ITEM
1. FINANCIAL STATEMENTS
LANDSTAR,
INC.
CONSOLIDATED
BALANCE SHEETS
June
30, 2019 and December 31, 2018
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
240,757
|
|
|
$
|
324,935
|
|
Accounts receivable
|
|
|
494,740
|
|
|
|
-
|
|
Inventory
|
|
|
8,301
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
18,097
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
761,895
|
|
|
|
326,435
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
64,697
|
|
|
|
-
|
|
Operating lease right-of-use assets, net
|
|
|
432,317
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets:
|
|
|
|
|
|
|
|
|
Intellectual property, net of accumulated amortization
|
|
|
2,646,944
|
|
|
|
1,788,333
|
|
Deposits
|
|
|
18,456
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,924,309
|
|
|
$
|
2,114,768
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
297,591
|
|
|
$
|
88,627
|
|
Payroll liabilities
|
|
|
17,368
|
|
|
|
-
|
|
Accrued consulting expense
|
|
|
87,500
|
|
|
|
87,500
|
|
Deferred revenues
|
|
|
426,818
|
|
|
|
28,951
|
|
Interest payable
|
|
|
23,986
|
|
|
|
43,394
|
|
Note payable
|
|
|
150,000
|
|
|
|
600,000
|
|
Convertible notes payable, net of unamortized discount
|
|
|
1,531,498
|
|
|
|
161,227
|
|
Derivative liability
|
|
|
-
|
|
|
|
12,447,109
|
|
Due to related party
|
|
|
307,854
|
|
|
|
287,084
|
|
License fee payable
|
|
|
405,000
|
|
|
|
-
|
|
Operating lease liability
|
|
|
61,012
|
|
|
|
-
|
|
Finance lease liability
|
|
|
22,233
|
|
|
|
-
|
|
Contingent liability
|
|
|
70,000
|
|
|
|
520,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,400,860
|
|
|
|
14,263,892
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Convertible notes payable, net of unamortized discount
|
|
|
-
|
|
|
|
158,250
|
|
License fee payable, net of current portion
|
|
|
775,000
|
|
|
|
-
|
|
Finance lease liability
|
|
|
38,303
|
|
|
|
-
|
|
Operating lease liability, net of current portion
|
|
|
417,046
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,631,209
|
|
|
|
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; 15,000,000,000 shares authorized; 7,282,678,714 and 5,112,210,803 issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
|
|
|
7,282,678
|
|
|
|
5,112,211
|
|
Additional paid-in capital
|
|
|
5,789,235
|
|
|
|
3,582,959
|
|
Accumulated deficit
|
|
|
(13,779,813
|
)
|
|
|
(21,003,544
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ deficit
|
|
|
(706,900
|
)
|
|
|
(12,307,374
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
3,924,309
|
|
|
$
|
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 and six months ended June 30, 2019 and 2018
(Unaudited)
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
358,612
|
|
|
$
|
-
|
|
|
$
|
501,403
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
5,153
|
|
|
|
-
|
|
|
|
9,934
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
353,459
|
|
|
|
-
|
|
|
|
491,469
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
-
|
|
|
|
42,596
|
|
|
|
4,205
|
|
|
|
67,469
|
|
General and administrative
|
|
|
1,210,618
|
|
|
|
1,803,589
|
|
|
|
1,901,887
|
|
|
|
2,079,527
|
|
Sales and marketing
|
|
|
155,907
|
|
|
|
501,674
|
|
|
|
381,594
|
|
|
|
782,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,366,525
|
|
|
|
2,347,860
|
|
|
|
2,287,686
|
|
|
|
2,929,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,013,066
|
)
|
|
|
(2,347,860
|
)
|
|
|
(1,796,217
|
)
|
|
|
(2,929,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(363,928
|
)
|
|
|
(5,508
|
)
|
|
|
(663,827
|
)
|
|
|
(7,152
|
)
|
Other income
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
|
|
10,511
|
|
Gain on contingent liability
|
|
|
150,000
|
|
|
|
-
|
|
|
|
450,000
|
|
|
|
-
|
|
Gain (loss) on change in fair value of derivative liability
|
|
|
2,420,622
|
|
|
|
893,100
|
|
|
|
9,233,775
|
|
|
|
(4,738,600
|
)
|
Total other income (expense)
|
|
|
2,206,694
|
|
|
|
887,626
|
|
|
|
9,019,948
|
|
|
|
(4,735,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,193,628
|
|
|
$
|
(1,460,234
|
)
|
|
$
|
7,223,731
|
|
|
$
|
(7,665,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic and diluted
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares, basic
|
|
|
6,876,085,307
|
|
|
|
4,123,764,894
|
|
|
|
6,257,909,520
|
|
|
|
4,078,389,689
|
|
Weighted-average common shares, diluted
|
|
|
7,370,381,670
|
|
|
|
4,123,764,894
|
|
|
|
6,729,688,957
|
|
|
|
4,078,389,689
|
|
See
the accompanying Notes, which are an integral part of these unaudited Financial Statements
LANDSTAR,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the six months ended June 30, 2019 and 2018
(Unaudited)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,223,731
|
|
|
$
|
(7,665,201
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
(Gain) loss from change in fair value of derivative liability
|
|
|
(9,233,775
|
)
|
|
|
4,738,600
|
|
Gain on contingent liability
|
|
|
(450,000
|
)
|
|
|
-
|
|
Consulting fees settled through common shares issuable
|
|
|
|
|
|
|
407,322
|
|
Loan interest amortization
|
|
|
677,021
|
|
|
|
-
|
|
Share-based compensation expense
|
|
|
363,409
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
592,309
|
|
|
|
-
|
|
Lease liability amortization
|
|
|
55,742
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
(16,597
|
)
|
|
|
(19,230
|
)
|
Accounts receivable
|
|
|
(494,740
|
)
|
|
|
-
|
|
Inventory
|
|
|
(8,301
|
)
|
|
|
-
|
|
Accounts payable
|
|
|
208,964
|
|
|
|
533,437
|
|
Deferred revenues
|
|
|
397,867
|
|
|
|
-
|
|
Accrued interest
|
|
|
(19,408
|
)
|
|
|
7,152
|
|
Payroll liabilities
|
|
|
17,368
|
|
|
|
-
|
|
Due to related party
|
|
|
20,769
|
|
|
|
(12,966
|
)
|
Deposits paid
|
|
|
(18,456
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(684,097
|
)
|
|
|
(2,010,887
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(4,629
|
)
|
|
|
-
|
|
Acquisitions of intellectual property and licenses
|
|
|
(265,000
|
)
|
|
|
(21,910
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(269,629
|
)
|
|
|
(21,910
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible notes payable
|
|
|
725,000
|
|
|
|
445,000
|
|
Capital lease payments
|
|
|
(5,452
|
)
|
|
|
-
|
|
Payments of notes payable
|
|
|
(450,000
|
)
|
|
|
-
|
|
Proceeds from issuance of common stock
|
|
|
600,000
|
|
|
|
1,645,503
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
869,548
|
|
|
|
2,090,503
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(84,178
|
)
|
|
|
57,706
|
|
|
|
|
|
|
|
|
|
|
Cash as of beginning of period
|
|
|
324,935
|
|
|
|
4,478
|
|
|
|
|
|
|
|
|
|
|
Cash as of end of period
|
|
$
|
240,757
|
|
|
$
|
62,183
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid in the period for interest
|
|
$
|
2,213
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of convertible notes payable through issuance of common stock
|
|
$
|
75,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000,000
|
|
|
|
500,000
|
|
|
|
1,195,000
|
|
|
|
-
|
|
|
|
1,695,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,007
|
|
|
|
-
|
|
|
|
45,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock subscriptions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
225,000
|
|
|
|
-
|
|
|
|
225,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants on stock subscriptions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250,878
|
|
|
|
-
|
|
|
|
250,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to settle debt
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000,000
|
|
|
|
1,000,000
|
|
|
|
510,000
|
|
|
|
-
|
|
|
|
1,510,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
318,402
|
|
|
|
-
|
|
|
|
318,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,193,628
|
|
|
|
1,193,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2019
|
|
|
1,000,000
|
|
|
$
|
1,000
|
|
|
|
7,282,678,714
|
|
|
$
|
7,282,678
|
|
|
$
|
5,789,235
|
|
|
$
|
(13,779,813
|
)
|
|
$
|
(706,900
|
)
|
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 JUNE 30, 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 June 30, 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 require consolidation of results with the reporting company, LandStar, Inc.,
from the time common control occurred. All intercompany accounts and activities have been eliminated. These consolidated financial
statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in
the United States of America (“U.S. GAAP”).
Interim
Financial Statements
These
unaudited consolidated financial statements have been prepared in accordance U.S. GAAP for interim financial information and with
the instructions to Form 10-Q and Regulation S-X. Accordingly, the consolidated financial statements do not include all of the
information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal
recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements
for the year ended December 31, 2018 and notes thereto and other pertinent information contained in our Form 10-K the Company
has filed with the Securities and Exchange Commission (the “SEC”) on April 12, 2019. The results of operations for
the three and six months ended June 30, 2019, are not necessarily indicative of the results to be expected for the full fiscal
year ending December 31, 2019.
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 Company’s contracts are for subscriptions to ArcMail and 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 ArcMail and ARALOC
TM
, hosting of the platform
and related services and are combined into a single performance obligation. New statements of work and modifications of contracts
are reviewed each reporting period and significant judgment is applied as to nature and characteristics of the new or modified
performance obligations on a contract by contract basis.
Convertible
Financial Instruments
The
Company bifurcates conversion options from their host instruments and accounts for them as free-standing derivative financial
instruments if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks
of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host
contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured
at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings
as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative
instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under
applicable U.S. GAAP.
When
the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, discounts
are recorded for the intrinsic value of conversion options embedded in the instruments based upon the differences between the
fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded
in the instrument.
Common
stock purchase warrants and derivative financial instruments
-
Common stock purchase warrants and other derivative
financial instruments are classified as equity if the contracts (1) require physical settlement or net-share settlement, or (2)
give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement).
Contracts which (1) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and
if that event is outside the control of the Company), (2) give the counterparty a choice of net-cash settlement or settlement
in shares (physical settlement or net-share settlement), or (3) that contain reset provisions that do not qualify for the scope
exception are classified as liabilities. The Company assesses classification of its common stock purchase warrants and other derivatives
at each reporting date to determine whether a change in classification between equity and liabilities is required.
Beneficial
Conversion Feature
- The issuance of the convertible debt described in Note 4, below, generated a beneficial conversion
feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is
beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less
than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic
value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference
between the effective conversion price per share and the fair value of common stock per share on the commitment date, resulting
in a discount on the convertible debt (recorded as a component of additional paid-in capital). The discount is amortized to interest
expense over the term of the convertible debt.
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 adopt ASU 2018-07 early. Under the requirements of ASU 2018-07, the Company accounts
for share-based compensation to non-employees under the fair value method which requires all such compensation to be calculated
based on the fair value at the measurement date (generally the grant date), and recognized in the statement of operations over
the requisite service period.
The
Company recorded approximately $363,000 in share-based compensation expense for the six months ended June 30, 2019, compared to
approximately $231,000 in share-based compensation expense for the six months ended June 30, 2018.
Determining
the appropriate fair value model and the related assumptions requires judgment. During the six months ended June 30, 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
|
|
|
175.86
|
%
|
Weighted-average risk-free interest rate
|
|
|
2.15
|
%
|
Expected life of options (years)
|
|
|
5.5
|
|
Weighted-average fair value per share
|
|
$
|
0.002
|
|
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, 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;
|
|
●
|
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)
|
|
|
(3,130,000
|
)
|
Reclassification from APIC to derivative liabilities due to tainted instruments
|
|
|
167,544
|
|
Reclassification to APIC to derivative liabilities due to non-tainted instruments
|
|
|
(250,878
|
)
|
Loss on change in fair value of derivative liabilities
|
|
|
(9,677,790
|
)
|
|
|
|
|
|
Derivative liability as of June 30, 2019
|
|
$
|
-
|
|
Segments
Operating
segments are defined as components of an enterprise engaging in business activities for which discrete financial information is
available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing
performance. The Company operates and manages its business as one operating segment and all of the Company’s revenues and
operations are currently in the United States.
Recently
Issued Accounting Pronouncements
In
August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-13,
Fair Value Measurement (Topic
820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
(“ASU 2018-13”).
ASU 2018-13 is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company,
the new standard will be effective on January 1, 2020. ASU 2018-13 modifies prior disclosure requirements for fair value measurement.
ASU 2018-13 removes certain disclosure requirements related to the fair value hierarchy, such as removing the requirement to disclose
the amount of and reasons for transfers between Level 1 and Level 2, modifies existing disclosure requirements related to measurement
uncertainty, and adds new disclosure requirements, such as disclosing the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurement. The Company is currently evaluating the impact of this new standard on
its consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-15,
Internal-Use Software (Subtopic 350-40)—Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
(“ASU 2018-15”). ASU
2018-15 is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company,
the new standard will be effective on January 1, 2020. ASU 2018-15 aligns the requirements for capitalizing implementation costs
incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred
to develop or obtain internal-use software (and hosting arrangements that include an internal use software license), by requiring
a customer in a cloud computing arrangement that is a service contract to capitalize certain implementation costs as if the arrangement
was an internal-use software project. The Company is currently evaluating the impact of this new standard and does not expect
ASU 2018-15 to have a material effect on its consolidated financial statements.
In
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
January 1, 2019; 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.
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 June 30, 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
February 7, 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 (iii) in month 18, final
payment in the amount of $765,000. As of June 30, 2019, the balance of payments due under the License Agreement was $1,180,000.
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 Rory Welch, the CEO of ArcMail (the right can be exercised over a period of 27 months); and (b) a Business
Covenants Agreement, under which ArcMail and Mr. Welch agreed to not compete with the Company’s use of the ArcMail business
under the License Agreement for a period of twenty-four (24) months. Mr. 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:
|
|
June 30, 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
|
|
|
(694,856
|
)
|
|
|
(108,467
|
)
|
Intellectual property, net of accumulated amortization
|
|
$
|
2,646,944
|
|
|
$
|
1,788,333
|
|
The
Company recognized amortization expense of approximately $333,000 and $586,000 for the three and six months ended June 30, 2019.
The company did not recognize any amortization expense for the six months ended June 30, 2018.
We
have noncancelable operating leases for our office facility that expire 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 and $70,000 for the three and six months ended
June 30, 2019, respectively, primarily related to operating lease costs paid to lessors from operating cash flows. We entered
into our operating lease in January 2019.
Future
minimum lease payments under operating leases that have initial noncancelable lease terms in excess of one year at June 30, 2019
were as follows:
|
|
Total
|
|
|
|
|
|
2019
|
|
$
|
37,500
|
|
2020
|
|
|
120,000
|
|
2021
|
|
|
123,600
|
|
2022
|
|
|
127,300
|
|
2023
|
|
|
131,150
|
|
2024
|
|
|
45,033
|
|
|
|
|
584,583
|
|
Less: Imputed interest
|
|
|
(106,524
|
)
|
Operating lease liabilities
|
|
$
|
478,059
|
|
The
following table summarizes lease cost for the six months ended June 30, 2019:
|
|
Total
|
|
|
|
|
|
Operating lease cost
|
|
$
|
55,742
|
|
Finance lease cost
|
|
|
13,503
|
|
Total lease cost
|
|
$
|
69,245
|
|
The
following summarizes other supplemental information about the Company’s operating lease as of June 30, 2019:
Weighted average discount rate
|
|
|
8.00
|
%
|
Weighted average remaining lease term (years)
|
|
|
4.75
|
|
NOTE
5:
|
CONVERTIBLE
NOTES PAYABLE
|
Convertible
notes payable consists of the following:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
|
|
|
|
|
|
|
1) Originated in October 2014
|
|
$
|
-
|
|
|
$
|
75,000
|
|
2) Originated in September 2017
|
|
|
1,083,500
|
|
|
|
985,000
|
|
3) Originated in October 2018
|
|
|
242,000
|
|
|
|
220,000
|
|
4) Originated in October 2018
|
|
|
121,000
|
|
|
|
110,000
|
|
5) Originated in April 2019
|
|
|
600,000
|
|
|
|
-
|
|
6) Originated in June 2019
|
|
|
63,000
|
|
|
|
-
|
|
|
|
|
2,109,500
|
|
|
|
1,390,000
|
|
Debt discount and debt issuance cost
|
|
|
(578,002
|
)
|
|
|
(1,070,523
|
)
|
|
|
|
1,531,498
|
|
|
|
319,477
|
|
Less current portion of convertible notes payable
|
|
|
1,531,498
|
|
|
|
161,227
|
|
Long-term convertible notes payable
|
|
$
|
-
|
|
|
$
|
158,250
|
|
During
the three and six months ended June 30, 2019, the Company recognized interest expense of $361,714 and $661,613, and amortization
of debt discount, included in interest expense of $275,779 and $549,521, respectively. During the three and six months ended June
30, 2018, the Company recognized interest expense of $5,508 and $7,152, with $0 amortization of debt discount included in interest
expense.
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 $0 as of June 30, 2019 and $75,000 as of December 31, 2018. During the six months ending
June 30, 2019 Blue Citi converted $75,000 of this convertible note into 1,500,000,000 shares of common stock.
|
|
|
|
|
2)
|
Convertible
note held by Blue Citi for a total principal of $1,083,500 as of June 30, 2019. On June 19, 2019, the Company and Blue Citi
entered into an Amendment and Forbearance Agreement. Under this agreement, Blue Citi agreed to forbear from enforcing its
rights under the note with regard to certain possible events of default, and further agreed to amend the note as follows:
|
|
a)
|
Blue
Citi can convert the note into shares of the Company’s common stock only upon the earlier of (i) February 2020
or (ii) any event of default under the note.
|
|
b)
|
The
face amount of the note was increased to $1,083,500.
|
|
c)
|
The
interest rate was increased to 12% per annum.
|
|
d)
|
The
conversion price shall be equal to 85% of the lesser of the lowest trading price of the Company’s common stock for (i)
the 20 days immediately preceding June 19, 2019 or (ii) the 20 days immediately preceding the date of conversion.
|
|
|
Because
the terms of the conversion features have changed, the Company has determined the derivative liability features no longer
exist and has reduced the derivative liability associated with this note to $0 as of June 30, 2019, from $3,276,331 as of
December 31, 2018.
|
|
3)
|
Convertible
note held by SMEA2Z, LLC for a total principal of $242,000 as of June 30, 2019. On June 19, 2019, the Company and SMEA2Z entered
into an Amendment and Forbearance Agreement. Under this agreement, SMEA2Z agreed to forbear from enforcing its rights under
the note with regard to certain possible events of default, and further agreed to amend the note as follows:
|
|
|
|
|
a)
|
SMEA2Z
can convert the note into shares of the Company’s common stock only upon the earlier of (i) April 15, 2020 or
(ii) any event of default under the note.
|
|
b)
|
The
face amount of the note was increased to $242,000.
|
|
c)
|
The
interest rate was increased to 12% per annum.
|
|
d)
|
The
conversion price shall be equal to 65% of the lesser of the lowest trading price of the Company’s common stock for (i)
the 20 days immediately preceding June 19, 2019 or (ii) the 20 days immediately preceding the date of conversion. The note
(i) accrues interest at the rate of 8% per annum and (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.
|
|
|
Because
the terms of the conversion features have changed, the Company has determined the derivative liability features no longer
exist and has reduced the derivative liability associated with this note to $0 as of June 30, 2019, from $788,724 as of December
31, 2018.
|
|
4)
|
Convertible
note held by AFT Funding Group, LLC for a total principal of $210,000 as of June 30, 2019. On June 19, 2019, the Company and AFT
Funding Group entered into an Amendment and Forbearance Agreement. Under this agreement, AFT Funding Group agreed to forbear from
enforcing its rights under the note with regard to certain possible events of default, and further agreed to amend the note as
follows:
|
|
a)
|
AFT
Funding can convert the note into shares of the Company’s common stock only upon the earlier of (i) April 15,
2020 or (ii) any event of default under the note.
|
|
b)
|
The
face amount of the note was increased to $242,000.
|
|
c)
|
The
interest rate was increased to 12% per annum.
|
|
d)
|
The
conversion price shall be equal to 65% of the lesser of the lowest trading price of the Company’s common stock for (i)
the 20 days immediately preceding June 19, 2019 or (ii) the 20 days immediately preceding the date of conversion. The note
(i) accrues interest at the rate of 8% per annum and (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.
|
|
Because the terms of the conversion features have changed, the Company has determined the derivative liability features no longer exist and has reduced the derivative liability associated with this note to $0 as of June 30, 2019, from $394,958 as of December 31, 2018.
|
|
5)
|
Convertible note held by Auctus Fund,
LLC for a total principal amount of $600,000 as of June 30, 2019. The note (i) accrues interest at the rate of 12% per annum,
(ii) can be converted into shares of our common stock at the lesser of $0.0015, or a 50% discount to the lowest trading price
during the twenty-five consecutive trading days immediately preceding the date of conversion, (iii) is convertible in whole or
in part at any time after the four (4) month anniversary of the issuance of the Note, and (iv) has an original issue discount
of $54,000.
|
|
|
|
|
6)
|
Convertible note held by Redstart Holdings Corp., for a total principal amount of $63,000 as of June 30, 2019. The note (i) accrues interest at a rate of 22% per annum, (ii) can be converted 180 days from June 12, 2019 at a discount of 39% to the lowest trading price during the twenty consecutive trading days immediately preceding the date of conversion, (iii) is due and payable June 12, 2020, and (iv) has an original issue discount of $3,000.
|
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 June 30, 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.
Common
Stock
On
June 21, 2019, the Company filed an amendment to its articles of incorporation to increase the total number of authorized shares
of the Company’s common stock, par value $0.001 per share, from 8,888,000,000 to 15,000,000,000 shares. 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 June 30, 2019 and 2018, respectively, was 7,282,678,714 and 5,427,946,244.
On
or about January 26, 2018, the Company committed to issue 1,200,000,000 shares to Myriad, a company wholly owned by the Company’s
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 June 30, 2019 and 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 June 30, 2019 and December 31, 2018. These shares have not been included in
the total number of issued and outstanding shares reflected herein.
On
January 15, 2019 the Company converted $5,000 of a promissory note into 100,000,000 shares of its common stock. The issuance was
exempt under Section 4(a)(2) of the Securities Act.
On
February 6, 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
February 7, 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
April 16, 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
May 21, 2019 the Company converted $30,000 of a promissory note into 600,000,000 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 June 30, 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 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, 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 June 30, 2019.
NOTE
8:
|
SHARE-BASED
COMPENSATION
|
Stock
Options
During
the six months ended June 30, 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.
The
following summarizes the stock option activity for the six months ended June 30, 2019:
|
|
Options Outstanding
|
|
|
Weighted- Average Exercise
Price
|
|
Balance as of January 1, 2019
|
|
|
135,319,554
|
|
|
$
|
0.0046
|
|
Grants of stock options
|
|
|
84,890,936
|
|
|
|
0.0020
|
|
Cancelled stock options
|
|
|
(10,553,013
|
)
|
|
|
0.0044
|
|
Balance as of June 30, 2019
|
|
|
209,657,477
|
|
|
$
|
0.0040
|
|
The
weighted average grant date fair value of stock options granted during the six months ended June 30, 2019 was $0.0020. The total
fair value of stock options that vested during the six months ended June 30, 2019 was approximately $245,000. 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 six months ended June 30, 2019:
Expected term (years)
|
|
|
5.5
|
|
Expected stock price volatility
|
|
|
265.47
|
%
|
Weighted-average risk-free interest rate
|
|
|
2.15
|
%
|
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 June 30, 2019:
|
|
Number of
|
|
|
Weighted-Average Remaining Contractual Life
|
|
|
Weighted- Average Exercise
|
|
|
|
Options
|
|
|
(In Years)
|
|
|
Price
|
|
Outstanding
|
|
|
209,657,477
|
|
|
|
9.44
|
|
|
$
|
0.0040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
68,570,780
|
|
|
|
9.19
|
|
|
|
0.0037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest
|
|
|
141,086,697
|
|
|
|
9.55
|
|
|
$
|
0.0041
|
|
As
of June 30, 2019, there was approximately $275,000 of total unrecognized compensation cost related to non-vested share-based compensation
arrangements which is expected to be recognized within the next year.
Restricted
Stock Awards
During
the six months ended June 30, 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 six months ended June 30, 2019:
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Fair
Value
|
|
Non-vested as of January
1, 2019
|
|
|
99,876,158
|
|
|
$
|
0.0051
|
|
Vested
|
|
|
(96,434,946
|
)
|
|
|
0.0028
|
|
Cancelled
|
|
|
(5,056,180
|
)
|
|
|
0.0014
|
|
Shares of
restricted stock granted
|
|
|
190,643,241
|
|
|
|
0.0015
|
|
Non-vested
as of June 30, 2019
|
|
|
189,028,273
|
|
|
|
0.0026
|
|
As
of June 30, 2019, there was approximately $144,000 of total unrecognized compensation cost related to non-vested share-based compensation,
which is expected to be recognized over the next year.
NOTE
9:
|
RELATED
PARTY TRANSACTIONS
|
Jason
Remillard is our Chief Executive Officer and sole director. Through his ownership of Series A Preferred Shares, Mr. Remillard
has voting control over all matters to be submitted to a vote of our shareholders.
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 June 30, 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 $1,000,000 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 June 30, 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 June 30, 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 June 30, 2019
|
|
|
(450,000
|
)
|
Contingent
liability for common shares issuable as of June 30, 2019
|
|
$
|
70,000
|
|
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 June 30, 2019, the Company has recorded a total liability of approximately $308,000, including an additional
net amount of approximately $21,000 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.
|
|
Three
months ended
|
|
|
Three
months ended
|
|
|
|
June
30, 2019
|
|
|
June
30, 2018
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,193,628
|
|
|
$
|
(1,460,234
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
|
6,876,085,307
|
|
|
|
4,123,764,894
|
|
Effect
of dilutive shares
|
|
|
494,296,363
|
|
|
|
-
|
|
Diluted
|
|
|
7,370,381,670
|
|
|
|
4,123,764,894
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
For
the three months ended June 30, 2019 and 2018 stock options to purchase 181,949,391 and 158,642,906 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 June 30, 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.
|
|
Six
months ended
|
|
|
Six
months ended
|
|
|
|
June
30, 2019
|
|
|
June
30, 2018
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
7,223,731
|
|
|
$
|
(7,665,201
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
|
6,257,909,520
|
|
|
|
4,078,389,689
|
|
Effect
of dilutive shares
|
|
|
471,779,437
|
|
|
|
-
|
|
Diluted
|
|
|
6,729,688,957
|
|
|
|
4,078,389,689
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
For
the six months ended June 30, 2019 and 2018 stock options to purchase 160,819,368 and 129,034,286 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 six months ended June 30, 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
|
None.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The
following discussion and analysis of the results of operations and financial condition for the six months ended June 30, 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 2 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-K filed
by the Company with the SEC on April 12, 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 of our authorized shares, and 50.6% of the 28,622,100 issued and outstanding shares on completion of
the acquisition.
The
share exchange with Rebound Rubber (and other transactions occurring in March 1999) resulted in a change of control and the appointment
of new officers and directors of the Company. These transactions also changed our focus to 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.
Our business strategy was to sell the de-vulcanized material (and compounds using the materials) to manufacturers of rubber products.
Prior
to 2001 we had no revenues. In 2001 and 2002 revenues were derived from management services rendered to a rubber recycling company.
In
August 2001, we amended our Articles of Incorporation to authorize 500,000,000 shares of common stock, $0.001 par value, and 150,000,000
shares of preferred stock, $0.01 par value. Preferred stock. We may designate preferred stock into specific classes by action
of our board of directors. In May 2008, our board established a class of Convertible Preferred Series A (the “
Series
A
”), authorizing 10,000,000 shares. When established, among other things, (i) each share of Series A was convertible
into 1,000 shares of 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, we amended our Articles of Incorporation to increase the number of authorized shares to 985,000,000, $0.001 par
value, further amended the Articles to increase the number of authorized shares to 4,000,000,000, and in January 2010 amended
our Articles to increase the number of authorized shares to 8,888,000,000.
We
were effectively dormant for a number of years. In or around February 2014 there was a change in control 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 our sole director and officer. Mr. Alessi initiated legal action
in his home state of North Carolina to confirm, among other things, his ownership of the Series A; his “control” over
the company; and the status of creditors of the company. In or around June 2017, the court entered judgment in favor of Mr. Alessi,
confirming his majority ownership of the company.
In
or around July 2017, while under the majority ownership and management of Mr. Alessi, we sought to effect a merger transaction
(the “
Merger
”) under which the Company would be merged into Data443 Risk Mitigation, Inc. (“
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 our sole director and sole officer of the company and 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, we acquired substantially all of the assets of Myriad Software Productions, LLC, which was owned 100% by Mr. Remillard.
Those assets were comprised of the software program known as ClassiDocs, and all intellectual property and goodwill associated
therewith. As a result of the acquisition, the Company was no longer a “shell” under applicable securities rules.
In consideration for the acquisition, we agreed to a purchase price of $1,500,000 comprised of: (i) $50,000 paid at closing; (ii)
$250,000 in the form of 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. However, these shares have been recorded as additional paid in capital within our consolidated financial
statements for the period ending June 30, 2019.
In
April 2018, we 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, we amended and restated our Articles of Incorporation. The total authorized number of shares to 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 we retained, it was determined that the Merger had,
in fact, not been completed, and that the Merger was not in the best interests of the Company and its shareholders. As such, the
Merger was legally terminated. In place of the Merger, in June 2018, we acquired all of the issued and outstanding shares of stock
of Data443 (the “
Share Exchange
”). As a result of the Share Exchange, Data443 became our wholly-owned subsidiary,
with both the Company and Data443 continuing to exist as corporate entities. 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. In consideration
of 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 June 29, 2018, we secured the rights to the WordPress GDPR Framework through our wholly owned subsidiary Data443 for
a total consideration of €40,001, or $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. Upon issuance of the final payment, we gained
the right to enter into an asset transfer agreement for the nominal cost of one euro (€1).
On
or about October 22, 2018, we entered into an asset purchase agreement with Modevity, LLC (“Modevity”) to 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. 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 to 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
February 6, 2019 we agreed to issue a total of 418,451,781 restricted shares of its common stock for subscriptions of $500,000.
In connection with the issuance of the shares, we 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
February 7, 2019 we 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
February 7, 2019, we 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, we were
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 goodwill 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
one through six; (iii) monthly payments in the amount of $30,000 per month during months seven through 17; and (iv) in 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 Rory Welch, the CEO of ArcMail (the right can be exercised
over a period of 27 months); and (b) a Business Covenants Agreement, under which ArcMail and Mr. 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. Mr. Welch shall continue
to serve as ArcMail’s CEO. The Company has not purchased any outstanding shares under the Stock Purchase Rights Agreement.
On
April 16, 2019 we 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
May 21, 2019 we converted $30,000 of a promissory note into 600,000,000 shares of its common stock. The issuance was exempt under
Section 4(a)(2) of the Securities Act.
On
June 26, 2019 we furnished to the holders of record of our outstanding shares of (i) common stock, $0.001 par value per share
and (ii) Convertible Preferred Series A Stock, $0.001 par value per share (“Series A Preferred Stock”), that as of
June 24, 2019 (the “Record Date”) that on June 24, 2019, in accordance with Section 78.320 of the Nevada Revised Statutes
(the “NRS”), a stockholder of the Company holding a majority of the voting power of the Company as of the Record Date
(the “Consenting Stockholder”) approved the following corporate actions:
(1)
Amendment of our articles of incorporation (“Articles of Incorporation”) to provide for a decrease in the authorized
shares of the Company’s common stock, $0.001 par value per share, from 15,000,000,000 shares to 60,000,000 shares (the “Authorized
Common Stock Reduction”);
(2)
Amendment of our Articles of Incorporation to provide for a decrease in the authorized shares of the Company’s preferred
stock, $0.001 par value per share, from 50,000,000 shares to 337,500 shares (the “Authorized Preferred Stock Reduction”);
(3)
That the Board of Directors of the Company (the “Board of Directors”) be authorized to implement a reverse stock split
of the Company’s common stock, $0.001 par value per share, and preferred stock, $0.001 par value per share, each at a ratio
of 1:750 (the “Reverse Stock Split”);
(4)
Adoption of the LandStar, Inc. 2019 Omnibus Stock Incentive Plan (the “2019 Plan”); and
(5)
Amendment of our Articles of Incorporation to change our corporate name from “LandStar, Inc.” to “Data443 Risk
Mitigation, Inc.” (the “Name Change”).
As
of the date of this Quarterly Report on Form 10-Q, these actions have not yet been effected.
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 1 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 us (described in Note 5 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. We recognized the BCF by allocating the intrinsic
value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference
between the effective conversion price per share and the fair value of common stock per share on the commitment date, resulting
in a discount on the convertible debt (recorded as a component of additional paid in capital). The discount is amortized to interest
expense over the term of the convertible debt.
Fair
Value of Financial Instruments
We
follow paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of our financial
instruments and have adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”)
to measure the fair value of our 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:
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
|
|
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.
|
|
|
|
|
Level
3:
|
Pricing
inputs that are generally unobservable inputs and not corroborated by market data.
|
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
We
adopted the provisions of paragraph 740-10-25-13 of the FASB Accounting Standards Codification. Paragraph 740-10-25-13 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, we operate 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 our net deferred tax assets resulting from our 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) we have incurred recurring losses and will continue to generate losses for the foreseeable future, (b) general economic
conditions, and (c) our ability to raise additional funds to support our daily operations by way of a public or private offering,
among other factors.
RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2018
Revenue
We
recognized $359,000 and $501,000 of revenue during the three and six months ended June 30, 2019, respectively, compared to zero
revenue for the three and six months ended June 30, 2018. We had net billings for the three and six months ended June 30, 2019
of $483,000 and $957,000, respectively, compared to zero in the prior year periods. Deferred revenues were $427,000 as
of June 30, 2019, an increase of $398,000 from $29,000 as of December 31, 2018.
General
and Administrative Expenses
General
and administrative expenses for the three and six months ended June 30, 2019 amounted to $1,211,000 and $1,902,000, respectively,
as compared to $1,804,000 and $2,080,000 for the three and six months ended June 30, 2018, respectively, which are decreases of
$593,000, or 33%, and $178,000, or 9%, respectively. The expenses for the six months ended June 30, 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 six months ended June 30, 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 and six months ended June 30, 2019 amounted to $156,000 and $382,000, respectively, as compared
to $502,000 and $783,000 for the three and six months ended June 30, 2018, respectively, which are decreases of $346,000, or 69%,
and $401,000, or 51%, respectively. The expenses for the six months ended June 30, 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 six months ended June 30, 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 and six months ended June 30, 2019 was $1,194,000 and $7,224,000 as compared to a loss of $1,460,000 and
$7,665,000 for the three and six months ended June 30, 2018, respectively. The net gain for the three and six months ended June
30, 2019 was mainly derived from a gain on change in fair value of derivative liability of $2,421,000 and $9,234,000, respectively,
associated with convertible notes payable and gross margins of $353,000 and $492,000, respectively, offset in part by general
and administrative, and sales and marketing expenses incurred. The net loss for the three months ended June 30, 2018 was mainly
derived from the general and administrative, and sales and marketing expenses incurred without generating revenue, offset in part
by a gain on change in fair value of derivative liabilities. The net loss for the six months ended June 30, 2018 was derived by
the net loss on change in fair value of derivative liability of $4,739,000 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 and six months ended June 30, 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:
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
Jason Remillard
|
|
$
|
307,854
|
|
|
$
|
287,084
|
|
CASH
FLOW FOR THE SIX MONTHS ENDED JUNE 30, 2019 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2018
Liquidity
and Capital Resources
We
require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of
June 30, 2019, our principal sources of liquidity were cash or cash equivalents of $241,000, trade accounts receivable of $495,000,
and other current assets of $26,000, 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 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 we will be able to secure such funding
on acceptable (or any) terms. During the six months ended June 2019 and 2018, we reported a loss from operations of $1,796,000
and $2,930,000, respectively, and had negative cash flows from operating activities of $684,000 and $2,011,000, respectively,
for the same periods. We had a beginning cash balance of $325,000 as of January 1, 2019, and a beginning cash balance of $4,000
as of January 1, 2018.
As
of June 30, 2019, we had assets of cash in the amount of $241,000 and other current assets in the amount of $521,000. As of June
30, 2019, we had current liabilities of $3,401,000. The Company’s accumulated deficit was $13,780,000.
As
of June 30, 2018, we had assets of cash in the amount of $62,000, and other current assets in the amount of $41,000. As June 30,
2018, we had current liabilities of $7,937,000. The Company’s accumulated deficit was $13,577,000.
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 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 six months ended June 30, 2019, we used funds in investing activities of $265,000 to acquire an exclusive license for software
and $5,000 to acquire furniture and fixtures. During the six months ended June 30, 2018, we used $22,000 to acquire intellectual
property.
Financing
Activities
During
the six months ended June 30, 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, $225,000 for stock subscriptions of commons stock and warrants to be issued
later, and $600,000 from issuance of convertible debt, offset in part through repayment of $450,000 on notes payable. By comparison,
during the six months ended June 30, 2018, we raised $445,000 by way of a convertible note and net financed $1,646,000 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. 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 the Company will continue to realize its assets and discharge its liabilities and commitments in the normal course of business.
The 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 the Company as a going concern is dependent upon
the ability of the Company to obtain necessary financing to achieve our operating objectives, and the attainment of profitable
operations. As of June 30, 2019, the Company has an accumulated deficit of $13,779,813. 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 filing of Exchange Act reports and 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.