NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
NOTE
1: BUSINESS DESCRIPTION
Data443
Risk Mitigation, Inc. (the “Company”) was incorporated as a Nevada corporation on May 4, 1998. On October 15, 2019, the Company
changed its name from LandStar, Inc. to Data443 Risk Mitigation, Inc. within the state of Nevada.
Reverse
Stock Splits
Effective
March 7, 2022 and July 1, 2021, we effected an 8 for 1 and 2,000 for 1 reverse stock split, respectively, of our issued and outstanding
common stock (the “Reverse Stock Splits”). All
references to shares of our common stock in this annual report refers to the number of shares of common stock after giving retrospective
effect to these Reverse Stock Splits (unless otherwise indicated).
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements as of December 31, 2021 include the accounts of the Company and its wholly-owned subsidiary,
Data 443 Risk Mitigation, Inc., a North Carolina operating company, 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. in North Carolina 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”).
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.
Reclassifications
Certain prior year amounts have been reclassified
to conform to the current presentation. These reclassifications had no impact on net earnings (loss) or and financial position.
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, usually on an annual subscription. The Company’s contracts are for subscriptions to our
data classification, movement, governance, encryption, access control and distribution software and related services. We also perform
professional services consulting with specific deliverables managed primarily by statements of work. Customers typically enter into our
services subscription and various statements of work concurrently. Most of the Company’s performance obligations are not considered
to be distinct from the subscriptions to our software or hosting platforms 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 to assess the nature and characteristics
of the new or modified performance obligations on a contract by contract basis.
Revenue
related to contracts with customers is evaluated utilizing the following steps: (i) Identify the contract, or contracts, with a customer;
(ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price
to the performance obligations in the contract; (v) Recognize revenue when the Company satisfies a performance obligation.
Cash
and Cash Equivalents
For
purposes of balance sheet presentation and reporting of cash flows, the Company considers all unrestricted demand deposits, money market
funds and highly liquid debt instruments with an original maturity of less than 90 days to be cash and cash equivalents. The Company
had no cash equivalents at December 31, 2021 and 2020.
Accounts
Receivable
Accounts
receivable are recorded in accordance with ASC 310, “Receivables.” Accounts receivable are recorded at the invoiced amount
and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses
in its existing accounts receivable.
Deferred
Revenue
Deferred
revenue mostly consists of service subscriptions received from users in advance of revenue recognition. The increase in the deferred
revenue balance for the year ended December 31, 2021 and 2020 was driven by cash payments from customers in advance of satisfying our
performance obligations, offset by revenue recognized that was included in the deferred revenue balance at the beginning of the period.
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 9, below, generated a beneficial conversion feature
(“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the
investor or in the money at inception because the conversion option has an effective strike price that is less than the market price
of the underlying stock at the commitment date. 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 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 $968,470 in share-based compensation expense for the year ended December 31, 2021, compared to approximately
$1,349,646 in share-based compensation expense for the year ended December 31, 2020.
Determining
the appropriate fair value model and the related assumptions requires judgment. During the year ended December 31, 2021 and 2020, the
fair value of each option grant was estimated using a Black-Scholes option-pricing model.
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 ASC 740 “Income Taxes,” 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 ASC 740, 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. ASC 740 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.
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.
Intellectual
Property
The
cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed on a straight-line
basis over the estimated periods benefited. Patents, technology and other intangibles with contractual terms are generally amortized
over their respective legal or contractual lives. When certain events or changes in operating conditions occur, an impairment assessment
is performed and lives of intangible assets with determinable lives may be adjusted.
Long-Lived
Assets
Long-lived
assets are evaluated for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets
may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison
of the undiscounted future cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its
estimated fair value.
Property
and Equipment
Property
and equipment, consisting mostly of computer equipment, is recorded at cost reduced by accumulated depreciation and impairment,
if any. Depreciation expense is recognized over the assets’ estimated useful lives of three - seven years using the straight-line
method. Major additions and improvements are capitalized as additions to the property and equipment accounts, while replacements, maintenance
and repairs that do not improve or extend the life of the respective assets, are expensed as incurred. Estimated useful lives are periodically
reviewed and, when appropriate, changes are made prospectively. When certain events or changes in operating conditions occur, asset lives
may be adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts.
Fair
Value Measurements
The
Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring
basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement.
The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining
fair value. The three tiers are defined as follows:
|
● |
Level
1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; |
|
|
|
|
● |
Level
2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace
for identical or similar assets and liabilities; and |
|
|
|
|
● |
Level
3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. |
The
Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, note payable, due
to related parties and accrued liabilities, are carried at historical cost. At December 31, 2021 and 2020, the carrying amounts of these
instruments approximated their fair values because of the short-term nature of these instruments. Management determined that liabilities
created by beneficial conversion features associated with the issuance of certain convertible notes payable (see Note 8), meet the criteria
of derivatives and are required to be measured at fair value. The fair value of these derivative liabilities was determined during the
year based on management’s estimate of the expected future cash flows required to settle the liabilities. As of the end of year,
at December 31, 2021 and 2020, there were no derivative liabilities due to a combination of all convertible notes being either (i) converted
into common stock; or, (ii) amended to have a fixed conversion price. This valuation technique involves management’s estimates
and judgment based on unobservable inputs and is classified in level 3.
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 year ended December 31, 2021 and 2020, 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
| |
Years
Ended | |
| |
December
31, | |
| |
2021 | | |
2020 | |
| |
(Shares) | | |
(Shares) | |
Series
A Preferred Stock | |
| 150,000,000 | | |
| 150,000,000 | |
Stock
options | |
| 2,121 | | |
| 734 | |
Warrants | |
| 146,842 | | |
| - | |
Convertible
notes | |
| - | | |
| 16,295 | |
Preferred
B stock | |
| 3,955 | | |
| 63 | |
Total | |
| 150,152,918 | | |
| 150,017,092 | |
Leases
We
determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”)
assets, operating lease liabilities - current, and operating lease liabilities - noncurrent on the balance sheets. Finance leases are
included in property and equipment, other current liabilities, and other long-term liabilities in our balance sheets.
ROU
assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease
payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental
borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement
date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include
options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments
is recognized on a straight-line basis over the lease term.
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 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. Early adoption is permitted, but no earlier
than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing
the impact of the adoption of this standard on its consolidated financial statements.
The
Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will
have a material impact on its consolidated financial statements.
NOTE
3: LIQUIDITY AND GOING CONCERN
The
accompanying consolidated financial statements have been prepared (i) in accordance with accounting principles generally accepted in
the Unitd 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 made two product acquisitions, ClassiDocs™, and ARALOC™, and completed the acquisition of one
entity, Data443 Risk Mitigation, Inc. (“Data443”), the North Carolina operating company. During 2019, the Company
completed the acquisition of selected assets of DataExpress™; and, completed a transaction under which the Company licensed
the assets of ArcMail™. During the period ending September 30, 2020, the Company has completed the acquisition of selected assets
of FileFacets™, and selected assets of Intelly WP™. The Company is actively seeking new products and entities to acquire,
with several candidates identified. The Company has developed, and continues to develop, large scale relationships with cyber security,
marketing and product organizations, and to market and promote ClassiDocs and other products the Company may develop or acquire. As of
December 31, 2021, the Company had negative net working capital; an accumulated deficit; and, had reduced its operating losses.
We
continue to monitor the effects COVID-19 could have on our operations and liquidity including our ability to collect account receivable
timely from our customers due to the economic impacts COVID-19 could have on the general economy. COVID-19 has also impacted our ability
to travel, meet distribution partners in their offices, present at tradeshows, and perform other enterprise-related sales functions.
Many customers have still yet to return to their pre-pandemic “normal” office working conditions. These continued operating
conditions have impacted our ability to execute and deploy some of our normal sales and marketing activities. While we are not unique
in this position, these factors, among others, raise some 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
4: PROPERTY AND EQUIPMENT
The
following table summarizes the components of the Company’s property and equipment as of the dates presented:
SUMMARY OF COMPONENTS OF PROPERTY AND EQUIPMENT
| |
December
31, | | |
December
31, | |
| |
2021 | | |
2020 | |
Furniture
and Fixtures | |
$ | 2,991 | | |
$ | 2,991 | |
Computer
Equipment | |
| 559,654 | | |
| 421,323 | |
| |
| 562,645 | | |
| 424,314 | |
Accumulated
depreciation | |
| (274,239 | ) | |
| (99,965 | ) |
Property
and equipment, net of accumulated depreciation | |
$ | 288,406 | | |
$ | 324,349 | |
Depreciation
expense for the years ended December 31, 2021 and 2020, was $174,274
and $81,274,
respectively, and recorded in general and administrative expenses.
During
the years ended December 31, 2021 and 2020, the Company acquired property and equipment of $138,331
and $146,400,
respectively.
NOTE
5: 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 December 31, 2019, the balance of payments due under the License Agreement was $1,094,691.
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.
As of September 30, 2020, the Company terminated all agreements with Mr. Welch and ArcMail. The Company continued to use all assets under
the License Agreement and was finalizing an agreement with the creditors of Mr. Welch and ArcMail (the creditors have taken ownership
of the assets) for the Company’s continued use of all assets. During the year ended the Company December 31. 2021, the Company
reached the agreement and issued notes payable of $1,404,000
to settle license fee payable of $1,094,691.
As a result, the Company recorded a loss on settlement of debt of $309,309.
On
August 13, 2020, the Company entered into an Asset Purchase Agreement to acquire certain assets collectively known as FileFacets™,
a Software-as-a-Service (SaaS) platform that performs sophisticated data discovery and content search of structured and unstructured
data within corporate networks, servers, content management systems, email, desktops and laptops. The total purchase price was $135,000,
which amount was paid in full at the closing of the transaction.
On
September 21, 2020, the Company entered into an Asset Purchase Agreement with the owners of a business known as IntellyWP™, to
acquire the intellectual property rights and certain assets collectively known as IntellyWP™, an Italy-based developer that produces
WordPress plug-ins that enhance the overall user experience for webmaster and end users. The total purchase price of $135,000 consists
of: (i) a $55,000 cash payment at closing; (ii) a cash payment of $40,000 upon completion of certain training; and, (iii) a cash payment
of $40,000 upon the Company collecting $25,000 from the assets acquired in the subject transaction.
On
October 8, 2020, the Company entered into an Asset Purchase Agreement with Resilient Network Systems, Inc. (“RNS”)
to acquire the intellectual property rights and certain assets collectively known as Resilient Networks™, a Silicon Valley based
SaaS platform that performs SSO and adaptive access control “on the fly” with sophisticated and flexible policy workflows
for authentication and authorization. The total purchase price of $305,000 consists of: (i) a $125,000 cash payment at closing; and,
(ii) the issuance of 19,148,936 shares of our common stock to RNS.
The
following table summarizes the components of the Company’s intellectual property as of the dates presented:
SCHEDULE OF INTELLECTUAL PROPERTY
| |
December
31, | | |
December
31, | |
| |
2021 | | |
2020 | |
Intellectual
property: | |
| | | |
| | |
Word
press GDPR rights | |
$ | 46,800 | | |
$ | 46,800 | |
ARALOC™ | |
| 1,850,000 | | |
| 1,850,000 | |
ArcMail
License | |
| 1,445,000 | | |
| 1,445,000 | |
DataExpressTM | |
| 1,388,051 | | |
| 1,388,051 | |
FileFacetsTM | |
| 135,000 | | |
| 135,000 | |
IntellyWP™ | |
| 135,000 | | |
| 135,000 | |
Resilient
Network Systems | |
| 305,000 | | |
| 305,000 | |
| |
| 5,304,851 | | |
| 5,304,851 | |
Accumulated
amortization | |
| (3,960,032 | ) | |
| (2,993,944 | ) |
Impairment | |
| (75,000 | ) | |
| | |
Intellectual
property, net of accumulated amortization | |
$ | 1,269,819 | | |
$ | 2,310,907 | |
The
Company recognized amortization expense of approximately $966,088
and $1,406,031
for the years ended December 31, 2021 and 2020,
respectively, recorded as general and administrative expense.
During
the years ended December 31, 2021 the Company determined that IntellyWPTM should be impaired because of the reduction in sales
from this service. Accordingly, the Company estimated the undiscounted future cash flows to be generated by IntellyWPTM to
be an immaterial amount, which was less than the carrying amount of IntellyWPTM of $75,000. This resulted in a $75,000 write-down
of the assets, which was reflected as a separate line item in the income statement.
Based
on the carrying value of definite-lived intangible assets as of December 31, 2021, 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 | |
| 815,484 | |
2023 | |
| 411,585 | |
2024 | |
| 27,000 | |
Thereafter | |
| 15,750 | |
Total | |
| 1,269,819 | |
NOTE
6: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The
following table summarizes the components of the Company’s accounts payable and accrued liabilities as of the dates presented:
SUMMARY OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| |
December
31, | | |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Accounts
payable | |
$ | 75,628 | | |
$ | 178,319 | |
Payroll
liabilities | |
| - | | |
| 102,793 | |
Credit
cards | |
| 28,492 | | |
| 31,918 | |
Accrued
dividend - preferred stock | |
| 6,849 | | |
| 484 | |
Accrued
liabilities | |
| 4,704 | | |
| 87,500 | |
Accounts
payable and accrued liabilities | |
$ | 115,673 | | |
$ | 401,014 | |
NOTE
7: DEFERRED REVENUE
For
the years ended December 31, 2021 and 2020, changes in deferred revenue were as follows:
SUMMARY OF CHANGES IN DEFERRED REVENUE
| |
December
31, | | |
December
31, | |
| |
2021 | | |
2020 | |
Balance,
beginning of year | |
$ | 1,518,163 | | |
$ | 953,546 | |
Deferral
of revenue | |
| 2,581,801 | | |
| 2,961,749 | |
Recognition
of deferred revenue | |
| (2,491,368 | ) | |
| (2,397,132 | ) |
Balance,
end of year | |
$ | 1,608,596 | | |
$ | 1,518,163 | |
As
of December 31, 2021 and 2020, is classified as follows:
SUMMARY OF DEFERRED REVENUE
| |
December
31, | | |
December
31, | |
| |
2021 | | |
2020 | |
Current | |
$ | 1,035,185 | | |
$ | 1,478,430 | |
Non-current | |
| 573,411 | | |
| 39,733 | |
Deferred
revenue | |
$ | 1,608,596 | | |
$ | 1,518,163 | |
NOTE
8: LEASES
Operating
lease
We
have noncancelable operating leases for our office facility that expire in 2024. The operating lease has renewal options and rent escalation
clauses. On July 1, 2020, the Company renegotiated the office lease to obtain rent expense relief for the months of April 2020 –
December 2020.
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 $97,385 and $100,910 for the years ended December 31, 2021 and 2020, respectively, primarily related to
operating lease costs paid to lessors from operating cash flows. As of December 31, 2021 and 2020, the Company recorded security deposit
of $10,000. 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 December 31, 2021
were as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER OPERATING LEASES
| |
Total | |
Year
Ended December 31, | |
| | |
2022 | |
| 127,300 | |
2023 | |
| 131,150 | |
Thereafter | |
| - | |
Total
lease payment | |
| 258,450 | |
Less:
Imputed interest | |
| (20,488 | ) |
Operating
lease liabilities | |
| 237,962 | |
| |
| | |
Operating
lease liability - current | |
| 112,322 | |
Operating
lease liability - non-current | |
$ | 125,640 | |
The
following summarizes other supplemental information about the Company’s operating lease as of December 31, 2021:
SCHEDULE OF OTHER SUPPLEMENTAL INFORMATION UNDER OPERATING LEASE
Weighted
average discount rate | |
| 8 | % |
Weighted
average remaining lease term (years) | |
| 2.04 | |
Finance
lease
The
Company leases computer and hardware under non-cancellable capital lease arrangements. The term of those capital leases is 3
years and annual interest rate is 12%.
At December 31, 2021 and 2020, capital lease obligations included in current liabilities were $72,768
and $90,565,
respectively, and capital lease obligations included in long-term liabilities were $10,341
and $83,109,
respectively. As of December 31, 2021 and 2020, the Company recorded security deposit of $10,944.
During the years ended December 31, 2021 and 2020, the Company paid interest expense of $15,967 and $22,892, respectively.
At
December 31, 2021, future minimum lease payments under the finance lease obligations, are as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER FINANCE LEASES
| |
Total | |
| |
| |
2022 | |
| 78,379 | |
2023 | |
| 10,496 | |
Thereafter | |
| - | |
Total
finance lease payment | |
| 88,875 | |
Less:
Imputed interest | |
| (5,766 | ) |
Finance
lease liabilities | |
| 83,109 | |
| |
| | |
Finance
lease liability | |
| 72,768 | |
Finance
lease liability - non-current | |
$ | 10,341 | |
As
of December 31, 2021 and 2020, finance lease assets are included in property and equipment as follows:
SCHEDULE OF FINANCE LEASE ASSETS
| |
December
31, | | |
December
31, | |
| |
2021 | | |
2020 | |
Finance
lease assets | |
$ | 267,284 | | |
$ | 267,284 | |
Accumulated
depreciation | |
| (192,928 | ) | |
| (87,337 | ) |
Finance
lease assets, net of accumulated depreciation | |
$ | 74,356 | | |
$ | 179,947 | |
NOTE
9: CONVERTIBLE NOTES PAYABLE
Convertible
notes payable consists of the following:
SCHEDULE OF CONVERTIBLE NOTES PAYABLE
| |
December
31, | | |
December
31, | |
| |
2021 | | |
2020 | |
Convertible
Notes - Issued in fiscal year 2020 | |
| 100,000 | | |
| 1,526,000 | |
Convertible
Notes - Issued in fiscal year 2021 | |
| 1,607,857 | | |
| - | |
| |
| 1,707,857 | | |
| 1,526,000 | |
Less
debt discount and debt issuance cost | |
| (691,569 | ) | |
| (282,232 | ) |
| |
| 1,016,288 | | |
| 1,243,768 | |
Less
current portion of convertible notes payable | |
| 993,931 | | |
| 1,241,412 | |
Long-term
convertible notes payable | |
$ | 22,357 | | |
$ | 2,356 | |
During
the years ended December 31, 2021 and 2020, the Company recognized interest expense of $131,623 and $274,857, and amortization of debt
discount, included in interest expense of $478,582 and $1,576,907, respectively.
Replacement
of note
During
the year ended December 31, 2020, the Company assigned a portion of note with outstanding principal amounts of $150,000 to a lender.
Our CEO paid $135,000 to repay a principal amount of $81,000 on behalf of the company. As a result, the Company recorded due to related
party of $135,000 and loss on settlement of debt of $54,000.
Effective
September 30, 2020, the Company exchanged (i) its convertible promissory note originally issued on March 20, 2020 in the amount of $125,000
(referred to herein as the Granite Note); and, (ii) the Common Stock Purchase Warrant dated 18 March 2020 for the issuance of sixteen (16) shares of Company Common Stock (the “Granite Warrant”) for the issuance of a new convertible promissory
note issued in favor of Blue Citi LLC in the amount of $325,000 (the “Exchange Note”). Both the Granite Note and the Granite
Warrant were cancelled as a result of the exchange and the issuance of the Exchange Note. Terms of the Exchange Note include, without
limitation, the following:
|
a. |
Principal
balance of $325,000, which includes all accrued and unpaid interest on the Granite Note; |
|
|
|
|
b. |
No
further interest shall accrue so long as there is no event of default; |
|
|
|
|
c. |
Conversions
into common stock under the Exchange Note shall be effected at the lowest closing stock price during the five (5) days preceding
any conversion, with -0- discount and a conversion price not below $112; |
|
|
|
|
d. |
No
prepayment premiums or penalties; and |
|
|
|
|
e. |
Maturity
date of September 30, 2021. Notes were fully converted in February 2021 |
Effective
November 17, 2020, the Company entered into a Settlement and Release Agreement (the “Settlement Agreement”) with an existing
lender to, among things, settle all dispute regarding a convertible promissory note, and exchanged that note for a newly issued note.
The disputed note, referred to herein as the “Smea2z Note”, was originally issued on October 23, 2018 in favor of Smea2z
LLC in the original principal amount of Two Hundred Twenty Thousand Dollars ($220,000). Subsequent to the issuance of the Smea2z Note,
a series of agreements were executed which amended various terms and conditions of the Smea2z Note, resulting in, among other things,
a purported principal balance of Six Hundred Thousand Eight Hundred Fifty Dollars ($608,850). As a result of the Settlement Agreement,
the Smea2z Note was cancelled, and a new note was issued (the “Exchange Note”) in exchange for the Smea2z Note. The Exchange
Note was issued as of November 17, 2020 in the reduced original principal amount of Four Hundred Thousand Dollars ($400,000). The Exchange
Note further provides as follows:
|
a. |
No
further interest shall accrue so long as there is no event of default; |
|
|
|
|
b. |
Maturity
date remains the same: 30 June 2021; |
|
|
|
|
c. |
No
right to prepay; |
|
|
|
|
d. |
Conversion
price is fixed at $56; |
|
|
|
|
e. |
Typical
events of default for such a note, as well as a default in the event the closing price for the Company’s common stock is less
than $56 for at least 5-consecutive days; and |
|
|
|
|
f. |
Leak
out provision: |
|
|
1. |
One
conversion per week, for no more than forty million shares; |
|
|
|
|
|
|
2. |
If
the trading volume for the Company’s common stock exceeds fifty million shares on any day, a second conversion may be exercised
during that week, again for no more than forty million shares (a total of eighty million shares for that week). Notes were fully
converted in February 2021 |
Effective
November 18, 2020, the Company entered into an agreement with three existing investors in the Company
(the
“Warrant Holders”), each of which was the holder of warrants issued the Company. The total number of warrants (collectively,
the “Exchanged Warrants”) held by the Warrant Holders totaled 39. The Company and the Warrant Holders agreed to exchange
the Exchanged Warrants for three newly issued promissory notes (the “Warrant Exchange Notes”). As a result of the exchange,
the Exchanged Warrants were cancelled and of no further force and effect. The Warrants Exchange Notes were issued as of November 18,
2020, in the total original principal amount of One Hundred Thousand Dollars ($100,000). The Warrant Exchange Notes further provide as
follows: (i) interest accrues at 5% per annum; (ii) maturity date of November 18, 2025; (iii) no right to prepay; (iv) fixed conversion
price of $160; and, (v) typical events of default for such a note.
Settlement of note and accrued interest
Convertible note in the original principal amount
of $25,000 issued on July 1, 2020 and accrued interest of replacement of notes of $56,808 were nullified in full and were to be deemed
to be zero, and be of no further force and effect. As a result, the Company recorded a gain on settlement of debt of $81,808.
Conversion
During
the year ended December 31, 2021, the Company converted notes with principal amounts and accrued interest of $1,450,150 into 24,536 shares
of common stock. The corresponding derivative liability at the date of conversion of $392,703 was credited to additional paid in capital.
During
the year ended December 31, 2020, the Company converted notes with principal amounts and accrued interest of $3,811,434 into 50,847 shares
of common stock. The corresponding derivative liability at the date of conversion of $10,548,012 was credited to additional paid in capital.
Convertible
notes payable consists of the following:
Promissory
Notes - Issued in fiscal year 2020
During
the twelve months ended December 31, 2020, the Company issued a total of $2,466,500 of notes with the following terms:
|
● |
Terms
ranging from 5 months to 60 months. |
|
|
|
|
● |
Annual
interest rates of 0% - 25%. |
|
|
|
|
● |
Convertible
at the option of the holders at issuance date, after maturity date or 6 months after issuance date. |
|
|
|
|
● |
Conversion
prices are typically based on the discounted (25% to 50% discount) average closing prices or lowest trading prices of the Company’s
shares during various periods prior to conversion. Certain note has a fixed conversion price ranging from $ 16to $112. Certain
note has a fixed conversion price of $0.5 for a first 5 months Certain note allows the principal amount will increase by $15,000
and the discount rate of conversion price will decrease by 18% if the conversion price is less than $$160. |
The
Company determined that the conversion features, in the convertible notes, met the definition of a liability in accordance with ASC Topic
No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own Stock and therefore bifurcated the embedded conversion options
once the notes become convertible and accounted for it as a derivative liability. The fair value of the conversion feature was recorded
as a debt discount and amortized to interest expense over the term of the note.
The
Company 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 twelve months ended December 31, 2020 amounted to $10,854,214,
and $947,175 of the value assigned to the derivative liability was recognized as a debt discount to the notes, while the balance of $9,907,039
was recognized as a “day 1” derivative loss.
As
of December 31, 2021, $100,000 notes that were issued in fiscal year 2020 were outstanding.
Promissory
Notes - Issued in fiscal year 2021
During
the year ended December 31, 2021, the Company issued convertible notes of $1,696,999 for cash proceeds of $1,482,000 after deducting
financing fee of $214,999 with the following terms;
|
● |
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
prices are typically based on the discounted (39% discount) average closing prices or lowest trading prices of the Company’s shares
during 20 periods prior to conversion. |
|
|
|
|
● |
1,414
shares of common stock valued at $133,663 issued in conjunction with convertible notes. |
|
|
|
|
● |
117,992
warrants to purchase shares of common stock with an exercise price a range from $7.44 to 36.00 granted in conjunction with convertible
notes. The term of warrant is 5 years from issue date. (Note 12) |
As of December 31, 2021, $1,607,857 notes that were issued in fiscal year
2021 were outstanding.
NOTE
10: DERIVATIVE LIABILITIES
The
Company 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.
The
Company 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 December 31, 2021. As of the end of year, at December 31, 2021 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 years ended December 31, 2021 and, 2020, 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
| |
Year
ended | | |
Year
ended | |
| |
December
31, | | |
December
31, | |
| |
2021 | | |
2020 | |
Expected
term | |
| 0.48
- 5.00 years | | |
| 0.25
- 5.00 years | |
Expected
average volatility | |
| 160%-
302 | % | |
| 187%-
464 | % |
Expected
dividend yield | |
| - | | |
| - | |
Risk-free
interest rate | |
| 0.04%
- 1.24 | % | |
| 0.01%
- 1.57 | % |
The
following table summarizes the changes in the derivative liabilities during the years ended December 31, 2021 and 2020:
SCHEDULE OF CHANGES IN DERIVATIVE LIABILITIES
Fair
Value Measurements Using Significant Unobservable Inputs (Level 3) |
Derivative
liability as of December 31, 2019 | |
$ | 2,601,277 | |
| |
| | |
Addition
of new derivatives recognized as debt discounts | |
| 947,175 | |
Addition
of new derivatives recognized as day-one loss | |
| 9,907,039 | |
Derivative
liabilities settled upon conversion of convertible note | |
| (10,954,868 | ) |
Change
in derivative liabilities recognized as loss on derivative | |
| (2,500,623 | ) |
Derivative
liability as of December 31, 2020 | |
$ | - | |
| |
| | |
Addition
of new derivatives recognized as debt discounts | |
| 390,000 | |
Addition
of new derivatives recognized as day-one loss | |
| 559,939 | |
Derivative
liabilities settled upon conversion of convertible note | |
| (1,004,658 | ) |
Change
in derivative liabilities recognized as loss on derivative | |
| 54,719 | |
Derivative
liability as of December 31, 2021 | |
$ | - | |
The
aggregate loss on derivatives during the years ended December 31, 2021 and 2020 was $614,658 and $7,406,416, respectively.
NOTE
11: NOTES PAYABLE
Notes
payable consists of the following:
SCHEDULE OF NOTES PAYABLE
| |
December
31, | | |
December
31, | | |
| |
| |
| |
2021 | | |
2020 | | |
Maturity | |
Interest
Rate | |
10%
Promissory note - originated in October 2019 | |
$ | - | | |
$ | 25,060 | | |
Due
on demand | |
| 10.0 | % |
Promissory
note - originated in October 2019 | |
| - | | |
| 25,060 | | |
Due
on demand | |
| 10.0 | % |
Promissory
note - originated in April 2020 | |
| - | | |
| 10,000 | | |
Due
on demand | |
| No
interest | |
Paycheck
Protection Program Promissory note - originated in April 2020 (1) | |
| - | | |
| 339,000 | | |
2
years | |
| 1.0 | % |
Economic
Injury Disaster Loan - originated in May 2020 (2) | |
| 500,000 | | |
| 150,000 | | |
30
years | |
| 3.75 | % |
Promissory
note - originated in June 2020 | |
| - | | |
| 43,356 | | |
$3,942.86
daily payment | |
| 16.0 | % |
Promissory
note - originated in September 2020 | |
| 50,456 | | |
| 80,730 | | |
$2,873.89 monthly payment for 36 months | |
| 14.0 | % |
Promissory
note - originated in October 2020 | |
| - | | |
| 158,169 | | |
$2,293.31 daily payment | |
| 25.0 | % |
Promissory
note - originated in November 2020 | |
| - | | |
| 170,886 | | |
$4,497.00 daily payment | |
| 25.0 | % |
Promissory
note - originated in November 2020 | |
| - | | |
| 394,846 | | |
$6,999.00 daily payment | |
| 25.0 | % |
Promissory
note - originated in December 2020 | |
| 33,039 | | |
| 50,031 | | |
$1,854.41 monthly payment for 36 months | |
| 8.0 | % |
Promissory
note - originated in January 2021 | |
| 48,583 | | |
| - | | |
$2,675.89 monthly payment for 36 months | |
| 18.0 | % |
Promissory
note - originated in February 2021 | |
| 1,328,848 | | |
| - | | |
5
years | |
| 4.0 | % |
Promissory
note - originated in April 2021 | |
| 832,000 | | |
| - | | |
1
year | |
| 12 | % |
Promissory
note - originated in April 2021 | |
| - | | |
| - | | |
$8,284.92 daily payment | |
| 24 | % |
Promissory
note - originated in July 2021 | |
| 282,000 | | |
| - | | |
1
year | |
| 12 | % |
Promissory
note - originated in August 2021 | |
| - | | |
| - | | |
$4,842.5 daily payment | |
| 49 | % |
Promissory
note - originated in September 2021 | |
| 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 | |
| 241,714 | | |
| - | | |
$10,071.45 weekly payment | |
| 4.94 | % |
Promissory
note - originated in December 2021 | |
| 189,975 | | |
| - | | |
$2,793.75 daily payment | |
| 7 | % |
| |
| 3,968,491 | | |
| 1,447,137 | | |
| |
| | |
Less
debt discount and debt issuance cost | |
| (476,727 | ) | |
| (289,332 | ) | |
| |
| | |
| |
| 3,491,764 | | |
| 1,157,805 | | |
| |
| | |
Less
current portion of promissory notes payable | |
| 1,720,777 | | |
| 585,310 | | |
| |
| | |
Long-term
promissory notes payable | |
$ | 1,770,989 | | |
$ | 572,495 | | |
| |
| | |
|
(1) |
In
response to the Coronavirus (COVID-19) pandemic, the US Government passed the Coronavirus Aid, Relief, and Economic Security (CARES)
Act on March 27, 2020. The CARES Act provides fast and direct economic assistance for entrepreneurs and small businesses through
the US Small Business Administration (“SBA”). |
During the year ended 2020, the Company received
a loan issued under the CARES Act program - Paycheck Protection Program (“PPP”). This loan program provides small businesses
with funds to pay up to eight (8) weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages,
rent, and utilities.
Under
the PPP, the Company may apply to have certain amounts forgiven under the direction of the Administrator of the SBA providing that the
Company satisfies certain criteria. Repayment of the PPP loan will commence earlier of when the SBA remits the forgiveness amount to
the lender or the Maturity Date.
During
the year ended December 31, 2021, PPP loan was fully forgiven.
|
(2) |
The
Company received an advance under the Economic Injury Disaster Loan (EIDL) program. |
As
the Company received an EIDL advance and a PPP loan, the EIDL advance portion will be applied against the PPP forgiveness amount as repayment
to the SBA upon approval of the PPP forgiveness application.
During
the years ended December 31, 2021 and 2020, the Company recognized interest expense of $260,155
and $34,331,
and amortization of debt discount, included in interest expense of $2,082,875
and $534,535,
respectively.
During
the years ended December 31, 2021 and 2020, the Company issued a total of $6,094,051
and $2,971,864,
less discount of $1,716,825
and $823,868
and repaid $4,577,578
and $1,689,846,
respectively.
During
the year ended December 31, 2021, debts and accrued interest of $413,657
were forgiven and the Company recorded a gain
on settlement of debt.
NOTE
12: CAPITAL STOCK AND REVERSE STOCK SPLIT
Changes
in Authorized Shares
On
March 5, 2020, the Company amended its Articles of Incorporation to increase the number of shares of authorized common stock to 250,000,000.
On
April 15, 2020, the Company amended its Articles of Incorporation to increase the number of shares of authorized common stock to 750,000,000.
On
August 17, 2020, the Company amended its Articles of Incorporation to increase the number of shares of authorized common stock to 1,500,000,000.
On
November 25, 2020 the Company filed a Certificate of Designation to authorize and create its Series B Preferred shares, consisting of
80,000 shares, $0.001 par value.
On
December 15, 2020 the Company amended its Articles of Incorporation to increase the number of shares of authorized common stock to 1,800,000,000.
On
July 1, 2021, we effected a 1-for-2,000 reverse stock split of our issued and outstanding common stock.
On
March 7, 2022, the Company filed an amendment to its Articles of Incorporation to effect a 1-for-8 reverse stock split of its 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 December 31, 2021, the Company is 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.
As
of December 31, 2021 and 2020, 150,000
shares of Series A were issued and outstanding. 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. Jason Remillard, sole director of the Company. During the year ended December 31,
2020, the Company issued a total of 148,666
shares of Series A preferred stock to Mr. Remillard.
As
of December 31, 2021 and 2020, 29,750 and 5,300 shares of Series B were issued and outstanding, respectively. Each share of Series B
(i) has a stated value of Ten Dollars ($10.00) per share; (ii) are convertible into common stock at a price per share equal to sixty
one percent (61%) of the lowest price for the Company’s common stock during the twenty (20) day of trading preceding the date of
the conversion; (iii) earn dividends at the rate of nine percent (9%) per annum; and, (iv) generally have no voting rights.
During
the year ended December 31, 2021, the Company issued a total of 62,700 shares of Series B preferred stock as follows
|
● |
56,400
shares for $525,000, less $39,000 financing fees. |
|
|
|
|
● |
6,560
shares in exchange for convertible note and accrued dividend of $65,600. |
During
the year ended December 31, 2020, the Company issued 5,300 shares of Series B preferred stock for $50,000, less $3,000 financing fee.
During
the years ended December 31, 2021 and 2020, the Company recorded accrued dividend of $40,149
and $484,
and amortization of debt discount, included in interest expense of $345,188 and $203, respectively.
During
the year ended December 31, 2021, 33,875 shares of series B preferred stock were converted into 18,024 shares of our common stock and
the Company redeemed 4,375 shares of series B preferred stock for $63,999.
Common
Stock
As
of December 31, 2021, the Company is authorized to issue 1,000,000,000
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. The total number of shares of Company common stock
issued and outstanding as of December 31, 2021 and 2020, respectively, was 122,044
and 65,308
shares, respectively.
On
January 6, 2022, the Company reduced the number of authorized shares of common stock to 125,000,000 shares of common stock.
During
the year ended December 31, 2021, the Company issued common stock as follows:
|
● |
24,536
shares issued for conversion of debt; |
|
● |
10,419
shares issued for cash of $1,000,000, less financing cost of $10,000, less an additional financing discount of $143,199; |
|
● |
1,227
shares issued for service; |
|
● |
1,116
shares issued upon the cash-less exercise of warrants; |
|
● |
18,024
shares issued for conversion of Series B preferred stock; |
|
● |
1,414
shares issued as a loan fee in connection with the issuance of promissory notes; and |
During
the year ended December 31, 2020, the Company issued common stock as follows,
|
● |
50,847
shares issued for conversion of debt |
|
● |
97
shares issued for the settlement of stock subscription |
|
● |
753
shares issued pursuance to S-8, of which 375 shares were issued to Mr. Remillard, who has not sold any of his shares (common or preferred) |
|
● |
32
shares issued for compensation to our former CFO (who has since sold all of his shares) |
|
● |
2,377
shares issued for cashless warrant |
|
● |
7,605
shares issued for the settlement of stock payable of acquisition DataExpress™ |
|
● |
1,197
shares issued for asset purchase |
|
● |
1,796
shares issued for service |
Warrants
The
Company identified conversion features embedded within warrants issued during the year ended December 31, 2020. The Company has determined
that the conversion feature of the Warrants represents an embedded derivative since the conversion price includes a reset provision which
could cause adjustments upon conversion. During the year ended December 31, 2020, 21 warrants were granted, for a period of five years
from issuance, at price of $8,000 per share. However, as of September 30, 2020, 16 of these original warrants, as reset, were completely
cancelled and are all null and void in all respects as part of the consideration for the issuance of the Exchange Note.
As
a result of the reset features, the warrants increased by 22,919 for the year ended December 31, 2020, and the total warrants exercisable
into 23,057 shares of common stock at a weighted average exercise price of $81.60 per share as of December 31, 2020. The reset feature
of warrants was effective at the time that a separate convertible instrument with lower exercise price was issued. We accounted for the
issuance of the Warrants as a derivative.
During
the year ended December 31, 2020, the Company entered into an agreement with three existing investors in the Company (the “Holders”),
each of which was the holder of warrants issued the Company. The total number of warrants (collectively, the “Warrants”)
held by the Holders totaled 2. The Company and the Holders agreed to exchange the Warrants for three newly issued convertible promissory
notes. As a result of the exchange, the Company recorded loss on settlement of $100,000.
On
December 11, 2020, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Triton Funds
LP, a Delaware limited partnership (“Triton”). Pursuant to the Purchase Agreement, subject to certain conditions set forth
in the Purchase Agreement, Triton is obligated to purchase up to One Million Dollars ($1,000,000) of the Company’s common stock
from time-to-time. The Company also granted to Triton warrants to purchase 6,250 shares of the Company’s Common Stock. The exercise
price for the warrants is $160 per share, and may be exercised at any time, in whole or in part, prior to December 11, 2025. The Warrant
Agreement provides for certain adjustments that may be made to the exercise price and the number of shares issuable upon exercise due
to future corporate events. The Warrant Agreement also contains a limited cashless exercise feature, providing for the cashless exercise
of 1,250 shares only upon the Company’s failure to secure the effectiveness of the Registration Statement, which is to include
all shares under the Warrant Agreement.
During
the year ended December 31, 2021, the Company issued the following warrants: (i) to acquire 6,933 shares of the Company’s common
stock pursuant at an exercise price of $120, with a cashless exercise option; (ii) to acquire 6,933 shares of the Company’s common
stock at an exercise price of $120, exercisable only in the event of a default under that certain Senior Secured Promissory Note issued
on 23 April 2021 in the original principal amount of $832,000; (iii) to acquire 15,666 shares of the Company’s common stock at
an exercise price of $36, exercisable only in the event of a default under that certain Senior Secured Promissory Note issued on July
27, 2021 in the original principal amount of $282,000; (iv) to acquire 2,917 shares of the Company’s common stock at an exercise
price of $36, exercisable only in the event of a default under that certain Convertible Promissory Note issued on September 28, 2021
in the original principal amount of $282,000; (v) to acquire 40,404 shares of the Company’s common stock at an exercise price of
$36, exercisable only in the event of a default under that certain Convertible Promissory Note issued on October 19, 2021 in the original
principal amount of $444,444 and, (vi) to acquire 74,671 shares of the Company’s common stock at an exercise price of $7.44, exercisable
only in the event of a default under that certain Convertible Promissory Note issued on December 21, 2021 in the original principal amount
of $555,555.
A
summary of activity during the period ended December 31, 2021 follows:
SCHEDULE OF WARRANTS ACTIVITY
| |
| | |
Weighted
Average | |
| |
| Shares | | |
| Exercise
Price | |
Outstanding,
December 31, 2019 | |
| 117 | | |
$ | 7,862.34 | |
Granted | |
| 6,271 | | |
| 227.20 | |
Reset
feature | |
| 22,919 | | |
| 81.60 | |
Exercised | |
| (2,416 | ) | |
| 81.60 | |
Forfeited/canceled | |
| (20,641 | ) | |
| 51.20 | |
Outstanding,
December 31, 2020 | |
| 6,250 | | |
$ | 20.00 | |
Granted | |
| 141,721 | | |
| 22.18 | |
Reset
feature | |
| - | | |
| - | |
Exercised | |
| (1,129 | ) | |
| 5.80 | |
Forfeited/canceled | |
| - | | |
| - | |
Outstanding,
December 31, 2021 | |
| 146,842 | | |
$ | 27.86 | |
The
following table summarizes information relating to outstanding and exercisable warrants as of December 31, 2021:
SCHEDULE OF OUTSTANDING AND EXERCISABLE WARRANTS
Warrants
Outstanding | | |
Warrants
Exercisable | |
Number
of
Shares | | |
Weighted
Average Remaining
Contractual life (in years) | | |
Weighted
Average
Exercise Price | | |
Number
of
Shares | | |
Weighted
Average
Exercise Price | |
| 6,250 | | |
| 3.95 | | |
$ | 160.00 | | |
| - | | |
$ | - | |
| 6,933 | | |
| 4.31 | | |
$ | 120.00 | | |
| - | | |
$ | - | |
| - | | |
| - | | |
$ | 46.40 | | |
| - | | |
$ | - | |
| 15,667 | | |
| 4.57 | | |
$ | 36.00 | | |
| - | | |
$ | - | |
| 2,917 | | |
| 4.75 | | |
$ | 36.00 | | |
| - | | |
$ | - | |
| 40,404 | | |
| 4.80 | | |
$ | 25.60 | | |
| - | | |
$ | - | |
| 74,671 | | |
| 4.98 | | |
$ | 7.44 | | |
| - | | |
$ | - | |
NOTE
13: INCOME TAXES
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and
deferred tax liabilities are as follows as of December 31:
SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES
| |
December
31, | | |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Non-operating
loss carryforward | |
$ | 4,685,000 | | |
$ | 4,014,000 | |
Valuation
allowance | |
| (4,685,000 | ) | |
| (4,014,000 | ) |
Net
deferred tax asset | |
$ | - | | |
$ | - | |
The
Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such
assets. During 2021 the valuation allowance increased by $671,000. The Company has net operating and economic loss carry-forwards of
approximately $19,072,000 available to offset future federal and state taxable income.
A
reconciliation between expected income taxes, computed at the federal income tax rate of 21% applied to the pretax accounting loss, and
our blended state income tax rate of 2.0%, and the income tax net expense included in the consolidated statements of operations for the
years ended December 31, 2021 and 2020 is as follows:
SCHEDULE OF STATUTORY FEDERAL INCOME TAX RATE LOSSES BEFORE INCOME TAX
| |
2021 | | |
2020 | |
| |
Years
Ended | |
| |
December
31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
| |
| | | |
| | |
Income
tax (recovery) at statutory rate | |
$ | (1,360,000 | ) | |
$ | (2,921,000 | ) |
State
income tax expense, net of federal tax effect | |
| (130,000 | ) | |
| (270,000 | ) |
Permanent
difference and other | |
| 819,000 | | |
| 2,201,000 | |
Change
in valuation allowance | |
| 671,000 | | |
| 990,000 | |
Income
tax expense per books | |
$ | - | | |
$ | - | |
The
effective tax rate of 0% differs from our statutory rate of 21% primarily due to the effect of non-deductible income and expenses. Tax
returns for the years ended 2013 – 2021, are subject to review by the tax authorities.
NOTE
14: SHARE-BASED COMPENSATION
Stock
Options
During
the years ended December 31, 2021 and 2020, the Company granted options for the purchase of the Company’s common stock to certain
employees, 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 years ended December 31, 2021 and 2020:
SCHEDULE OF STOCK OPTION ACTIVITY
| |
| | |
Weighted-Average | |
| |
Options
Outstanding | | |
Exercise
Price | |
Balance
as of December 31, 2019 | |
| 24 | | |
$ | 29,760.00 | |
Grants | |
| 782 | | |
| 398.46 | |
Exercised | |
| (8 | ) | |
| 33,833.25 | |
Cancelled | |
| (63 | ) | |
| 1,824.72 | |
Balance
as of December 31, 2020 | |
| 735 | | |
$ | 775.93 | |
Grants | |
| 1,386 | | |
| 304.44 | |
Exercised | |
| - | | |
| - | |
Cancelled | |
| - | | |
| - | |
Balance
as of December 31, 2021 | |
| 2,121 | | |
$ | - | |
The
weighted average grant date fair value of stock options granted during the years ended December 31, 2021 and 2020 was $299 and $320,
respectively. The total fair value of stock options that granted during the year ended December 31, 2021 and 2020 was approximately $414,902
and $251,117, respectively. 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 year ended December 31, 2021 and 2020:
SCHEDULE OF WEIGHTED AVERAGE ASSUMPTIONS FOR STOCK OPTIONS GRANTED
| |
2021 | | |
2020 | |
Expected
term (years) | |
| 5.74 | | |
| 5.7 | |
Expected
stock price volatility | |
| 296.25 | % | |
| 316.43 | % |
Weighted-average
risk-free interest rate | |
| 0.62 | % | |
| 0.40 | % |
Expected
dividend | |
$ | 0.00 | | |
$ | 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 December 31, 2021:
SCHEDULE OF STOCK OPTIONS VESTED AND EXPECTED TO VEST
| |
| | |
Weighted-Average | | |
| |
| |
Number
of | | |
Remaining
Contractual Life | | |
Weighted-Average | |
| |
Options | | |
(In
Years) | | |
Exercise
Price | |
Outstanding | |
| 2,121 | | |
| 8.90 | | |
$ | 467.76 | |
Exercisable | |
| 344 | | |
| 8.42 | | |
$ | 1,368.32 | |
Expected
to vest | |
| 1,777 | | |
| 8.99 | | |
$ | 293.51 | |
As
of December 31, 2021 and 2020, there was $381,547 and $211,661, respectively, of total unrecognized compensation cost related to non-vested
stock-based compensation arrangements which is expected to be recognized within the next year.
Restricted
Stock Awards
During
the years ended December 31, 2021 and 2020, 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 restricted stock activity for the years ended December 31, 2021 and 2020:
SCHEDULE OF RESTRICTED STOCK ACTIVITY
| |
| | |
Weighted-Average | |
| |
Shares | | |
Fair
Value | |
Balance
as of December 31, 2019 | |
| 32 | | |
| 15,449.60 | |
Shares
of restricted stock granted | |
| 892 | | |
| 253.15 | |
Exercised | |
| - | | |
| - | |
Cancelled | |
| (1 | ) | |
| 9,600.00 | |
Balance
as of December 31, 2020 | |
| 923 | | |
| 748.89 | |
Shares
of restricted stock granted | |
| 447 | | |
| 413.33 | |
Exercised | |
| - | | |
| - | |
Cancelled | |
| - | | |
| - | |
Balance
as of December 31, 2021 | |
| 1,370 | | |
| 639.22 | |
SCHEDULE OF RESTRICTED STOCK AWARD
| |
December
31, | | |
December
31, | |
Number
of Restricted Stock Awards | |
2021 | | |
2020 | |
Vested | |
| 1,370 | | |
| 29 | |
Non-vested | |
| - | | |
| 894 | |
As
of December 31, 2021 and 2020, there was $0 and $144,964, respectively, of total unrecognized compensation cost related to non-vested
stock-based compensation, which is expected to be recognized over the next year.
NOTE 15: INTEREST EXPENSE
For the years ended December 31, 2021 and 2020, the
Company recorded interest expense as follows:
Summary
of Interest Expense
| |
Year ended | | |
Year ended | |
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
Interest expense - convertible notes | |
$ | 131,623 | | |
$ | 274,857 | |
Interest expense - notes payable | |
| 260,155 | | |
| 34,331 | |
Interest expense - notes payable - related party | |
| 9,992 | | |
| 35,096 | |
Finance lease | |
| 15,967 | | |
| 22,892 | |
Other | |
| 10,031 | | |
| 37,126 | |
Amortization of debt discount | |
| 2,906,645 | | |
| 2,110,645 | |
| |
$ | 3,334,413 | | |
$ | 2,514,947 | |
NOTE
16: 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 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 100 shares of
our common stock. The shares were issued in the form of 144,000 shares of the Company’s Series A preferred stock as part of the
consideration under the Share Settlement Agreement dated August 14, 2020.
On
September 16, 2019, the Company entered into an Asset Purchase Agreement with DMBGroup, LLC. Amounts owed to DMBGroup, LLC including
the note payable of $940,000 and member loans of $97,689 were recorded as amounts due to a related party. During the year ended December
31, 2021 and 2020, the Company repaid note payable of $281,638 and $458,275 including interest expense of $9,992 and $35,096, respectively.
As of December 31, 2021 and 2020, the Company had recorded a liability to DMBGroup totaling $123,745 and $405,382, respectively.
During
the year ended December 31, 2021, the Company borrowed $231,150 from our CEO, our CEO paid operating expenses of $135,793 on behalf of
the Company and the Company repaid $399,169 to our CEO. During the year ended December 31, 2020, our CEO paid operating expenses of $299,173
on behalf of the Company and the Company repaid $303,079 to our CEO.
During
the year ended December 31, 2020, our CEO repaid $135,000 to purchase convertible note of $81,000 and a prepayment penalty of $54,000.
As a result, the Company recorded $54,000 as loss on settlement of debt.
During
the year ended December 31, 2020 we issued to our CEO a total of 148,666 shares of Series A preferred stock.
As
of December 31, 2021 and 2020, the Company had due to related party of $247,366 and $561,230, respectively, which arose from the DMB
transaction to acquire DataExpress™.
NOTE
17: SUBSEQUENT EVENTS
Subsequent
to December 31, 2021, the following transactions occurred:
|
● |
The
Company issued 7,875 shares of Series B Preferred stock for $75,000 |
|
● |
The
Company fully redeemed all outstanding 37,625 shares of Series B Preferred stock for $487,730 – leaving no outstanding Preferred
B shares issued as of the time of this report |
|
● |
The
Company issued convertible notes a total of $959,313 with 33,196 shares of common stock, which the term of notes is 1 year and annual
interest rate is 9%. Notes are convertible at the option of the holders after 6 months of issuance date of the note and conversion
price are Conversion prices are based on the discounted (39% or 20% discount) lowest trading prices of the Company’s shares
during 20 periods prior to conversion. Certain note has a floor price of $0.01. |
|
● |
On
January 19, 2022, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Centurion Holdings
I, LLC, a Missouri limited liability company (“Centurion”) and certain other parties. Pursuant to the Purchase Agreement,
Centurion sold, transferred, assigned, conveyed and delivered to the Company, and the Company purchased from Centurion, all right,
title, and interest in and to certain assets in the Purchase Agreement (the “Assets”). In exchange for the Assets, the
Company paid to Centurion (i) $250,000 payable in cash, (ii) $2,900,000 payable pursuant to a five year promissory note issued by
the Company in favor of Centurion, which accrues interest at a rate of 8% per annum and (iii) $250,000 in the form of a contingent
payment, as further described in the Purchase Agreement. |