ITEM
1. FINANCIAL STATEMENTS
LANDSTAR,
INC.
CONSOLIDATED
BALANCE SHEETS
March
31, 2018 and December 31, 2018
(Unaudited)
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
15,740
|
|
|
$
|
324,935
|
|
Accounts receivable
|
|
|
301,067
|
|
|
|
-
|
|
Inventory
|
|
|
192
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
3,333
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
320,332
|
|
|
|
326,435
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
3,825
|
|
|
|
-
|
|
Operating lease right-of-use assets, net
|
|
|
450,588
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets:
|
|
|
|
|
|
|
|
|
Intellectual property and licenses, net of accumulated amortization
|
|
|
2,980,277
|
|
|
|
1,788,333
|
|
Deposits
|
|
|
10,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,765,022
|
|
|
$
|
2,114,768
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
215,324
|
|
|
$
|
88,627
|
|
Payroll liabilities
|
|
|
16,525
|
|
|
|
-
|
|
Accrued consulting expense
|
|
|
87,500
|
|
|
|
87,500
|
|
Deferred revenues
|
|
|
302,682
|
|
|
|
28,951
|
|
Interest payable
|
|
|
69,551
|
|
|
|
43,394
|
|
Note payable
|
|
|
375,000
|
|
|
|
600,000
|
|
Convertible notes payable, net of unamortized discount
|
|
|
245,018
|
|
|
|
161,227
|
|
Derivative liability
|
|
|
4,131,500
|
|
|
|
12,447,109
|
|
Due to related party
|
|
|
295,071
|
|
|
|
287,084
|
|
License fee payable
|
|
|
355,000
|
|
|
|
-
|
|
Lease liability
|
|
|
40,039
|
|
|
|
-
|
|
Contingent liability
|
|
|
220,000
|
|
|
|
520,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,353,210
|
|
|
|
14,263,892
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Convertible notes payable, net of unamortized discount
|
|
|
323,201
|
|
|
|
158,250
|
|
License fee payable, net of current portion
|
|
|
855,000
|
|
|
|
-
|
|
Lease liability, net of current portion
|
|
|
438,419
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
7,969,830
|
|
|
|
14,422,142
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 50,000,000 shares authorized; 1,000,000 issued and outstanding as of December 31, 2018 and 2017
|
|
|
1,000
|
|
|
|
1,000
|
|
Common stock, $0.001 par value; 8,888,000,000 shares authorized; 6,282,678,714 and 5,112,210,803 issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
|
|
|
6,282,678
|
|
|
|
5,112,211
|
|
Additional paid-in capital
|
|
|
4,484,955
|
|
|
|
3,582,959
|
|
Accumulated deficit
|
|
|
(14,973,441
|
)
|
|
|
(21,003,544
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ deficit
|
|
|
(4,204,808
|
)
|
|
|
(12,307,374
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
3,765,022
|
|
|
$
|
2,114,768
|
|
See
the accompanying Notes, which are an integral part of these unaudited Financial Statements
LANDSTAR,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the three months ended March 31, 2019 and 2018
(Unaudited)
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
142,791
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
4,781
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
138,010
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
691,269
|
|
|
|
275,938
|
|
Sales and marketing
|
|
|
225,687
|
|
|
|
281,290
|
|
Research and development
|
|
|
4,205
|
|
|
|
24,872
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
921,161
|
|
|
|
582,100
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(783,151
|
)
|
|
|
(582,100
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(299,899
|
)
|
|
|
(1,644
|
)
|
Other income
|
|
|
-
|
|
|
|
10,477
|
|
Gain on contingent liability
|
|
|
300,000
|
|
|
|
-
|
|
Gain (loss) from change in fair value of derivative liability
|
|
|
6,813,153
|
|
|
|
(5,631,700
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,030,103
|
|
|
$
|
(6,204,967
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share,
basic
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
Net income (loss) per common share, basic and
diluted
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares, basic
|
|
|
5,549,531,779
|
|
|
|
3,947,676,982
|
|
Weighted-average common shares, basic and diluted
|
|
|
5,828,053,744
|
|
|
|
3,947,676,982
|
|
See
the accompanying Notes, which are an integral part of these unaudited Financial Statements
LANDSTAR,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the three months ended March 31, 2019 and 2018
(Unaudited)
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,030,103
|
|
|
$
|
(6,204,967
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
(Gain) loss from change in fair value of derivative liability
|
|
|
(6,813,153
|
)
|
|
|
5,631,700
|
|
Gain on contingent liability
|
|
|
(300,000
|
)
|
|
|
-
|
|
Consulting fees settled through common shares issuable
|
|
|
|
|
|
|
101,485
|
|
Loan interest amortization
|
|
|
273,742
|
|
|
|
-
|
|
Share-based compensation expense
|
|
|
45,007
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
253,196
|
|
|
|
-
|
|
Lease liability amortization
|
|
|
27,871
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
(1,833
|
)
|
|
|
(19,015
|
)
|
Accounts receivable
|
|
|
(301,067
|
)
|
|
|
-
|
|
Inventory
|
|
|
(192
|
)
|
|
|
-
|
|
Accounts payable
|
|
|
126,697
|
|
|
|
50,284
|
|
Deferred revenues
|
|
|
273,731
|
|
|
|
-
|
|
Accrued interest
|
|
|
26,157
|
|
|
|
1,644
|
|
Payroll liabilities
|
|
|
16,525
|
|
|
|
-
|
|
Due to related party
|
|
|
7,986
|
|
|
|
4,300
|
|
Deposits paid
|
|
|
(10,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(345,230
|
)
|
|
|
(434,569
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(3,965
|
)
|
|
|
-
|
|
Acquisitions of intellectual property and licenses
|
|
|
(235,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(238,965
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible notes payable
|
|
|
-
|
|
|
|
175,000
|
|
Payments of notes payable
|
|
|
(225,000
|
)
|
|
|
-
|
|
Proceeds from issuance of stock and member distributions
|
|
|
500,000
|
|
|
|
283,622
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
275,000
|
|
|
|
458,622
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(309,195
|
)
|
|
|
24,053
|
|
|
|
|
|
|
|
|
|
|
Cash as of beginning of period
|
|
|
324,935
|
|
|
|
4,478
|
|
|
|
|
|
|
|
|
|
|
Cash as of end of period
|
|
$
|
15,740
|
|
|
$
|
28,531
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid in the period for interest
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of convertible notes payable through issuance of common stock
|
|
$
|
25,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
See
the accompanying Notes, which are an integral part of these unaudited Financial Statements
LANDSTAR,
INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ DEFICIT
(Unaudited)
|
|
Convertible
Preferred Series A
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Total
Stockholder
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
|
1,000,000
|
|
|
$
|
1,000
|
|
|
|
5,112,210,803
|
|
|
$
|
5,112,211
|
|
|
$
|
3,582,959
|
|
|
$
|
(21,003,544
|
)
|
|
$
|
(12,307,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of stock subscriptions
|
|
|
-
|
|
|
|
-
|
|
|
|
252,016,130
|
|
|
|
252,016
|
|
|
|
(252,016
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants on stock subscriptions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(167,544
|
)
|
|
|
-
|
|
|
|
(167,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common issued to settle debt
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000,000
|
|
|
|
500,000
|
|
|
|
1,195,000
|
|
|
|
-
|
|
|
|
1,695,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,007
|
|
|
|
-
|
|
|
|
45,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
418,451,781
|
|
|
|
418,451
|
|
|
|
81,549
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,030,103
|
|
|
|
6,030,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2019
|
|
|
1,000,000
|
|
|
$
|
1,000
|
|
|
|
6,282,678,714
|
|
|
$
|
6,282,678
|
|
|
$
|
4,484,955
|
|
|
$
|
(14,973,441
|
)
|
|
$
|
(4,204,808
|
)
|
See
the accompanying Notes, which are an integral part of these unaudited Financial Statements
LANDSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD ENDING MARCH 31, 2019
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 March 31, 2019 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.
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 with
revenue recognized over the contract period or a single point in time. 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.
LANDSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD ENDING MARCH 31, 2019
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).
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 $45,000 in nonemployee share-based compensation expense for the three months ended March 31, 2019.
There was zero in share-based compensation expense for the three months ended March 31, 2018.
Determining
the appropriate fair value model and the related assumptions requires judgment. During the three months ended March 31, 2019, 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
|
|
|
187.55
|
%
|
Weighted-average risk-free interest rate
|
|
|
2.35
|
%
|
Expected life of options (years)
|
|
|
5.5
|
|
Weighted-average fair value per share
|
|
$
|
0.0033
|
|
LANDSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD ENDING MARCH 31, 2019
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.
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;
|
LANDSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD ENDING MARCH 31, 2019
|
●
|
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.
Derivative liability as of December 31, 2018
|
|
$
|
12,447,109
|
|
Additions of new derivatives recognized as day 1 loss
|
|
|
444,015
|
|
Settled upon conversion of debt (Derivative resolution)
|
|
|
(1,670,000
|
)
|
Reclassification from APIC to derivative due to tainted instruments
|
|
|
167,544
|
|
Loss on change in fair value of derivative liabilities
|
|
|
(7,257,168
|
)
|
|
|
|
|
|
Derivative liability as of March 31, 2019
|
|
$
|
4,131,500
|
|
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.
LANDSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD ENDING MARCH 31, 2019
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
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
. As a result of the adoption
of this amendment, we were not required to recognize any additional assets or liabilities from operating leases in effect as of
December 31, 2018; however, we recognized long-term assets of $460,000 and liabilities of $460,000 with the commencement of our
long-term operating lease in January 2019. See Note 4 for further information.
LANDSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD ENDING MARCH 31, 2019
NOTE
2:
|
LIQUIDITY AND
GOING CONCERN
|
The
accompanying consolidated financial statements have been prepared (i) in accordance with accounting principles generally accepted
in the United States, and (ii) assuming that the Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. The Company has 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 March 31, 2019, 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.
NOTE
3:
|
INTELLECTUAL
PROPERTY
|
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. 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. Rory Welch, the CEO of ArcMail (“
Welch
”),
shall continue to serve as ArcMail’s CEO. The Company has not purchased any outstanding shares under the Stock Purchase
Rights Agreement.
The
following table summarizes the components of the Company’s intellectual property as of the dates presented:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Intellectual property:
|
|
|
|
|
|
|
|
|
Wordpress GDPR rights
|
|
$
|
46,800
|
|
|
$
|
46,800
|
|
ARALOC™
|
|
|
1,850,000
|
|
|
|
1,850,000
|
|
ArcMail License
|
|
|
1,445,000
|
|
|
|
-
|
|
|
|
|
3,341,800
|
|
|
|
1,896,800
|
|
Accumulated amortization
|
|
|
(361,523
|
)
|
|
|
(108,467
|
)
|
Intellectual property, net of accumulated amortization
|
|
$
|
2,980,277
|
|
|
$
|
1,788,333
|
|
The
Company recognized amortization expense of approximately $253,000 and zero for the three months ended March 31, 2019 and 2018,
respectively.
We
have noncancelable operating leases for our office facility that expires in 2024. The operating lease has renewal options and
rent escalation clauses.
Lease
right-of-use assets represent the right to use an underlying asset pursuant to the lease for the lease term, and lease liabilities
represent the obligation to make lease payments arising from the lease. Lease right-of-use assets and lease liabilities are recognized
at the commencement of an arrangement where it is determined at inception that a lease exists. These assets and liabilities are
initially recognized based on the present value of lease payments over the lease term calculated using our estimated incremental
borrowing rate generally applicable to the location of the lease right-of-use asset, unless an implicit rate is readily determinable.
We combine lease and certain non-lease components in determining the lease payments subject to the initial present value calculation.
Lease right-of-use assets include upfront lease payments and exclude lease incentives, if applicable. When lease terms include
an option to extend the lease, we have not assumed the options will be exercised.
Lease
expense for operating leases generally consist of both fixed and variable components. Expense related to fixed lease payments
are recognized on a straight-line basis over the lease term. Variable lease payments are generally expensed as incurred, where
applicable, and include agreed-upon changes in rent, certain non-lease components, such as maintenance and other services provided
by the lessor, and other charges included in the lease. Leases with an initial term of twelve months or less are not recorded
on the balance sheet. We recognized total lease expense of approximately $35,000 for the three months ended March 31,
2019 primarily related to operating lease costs paid to lessors from operating cash flows. We entered into our operating lease
in January 2019.
LANDSTAR,
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD ENDING MARCH 31, 2019
Future
minimum lease payments under operating leases that have initial noncancelable lease terms in excess of one year at March 31, 2019
were as follows:
|
|
Total
|
|
|
|
|
|
2019
|
|
$
|
47,500
|
|
2020
|
|
|
120,000
|
|
2021
|
|
|
123,600
|
|
2022
|
|
|
127,300
|
|
2023
|
|
|
131,150
|
|
2024
|
|
|
45,033
|
|
|
|
|
594,583
|
|
Less: Imputed interest
|
|
|
(116,125
|
)
|
Operating lease liabilities
|
|
$
|
478,458
|
|
The
following table summarizes lease cost for the three months ended March 31, 2019:
|
|
Total
|
|
|
|
|
|
Operating lease cost
|
|
$
|
27,871
|
|
Short-term lease cost
|
|
|
6,730
|
|
Total lease cost
|
|
$
|
34,601
|
|
The
following summarizes other supplemental information about the Company’s operating lease as of March 31, 2019:
Weighted average discount rate
|
|
|
8.00
|
%
|
Weighted average remaining lease term (years)
|
|
|
5.0
|
|
NOTE
5:
|
CONVERTIBLE NOTES
PAYABLE
|
Convertible
notes payable consists of the following:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
|
|
|
|
|
|
|
1) Originated in October 2014
|
|
$
|
50,000
|
|
|
$
|
75,000
|
|
2) Originated in September 2017
|
|
|
985,000
|
|
|
|
985,000
|
|
3) Originated in October 2018
|
|
|
110,000
|
|
|
|
110,000
|
|
4) Originated in October 2018
|
|
|
220,000
|
|
|
|
220,000
|
|
|
|
|
1,365,000
|
|
|
|
1,390,000
|
|
Debt discount and debt issuance cost
|
|
|
(796,781
|
)
|
|
|
(1,070,523
|
)
|
|
|
|
568,219
|
|
|
|
319,477
|
|
Less current portion of convertible notes payable
|
|
|
245,018
|
|
|
|
161,227
|
|
Long-term convertible notes payable
|
|
$
|
323,201
|
|
|
$
|
158,250
|
|
During
the 3-months ended March 31, 2019 and 2018, the Company recognized interest expense of $299,899 and $1,644, and amortization of
debt discount, included in interest expense of $273,742 and $0, respectively.
Convertible
notes payable consists of the following
|
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 $50,000 and $125,000 as of March 31, 2019 and March 31, 2018, respectively. During
the three months ending March 31, 2019 Blue Citi converted $25,000 of this convertible note into 500,000,000 shares of common
stock. The embedded conversion feature in this note created a BCF totaling approximately $2,200,000 as of March 31, 2019.
|
|
|
|
|
2)
|
Convertible note
held by Blue Citi for a total principal of $985,000 as of March 31, 2019. 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 UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD ENDING MARCH 31, 2019
|
|
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
|
|
|
12 months
|
|
Expected stock price volatility
|
|
|
160
|
%
|
Weighted-average risk-free interest rate
|
|
|
2.40
|
%
|
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 three months ended March 31, 2019, $3,855,000 was recorded as the change in fair value of the derivative liability
within the consolidated statement of operations. As of March 31, 2019 a derivative liability totaling $2,200,000 was recorded.
|
|
3)
|
Convertible note
held by SMEA2Z, LLC for a total principal of $220,000 as of March 31, 2019. 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
|
|
|
4 months
|
|
Expected stock price volatility
|
|
|
165
|
%
|
Weighted-average risk-free interest rate
|
|
|
2.4
|
%
|
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 three months ended March 31, 2019, $558,853 was recorded as the change in fair value of the derivative liability within
the consolidated statement of operations. As of March 31, 2019, a derivative liability totaling $229,871 was recorded.
|
|
|
|
|
4)
|
Convertible note
held by AFT Funding Group, LLC for a total principal of $210,000 as of March 31, 2019. 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.
|
LANDSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD ENDING MARCH 31, 2019
|
|
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
|
|
|
4 months
|
|
Expected stock price volatility
|
|
|
169
|
%
|
Weighted-average risk-free interest rate
|
|
|
2.40
|
%
|
Expected dividend
|
|
$
|
0.00
|
|
|
|
As of March 31,
2019, a liability totaling $115,105 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 $43,113 included in the change in fair value of the derivative liability
within the consolidated statement of operations as of March 31, 2019.
|
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 March 31, 2019 and 2018, 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 March 31, 2019 and 2018, respectively, was 6,282,678,714 and 4,022,676,982.
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 March 31, 2019. These shares have not been included in the total number of
issued and outstanding shares reflected herein.
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.
LANDSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD ENDING MARCH 31, 2019
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.
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 March 31, 2019 and 2018, 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 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.
As
of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact its
view with regard to future realization of deferred tax assets. Beginning in 2018, the Company’s management determin
ed
that negative evidence outweighed the positive and established a full valuation allowance against its deferred tax assets, which
the Company continued to maintain as of December 31, 2018 and March 31, 2019.
NOTE
8:
|
SHARE-BASED
COMPENSATION
|
Stock
Options
During
the three months ended March 2019 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.
LANDSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD ENDING MARCH 31, 2019
The
following summarizes the stock option activity for the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Available for
|
|
|
Options
|
|
|
Exercise
|
|
|
|
Grant
|
|
|
Outstanding
|
|
|
Price
|
|
Balance as of January 1, 2019
|
|
|
-
|
|
|
|
135,319,554
|
|
|
$
|
0.0046
|
|
Authorization of awards
|
|
|
23,234,237
|
|
|
|
-
|
|
|
|
-
|
|
Grants of stock options
|
|
|
(23,234,237
|
)
|
|
|
23,234,237
|
|
|
|
0.0034
|
|
Cancelled stock options
|
|
|
-
|
|
|
|
(15,131,579
|
)
|
|
|
0.0028
|
|
Balance as of March 31, 2019
|
|
|
-
|
|
|
|
143,422,212
|
|
|
$
|
0.0047
|
|
The
weighted average grant date fair value of stock options granted during the three months ended March 31, 2019 was $0.0022. The
total fair value of stock options that vested during the three months ended March 31, 2019 was approximately $64,000. The fair
value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following
weighted average assumptions for stock options granted during the three months ended March 31, 2019:
Expected term (years)
|
|
|
5.5
|
|
Expected stock price volatility
|
|
|
187.55
|
%
|
Weighted-average risk-free interest rate
|
|
|
2.35
|
%
|
Expected dividend
|
|
$
|
0.00
|
|
Volatility
is a measure of the amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected
to fluctuate (expected volatility) during a period. The Company estimates expected volatility giving primary consideration
to the historical volatility of its common stock. The risk-free interest rate is based on the published yield available on
U.S. Treasury issues with an equivalent term remaining equal to the expected life of the stock option. The expected lives
of the stock options represent the estimated period of time until exercise or forfeiture and are based on the simplified method
of using the mid-point between the vesting term and the original contractual term.
The
following summarizes certain information about stock options vested and expected to vest as of March 31, 2019:
|
|
|
|
|
Weighted-Average
|
|
|
Weighted-
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
Number of
|
|
|
Contractual Life
|
|
|
Exercise
|
|
|
|
Options
|
|
|
(In Years)
|
|
|
Price
|
|
Outstanding
|
|
|
143,422,212
|
|
|
|
9.53
|
|
|
$
|
0.0047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
27,437,989
|
|
|
|
8.85
|
|
|
|
0.0027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest
|
|
|
115,984,223
|
|
|
|
9.69
|
|
|
$
|
0.0052
|
|
As
of March 31, 2019, there was approximately $324,000 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements which is expected to be recognized within the next twelve months.
Restricted
Stock Awards
During
the three months ended March 31, 2019, 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 three months ended March 31, 2019:
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested as of January 1, 2019
|
|
|
99,876,158
|
|
|
$
|
0.0051
|
|
Vested
|
|
|
(32,142,857
|
)
|
|
|
0.0014
|
|
Cancelled
|
|
|
(5,056,180
|
)
|
|
|
0.0014
|
|
Shares of restricted stock reserved
|
|
|
39,130,434
|
|
|
|
0.0023
|
|
Non-vested as of March 31, 2019
|
|
|
101,807,555
|
|
|
|
0.0050
|
|
As
of March 31, 2019, there was approximately $229,000 of total unrecognized compensation cost related to non-vested share-based
compensation, which is expected to be recognized within the next twelve months.
NOTE
9:
|
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 March 2019.
LANDSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD ENDING MARCH 31, 2019
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 March 31, 2019. 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 recorded
as of March 31 2019 is follows:
Contingent liability for common shares issuable:
|
|
|
|
|
|
|
|
|
|
Original liability on date of agreement
|
|
$
|
1,220,000
|
|
Gain on contingent liability in 2018
|
|
|
(700,000
|
)
|
Balance as of December 31, 2018
|
|
|
520,000
|
|
Gain on contingent liability through March 31, 2019
|
|
|
(300,000
|
)
|
Contingent liability for common shares issuable as of March 31, 2019
|
|
$
|
520,000
|
|
As
of December 31, 2018 the Company had recorded a liability of approximately $287,000 for certain advances Mr. Remillard made to
the Company. These advances in 2018 and 2017 of approximately $181,000 and $106,000 in net, respectively, were to be used for
operating purposes. As of March 31, 2019, the Company has recorded a total liability of approximately $295,000, including an additional
net amount of approximately $8,000 advanced during the period.
NOTE
10:
|
NET
INCOME PER COMMON SHARE
|
Basic
net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during
the periods. Diluted net income per common share is computed using the weighted average number of common and dilutive common equivalent
shares outstanding during the periods. Common equivalent shares consist of stock options, unvested restricted shares, and outstanding
warrants that are computed using the treasury stock method. Antidilutive stock awards consist of stock options that would have
been antidilutive in the application of the treasury stock method.
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,030,103
|
|
|
$
|
(6,204,967
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
5,549,531,779
|
|
|
|
4,033,343,649
|
|
Effect of dilutive shares
|
|
|
278,521,965
|
|
|
|
-
|
|
Diluted
|
|
|
5,828,053,744
|
|
|
|
4,033,343,649
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
For the three months ended March 31, 2019 and 2018 stock options to purchase 134,582,404 and 27,363,989 shares,
respectively, were excluded from the computation of diluted net income per common share because the exercise price of the stock
options was greater than the average market price of the common shares or the effect of inclusion of such amounts would be anti-dilutive
to net income per common share. For the three months ended March 31, 2019 and 2018, no restricted shares that were issued but not
yet vested were excluded from the computation of diluted net income per common share.
NOTE
11:
|
SUBSEQUENT EVENTS
|
On
15 April 2019 the Company closed a financing transaction under which a Convertible Promissory Note (the “
Note
”)
in the aggregate principal amount of $600,000.00 (the “
Principal Amount
”), and received gross proceeds of $546,000.00
(excluded were legal fees and a transaction fee charged by the lender Auctus Fund, LLC). The Note may be converted into shares
of the Company’s common stock in whole or in part at any time from time to time after the four (4) month anniversary of
the issuance of the Note, at an initial conversion price per share equal to the lesser of: (a) $0.0015; or, (b) 50% multiplied
by the lowest trading price for the Company’s common stock during the 25-days of trading ending on the latest complete trading
day prior to the date of conversion. The Conversion Price is subject to adjustment for stock splits, reverse stock splits, stock
dividends and other similar transactions and terms. The Company also granted to the lender warrants to purchase 60,000,000 shares
of Common Stock at $0.005 per share, with a cashless exercise feature. The Note and the Warrants were issued in reliance on the
exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar
exemptions under applicable state laws.
On
15 April 2019 the Company converted $20,000 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.
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, 2019
and 2018 should be read in conjunction with our consolidated financial statements, and the notes to those financial statements
that are included elsewhere in this Quarterly Report.
All
references to “LandStar”, “we”, “our,” “us” and the “Company” in this
Item 7 refer to LandStar, Inc.
The
discussion in this section contains forward-looking statements. These statements relate to future events or our future financial
performance. We have attempted to identify forward-looking statements by terminology such as “anticipate,” “believe,”
“can,” “continue,” “could,” “estimate,” “expect,” “intend,”
“may,” “plan,” “potential,” “predict,” “should,” “would”
or “will” or the negative of these terms or other comparable terminology, but their absence does not mean that a statement
is not forward-looking. These statements are only predictions and involve known and unknown risks, uncertainties and other factors,
which could cause our actual results to differ from those projected in any forward-looking statements we make. Several risks and
uncertainties we face are discussed in more detail under “Risk Factors” in Part I, Item 1A of the Form 10 filed by
the Company with the SEC on 11 January 2019, or in the discussion and analysis below. You should, however, understand that it
is not possible to predict or identify all risks and uncertainties and you should not consider the risks and uncertainties identified
by us to be a complete set of all potential risks or uncertainties that could materially affect us. You should not place undue
reliance on the forward-looking statements we make herein because some or all of them may turn out to be wrong. We undertake no
obligation to update any of the forward-looking statements contained herein to reflect future events and developments, except
as required by law. The following discussion should be read in conjunction with the consolidated financial statements and the
notes to those statements included elsewhere in this Quarterly Report on Form 10-Q.
Overview
LandStar,
Inc. was incorporated as a Nevada corporation on May 4, 1998, for the purpose of purchasing, developing and reselling real property,
with its principal focus on the development of raw land. From incorporation through December 31, 1998, LandStar had no business
operations and was a development-stage company. LandStar did not purchase or develop any properties and decided to change its
business plan and operations. On March 31, 1999, the Company acquired approximately 98.5% of the common stock of Rebound Rubber
Corp. pursuant to a share exchange agreement with Rebound Rubber Corp. (“
Rebound Rubber
”) and substantially
all of Rebound Rubber’s shareholders. The acquisition was effected by issuing 14,500,100 shares of common stock, which constituted
14.5% of the 100,000,000 authorized shares of LandStar, and 50.6% of the 28,622,100 issued and outstanding shares on completion
of the acquisition. The acquisition was treated for accounting purposes as a continuation of Rebound Rubber under the LandStar
capital structure. If viewed from a non-consolidated perspective, on March 31, 1999 LandStar issued 14,500,100 shares for the
acquisition of the outstanding shares of Rebound Rubber.
The
share exchange with Rebound Rubber (and other transactions occurring in March 1999) resulted in a change of control of LandStar
and the appointment of new officers and directors of the Company. These transactions also redefined the focus of the Company on
the development and exploitation of the technology to de-vulcanize and reactivate recycled rubber for resale as a raw material
in the production of new rubber products. The Company’s business strategy was to sell the de-vulcanized material (and compounds
using the materials) to manufacturers of rubber products.
Prior
to 2001 the Company had no revenues. In 2001 and 2002 revenues were derived from management services rendered to a rubber recycling
company.
In
August 2001 the Company amended its Articles of Incorporation to authorize 500,000,000 shares of common stock, $0.001 par value;
and, 150,000,000 shares of preferred stock, $0.01 par value. Preferred stock. Preferred shares could be designated into specific
classes and issued by action of the Company’s Board of Directors. In May 2008 the Company’s Board established a class
of Convertible Preferred Series A (the “
Series A
”), authorizing 10,000,000 shares. The Series A provided for,
among other things, (i) each share of Series A was convertible into 1,000 shares of the Company’s common stock; and, (ii)
a holder of Series A was entitled to vote 1,000 shares of common stock for each share of Series A on all matters submitted to
a vote by shareholders.
In
September 2008 the Company amended its Articles to increase the number of authorized shares to 985,000,000, $0.001 par value.
In January 2009 the Company amended its Articles to increase the number of authorized shares to 4,000,000,000, $0.001 par value.
In January 2010 the Company once again amended its Articles to increase the number of authorized shares to 8,888,000,000, $0.001
par value.
The
Company’s last filing of financial information with the SEC was the Form 10-QSB it filed on December 19, 2002 for the quarter
ended 30 September 2002. No other filings were effected with the SEC until the Company filed a Form 15 May 19, 2008, which terminated
the Company’s filing obligations with SEC.
The
Company was effectively dormant for a number of years. In or around February 2014 there was a change in control when Kevin Hayes
acquired 1,000,000 shares of the Series A, and was appointed as the sole director and officer. In or around April 2017 there was
another change in control when Kevin Hayes sold the 1,000,000 shares of Series A to Hybrid Titan Management, which then proceeded
to assign the Series A to William Alessi. Mr. Alessi was then appointed as the sole director and officer of the Company. Mr. Alessi
initiated legal action in his home state of North Carolina to confirm, among other things, his ownership of the Series A; his
“control” over the Company; and, the status of creditors of the Company. In or around June 2017 the court entered
judgment in favor of Mr. Alessi.
In
or around July 2017, while under the majority ownership and management of Mr. Alessi, the Company sought to effect a merger transaction
(the “
Merger
”) under which the Company would be merged into Data443 Risk Mitigation, Inc. (“
Data443
”).
Data443 was formed as a North Carolina corporation in July 2017 under the original name LandStar, Inc. The name of the North Carolina
corporation was changed to Data443 in December 2017. In November 2017 the controlling interest in the Company was acquired by
our current chief executive officer and sole board member, Jason Remillard, when he acquired all of the Series A shares from Mr.
Alessi. In that same transaction Mr. Remillard also acquired all of the shares of Data443 from Mr. Alessi. Mr. Remillard was then
appointed as the sole director and sole officer of the Company, and of Data443. Initially, Mr. Remillard sought to recognize the
Merger initiated by Mr. Alessi and respect the results of the Merger. The Company relied upon documents previously prepared and
proceeded as if the Merger had been effected.
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 30 June 2018.
In
April 2018 the Company amended the designation for its Series A Preferred Stock by providing that a holder of Series A was entitled
to (i) vote 15,000 shares of common stock for each share of Series A on all matters submitted to a vote by shareholders; and,
(ii) convert each share of Series A into 1,000 shares of our common stock.
In
May 2018 the Company amended and restated its Articles of Incorporation. The total authorized number of shares is: 8,888,000,000
shares of common stock, $0.001 par value; and, 50,000,000 shares of preferred stock, $0.001 par value, designated in the discretion
of the Board of Directors. The Series A remains in full force and effect.
In
June 2018, after careful analysis and in reliance upon professional advisors retained by the Company, it was determined that the
Merger had, in fact, not been completed, and that the Merger was not in the best interests of the Company and its shareholders.
As such, the Merger was legally terminated. In place of the Merger, in June 2018 the Company acquired all of the issued and outstanding
shares of stock of Data443 (the “
Share Exchange
”). 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 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.
On
or about 29 June 2018 we secured the rights to the WordPress GDPR Framework through our wholly owned subsidiary Data443 for a
total consideration of €40,001, or $46,521, payable in four payments of €10,000, with the first payment due at closing,
and the remaining payments issuable at the end of July, August and September, 2018. All of the payments were made and upon issuance
of the final payment, we have the right to enter into an asset transfer agreement for the nominal cost of one euro (€1).
On
or about October 22, 2018 we entered into an asset purchase agreement with Modevity, LLC (“Modevity”) to acquire certain
assets collectively known as ARALOC™, a software-as-a service (“SaaS”) platform that provides cloud-based data
storage, protection, and workflow automation. The acquired assets consist of intellectual and related intangible property including
applications and associated software code, and trademarks. While the Company did not acquire any of the customers or customer
contracts of Modevity, the Company did acquire access to books and records related to the customers and revenues Modevity created
on the ARALOC™ platform as part of the asset purchase agreement. These assets were substantially less than the total assets
of Modevity, and revenues from the platform comprised a portion of the overall sales of Modevity. We are required to create the
technical capabilities to support the ongoing operation of this SaaS platform. A substantial effort on the part of the Company
is needed continue generating ARALOC™ revenues through development of a sales force, as well as billing and collection processes.
We paid Modevity (i) $200,000 in cash; (ii) $750,000, in the form of our 10-month promissory note; and, (iii) 164,533,821 shares
of our common stock.
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. 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. Rory Welch, the CEO of ArcMail (“
Welch
”),
shall continue to serve as ArcMail’s CEO. The Company has not purchased any outstanding shares under the Stock Purchase
Rights Agreement.
Recent
Accounting Pronouncements
From
time-to-time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other
standard setting bodies, relating to the treatment and recording of certain accounting transactions. Unless otherwise discussed
herein, management of the Company has determined that these recent accounting pronouncements will not have a material impact on
the financial position or results of operations of the Company.
Critical
Accounting Policies
Critical
Accounting Policies and Significant Judgments and Estimates
Our
management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial
statements which we have been prepared in accordance with U.S. generally accepted accounting principles. In preparing our consolidated
financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting periods.
Critical
accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact
of the estimate on financial condition or operating performance is material.
These
significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached
to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the
consolidated financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management
regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes
in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those
estimates are adjusted accordingly.
Actual
results could differ from those estimates.
While
our significant accounting policies are described in more detail in Note 2 of our consolidated Quarterly financial statements
included in this Quarterly Report, we believe the following accounting policies to be critical to the judgments and estimates
used in the preparation of our consolidated financial statements:
Assumption
as a Going Concern
Management
assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets,
and liquidation of liabilities in the normal course of business. However, given our current financial position and lack of liquidity,
there is substantial doubt about our ability to continue as a going concern.
Convertible
Financial Instruments
The
Company bifurcates conversion options from their host instruments and accounts for them as free standing derivative financial
instruments if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks
of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host
contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured
at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings
as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative
instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under
applicable GAAP.
When
the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, discounts
are recorded for the intrinsic value of conversion options embedded in the instruments based upon the differences between the
fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded
in the instrument.
Beneficial
Conversion Feature
The
issuance of the convertible debt issued by the Company (described in Note 3 to the Consolidated Financial Statements) generated
a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion
option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price
that is less than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating
the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied
by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment
date, resulting in a discount on the convertible debt (recorded as a component of additional paid in capital).
Fair
Value of Financial Instruments
The
Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial
instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”)
to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value
in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37
establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three
(3) broad levels. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
|
Level
1:
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Quoted market prices
available in active markets for identical assets or liabilities as of the reporting date.
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|
|
|
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Level 2:
|
Pricing inputs other
than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting
date.
|
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Level 3:
|
Pricing inputs that
are generally unobservable inputs and not corroborated by market data.
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Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
Transactions
involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of
competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply
that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions
unless such representations can be substantiated.
Stock-Based
Compensation
We
measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For
employees and directors, the fair value of the award is measured on the grant date. For non-employees, as per ASU No. 2018-7,
Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,
remeasurement
is not required. The fair value amount is then recognized over the period during which services are required to be provided in
exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by us in the same expense classifications
in the consolidated statements of operations, as if such amounts were paid in cash.
Deferred
Tax Assets and Income Taxes Provision
The
Company adopted the provisions of paragraph 740-10-25-13 of the FASB Accounting Standards Codification. Paragraph 740-10-25-13
which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded
in the consolidated financial statements. Under paragraph 740-10-25-13, the Company may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such
a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized
upon ultimate settlement. Paragraph 740-10-25-13 also provides guidance on de-recognition, classification, interest and penalties
on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to
its liabilities for unrecognized income tax benefits according to the provisions of paragraph 740-10-25-13.
The
estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying
balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred
tax assets recorded on its balance sheets and provides valuation allowances as management deems necessary.
Management
makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous
estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in
these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual
taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Management
assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”)
carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more
likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance.
Management made this assumption based on (a) the Company has incurred recurring losses and presently has no revenue-producing
business; (b) general economic conditions; and, (c) its ability to raise additional funds to support its daily operations by way
of a public or private offering, among other factors.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2019 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2018
Revenue
We
recognized $143,000 of revenue during the three months ended March 31, 2019, compared to zero revenue for the three months
ended March 31, 2018. We had net billings for the three months ended March 31, 2019 of $417,000 compared to zero in the
prior year period. Deferred revenues are $303,000 as of March 31, 2019, an increase of $274,000 from $29,000 as of December 31,
2018.
General
and Administrative Expenses
General
and administrative expenses for the three months ended March 31, 2019 amounted to $691,000 as compared to $276,000 for the three
months ended year ended March 31, 2018, an increase of $415,000, or 150%. The expenses for the three months ended March 31, 2019
primarily consisted of management costs, costs to integrate assets we acquired and to expand sales, audit and review fees, filing
fees, professional fees, and other expenses, including the re-classification of sales-related management expenses, in connection
with the projected growth of the Company’s business. Expenses for the three months ended March 31, 2018 consisted of primarily
the same items with the exception of costs to integrate assets we acquired.
Sales
and Marketing Expenses
Sales
and marketing expense for the three months ended March 31, 2019 amounted to $226,000 as compared to $281,000 for the three months
ended year ended March 31, 2018, a decrease of $55,000, or 20%. The expenses for the three months ended March 31, 2019 primarily
consisted of developing a sales operation, with some previously reported expenses, primarily management costs, reclassified to
general and administrative expenses. Expenses for the three months ended March 31, 2018 consisted of primarily the same items
with the exception of previously mentioned costs reclassified to general and administrative expenses.
Net
Gain and Loss
The
net gain for the three months ended March 31, 2019 was $6,030,000 as compared to a loss of $6,205,000 for the three months ended
March 31, 2018. The net gain for the three months ended March 31, 2019 was mainly derived from a gain on change in fair value
of derivative liability of $6,813,000 associated with convertible notes payable and gross margins of $138,000, offset in part
by general and administrative, and sales and marketing expenses incurred. The net loss for the three months ended March 31, 2018
was mainly derived from the loss on change in fair value of derivative liability of $5,632,000 associated with convertible notes
payable, as well as general and administrative, and sales and marketing expenses incurred.
Provision
for Income Tax
No
provision for income taxes was recorded in either the three months ended March 31, 2019 or 2018, as we have incurred taxable losses
in both periods.
Related
Party Transactions
The
following individuals and entities have been identified as related parties based on their affiliation with our CEO and sole director,
Jason Remillard:
Jason
Remillard
Myriad
Software Productions, LLC
The
following amounts were owed to related parties, affiliated with the CEO and Chairman of the Board, at the dates indicated:
|
|
March 31, 2019
|
|
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December 31, 2018
|
|
Jason Remillard
|
|
$
|
295,071
|
|
|
$
|
287,084
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CASH
FLOW FOR THE THREE MONTHS ENDED MARCH 31, 2019 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2018
Liquidity
and Capital Resources
We
require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of
March 31, 2019, our principal sources of liquidity were cash or cash equivalents of $16,000, trade accounts receivable of $301,000,
and other current assets of $3,000, as compared to cash or cash equivalents of $325,000, zero trade accounts receivable, and other
current assets of $1,000 as of December 31, 2018.
During
the last two years, and through the date of this Quarterly Report, we have faced an increasingly challenging liquidity situation
that has severely limited our ability to execute our operating plan. We have generated no revenue until the fourth quarter of
2018, though we have actively prepared to initiate business in the data security market. We have also been required to maintain
our corporate existence; satisfy the requirements of being a public company; and, have chosen to become a mandatory filer with
the SEC. We will need to obtain capital to continue operations. There is no assurance that our Company will be able to secure
such funding on acceptable (or any) terms. During the three months ended March 2019 and 2018, we reported a loss from operations
of $783,000 and $582,000, respectively; and, had negative cash flows from operating activities totaling $345,000 and $435,000,
respectively, for the same periods. We had a beginning cash balance of $325,000 as of January 01, 2019, and a beginning cash balance
of $4,000 as of January 01, 2018.
As
of March 31, 2019, we had assets of cash in the amount of $16,000 and other current assets in the amount of $304,000. As of March
31, 2019, we had current liabilities of $7,168,000. The Company’s accumulated deficit was $14,973,000.
As
of March 31, 2018, we had assets of cash in the amount of $29,000, and other current assets in the amount of 19,000. As March
31, 2018, we had current liabilities of $6,542,000. The Company’s accumulated deficit was $12,117,000.
The
revenues, if any, generated from our acquisitions alone will not be sufficient to fund our operations or 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 the Company can attract additional investment,
the future of the Company operating as a going concern is in serious doubt.
We
are now obligated to file annual, quarterly and current reports with the SEC pursuant to the Exchange Act. In addition, the Sarbanes-Oxley
Act of 2002 (“
Sarbanes-Oxley
”) and the rules subsequently implemented by the SEC and the Public Company Accounting
Oversight Board have imposed various requirements on public companies, including requiring changes in corporate governance practices.
We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities of ours
more time- consuming and costly. In order to meet the needs to comply with the requirements of the Securities Exchange Act, we
will need investment of capital.
Management
has determined that additional capital will be required in the form of equity or debt securities. There is no assurance that management
will be able to raise capital on terms acceptable to the Company.
If
we are unable to obtain sufficient amounts of additional capital, we may have to cease filing the required reports and cease operations
completely. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or
future obligations, the percentage ownership of our shareholders will be reduced, shareholders may experience additional dilution,
or the equity securities may have rights preferences or privileges senior to the common stock.
Investing
Activities
During
the three months ended March 31, 2019, we used funds in investing activities of $235,000 to acquire an exclusive license for software
and $4,000 to acquire furniture and fixtures. We did not use, nor were any funds provided by investing activities for the three
months ended March 31, 2018.
Financing
Activities
During
the three months ended March 31, 2019 we raised $500,000 through the issuance of 418,451,781 shares of our common stock and warrants
to acquire 218,413,977 shares of our common stock, and repaid $225,000 on a note payable. By comparison, during the three months
ended March 31, 2018, we raised $175,000 by way of a convertible note and net financed $284,000 primarily through issuances of
stock subscriptions.
We
are dependent upon the receipt of capital investment or other financing to fund our ongoing operations and to execute our business
plan of seeking a combination with a private operating company. In addition, we are dependent upon our controlling shareholder
to provide continued funding and capital resources. If continued funding and capital resources are unavailable at reasonable terms,
we may not be able to implement our plan of operations.
Going
Concern
The
consolidated financial statements accompanying this Quarterly Report have been prepared on a going concern basis, which implies
that our company will continue to realize its assets and discharge its liabilities and commitments in the normal course of business.
Our Company has generated very limited revenues since inception and has never paid any dividends and is unlikely to pay dividends
or generate earnings in the immediate or foreseeable future. The continuation of our company as a going concern is dependent upon
the ability of our company to obtain necessary financing to achieve our operating objectives, and the attainment of profitable
operations. As of March 31, 2019, our Company has an accumulated deficit of $14,973,441. We do not have sufficient working
capital to enable us to carry out our plan of operation for the next twelve months.
Due
to the uncertainty of our ability to meet our current operating expenses and the capital expenses noted in their report on the
consolidated financial statements for the year ended December 31, 2018, our independent auditors included an explanatory paragraph
regarding concerns about our ability to continue as a going concern. Our consolidated financial statements contain additional
note disclosures describing the circumstances that lead to this disclosure by our independent auditors.
The
continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity or debt
securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial
loans, assuming those loans would be available, will increase our liabilities and future cash commitments. There can be no assurance
that the Company will be able to raise any additional capital.
Off-Balance
Sheet Arrangements
There
are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that are material to investors.
Management’s
Plans
Our
plan is to continue to grow our business through strategic acquisitions, and then expand selling across our subsidiaries and affiliated
companies. During the next twelve months, we anticipate incurring costs related to (i) filing of Exchange Act reports; and, (ii)
operating our businesses. We will require additional operating capital to maintain and continue operations. We will need to raise
additional capital through debt or equity financing, and there is no assurance we will be able to raise the necessary capital.