Exhibit 4.21
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 March 31, 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 May 15, 2023 was .
DATA443 RISK MITIGATION, INC.
FORM 10-Q
TABLE OF CONTENTS
| 1 |
PART I
FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
DATA443 RISK MITIGATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | (Audited) | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | 108,956 | $ | 1,712 | ||||
| Accounts receivable, net | 11,080 | 31,978 | ||||||
| Advance payment for acquisition | 2,726,188 | 2,726,188 | ||||||
| Prepaid expense and other current assets | 154,192 | 91,204 | ||||||
| Total current assets | 3,000,416 | 2,851,082 | ||||||
| Property and equipment, net | 457,819 | 427,031 | ||||||
| Operating lease right-of-use assets, net | 328,762 | 405,148 | ||||||
| Intellectual property, net of accumulated amortization | 329,664 | 454,331 | ||||||
| Deposits | 45,673 | 45,673 | ||||||
| Total Assets | $ | 4,162,334 | $ | 4,183,265 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | 1,510,966 | 1,031,931 | ||||||
| Deferred revenue | 1,584,809 | 1,704,249 | ||||||
| Interest payable | 710,960 | 478,712 | ||||||
| Notes payable, net of unamortized discount | 2,091,879 | 918,785 | ||||||
| Convertible notes payable, net of unamortized discount | 4,431,260 | 4,134,155 | ||||||
| 151,272 | 112,062 | |||||||
| Operating lease liability | 429,907 | 213,831 | ||||||
| Finance lease liability | 10,341 | 10,341 | ||||||
| Total Current Liabilities | 10,921,394 | 8,604,066 | ||||||
| Notes payable, net of unamortized discount - non-current | 1,555,652 | 3,104,573 | ||||||
| Convertible notes payable, net of unamortized discount - non-current | 97,946 | 97,946 | ||||||
| Deferred revenues - non-current | 718,145 | 788,902 | ||||||
| Operating lease liability - non-current | 30,100 | 354,631 | ||||||
| Total Liabilities | 13,323,237 | 12,950,118 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Deficit | ||||||||
| Series A Preferred Stock, shares designated; $ par value; and shares issued and outstanding, respectively | 150 | 150 | ||||||
| Series B Preferred Stock, 80,000 designated; $10 par value; 0 shares issued and outstanding | - | - | ||||||
| Common stock: authorized; $ par value and shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively | 6,742 | 2,611 | ||||||
| Additional paid in capital | 42,982,226 | 42,642,514 | ||||||
| Accumulated deficit | (52,150,021 | ) | (51,412,128 | ) | ||||
| Total Stockholders’ Deficit | (9,160,903 | ) | (8,766,853 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 4,162,334 | $ | 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)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | $ | 1,379,806 | $ | 612,516 | ||||
| Cost of revenue | 208,982 | 199,679 | ||||||
| Gross profit | 1,170,824 | 412,837 | ||||||
| Operating expenses | ||||||||
| General and administrative | 1,400,809 | 973,562 | ||||||
| Sales and marketing | 32,174 | 120,395 | ||||||
| Total operating expenses | 1,432,983 | 1,093,957 | ||||||
| Net loss from operations | (262,159 | ) | (681,120 | ) | ||||
| Other income (expense) | ||||||||
| Interest expense | (475,734 | ) | (1,094,316 | ) | ||||
| Change in fair value of derivative liability | (57,883 | ) | ||||||
| Total other expense | (475,734 | ) | (1,152,199 | ) | ||||
| Loss before income taxes | (737,893 | ) | (1,833,319 | ) | ||||
| Provision for income taxes | ||||||||
| Net loss | $ | (737,893 | ) | $ | (1,833,319 | ) | ||
| Dividend on Series B Preferred Stock | (104,631 | ) | ||||||
| Net loss attributable to common stockholders | $ | (737,893 | ) | $ | (1,937,950 | ) | ||
| Basic and diluted loss per Common Share | $ | (0.17 | ) | $ | (13.75 | ) | ||
| Basic and diluted weighted average number of common shares outstanding | 4,384,911 | 133,344 | ||||||
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 STOCKHOLDERS’ DEFICIT
(Unaudited)
Three Months Ended March 31, 2023
| 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 | ) | ||||||||||||||
| Common stock issued for conversion of debt | - | 4,131,027 | 4,131 | 225,858 | 229,989 | |||||||||||||||||||||||
| Stock-based compensation | - | - | 113,854 | 113,854 | ||||||||||||||||||||||||
| Net loss | - | - | (737,893 | ) | (737,893 | ) | ||||||||||||||||||||||
| Balance – March 31, 2023 | 149,892 | $ | 150 | 6,746,764 | $ | 6,742 | $ | 42,982,226 | $ | (52,150,021 | ) | $ | (9,160,903 | ) | ||||||||||||||
Three Months Ended March 31, 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 conversion of debt | - | 14,073 | 13 | 27,799 | 27,812 | |||||||||||||||||||||||
| Common stock issued in conjunction with convertible notes | - | 5,619 | 6 | 62,487 | 62,493 | |||||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | 6,631 | 7 | (7 | ) | |||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | 57,883 | 57,883 | ||||||||||||||||||||||||
| Stock-based compensation | - | (87,685 | ) | (87,685 | ) | |||||||||||||||||||||||
| Dividend on Series B Preferred Stock | - | - | (104,631 | ) | (104,631 | ) | ||||||||||||||||||||||
| Net loss | - | - | (1,833,319 | ) | (1,833,319 | ) | ||||||||||||||||||||||
| Balance - March 31, 2022 | 150,000 | $ | 150 | 148,367 | $ | 148 | $ | 37,353,357 | $ | (43,531,980 | ) | $ | (6,178,325 | ) | ||||||||||||||
See the accompanying notes, which are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
DATA443 RISK MITIGATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (737,893 | ) | $ | (1,833,319 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Change in fair value of derivative liability | 57,883 | |||||||
| Stock-based compensation expense | 113,854 | (87,685 | ) | |||||
| Depreciation and amortization | 175,005 | 269,877 | ||||||
| Amortization of debt discount | 337,143 | 734,191 | ||||||
| Right of use asset amortization | 76,386 | (7,479 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 20,898 | (197,979 | ) | |||||
| Prepaid expenses and other assets | (62,988 | ) | 43,899 | |||||
| Accounts payable and accrued liabilities | 479,035 | 97,515 | ||||||
| Lease liability | (108,455 | ) | ||||||
| Deferred revenue | (190,197 | ) | 1,042,647 | |||||
| Accrued interest | 257,009 | 35,962 | ||||||
| Net Cash provided by Operating Activities | 359,797 | 155,512 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Advance payment for acquisition | (250,000 | ) | ||||||
| Purchase of property and equipment | (81,126 | ) | (8,280 | ) | ||||
| Net Cash used in Investing Activities | (81,126 | ) | (258,280 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of convertible notes payable | 489,070 | 902,000 | ||||||
| Repayment of convertible notes payable | (70,286 | ) | (729,506 | ) | ||||
| Proceeds from issuance of Series B Preferred Stock | 75,000 | |||||||
| Redemption of Series B Preferred Stock | (487,730 | ) | ||||||
| Finance lease payments | (21,872 | ) | ||||||
| Proceeds from issuance of notes payable | 80,960 | 438,860 | ||||||
| Repayment of notes payable | (710,381 | ) | (972,853 | ) | ||||
| Proceeds from related parties | 44,210 | |||||||
| Repayment to related parties | (5,000 | ) | (123,788 | ) | ||||
| Net Cash used in Financing Activities | (171,427 | ) | (919,889 | ) | ||||
| Net change in cash | 107,244 | (1,022,657 | ) | |||||
| Cash, beginning of period | 1,712 | 1,204,933 | ||||||
| Cash, end of period | $ | 108,956 | $ | 182,276 | ||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | 5,979,456 | $ | 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 | $ | 229,989 | $ | 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 . 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 March 31, 2022. The results of operations for the three months ended March 31, 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 March 31, 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.
| 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 March 31, 2023, and March 31, 2022, we recorded bad debt expense of $0 and $0, respectively
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 $ in stock-based compensation expense for the three months ended March 31, 2023, compared to ($ in stock-based compensation expense for the three months ended March 31, 2022. Determining the appropriate fair value model and the related assumptions requires judgment. During the three months ended March 31, 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 March 31, 2023, and based on that assessment, there are no probable or possible loss contingencies requiring accrual or establishment of a reserve.
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.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| (Shares) | (Shares) | |||||||
| Series A Preferred Stock | 149,892,000 | 149,892,000 | ||||||
| Stock options | 1,088,067 | 1,029 | ||||||
| Warrants | 158,441 | 158,441 | ||||||
| Total | 151,138,508 | 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 and we have negative working capital and an accumulated deficit. 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:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Furniture and Fixtures | $ | 6,103 | $ | 6,103 | ||||
| Computer Equipment | 948,796 | 867,670 | ||||||
| 954,899 | 873,773 | |||||||
| Accumulated depreciation | (497,080 | ) | (446,742 | ) | ||||
| Property and equipment, net of accumulated depreciation | $ | 457,819 | $ | 427,031 | ||||
Depreciation expense for the three months ended March 31, 2023 and 2022, was $50,338 and $126,128, respectively.
During the three months ended March 31, 2023 and 2022, we purchased property and equipment of $81,126 and $8,280, respectively.
| 8 |
NOTE 4: INTELLECTUAL PROPERTY
The following table summarizes the components of our intellectual property as of the dates presented:
| March 31, 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 | ||||||
| 5,229,851 | 5,229,851 | |||||||
| Accumulated amortization | (4,900,187 | ) | (4,775,520 | ) | ||||
| Intellectual property, net of accumulated amortization | $ | 329,664 | $ | 454,331 | ||||
We recognized amortization expense of $124,667 and $230,272 for the three months ended March 31, 2023, and 2022, respectively.
Based on the carrying value of definite-lived intangible assets as of March 31, 2023, we estimate our amortization expense for the next five years will be as follows:
| Amortization | ||||
| Year Ended December 31, | Expense | |||
| 2023 (excluding the three months ended March 31, 2023) | $ | 286,914 | ||
| 2024 | 27,000 | |||
| 2025 | 15,750 | |||
| Thereafter | ||||
| $ | 329,664 | |||
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:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accounts payable | $ | 878,744 | $ | 427,553 | ||||
| Credit cards | 78,855 | 50,302 | ||||||
| Accrued liabilities | 553,367 | 554,076 | ||||||
| $ | 1,510,966 | $ | 1,031,931 | |||||
NOTE 6: DEFERRED REVENUE
For the three months ended March 31, 2023 and as of December 31, 2022, changes in deferred revenue were as follows:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Balance, beginning of period | $ | 2,493,151 | $ | 1,608,596 | ||||
| Deferral of revenue | 475,769 | 3,511,678 | ||||||
| Recognition of deferred revenue | (665,966 | ) | (2,627,123 | ) | ||||
| Balance, end of period | $ | 2,302,954 | $ | 2,493,151 | ||||
| 9 |
As of March 31, 2023 and December 31, 2022, deferred revenue is classified as follows:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Current | $ | 1,584,809 | $ | 1,704,249 | ||||
| Non-current | 718,145 | 788,902 | ||||||
| $ | 2,302,954 | $ | 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 $76,386 and $137,813 for the three months ended March 31, 2023 and 2022, respectively, primarily related to operating lease costs paid to lessors from operating cash flows. As of March 31, 2023 and December 31, 2022, we recorded a security deposit of $33,467.
At March 31, 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 three months ended March 31, 2023) | 360,368 | |||
| 2024 | 121,406 | |||
| Thereafter | ||||
| 481,774 | ||||
| Less: Imputed interest | (75,767 | ) | ||
| Operating lease liabilities | 460,007 | |||
| Operating lease liability - current | 429,907 | |||
| Operating lease liability - non-current | $ | 30,100 | ||
The following summarizes other supplemental information about our operating leases as of March 31, 2023:
| Weighted average discount rate | 8 | % | ||
| Weighted average remaining lease term (years) | .97 |
Financing leases
We lease computer and hardware under non-cancellable finance leases. The term of those finance leases is 3 years and annual interest rate is 12%. At March 31, 2023 and December 31, 2022, the finance lease obligations included in current liabilities were $10,341 and $10,341, respectively, and finance lease obligations included in long-term liabilities were $ and $0, respectively. As of March 31, 2023 and December 31, 2022, we recorded a security deposit of $0.
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At March 31, 2023, future minimum lease payments under the finance lease obligations, are as follows:
| Total | ||||
| 2023 | 10,341 | |||
| Thereafter | ||||
| 10,341 | ||||
| Less: Imputed interest | (5,300 | ) | ||
| Finance lease liabilities | 5,041 | |||
| Finance lease liability | 10,341 | |||
| Finance lease liability - non-current | $ |
As of March 31, 2023 and December 31 2022, finance lease assets are included in property and equipment as follows:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Finance lease assets | $ | 267,284 | $ | 267,284 | ||||
| Accumulated depreciation | (267,284 | ) | (258,506 | ) | ||||
| Finance lease assets, net of accumulated depreciation | $ | $ | 8,778 | |||||
NOTE 8: CONVERTIBLE NOTES PAYABLE
Convertible notes payable consists of the following:
| March 31, | 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 | 3,662,082 | 3,710,440 | ||||||
| Convertible Notes - Issued in fiscal year 2023 | 524,582 | |||||||
| 4,699,300 | 4,408,786 | |||||||
| Less debt discount and debt issuance cost | (170,094 | ) | (176,685 | ) | ||||
| 4,529,206 | 4,232,101 | |||||||
| Less current portion of convertible notes payable | 4,431,260 | 4,134,155 | ||||||
| Long-term convertible notes payable | $ | 97,946 | $ | 97,946 | ||||
During the three months ended March 31, 2023 and the year ended December 31, 2022, we recognized interest expense of $228,583 and $3,795,591, respectively, and amortization of debt discount expense of $83,549 and $911,020, respectively.
Conversion
During the three months ended March 31, 2023, we converted notes with principal amounts and accrued interest of $229,989 into 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 March 31, 2023 the note had a principle balance of $414,690 and accrued interest of $5,430. The note is currently in default. |
The 2021 Convertible Notes also were associated with the following:
| ● | The issuance of shares of Common stock valued at $133,663. | |
| ● | The issuance of 117,992 warrants to purchase shares of Common stock with an exercise price a range from $7.44 to 36.00. The term in which the warrants can be exercised is 5 years from issue date. (Note 12) |
During the three months ended March 31, 2023, in connection with the 2021 Convertible Notes, we repaid principal in the amount of $38,490 and interest expense of $17,105.
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. |
| ● | shares of common stock valued at $473,691 issued in conjunction with convertible notes. |
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.
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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 March 31, 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 three months ended March 31, 2023, there were no derivative liabilities.
For the three months ended March 31, 2023 there was no derivative outstanding, and no loss recorded. For the three months ended March 31, 2022 the fair value of the derivative liability was $57,883 and the loss on the derivative was $57,883.
The inputs used to calculate the derivative values are as follows:
| Three months ended | Year ended | |||||||
| March 31, | 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:
| March 31, | 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 | 12,614 | 20,182 | $2,873.89 monthly payment for 36 months | 14.0 | % | |||||||||
| Promissory note - originated in December 2020 | 11,799 | 16,047 | $1,854.41 monthly payment for 36 months | 8.0 | % | |||||||||
| Promissory note - originated in January 2021 | 15,658 | 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 | 40,690 | 43,667 | $1,383.56 monthly payment for 60 months | 28 | % | |||||||||
| Promissory note - originated in April 2022 | 68,941 | 73,204 | $1,695.41 monthly payment for 36 months | 16.0 | % | |||||||||
| Promissory note - originated in April 2022 | 150,951 | 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 | 51,563 | 54,557 | $1,485.38 monthly payment for 60 months | 18 | % | |||||||||
| Promissory note - originated in July 2022 | 85,696 | 94,878 | $3,546.87 monthly payment for 36 months | 10 | % | |||||||||
| Promissory note - originated in August 2022 | 25,103 | 26,538 | $589.92 monthly payment for 60 months | 8 | % | |||||||||
| Promissory note - originated in October 2022 | 1,389,054 | 635,745 | $1,749.00 daily payment for 30 days | 66 | % | |||||||||
| Promissory note - originated in January 2023 | 5,659 | $237.03 monthly payment for 36 months | 25 | % | ||||||||||
| Promissory note - originated in March 2023 | 56,489 | $1,521.73 monthly payment for 60 months | 18 | % | ||||||||||
| Promissory note - originated in March 2023 | 14,801 | $559.25 monthly payment for36 months | 17 | % | ||||||||||
| 4,953,557 | 4,400,469 | |||||||||||||
| Less debt discount and debt issuance cost | (1,306,026 | ) | (377,111 | ) | ||||||||||
| 3,647,531 | 4,023,358 | |||||||||||||
| Less current portion of promissory notes payable | 2,091,879 | 918,785 | ||||||||||||
| Long-term promissory notes payable | $ | 1,555,652 | $ | 3,104,573 | ||||||||||
During the three months ended March 31, 2023 and 2022, we recognized interest expense of $327,736 and $56,457, and amortization of debt discount, included in interest expense of $253,430 and $387,766, respectively.
During the three months ended March 31, 2023 and 2022, we issued promissory notes for a total of $1,263,471 and $682,400, less discount of $1,182,344 and $243,540, and repaid $710,381 and $972,853, 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 March 31, 2023, we are authorized to issue shares of preferred stock with a par value of $, of which shares have been designated as Series A, and shares have been designated as Series B.
Series A Preferred Stock
As of March 31, 2023, we are authorized to issue of Series A Preferred stock with par value of $. Each share of Series A was (i) convertible into shares of common stock, and (ii) entitled to vote 15,000 shares of common stock on all matters submitted to a vote by shareholders voting common stock. All issued and outstanding shares of Series A Preferred Stock are held by our Chief Executive Officer.
As of March 31, 2023 and December 31, 2022, shares of Series A were issued and outstanding, respectively.
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Series B Preferred Stock
As of March 31, 2023, we are authorized to issue of Series A Preferred stock with par value of $. 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 March 31, 2023 and December 31, 2022, and shares of Series B were issued and outstanding, respectively.
Common stock
As of March 31, 2023, we are authorized to issue shares of Common stock with a par value of $. All shares have equal voting rights, are non-assessable, and have one vote per share.
During the three months ended March 31, 2023, we issued Common stock as follows:
| ● | shares issued for conversion of debt; |
As of March 31, 2023 and December 31, 2022, and shares of Common stock were issued and outstanding, respectively.
Warrants
A summary of activity during the three months ended March 31, 2023 follows:
| Warrants Outstanding | ||||||||
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
| Outstanding, December 31, 2022 | 159,974 | $ | 22.07 | |||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited/canceled | ||||||||
| Outstanding, March 31, 2023 | 159,974 | $ | 22.07 | |||||
During the three months ended March 31, 2023, warrants were exercised cashless and we issued 0 shares of Common stock as a result.
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The following table summarizes information relating to outstanding and exercisable warrants as of March 31, 2023:
| Exercisable Warrants Outstanding | ||||||||
| Weighted Average Remaining | ||||||||
| Number of Shares | Contractual life (in years) | Weighted Average Exercise Price | ||||||
| 6,250 | 2.70 | $ | 160.00 | |||||
| 6,934 | 3.06 | $ | 120.00 | |||||
| 15,666 | 3.32 | $ | 36.00 | |||||
| 2,917 | 3.50 | $ | 36.00 | |||||
| 32,837 | 3.29 | $ | 9.88 | |||||
| 74,671 | 3.75 | $ | 7.44 | |||||
| 20,699 | 4.11 | $ | 6.00 | |||||
| 159,974 | 3.87 | $ | 22.07 | |||||
Stock Options
During the three months ended March 31, 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 anniversary date of the grant and have a maximum term of .
| Options Outstanding | Weighted-Average Exercise Price | |||||||
| Balance as of December 31, 2022 | 865,983 | $ | 1.67 | |||||
| Grants | 222,728 | .32 | ||||||
| Exercised | ||||||||
| Cancelled | 644 | 67.40 | ||||||
| Balance as of March 31, 2023 | 1,088,067 | $ | 481.46 | |||||
| Number of Options | Weighted-Average Remaining Contractual Life (In Years) | Weighted- Average Exercise Price | ||||||||||
| Outstanding | 1,088,067 | $ | 2.09 | |||||||||
| Exercisable | 699,840 | $ | 2.43 | |||||||||
| Expected to vest | 1,088,067 | $ | 2.09 | |||||||||
As of March 31, 2023 and December 31, 2022, there was $ and $, 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
| Weighted-Average | ||||||||
| Shares | Fair Value | |||||||
| Balance as of December 31, 2022 | 322,798 | $ | 225,639 | |||||
| Shares of restricted stock granted | 300,000 | 90,000 | ||||||
| Exercised | ||||||||
| Cancelled | ||||||||
| Balance as of March 31, 2023 | 622,798 | $ | 315,639 | |||||
| Number of Restricted Stock Awards | March 31, 2023 | December 31, 2022 | ||||||
| Vested | 322,798 | 1,370 | ||||||
| Non-vested | 300,000 | 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.
During the three months ended March 31, 2023, the Company borrowed $19,700 from our CEO, our CEO paid operating expenses of $24,510 on behalf of the Company and the Company repaid $5,000 to our CEO.
As of March 31, 2023 and December 31, 2022, we had due to related party transactions in the amounts of $ and $, respectively.
NOTE 15: SUBSEQUENT EVENTS
The Company does not have any events subsequent to December 31, 2021 through May 15, 2023, the date the financial statements were issued for disclosure consideration, except for the following:
| ● | On May 1, 2023, we issued shares of Common Stock to One44 Capital, LLC pursuant to an agreement with One44 Capital, LLC, in exchange for $6,300 in note payable principal and $690 of accrued interest. | |
| ● | On May 1, 2023, we issued shares of Common Stock to Root Ventures, LLC pursuant to an agreement with Root Ventures, LLC, in exchange for $7,137 in note payable principal. | |
| ● | On May 8, 2023, we issued shares of Common Stock to One44 Capital, LLC pursuant to an agreement with One44 Capital, LLC, in exchange for $6,000 in note payable principal and $556 of accrued interest. | |
| ● | On May 11, 2023, the Company 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, Receiver sold, transferred, assigned, conveyed and delivered to the Company, and the Company purchased from Receiver, all right, title, and interest in and to certain assets in the Purchase Agreement (the “Assets”). In exchange for the Assets, the Company will pay (i) $500,000 payable in cash, (ii) shares of the Company’s 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. |
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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 three months ended March 31, 2023 and for 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.
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 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 base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this 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.
Results of Operations for the Three Ended March 31, 2023 Compared to the Three Ended March 31, 2022
Our operations for the three months ended March 31, 2023 and 2022 are outlined below:
| Three Months Ended | ||||||||||||||||
| March 31, 2023 | ||||||||||||||||
| 2023 | 2022 | Change | % | |||||||||||||
| Revenue | $ | 1,379,806 | $ | 612,516 | $ | 767,290 | 125 | % | ||||||||
| Cost of revenue | 208,982 | 199,679 | 9,303 | 5 | % | |||||||||||
| Gross Profit | 1,170,824 | 412,837 | 757,987 | 184 | % | |||||||||||
| Gross Profit Percentage | 85 | % | 67 | % | ||||||||||||
| Operating expense | 1,432,983 | 1,093,957 | 339,026 | 31 | % | |||||||||||
| Other income (expense) | (475,734 | ) | (1,152,199 | ) | 676,465 | (59 | )% | |||||||||
| Net loss | $ | (737,893 | ) | $ | (1,833,319 | ) | $ | 1,095,426 | (60 | )% | ||||||
Revenue
Revenues increased 125% from $612,516 for the three months ended March 31, 2022 to $1,379,806 for the three months ended March 31, 2023. The increase in revenues was driven by existing customer organic growth customers, new customer acquisitions and our high renewal rate.
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Cost of Revenue
Cost of revenue consists of direct expenses, such as labor, shipping, and supplies.
Operating Expenses
For the three months ended March 31, 2023 and 2022 our operating expenses were as follows:
| Three Months Ended | ||||||||||||||||
| March 31, | ||||||||||||||||
| 2023 | 2022 | Change | % | |||||||||||||
| General and administrative | $ | 1,400,809 | $ | 973,562 | $ | 427,247 | 44 | % | ||||||||
| Sales and marketing | 32,174 | 120,395 | (88,221 | ) | (73 | )% | ||||||||||
| Total operating expenses | $ | 1,432,983 | $ | 1,093,957 | $ | 339,026 | 31 | % | ||||||||
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 increase in general and administrative expense was primarily due to an increase in professional service fees.
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 a decrease in trade show events, related travel and marketing expenses.
Other income (expense)
Other expenses for the three months ended March 31, 2023 consisted primarily of interest expense. Other expenses for the March 31, 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 60% from $1,833,319 for the three months ended March 31, 2022 to $737,893 for the three months ended March 31, 2023. The net loss was mainly derived from an operating loss of $262,159, and interest expense of $475,734. The net loss for the three months ended March 31, 2022 was mainly derived from an operating loss of $681,120, interest expense of $1,094,316 and loss on change in fair value of derivative liability of $57,883. The decrease in Net Loss was primarily due to the increase in recognized revenue and a decrease in interest expense.
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Liquidity and Capital Resources
Working Capital
The following table provides selected financial data about our company as of March 31, 2023 and December 31, 2022, respectively.
| March 31, | December 31, | |||||||||||||||
| 2023 | 2022 | Change | % | |||||||||||||
| Current assets | $ | 3,000,416 | $ | 2,851,082 | $ | 149,337 | 5 | % | ||||||||
| Current liabilities | $ | 10,921,394 | $ | 8,604,066 | $ | 2,317,328 | 27 | % | ||||||||
| Working capital deficiency | $ | (7,920,978 | ) | $ | (5,752,984 | ) | $ | (2,167,991 | ) | (38 | )% | |||||
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of March 31, 2023, we had cash balance of $108,956 and our principal sources of liquidity were trade accounts receivable of $11,080, advance payment for acquisition of $2,726,188 and prepaid expenses and other current assets of $154,192, as compared to cash of $1,712 trade accounts receivable of $31,978, advance payment for acquisition of $2,726,188 and prepaid expenses and other current assets of $91,204 as of December 31, 2022.
During the last two 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 three months ended March 31, 2023, we reported a loss from operations of $737,983.
As of March 31, 2023, we had assets of cash in the amount of $108,956 and other current assets in the amount of $2,891,460. As of March 31, 2023, we had current liabilities of $10,921,394. Our accumulated deficit as of March 31, 2023 was $52,150,021.
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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 $2,849,370. 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
| Three Months Ended | ||||||||||||
| March 31, | ||||||||||||
| 2023 | 2022 | Change | ||||||||||
| Cash provided by (used in) operating activities | $ | 359,797 | $ | 155,512 | $ | 204,443 | ||||||
| Cash used in investing activities | $ | (81,126 | ) | $ | (258,280 | ) | $ | 177,154 | ||||
| Cash provided by financing activities | $ | (171,427 | ) | $ | (919,889 | ) | $ | 748,460 | ||||
| Cash on hand | $ | 108,956 | $ | 182,276 | $ | (73,164 | ) | |||||
Operating Activities
During the three months ended March 31, 2023, we generated $359,797 by operating activities, compared to $155,512 provided by during the three months ended March 31, 2022.
Investing Activities
During the three months ended March 31, 2023, we used funds in investing activities of $81,126 to acquire property and equipment and advance payment for acquisition. During the three months ended March 31, 2022, we used funds in investing activities of $258,280 to acquire property and equipment.
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Financing Activities
During the three months ended March 31, 2023, we raised $489,070 from issuance of convertible debt; proceeds from related party of $44,210; and $80,960 from issuance of notes payable; repayment of convertible note payable of $70,286; repayment of $710,381 on notes payable; and repayment to related party of $5,000. For March 31, 2023 we had net cash outflows for financing activities of $171,427. By comparison, during the three months ended March 31, 2022, we raised $75,000 through the issuance of Series B Preferred Stock; $902,000 from issuance of convertible debt; and $438,860 from issuance of notes payable; offset in part through redemption of Series B Preferred Stock of $487,730; repayment of convertible note payable of $729,506; repayment of $972,853 on notes payable; repayment to related party of $123,788 and, $21,872 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 March 31, 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 statements and reported amounts of income and expense during the reporting periods presented.
Our critical estimates include revenue recognition and intangible assets. Although we believe that these estimates are reasonable, actual results could differ from those estimates given a change in conditions or assumptions that have been consistently applied. We also have other policies that we consider key accounting policies, such as our policy for revenue recognition, however, the application of these policies does not require us to make significant estimates or judgments that are difficult or subjective.
The critical accounting policies used by management and the methodology for its estimates and assumptions are as follows:
Convertible Financial Instruments
We bifurcate conversion options from their host instruments and accounts for them as free standing derivative financial instruments if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable GAAP.
When we have determined that the embedded conversion options should not be bifurcated from their host instruments, discounts are recorded for the intrinsic value of conversion options embedded in the instruments based upon the differences between the fair value of the underlying Common Stock at the commitment date of the transaction and the effective conversion price embedded in the instrument.
Beneficial Conversion Feature
The issuance of the convertible debt described in Note 9, below, generated a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. We recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of Common Stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of Common Stock per share on the commitment date, resulting in a discount on the convertible debt (recorded as a component of additional paid-in capital). The discount is amortized to interest expense over the term of the convertible debt.
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Stock-Based Compensation
We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date. For non-employees, as per ASU No. 2018-7, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Stock-Based Payment Accounting, remeasurement is not required. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by us in the same expense classifications in the consolidated statements of operations, as if such amounts were paid in cash. Also, refer to Note 1 – Summary of Significant Accounting Policies, in the consolidated financial statements that are included in this Annual Report.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information regarding this Item.
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. However, our chief executive officer and our chief financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under Exchange Act) as of the end of the period by this Form 10-Q and have concluded that we have material weaknesses and significant deficiencies in our internal control over financial reporting as described below. Accordingly, our disclosure controls and procedures were not sufficient to accomplish their objectives at the reasonable assurance level as of June 30, 2022.
Management’s Report of Internal Control over Financial Reporting
Our chief executive officer and our chief financial officer are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. An evaluation was performed of the effectiveness of our internal control over financial reporting. The evaluation was based on the framework in 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on our evaluation under the criteria set forth in 2013 Internal Control — Integrated Framework, our management concluded that, as of March 31, 2023 our internal control over financial reporting was not effective because of the identification of material weaknesses described as follows:
| ● | We did not have controls designed to validate the completeness and accuracy of underlying data used in the determination of accounting transactions. Accordingly, we believe we have a material weakness because there is a reasonable possibility that a material misstatement to the interim or annual consolidated financial statements would not be prevented or detected on a timely basis. | |
|
● | We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. |
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| ● | We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. | |
| ● | We do not have a functioning audit committee or outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. |
Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting
Our management is committed to improving its internal controls when we have adequate resources to do so, we appointed a full-time Chief Financial Officer in September but do not currently have independent directors or an audit committee. Until there are independent directors and an audit committee, we will mitigate the lack of segregation of duties by (i) continuing to use third party specialists to assist us with accounting and finance; and (ii) commissioning frequent reconciliations of significant accounts using independent auditors.
Our Management has discussed the material weaknesses noted above with our independent registered public accounting firm. Due to the nature of these material weaknesses, it is reasonably possible that misstatements which could be material to the annual or interim consolidated financial statements could occur that would not be prevented or detected during our financial close and reporting process.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
We are not currently a party to any material litigation.
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| ITEM 1A. | RISK FACTORS |
Investing in our Common Stock involves a high degree of risk. You should carefully consider the following risk factors, as well as other information in this Annual Report, before deciding whether to invest in the shares of our Common Stock. The occurrence of any of the events described below could have a material adverse effect on our business, financial condition or results of operations. In the case of such an event, the trading price of our Common Stock may decline and you may lose all or part of your investment.
Risk Factor Summary
Our business is subject to numerous risks and uncertainties, including those described in “Risk Factors” in this Annual Report, any of which could materially and adversely impact our business and operations, adversely impact our growth prospects, cause us to incur additional costs or liabilities and/or cause the price of our Common Stock to decline. You should carefully consider these risks and uncertainties when investing in our Common Stock. Some of the principal risks and uncertainties include the following:
| ● | We will require additional funds in the future to achieve our current business strategy; |
| ● | Technology is constantly changing and evolving and the continued viability of our products and services requires that we keep up with an ever-changing technological landscape; |
| ● | We face intense competition in our market, especially from larger, well-established companies; |
| ● | We are dependent on the continued services and performance of our founder and Chief Executive Officer; |
| ● | We may be unable to attract new customers and/or expand sales to existing customers; |
| ● | We may be unable to maintain successful relationships with our channel partners; |
| ● | We may be subject to breaches in our security, cyberattacks or other cyber risks; |
| ● | We may be unable to protect our proprietary technology and intellectual property rights; |
| ● | We may be subject to real or perceived errors, failures, or bugs in our technology; |
| ● | We are subject to federal, state and industry privacy and data security regulations; |
| ● | Our business is susceptible to risks associated with international operations; |
| ● | Our business is subject to the risks of pandemic, fire, power outages, floods, earthquakes, and other catastrophic events, and to interruption by manmade problems such as terrorism and war; |
| ● | Our operations may continue to increase in complexity as we grow, which will add additional challenges to the management of our business in the future; |
| ● | We may be unable to secure necessary financing on acceptable terms and in a timely manner; |
| ● | There is no assurance that future financing from Mr. Remillard will be available or, if available, that it will be on terms that are satisfactory to us; |
| ● | We may not be able to identify suitable acquisition candidates or consummate acquisitions on acceptable terms, or we may be unable to successfully integrate acquisitions; |
| ● | The JOBS Act allows us to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we provide in reports filed with the SEC; |
| ● | Failure to implement proper and effective internal controls or to remediate weakness in internal accounting controls could result in material misstatements in our financial statements. |
| ● | We have secured debt, which could have adverse consequences to you; |
| ● | We may not be able to attract the attention of research analysts at major brokerage firms; |
| ● | In the event of a bankruptcy, liquidation or winding up of our assets, our Common Stock will rank junior to all of our liabilities to third party creditors, and to any class or series of our capital stock created after this offering that, by its terms, ranks senior to our Common Stock; |
| ● | Future issuances of debt securities and preferred stock may adversely affect the return of your investment; |
| ● | Our Common Stock is subject to the SEC’s penny stock rules; |
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| ● | Our Common Stock has historically experienced low trading volume on the OTC Pink, and therefore the price may not accurately reflect our value and there can be no assurance that an active market for our Common Stock will develop, either now or in the future; |
| ● | We have had a history of losses and may incur future losses, which may prevent us from attaining profitability; |
| ● | There is substantial doubt about our ability to continue as a going concern; |
| ● | We currently have outstanding shares of preferred stock that have special rights that could limit our ability to undertake corporate transactions, inhibit potential changes of control and reduce the proceeds available to our Common Stock holders in the event of a change in control; |
| ● | Our Chief Executive Officer has the ability to control all matters submitted to stockholders for approval; |
| ● | We will continue to incur substantial costs as a result of operating as a public reporting company, and our management will be required to devote substantial time to compliance initiatives; |
| ● | We may issue additional shares of our Common Stock, which may dilute current stockholders; |
| ● | Our management will have broad discretion in the use of the net proceeds from this offering; |
| ● | Adverse or uncertain macroeconomic or geopolitical conditions or reduced IT spending may adversely impact our business, revenues, and profitability; and |
| ● | Prolonged economic uncertainties or downturns could materially adversely affect our business. |
Risks Related to Our Business and Industry
We will require additional funds in the future to achieve our current business strategy and an inability to obtain funding could cause our business to fail.
We will need to raise additional funds through public or private debt or equity financings in order to fund our future operations and fulfill our future contractual obligations. These financings may not be available when needed. Even if these financings are available, they may be on terms that we deem unacceptable or that are materially adverse to your interests with respect to dilution of book value, dividend preferences, liquidation preferences, or other terms. Our inability to obtain financing could have an adverse effect on our ability to implement our business plan and develop our products, and as a result, could diminish our sales or require us to suspend our operations and possibly cease our existence.
Even if we are successful in raising capital in the future, we will likely need to raise additional capital to continue and/or expand our operations. If we do not raise the additional capital, the value of any investment in us may become worthless.
If we do raise additional capital but from other than conventional sources, we may need to scale back or otherwise adjust our growth strategy which may prevent us from fully implementing our business plan.
Technology is constantly changing and evolving and the continued viability of our products and services requires that we keep up with an ever-changing technological landscape.
Our industry is categorized by rapid technological progression, ever-increasing innovation, changes in customer requirements, and frequent new product introductions, and we may be subject to legal and regulatory compliance mandates as the relevant law develops in the fields in which our products are used. As a result, we must continually change and improve our products in response to such changes, and our products must also successfully interface with products from other vendors, which are also subject to constant changes. While we believe we have the competency to aid our customers in all aspects of data privacy and security, we will need to constantly improve our current assets and offerings to keep up with technological advances that are expected to occur.
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We cannot guarantee that we will be able to anticipate future market needs and opportunities or be able to develop new products and services or expand the functionality of our current products and services in a timely manner or at all. Even if we are able to anticipate, develop, and introduce new products and expand the functionality of our current products, there can be no assurance that enhancements or new products will achieve widespread market acceptance: If they do not, our business may be adversely affected and we may have to cease operations altogether.
We face intense competition in our market, especially from larger, well-established companies, and we may lack sufficient financial and other resources to maintain and improve our competitive position.
The market for data privacy and security and other data governance solutions is intensely competitive and is characterized by constant change and innovation. We face competition from both traditional, larger software vendors offering enterprise-wide software frameworks and services and smaller companies offering point solutions for specific identification and data governance issues. We also compete with IT equipment vendors and systems management solution providers whose products and services address data identification and classification and data governance requirements. Our principal competitors vary depending on the product. Many of our existing competitors have achieved, and some of our potential competitors could achieve, substantial competitive advantages due to:
| ● | greater name recognition and longer operating histories; | |
| ● | more comprehensive and varied products and services; | |
| ● | broader market focus; | |
| ● | greater resources to develop technologies or make acquisitions; | |
| ● | intellectual property portfolios that may limit our ability to market or sell products and services in the United States or markets outside the United States; | |
| ● | broader distribution capabilities and established relationships with distribution partners and customers; | |
| ● | greater customer support resources; and | |
| ● | substantially greater financial, technical, and other resources. |
Our competitors may be able to compete and respond more effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. Our competitors may also seek to extend or supplement their existing products and services to provide data security and data governance solutions that more closely compete with our products and services offerings. Potential customers may also prefer to purchase, or incrementally add solutions, from their existing suppliers rather than to onboard with us as a new or additional supplier regardless of whether our products offer better performance or more features.
In addition, with the recent increase in large merger and acquisition transactions in the technology industry, particularly transactions involving cloud-based technologies, there is a greater likelihood that we will compete with other large technology companies in the future.
Some of our competitors have made acquisitions or entered into strategic relationships to provide more comprehensive product offerings in combination than they were previously able to offer alone. Companies resulting from these possible consolidations and partnerships may be able to offer more attractive pricing, making them more compelling to customers and more difficult for us to compete with effectively. In addition, continued industry consolidation may adversely impact customer perceptions of the viability of small- and medium-sized technology companies and consequently their willingness to purchase from those companies. Conditions in our market could change rapidly and significantly as a result of technological advancements, partnering among our competitors, or continuing market consolidation. These competitive pressures in our market or our potential inability to compete effectively may result in price reductions, fewer orders, reduced revenue and gross margins, increased net losses, and loss of market share. Any failure to meet and address these factors could adversely affect our business, financial condition, and operating results.
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We are dependent on the continued services and performance of our founder and Chief Executive Officer, Jason Remillard, the loss of whom could adversely affect our business.
Our future performance largely depends on the continued services and contributions of our founder, Chief Executive Officer and president, Jason Remillard, to successfully manage our company, execute our business plan, identify and pursue new opportunities, and deliver product innovations. The loss of Mr. Remillard’s services could significantly delay or prevent us from achieving our development and strategic objectives and adversely affect our business.
If we are unable to attract new customers and/or expand sales to existing customers, both domestically and internationally, our growth could be slower than we expect, and our business may be harmed.
Our future growth depends in part upon increasing our customer base. Our ability to achieve significant revenue growth in the future will depend upon the effectiveness of our sales and marketing efforts, both domestically and internationally, and our ability to attract new customers. If we fail to attract new customers, our revenues may grow more slowly than expected, and our business may be harmed.
Our future growth also depends upon expanding sales of our products and services to existing customers and their organizations. If our customers do not purchase additional licenses or our other offerings related to complementary products and services, our revenues may grow more slowly than expected, may not grow at all, or may decline. There can be no assurance that our efforts will increase sales to existing customers and additional revenues. If our efforts are not successful, our business may suffer.
If we are unable to maintain successful relationships with our channel partners, our business could be adversely affected.
We intend to rely to some extent on channel partners, such as distribution partners and resellers, to sell licenses for our products and to sell our technical support and maintenance services. Our ability to achieve revenue growth in the future may depend in part on our success in maintaining successful relationships with our channel partners. Agreements with channel partners tend to be non-exclusive, meaning our channel partners may offer customers the products of several different companies. If our channel partners do not effectively market and sell our products and services, choose to use greater efforts to market and sell their own products or those of others, or fail to meet the needs of our customers, our ability to grow our business may be adversely affected. Furthermore, agreements with channel partners generally allow them to terminate their agreements for any reason upon 30 days’ notice. If we are unable to maintain our relationships with these channel partners, our business, results of operations, financial condition, or cash flows could be adversely affected.
Breaches in our security, cyberattacks, or other cyber risks could expose us to significant liability and cause our business and reputation to suffer.
Our operations may involve transmitting and processing our customers’ confidential, proprietary, and sensitive information. We have legal and contractual obligations to protect the confidentiality of and to use customer data appropriately. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks due to third-party action, employee error, or misconduct. Security risks, including, but not limited to, unauthorized use or disclosure of customer data, theft of proprietary information, loss or corruption of customer data, and computer hacking attacks or other cyberattacks, could expose us to substantial litigation expenses and damages, indemnity and other contractual obligations, government fines and penalties, mitigation expenses and other liabilities. We have been subject to attempted cyberattacks in the past and expect to be subject to such attacks in the future. We continuously work to improve our information technology systems and to create security boundaries around our critical and sensitive assets. We perform activities to mitigate the risk of attacks and increase our capabilities to responsibly handle any security violation or attack. However, because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until successfully launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures and our products could be harmed, we could lose potential sales and existing customers, our ability to operate our business could be impaired, and we may incur significant liabilities.
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Failure to protect our proprietary technology and intellectual property rights could substantially harm our business.
The success of our business depends on our ability to obtain, protect, and enforce our trade secrets, patents, and other intellectual property rights, such as copyrights and trademarks. We attempt to protect our intellectual property under trade secret, patent, copyright, and trademark laws, and through a combination of confidentiality procedures, contractual provisions, and other methods, all of which offer only limited protection. The process of obtaining patent protection is expensive and time-consuming, and we may choose not to seek patent protection for certain innovations. We may choose not to pursue patent protection in certain jurisdictions in which we do or plan to do business. Not seeking patent protection may limit our options to exclude competitors from using those innovations altogether or in those jurisdictions.
Our policy is to require our employees to execute written agreements in which they assign to us their rights in potential inventions and other intellectual property created within the scope of their employment. We also require any consultants we engage to provide services that may result in intellectual property that would benefit us to contractually agree to assign their rights to their inventions or creations to us, in connection with the engagement. However, we cannot assure you that we have adequately protected our rights in every such agreement or that we have executed an agreement with every such party. Finally, in order to benefit from intellectual property protection, we must monitor, detect, and pursue infringement claims in certain circumstances in relevant jurisdictions, all of which is costly and time-consuming. As a result, we may not be able to adequately protect our intellectual property rights.
The data security, cybersecurity, data retention, and data governance industries are characterized by the existence of a large number of relevant patents and frequent claims and related litigation regarding patent and other intellectual property rights. From time to time, third parties have asserted and may assert their patent, copyright, trademark and other intellectual property rights against us, our channel partners, or our customers. Successful claims of infringement or misappropriation by a third party could prevent us from distributing certain products or performing certain services or could require us to pay substantial damages (including, for example, treble damages if we are found to have willfully infringed patents and increased statutory damages if we are found to have willfully infringed copyrights), royalties or other fees. Such claims also could require us to cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others or to expend additional development resources to attempt to redesign our products or services or otherwise to develop non-infringing technology. Even if third parties may offer a license to their technology, the terms of any offered license may not be acceptable, and the failure to obtain a license or the costs associated with any license could cause our business, results of operations or financial condition to be materially and adversely affected. In some cases, we indemnify our channel partners and customers against claims that our products infringe the intellectual property of third parties. Defending against claims of infringement or being deemed to be infringing the intellectual property rights of others could impair our ability to innovate, develop, distribute, and sell our current and planned products and services. If we are unable to protect our intellectual property rights and ensure that we are not violating the intellectual property rights of others, we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time, and effort required to create the innovative products that have enabled us to be successful to date.
Real or perceived errors, failures, or bugs in our technology could adversely affect our growth prospects.
Because we develop, use, and provide complex technology, undetected errors, failures, or bugs may occur. Our technology is often installed and used in a variety of computing environments with different operating system management software, equipment, and networking configurations, which may cause errors or failures of our technology or other aspects of the computing environment into which it is deployed. In addition, deployment of our technology into computing environments may expose undetected errors, compatibility issues, failures, or bugs in our technology. Despite testing by us, errors, failures, or bugs may not be found until our technology is released to our customers. Moreover, our customers could incorrectly implement or inadvertently misuse our technology, which could result in customer dissatisfaction and adversely impact the perceived utility of our products. Any of these real or perceived errors, compatibility issues, failures, or bugs could result in negative publicity, reputational harm, loss of or delay in market acceptance, loss of competitive position, or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem.
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We are subject to federal, state and industry privacy and data security regulations, which could result in additional costs and liabilities to us or inhibit sales of our software.
The regulatory framework for privacy issues worldwide is rapidly evolving and is likely to remain fluid and unpredictable for the foreseeable future. Many federal, state, and foreign government bodies and agencies have adopted or are considering adopting privacy and data security laws and regulations. In addition, privacy advocates and industry groups may propose new and different self-regulatory standards. We also may determine that certain requirements or standards are best practices for us to implement. Because the interpretation and application of privacy and data protection laws can be uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data security practices. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our technology, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business.
Because our long-term success depends, in part, on our ability to expand the sales and marketing of our technology and solutions to customers located outside of the United States, our business is susceptible to risks associated with international operations.
We intend to expand our international sales and marketing operations. Conducting international operations subjects us to risks that we may not face in the United States or may prove more challenging to address. These risks include:
| ● | pandemics, political instability, war, armed conflict, or terrorist activities; | |
| ● | challenges developing, marketing, selling, and implementing our technology and solutions caused by language, cultural and ethical differences, and the competitive environment; | |
| ● | heightened risks of unethical, unfair, or corrupt business practices, actual or claimed, in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and necessitate restatements of or result in irregularities in financial statements; | |
| ● | competition from bigger and stronger companies in the new markets; | |
| ● | laws imposing heightened restrictions on data use and increased penalties for failure to comply with applicable laws, particularly in countries within the European Union (EU); | |
| ● | currency fluctuations; | |
| ● | management communication and integration problems resulting from cultural differences and geographic dispersion; | |
| ● | potentially adverse tax consequences, including multiple and possibly overlapping tax structures, the complexities of foreign value-added tax (VAT) systems, restrictions on the repatriation of earnings and changes in tax rates; and | |
| ● | lack of familiarity with local laws, customs and practices, and laws and business practices favoring local competitors or commercial parties. |
The occurrence of any one of these risks could harm our international business and, consequently, our operating results. Additionally, operating in international markets requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required to operate in other countries will produce desired levels of revenue or net income.
Changes in financial accounting standards may cause adverse and unexpected revenue fluctuations and impact our results of operations.
A change in accounting standards or practices could harm our operating results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may harm our operating results or the way we conduct our business. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems process and controls, which could be time consuming and costly.
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Our business is subject to the risks of pandemic, fire, power outages, floods, earthquakes, and other catastrophic events, and to interruption by manmade problems such as terrorism and war.
A pandemic, significant natural disaster, such as a fire, flood or an earthquake, or a significant power outage could have a material adverse impact on our business, results of operations and financial condition. In the event our customers’ information technology systems or our channel partners’ selling or distribution abilities are hindered by any of these events, we may miss financial targets, such as revenues and sales targets, for a particular quarter. Furthermore, if a natural disaster occurs in a region from which we derive a significant portion of our revenue, customers in that region may delay or forego purchases of our products, which may materially and adversely impact our results of operations for a particular period. In addition, acts of terrorism or war could cause disruptions in our business or the business of channel partners, customers, or the economy as a whole. All of the aforementioned risks may be exacerbated if the disaster recovery plans for us and our channel partners prove to be inadequate. To the extent that any of the above results in delays or cancellations of customer orders, or delays in producing, deploying or shipping our products or delivering our services, our business, financial condition and results of operations would be adversely affected.
We anticipate that our operations will continue to increase in complexity as we grow, which will add additional challenges to the management of our business in the future.
We expect that our business will grow as we execute on our business plan, and that as we grow, our operations will increase in complexity. To effectively manage this growth, we have made and continue to make substantial investments to improve our operational, financial and management controls as well as our reporting systems and procedures. Further, as our customer base grows, we will need to expand our professional services and other personnel. We also will need to effectively manage our direct and indirect sales processes as the number and type of our sales personnel and channel partners grows and becomes more complex, and as we expand into foreign markets. If we are unable to effectively manage the increasing complexity of our business and operations, the quality of our technology and customer service could suffer, and we may not be able to adequately address competitive challenges. These factors could all negatively impact our business, operations, operating results, and financial condition.
We require additional financing to sustain our operations and execute our business plan. If we fail to secure the required additional financing on acceptable terms and in a timely manner, our ability to implement our business plan will be compromised and we may be unable to sustain our operations.
We have limited capital resources and operations. To date, our operations have been funded largely from the proceeds of debt and equity financings. We will require substantial additional capital in the near future to operate our business. We may be unable to obtain additional financing on terms acceptable to us, or at all. Even if we obtain financing for our short-term operations, we expect that we will require additional capital thereafter. Our capital needs will depend on numerous factors including but not limited to (i) the scale of our marketing and sales activities, (ii) other expenditures of resources to maintain or increase revenue and (iii) the amount of our capital expenditures, including acquisitions. We cannot assure you that we will be able to obtain capital in the future to meet our needs. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership held by our existing shareholders will be reduced and our shareholders may experience significant dilution. In addition, new securities may contain rights, preferences, or privileges that are senior to those of our Common Stock. If we raise additional capital by incurring debt, this will result in increased interest expense. If we raise additional funds through the issuance of securities, market fluctuations in the price of our shares of Common Stock could limit our ability to obtain equity financing. We cannot give any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us. If we are unable to raise capital when needed, our business, financial condition, and results of operations would be materially adversely affected, and we could be forced to reduce or discontinue our operations.
We have relied on funding from Jason Remillard for working capital to fund operations in the past, and there is no assurance that future financing from Mr. Remillard will be available or, if available, that it will be on terms that are satisfactory to us.
For the past several years, we have depended on our Chief Executive Officer, Jason Remillard, for working capital to fund our operations and to execute our business plan. In addition, we have in the past been and in the future be dependent upon Mr. Remillard to provide continued funding and capital resources. However, no assurance can be given that future financing from Mr. Remillard will be available or, if available, that it will be on terms that are satisfactory to us. In the absence of financing from other sources, the inability to obtain additional financing from Mr. Remillard could result in the scaling back or discontinuance of our operations or our inability to successfully implement our plan of operations.
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We have made and expect to continue to make acquisitions as a primary component of our growth strategy. We may not be able to identify suitable acquisition candidates or consummate acquisitions on acceptable terms, or we may be unable to successfully integrate acquisitions, which could disrupt our operations and adversely impact our business and operating results.
A primary component of our growth strategy is to acquire complementary businesses. We intend to continue to pursue acquisitions of complementary technologies, products, and businesses as a primary component of our growth strategy to enhance the features and functionality of our offerings, to expand our customer base and access to new markets, and to increase benefits of scale. Acquisitions involve certain known and unknown risks that could cause our actual growth or operating results to differ from our expectations. For example:
| ● | we may not be able to identify suitable acquisition candidates or to consummate acquisitions on acceptable terms; | |
| ● | we may pursue international acquisitions, which inherently pose more risks than domestic acquisitions; | |
| ● | we compete with others to acquire complementary products, technologies, and businesses, which may result in decreased availability of, or increased price for, suitable acquisition candidates; | |
| ● | we may not be able to obtain the necessary financing on favorable terms or at all, to finance our potential acquisitions; | |
| ● | we may ultimately fail to consummate an acquisition even if we announce that we plan to acquire a technology, product, or business; and | |
| ● | acquired technologies, products, or businesses may not perform as we expect and we may fail to realize anticipated revenue and profits. |
In addition, our acquisition strategy may divert management’s attention away from our existing business, resulting in the loss of key customers or employees, and expose us to unanticipated problems or legal liabilities, including responsibility as a successor for undisclosed or contingent liabilities of acquired businesses or assets.
If we fail to conduct due diligence on our potential targets effectively, we may, for example, not identify problems at target companies or fail to recognize incompatibilities or other obstacles to successful integration. Our inability to successfully integrate future acquisitions could impede us from realizing all of the benefits of those acquisitions and could severely weaken our business operations. The integration process may disrupt our business and, if new technologies, products, or businesses are not implemented effectively, may preclude the realization of the full benefits expected by us and could harm our results of operations. In addition, the overall integration of new technologies, products, or businesses may result in unanticipated problems, expenses, liabilities, and competitive responses.
In addition, even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of the acquisition, including the synergies, cost savings, or growth opportunities that we expect. The benefits we do realize may not be achieved within the anticipated time frame.
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The JOBS Act allows us to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we provide in reports filed with the SEC.
The JOBS Act is intended to reduce the regulatory burden on “emerging growth companies.” We meet the definition of an emerging growth company and so long as we qualify as an emerging growth company, we are, among other things:
| ● | not required to comply with the auditor attestation requirements of the Sarbanes-Oxley Act, which include having an independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting; | |
| ● | subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exempt from the requirement to hold a nonbinding advisory vote on executive compensation and stockholder approval of any “golden parachute” payments not previously approved; | |
| ● | permitted to present only two years of audited financial statements and only two years of management’s discussion and analysis of financial condition and results of operations disclosure in this Annual Report; and | |
| ● | not required to comply with any rules that may be adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report on our financial statements. |
We may choose to take advantage of some or all of these reduced burdens while we qualify as an emerging growth company. We have taken advantage of all of these reduced burdens in this Annual Report, and currently intend to do so in future filings. As a result, the information we provide stockholders may be less than information you might receive from other public companies in which you hold equity. In addition, the JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until those standards apply to private companies. We have elected to avail ourselves of this exemption. We will remain an emerging growth company until the earliest to occur of 1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; 2) the last day of the fiscal year in which we qualify as a “large accelerated filer”, 3) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; and 4) the last day of the fiscal year in which the fifth anniversary of this offering occurs.
We are also currently a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million as of the last business day of the second fiscal quarter or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million as of the last business day of the second fiscal quarter. In the event that we are still considered a smaller reporting company, at the time we cease being an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that area available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Decreased disclosures in our SEC filings due to our status as an emerging growth company or smaller reporting company may make it harder for investors to analyze our results of operations and financial prospects.
Failure to remediate weakness in internal accounting controls could result in material misstatements in our financial statements and may result in a lack of certain protections typically afforded to investors.
As a reporting company we are required, pursuant to the Sarbanes-Oxley Act, to include in our annual report our assessment of the effectiveness of our internal control over financial reporting. Our assessment must include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, and when we cease to be an emerging growth company, we will need to provide a statement that our independent registered public accounting firm has issued an opinion on the effectiveness of our internal control over financial reporting.
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A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis. Our management has identified a material weakness in our internal control over financial reporting related to lack of segregation of duties resulting from our limited personnel and has concluded that, due to such weakness, our disclosure controls and procedures were not effective as of December 31, 2021. We do not have a sufficient number of employees to segregate responsibilities and may be unable to afford increasing our staff or engaging outside consultants or professionals to overcome our lack of employees, and we do not expect to be able to remediate this weakness until after the offering. If not remediated, or if we identify further weaknesses in our internal controls, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our Common Stock.
We do not have a majority of independent directors on our board of directors, and we have not voluntarily implemented various corporate governance measures, in the absence of which stockholders may have more limited protections against interested director transactions, conflicts of interest and similar matters.
Federal legislation, including the Sarbanes-Oxley Act, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or the NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address the board of directors’ independence, audit committee oversight, and the adoption of a code of ethics. Although we plan to adopt these corporate governance measures upon our listing on The Nasdaq Capital Market, we have not yet adopted any of these other corporate governance measures and since our securities are not yet listed on a national securities exchange, we are not required to do so.
Our Board of Directors is comprised of one individual, who is also our executive officer. As a result, we do not have independent directors on our Board of Directors. Upon our listing on The Nasdaq Capital Market, we plan to establish audit and compensation committees comprised only of independent directors. However, until that date, our current sole director has the ability, among other things, to determine his own level of compensation and to unilaterally make certain other governance decisions. and the prior absence of such standards of corporate governance may leave our stockholders without protections against interested-director transactions, conflicts of interest, and similar matters.
We have secured debt, which could have adverse consequences to you.
The terms of the secured debt we have incurred could result in adverse consequences, including but not limited to the following:
| ● | limiting our ability to obtain additional financing for working capital, capital expenditures, acquisitions, and other general corporate requirements; | |
| ● | limiting our flexibility in planning for or reacting to changes in our business and the industry in which we operate; and | |
| ● | placing us at a competitive disadvantage compared to competitors that may have proportionately less debt and greater financial resources. |
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital, or restructure our debt. In the event that we are required to dispose of material assets or operations to service our debt and to meet our other obligations, the value realized on such assets or operations will depend on market conditions and the availability of buyers. Accordingly, any such sale may not, among other things, be for a sufficient dollar amount. Certain of our obligations are secured by a security interest in all of our assets. The foregoing encumbrances may limit our ability to dispose of material assets or operations. We also may not be able to restructure our indebtedness on favorable economic terms, if at all.
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Risks Related to Ownership of Our Securities
Because we became a reporting company under the Exchange Act by means other than a traditional underwritten initial public offering, we may not be able to attract the attention of research analysts at major brokerage firms.
Because we did not become a reporting company by conducting an underwritten initial public offering, or IPO, of our Common Stock on a national securities exchange, and our stock trades on OTC Pink rather than being listed on a national securities exchange, research analysts of brokerage firms may not provide coverage of us. In addition, investment banks may be less likely to agree to underwrite secondary offerings on our behalf than they might if we had become a public reporting company by means of an IPO because they may be less familiar with us as a result of more limited coverage by analysts and the media, and because we became public at an early stage in our development.
Risks Related to Our Common Stock
Our Common Stock will rank junior to all our liabilities to third party creditors, and to any class or series of our capital stock created after this offering specifically ranking by its terms senior to our Common Stock, in the event of a bankruptcy, liquidation or winding up of our assets.
In the event of bankruptcy, liquidation or winding up, our assets will be available to pay obligations on our Common Stock only after all our liabilities have been paid. Our Common Stock will effectively rank junior to all existing and future liabilities held by third party creditors. The terms of our Common Stock do not restrict our ability to raise additional capital in the future through the issuance of debt or senior series of preferred stock. Our Common Stock will also rank junior to our existing Series A Preferred Stock and any Series B Preferred Stock we may issue, as well as any class or series of our capital stock created after this offering specifically ranking by its terms senior to our Common Stock. In the event of bankruptcy, liquidation or winding up, there may not be sufficient assets remaining, after paying our liabilities, to pay amounts due on any or all of our Common Stock then outstanding.
Future issuances of debt securities, which would rank senior to our Common Stock upon our bankruptcy or liquidation, and future issuances of preferred stock, which could rank senior to our Common Stock for the purposes of dividends and liquidating distributions, may adversely affect the level of return you may be able to achieve from an investment in our Common Stock.
In the future, we may attempt to increase our capital resources by offering debt securities. Upon bankruptcy or liquidation, holders of our debt securities, and lenders with respect to other borrowings we may make, would receive distributions of our available assets prior to any distributions being made to holders of our Common Stock. Moreover, if we issue preferred stock, the holders of such preferred stock could be entitled to preferences over holders of Common Stock in respect of the payment of dividends and the payment of liquidating distributions. Because our decision to issue debt or preferred stock in any future offering, or borrow money from lenders, will depend in part on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any such future offerings or borrowings. Holders of our Common Stock must bear the risk that any future offerings we conduct or borrowings we make may adversely affect the level of return, if any, they may be able to achieve from an investment in our Common Stock.
Our Common Stock is subject to the SEC’s penny stock rules, which may make it difficult for broker-dealers to complete customer transactions and could adversely affect trading activity in our securities.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our Common Stock may be less than $5.00 per share for some period of time and therefore would be a penny stock according to SEC rules, unless we are listed on a national securities exchange. Under the SEC penny stock rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
| ● | make a special written suitability determination for the purchaser; | |
| ● | receive the purchaser’s prior written agreement to the transaction; | |
| ● | provide the purchaser with risk disclosure documents which identify certain risks associated with investing in penny stocks and which describe the market for these penny stocks as well as a purchaser’s legal remedies; and | |
| ● | obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a penny stock can be completed. |
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When complying with these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected.
Our Common Stock has historically experienced low trading volume on the OTC Pink, and therefore the price may not accurately reflect our value. There can be no assurance that an active market for our Common Stock will develop, either now or in the future.
Our shares of Common Stock have been thinly traded on the OTC Pink. Only a small percentage of our Common Stock is available to be traded and is held by a small number of holders and the price, if traded, may not reflect our actual or perceived value. There can be no assurance that there will be an active market for our shares of Common Stock either now or in the future. The market liquidity will be dependent on the perception of our operating business, among other things. We will take certain steps that may include any or all of investor awareness campaigns, press releases, road shows and conferences to increase awareness of our business and any steps that we might take to bring us to the awareness of investors may require that we compensate consultants with cash and/or stock.
In addition, the trading volume of stocks quoted on the OTC Pink is often low and is often characterized by wide fluctuations in trading prices due to many factors that may have little to do with a company’s operations or business prospects. Because our Common Stock is only quoted on the OTC Pink, trading is only possible through broker-dealers, and the trading volume of our Common Stock has been low. Because we are quoted on the OTC Pink and were not a privately-held company, you may experience difficulty liquidating your investment in our Common Stock or liquidating it at a price that reflects the value of our business. As a result, holders of our securities may not find purchasers for our securities should they desire to sell them. Accordingly, our securities should be purchased only by investors having no need for liquidity in their investment and who can hold our securities for an indefinite period of time.
We have had a history of losses and may incur future losses, which may prevent us from attaining profitability.
We have had a history of operating losses since our inception and, as of March 31, 2023, we had an accumulated deficit of $52,150,021. We may incur operating losses in the future, and these losses could be substantial and impact our ability to attain profitability. If we cannot increase revenue growth, we will not achieve or sustain profitability or positive operating cash flows. Even if we achieve profitability and positive operating cash flows, we may not be able to sustain or increase profitability or positive operating cash flows on a quarterly or annual basis.
There is substantial doubt about our ability to continue as a going concern.
Our independent registered public accounting firm has included an explanatory paragraph in their report in our audited financial statements for the fiscal year ended December 31, 2022 to the effect that our losses from operations and our negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern within one year after the date that the financial statements are issued. We may be required to cease operations which could result in our stockholders losing all or almost all of their investment. As of March 31, 2023, we had cash balance of $108,956 and our principal sources of liquidity were trade accounts receivable of $11,080 and prepaid, advance payment for acquisition of $2,726,188 and other current assets of $154,192, as compared to cash of $1,712, trade accounts receivable of $31,978 advance payment for acquisition of $2,726,188 and other current assets of $91,204 as of December 31, 2022.
The market price of our Common Stock may be volatile and may fluctuate in a way that is disproportionate to our operating performance.
Our stock price may experience substantial volatility as a result of a number of factors, including:
| ● | sales or potential sales of substantial amounts of our Common Stock; | |
| ● | the success of competitive products or technologies; |
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| ● | announcements about us or about our competitors, including new product introductions and commercial results; | |
| ● | the recruitment or departure of key personnel; | |
| ● | litigation and other developments; | |
| ● | actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts; | |
| ● | variations in our financial results or those of companies that are perceived to be similar to us; and | |
| ● | general economic, industry and market conditions. |
Many of these factors are beyond our control. The stock markets in general, and the market for companies whose shares are quoted on the OTC Pink in particular have historically experienced extreme price and volume fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors could reduce the market price of our Common Stock, regardless of our actual operating performance.
We currently have outstanding shares of preferred stock that have special rights that could limit our ability to undertake corporate transactions, inhibit potential changes of control and reduce the proceeds available to our common stockholders in the event of a change in control.
We currently have Common Stock and preferred stock outstanding. Our preferred stockholders have special rights that holders of our Common Stock do not have. Currently, we have two types of preferred stock: Series A Preferred Stock and Series B Preferred Stock. An example of special rights that holders of our Series A Preferred Stock have is the ability to vote on all matters submitted to holders of Common Stock with 15,000 votes for each share of Series A Preferred Stock. Examples of the special rights that holders of our Series B Preferred Stock have are that each share of Series B Preferred Stock has (i) a stated value of $10.00 per share; (ii) is convertible into Common Stock at a price per share equal to 61% of the lowest price for our Common Stock during the 20 days of trading preceding the date of the conversion; (iii) earns dividends at the rate of 9% per annum; but (iv) has no voting rights. Our Series A Preferred Stock and Series B Preferred Stock ranks senior to holders of our Common Stock as to dividend rights and liquidation preference. We currently have shares 149,892 of Series A Preferred Stock.
As a result of the rights our preferred stockholders have, we may not be able to undertake certain corporate transactions, including equity or debt transactions necessary to raise sufficient capital to run our business, change of control transactions or other transactions that may be beneficial to our businesses. The holdings of the preferred stockholders may discourage, delay, or prevent a merger, acquisition, or other change in control of us that stockholders may consider favorable, including transactions in which our Common Stockholders might otherwise receive a premium for their shares. The market price of our Common Stock could be adversely affected by the rights of our preferred stockholders.
We have never paid and do not currently intend to pay cash dividends.
We have never paid cash dividends on any of our Common Stock and we currently intend to retain future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our Common Stock will be our common stockholders’ sole source of gain for the foreseeable future. Under the terms of our existing Articles of Incorporation, we cannot declare, pay, or set aside any dividends on shares of any class or series of our capital stock, other than dividends on shares of Common Stock payable in shares of Common Stock, unless we pay dividends to the holders of our preferred stock. Additionally, without special stockholder and sole director approvals, we cannot currently pay or declare dividends and will be limited in our ability to do so until such time, if ever, that we are listed on a stock exchange.
Our Chief Executive Officer has the ability to control all matters submitted to stockholders for approval, which limits stockholders’ ability to influence corporate affairs.
Our Chief Executive Officer, Jason Remillard, holds 149,892 shares of our Series A Preferred Stock (each share votes as the equivalent of 15,000 shares of Common Stock on all matters submitted for a vote by the common stockholders), and as such, Mr. Remillard would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, Mr. Remillard would control the election of directors and approval of any merger, consolidation, or sale of all or substantially all of our assets.
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This concentration of voting power could delay or prevent a change of control of our company on terms that other stockholders may desire, which could deprive our stockholders from receiving a premium for their Common Stock. Concentrated ownership and control by Mr. Remillard could adversely affect the price of our Common Stock. Any material sales of Common Stock by Mr. Remillard, for example, could adversely affect the price of our Common Stock.
The interests of Mr. Remillard and his affiliates may differ from the interests of other stockholders with respect to the issuance of shares, business transactions with and/or sales to other companies, selection of officers and directors, and other business decisions. The non-controlling stockholders are severely limited in their ability to override the decisions of Mr. Remillard.
Provisions in our articles of incorporation and bylaws and under Nevada law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our articles of incorporation and bylaws, respectively, may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which our common stockholders might otherwise receive a premium price for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our Common Stock, thereby depressing the market price of our Common Stock. In addition, because our sole director is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace our sole director.
We will continue to incur substantial costs as a result of operating as a public reporting company, and our management will be required to devote substantial time to compliance initiatives.
As a public reporting company, we incur significant legal, accounting, and other expenses that private companies do not incur. In addition, the Sarbanes-Oxley Act and rules subsequently implemented by the SEC have imposed various requirements on public companies, including establishing and maintaining effective disclosure, financial controls, and corporate governance practices. Complying with these laws and regulations will require the time and attention of our Board of Directors and management and will increase our expenses. We estimate that we will incur approximately $350,000 to $600,000 in 2023 to comply with public company compliance requirements, with many of those costs recurring annually thereafter.
Among other things, we will be required to:
| ● | maintain and evaluate a system of internal controls over financial reporting in compliance with the requirements of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board; | |
| ● | maintain adequate insurance coverage to attract and retain directors and officers; | |
| ● | provide adequate compensation to attract qualified directors; | |
| ● | maintain policies relating to disclosure controls and procedures; | |
| ● | prepare and distribute periodic reports in compliance with our obligations under federal securities laws; | |
| ● | institute a more comprehensive compliance function, including corporate governance; and | |
| ● | involve, to a greater degree, our outside legal counsel and accountants in the above activities. |
The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders are significant and much greater for a publicly-held company than for a privately-held company, and compliance with these rules and regulations may require us to hire additional financial reporting, internal controls and other finance personnel, and will involve a material increase in regulatory, legal and accounting expenses, and the attention of management. There can be no assurance that we will be able to comply with the applicable regulations in a timely manner, if at all. In addition, being a public company may make it more expensive for us to obtain director and officer liability insurance. In the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain this coverage.
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We currently have outstanding, and we may in the future issue, instruments which are convertible into shares of Common Stock, which will result in additional dilution to you.
We currently have outstanding instruments which are convertible into shares of Common Stock, and we may need to issue similar instruments in the future. If these convertible instruments are converted into shares of Common Stock, or if we issue other convertible or exchangeable securities, you could experience additional dilution. Furthermore, we cannot assure you that we will be able to issue shares or other securities in any other offering at a price per share that is equal to or greater than the price per share you pay or the then-current market price.
We may, in the future, issue additional shares of our Common Stock, which may have a dilutive effect on our current stockholders.
Our articles of incorporation authorize the issuance of 125,000,000 shares of Common Stock, of which 6,746,764 shares were issued and outstanding as of March 31, 2023. The future issuance of shares of our Common Stock may result in substantial dilution in the percentage of our Common Stock held by our then- existing stockholders. We may value any Common Stock issued in the future on an arbitrary basis. The issuance of Common Stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors and might have an adverse effect on any trading market for our Common Stock.
An investment in our Common Stock is speculative and there can be no assurance of any return on any such investment.
An investment in our Common Stock is speculative and there is no assurance that investors will obtain any return on their investment. Investors will be subject to substantial risks involved in an investment in us, including the risk of losing their entire investment.
If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud. Any inability to report and file our financial results accurately and on a timely basis could harm our reputation and adversely impact the trading price of our Common Stock.
Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operation, and access to capital. We have not performed an in-depth analysis to determine if historical undiscovered failures of internal controls exist, and we may in the future discover areas of our internal control that need improvement.
We must ensure that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis. We have tested our internal controls and identified a weakness and may find additional areas for improvement in the future. Remediating this weakness will require us to hire and train additional personnel. Implementing any future changes to our internal controls may require compliance training of our directors, officers, and employees, entail substantial costs to modify our accounting systems and take a significant period of time to complete. Such changes may not, however, be effective in establishing the adequacy of our internal control over financial reporting, and our failure to produce accurate financial statements on a timely basis could increase our operating costs and could materially impair our ability to operate our business. In addition, investor perception that our internal control over financial reporting is inadequate or that we are unable to produce accurate financial statements may materially adversely affect our stock price.
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Offers or availability for sale of a substantial number of shares of our Common Stock may cause the price of our Common Stock to decline.
If our stockholders sell substantial amounts of our Common Stock in the public market, or upon the expiration of any statutory holding period under Rule 144 or upon the exercise of outstanding options or warrants, such sale could create a circumstance commonly referred to as an “overhang”. In anticipation of an overhang, the market price of our Common Stock could decline. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional funds through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
Our management has broad discretion in the use of the net proceeds from any offerings or other financing activities and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.
Our management will have broad discretion in the application of the net proceeds from any offering of shares of our Common Stock or warrants or from other financing activities, such as convertible debt and you will not have the opportunity as part of any investment decision to assess whether the net proceeds are being used appropriately. The failure by our management to apply these funds effectively could harm our business.
Our Common Stock may not attract new investors, including institutional investors, and may not satisfy the investing requirements of those investors. Consequently, the liquidity of our Common Stock may not improve.
Although we believe that a higher market price of our Common Stock may help generate greater or broader investor interest, there can be no assurance that our share price will rise to a price that will attract new investors, including institutional investors. In addition, there can be no assurance that the market price of our Common Stock will satisfy the investing requirements of those investors.
Adverse or uncertain macroeconomic or geopolitical conditions or reduced IT spending may adversely impact our business, revenues, and profitability.
Our business, operations and performance are dependent in part on worldwide economic conditions and events that may be outside of our control, such as political and social unrest, terrorist attacks, hostilities, malicious human acts, climate change, natural disasters (including extreme weather), pandemics or other major public health concerns and other similar events, and the impact these conditions and events have on the overall demand for enterprise computing infrastructure solutions and on the economic health and general willingness of our current and prospective end customers to purchase our solutions and to continue spending on IT in general. The global macroeconomic environment has been, and may continue to be, inconsistent, challenging and unpredictable due to international trade disputes, tariffs, including those recently imposed by the U.S. government on Chinese imports to the U.S., restrictions on sales and technology transfers, uncertainties related to changes in public policies such as domestic and international regulations, taxes, or international trade agreements, elections, geopolitical turmoil and civil unrests, instability in the global credit markets, uncertainties regarding the effects of the United Kingdom’s separation from the European Union, commonly known as “Brexit”, actual or potential government shutdowns, and other disruptions to global and regional economies and markets. Specifically, pandemics have caused and may continue to cause travel bans or disruptions, supply chain delays and disruptions, and additional macroeconomic uncertainty. The impact of a pandemic is fluid and uncertain, but it has caused and may continue to cause various negative effects, including an inability to meet with actual or potential customers, our customers deciding to delay or abandon their planned purchases, us deciding to delay, cancel, or withdraw from user and industry conferences and other marketing events, and delays or disruptions in our or our partners’ supply chains, including delays or disruptions in procuring and shipping the hardware appliances on which our software solutions run. As a result, we may experience extended sales cycles, our ability to close transactions with new and existing customers and partners may be negatively impacted, potentially significantly, our ability to recognize revenue from software transactions we do close may be negatively impacted, potentially significantly, our demand generation activities, and the efficiency and effect of those activities, may be negatively affected, our ability to provide 24x7 worldwide support to our customers may be effected, and it may continue to be more difficult for us to forecast our operating results. These macroeconomic challenges and uncertainties, including a possible pandemic, have, and may continue to, put pressure on global economic conditions and overall IT spending and may cause our customers to modify spending priorities or delay or abandon purchasing decisions, thereby lengthening sales cycles and potentially lowering prices for our solutions and product and services offerings, and may make it difficult for us to forecast our sales and operating results and to make decisions about future investments, any of which could materially harm our business, operating results and financial condition.
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Public health threats or outbreaks of communicable diseases could have a material adverse effect on our operations and overall financial performance.
We may face risks related to public health threats or outbreaks of communicable diseases. A global health crisis could adversely affect the United States and global economies and limit the ability of enterprises to conduct business for an indefinite period. Such crisis may also cause disrupted financial markets, and international trade, resulted in increased unemployment levels and significantly impacted global supply chains, all of which have the potential to impact our business.
As we cannot predict the duration or scope of the global health crisis, the anticipated negative financial impact to our operating results cannot be reasonably estimated but could be material and last for an extended period of time.
Prolonged economic uncertainties or downturns could materially adversely affect our business.
Our business depends on our current and prospective customers’ ability and willingness to invest money in IT services, and more importantly cybersecurity projects, which in turn is dependent upon their overall economic health. Negative conditions in the general economy both in the United States and abroad, which beyond our control, could cause a decrease in business investments, including corporate spending on enterprise software in general, and could negatively affect the rate of growth of our business. Uncertainty in the global economy makes it difficult for our customers and us to forecast and plan future business activities accurately. This could cause our customers to reevaluate decisions to purchase our product or to delay their purchasing decisions, which could lengthen our sales cycles.
A significant number of our customers have been and continue to be impacted by the economic turmoil. Our customers may reduce their spending on IT; delay or cancel IT projects; focus on in-house development efforts; or seek to lower their costs by renegotiating maintenance and support agreements. To the extent purchases of licenses for our software and services are perceived by customers and potential customers to be discretionary, our revenues may be disproportionately affected by delays or reductions in general IT spending. If the economic conditions of the general economy or industries in which we operate worsen from present levels, our business, results of operations and financial condition could be adversely affected.
In addition, should we have a significant number of our employees contract the communicable diseases, it could have a negative impact on our ability to serve customers in a timely fashion.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During the three months ended March 31, 2023, we issued shares of our common stock as follows, pursuant to exemption from registration pursuant to Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder:
| ● | On January 4, 2023, we issued 97,761 shares of Common Stock to GS Capital Partners LLC pursuant to an agreement with GS Capital Partners LLC, in exchange for $15,000 in note payable principal and $1,384 of accrued interest. | |
| ● | On January 9, 2023, we issued 83,333 shares of Common Stock to Westland Properties, LLC pursuant to an agreement with Westland Properties, LLC, in exchange for $15,000 in note payable principal. | |
| ● | On January 16, 2023, we issued 139,557 shares of Common Stock to Root Ventures, LLC pursuant to an agreement with Root Ventures, LLC, in exchange for $23,027 in note payable principal. | |
| ● | On January 19, 2023, we issued 139,500 shares of Common Stock to Fast Capital LLC pursuant to an agreement with Fast Capital LLC, in exchange for $20,000 in note payable principal. | |
| ● | On January 20, 2023, we issued 122,248 shares of Common Stock to GS Capital Partners LLC pursuant to an agreement with GS Capital Partners LLC, in exchange for $16,000 in note payable principal and $1,524 of accrued interest. | |
| ● | On January 25, 2023, we issued 111,773 shares of Common Stock to Westland Properties, LLC pursuant to an agreement with Westland Properties, LLC, in exchange for $15,000 in note payable principal. | |
| ● | On February 1, 2023, we issued 165,000 shares of Common Stock to Mast Hill Fund pursuant to an agreement with Mast Hill Fund, in exchange for $13,023 in note payable principal and $10,792 of accrued interest. | |
| ● | On February 6, 2023, we issued 118,858 shares of Common Stock to Westland Properties, LLC pursuant to an agreement with Westland Properties, LLC, in exchange for $15,000 in note payable principal. |
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| ● | On February 17, 2023, we issued 179,000 shares of Common Stock to Mast Hill Fund pursuant to an agreement with Mast Hill Fund, in exchange for $21,638 in note payable principal and $4,197 of accrued interest. | |
| ● | On February 21, 2023, we issued 174,539 shares of Common Stock to One44 Capital, LLC pursuant to an agreement with One44 Capital, LLC, in exchange for $6,900 in note payable principal and $638 of accrued interest. | |
| ● | On February 21, 2023, we issued 179,325 shares of Common Stock to Root Ventures, LLC pursuant to an agreement with Root Ventures, LLC, in exchange for $7,711 in note payable principal. | |
| ● | On February 23, 2023, we issued 192,702 shares of Common Stock to GS Capital Partners LLC pursuant to an agreement with GS Capital Partners LLC, in exchange for $5,200 in note payable principal and $503 of accrued interest. | |
| ● | On February 23, 2023, we issued 200,674 shares of Common Stock to One44 Capital, LLC pursuant to an agreement with One44 Capital, LLC, in exchange for $5,600 in note payable principal and $521 of accrued interest. | |
| ● | On February 28, 2023, we issued 179,000 shares of Common Stock to Mast Hill Fund pursuant to an agreement with Mast Hill Fund, in exchange for $356 in note payable principal and $1,434 of accrued interest. | |
| ● | On February 28, 2023, we issued 216,390 shares of Common Stock to One44 Capital, LLC pursuant to an agreement with One44 Capital, LLC, in exchange for $3,800 in note payable principal and $358 of accrued interest. | |
| ● | On March 2, 2023, we issued 245,000 shares of Common Stock to Mast Hill Fund pursuant to an agreement with Mast Hill Fund, in exchange for $2,020 in note payable principal and $430 of accrued interest. | |
| ● | On March 3, 2023, we issued 220,139 shares of Common Stock to GS Capital Partners LLC pursuant to an agreement with GS Capital Partners LLC, in exchange for $2,900 in note payable principal and $471 of accrued interest. | |
| ● | On March 3, 2023, we issued 235,992 shares of Common Stock to One44 Capital, LLC pursuant to an agreement with One44 Capital, LLC, in exchange for $3,300 in note payable principal and $313 of accrued interest. | |
| ● | On March 7, 2023, we issued 273,081 shares of Common Stock to One44 Capital, LLC pursuant to an agreement with One44 Capital, LLC, in exchange for $3,800 in note payable principal and $364 of accrued interest. | |
| ● | On March 9, 2023, we issued 245,000 shares of Common Stock to Mast Hill Fund pursuant to an agreement with Mast Hill Fund, in exchange for $2,205 in note payable principal and $997 of accrued interest. | |
| ● | On March 10, 2023, we issued 302,030 shares of Common Stock to One44 Capital, LLC pursuant to an agreement with One44 Capital, LLC, in exchange for $4,200 in note payable principal and $406 of accrued interest. | |
| ● | On March 23, 2023, we issued 310,125 shares of Common Stock to One44 Capital, LLC pursuant to an agreement with One44 Capital, LLC, in exchange for $4,300 in note payable principal and $429 of accrued interest. |
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| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5. | OTHER INFORMATION |
None.
| ITEM 6. | EXHIBITS |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, our Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: May 15, 2023 | DATA443 RISK MITIGATION, INC. | |
| By: | /s/ Jason Remillard | |
| Name: | JASON REMILLARD | |
| Title: | Chief Executive Officer, (Principal Executive Officer) | |
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Exhibit 4.21
Exhibit 4.22
Exhibit 4.23
Exhibit 4.24
Exhibit 10.26
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of March 1, 2022, by and between DATA443 RISK MITIGATION, INC., a Nevada corporation, with headquarters located at 101 J Morris Commons Lane, Suite 105, Morrisville, NC 27560 (the “Company”) and ROOT VENTURES, LLC, a Nevada limited liability company, with its address at 1 East Liberty Street, Suite 600, Reno, NV 85901, (the “Buyer”).
WHEREAS:
A. The Company and the Buyer are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the rules and regulations as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”);
B. Buyer desires to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement a 9% convertible note of the Company, in the form attached hereto as Exhibit A in the aggregate principal amount of $207,500.00 (together with any note(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the “Note”), convertible into shares of common stock, of the Company (the “Common Stock”), upon the terms and subject to the limitations and conditions set forth in such Note .
C. The Buyer wishes to purchase, upon the terms and conditions stated in this Agreement, such principal amount of Note as is set forth immediately below its name on the signature pages hereto; and
NOW THEREFORE, the Company and the Buyer severally (and not jointly) hereby agree as follows:
1. Purchase and Sale of Note.
a. Purchase of Note. On the Closing Date (as defined below), the Company shall issue and sell to the Buyer and the Buyer agrees to purchase from the Company such principal amount of Note as is set forth immediately below the Buyer’s name on the signature pages hereto.
b. Form of Payment. On the Closing Date (as defined below), (i) the Buyer shall pay the purchase price for the Note to be issued and sold to it at the Closing (as defined below) (the “Purchase Price”) by wire transfer of immediately available funds to the Company, in accordance with the Company’s written wiring instructions, against delivery of the Note in the principal amount equal to the Purchase Price as is set forth immediately below the Buyer’s name on the signature pages hereto, and (ii) the Company shall deliver such duly executed Note on behalf of the Company, to the Buyer, against delivery of such Purchase Price.
_____ Company Initials |
c. Closing Date. The date and time of the first issuance and sale of the Note pursuant to this Agreement (the “Closing Date”) shall be on or about March 1, 2022, or such other mutually agreed upon time. The closing of the transactions contemplated by this Agreement (the “Closing”) shall occur on the Closing Date at such location as may be agreed to by the parties.
2. Buyer’s Representations and Warranties. The Buyer represents and warrants to the Company that:
a. Investment Purpose. As of the date hereof, the Buyer is purchasing the Note and the shares of Common Stock issuable upon conversion of or otherwise pursuant to the Note, such shares of Common Stock being collectively referred to herein as the “Conversion Shares” and, collectively with the Note, the “Securities”) for its own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the 1933 Act; provided, however, that by making the representations herein, the Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act.
b. Accredited Investor Status. The Buyer is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D (an “Accredited Investor”). Any of Buyer’s transferees, assignees, or purchasers must be “accredited investors” in order to qualify as prospective transferees, permitted assignees in the case of Buyer’s or Holder’s transfer, assignment or sale of the Note.
c. Reliance on Exemptions. The Buyer understands that the Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities.
d. Information. The Buyer and its advisors, if any, have been, and for so long as the Note remain outstanding will continue to be, furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the Buyer or its advisors. The Buyer and its advisors, if any, have been, and for so long as the Note remain outstanding will continue to be, afforded the opportunity to ask questions of the Company. Notwithstanding the foregoing, the Company has not disclosed to the Buyer any material nonpublic information and will not disclose such information unless such information is disclosed to the public prior to or promptly following such disclosure to the Buyer. Neither such inquiries nor any other due diligence investigation conducted by Buyer or any of its advisors or representatives shall modify, amend or affect Buyer’s right to rely on the Company’s representations and warranties contained in Section 3 below. The Buyer understands that its investment in the Securities involves a significant degree of risk. The Buyer is not aware of any facts that may constitute a breach of any of the Company’s representations and warranties made herein.
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e. Governmental Review. The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities.
f. Transfer or Re-sale. The Buyer understands that (i) the sale or re-sale of the Securities has not been and is not being registered under the 1933 Act or any applicable state securities laws, and the Securities may not be transferred unless (a) the Securities are sold pursuant to an effective registration statement under the 1933 Act, (b) in the case of subparagraphs (c), (d) and (e) below, the Buyer shall have delivered to the Company, at the cost of the Buyer, an opinion of counsel that shall be in form, substance and scope customary for opinions of counsel in comparable transactions to the effect that the Securities to be sold or transferred may be sold, or transferred pursuant to an exemption from such registration, including the removal of any restrictive legend which opinion shall be accepted by the Company, (c) the Securities are sold or transferred to an “affiliate” (as defined in Rule 144 promulgated under the 1933 Act (or a successor rule) (“Rule 144”) of the Buyer who agrees to sell or otherwise transfer the Securities only in accordance with this Section 2(f) and who is an Accredited Investor, (d) the Securities are sold pursuant to Rule 144, or (e) the Securities are sold pursuant to Regulation S under the 1933 Act (or a successor rule) (“Regulation S”); (ii) any sale of such Securities made in reliance on Rule 144 may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any re-sale of such Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder (in each case). Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities may be pledged as collateral in connection with a bona fide margin account or other lending arrangement.
g. Legends. The Buyer understands that the Note and, until such time as the Conversion Shares have been registered under the 1933 Act will be sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that can then be immediately sold, the Conversion Shares may bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for such Securities):
“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”
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The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of any Security upon which it is stamped, if, unless otherwise required by applicable state securities laws, (a) such Security is registered for sale under an effective registration statement filed under the 1933 Act or otherwise may be sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that can then be immediately sold, and (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Security may be made without registration under the 1933 Act, and that legend removal is appropriate, which opinion shall be accepted by the Company so that the sale or transfer is effected. The Buyer agrees to sell all Securities, including those represented by a certificate(s) from which the legend has been removed, in compliance with applicable prospectus delivery requirements, if any. In the event that the Company does not accept the opinion of counsel provided by the Buyer with respect to the transfer of Securities pursuant to an exemption from registration, such as Rule 144 or Regulation S, within 2 business days, it will be considered an Event of Default under the Note.
h. Authorization; Enforcement. This Agreement has been duly and validly authorized. This Agreement has been duly executed and delivered on behalf of the Buyer, and this Agreement constitutes a valid and binding agreement of the Buyer enforceable in accordance with its terms.
i. Residency. The Buyer is a resident of the jurisdiction set forth immediately below the Buyer’s name on the signature pages hereto.
j. No Short Sales. Buyer/Holder, its successors and assigns, agree that so long as the Note remains outstanding, neither the Buyer/Holder nor any of its affiliates shall not enter into or effect “short sales” of the Common Stock or hedging transaction which establishes a short position with respect to the Common Stock of the Company. The Company acknowledges and agrees that upon delivery of a Conversion Notice by the Buyer/Holder, the Buyer/Holder immediately owns the shares of Common Stock described in the Conversion Notice and any sale of those shares issuable under such Conversion Notice would not be considered short sales.
3. Representations and Warranties of the Company. The Company represents and warrants to the Buyer that:
a. Organization and Qualification. The Company and each of its subsidiaries, if any, is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, with full power and authority (corporate and other) to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted.
b. Authorization; Enforcement. (i) The Company has all requisite corporate power and authority to enter into and perform this Agreement, the Note and to consummate the transactions contemplated hereby and thereby and to issue the Securities, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Note by the Company and the consummation by it of the transactions contemplated hereby and thereby (including without limitation, the issuance of the Note and the issuance and reservation for issuance of the Conversion Shares issuable upon conversion or exercise thereof) have been duly authorized by the Company’s Board of Directors and no further consent or authorization of the Company, its Board of Directors, or its shareholders is required, (iii) this Agreement has been duly executed and delivered by the Company by its authorized representative, and such authorized representative is the true and official representative with authority to sign this Agreement and the other documents executed in connection herewith and bind the Company accordingly, and (iv) this Agreement constitutes, and upon execution and delivery by the Company of the Note, each of such instruments will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms.
c. Issuance of Shares. The Conversion Shares are duly authorized and reserved for issuance and, upon conversion of the Note in accordance with its respective terms, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of shareholders of the Company and will not impose personal liability upon the holder thereof.
d. Acknowledgment of Dilution. The Company understands and acknowledges the potentially dilutive effect to the Common Stock upon the issuance of the Conversion Shares upon conversion of the Note. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Note in accordance with this Agreement, the Note is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company.
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e. No Conflicts. The execution, delivery and performance of this Agreement, the Note by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance and reservation for issuance of the Conversion Shares) will not (i) conflict with or result in a violation of any provision of the Certificate of Incorporation or By-laws, or (ii) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). All consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company is not in violation of the listing requirements of the OTC Markets Exchange (the “OTC MARKETS”) and does not reasonably anticipate that the Common Stock will be delisted by the OTC MARKETS in the foreseeable future, nor are the Company’s securities “chilled” by FINRA. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing.
f. Absence of Litigation. Except as disclosed in the Company’s Periodic Report filings with the SEC, there is no action, suit, claim, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its subsidiaries, threatened against or affecting the Company or any of its subsidiaries, or their officers or directors in their capacity as such, that could have a material adverse effect. Schedule 3(f) contains a complete list and summary description of any pending or, to the knowledge of the Company, threatened proceeding against or affecting the Company or any of its subsidiaries, without regard to whether it would have a material adverse effect. The Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing.
g. Acknowledgment Regarding Buyer’ Purchase of Securities. The Company acknowledges and agrees that the Buyer is acting solely in the capacity of arm’s length purchasers with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that the Buyer is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any statement made by the Buyer or any of its respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to the Buyer’ purchase of the Securities. The Company further represents to the Buyer that the Company’s decision to enter into this Agreement has been based solely on the independent evaluation of the Company and its representatives.
h. No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales in any security or solicited any offers to buy any security under circumstances that would require registration under the 1933 Act of the issuance of the Securities to the Buyer.
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i. Title to Property. The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in Schedule 3(i) or such as would not have a material adverse effect. Any real property and facilities held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as would not have a material adverse effect.
j. Bad Actor. No officer or director of the Company would be disqualified under Rule 506(d) of the Securities Act as amended on the basis of being a “bad actor” as that term is established in the September 19, 2013 Small Entity Compliance Guide published by the Securities and Exchange Commission.
k. Breach of Representations and Warranties by the Company. If the Company breaches any of the representations or warranties set forth in this Section 3, and in addition to any other remedies available to the Buyer pursuant to this Agreement, it will be considered an Event of default under the Note.
4. COVENANTS.
a. Expenses. At the Closing, the Company shall reimburse Buyer for expenses incurred by them in connection with the negotiation, preparation, execution, delivery and performance of this Agreement and the other agreements to be executed in connection herewith (“Documents”), including, without limitation, reasonable attorneys’ and consultants’ fees and expenses, transfer agent fees, fees for stock quotation services, fees relating to any amendments or modifications of the Documents or any consents or waivers of provisions in the Documents, fees for the preparation of opinions of counsel, escrow fees, and costs of restructuring the transactions contemplated by the Documents. When possible, the Company must pay these fees directly, otherwise the Company must make immediate payment for reimbursement to the Buyer for all fees and expenses immediately upon written notice by the Buyer or the submission of an invoice by the Buyer.
b. Listing. The Company shall promptly secure the listing of the Conversion Shares upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and, so long as the Buyer owns any of the Note Securities, shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Conversion Shares from time to time issuable upon conversion of the Note. The Company will obtain and, so long as the Buyer owns any of the Securities, maintain the listing and trading of its Common Stock on the OTC MARKETS or any equivalent replacement market, the Nasdaq stock market (“Nasdaq”), or the New York Stock Exchange (“NYSE”) and will comply in all respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the Financial Industry Regulatory Authority (“FINRA”) and such exchanges, as applicable. The Company shall promptly provide to the Buyer copies of any notices it receives from the OTC MARKETS and any other markets on which the Common Stock is then listed regarding the continued eligibility of the Common Stock for listing on such markets.
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c. Corporate Existence. So long as the Buyer beneficially owns the Note, the Company shall maintain its corporate existence and shall not sell all or substantially all of the Company’s assets, except in the event of a merger or consolidation or sale of all or substantially all of the Company’s assets, where the surviving or successor entity in such transaction (i) assumes the Company’s obligations hereunder and under the agreements and instruments entered into in connection herewith and (ii) is a publicly traded corporation whose Common Stock is listed for trading on the OTC MARKETS, Nasdaq or NYSE.
d. No Integration. The Company shall not make any offers or sales of any security (other than the Securities) under circumstances that would require registration of the Securities being offered or sold hereunder under the 1933 Act or cause the offering of the Securities to be integrated with any other offering of securities by the Company for the purpose of any stockholder approval provision applicable to the Company or its securities.
e. Commitment Shares. The Company shall issue the Buyer a total of 11,750 commitment shares (the “Commitment Shares”) as additional consideration for the purchase of the Note. It is anticipating the Company will shortly effect a 1 for 8 reverse split of its Common Stock in connection with a NASDAQ up list. Consequently, the Commitment Shares shall have a true up feature to take effect which will occur on the 20th trading day following the effective day of the Company’s reverse stock split (the “Split Date”). On the 21st trading day following the Split Date, the Company, if necessary, will issue additional shares based on the difference between the value of the Commitment Shares immediately prior to the Split Date and the value of the Commitment Shares at the close of the 20th day following the Split Date in order to ensure that the aggregate market value of the Commitment Shares has not decreased as a result of the reverse stock split.
f. Breach of Covenants. If the Company breaches any of the covenants set forth in this Section 4, and in addition to any other remedies available to the Buyer pursuant to this Agreement, it will be considered an event of default under the Note.
5. Governing Law; Miscellaneous.
a. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of Nevada or in the federal courts located in the state Nevada and county or city of either Washoe County, Nevada or Clark County, Nevada. The parties to this Agreement hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. The Company and Buyer waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other Transaction Document by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.
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b. Counterparts; Signatures by Facsimile. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.
c. Headings. The headings of this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement.
d. Severability. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.
e. Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the majority in interest of the Buyer.
f. Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, (iv) via electronic mail or (v) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received) or delivery via electronic mail, or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be:
| If to the Company, to: | ||
| DATA443 RISK MITIGATION, INC. | ||
| 101 J Morris Commons Lane, Suite 105 | ||
| Morrisville, NC 27560 | ||
| Attn: Jason Remillard, CEO | ||
| If to the Buyer: | ||
| ROOT VENTURES, LLC | ||
| 1 East Liberty Street, Suite 600 | ||
| Reno, NV 85901 | ||
| Attn: Zackery Ouderkirk | ||
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Each party shall provide notice to the other party of any change in address.
g. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Neither the Company nor the Buyer shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other. Notwithstanding the foregoing, the Buyer may assign its rights hereunder to any “qualified person”, any “permitted assigns”, or “prospective transferee” that acquires or purchases Note Securities in a private transaction from the Buyer or to any of its “affiliates,” as that term is defined under the 1934 Act, without the consent of the Company with Buyer’s Opinion of Counsel. A qualified person is an “accredited investor” transferee, assignee, or purchaser of the Note who succeeds to the Holder’s right, title and interest to all or a portion of the Note accompanied with an Opinion of Counsel as provided for in Section 2(f).
h. Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.
i. Survival. The representations and warranties of the Company and the agreements and covenants set forth in this Agreement shall survive the closing hereunder notwithstanding any due diligence investigation conducted by or on behalf of the Buyer. The Company agrees to indemnify and hold harmless the Buyer and all their officers, directors, employees and agents for loss or damage arising as a result of or related to any breach or alleged breach by the Company of any of its representations, warranties and covenants set forth in this Agreement or any of its covenants and obligations under this Agreement, including advancement of expenses as they are incurred.
j. Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
k. No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.
l. Remedies. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyer by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Agreement, that the Buyer shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Agreement and to enforce specifically the terms and provisions hereof, without the necessity of showing economic loss and without any bond or other security being required.
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IN WITNESS WHEREOF, the undersigned Buyer and the Company have caused this Agreement to be duly executed as of the date first above written.
| DATA443 RISK MITIGATION, INC. | ||
| By: | ||
| Name: | Jason Remillard | |
| Title: | CEO | |
| ROOT VENTURES, LLC. | ||
| By: | ||
| Name: | Zackery Ouderkirk | |
| Title: | Manager | |
| AGGREGATE SUBSCRIPTION AMOUNT: | $ | 207,500.00 | ||
| Aggregate Principal Amount of Note: | ||||
| Aggregate Purchase Price: | ||||
| Note: $207,500.00 less $7,500.00 in legal fees. |
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EXHIBIT A
144 NOTE - $207,500.00
| 11 |
Exhibit 10.27
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Jason Remillard, Chief Executive Officer of Data443 Risk Mitigation, Inc. certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Data443 Risk Mitigation, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process summarize and report financial information; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 15, 2023 | By: | /s/ Jason Remillard |
| Name: | Jason Remillard | |
| Title: | Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Gregory McCraw, Chief Financial Officer of Data443 Risk Mitigation, Inc. certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Data443 Risk Mitigation, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process summarize and report financial information; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 15, 2023 | By: | /s/ Gregory McCraw |
| Name: | Gregory McCraw | |
| Title: | Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the period ended March 31, 2023 of Data443 Risk Mitigation, Inc. (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Annual Report”), I, Jason Remillard, Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Quarterly Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and |
| 2. | The information contained in this Annual Report fairly presents, in all material respects, the financial condition and results of operation of the Company. |
| Date: May 15, 2023 | By: | /s/ Jason Remillard |
| Name: | Jason Remillard | |
| Title: | Chief Executive Officer |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the period ended March 31, 2023 of Data443 Risk Mitigation, Inc. (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Annual Report”), I, Gregory McCraw, Chief Financial Officer of the Company certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Quarterly Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and |
| 2. | The information contained in this Annual Report fairly presents, in all material respects, the financial condition and results of operation of the Company. |
| Date: May 15, 2023 | By: | /s/ Gregory McCraw |
| Name: | Gregory McCraw | |
| Title: | Chief Financial Officer |