine months ended September 30, 2021:

 

       Weighted-Average 
   Shares   Fair Value 
Balance as of December 31, 2020   7,356    93.61 
Shares of restricted stock granted   4,501    51.40 
Exercised   -    - 
Cancelled   -    - 
Balance as of September 30, 2021   11,857    77.59 

 

   September 30,   December 31, 
Number of Restricted Stock Awards  2021   2020 
Vested   7,046    226 
Non-vested   4,811    7,130 

  

As of September 30, 2021 and December 31, 2020, there was $44,122 and $144,964, respectively, of total unrecognized compensation cost related to non-vested share-based compensation, which is expected to be recognized over the next year.

 

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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 $940,000 and member loans of $97,689 were recorded as amounts due to a related party. During the nine months ended September 30, 2021, the Company repaid note payable of $159,731 including interest expense of $6,915. As of September 30, 2021 and December 31, 2020, the Company had recorded a liability to DMBGroup totaling $245,652 and $405,382, respectively.

 

During the nine months ended September 30, 2021, the Company borrowed $231,150 from our CEO, our CEO paid operating expenses of $134,723 on behalf of the Company and the Company repaid $378,143 to our CEO.

 

As of September 30, 2021 and December 31, 2020, the Company had due to related party of $389,229 and $561,230, respectively.

 

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 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.

 

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 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 ac