NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE PERIOD DECEMBER 31, 2018 and DECEMBER 31, 2017
NOTE
1:
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
Business
Description
LandStar,
Inc. (the “Company”) was incorporated as a Nevada corporation on May 4, 1998. The Company is developing products that
enable secure data, at rest and in flight, across local devices, network, cloud, and databases.
Basis of Presentation and Principles
of Consolidation
The
accompanying consolidated financial statements as of December 31, 2018 include the accounts of the Company and
its wholly-owned subsidiary, Data 443 Risk Mitigation, Inc., and the operations of Myriad Software Productions, LLC
through September 2018 when it was liquidated. The comparative figures as of December 31, 2017 and for the year then ended
include the accounts of the Company and the operations of Data 443 Risk Mitigation, Inc. and Myriad Software Productions, LLC
from November 18, 2017 through December 31, 2017. Prior to the acquisition of Data 443 Risk Mitigation, Inc. and the assets
of Myriad Software Productions, LLC in 2018, these two entities were controlled by our sole director and officer,
Jason Remillard. On November 17, 2017, Mr. Remillard acquired control of LandStar, Inc. through his purchase of all the
outstanding Series A preferred shares of the Company, and as a result, these two entities became common controlled entities
that requires consolidation of results with the reporting company, LandStar, Inc., from the time common control occurred. All
intercompany accounts and activities have been eliminated. These consolidated financial statements
have been
prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”).
Use
of Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as
of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives revenue primarily from
contracts for subscription to access our SaaS platforms and, to a much lesser degree, ancillary services provided in connection
with subscription services. The Company’s contracts include the performance obligations that require us to provide access
to the platforms. The majority of the Company’s contracts are for subscription to ARALOC
TM
, hosting of the platform
and related services. Custom work for specific deliverables is documented in the statements of work. Customers may enter into
subscription and various statements of work concurrently or consecutively. Most of the Company’s performance obligations
are not considered to be distinct from the subscription to ARALOC
TM
, hosting of the platform and related services and
are combined into a single performance obligation. New statements of work and modifications of contracts are reviewed each reporting
period and significant judgment is applied as to nature and characteristics of the new or modified performance obligations on
a contract by contract basis.
Convertible
Financial Instruments
The
Company bifurcates conversion options from their host instruments and accounts for them as free-standing derivative financial
instruments if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks
of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host
contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured
at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings
as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative
instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under
applicable U.S. GAAP.
When
the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, discounts
are recorded for the intrinsic value of conversion options embedded in the instruments based upon the differences between the
fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded
in the instrument.
Common
stock purchase warrants and derivative financial instruments
-
Common stock purchase warrants and other derivative
financial instruments are classified as equity if the contracts (1) require physical settlement or net-share settlement, or (2)
give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement).
Contracts which (1) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and
if that event is outside the control of the Company), (2) give the counterparty a choice of net-cash settlement or settlement
in shares (physical settlement or net-share settlement), or (3) that contain reset provisions that do not qualify for the scope
exception are classified as liabilities. The Company assesses classification of its common stock purchase warrants and other derivatives
at each reporting date to determine whether a change in classification between equity and liabilities is required.
Beneficial
Conversion Feature
- The issuance of the convertible debt described in Note 4, below, generated a beneficial conversion
feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is
beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less
than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic
value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference
between the effective conversion price per share and the fair value of common stock per share on the commitment date, resulting
in a discount on the convertible debt (recorded as a component of additional paid-in capital).
LANDSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD DECEMBER 31, 2018 and
DECEMBER 31, 2017
Share-Based
Compensation
Employees
- The Company accounts for share-based compensation under the fair value method which requires all such compensation to
employees, including the grant of employee stock options, to be calculated based on its fair value at the measurement date (generally
the grant date), and recognized in the condensed consolidated statement of operations over the requisite service period.
Nonemployees
- During June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2018-07,
Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
(“ASU
2018-07”) to simplify the accounting for share- based payments to nonemployees by aligning it with the accounting for share-based
payments to employees. The Company elected to early adopt ASU 2018-07. Under the requirements of ASU 2018-07, the Company accounts
for share-based compensation to non-employees under the fair value method which requires all such compensation to be calculated
based on the fair value at the measurement date (generally the grant date), and recognized in the statement of operations over
the requisite service period.
The
Company recorded approximately $585,886 in nonemployee share-based compensation expense for the year ended December 31, 2018.
There was no share-based compensation expense for the year ended December 31, 2017.
Determining
the appropriate fair value model and the related assumptions requires judgment. There were no option grants during 2017. During
2018, the fair value of each option grant was estimated using a Black-Scholes option-pricing model on the date of the grant as
follows:
|
|
Nonemployees
|
|
|
|
|
|
Estimated
dividend yield
|
|
|
0.00
|
%
|
Expected stock price
volatility
|
|
|
306
|
%
|
Weighted-average
risk-free interest rate
|
|
|
2.67
|
%
|
Expected life of
options
|
|
|
5.00
|
|
Weighted-average
fair value per share
|
|
$
|
0.0083
|
|
The
expected volatility represents the historical volatility of the Company’s publicly traded common stock. Due to limited historical
data, the Company calculates the expected life based on the mid-point between the vesting date and the contractual term which
is in accordance with the simplified method. The expected term for options granted to nonemployees is the contractual life. The
risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of stock options. The
Company has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend
yield is assumed to be zero.
Income
Taxes
The
asset and liability method is used in the Company’s accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.
Deferred
tax assets and liabilities are determined based on the temporary differences between the financial statement carrying amounts
and the tax bases of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected
to reverse. In estimating future tax consequences, all expected future events are considered other than enactment of changes in
the tax law or rates.
The Company adopted the provisions of paragraph
740-10-25-13 of the FASB Accounting Standards Codification. Paragraph 740-10-25-13 which addresses the determination of whether
tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under paragraph
740-10-25-13, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The
tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that
has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Paragraph 740-10-25-13 also provides
guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires
increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according
to the provisions of paragraph 740-10-25-13.
LANDSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD DECEMBER 31, 2018 and
DECEMBER 31, 2017
The
determination of recording or releasing tax valuation allowance is made, in part, pursuant to an assessment performed by management
regarding the likelihood that the Company will generate future taxable income against which benefits of its deferred tax assets
may or may not be realized. This assessment requires management to exercise significant judgment and make estimates with respect
to its ability to generate taxable income in future periods.
Fair
Value Measurements
The
framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).
The
three levels of the fair value hierarchy are described as follows:
|
Level
1
|
Inputs
to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company
has the ability to access.
|
|
|
|
|
|
Level
2
|
Inputs
to the valuation methodology include:
|
|
●
|
quoted
prices for similar assets or liabilities in active markets;
|
|
|
|
|
●
|
quoted
prices for identical or similar assets or liabilities in inactive markets;
|
|
|
|
|
●
|
inputs
other than quoted prices that are observable for the asset or liability;
|
|
|
|
|
●
|
inputs
that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
|
If
the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full
term of the asset or liability.
|
|
Level
3
|
Inputs
to the valuation methodology are unobservable and significant to the fair value measurement.
|
The
asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input
that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and
minimize the use of unobservable inputs.
Following
is a description of the valuation methodology used for significant liabilities measured at fair value:
Management
determined that liabilities created by beneficial conversion features associated with the issuance of certain convertible notes
payable (see Note 5), meet the criteria of derivatives and are required to be measured at fair value. The fair value of these
derivative liabilities was determined based on management’s estimate of the expected future cash flows required to settle
the liabilities. This valuation technique involves management’s estimates and judgment based on unobservable inputs and
is classified in level 3.
LANDSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD DECEMBER 31, 2018 and
DECEMBER 31, 2017
Derivative liability as of December 31, 2016
|
|
$
|
19,700
|
|
Change in fair value of derivative liability
|
|
|
276,100
|
|
|
|
|
|
|
Derivative liability as of December 31, 2017
|
|
$
|
295,800
|
|
|
|
|
|
|
The amount of net loss for the period attributable
to the unrealized losses relating to liability still held at the reporting date
|
|
$
|
276,100
|
|
Derivative
liability as of December 31, 2017
|
|
$
|
295,800
|
|
Additions of new
derivatives recognized as debt discounts
|
|
|
1,276,667
|
|
Additions of new
derivatives recognized as loss on derivatives
|
|
|
716,948
|
|
Settled upon conversion
of debt (Derivative resolution)
|
|
|
(2,480,000
|
)
|
Reclassification
from APIC to derivative due to tainted instruments
|
|
|
83,334
|
|
Loss
on change in fair value of derivative liabilities
|
|
|
12,554,360
|
|
|
|
|
|
|
Derivative
liability as of December 31, 2018
|
|
$
|
12,447,109
|
|
The amount of net loss for the period attributable to the unrealized
losses relating to liability still held at the reporting date
|
|
|
10,999,360
|
|
Net
Loss Per Common Share
The
Company calculates net loss per common share as a measurement of the Company’s performance while giving effect to all dilutive
potential common shares that were outstanding during the reporting period. As the Company had a net loss for all periods presented,
the inclusion of common stock options or other similar instruments would be anti-dilutive. Therefore, the weighted average shares
used to calculate both basic and diluted earnings per share are the same.
Segments
Operating
segments are defined as components of an enterprise engaging in business activities for which discrete financial information is
available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing
performance. The Company operates and manages its business as one operating segment and all of the Company’s revenues and
operations are currently in the United States.
Recently
Issued Accounting Pronouncements
In August 2018, the Financial
Accounting Standards Board (“FASB”) issued ASU No. 2018-13,
Fair Value Measurement (Topic 820):
Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
(“ASU 2018-13”).
ASU 2018-13 is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For
the Company, the new standard will be effective on January 1, 2020. ASU 2018-13 modifies prior disclosure requirements
for fair value measurement. ASU 2018-13 removes certain disclosure requirements related to the fair value hierarchy, such as
removing the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2, modifies
existing disclosure requirements related to measurement uncertainty, and adds new disclosure requirements, such as disclosing
the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurement. The Company
is currently evaluating the impact of this new standard on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15,
Internal-Use Software (Subtopic 350-40)—Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That is a Service Contract
(“ASU 2018-15”). ASU 2018-15 is effective for reporting periods beginning
after December 15, 2019 and early adoption is permitted. For the Company, the new standard will be effective on January 1,
2020. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service
contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and
hosting arrangements that include an internal use software license), by requiring a customer in a cloud computing arrangement
that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project.
The Company is currently evaluating the impact of this new standard and does not expect ASU 2018-15 to have a material effect
on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations: Clarifying the Definition of a Business
(“ASU 2017-01”). ASU 2017-01 changed the definition
of a business in an effort to assist entities with evaluating whether a set of transferred assets, liabilities and activities
is a business. ASU 2017-01 was effective for the Company on January 1, 2018 and had no impact to the Company’s consolidated
financial statements as of adoption date.
LANDSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD DECEMBER 31, 2018 and
DECEMBER 31, 2017
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which
supersedes virtually all of the existing revenue recognition guidance under U.S. GAAP, and requires entities to recognize revenue
for the transfer to a customer of promised goods or services in an amount that reflects the consideration to which the entity
expects to be entitled to receive in exchange for those goods or services. Subsequent to the issuance of ASU 2014-09, the FASB
issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, ASU 2016-08,
Revenue from Contacts with Customers: Principal Versus Agent Considerations
, ASU No. 2016-10,
Revenue from Contracts
with Customers: Identifying Performance Obligations and Licensing
, and ASU No. 2016-12,
Revenue from Contracts with
Customers: Narrow-Scope Improvements and Practical Expedients
. The additional ASUs clarified certain provisions of ASU 2014-09
in response to recommendations from the Transition Resources Group established by the FASB and extended the required adoption
of ASU 2014-09, which was effective for reporting periods beginning after December 15, 2017. The Company adopted the new
standard on January 1, 2018 using the modified retrospective method. The Company does not currently have multiple-element
arrangements, variable consideration, financing components, significant noncash consideration, or long-term contracts with customers
or other items affecting the transaction price. The Company determined that the transaction price is generally fixed and determinable,
and collectability is reasonably assured. The Company did not have revenue in 2017 and years prior to 2017. Accordingly, the adoption
of ASU 2014-09, as clarified, did not have an effect on the manner or timing of the recognition of the Company’s revenue.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). The provisions of ASU 2016-02
set out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The
new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the
principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether
lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee
is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months, regardless
of their classification. Leases with a term of 12 months or less will be accounted for in a similar manner as under existing guidance
for operating leases. ASU 2016-02 supersedes the previous lease standard, Topic 840,
Leases
. This guidance is effective
for the Company for the year ending December 31, 2020. The Company does not believe implementation of this standard will have
an impact on the Company’s consolidated financial statements.
NOTE
2:
|
RETROSPECTIVE ADJUSTMENTS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
|
The Company has retrospectively adjusted
previously issued financial statements as of December 31, 2017, to reflect the consolidation of common controlled entities.
Prior to the acquisition of Data 443 Risk Mitigation, Inc. and the assets of Myriad Software Productions, LLC in 2018, these
two entities were controlled by our sole director and officer, Jason Remillard. On November 17, 2017, Mr. Remillard acquired control
of LandStar, Inc. through his purchase of all the outstanding Series A preferred shares of the Company, and as a result, these
two entities became common controlled entities that requires consolidation of results with the reporting company, LandStar, Inc.,
from the time common control occurred. The Company has consolidated the balance sheets of these affiliated entities as of
the reporting date, as well as the results of operations from November 18, 2017 through December 31, 2017.
The
following sets forth the previously reported and restated amounts of selected items within the balance sheet and statement of
operations as of and for the year ended December 31, 2017:
|
|
2017
|
|
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
4,478
|
|
|
$
|
4,478
|
|
Accounts payable
|
|
|
52,837
|
|
|
|
31,882
|
|
|
|
84,719
|
|
Due to related party
|
|
|
7,990
|
|
|
|
98,339
|
|
|
|
106,329
|
|
Additional paid-in
capital
|
|
|
1,286,802
|
|
|
|
69,362
|
|
|
|
1,356,164
|
|
Stockholders’
deficit, December 31, 2017
|
|
|
5,717,106
|
|
|
|
195,105
|
|
|
|
5,912,211
|
|
Net loss for the
year ended December 31, 2017
|
|
|
271,187
|
|
|
|
57,275
|
|
|
|
328,462
|
|
NOTE
3:
|
LIQUIDITY AND
GOING CONCERN
|
The
accompanying consolidated financial statements have been prepared (i) in accordance with accounting principles generally
accepted in the United States, and (ii) assuming that the Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. The Company has not generated significant income
to date. The Company is subject to the risks and uncertainties associated with a business with no substantive revenue, as well
as limitations on its operating capital resources. These matters, among others, raise substantial doubt about the ability of the
Company to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts
and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.
In light of these matters, the Company’s ability to continue as a going concern is dependent upon the Company’s ability
to raise capital and generate revenue and profits in the future.
During
2018, the Company has made two product acquisitions, ClassiDocs, and ARALOC
TM
, and completed the acquisition of one
entity, Data443 Risk Mitigation, Inc. (“Data443”). The Company is actively seeking new products and entities to acquire,
with several candidates identified. The Company has developed, and continues to develop, large scale relationships with cyber
security, marketing and product organizations, and to market and promote ClassiDocs and other products the Company may develop
or acquire. As of December 31, 2018, the Company had operating losses, negative net working capital, and an accumulated deficit.
These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
LANDSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD DECEMBER 31, 2018 and
DECEMBER 31, 2017
NOTE
4:
|
CONVERTIBLE NOTES
PAYABLE
|
Convertible
notes payable consists of the following
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Convertible
notes payable
|
|
|
|
|
|
|
|
|
1)
Originated in October 2014
|
|
$
|
75,000
|
|
|
$
|
125,000
|
|
2)
Originated in September 2017
|
|
|
985,000
|
|
|
|
-
|
|
3)
Originated in October 2018
|
|
|
110,000
|
|
|
|
-
|
|
4)
Originated in October 2018
|
|
|
220,000
|
|
|
|
-
|
|
|
|
|
1,390,000
|
|
|
|
125,000
|
|
Debt
discount and debt issuance cost
|
|
|
(1,070,523
|
)
|
|
|
-
|
|
|
|
|
319,477
|
|
|
|
125,000
|
|
Less
current portion of convertible notes payable
|
|
|
161,227
|
|
|
|
125,000
|
|
Long-term
convertible notes payable
|
|
$
|
158,250
|
|
|
$
|
-
|
|
During the year ended December 31, 2018
and 2017, the Company recognized interest expense of $43,394 and $0, and amortization of debt discount, included in interest expense
of $236,144 and $0, respectively.
|
1)
|
Non-interest
bearing convertible note held by Blue Citi LLC (“Blue Citi”) for the original principal of $125,000, payable on
demand and convertible at the option of the holder into common shares at the conversion price of $0.00005 per share. The outstanding
principal for the convertible note was $75,000 and $125,000 as of December 31, 2018 and December 31, 2017. During the year
ending December 31, 2018, Blue Citi converted $50,000 of this convertible note into 1,000,000,000 shares of common stock.
The embedded conversion feature in this note created a BCF totaling approximately $7,800,000 as of December 31, 2018.
|
|
|
|
|
2)
|
Convertible
note held by Blue Citi for a total principal of $985,000 as of December 31, 2018. The note (i) accrues interest at the rate
of 8% per annum; (ii) can be converted into shares of our common stock at a 10% discount to the lowest trading price during
the ten consecutive trading days immediately preceding the date of conversion (40% discount upon an event of default under
the note), and (iii) is due and payable upon the 18-month anniversary of its issuance.
|
|
|
|
|
|
In
September 2018, this convertible note was issued to Blue Citi in connection with a restructuring (the “Convertible Note
Restructuring”) of previously outstanding convertible notes with Blue Citi. Immediately prior to the issuance of this
note, various convertible notes totaling $810,000 were outstanding with Blue Citi, along with associated accrued interest
total $19,680.
|
LANDSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD DECEMBER 31, 2018 and
DECEMBER 31, 2017
|
|
The
Company evaluated the terms of the conversion features of this convertible note in accordance with ASC 815,
Derivatives
and Hedging
, and determined it is indexed to the Company’s common stock and that the conversion features meet the
definition of a liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability.
The Company determined the value of the conversion feature using the binomial valuation model as follows:
|
Expected term
|
|
|
15-18
months
|
|
Expected
stock price volatility
|
|
|
291-355
|
%
|
Weighted-average
risk-free interest rate
|
|
|
2.63-2.86
|
%
|
Expected dividend
|
|
$
|
0.00
|
|
|
|
On
the issuance date, the fair value of the derivative liability for the note that became
convertible amounted to $1,399,179. $976,667 of the value assigned to the derivative
liability was recognized as a debt discount on the convertible note which will be amortized
over the life of the convertible note while the balance of $422,512 was recognized as
a “day 1” derivative loss.
During the year ended December 31, 2018,
$1,877,152 was recorded as the change in fair value of the derivative liability within the consolidated statement of operations.
As of December 31, 2018 a derivative liability totaling $3,276,331 was recorded.
|
|
3)
|
Convertible
note held by SMEA2Z, LLC for a total principal of $220,000 as of December 31, 2018. The note (i) accrues interest at the rate
of 8% per annum; (ii) can be converted into shares of our common stock at a 30% discount to the lowest trading price during
the twenty consecutive trading days immediately preceding the date of conversion, and (iii) is due and payable upon the 9-month
anniversary of its issuance, and (iv) has an original issue discount of $20,000.
|
|
|
|
|
|
The
Company evaluated the terms of the conversion features of this convertible note in accordance
with ASC 815,
Derivatives and Hedging
, and determined it is indexed to the Company’s
common stock and that the conversion features meet the definition of a liability and
therefore bifurcated the conversion feature and accounted for it as a separate derivative
liability. The Company determined the value of the conversion feature using the binomial
valuation model as follows:
|
Expected term
|
|
|
7-
9
months
|
|
Expected
stock price volatility
|
|
|
164-211
|
%
|
Weighted-average
risk-free interest rate
|
|
|
2.56-2.58
|
%
|
Expected dividend
|
|
$
|
0.00
|
|
|
|
On
the issuance date, the fair value of the derivative liability for the note that became
convertible amounted to $367,781. $200,000 of the value assigned to the derivative liability
was recognized as a debt discount on the convertible note which will be amortized over
the life of the convertible note while the balance of $167,781 was recognized as a “day
1” derivative loss.
During
the year ended December 31, 2018, $420,943 was recorded as the change in fair value of
the derivative liability
within
the consolidated statement of operations. As of December 31, 2018, a derivative liability
totaling $788,724 was recorded.
|
|
|
|
|
4)
|
Convertible
note held by AFT Funding Group, LLC for a total principal of $210,000 as of December 31, 2018. The note (i) accrues interest
at the rate of 8% per annum; (ii) can be converted into shares of our common stock at a 30% discount to the lowest trading
price during the twenty consecutive trading days immediately preceding the date of conversion, and (iii) is due and payable
upon the 9-month anniversary of its issuance, and (iv) has an original issue discount of $10,000.
|
|
|
|
|
|
The
Company evaluated the terms of the conversion features of this convertible note in accordance
with ASC 815,
Derivatives and Hedging
, and determined it is indexed to the Company’s
common stock and that the conversion features meet the definition of a liability and
therefore bifurcated the conversion feature and accounted for it as a separate derivative
liability. The Company determined the value of the conversion feature using the binomial
valuation model as follows:
|
Expected term
|
|
|
7-
9
months
|
|
Expected
stock price volatility
|
|
|
167-214
|
%
|
Weighted-average
risk-free interest rate
|
|
|
2.56
|
%
|
Expected dividend
|
|
$
|
0.00
|
|
LANDSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD DECEMBER 31, 2018 and
DECEMBER 31, 2017
|
|
As
of December 31, 2018, a liability totaling $394,958 was recorded and is included in long-term liabilities. This derivative
liability was recorded with $110,000 of the value recognized as a debt discount on the convertible note which will be amortized
over the life of the convertible note, and the remaining balance of $79,377 included in the change in fair value of the derivative
liability within the consolidated statement of operations as of December 31, 2018.
|
Preferred
Stock
The
Company is authorized to issue 50,000,000 shares of preferred stock with a par value of $0.001, of which 1,000,000 shares have
been designated as Series A. As of December 31, 2018 and 2017, 1,000,000 shares of Series A were issued and outstanding. Each
share of Series A is (i) convertible into 1,000 shares of common stock, and (ii) entitled to vote 15,000 shares of common stock
on all matters submitted to a vote by shareholders voting common stock. All issued and outstanding shares of Series A Preferred
Stock are held by Mr. Remillard.
Common
Stock
The
Company is authorized to issue 8,888,000,000 shares of common stock with a par value of $0.001 per share. All shares have
equal voting rights, are non-assessable, and have one vote per share. The total number of shares of Company common stock issued
and outstanding as of December 31, 2018 and 2017, respectively, was 5,112,210,803 and 3,947,676,982.
On
or about January 26, 2018, the Company committed to issue 1,200,000,000 shares to Myriad, a company wholly owned by the Chief
Executive Officer and controlling shareholder Mr. Remillard, as part of the payment for the Company’s purchase of ClassiDocs
from Myriad. Those shares will now be issued to Mr. Remillard pursuant to instructions from Myriad. While not yet issued as of
this filing, these shares have been recorded as common shares issuable and included in additional paid-in capital
within the consolidated financial statements as of December 31, 2018. These shares have not been included in the
total number of issued and outstanding shares reflected herein.
During
June 2018, the Company committed to issue 100,000,000 shares to Mr. Remillard, and an additional estimated 100,000,000
shares as an earn out, to Mr. Remillard, under the transaction in which the Company acquired all of the shares of Data443.
While not yet issued as of this filing, the shares committed to Mr. Remillard have been recorded as common shares
issuable and included in additional paid-in capital, and the earn out shares have been reflected as a contingent
liability for common stock issuable within the consolidated financial statements as of December
31, 2018. These shares have not been included in the total number of issued and outstanding shares reflected
herein.
The
Company is authorized to issue 50,000,000 shares of preferred stock with a par value of $0.001, of which 1,000,000 shares have
been designated as Series A. As of December 31, 2017 and 2016, 1,000,000 shares of Series A were issued and outstanding, and each
share of Series A was (i) convertible into 1,000 shares of common stock, and (ii) entitled to vote 1,000 shares of common stock
on all matters submitted to a vote by shareholders voting common stock. All issued and outstanding shares of Series A Preferred
Stock are held by Mr. Jason Remillard, (“Mr. Remillard”) sole director and sole officer of the Company.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets
and deferred tax liabilities are as follows as of December 31:
|
|
2018
|
|
|
2017
|
|
Noncurrent:
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Tax
loss
|
|
$
|
1,776,000
|
|
|
$
|
1,250,100
|
|
Valuation
allowance
|
|
|
(1,776,000
|
)
|
|
|
(1,250,100
|
)
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets, noncurrent
|
|
$
|
-
|
|
|
$
|
-
|
|
LANDSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD DECEMBER 31, 2018 and
DECEMBER 31, 2017
The Company has established a valuation allowance
against its deferred tax assets due to the uncertainty surrounding the realization of such assets. During 2018 the valuation allowance
increased by $525,900. The Company has net operating and economic loss carry-forwards of approximately $7,772,000
available to offset future federal and state taxable income.
A reconciliation between expected
income taxes, computed at the federal income tax rate of 21% applied to the pretax accounting loss, and our blended
state income tax rate of 2.0%, and the income tax net expense included in the consolidated statements of operations for the
years ended December 31, 2018 and 2017 is as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Anticipated income tax benefit at statutory rate
|
|
$
|
(3,331,900
|
)
|
|
|
(92,200
|
)
|
State income tax expense, net of federal tax effect
|
|
|
(317,300
|
)
|
|
|
(5,400
|
)
|
Non-deductible expenses
|
|
|
3,124,600
|
|
|
|
99,300
|
|
Increase/(decrease) in valuation allowance
|
|
|
525,900
|
|
|
|
(691,400
|
)
|
Change in federal tax rate
|
|
|
-
|
|
|
|
707,300
|
|
Change in state tax rate
|
|
|
-
|
|
|
|
(17,400
|
)
|
Other
|
|
|
(1,300
|
)
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
-
|
|
|
$
|
-
|
|
The
effective tax rate of 3.3% differs from our statutory rate of 23% primarily due to the effect of non-deductible expenses.
NOTE 7:
|
SHARE-BASED COMPENSATION
|
Stock
Options
During
2018, the Company granted options for the purchase of the Company’s common stock to certain consultants and
advisors as consideration for services rendered. The terms of the stock option grants are determined by the Company’s Board
of Directors. The Company’s stock options generally vest upon the one-year anniversary date of the grant and have a maximum
term of ten years.
The
following summarizes the stock option activity for the twelve -month period ended December 31, 2018:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Available for
|
|
|
Options
|
|
|
Exercise
|
|
|
|
Grant
|
|
|
Outstanding
|
|
|
Price
|
|
Balance as of January 1, 2018
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Authorization of awards
|
|
|
225,658,413
|
|
|
|
-
|
|
|
|
-
|
|
Grants of stock options
|
|
|
(225,658,413
|
)
|
|
|
225,658,413
|
|
|
|
0.0046
|
|
Cancelled stock options
|
|
|
-
|
|
|
|
(90,338,859
|
)
|
|
|
0.0043
|
|
Balance as of December 31, 2018
|
|
|
-
|
|
|
|
135,319,554
|
|
|
$
|
0.0046
|
|
LANDSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD DECEMBER 31, 2018 and
DECEMBER 31, 2017
The
following summarizes certain information about stock options vested and expected to vest as of December 31, 2018:
|
|
|
|
|
Weighted-Average
|
|
|
Weighted-
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
Number
of
|
|
|
Contractual
Life
|
|
|
Exercise
|
|
|
|
Options
|
|
|
(In
Years)
|
|
|
Price
|
|
Outstanding
|
|
|
135,319,554
|
|
|
|
9.74
|
|
|
$
|
0.0048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest
|
|
|
135,319,554
|
|
|
|
9.74
|
|
|
$
|
0
.0048
|
|
As
of December 31, 2018, there was approximately $413,000 of total unrecognized compensation cost related to non-vested share-based
compensation arrangements which is expected to be recognized within the next year.
Restricted
Stock Awards
During
2018, the Company issued restricted stock awards for shares of common stock which have been reserved for the holders of the awards.
Restricted stock awards were issued to certain consultants and advisors as consideration for services rendered. The terms of the
restricted stock units are determined by the Company’s Board of Directors. The Company’s restricted stock shares generally
vest over a period of one year and have a maximum term of ten years.
The
following summarizes the non-vested restricted stock activity for the year ended December 31, 2018:
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Fair
Value
|
|
Non-vested as of January 1, 2018
|
|
|
-
|
|
|
|
-
|
|
Shares
of restricted stock reserved
|
|
|
99,876,158
|
|
|
|
0.0051
|
|
Non-vested
as of December 31, 2018
|
|
|
99,876,158
|
|
|
|
0.0051
|
|
Share-based
compensation expense for restricted stock grants during the year ended December 31, 2018, was approximately $351,000.
As
of December 31, 2018, there was approximately $291,000 of total unrecognized compensation cost related to non-vested share-based
compensation, which is expected to be recognized over the next year.
NOTE
8:
|
RELATED PARTY
TRANSACTIONS
|
Jason
Remillard is our sole director and sole director. Through his ownership of Series A Preferred Shares, Mr. Remillard has voting
control over all matters to be submitted to a vote of our shareholders.
In
January 2018 the Company acquired substantially all of the assets of Myriad Software Productions, LLC, which is owned 100% by
Mr. Remillard. Those assets were comprised of the software program known as ClassiDocs, and all intellectual property and goodwill
associated therewith. This acquisition changed the Company’s status to no longer being a “shell” under applicable
securities rules. In consideration for the acquisition, the Company agreed to a purchase price of $1,500,000 comprised of (i)
$50,000 paid at closing; (ii) $250,000 in the form of our promissory note; and, (iii) $1,200,000 in shares of our common stock,
valued as of the closing, which equated to 1,200,000,000 shares of our common stock. The shares have not yet been issued and are
not included as part of the issued and outstanding shares of the Company. However, these shares have been recorded as additional paid in capital within our consolidated financial statements for the period ending 31 December 2018.
In June 2018 the Company acquired all of
the issued and outstanding shares of stock of Data443 Risk Mitigation, Inc. (the “
Share Exchange
”). 100% of
the shares of Data443 was owned by Mr. Remillard. As a result of the Share Exchange, Data443 became a wholly-owned subsidiary
of the Company, with both the Company and Data443 continuing to exist as corporate entities. The finances and business conducted
by the respective entities prior to the Share Exchange will be treated as related party transactions in anticipation of the Share
Exchange. As consideration in the Share Exchange, we agreed to issue to Mr. Remillard: (a) One hundred million (100,000,000) shares
of our common stock; and (b) On the eighteen (18) month anniversary of the closing of the Share Exchange (the “
Earn Out
Date
”), an additional 100,000,000 shares of our common stock (the “
Earn Out Shares
”) provided that
Data 443 has at least an additional $1MM in revenue by the Earn Out Date (not including revenue directly from acquisitions). None
of our shares of our common stock to be issued to Mr. Remillard under the Share Exchange have been issued. As such, none of said
shares are included as part of the issued and outstanding shares of the Company. However, the shares committed to Mr. Remillard
have been recorded as a contingent liability for common shares issuable within the consolidated financial statements as of December
31, 2018. This contingent liability was originally recorded based on the current market value per share on the date of the agreement
and has been revalued at the market value per share as of December 31, 2018. The contingent liability was recorded during 2018
as follows:
|
|
2018
|
|
Contingent liability for common shares issuable:
|
|
|
|
|
|
|
|
|
|
Original liability on date of agreement
|
|
$
|
1,220,000
|
|
Gain on contingent liability
|
|
|
(700,000
|
)
|
|
|
|
|
|
Contingent liability for common shares issuable
|
|
$
|
520,000
|
|
During
2018 and 2017, Mr. Remillard made certain advances to the Company totaling $287,084 and $106,329, respectively, to be used for
operating expenses. As of December 31, 2018, $28,084 was included in due from related party for those advances.
NOTE 9:
|
SUBSEQUENT EVENTS
|
On
15
January
2019 the Company converted $5,000 of a promissory note into 100,000,000 shares of its common stock. The issuance was exempt under
Section 4(a)(2) of the Securities Act.
On 06 February 2019
the Company agreed to issue a total of 418,451,781 restricted shares of its common stock for subscriptions of $500,000. The Company
received the entire amount of the proceeds. In connection with the issuance of the shares, the Company also agreed to issue to
the subscribers warrants to acquire a total of 218,413,977 shares of our common stock at a strike price of $0.0029
per share, with a cashless exercise feature and a five (5) year term. The issuance was exempt under Section 4(a)(2) of the Securities
Act.
On
07 February 2019 the Company converted $20,000 of a promissory note into 400,000,000 shares of its common stock. The issuance
was exempt under Section 4(a)(2) of the Securities Act.
On
07 February 2019, the Company entered into an Exclusive License and Management Agreement (the “
License Agreement
”)
with WALA, INC., which conducts business under the name ArcMail Technology (“
ArcMail
”). Under the License Agreement
the Company was granted the exclusive right and license to receive all benefits from the marketing, selling and licensing, of
the ArcMail business products, including, without limitation, the good will of the business. Rory Welch, the CEO of ArcMail (“
Welch
”),
shall continue to serve as ArcMail’s CEO. The term of the License Agreement is twenty-seven (27) months, with the following
payments to be made by the Company to ArcMail: (i) $200,000 upon signing the License Agreement; (ii) monthly payments starting
30-days after the execution of the License Agreement in the amount of $25,000 per month during months 1-6; (iii) monthly payments
in the amount of $30,000 per month during months 7-17; and, (iv) on month 18, final payment in the amount of $765,000. In connection
with the execution of the License Agreement, two other agreements were also executed: (a) a Stock Purchase Rights Agreement, under
which the Company has the right, though not the obligation, to acquire 100% of the issued and outstanding shares of stock of ArcMail
from Welch (the right can be exercised over a period of 27-months); and, (b) a Business Covenants Agreement, under which ArcMail
and Welch agreed to not compete with the Company’s use of the ArcMail business under the License for a period of twenty
four (24) months.