0001493152-23-028461.txt : 20230814 0001493152-23-028461.hdr.sgml : 20230814 20230814161321 ACCESSION NUMBER: 0001493152-23-028461 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 94 CONFORMED PERIOD OF REPORT: 20230630 FILED AS OF DATE: 20230814 DATE AS OF CHANGE: 20230814 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: 231170275 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 June 30, 2023

 

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.)

     

4000 Sancar Way, Suite 400

Research Triangle Park, North Carolina

  27709
(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 August 14, 2023 was 61,413,168.

 

 

 

 

 

 

DATA443 RISK MITIGATION, INC.

FORM 10-Q

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
   
ITEM 1. Financial Statements 2
  Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 (unaudited) 2
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022 (unaudited) 3
  Condensed Consolidated Statements of Stockholders’ Deficit for the six months ended June 30, 2023 and 2022 (unaudited) 4
  Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2023 and 2022 (unaudited) 5
  Notes to the Unaudited Condensed Consolidated Financial Statements 6
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
     
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 27
     
ITEM 4. Controls and Procedures 27
     
PART II. OTHER INFORMATION  
     
ITEM 1. Legal Proceedings 28
     
ITEM 1A. Risk Factors 29
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
     
ITEM 3. Defaults Upon Senior Securities 46
     
ITEM 4. Mine Safety Disclosures 46
     
ITEM 5. Other Information 46
     
ITEM 6. Exhibits 46
     
  SIGNATURES 47

 

1

 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

DATA443 RISK MITIGATION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   June 30,   December 31, 
   2023   2022 
Assets          
Current assets          
Cash  $15,904   $1,712 
Accounts receivable, net   

3,147

   31,978 
Prepaid expense and other current assets   273,159    91,204 
Total current assets   292,210    124,894 
           
Property and equipment, net   503,242    427,031 
Operating lease right-of-use assets, net   249,796    405,148 
Advance payment for acquisition   

2,726,188

    

2,726,188

 
Intellectual property, net of accumulated amortization   204,997    454,331 
Deposits   45,673    45,673 
Total Assets  $4,022,106   $4,183,265 
           
Liabilities and Stockholders’ Deficit          
Current Liabilities          
           
Accounts payable and accrued liabilities   2,221,000    1,031,931 
Deferred revenue   1,814,620    1,704,249 
Interest payable   616,593    478,712 
Notes payable, net of unamortized discount   

2,267,658

    918,785 
Convertible notes payable, net of unamortized discount   2,721,171    4,134,155 
Due to a related party   320,488    112,062 
Operating lease liability   338,818    213,831 
Finance lease liability   -    10,341 
Total Current Liabilities   10,300,348    8,604,066 
           
Notes payable, net of unamortized discount - non-current   1,605,855    3,104,573 
Convertible notes payable, net of unamortized discount - non-current   97,946    97,946 
Deferred revenues - non-current   515,000    788,902 
Operating lease liability - non-current   -    354,631 
           
Total Liabilities   12,519,149    12,950,118 
           
Commitments and Contingencies   -    - 
           
Stockholders’ Deficit          
Series A Preferred Stock, 150,000 shares designated; $0.001 par value; 149,892 shares issued and outstanding, respectively   150    150 
Series B Preferred Stock, 80,000 designated; $10 par value; 0 shares issued and outstanding   -    - 
Common stock: 500,000,000 authorized; $0.001 par value 59,363,988 and 2,615,737 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively   

 

59,360

    2,611 
Additional paid in capital   43,503,928    42,642,514 
Accumulated deficit   (52,060,481)   (51,412,128)
Total Stockholders’ Deficit   (8,497,043)   (8,766,853)
Total Liabilities and Stockholders’ Deficit  $4,022,106   $4,183,265 

 

See the accompanying notes, which are an integral part of these unaudited condensed consolidated financial statements.

 

2

 

 

DATA443 RISK MITIGATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   2023   2022   2023   2022 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2023   2022   2023   2022 
                 
Revenue  $

619,040

   $750,989   $1,998,846   $1,363,505 
Cost of revenue   

244,881

    78,593    453,863    278,272 
Gross profit   374,159    672,396    1,544,983    1,085,233 
                     
Operating expenses                    
General and administrative   1,635,499    2,116,220    3,036,308    3,089,782 
Sales and marketing   64,379    59,635    96,553    180,030 
Total operating expenses   1,699,878   2,175,855    3,132,861    3,269,812 
                     
Loss from operations   (1,325,719)   (1,503,459)   (1,587,878)   (2,184,579)
                     
Other income (expense)                    
Interest expense   (3,488,822)   (942,753)   (3,964,556)   (2,037,069)
Gain (loss) on settlement of debt   4,904,081    -    4,904,081    -
Change in fair value of derivative liability   -    -    -    (57,883)
Total other expense   1,415,259    (942,753)   939,525    (2,094,952)
                     
Income/(loss) before income taxes   89,540   (2,446,212)   (648,353)   (4,279,531)
Provision for income taxes   -    -    -    - 
Net income/(loss)  $89,540  $(2,446,212)  $(648,353)  $(4,279,531)
                     
Dividend on Series B Preferred Stock   -    -    -    (104,631)
Net income/(loss) attributable to common stockholders  $

 

89,540

  $(2,446,212)  $(648,353)  $(4,384,162)
                     
Basic and diluted income/(loss) per Common Share  $0.00  $(25.10)  $(0.04)  $(9.62)
Basic and diluted weighted average number of common shares outstanding   28,510,444    97,477    16,334,701    444,824 

 

See the accompanying notes, which are an integral part of these unaudited condensed consolidated financial statements.

 

3

 

 

DATA443 RISK MITIGATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(UNAUDITED)

 

Six Months Ended June 30, 2023

 

    Shares     Amount     Shares     Amount     Capital     Deficit     Deficit  
    Series A                 Additional           Total  
    Preferred Stock     Common stock     Paid in     Accumulated     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Deficit     Deficit  
                                           
Balance - December 31, 2022     149,892     $ 150       2,615,737     $ 2,611     $ 42,642,514     $ (51,412,128 )   $ (8,766,853 )
                                                         
Subscription of stock for cash     -       -       -       -       20,000       -       20,000  
Common stock issued for conversion of debt     -       -       10,807,823       10,808       321,784       -       332,592  
Common stock issued for adjustment to PPM investors    

-

     

-

     

45,619,000

     

45,619

     

(45,619

)    

-

     

-

 
Stock-based compensation     -       -       321,428       322       565,249       -       565,571  
Net loss     -       -       -       -       -       (648,353 )     (648,353 )
Balance – June 30, 2023     149,892     $ 150       59,363,988     $ 59,360     $ 43,503,928     $

 

(52,060,481

)   $

 

(8,497,043

)

 

Three Months Ended June 30, 2023

 

   Series A           Additional       Total 
   Preferred Stock   Common stock   Paid in   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                             
Balance - March 31, 2023   149,892   $150    6,746,764   $6,742   $42,982,226   $(52,150,021)  $(9,160,903)
                                    
Subscription of stock for cash   -    -    -    -    

20,000

    -    20,000 
Common stock issued for conversion of debt   -    -    6,676,796    6,677    95,926    -    102,603 
Common stock issued for adjustment to PPM investors   -    -    

45,619,000

    

45,619

    

(45,619

)   -    - 
Stock-based compensation   -    -    321,428    322    451,395    -    451,717 
Net income   -    -    -    -    -    89,540   89,540
Balance – June 30, 2023   149,892   $150    59,363,988   $59,360   $43,503,928   $(52,060,481)  $(8,497,043)

 

Six Months Ended June 30, 2022

 

   Series A           Additional       Total 
   Preferred Stock   Common Stock   Paid in   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                             
Balance - December 31, 2021   150,000   $150    122,044   $122   $37,810,380   $(42,033,887)  $(4,223,235)
                                    
Cumulative-effect adjustment from adoption of ASU 2020-06   -    -    -    -    (517,500)   439,857    (77,643)
Common stock issued for acquisition of Centurion assets   -    -    380,952    381    2,475,807    -    2,476,188 
Common stock issued for conversion of preferred stock   (108)   -    108,000    108    (108)        - 
Common stock issued for conversion of debt   -    -    165,273    165    29,160    -    29,325 
Common stock issued in conjunction with convertible notes   -    -    18,170    18    140,918    -    140,936 
Common stock issued for exercised cashless warrant   -    -    6,631    7    (7)   -    - 
Common stock issued for service   -    -    153,491    153    844,048    -    844,201 
Resolution of derivative liability upon exercise of warrant   -    -         -    57,883    -    57,883 
Warrant issued in conjunction with debts   -    -         -    47,628    -    47,628 
Stock-based compensation   -    -         -    (45,511)   -    (45,511)
Net loss   -    -         -    -    (4,384,162)   (4,384,162)
Balance - June 30, 2022   149,892   $150    954,561   $954   $40,842,698   $(45,978,192)  $(5,134,390)

 

See the accompanying notes, which are an integral part of these unaudited condensed consolidated financial statements.

 

4

 

 

Three months ended June 30, 2022

 

   Series A           Additional       Total 
   Preferred Stock   Common Stock   Paid in   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                             
Balance - March 31, 2022   150,000   $150    148,367   $148   $37,353,357   $(43,531,980)  $(6,178,325)
                                    
Common stock issued for acquisition of Centurion assets   -    -    380,952    381    2,475,807    -    2,476,188 
Common stock issued for conversion of preferred stock   (108)   -    108,000    108    (108)   -    - 
Common stock issued for conversion of debt   -    -    151,200    151    1,361    -    1,512 
Common stock issued for service   -    -    153,491    153    844,048    -    844,201 
Common stock issued in conjunction with convertible notes   -    -    12,551    13    78,431    -    78,444 
Warrant issued in conjunction with debts   -    -    -    -    47,628    -    47,628 
Stock-based compensation   -    -    -    -    42,174    -    42,174 
Adjustment of reverse stock split   -    -                   -    - 
Net loss   -    -                   (2,446,212)   (2,446,212)
Balance - June 30, 2022   149,892    150    954,561    954    40,842,698    (45,978,192)   (5,134,390)

 

DATA443 RISK MITIGATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   2023   2022 
   Six Months Ended 
   June 30, 
   2023   2022 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
           
Net loss  $(648,353)  $(4,279,531)
Adjustments to reconcile net loss to net cash used in operating activities:          
Change in fair value of derivative liability   -    57,883 
Gain on settlement of debt   (4,904,081)   - 
Stock-based compensation expense   565,571    798,690 
Depreciation and amortization   340,550    540,714 
Amortization of debt discount   625,783    1,549,752 
Lease liability amortization   (74,292)   (14,958)
Changes in operating assets and liabilities:          
Accounts receivable   28,831    (209,938)
Prepaid expenses and other assets   (181,955)   42,852 
Accounts payable and accrued liabilities   1,189,069    308,642 
Deferred revenue   (163,531)   973,992 
Accrued interest   3,398,326    105,577 
Deposit   -    10,414 
Net Cash provided by/(used in) Operating Activities   175,918    (115,911)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Advance payment for acquisition   -    (250,000)
Purchase of property and equipment   (167,427)   (96,960)
Net Cash used in Investing Activities   (167,427)   (346,960)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Bank overdraft   -    3,781 
Proceeds from issuance of convertible notes payable   564,070    1,207,800 
Repayment of convertible notes payable   (146,663)   (758,346)
Proceeds from stock subscription   20,000    - 
Proceeds from issuance of Series B Preferred Stock   -    75,000 
Redemption of Series B Preferred Stock   -    (487,730)
Finance lease payments   (10,341)   (41,195)
Proceeds from issuance of notes payable   417,427    1,186,453 
Repayment of notes payable   (1,047,218)   (1,957,492)
Proceeds from related parties   229,426    116,238 
Repayment to related parties   (21,000)   (86,571)
Net Cash provided by/(used in) Financing Activities   5,701    (742,062)
           
Net change in cash   14,192    (1,204,933)
Cash, beginning of period   1,712    1,204,933 
Cash, end of period  $15,904   $- 
           
Supplemental cash flow information          
Cash paid for interest  $408,160   $344,867
           
Non-cash Investing and Financing transactions:          
Common stock issued for exercised cashless warrant  $-   $7 
Settlement of convertible notes payable through issuance of common stock  $

332,592

   $27,812 
Common stock issued in conjunction with convertible note  $-   $62,493 
Resolution of derivative liability upon exercise of warrant  $-   $57,883 
Settlement of convertible notes payable through issuance of preferred common stock  $-   $65,600 
Note payable issued for settlement of License fee payable  $-   $77,643 

 

See the accompanying notes, which are an integral part of these unaudited condensed consolidated financial statements.

 

5

 

 

DATA443 RISK MITIGATION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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.

 

The Company delivers solutions and capabilities that businesses can use in conjunction with their use of established cloud vendors such as Microsoft® Azure, Google® Cloud Platform (GCP) and Amazon® Web Services (AWS), as well as with on-premises databases and database applications with virtualization platforms, such as those hosted or configured using VMWare®, Citrix® and Oracle® clouds/products).

 

Advance Payment for Acquisition

 

On January 19, 2022, we entered into an Asset Purchase Agreement with Centurion Holdings I, LLC (“Centurion”) to acquire the intellectual property rights and certain assets collectively known as Centurion SmartShield Home and SmartShield Enterprise, patented technology that protects and recovers devices in the event of ransomware attacks. The total purchase price of $3,400,000 consists of: (i) a $250,000 cash payment at closing; (ii) a $2,900,000 promissory note issued by Data443 in favor of Centurion (“Centurion Note”); and (iii) $250,000 in the form of a contingent payment. The Centurion Note matures January 19, 2027 but provides that Data443’s repayment obligation would accelerate on the occurrence of certain events. One of those events was a financing event that did not occur within the originally anticipated timeframe. If that event had occurred, then Data443’s repayment obligation would have been to repay the balance of the outstanding principal and interest as follows: (i) $500,000 of the then-outstanding amount due in cash; and (ii) the remaining balance, at Data443’s option, in Common stock or a combination of Common stock and cash, with the number of shares of Common stock to be determined according to a specified formula. In April 2022, Data443 and Centurion agreed that, even though the trigger for this acceleration event did not occur, Data443 would issue shares of Common stock to Centurion in an amount then-equivalent to $2,400,000, as partial repayment of the obligation due under the Centurion Note. The number of shares of Common stock Data443 issued to Centurion on April 20, 2022, was 380,952. Because Data443 still has some repayment obligations to fulfill under the Centurion Note, as of the filing date of these financial statements, the acquisition that is the subject of the Centurion Asset Purchase Agreement is still not completed, and is expected to be completed in 2023.

 

Basis of Presentation

 

These unaudited condensed consolidated financial statements have been prepared in accordance with rules and regulations of the Securities and Exchange Commission (“SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, we have included all adjustments considered necessary for a fair presentation and such adjustments are of a normal recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2022 and notes thereto and other pertinent information contained in our Form 10-K as filed with the SEC on February 24, 2023. The results of operations for the six months ended June 30, 2023, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2023.

 

Basis of Consolidation

 

The accompanying unaudited consolidated financial statements as of June 30, 2023 include our accounts and those of our wholly-owned subsidiary, Data 443 Risk Mitigation, Inc., a North Carolina operating company. These unaudited consolidated financial statements have been prepared on the accrual basis of accounting in accordance with US GAAP. All inter company balances and transactions have been eliminated in consolidation.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on the net earnings (loss) or and financial position.

 

6

 

 

Accounts Receivable

 

Trade receivables are generally recorded at the invoice amount mostly for a one-year period, net of an allowance for bad debt. For the three months ended June 30, 2023, and June 30, 2022, we recorded bad debt expense of $0 and $0, respectively

 

Stock-Based Compensation

 

Employees – We account for stock-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 - Under the requirements of the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Stock-Based Payment Accounting (“ASU 2018-07”), we account for stock-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.

 

We recorded approximately $565,571 in stock-based compensation expense for the six months ended June 30, 2023, compared to $798,690 in stock-based compensation expense for the six months ended June 30, 2022. Determining the appropriate fair value model and the related assumptions requires judgment. During the three months ended June 30, 2023, the fair value of each option grant was estimated using a Black-Scholes option-pricing model. The expected volatility represents the historical volatility of our publicly traded common stock. Due to limited historical data, we calculate the expected life based on the mid-point between the vesting date and the contractual term which is in accordance with the simplified method. The expected term for options granted to nonemployees is the contractual life. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of stock options. We have not paid and do not anticipate paying cash dividends on our shares of Common stock; therefore, the expected dividend yield is assumed to be zero.

 

Contingencies

 

We account for contingent liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 450, Contingencies. This standard 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 our 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 in our financial statements. For loss contingencies considered remote, we generally would neither accrue any estimated liability nor disclose the nature of the contingent liability in our financial statements. Management has assessed potential contingent liabilities as of June 30, 2023, and based on that assessment, there are no probable or possible loss contingencies requiring accrual or establishment of a reserve.

 

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 six months ended June 30, 2023 and 2022, 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:

 

   2023   2022 
   Six Months Ended 
   June 30, 
   2023   2022 
   (Shares)   (Shares) 
Series A Preferred Stock   149,892,000    149,892,000 
Stock options   2,838,067    1,029 
Warrants   158,441    158,441 
Total   152,888,508    150,051,470 

 

7

 

 

Recently Adopted Accounting Guidance

 

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” (“Standard”). The Standard reduced the number of accounting models available for convertible debt instruments and convertible preferred stock. Pursuant to the Standard, convertible debt 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 Standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Due to adoption of this Standard on January 1, 2022, we recognized a cumulative effect adjustment to increase the opening retained earnings as of January 1, 2022 by $439,857.

 

To compute the transition adjustment for a convertible instrument under both the modified retrospective and full retrospective methods, entities need to recompute the basis of that instrument at transition (i.e., the beginning of year of adoption for the modified retrospective method or the beginning of earliest year presented for the full retrospective method) as if the conversion option had not been separated. The Company use the modified retrospective method to adjust.

 

Recently Issued Accounting Pronouncements

 

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 financial statements have been prepared assuming that we will continue as a going concern. As reflected in the financial statements, we have incurred significant current period losses of $648,353 for the six months ended June 30, 2023 and we have negative working capital of $10,008,138 and an accumulated deficit $52,060,481 as of June 30, 2023. We have relied upon loans and issuances of our equity to fund our operations. These conditions, among others, raise substantial doubt about our ability to continue as a going concern. Management’s plans regarding these matters, include raising additional debt or equity financing, the terms of which might not be acceptable. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

NOTE 3: PROPERTY AND EQUIPMENT

 

The following table summarizes the components of our property and equipment as of the dates presented:

 

   June 30,   December 31, 
   2023   2022 
Furniture and Fixtures  $6,103   $6,103 
Computer Equipment   1,035,097    867,670 
Property and equipment, gross   1,041,200    873,773 
Accumulated depreciation   (537,958)   (446,742)
Property and equipment, net of accumulated depreciation  $503,242   $427,031 

 

Depreciation expense for the six months ended June 30, 2023 and 2022, was $91,216 and $80,170, respectively.

 

During the six months ended June 30, 2023 and 2022, we purchased property and equipment of $167,427 and $96,960, respectively.

 

8

 

 

NOTE 4: INTELLECTUAL PROPERTY

 

The following table summarizes the components of our intellectual property as of the dates presented:

 

   June 30,
2023
   December 31,
2022
 
Intellectual property:          
WordPress® GDPR rights  $46,800   $46,800 
ARALOC®   1,850,000    1,850,000 
ArcMail®   1,445,000    1,445,000 
DataExpress®   1,388,051    1,388,051 
FileFacets®   135,000    135,000 
IntellyWP™   60,000    60,000 
Resilient Network Systems   305,000    305,000 
Intellectual property   5,229,851    5,229,851 
Accumulated amortization   (5,024,854)   (4,775,520)
Intellectual property, net of accumulated amortization  $204,997   $454,331 

 

We recognized amortization expense of $249,334 and $460,544 for the six months ended June 30, 2023, and 2022, respectively.

 

Based on the carrying value of definite-lived intangible assets as of June 30, 2023, we estimate our amortization expense for the next five years will be as follows:

 

   Amortization 
   Expense 
Year ended December 31,    
2023 (excluding the six months ended June 30, 2023)  $162,247 
2024   27,000 
2025   15,750 
Thereafter   - 
Total  $204,997 

 

NOTE 5: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

The following table summarizes the components of our accounts payable and accrued liabilities as of the dates presented:

 

   June 30,   December 31, 
   2023   2022 
Accounts payable  $1,370,015   $427,553 
Credit cards   72,374    50,302 
Accrued liabilities   778,611    554,076 
Balance, end of year  $2,221,000   $1,031,931 

 

NOTE 6: DEFERRED REVENUE

 

For the six months ended June 30, 2023 and as of December 31, 2022, changes in deferred revenue were as follows:

 

   June 30,   December 31, 
   2023   2022 
Balance, beginning of period  $2,493,151   $1,608,596 
Deferral of revenue   1,186,955    3,511,678 
Recognition of deferred revenue   (1,350,486)   (2,627,123)
Balance, end of period  $2,329,620   $2,493,151 

 

As of June 30, 2023 and December 31, 2022, deferred revenue is classified as follows:

   June 30,   December 31, 
   2023   2022 
Current  $1,814,620   $1,704,249 
Non-current   515,000    788,902 
Balance, end of year  $2,329,620   $2,493,151 

 

NOTE 7: LEASES

 

Operating lease

 

We have two noncancelable operating leases for office facilities, one that we entered into January 2019 and that expires January 10, 2024 and another that we entered into in April 2022 and that expires April 30, 2024. Each operating lease has a renewal option and a rent escalation clause. In the summer of 2022, we relocated to the expanded square footage of the premises that are the subject of the April 2022 lease to support our growing operations, and entered into a commission agreement with the landlord of the building to sublet the premises that are the subject of the January 2019 lease.

 

We recognized total lease expense of approximately $146,994 and $83,339 for the six months ended June 30, 2023 and 2022, respectively, primarily related to operating lease costs paid to lessors from operating cash flows. As of June 30, 2023 and December 31, 2022, we recorded a security deposit of $33,467.

 

At June 30, 2023, future minimum lease payments under operating leases that have initial noncancelable lease terms in excess of one year were as follows:

 

   Total 
Year Ended December 31,     
2023 (excluding the six months ended June 30, 2023)   242,379 
2024   121,406 
Thereafter   - 
Total lease payment   363,785 
Less: Imputed interest   (24,967)
Operating lease liabilities   338,818 
      
Operating lease liability - current   338,818 
Operating lease liability - non-current  $- 

 

The following summarizes other supplemental information about our operating leases as of June 30, 2023:

 

Weighted average discount rate   8%
Weighted average remaining lease term (years)   .70 

 

Financing leases

 

We do not have any financing leases as June 30, 2023 and $10,341 as of December 31, 2022.

 

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NOTE 8: CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable consists of the following:

 

   June 30,   December 31, 
   2023   2022 
Convertible Notes - Issued in fiscal year 2020   97,946    97,946 
Convertible Notes - Issued in fiscal year 2021   414,690    600,400 
Convertible Notes - Issued in fiscal year 2022   1,891,083    3,710,440 
Convertible Notes - Issued in fiscal year 2023   534,454    - 
Convertible notes payable, Gross   2,938,173    4,408,786 
Less debt discount and debt issuance cost   (119,056)   (176,685)
Convertible notes payable   2,819,117    4,232,101 
Less current portion of convertible notes payable   2,721,171    4,134,155 
Long-term convertible notes payable  $97,946   $97,946 

 

During the six months ended June 30, 2023 and the year ended December 31, 2022, we recognized interest expense of $3,964,556 and $374,938, respectively, and amortization of debt discount expense of $145,837 and $636,010, respectively. During the six months ended June 30, 2022 we recognized interest expense of $346,348 and amortization of debt discount, included in interest expense of $625,783.

 

Conversion

 

During the six months ended June 30, 2023, we converted notes with principal amounts and accrued interest of $332,592 into 10,807,823 shares of common stock.

 

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Convertible notes payable consists of the following:

 

Promissory Notes - Issued in fiscal year 2020

 

In 2020, we issued convertible promissory notes with principal amounts totaling $100,000. The 2020 Promissory Notes have the following key provisions:

 

  Terms 60 months.
     
  Annual interest rates of 5%.
     
  Conversion price fixed at $0.01.

 

Promissory Notes - Issued in fiscal year 2021

 

In 2021, we issued convertible promissory notes with principal amounts totaling $1,696,999, which resulted in cash proceeds of $1,482,000 after financing fees of $214,999 were deducted. The 2021 Convertible Notes have the following key provisions:

 

  Terms ranging from 90 days to 12 months.
     
  Annual interest rates of 5% to 12%.
     
  Convertible at the option of the holders after varying dates.
     
  Conversion price based on a formula corresponding to a discount (39% discount) off the average closing price or lowest trading price of our Common stock for the 20 prior trading days including the day on which a notice of conversion is received.
     
  The Mast Hill Fund, LLC convertible promissory note matured on October 19, 2022. The default annual interest rate of 16% becomes the effective interest rate on the past due principal and interest. As of June 30, 2023 the note had a principle balance of $414,690 and accrued interest of $39,822. The note is currently in default.

 

The 2021 Convertible Notes also were associated with the following:

 

  The issuance of 1,414 shares of Common stock valued at $133,663.
     
  The issuance of 117,992 warrants to purchase shares of Common stock with an exercise price a range from $7.44 to 36.00. The term in which the warrants can be exercised is 5 years from issue date. (Note 12)

 

During the six months ended June 30, 2023, in connection with the 2021 Convertible Notes, we repaid principal in the amount of $38,490 and interest expense of $39,822.

 

Promissory Notes - Issued in fiscal year 2022

 

During the year ended December 31, 2022, we issued convertible promissory notes with principal amounts totaling $2,120,575, which resulted in cash proceeds of $1,857,800 after deducting a financing fee of $262,775. The 2022 Convertible Notes have the following key provisions:

 

  Terms ranging from 3 to 12 months.
     
  Annual interest rates of 9% to 20%.
     
  Convertible at the option of the holders after varying dates.
     
  Conversion price based on a formula corresponding to a discount (20% or 39% discount) off the lowest trading price of our Common stock for the 20 prior trading days including the day on which a notice of conversion is received, although one of the 2022 Convertible Notes establishes a fixed conversion price of $4.50 per share.
     
  554,464 shares of common stock valued at $473,691 issued in conjunction with convertible notes.
     
  On June 30, 2023, the Company entered into a Note Exchange Agreement (the “Note Exchange Agreement”) with Westland Properties LLC (the “Noteholder”), pursuant to which the Company agreed with Westland Properties LLC to exchange one outstanding note with a total outstanding balance of $5,398,299 for a new note with an aggregate value of $665,000 (the “New Note”). The New Note matures on June 1, 2024, and calls for payments of (i) $115,000 on or prior to July 25, 2023, (ii) nine monthly payments to the noteholder in the amount of $38,889 each, with the first payment beginning September 1, 2023 and (iii) $200,000 on the earlier of (a) three business days following the Company’s successful listing on any of the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange or (b) the receipt of not less than $4,000,000 in funding from a single transaction. If the conditions for payment of the above $200,000 are not met, but the Company raises capital in excess of $500,000 in a single closing, then 25% of any capital raised in such closing shall be used to satisfy the $200,000 payment. The Company followed ASC470 Trouble Debt Restructuring, to record a gain on settlement of debt for $4,904,081.

 

In connection with the adoption of ASU 2020-06 on January 1, 2022, we reclassified $517,500, previously allocated to the conversion feature, from additional paid-in capital to convertible notes on our balance sheet. The reclassification was recorded to combine the two legacy units of account into a single instrument classified as a liability. As of January 1, 2022, we also recognized a cumulative effect adjustment of $439,857 to accumulated deficit on our balance sheet, that was primarily driven by the derecognition of interest expense related to the accretion of the debt discount as required under the legacy accounting guidance. Under ASU 2020-06, we will no longer incur non-cash interest expense related to the accretion of the debt discount associated with the embedded conversion option.

 

Promissory Notes - Issued in fiscal year 2023

 

During the six months ended June 30, 2023, we issued convertible promissory notes with principal amounts totaling $637,858, which resulted in cash proceeds of $520,000 after deducting a financing fee of $117,858. The 2023 Convertible Notes have the following key provisions:

 

  Terms ranging from 9 to 12 months.
     
  Annual interest rates of 9% to 20%.
     
  Convertible at the option of the holders after varying dates.
     
  Conversion price based on a formula corresponding to a discount (20% or 30% discount) off the lowest trading price of our Common stock for the 20 prior trading days including the day on which a notice of conversion is received, although one of the 2023 Convertible Notes establishes a fixed conversion price of $.50 per share.
     
  As of the six months ended June 30, 2023, there were no derivative liabilities.

 

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NOTE 9: DERIVATIVE LIABILITIES

 

We analyzed the conversion option of convertible notes 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.

 

We 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 June 30, 2023. 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. As of the six months ended June 30, 2023, there were no derivative liabilities.

 

For the six months ended June 30, 2023 there was no derivative outstanding, and no loss recorded. For the six months ended June 30, 2022, the change in fair value of the derivative liability was $57,883 and the loss on the derivative was $57,883.

 

The fair value of the derivative liability for all the notes that became convertible, including the notes issued in prior years, during the year ended December 31, 2022 amounted to $57,883 recognized as a derivative loss.

 

The inputs used to calculate the derivative values are as follows:

 

   Six months ended   Year ended 
   June 30,   December 31, 
   2023   2022 
Expected term   -    -*
Expected average volatility   -%   280%
Expected dividend yield   -    - 
Risk-free interest rate   -%   3.65%

 

* There is no excepted term on the convertible notes.

 

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NOTE 10: NOTES PAYABLE

 

Notes payable consists of the following:

 

   June 30,   December 31,      Interest 
   2023   2022   Maturity  Rate 
Economic Injury Disaster Loan - originated in May 2020 (1, 2)  $500,000   $500,000   30 years   3.75%
Promissory note - originated in September 2020   7,568    20,182   $2,873.89 monthly payment for 36 months   14.0%
Promissory note - originated in December 2020   7,551    16,047   $1,854.41 monthly payment for 36 months   8.0%
Promissory note - originated in January 2021   11,268    22,243   $2,675.89 monthly payment for 36 months   18.0%
Promissory note - originated in February 2021 (3)   1,305,373    1,305,373   5 years   4.0%
Promissory note - originated in April 2021(4)   866,666    866,666   1 year   12%
Promissory note - originated in July 2021(4)   352,500    352,500   1 year   12%
Promissory note - originated in September 2021   37,712    43,667   $1,383.56 monthly payment for 60 months   28%
Promissory note - originated in April 2022   64,680    73,204   $1,695.41 monthly payment for 36 months   16.0%
Promissory note - originated in April 2022   64,053    239,858   $7,250 daily payment for 168 days   25%
Promissory note – originated in June 2022   -    149,011   $20,995 weekly payment for 30 weeks   49%
Promissory note - originated in July 2022   48,569    54,557   $1,485.38 monthly payment for 60 months   18%
Promissory note - originated in July 2022   76,514    94,878   $3,546.87 monthly payment for 36 months   10%
Promissory note - originated in August 2022   22,710    26,538   $589.92 monthly payment for 60 months   8%
Promissory note - originated in October 2022   1,193,612    635,745   $1,749.00 daily payment for 30 days   66%
Promissory note - originated in January 2023   5,160    -   $237.03 monthly payment for 36 months   25%
Promissory note - originated in March 2023   53,519    -   $1,521.73 monthly payment for 60 months   18%
Promissory note - originated in March 2023   13,495    -   $559.25 monthly payment for36 months   17%
Promissory note - originated in April 2023   31,672    -   $3,999.00 monthly payment for 12 months   12%
Promissory note - originated in April 2023   40,400    -   $3,918.03 monthly payment for 12 months   6%
Promissory note - originated in May 2023   250,000    -   3 months   29%
    4,953,022    4,400,469         
Less debt discount and debt issuance cost   (1,079,509)   (377,111)        
    3,873,513    4,023,358         
Less current portion of promissory notes payable   2,267,658    918,785         
Long-term promissory notes payable  $1,605,855   $3,104,573         

 

During the six months ended June 30, 2023 and 2022, we recognized interest expense of $630,192 and $113,693, and amortization of debt discount, of $479,946 and $625,621, respectively, included in interest expense.

 

During the six months ended June 30, 2023 and 2022, we issued promissory notes for a total of $1,599,772 and $1,840,518, less discount of $1,182,344 and $654,065, and repaid $1,047,218 and $1,957,492, respectively.

 

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NOTE 11: COMMITMENTS AND CONTINGENCIES

 

DMB Note Collection Action

 

On June 17, 2021, DMB Group, LLC (“DMB”) filed a lawsuit against our wholly-owned subsidiary, the North Carolina operating company Data443 Risk Mitigation, Inc., (the “Subsidiary”) in County Court in Denton County, Texas, naming the Subsidiary as defendant. The matter was settled September 2021 by mutual agreement of the involved parties. The Subsidiary has made all payments required pursuant to the settlement and the matter is now considered closed. The Court granted our motions for nonsuit and dismissal with prejudice on orders entered May 4 and May 5, 2022 respectively.

 

Employment Related Claims

 

We view most legal proceedings involving claims of former employees as routine litigation incidental to the business, and therefore not material.

 

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

 

Preferred Stock

 

As of June 30, 2023, we are authorized to issue 337,500 shares of preferred stock with a par value of $0.001, of which 150,000 shares have been designated as Series A, and 80,000 shares have been designated as Series B.

 

Series A Preferred Stock

 

As of June 30, 2023, we are authorized to issue 150,000 of Series A Preferred stock with par value of $0.001. 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 our Chief Executive Officer.

 

As of June 30, 2023 and December 31, 2022, 149,892 shares of Series A were issued and outstanding, respectively.

 

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Series B Preferred Stock

 

As of June 30, 2023, we are authorized to issue 80,000 of Series A Preferred stock with par value of $10.00. Each share of Series B (i) is convertible into Common stock at a price per share equal to sixty one percent (61%) of the lowest price for our Common stock during the twenty (20) days of trading preceding the date of the conversion; (ii) earns dividends at the rate of nine percent (9%) per annum; and, (iii) has no voting rights.

 

As of June 30, 2023 and December 31, 2022, 0 and 0 shares of Series B were issued and outstanding, respectively.

 

Common stock

 

As of June 30, 2023, we are authorized to issue 500,000,000 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.

 

During the six months ended June 30, 2023, we issued Common stock as follows:

 

  10,807,823 shares issued for conversion of debt;
  45,619,000 shares issued for adjustment to PPM investors;
  321,428 shares issued for stock-based compensation.

 

As of June 30, 2023 and December 31, 2022, 59,363,988 and 2,615,737 shares of Common stock were issued and outstanding, respectively.

 

Warrants

 

A summary of activity during the six months ended June 30, 2023 follows:

   Warrants Outstanding 
       Weighted Average 
   Shares   Exercise Price 
Outstanding, December 31, 2022   159,974   $22.07 
Granted   -    - 
Exercised   -    - 
Forfeited/canceled   -    - 
Outstanding, June 30, 2023   159,974   $22.07 

 

During the six months ended June 30, 2023, 0 warrants were exercised and we issued 0 shares of Common stock as a result.

 

15

 

 

The following table summarizes information relating to outstanding and exercisable warrants as of June 30, 2023:

 

Exercisable Warrants Outstanding 
    Weighted Average Remaining     
Number of
Shares
   Contractual life
(in years)
   Weighted Average
Exercise Price
 
 6,250    2.45   $160.00 
 6,934    2.81   $120.00 
 15,666    3.07   $36.00 
 2,917    3.25   $36.00 
 32,837    3.04   $9.88 
 74,671    3.50   $7.44 
 20,699    3.86   $6.00 
 159,974    3.33   $22.07 

 

NOTE 13: STOCK-BASED COMPENSATION

 

Stock Options

 

During the six months ended June 30, 2023, we granted options for the purchase of our Common stock to certain employees as consideration for services rendered. The terms of the stock option grants are determined by our Board of Directors consistent our 2019 Omnibus Stock Incentive Plan which the Board adopted May 16, 2019. Our 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 six months ended June 30, 2023:

 

   Options
Outstanding
   Weighted-Average
Exercise Price
 
Balance as of December 31, 2022    865,983   $ 1.67 
Grants    1,972,728     .07 
Exercised    -     - 
Cancelled    644     67.40 
Balance as of June 30, 2023    2,838,067   $ .57 

 

The following summarizes certain information about stock options vested and expected to vest as of June 30, 2023:

 

   Number of
Options
   Weighted-Average Remaining Contractual Life
(In Years)
   Weighted- Average
Exercise Price
 
Outstanding   2,838,067    9.07   $.78 
Exercisable   477,112    8.29   $3.14 
Expected to vest   2,838,067    9.07   $.78 

 

As of June 30, 2023 and December 31, 2022, there was $226,716 and $381,547, respectively, of total compensation costs related to non-vested stock-based compensation arrangements which we expect to recognized within the next 12 months.

 

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Restricted Stock Awards

 

The following summarizes the restricted stock activity for the six months ended June 30, 2023:

 

       Weighted-Average 
   Shares   Fair Value 
Balance as of December 31, 2022   322,798   $225,639 
Shares of restricted stock granted   2,550,000    180,000 
Exercised   -    - 
Cancelled   -    - 
Balance as of June 30, 2023   2,872,798   $405,639 

 

 

Number of Restricted Stock Awards  June 30,
2023
   December 31,
2022
 
Vested   322,798    1,370 
Non-vested   2,550,000    321,428 

 

NOTE 14: RELATED PARTY TRANSACTIONS

 

Jason Remillard is our president and Chief Executive Officer and the sole director. Through his ownership of Series A Preferred Shares, Mr. Remillard has voting control over all matters to be submitted to a vote of our shareholders. Greg McCraw is our Chief Financial Officer own shares of the Company.

 

During the six months ended June 30, 2023, the Company borrowed $19,700 from our CEO and $150,000 from our CFO. Our CEO paid operating expenses of $68,942 on behalf of the Company and the Company repaid $21,000 to our CEO.

 

As of June 30, 2023 and December 31, 2022, we had due to related party transactions in the amounts of $320,486 and $112,062, respectively.

 

NOTE 15: SUBSEQUENT EVENTS

 

The Company does not have any events subsequent to June 30, 2023 through August 14, 2023, the date the financial statements were issued for disclosure consideration, except for the following:

 

  On July 7, 2023, we issued 2,049,180 shares of Common Stock to Root Ventures, LLC pursuant to an agreement with Root Ventures, LLC, in exchange for $25,000 in note payable principal.
     
  On July 6, 2023, we received funds as result of entering into a securities purchase agreement (“Purchase Agreement #1”) with an accredited investor as purchaser (“Investor #1”). Pursuant to Purchase Agreement #1, the Company sold, and Investor #1 purchased, $812,500.00 in principal amount of secured convertible notes (the “Investor #1 Notes”) and pre-funded warrants (the “Investor #1 Warrants”). The Investor #1 Notes are convertible into shares of the Company’s common stock, par value $0.01 per share (“Common Stock”), at a conversion price per share of $0.005, subject to adjustment under certain circumstances described in the Investor #1 Notes. The Investor #1 Notes were issued with an original issue discount of 30.00%, do not bear interest, and mature twelve months from the date of issuance.
     
 

On July 24, 2023, we received funds as result of entering into a second securities purchase agreement (“Purchase Agreement #2” and, together with Purchase Agreement #1, the “Purchase Agreements”) with an accredited investor as purchaser (“Investor #2” and, together with Investor #1, the “Investors”). Pursuant to Purchase Agreement #2, the Company sold, and Investor #2 purchased, $718,750.00 in principal amount of secured convertible notes (the “Investor #2 Notes” and, together with the Investor #1 Notes, the “Notes”) and pre-funded warrants (the “Investor #2 Warrants” and, together with the Investor #1 Warrants, the “Warrants”). The Investor #2 Notes are convertible into Common Stock, at a conversion price per share of $0.005, subject to adjustment under certain circumstances described in the Notes. The Notes were issued with an original issue discount of 15.00%, bear interest at a rate of 12%, and mature twelve months from the date of issuance.

 

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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 six months ended June 30, 2023 and for the year ended December 31, 2022 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 on Form 10-Q for the quarter ended June 30, 2023 (the “Quarterly Report”).

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions, or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements.” All statements other than statements of historical facts contained in this Quarterly Report may be forward-looking statements. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “continues,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “would” or “should” or, in each case, their negative or other variations or comparable terminology. They appear in a number of places throughout this Quarterly Report, and include statements regarding our intentions, beliefs, or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, future acquisitions, and the industry in which we operate.

 

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the “Risk Factors” section of this Quarterly Report, which include, but are not limited to, the following:

 

  we will need significant additional capital to fund our operations;
     
  there is substantial doubt about our ability to continue as a going concern;
     
  we will face intense competition in our market, and we may lack sufficient financial and other resources to maintain and improve our competitive position;
     
  we are dependent on the continued services and performance of our founder and Chief Executive Officer, Jason Remillard;
     
  our common stock is currently quoted on the OTC Pink and is thinly traded, reducing your ability to liquidate your investment in us;
     
  we have had a history of losses and may incur future losses, which may prevent us from attaining profitability;
     
  the market price of our common stock may be volatile and may fluctuate in a way that is disproportionate to our operating performance;
     
  we have shares of preferred stock that have special rights that could limit our ability to undertake corporate transactions, inhibit potential changes of control, and reduce the proceeds available to our common stockholders in the event of a change in control;
     
  we have never paid and do not intend to pay cash dividends;
     
  our Chief Executive Officer has the ability to control all matters submitted to stockholders for approval, which limits our stockholders’ ability to influence corporate affairs; and
     
  the other factors described in “Risk Factors.”

 

Those factors should not be construed as exhaustive and should be read with the other cautionary statements in this quarterly report.

 

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Although we have based these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this Quarterly Report. The matters summarized under “Overview”, “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this Quarterly Report could cause our actual results to differ significantly from those contained in our forward-looking statements. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods.

 

In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments, except as required by applicable law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

 

Overview

 

We provide data security and privacy management solutions across the enterprise and in the cloud. With over 10,000 customers, we provide the visibility and control needed to protect data at scale, regardless of format, location, or consumer, and to facilitate compliance with fast-changing global data privacy requirements. Our customers include established leaders and up-and-coming businesses spanning the private and public/government sectors across diverse industries and fields, including financial services, healthcare, manufacturing, retail, technology, and telecommunications.

 

The mounting ransomware landscape as well as other threats to data have accelerated the rate at which businesses are adopting data security solutions and we believe that our portfolio of data security and privacy products provides an encompassing solution set such that we are well positioned to capitalize on that increased adoption rate and establish our products as new data privacy and security standards. Our offerings are anchored in reliable and comprehensive privacy management and equip organizations with a seamless approach to safeguard data, protect against attacks, and otherwise mitigate the most critical risks.

 

Sector-specific US laws, state-level legislation, and outside-the-United States (OUS) regulations are confounding enterprises of all sizes for whom safeguarding and stewarding data is key, but for whom becoming specialists in privacy and security is not an element of their strategic roadmap. For many of these enterprises, we can bridge the gap between their need to protect data and their need to use their resources to grow their core business by offering turnkey solutions and related counseling and technical support to offset risks from data breaches and security incidents of various types. We provide products and services for the marketplace that are designed to protect data that is stored in the cloud, on-premises, and in hybrid cloud/on-premises environments, and data that is transmitted throughout the enterprise, including but not limited to by remote employees. Our suite of security products focuses on protecting sensitive files and email, confidential customer, patient and employee data, financial records, strategic and product plans, intellectual property and other proprietary information, allowing our customers to create, share, and protect their sensitive data wherever it is stored and however it is used.

 

We deliver solutions and capabilities that businesses can use in conjunction with their use of established cloud vendors such as Microsoft® Azure, Google® Cloud Platform (GCP), and Amazon® Web Services (AWS), as well as with on-premises databases and database applications and with virtualization platforms, such as those hosted or configured using VMWare®, Citrix®, and Oracle® products.

 

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We sell or plan to sell substantially all of our products and services through a sales model that combines the leverage of a channel sales model or direct account management, thereby providing us with opportunities to grow our current customer base and deliver our value proposition for data privacy and security. We endeavor to use subscription models to license products and services, commonly for a paid in-advance, multiyear term that is auto-renewing. We also make use of channel partners, distributors, and resellers which sell to end-users of the products and services. This approach allows us to maintain close relationships with our customers and benefit from the global reach of our partners. Additionally, we are enhancing our product offerings and go-to-market strategy by establishing technology alliances within the IT infrastructure and security vendor ecosystem. Our sales and marketing focus for new organic growth is on organizations with 500 or more users who are adopting cloud services and can make larger purchases with us over time and have a greater potential lifetime value.

 

We continue to onboard to cloud-native technology adoption portals such as the Microsoft® Azure Marketplace and the Amazon® AWS Marketplace. Vendors may offer incentives to us as a software and services provider to onboard and market via their marketplace portals.

 

We strive to create new and innovative products and to improve existing products, proactively identifying and solving the data security needs of our customers.

 

As cloud adoption continues to accelerate, data privacy requirements get more complex, and data security becomes more challenging, we believe we are well positioned to capture more market share, continue to lead in strategic data security technology development, and prepare organizations for the next epoch in IT data privacy services.

 

Our Products

 

Each of our major product lines provides features and functionality which we believe enable our customers to optimally secure their data. The products are modular, giving our customers the flexibility to select what they require for their business needs and the flexibility to expand their usage simply by adding a license. We currently offer the following products and services:

 

  Data443® Ransomware Recovery Manager (also known as SmartShield™), a unique offering designed to recover a workstation immediately upon infection to the last known business-operable state, without requiring any end user or IT administrator intervention.
     
  Data443® Data Identification Manager (also known as ClassiDocs® and FileFacets®), our data classification and governance technology, which supports CCPA (California), LGPD (Brazil) and GDPR (Europe) compliance in a Software-as-a-Service (SaaS) platform that performs sophisticated data discovery and content searching of structured and unstructured data within corporate networks, servers, content management systems, email, desktops, and laptops.
     
  Data443® Data Archive Manager (also known as ArcMail®), a simple, secure, and cost-effective enterprise data retention management and archiving.
     
  Data443® Sensitive Content Manager (also known as ARALOC®), a secure, cloud-based platform for managing, protecting and distributing digital content to desktop and mobile devices, which protects an organization’s confidential content and intellectual property assets from accidental leakage or intentional misappropriation - without impeding all other authorized users of the content and other stakeholder from collaborating.
     
  Data443® Data Placement Manager (also known as DATAEXPRESS®), a data transport, transformation, and delivery product trusted by leading financial organizations worldwide.

 

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  Data443® Access Control Manager (also known as “Resilient Access”), enables fine-grained access controls across a wide variety of platforms at scale for internal client systems and commercial public cloud platforms like Salesforce®, Box.Net, Google® G Suite, Microsoft® OneDrive, and others.
     
  Data443® Blockchain Protection Manager (also known 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 Data443® Data Identification Manager to do the delivery portions of GDPR and CCPA as well as process privacy-related requests under such laws, and therefore enables customers to manage the full range of privacy-law driven requirements, such as responding to permitted consumer demands for access or removal, as well as to remediate issues and monitor and report on status and compliance.
     
  Data443® IntellyWP, products for enhancing the user experience for the world’s largest content management platform, WordPress.
     
  Data443® Chat History Scanner, which scans chat messages for compliance, security, personally identifiable information (PII), personal information (PI), payment card industry (PCI) information as well as any custom keywords selected by the customer, and which can be used with third party platforms such as the Zoom Video Communications, Inc. video conferencing platform.
     
  Data443® - GDPR Framework, CCPA Framework, and LGPD Framework WordPress® Plugins, which help organizations of all sizes comply with Europe, California and Brazil privacy rules and regulations and are currently used by over 30,000 active site owners. We offer the plugins with a “freemium” business model, i.e., basic features at no cost and additional or more advanced features at a premium.

 

Outlook

 

Our objective is to further integrate our suite of data security, ransomware protection, and privacy products and offer the products alone or in combination to enterprise customers directly and via our partner channels. We aim to position our products to meet the challenges our customers face - data privacy concerns grow in lockstep with security breaches, the need to continually expand data storage, and to meet telework, telehealth, and remote learning requirements.

 

We have relied on and expect to continue to benefit from strategic acquisitions of products, talent, and an established customer base to contribute to our long-term growth objectives.

 

Key elements of our growth strategy may be summarized as follows:

 

Acquisitions. We intend to aggressively pursue acquisitions of other cybersecurity software and service providers focused on the data security sector. We target companies with a developed and/or steady client base, as well as companies with offerings that complement our existing suite of products.

 

Research & Development; Innovation. We intend to increase our spending on research and development to create new and innovative products and to improve existing products, proactively identifying and solving the data security needs of our clients.

 

Grow Our Customer Base. We believe the continued challenges businesses face in managing their enterprise data and the ever-evolving landscape of cybersecurity threats will keep the demand high for the type of products and services we offer. We intend to capitalize on this demand by continually developing and curating a collection of products and services that are attractive and relevant to both our established revenue base and to new customers.

 

Expand Our Sales Capacity. We believe that continuing to expand our sales force will be essential to achieving our expansion and growth. We intend to expand our sales capacity by adding sales and marketing employees, with heavy focus on customer success and leveraging our existing customer relationships.

 

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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.

 

While we primarily report income based on recognized and deferred revenue, another measurement internally for the business is booked revenues. Management uses 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 executed 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.

 

Recent Developments

 

On May 11, 2023, we entered into an agreement to purchase certain assets (the “Purchase Agreement”) with the Appointed Receiver for the Assets of Cyren Ltd (the “Receiver”). Pursuant to the Purchase Agreement, the Receiver sold, transferred, assigned, conveyed and delivered to the Company, and we purchased from Receiver, all right, title, and interest in and to certain assets in the Purchase Agreement (the “Assets”). In exchange for the Assets, we will pay (i) $500,000 payable in cash, (ii) shares of our common stock equivalent to $2,000,000 and (iii) $1,000,000 in the form of an earn out payment, as further described in the Purchase Agreement. As of the filing of this Quarterly Report, the transaction has not yet closed.

 

Results of Operations for the Three and Six Months Ended June 30, 2023 Compared to the Three and Six Months Ended June 30, 2022

 

Our operations for the three months ended June 30, 2023 and 2022 are outlined below:

 

   Three Months Ended         
   June 30   Change 
   2023   2022   $   % 
Revenue  $619,040   $750,989   $(131,949)   (18)%
Cost of revenue   244,881    78,593    166,288    212%
Gross Profit   

374,159

    672,396    (298,237)   (44)%
Gross Profit Percentage   60%   90%          
                     
Operating expense   1,699,878    2,175,855    (475,977)   (22)%
Other income (expense)   1,415,259    (942,753)   2,358,012    250%
Net loss  $89,540  $(2,446,212)  $2,535,752    (104)%

 

Revenue

 

The decrease in revenue has partially resulted from some sales that were originally forecasted for the second quarter of 2023 being pulled forward to the first quarter of 2023. In addition, two of our larger customers opted for annual renewals instead of a multi-year, paid-up-front renewals.. We have restarted several of our lead generation and funnel movement activities throughout the second quarter of 2023. Our existing customers continue to evaluate our offerings for multiple products at a time, rather than singular use cases, which continues to build on organic growth from our customers that come from our acquisitions.

 

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Cost of Revenue

 

Cost of revenue consists of direct expenses, such as labor, shipping, and supplies. The increase in cost of revenue in part is due to the rise in inflation for products and services. We also incurred additional software and contractor costs related to new business activities.

 

Operating Expenses

 

For the three months ended June 30, 2023 and 2022 our operating expenses were as follows:

 

   Three Months Ended         
   June 30,   Change 
   2023   2022   $   % 
                 
General and administrative  $1,635,499   $2,116,220   $(480,721)   (23)%
Sales and marketing   64,379    59,635    4,744    8%
Total operating expenses  $1,699,878   $2,175,855   $(475,977)   (22)%

 

General and Administrative Expenses

 

The general and administrative expenses primarily consisted of management costs, costs to integrate assets we acquired and to expand sales, product enhancements, audit and review fees, filing fees, professional fees, and other expenses related to SEC reporting, including the re-classification of sales-related management expenses, in connection with the projected growth of our business. Additionally, we continue to incur specific one-time costs in relation to our planned Nasdaq Capital Markets uplist, additional financing activities and related functions. The decrease in general and administrative expense was primarily due to an increase cost cutting measures.

 

Sales and Marketing Expenses

 

The sales and marketing expenses primarily consisted of continuing to shift our sales operation toward an inbound model, continued high focus on renewals and customer success operations and previously reported expenses, which are, primarily management costs, reclassified to general and administrative expenses.

 

Other income (expense)

 

Other expenses for the three months ended June 30, 2023 consisted primarily of interest expense and an forgiveness of debt on note payable of $4,904,081 and accrued interest of $3,488,822. Other expenses for the June 30, 2022 consisted of interest expense and loss on change in fair value of derivative. The decrease in other expenses was primarily due to a decrease in interest expense.

 

Net Income

 

Net loss decreased 93% from $2,446,212 for the three months ended June 30, 2022 to net income of $89,540 for the three months ended June 30, 2023. The net income was mainly derived from an operating loss of $1,325,719, and interest expense of $3,488,822 and settlement of debt of $4,904,081. The net loss for the three months ended June 30, 2022 was mainly derived from an operating loss of $1,503,459, interest expense of $671,862 and loss on change in fair value of derivative liability of $178,398. The decrease in net loss was primarily due to the increase in recognized revenue and a decrease in interest expense and the forgiveness of debt.

 

Our operations for the six months ended June 30, 2023 and 2022 are outlined below:

 

   Six Months Ended         
   June 30,   Change 
   2023   2022   $   % 
Revenue  $1,998,846   $1,363,505   $635,341    47%
Cost of revenue   453,863    278,272    175,591    63%
Gross Profit   1,544,983    1,085,233    459,750    42%
Gross Profit Percentage   77%   80%          
                     
Operating expense   3,132,861    3,269,812    (136,951)   4%
Other income (expense)   939,525    (2,094,952)   3,034,477    145%
Net loss  $(648,353)  $(4,279,531)  $3,631,178    (85)%

 

Revenue

 

Revenues increased 220% from $1,363,505 for the six months ended June 30, 2022 to $1,998,846 for the six months ended June 30, 2023. The increase in revenues was driven by existing customer organic growth customers, new customer acquisitions and our high renewal rate.

 

Cost of Revenue

 

Cost of revenue consists of direct expenses, such as sales commission, shipping, and supplies. The increase in cost of revenue was primarily due to an increase in one-time costs, including sales commissions for some larger deal closings and customer outreach.

 

Operating Expenses

 

For the six months ended June 30, 2023 and 2022 our operating expenses were as follows:

 

   Six Months Ended         
   June 30,   Change 
   2023   2022   $   % 
                 
General and administrative  $3,036,308   $3,089,782   $(53,474)   (2)%
Sales and marketing   96,553    180,030    (83,477)   (46)%
Total operating expenses  $3,132,861   $3,269,812   $(136,951)   (4)%

 

General and Administrative Expenses

 

The general and administrative expenses primarily consisted of management costs, costs to integrate assets we acquired and to expand sales, product enhancements, audit and review fees, filing fees, professional fees, and other expenses related to SEC reporting, including the re-classification of sales-related management expenses, in connection with the projected growth of our business. Additionally, we continue to incur specific costs in relation to our planned uplist to the Nasdaq Capital Markets, additional financing activities and related functions. The increase in general and administrative expense was primarily due to a increases in professional services fees related to uplist activities, increased overhead costs associated with our continued public OTC Pink Market listing, and acquisition-related costs.

 

Sales and Marketing Expenses

 

The sales and marketing expenses primarily consisted of continuing to shift our sales operation toward an inbound model, continued high focus on renewals and customer success operations and previously reported expenses, primarily management costs, reclassified to general and administrative expenses. The decrease in sales and marketing expense was primarily due to not having dedicated sales and marketing staff to drive efforts expenses.

 

Other income (expense)

 

Other income (expenses) for the six months ended June 30, 2023 consisted primarily of interest expense and an forgiveness of debt on note payable of $4,724,299. Other expenses for the six months ended June 30, 2022 consisted of interest expense and loss on change in fair value of derivative. The decrease in other expenses was primarily due to a decrease in interest expense.

 

Net Loss

 

Net loss decreased 85% from $4,279,531 for the six months ended June 30, 2022 to $648,353 for the six months ended June 30, 2023. The net loss was mainly derived from an operating loss of $1,587,878, and interest expense of $3,964,556 and settlement of debt of $4,904,081. The net loss for the six months ended June 30, 2022 was mainly derived from an operating loss of $2,184,579, and interest expense of $2,037,069.

 

Accumulated Losses

 

We had a net operating loss carryfowards of approximately $6 million from prior operations in 2017, before our current President and Chief Executive Officer acquired a controlling interest in the company. Subsequent to this and through June 30, 2023, we have relied on convertible notes and other debt instruments that may contain unfavorable discounts, origination fees, and have embedded conversion features that are subject to derivative treatment for accounting purposes. Due primarily to this treatment of convertible notes, debt and related derivative accounting, since 2017, we have accumulated deficits of approximately $14.1 million due to derivative valuations and $14.5 million expensed for interest and amortization of debt discounts for financing and other origination fees.

 

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Liquidity and Capital Resources

 

Working Capital

 

The following table provides selected financial data about our company as of June 30, 2023 and December 31, 2022, respectively.

 

   June 30,   December 31,   Change 
   2023   2022   $   % 
Current assets  $292,210   $124,894   $167,316   134%
Current liabilities  $10,300,348   $8,604,066   $1,696,282    20%
Working capital deficiency  $(10,008,138)  $(8,479,172)  $(1,528,966)   (18)%

 

We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of June 30, 2023, we had cash balance of $15,904 and our principal sources of liquidity were trade accounts receivable of $3,147, and prepaid expenses and other current assets of $273,169, as compared to cash of $1,712 trade accounts receivable of $31,978, and prepaid expenses and other current assets of $91,204 as of December 31, 2022.

 

During the last three years, and through the date of this Report, we have faced an increasingly challenging liquidity situation that has limited our ability to execute our operating plan. We will need to obtain capital to continue operations. There is no assurance that we will be able to secure such funding on acceptable terms. During the six months ended June 30, 2023, we reported a loss from operations of $1,587,878.

 

As of June 30, 2023, we had assets of cash in the amount of $15,904 and other current assets in the amount of $276,306. As of June 30, 2023, we had current liabilities of $10,300,348. Our accumulated deficit as of June 30, 2023 was $52,060,481.

 

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As of December 31, 2022, we had assets of cash in the amount of $1,712 and other current assets in the amount of $123,182. As of December 31, 2022, we had current liabilities of $8,604,066. Our accumulated deficit as of December 31, 2022 was $51,412,128.

 

The revenues generated from our current operations will not be sufficient to fund our planned growth. We will require additional capital to continue to operate our business, and to further expand our business. Sources of additional capital through various financing transactions or arrangements with third parties may include equity or debt financing, bank loans or revolving credit facilities. We may not be successful in locating suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means. Unless we can attract additional investment, our operating as a going concern is in doubt.

 

We are now obligated to file annual, quarterly and current reports with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the rules subsequently implemented by the SEC and the Public Company Accounting Oversight Board (“PCAOB”) have imposed various requirements on public companies, including requiring changes in corporate governance practices. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities of ours more time-consuming and costly. In order to meet the needs to comply with the requirements of the Exchange Act, we will need investment of capital.

 

Management has determined that additional capital will be required in the form of equity or debt securities. There is no assurance that management will be able to raise capital on terms acceptable to us, or at all.

 

If we are unable to obtain sufficient amounts of additional capital, we may have to cease filing the required reports and cease operations completely. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock.

 

Cash Flow

 

   Six Months Ended     
   June 30,     
   2023   2022   Change 
Cash provided by (used in) operating activities  $175,918   $(115,911)  $291,829 
Cash used in investing activities  $(167,427)  $(346,960)  $179,533 
Cash used in financing activities  $5,701  $(742,062)  $747,763
Cash on hand  $15,904   $-   $15,904 

 

Operating Activities

 

During the six months ended June 30, 2023, we provided $175,918 by operating activities, compared to $115,911 used by during the six months ended June 30, 2022.

 

Investing Activities

 

During the six months ended June 30, 2023, we used funds in investing activities of $167,427 to acquire property and equipment and advance payment for acquisition. During the six months ended June 30, 2022, we used funds in investing activities of $346,960 to acquire property and equipment.

 

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Financing Activities

 

During the six months ended June 30, 2023, we (i) raised $564,070 from issuance of convertible debt; (ii) received proceeds from a related party of $229,426; and (iii) received proceeds of $417,427 from issuance of notes payable; (iv) repaid of convertible note payable of $146,663; (v) repaid of $1,047,218 on notes payable; and (vi) repaid to a related party of $13,000. For June 30, 2023 we had net cash inflows for financing activities of $5,701. By comparison, during the six months ended June 30, 2022, we (i) raised $75,000 through the issuance of Series B Preferred Stock; (ii) raised $1,207,800 from issuance of convertible debt; (iii) received proceeds from related party of $116,238, (iv) had a bank overdraft of $3,781; and (v) received $1,186,453 from issuance of notes payable. These amounts were offset in part through (i) redemption of Series B Preferred Stock of $487,730; (ii) repayment of convertible note payable of $758,346; (iii) repayment of $1,957,492 on notes payable; (iv) repayment to related party of $86,571; and (v) $41,195 of capital lease payments.

 

We are dependent upon the receipt of capital investment or other financing to fund our ongoing operations and to execute our business plan. If continued funding and capital resources are unavailable at reasonable terms, we may not be able to implement our plan of operations.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2023, we did not have any off-balance sheet arrangements.

 

Critical Accounting Policies

 

Critical Accounting Policies and Significant Judgments and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial stateme