NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
NOTE
1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business
Data443
Risk Mitigation, Inc. (the “Company”, “we”, “us” and “our”) was incorporated as a Nevada
corporation on May 4, 1998. On October 15, 2019, the Company changed its name from LandStar, Inc. to Data443 Risk Mitigation, Inc. within
the State of Nevada.
We
deliver solutions and capabilities that businesses can use in conjunction with their use of established cloud vendors such as Microsoft®
Azure, Google® Cloud Platform (GCP) and Amazon® Web Services (AWS), as well as with on-premises databases and database applications
with virtualization platforms, such as those hosted or configured using VMWare®, Citrix® and Oracle® clouds/products).
On
January 19, 2022, we entered into an Asset Purchase Agreement with Centurion Holdings I, LLC (“Centurion”) to acquire the
intellectual property rights and certain assets collectively known as Centurion SmartShield Home and SmartShield Enterprise, patented
technology that protects and recovers devices in the event of ransomware attacks. The total purchase price of $3,400,000 consists of:
(i) a $250,000 cash payment at closing; (ii) a $2,900,000 promissory note issued by Data443 in favor of Centurion (“Centurion
Note”); and (iii) $250,000 in the form of a contingent payment. The Centurion Note matures January 19, 2027 but provides that
Data443’s repayment obligation would accelerate on the occurrence of events. One of those events was a financing event that did
not occur within the originally anticipated timeframe. If that event had occurred, then Data443’s repayment obligation would have
been to repay the balance of the outstanding principal and interest as follows: (i) $500,000 of the then-outstanding amount due in cash;
and (ii) the remaining balance, at Data443’s option, in Common Stock or a combination of Common Stock and cash, with the number
of shares of Common Stock to be determined according to a specified formula. In April 2022, Data443 and Centurion agreed that, even though
the trigger for this acceleration event did not occur, Data443 would issue shares of Common Stock to Centurion in an amount then-equivalent
to $2,400,000, as partial repayment of the obligation due under the Centurion Note. The number of shares of Common Stock Data443 issued
to Centurion on April 20, 2022, was 380,952. Because Data443 still has some repayment obligations to fulfill under the Centurion Note,
as of the filing date of these financial statements, the acquisition that is the subject of the Centurion Asset Purchase Agreement is
still not completed.
Basis
of Presentation
These
unaudited consolidated financial statements have been prepared in accordance rules and regulations of the Securities and Exchange Commission
(“SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) for interim financial
information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, the unaudited consolidated financial statements do
not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, we have included all adjustments considered necessary for a fair presentation and such adjustments are
of a normal recurring nature. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial
statements for the year ended December 31, 2021 and notes thereto and other pertinent information contained in our Form 10-K as filed
with the SEC on March 31, 2022. The results of operations for the six months ended June 30, 2022, are not necessarily indicative of the
results to be expected for the full fiscal year ending December 31, 2022.
Basis
of Consolidation
The
accompanying unaudited consolidated financial statements as of June 30, 2022 include our accounts and those of our wholly-owned subsidiary,
Data 443 Risk Mitigation, Inc., a North Carolina operating company. These unaudited consolidated financial statements have been prepared
on the accrual basis of accounting in accordance with GAAP.
Stock-Based
Compensation
Employees
– We account 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 consolidated statement of operations over the requisite service period.
Nonemployees
- Under the requirements of the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
(“ASU 2018-07”), we account 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.
We
recorded approximately $798,690
in share-based compensation expense for the six months ended June 30, 2022, compared to $680,440
in share-based compensation expense for the six months ended June 30, 2021. Determining the appropriate fair value model and the
related assumptions requires judgment. During the six months ended June 30, 2022, the fair value of each option grant was estimated
using a Black-Scholes option-pricing model. The expected volatility represents the historical volatility of our
publicly traded common stock. Due to limited historical data, we calculate the expected life based on the mid-point between the
vesting date and the contractual term which is in accordance with the simplified method. The expected term for options granted to
nonemployees is the contractual life. The risk-free interest rate is based on a treasury instrument whose term is consistent with
the expected life of stock options. We have not paid and do not anticipate paying cash dividends on our shares of Common Stock;
therefore, the expected dividend yield is assumed to be zero.
Basic
and Diluted Net Loss Per Common Share
Basic
earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during
the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential
common shares outstanding during the period using the treasury stock method and as if converted method. Dilutive potential common shares
include outstanding stock options, warrant and convertible notes.
For
the six months ended June 30, 2022 and 2021, respectively, the following common stock equivalents were excluded from the computation
of diluted net loss per share as the result of the computation was anti-dilutive:
SCHEDULE OF ANTI-DILUTIVE BASIC AND DILUTED EARNINGS PER SHARE
| | |
2022 | | |
2021 | |
| | |
Six Months Ended | |
| | |
June
30, | |
| | |
2022 | | |
2021 | |
| | |
(Shares) | | |
(Shares) | |
| Series A Preferred Stock | |
| 149,892,000 | | |
| 150,000,000 | |
| Stock options | |
| 1,029 | | |
| 1,559 | |
| Warrants | |
| 158,441 | | |
| - | |
| Convertible notes | |
| - | | |
| 13,183 | |
| Preferred B stock | |
| - | | |
| 2,517 | |
| Total | |
| 150,051,470 | | |
| 150,017,259 | |
COVID-19
In
March 2020, the World Health Organization (“WHO”) declared the novel coronavirus COVID-19 (“COVID-19”) a global
pandemic. The pandemic adversely affected workforces, economies, and financial markets globally in 2020 and, until contained, is still
expected to disrupt general business operations. The COVID-19 pandemic and the measures taken by many governments around the world in
response could in the future meaningfully impact our business, results of operations and financial condition. We are currently unable
to predict the duration of that impact but continue to monitor our accounting estimates of the carrying value of certain assets and
liabilities relating to our leases and will continue to do so as additional information is obtained or new events occur. Actual results
could differ from our estimates and judgments, and any such differences may be material to our financial statements.
Recently
Adopted Accounting Guidance
In
August 2020, the FASB issued ASU 2020-06, ASC Subtopic 470-20 “Debt—Debt with Conversion and Other Options” and ASC
subtopic 815-40 “Hedging—Contracts in Entity’s Own Equity”. The standard reduced the number of accounting models
for convertible debt instruments and convertible preferred stock. Convertible instruments that continue to be subject to separation models
are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition
of a derivative, and that do not qualify for a scope exception from derivative accounting; and (2) convertible debt instruments issued
with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this update are effective for fiscal
years beginning after December 15, 2021, including interim periods within those fiscal years. Due to adoption of this accounting policy
on January 1, 2022, we recognized a cumulative effect adjustment to increase the opening retained earnings as of January 1, 2022 by $439,857.
Recently
Issued Accounting Pronouncements
We
have considered all other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have
a material impact on our consolidated financial statements.
NOTE
2: LIQUIDITY AND GOING CONCERN
The
accompanying financial statements have been prepared assuming that we will continue as a going concern. As reflected in the
financial statements, we have incurred significant current period losses and negative cash flows from operating activities, and we
have negative working capital and an accumulated deficit. We have relied upon loans and issuances of our equity to fund our
operations. These conditions, among others, raise substantial doubt about our ability to continue as a going concern.
Management’s plans regarding these matters, include raising additional debt or equity financing, the terms of which
might not be acceptable. The accompanying financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
NOTE
3: PROPERTY AND EQUIPMENT
The
following table summarizes the components of our property and equipment as of the dates presented:
SUMMARY OF COMPONENTS OF PROPERTY AND EQUIPMENT
| | |
June 30, | | |
December
31, | |
| | |
2022 | | |
2021 | |
| Furniture and Fixtures | |
$ | 2,991 | | |
$ | 2,991 | |
| Computer Equipment | |
| 656,613 | | |
| 559,654 | |
| Property
and equipment, gross | |
| 659,604 | | |
| 562,645 | |
| Accumulated depreciation | |
| (354,408 | ) | |
| (274,239 | ) |
| Property and equipment,
net of accumulated depreciation | |
$ | 305,196 | | |
$ | 288,406 | |
Depreciation
expense for the six months ended June 30, 2022 and 2021, was $80,170 and $71,513, respectively.
During
the six months ended June 30, 2022 and 2021, we purchased property and equipment of $96,960 and $79,020, respectively.
NOTE
4: INTELLECTUAL PROPERTY
The
following table summarizes the components of our intellectual property as of the dates presented:
SCHEDULE OF INTELLECTUAL PROPERTY
| | |
June
30,
2022 | | |
December
31,
2021 | |
| Intellectual property: | |
| | | |
| | |
| Word press GDPR rights | |
$ | 46,800 | | |
$ | 46,800 | |
| ARALOC® | |
| 1,850,000 | | |
| 1,850,000 | |
| ArcMail® | |
| 1,445,000 | | |
| 1,445,000 | |
| DataExpress® | |
| 1,388,051 | | |
| 1,388,051 | |
| FileFacets® | |
| 135,000 | | |
| 135,000 | |
| IntellyWP™ | |
| 60,000 | | |
| 60,000 | |
| Resilient Network Systems | |
| 305,000 | | |
| 305,000 | |
| Intellectual
property | |
| 5,229,851 | | |
| 5,229,851 | |
| Accumulated amortization | |
| (4,420,576 | ) | |
| (3,960,032 | ) |
| Intellectual property,
net of accumulated amortization | |
$ | 809,275 | | |
$ | 1,269,819 | |
We
recognized amortization expense of $460,544 and $483,044 for the six months ended June 30, 2022, and 2021, respectively.
Based
on the carrying value of definite-lived intangible assets as of June 30, 2022, we estimate our amortization expense for the next five
years will be as follows:
SCHEDULE OF FUTURE AMORTIZATION EXPENSE OF INTANGIBLE ASSETS
| | |
Amortization | |
| Year Ended December 31, | |
Expense | |
| 2022 (excluding the six months
ended June 30, 2022) | |
$ | 354,940 | |
| 2023 | |
| 411,585 | |
| 2024 | |
| 27,000 | |
| Thereafter | |
| 15,750 | |
| Total | |
$ | 809,275 | |
NOTE
5: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The
following table summarizes the components of our accounts payable and accrued liabilities as of the dates presented:
SUMMARY OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| | |
June
30, | | |
December
31, | |
| | |
2022 | | |
2021 | |
| Accounts
payable | |
$ | 264,105 | | |
$ | 75,628 | |
| Credit
cards | |
| 61,461 | | |
| 28,492 | |
| Accrued
dividend - preferred stock | |
| - | | |
| 6,849 | |
| Accrued
liabilities | |
| 91,900 | | |
| 4,704 | |
| Accounts
payable and accrued liabilities | |
$ | 417,466 | | |
$ | 115,673 | |
NOTE
6: DEFERRED REVENUE
For
the six months ended June 30, 2022 and as of December 31, 2021, changes in deferred revenue were as follows:
SUMMARY OF CHANGES IN DEFERRED REVENUE
| | |
June 30, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Balance, beginning of period | |
$ | 1,608,596 | | |
$ | 1,518,163 | |
| Deferral of revenue | |
| 2,182,504 | | |
| 2,581,801 | |
| Recognition of deferred
revenue | |
| (1,208,512 | ) | |
| (2,491,368 | ) |
| Balance, end of period | |
$ | 2,582,588 | | |
$ | 1,608,596 | |
As
of June 30, 2022 and December 31, 2021, deferred revenue is classified as follows:
SCHEDULE OF DEFERRED REVENUE
| | |
June 30, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Current | |
$ | 1,510,827 | | |
$ | 1,035,185 | |
| Non-current | |
| 1,071,761 | | |
| 573,411 | |
| Deferred
revenue | |
$ | 2,582,588 | | |
$ | 1,608,596 | |
NOTE
7: LEASES
Operating
lease
We
have two noncancelable operating leases for office facilities, one that we entered into January 2019 and that expires April 10,
2024 and another that we entered into in April 2022 and that expires April 30, 2024. Each operating lease has a renewal
option and a rent escalation clause. We relocated to the expanded square footage of the premises that are the subject of the April 2022 lease to support
our growing operations, and entered into a commission agreement with the landlord of the building to sublet the premises that are the subject of the January 2019 lease.
We
recognized total lease expense of approximately $83,339 and $24,000 for the six months ended June 30, 2022 and 2021, respectively, primarily
related to operating lease costs paid to lessors from operating cash flows. As of June 30, 2022 and December 31, 2021, we recorded a
security deposit of $10,000.
At
June 30, 2022, future minimum lease payments under operating leases that have initial noncancelable lease terms in excess of one year
were as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER OPERATING LEASES
| | |
Total | |
| Year Ended December 31, | |
| | |
| 2022 (excluding the six months ended June 30, 2022) | |
| 63,650 | |
| 2023 | |
| 131,150 | |
| Thereafter | |
| - | |
| Total
lease payment | |
| 194,800 | |
| Less: Imputed interest | |
| (11,880 | ) |
| Operating lease liabilities | |
| 182,920 | |
| | |
| | |
| Operating lease liability
- current | |
| 118,848 | |
| Operating lease liability
- non-current | |
$ | 64,072 | |
The
following summarizes other supplemental information about our operating leases as of June 30, 2022:
SCHEDULE OF OTHER SUPPLEMENTAL INFORMATION UNDER OPERATING LEASE
| Weighted average discount rate | |
| 8 | % |
| Weighted average remaining lease term (years) | |
| 1.54 | |
Financing
leases
We
lease computer and hardware under non-cancellable capital leases. The term of those capital leases is 3 years and annual interest rate
is 12%. At June 30, 2022 and December 31, 2021, the capital lease obligations included in current liabilities were $41,914 and $72,768,
respectively, and capital lease obligations included in long-term liabilities were $0 and $10,341, respectively. As of June 30, 2022
and December 31, 2021, we recorded a security deposit of $10,944.
At
June 30, 2022, future minimum lease payments under the finance lease obligations, are as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER FINANCE LEASES
| | |
Total | |
| | |
| |
| 2022 (excluding the six months ended June 30, 2022) | |
$ | 33,285 | |
| 2023 | |
| 10,496 | |
| Thereafter | |
| - | |
| Total
finance lease payment | |
| 43,781 | |
| Less: Imputed interest | |
| (1,867 | ) |
| Finance lease liabilities | |
| 41,914 | |
| | |
| | |
| Finance lease liability | |
| 41,914 | |
| Finance lease liability
- non-current | |
$ | - | |
As
of June 30, 2022 and December 31 2021, finance lease assets are included in property and equipment as follows:
SCHEDULE OF FINANCE LEASE ASSETS
| | |
June 30, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Finance lease assets | |
$ | 267,284 | | |
$ | 267,284 | |
| Accumulated depreciation | |
| (231,156 | ) | |
| (192,928 | ) |
| Finance lease assets,
net of accumulated depreciation | |
$ | 36,128 | | |
$ | 74,356 | |
NOTE
8: CONVERTIBLE NOTES PAYABLE
Convertible
notes payable consists of the following:
SCHEDULE OF CONVERTIBLE NOTES PAYABLE
| | |
June 30, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Convertible Notes - Issued in fiscal
year 2020 | |
| 98,488 | | |
| 100,000 | |
| Convertible Notes - Issued in fiscal year 2021 | |
| 851,851 | | |
| 1,607,857 | |
| Convertible Notes - Issued
in fiscal year 2022 | |
| 1,291,735 | | |
| - | |
| Convertible
notes payable, Gross | |
| 2,242,074 | | |
| 1,707,857 | |
| Less debt discount and
debt issuance cost | |
| (200,812 | ) | |
| (691,569 | ) |
| Convertible
notes payable | |
| 2,041,262 | | |
| 1,016,288 | |
| Less current portion of
convertible notes payable | |
| 1,942,774 | | |
| 993,931 | |
| Long-term convertible
notes payable | |
$ | 98,488 | | |
$ | 22,357 | |
During
the six months ended June 30, 2022 and the year ended 2021, we recognized interest expense of $374,938
and $14,556,
respectively, and amortization of debt discount, included in interest expense of $636,010
and $335,663,
respectively.
Conversion
During
the six months ended June 30, 2022, we converted notes with principal amounts and accrued interest of $29,325
into 165,273
shares of common stock.
The corresponding derivative liability of $57,883 at the date of conversion was credited to additional paid in capital.
Convertible
notes payable consists of the following:
Promissory
Notes - Issued in fiscal year 2020
In
2020, we issued convertible promissory notes with principal amounts totaling $100,000. The 2020 Promissory Notes have the following
key provisions:
| |
● |
Terms
60 months. |
| |
|
|
| |
● |
Annual
interest rates of 5%. |
| |
|
|
| |
● |
Conversion
price fixed at $0.01. |
Promissory
Notes - Issued in fiscal year 2021
In 2021, we issued
convertible promissory notes with principal amounts totaling $1,696,999, which resulted in
cash proceeds of $1,482,000
after financing fees of $214,999
were deducted. The 2021 Convertible Notes have the following key provisions:
| |
● |
Terms
ranging from 90 days to 12 months. |
| |
|
|
| |
● |
Annual
interest rates of 5% to 12%. |
| |
|
|
| |
● |
Convertible
at the option of the holders after varying dates. |
| |
|
|
| |
● |
Conversion
price based on a formula corresponding to a discount (39% discount) off the average closing price or lowest trading price of our
Common Stock for the 20 prior trading days including the day on which a notice of conversion is received. |
The 2021 Convertible Notes also were associated with the following:
| |
● |
The
issuance of 1,414 shares of Common Stock valued at $133,663. |
| |
|
|
| |
● |
The
issuance of 117,992 warrants to purchase shares of Common Stock with an exercise price a range from $7.44 to 36.00. The term in which
the warrants can be exercised is 5 years from issue date. (Note 12) |
During
the six months ended June 30, 2022, in connection with the 2021 Convertible Notes, we repaid principal in the amount of $729,506 and interest expense of $319,743.
Promissory
Notes - Issued in fiscal year 2022
During
the six months ended June 30, 2022, we issued convertible promissory notes with principal amounts totaling $1,320,575, which resulted in
cash proceeds of $1,207,800
after deducting financing fee of $57,313
were deducted. The 2022 Convertible Notes have the following key provisions:
| |
● |
Terms
ranging from 9 to 12 months. |
| |
|
|
| |
● |
Annual
interest rates of 9% to 12%. |
| |
|
|
| |
● |
Convertible
at the option of the holders after varying dates. |
| |
|
|
| |
● |
Conversion
price based on a formula corresponding to a discount (20% or 39% discount) off the lowest trading price of our Common Stock for the
20 prior trading days including the day on which a notice of conversion is received, although one of the 2022 Convertible Notes
establishes a fixed conversion price of $4.50 per share. |
During the six months ended June 30, 2022, the 2022 Convertible Notes also
were associated with the following:
| |
● |
18,170
shares of common stock valued at $140,936 issued in conjunction with convertible notes. |
In
connection with the adoption of ASU 2020-06 on January 1, 2022, we reclassified $517,500, previously allocated to the conversion feature,
from additional paid-in capital to convertible notes on our balance sheet. The reclassification was recorded to combine the two legacy
units of account into a single instrument classified as a liability. As of January 1, 2022, we also recognized a cumulative effect adjustment
of $439,857 to accumulated deficit on our balance sheet, that was primarily driven by the derecognition of interest expense related to
the accretion of the debt discount as required under the legacy accounting guidance. Under ASU 2020-06, we will no longer incur non-cash
interest expense related to the accretion of the debt discount associated with the embedded conversion option.
NOTE
9: DERIVATIVE LIABILITIES
We
analyzed the conversion option for derivative accounting consideration under ASC 815, Derivatives and Hedging, and hedging, and determined
that the instrument should be classified as a liability since the conversion option becomes effective at issuance resulting in there
being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
ASC
815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in
the fair market value as other income or expense item.
We
determined our derivative liabilities to be a Level 3 fair value measurement during the year based on management’s estimate of
the expected future cash flows required to settle the liabilities, and used the Binomial pricing model to calculate the fair value as
of June 30, 2022. As of the six months ended June 30, 2022, there were no derivative liabilities. The Binomial model requires six basic
data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility
of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value
measurement. The fair value of each convertible note and warrant is estimated using the Binomial valuation model.
For
the six months ended June 30, 2022 and year ended December 31, 2021, the estimated fair values of the liabilities measured on a recurring
basis are as follows:
We
valued the conversion feature using the Binomial pricing model. The fair value of the derivative liability for all the notes that became
convertible, including the notes issued in prior years, during the six months ended June 30, 2022 amounted to $57,883 recognized as a
derivative loss.
For
the six months June 30, 2022 and year ended December 31, 2021, the estimated fair values of the liabilities measured on a recurring basis
are as follows:
SCHEDULE OF FAIR VALUE OF LIABILITIES MEASURED ON RECURRING BASIS
| | |
Six months ended | | |
Year ended | |
| | |
June 30, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| Expected term | |
| 0.51
years | | |
| 0.48
- 5.00 years | |
| Expected average volatility | |
| 134 | % | |
| 160%-
302% | |
| Expected dividend yield | |
| - | | |
| - | |
| Risk-free interest rate | |
| 59 | % | |
| 0.04%
- 1.24% | |
The
aggregate loss on derivatives during the six months ended June 30, 2022 and 2021 was $57,883 and $363,654, respectively.
NOTE
10: NOTES PAYABLE
Notes
payable consists of the following:
SCHEDULE
OF NOTES PAYABLE
| | |
June
30, | | |
December
31, | | |
| |
Interest | |
| | |
2022 | | |
2021 | | |
Maturity | |
Rate | |
| Economic
Injury Disaster Loan - originated in May 2020 (1, 3) | |
$ | 500,000 | | |
$ | 500,000 | | |
30 years | |
| 3.75 | % |
| Promissory
note - originated in September 2020 | |
| 35,319 | | |
| 50,456 | | |
$2,873.89
monthly payment for 36 months | |
| 14.0 | % |
| Promissory
note - originated in December 2020 | |
| 24,543 | | |
| 33,039 | | |
$1,854.41
monthly payment for 36 months | |
| 8.0 | % |
| Promissory
note - originated in January 2021 | |
| 35,413 | | |
| 48,583 | | |
$2,675.89
monthly payment for 36 months | |
| 18.0 | % |
| Promissory
note - originated in February 2021 (2) | |
| 1,305,374 | | |
| 1,328,848 | | |
5 years | |
| 4.0 | % |
| Promissory
note - originated in April 2021 | |
| 693,333 | | |
| 832,000 | | |
1 year | |
| 12 | % |
| Promissory
note - originated in July 2021 | |
| 282,000 | | |
| 282,000 | | |
1 year | |
| 12 | % |
| Promissory
note - originated in September 2021 | |
| 49,621 | | |
| 55,576 | | |
$1,383.56
monthly payment for 60 months | |
| 28 | % |
| Promissory
note - originated in December 2021 | |
| - | | |
| 406,300 | | |
$20,050
weekly payment | |
| 49 | % |
| Promissory
note - originated in December 2021 | |
| - | | |
| 241,716 | | |
$10,071.45
weekly payment | |
| 4.94 | % |
| Promissory
note - originated in December 2021 | |
| - | | |
| 189,975 | | |
$2,793.75
daily payment | |
| 7 | % |
| Promissory
note - originated in March 2022 | |
| 233,980 | | |
| - | | |
$20,995
weekly payment | |
| 49 | % |
| Promissory
note - originated in March 2022 | |
| 62,357 | | |
| - | | |
$642.86
daily payment | |
| 15 | % |
| Promissory
note - originated in April 2022 | |
| 81,726 | | |
| - | | |
$1,695.41
monthly payment for 36 months | |
| 16.0 | % |
| Promissory
note - originated in April 2022 | |
| 127,395 | | |
| - | | |
$2,235
daily payment | |
| 15 | % |
| Promissory
note - originated in April 2022 | |
| 68,913 | | |
| - | | |
$1,862.50
daily payment | |
| 5 | % |
| Promissory
note - originated in April 2022 | |
| 284,088 | | |
| - | | |
$7,250
daily payment | |
| 25 | % |
| Promissory
note - originated in June 2022 | |
| 67,455 | | |
| - | | |
$1,873.75
daily payment | |
| 25 | % |
| | |
| 3,851,517 | | |
| 3,968,491 | | |
| |
| | |
| Less
debt discount and debt issuance cost | |
| (317,931 | ) | |
| (476,727 | ) | |
| |
| | |
| | |
| 3,533,586 | | |
| 3,491,766 | | |
| |
| | |
| Less
current portion of promissory notes payable | |
| 1,799,147 | | |
| 1,720,777 | | |
| |
| | |
| Long-term
promissory notes payable | |
$ | 1,734,439 | | |
$ | 1,770,989 | | |
| |
| | |
| (1) |
We
received an advance under the Economic Injury Disaster Loan (EIDL) program. |
| |
|
| (2) |
We
received a second advance under the EIDL program in fiscal year 2021. |
| |
|
| (3) |
On
February 12, 2021, we issued notes payable of $1,404,000 to settle license fee payable of $1,094,691. As a result, we recorded loss
on settlement of debt of $309,309 in fiscal year 2021. |
During
the six months ended June 30, 2022 and 2021, we recognized interest expense of $113,693 and $57,209, and amortization of debt discount,
included in interest expense of $625,621 and $995,066, respectively.
During
the six months ended June 30, 2022 and 2021, we issued a total of $1,840,518 and $3,641,037, less discount of $654,065 and $1,066,393,
and repaid $1,957,492 and $2,734,275, respectively.
NOTE
11: COMMITMENTS AND CONTINGENCIES
We
account for contingent liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 450, Contingencies.
This standard requires management to assess potential contingent liabilities that may exist as of the date of the financial statements
to determine the probability and amount of loss that may have occurred, which inherently involves an exercise of judgment. If the assessment
of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in our financial statements. If the assessment indicates that a potential material loss
contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability,
and an estimate of the range of possible losses, if determinable and material, would be disclosed in our financial statements. For loss
contingencies considered remote, we generally would neither accrue any estimated liability nor disclose the nature of the contingent
liability in our financial statements. Management has assessed potential contingent liabilities as of June 30, 2022, and based on that
assessment, there are no probable loss contingencies requiring accrual or establishment of a reserve.
DMB
Note Collection Action
On
June 17, 2021, DMB Group, LLC (“DMB”) filed a lawsuit against our wholly-owned subsidiary, the North Carolina operating
company Data443 Risk Mitigation, Inc., (the “Subsidiary”) in County Court in Denton County, Texas, naming the Subsidiary
as defendant. The matter was settled September 2021 by mutual agreement of the involved parties. The Subsidiary has made all payments
required pursuant to the settlement and the matter is now considered closed. The Court granted our motions for nonsuit and dismissal
with prejudice on orders entered May 4 and May 5, 2022.
Employment
Related Claims
We
view most legal proceedings involving claims of former employees as routine litigation incidental to the business, and therefore not
material.
Litigation
In
the ordinary course of business, we are involved in a number of lawsuits incidental to our business, including litigation related to
intellectual property, employees, and commercial matters. Although it is difficult to predict the ultimate outcome of these cases, management
believes that any ultimate liability would not have a material adverse effect on our consolidated financial condition or results of operations.
However, an unforeseen unfavorable development in any of these cases could have a material adverse effect on our consolidated financial
condition, results of operations, or cash flows in the period in which it is recorded.
NOTE
12: CAPITAL STOCK AND REVERSE STOCK SPLIT
On
March 7, 2022, we filed an amendment to our Articles of Incorporation to effect a 1-for-8 reverse stock split of our issued and outstanding
shares of common and preferred shares, each with $0.001 par value. All per share amounts and number of shares, in the consolidated financial
statements and related notes have been retroactively adjusted to reflect the reverse stock split.
Preferred
Stock
As
of June 30, 2022, we are authorized to issue 337,500 shares of preferred stock with a par value of $0.001, of which 150,000 shares have
been designated as Series A, and 80,000 shares have been designated as Series B.
Series
A Preferred Stock
Each
share of Series A was (i) convertible into 1,000 shares of common stock, and (ii) entitled to vote 15,000 shares of common stock on all
matters submitted to a vote by shareholders voting common stock. All issued and outstanding shares of Series A Preferred Stock are held
by our Chief Executive Officer.
During
the six months ended June 30, 2022, 108 shares of Series A preferred stock were converted into 108,000 shares of Common Stock.
As
of June 30, 2022 and December 31, 2021, 149,892 and 150,000 shares of Series A were issued and outstanding, respectively.
Series
B Preferred Stock
Each
share of Series B (i) has a stated value of Ten Dollars ($10.00) per share; (ii) is convertible into Common Stock at a price per share
equal to sixty one percent (61%) of the lowest price for our Common Stock during the twenty (20) days of trading preceding
the date of the conversion; (iii) earns dividends at the rate of nine percent (9%) per annum; and, (iv) has no voting rights.
During
the six months ended June 30, 2022, we issued 7,875 shares of Series B preferred stock for $78,750, less $3,750 financing fees.
During
the six months ended June 30, 2022, we redeemed 37,625 shares of Series B preferred stock, representing all outstanding shares of Series B preferred stock, for $487,730.
During
the six months ended June 30, 2022, we recorded an accrued dividend of $104,631, and amortization of debt discount, included in interest
expense of $22,439.
As
of June 30, 2022 and December 31, 2021, 0 and 29,750 shares of Series B were issued and outstanding, respectively.
Common
Stock
As
of June 30, 2022, we are authorized to issue 125,000,000 shares of Common Stock with a par value of $0.001. All shares have equal voting
rights, are non-assessable, and have one vote per share.
During
the six months ended June 30, 2022, we issued Common Stock as follows:
| |
● |
165,273
shares issued for conversion of debt; |
| |
● |
6,631
shares issued upon the cash-less exercise of warrants; |
| |
● |
380,952
shares issued for consideration under an asset purchase agreement; |
| |
● |
108,000
shares issued for conversion of Series A preferred stock; |
| |
● |
153,491
shares issued for services; and |
| |
● |
18,170
shares issued as a loan fee in connection with the issuance of promissory notes. |
As
of June 30, 2022 and December 31, 2021, 954,561 and 122,044 shares of Common Stock were issued and outstanding, respectively.
Warrants
A
summary of activity during the six months ended June 30, 2022 follows:
SCHEDULE OF WARRANTS ACTIVITY
| | |
Warrants
Outstanding | |
| | |
| | |
Weighted
Average | |
| | |
Shares | | |
Exercise
Price | |
| Outstanding,
December 31, 2021 | |
| 146,842 | | |
$ | 27.86 | |
| Granted | |
| 19,166 | | |
| 6.00 | |
| Exercised | |
| (7,567 | ) | |
| - | |
| Forfeited/canceled | |
| - | | |
| - | |
| Outstanding,
June 30, 2022 | |
| 158,441 | | |
$ | 22.07 | |
During
the six months ended June 30, 2022, 7,567 warrants were exercised cashless and we issued 6,631 shares of Common Stock.
The
following table summarizes information relating to outstanding and exercisable warrants as of June 30, 2022:
SCHEDULE OF OUTSTANDING AND EXERCISABLE WARRANTS
| Exercisable
Warrants Outstanding |
| |
Weighted
Average Remaining | | |
| |
Number
of
Shares | |
Contractual
life
(in
years) | | |
Weighted
Average
Exercise
Price | |
| 6,250 | |
| 3.45 | | |
$ | 160.00 | |
| 6,934 | |
| 3.81 | | |
$ | 120.00 | |
| 15,666 | |
| 4.08 | | |
$ | 36.00 | |
| 2,917 | |
| 4.25 | | |
$ | 36.00 | |
| 32,837 | |
| 4.31 | | |
$ | 9.88 | |
| 74,671 | |
| 4.48 | | |
$ | 7.44 | |
| 19,166 | |
| 4.86 | | |
$ | 6.00 | |
| 158,441 | |
| 4.38 | | |
$ | 22.07 | |
NOTE
13: SHARE-BASED COMPENSATION
Stock
Options
During
the three months ended June 30, 2022, we granted options for the purchase of our Common Stock to certain employees as consideration for services rendered. The terms of the stock option grants are determined by our Board of Directors consistent our
2019 Omnibus Stock Incentive Plan which the Board adopted May 16, 2019. Our stock options generally vest upon the one-year anniversary
date of the grant and have a maximum term of ten years.
The
following summarizes the stock option activity for the six months ended June 30, 2022:
SCHEDULE OF STOCK OPTION ACTIVITY
| | |
Options
Outstanding | | |
Weighted-Average
Exercise Price | |
| Balance as of December 31, 2021 | |
| 2,121 | | |
$ | 467.76 | |
| Grants | |
| - | | |
| - | |
| Exercised | |
| - | | |
| - | |
| Cancelled | |
| (1,092 | ) | |
| 134.40 | |
| Balance as of June 30, 2022 | |
| 1,029 | | |
$ | 481.46 | |
The
following summarizes certain information about stock options vested and expected to vest as of June 30, 2022:
SCHEDULE OF STOCK OPTIONS VESTED AND EXPECTED TO VEST
| | |
Number of
Options | | |
Weighted-Average Remaining Contractual Life
(In Years) | | |
Weighted- Average
Exercise Price | |
| | |
Number of
Options | | |
Weighted-Average Remaining Contractual Life
(In Years) | | |
Weighted- Average
Exercise Price | |
| Outstanding | |
| 1,029 | | |
| 8.39 | | |
$ | 481.46 | |
| Exercisable | |
| 585 | | |
| 8.23 | | |
$ | 735.99 | |
| Expected to vest | |
| 444 | | |
| 8.51 | | |
$ | 303.82 | |
As
of June 30, 2022 and December 31, 2021, there was $67,833 and $381,547, respectively, of total unrecognized compensation costs related
to non-vested share-based compensation arrangements which we expect to recognized within the next 12 months.
Restricted
Stock Awards
The
following summarizes the restricted stock activity for the six months ended June 30, 2022:
SCHEDULE OF RESTRICTED STOCK ACTIVITY
| | |
| | |
Weighted-Average | |
| | |
Shares | | |
Fair
Value | |
| Balance
as of December 31, 2021 | |
| 1,370 | | |
$ | 639.22 | |
| Shares of restricted
stock granted | |
| - | | |
| - | |
| Exercised | |
| - | | |
| - | |
| Cancelled | |
| - | | |
| - | |
| Balance
as of June 30, 2022 | |
| 1,370 | | |
$ | 639.22 | |
SCHEDULE OF RESTRICTED STOCK AWARD
| Number
of Restricted Stock Awards | |
June
30,
2022 | | |
December
31,
2021 | |
| Vested | |
| 1,370 | | |
| 1,370 | |
| Non-vested | |
| - | | |
| - | |
NOTE
14: RELATED PARTY TRANSACTIONS
Jason
Remillard is our president and chief executive officer and the sole director. Through his ownership of Series A Preferred Shares, Mr.
Remillard has voting control over all matters to be submitted to a vote of our shareholders.
On
September 16, 2019, we entered into an Asset Purchase Agreement with DMB Group, LLC (“DMB Group”). A significant part of
the purchase price was in the form of our Common Stock. As a direct result of this transaction and our Common Stock issued to DMB Group,
we determined that DMB Group was a related party. Amounts owed to DMB Group, including the note payable of $940,000 and member loans
of $97,689 were recorded as amounts due to a related party. During the three months ended June 30, 2022, we repaid a note payable of
$124,985 including interest expense of $1,240. As of June 30, 2022 and December 31, 2021, we had recorded a liability to DMB Group totaling
$0 and $123,745, respectively.
During
the six months ended June 30, 2022, we received cash from our Chief Executive Officer of $116,238 and repaid $86,571 to our Chief Executive Officer.
As
of June 30, 2022 and December 31, 2021, we had due to related party transactions in the amounts of $277,033
and $247,366,
respectively.
NOTE
15: SUBSEQUENT EVENTS
In
accordance with ASC 855-10, “Subsequent Events”, we analyzed our operations subsequent to June 30, 2022 to August
15, 2022, the date when these consolidated financial statements were issued. Our Management determined that there were
no reportable events that occurred during that subsequent period to be disclosed or recorded.