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ITEM
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The
following discussion and analysis of the results of operations and financial condition for the three months ended March 31, 2021
and 2020 should be read in conjunction with our consolidated financial statements, and the notes to those financial statements
that are included elsewhere in this Quarterly Report.
All
references to “Data443”, “we”, “our,” “us” and the “Company” in this
Item 2 refer to Data443 Risk Mitigation, Inc., a Nevada corporation.
The
discussion in this section contains forward-looking statements. These statements relate to future events or our future financial
performance. We have attempted to identify forward-looking statements by terminology such as “anticipate,” “believe,”
“can,” “continue,” “could,” “estimate,” “expect,” “intend,”
“may,” “plan,” “potential,” “predict,” “should,” “would”
or “will” or the negative of these terms or other comparable terminology, but their absence does not mean that a statement
is not forward-looking. These statements are only predictions and involve known and unknown risks, uncertainties and other factors,
which could cause our actual results to differ from those projected in any forward-looking statements we make. Several risks and
uncertainties we face are discussed in more detail under “Risk Factors” in Part I, Item 1A of the Form 10 filed by
the Company with the SEC on January 11, 2019, and in the Part I, Item 1A of the Form 10-K filed by the Company with the SEC on
March 23, 2021, and in the discussion and analysis below. You should, however, understand that it is not possible to predict or
identify all risks and uncertainties and you should not consider the risks and uncertainties identified by us to be a complete
set of all potential risks or uncertainties that could materially affect us. You should not place undue reliance on the forward-looking
statements we make herein because some or all of them may turn out to be wrong. We undertake no obligation to update any of the
forward-looking statements contained herein to reflect future events and developments, except as required by law. The following
discussion should be read in conjunction with the consolidated financial statements and the notes to those statements included
elsewhere in this Quarterly Report on Form 10-Q.
Overview
Our
company was incorporated as LandStar, Inc., a Nevada corporation, on May 4, 1998, for the purpose of purchasing, developing and
reselling real property, with its principal focus on the development of raw land. From incorporation through December 31, 1998,
we had no business operations and was a development-stage company. We did not purchase or develop any properties and decided to
change our business plan and operations. On March 31, 1999, we acquired approximately 98.5% of the common stock of Rebound Rubber
Corp. (“Rebound Rubber”) pursuant to a share exchange agreement with Rebound Rubber and substantially all of Rebound
Rubber’s shareholders. The acquisition was effected by issuing 14,500,100 shares of common stock, which constituted 14.5%
of the 100,000,000 of our authorized shares, and 50.6% of the 28,622,100 issued and outstanding shares on completion of the acquisition.
The
share exchange with Rebound Rubber (and other transactions occurring in March 1999) resulted in a change of control and the appointment
of new officers and directors. These transactions also changed our focus to the development and utilization of technology to de-vulcanize
and reactivate recycled rubber for resale as a raw material in the production of new rubber products. Our business strategy was
to sell the de-vulcanized material (and compounds using the materials) to manufacturers of rubber products.
Prior
to 2001 we had no revenues. In 2001 and 2002 revenues were derived from management services rendered to a rubber recycling company.
In
August 2001, we amended our Articles of Incorporation to authorize 500,000,000 shares of common stock, $0.001 par value per share,
and 150,000,000 shares of preferred stock, $0.01 par value per share. We may designate preferred stock into specific classes by
action of our board of directors. In May 2008, our board of directors established a class of Convertible Preferred Series A (the
“Series A”), authorizing 10,000,000 shares. When established, among other things, (i) each share of Series A was convertible
into 1,000 shares of our common stock, and (ii) a holder of Series A was entitled to vote 1,000 shares of common stock for each
share of Series A on all matters submitted to a vote by stockholders.
In
September 2008, we amended our Articles of Incorporation to increase the number of authorized shares to 985,000,000, $0.001 par
value per share, further amended the Articles in January 2009 to increase the number of authorized shares to 4,000,000,000, and
in January 2010 amended our Articles to increase the number of authorized shares to 8,888,000,000.
We
were effectively dormant for a number of years. In or around February 2014, there was a change in control whereby Kevin Hayes
acquired 1,000,000 shares of the Series A and was appointed as our sole director and officer. In or around April 2017, there was
another change in control when Mr. Hayes sold the 1,000,000 shares of Series A to Hybrid Titan Management, which then proceeded
to assign the Series A to William Alessi. Mr. Alessi was then appointed as our sole director and officer. Mr. Alessi initiated
legal action in his home state of North Carolina to confirm, among other things, his ownership of the Series A; his “control”
over the company, and the status of creditors of the company. In or around June 2017, the court entered judgment in favor of Mr.
Alessi, confirming his majority ownership and control of the company.
In
or around July 2017, while under the majority ownership and management of Mr. Alessi, we sought to effect a merger transaction
(the “Merger”) under which the company would be merged into Data443 Risk Mitigation, Inc., a North Carolina corporation
(“Data443”). Data443 was originally formed under the name LandStar, Inc. The name of the North Carolina corporation
was changed to Data443 in December 2017. In November 2017, our controlling interest was acquired by our current chief executive
officer and sole board member, Jason Remillard, when he acquired all of the Series A shares from Mr. Alessi. In that same transaction,
Mr. Remillard also acquired all of the shares of Data443 from Mr. Alessi. Mr. Remillard was then appointed as our sole director
and sole officer and of Data443.
In
January 2018, we acquired substantially all of the assets of Myriad Software Productions, LLC, which was owned 100% by Mr. Remillard.
Those assets were comprised of the software program known as ClassiDocs®, and all intellectual property and goodwill
associated therewith. As a result of the acquisition, the Company was no longer a “shell” under applicable securities
rules. In consideration for the acquisition, we agreed to a purchase price of $1,500,000, comprised of: (i) $50,000 paid at closing;
(ii) $250,000 in the form of a promissory note; and (iii) $1,200,000 in shares of our common stock, valued as of the closing,
which equated to 1,200,000,000 shares of our common stock. The shares have not yet been issued and are not included as part of
our issued and outstanding shares. However, these shares have been recorded as “Acquisition of ClassiDocs” included
in additional paid in capital within our financial statements for the year ending December 31, 2019.
In
April 2018, we amended the designation for our Series A by providing that a holder of Series A was entitled to (i) vote 15,000
shares of common stock for each share of Series A on all matters submitted to a vote by stockholders, and (ii) convert each share
of Series A into 1,000 shares of our common stock.
In
May 2018, the Company amended and restated its Articles of Incorporation. The total authorized number of shares is 8,888,000,000
shares of common stock, $0.001 par value per share, and 50,000,000 shares of preferred stock, $0.001 par value per share, designated
in the discretion of our board of directors. The Series A remains in full force and effect.
In
June 2018, after careful analysis and in reliance upon professional advisors we retained, it was determined that the Merger had,
in fact, not been completed, and that the Merger was not in the best interests of the Company and its stockholders. As such, the
Merger was legally terminated. In place of the Merger, in June 2018, we acquired all of the issued and outstanding shares of stock
of Data443 (the “Share Exchange”). As a result of the Share Exchange, Data443 became our wholly-owned subsidiary,
with both the Company and Data443 continuing to exist as corporate entities. As consideration in the Share Exchange, we agreed
to issue to Mr. Remillard: (a) 100,000,000 shares of our common stock and (b) on the eighteen-month anniversary of the closing
of the Share Exchange (the “Earn Out Date”), an additional 100,000,000 shares of our common stock, provided that Data443
has at least an additional $1,000,000 in revenue by the Earn Out Date (not including revenue directly from acquisitions). None
of the shares of our common stock to be issued to Mr. Remillard under the Share Exchange have been issued. As such, none of said
shares are included as part of our issued and outstanding shares. However, these shares have been recorded as “Share exchange
with related party for Data443 additional share issuable” included in additional paid in capital within our financial statements
for the year ending December 31, 2019.
On
or about June 29, 2018, we secured the rights to the WordPress GDPR Framework through our wholly-owned subsidiary Data443 for
a total consideration of €40,001, or approximately $46,521, payable in four payments of approximately €10,000, with
the first payment due at closing, and the remaining payments due at the end of July, August and September 2018. Upon issuance
of the final payment, we gained the right to enter into an asset transfer agreement for the nominal cost of one euro (€1).
On
or about October 22, 2018, we entered into an asset purchase agreement with Modevity, LLC (“Modevity”) to acquire certain
assets collectively known as ARALOC®, a software-as-a service (“SaaS”) platform that provides cloud-based
data storage, protection, and workflow automation. The acquired assets consist of intellectual and related intangible property including
applications and associated software code, and trademarks. Access to books and records related to the customers and revenues Modevity
created on the ARALOC platform were also included in the asset purchase agreement. These assets were substantially less than the total
assets of Modevity, and revenues from the platform comprised a portion of the overall sales of Modevity. We are required to create the
technical capabilities to support the ongoing operation of this SaaS platform. A substantial effort on our part is needed to continue
generating ARALOC revenues through development of a sales force, as well as billing and collection processes. We paid Modevity (i) $200,000
in cash, (ii) $750,000, in the form of a 10-month promissory note, and (iii) 164,533,821 shares of our common stock.
On
or around February 7, 2019, the Company entered into an Exclusive License and Management Agreement (the “License Agreement”)
with Wala, Inc. (“Wala”). 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 data archiving platform known as ArcMail and all assets related thereto
(the “ArcMail Assets”). In connection with the License Agreement, the Company also executed (i) a Stock Rights Agreement,
under which the Company had the right to acquire all shares of stock of Wala; and, (ii) a Business Covenants Agreement, under which Wala
and its CEO agreed to not compete with the Company’s use of the ArcMail assets for a designated period of time. The License Agreement,
Stock Rights Agreement, and Business Covenants Agreement are collectively referred to herein as the “ArcMail Agreements”).
On
June 21, 2019, the Company filed an amendment to its articles of incorporation to increase the total number authorized shares of the
Company’s common stock, par value $0.001 per share, from 8,888,000,000 shares to 15,000,000,000 shares.
On
September 16, 2019, the Company entered into an Asset Purchase Agreement with DMBGroup, LLC to acquire certain assets collectively known
as DataExpressTM, a software platform for secure sensitive data transfer within the hybrid cloud. The total purchase price
of approximately $2.8 million consists of: (i) a $410,000 cash payment at closing; (ii) a promissory note in the amount of $940,000,
payable in the amount of $41,661 over 24 monthly payments starting on October 15, 2019, accruing at a rate of 6% per annum; (iii) assumption
of approximately $98,000 in liabilities and, (iv) approximately 2,465,753 shares of our common stock. As of December 31, 2019, these
shares have not been issued and are recorded as “Stock issuable for asset purchase” included in additional paid in capital.
On
October 14, 2019, the Company filed an amendment to its Articles of Incorporation to change its name to Data443 Risk Mitigation, Inc.,
and to effect a 1-for-750 reverse stock split of its issued and outstanding shares of common and preferred shares, each with $0.001 par
value, and to reduce the numbers of authorized common and preferred shares to 60,000,000 and 337,500, respectively. On October 28, 2019,
the name change and the split and changes in authorized common and preferred shares was effected, resulting in approximately 7,282,678,714
issued and outstanding shares of the Company’s common stock to be reduced to approximately 9,710,239, and 1,000,000 issued and
outstanding shares of the Company’s preferred shares to be reduced to 1,334 as of October 28, 2019. All per share amounts and number
of shares, including the authorized shares, in the consolidated financial statements and related notes have been retroactively adjusted
to reflect the reverse stock split and decrease in authorized common and preferred shares.
On
March 05, 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 further 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 again amended its Articles of Incorporation to increase the number of shares of authorized
common stock to 1.5 billion. 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. On December 15, 2020 the Company again amended its Articles of Incorporation to increase
the number of shares of authorized common stock to 1.8 billion.
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 08, 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.
On
December 11, 2020, the Company entered into a Common Stock Purchase Agreement (“CSPA”) with Triton Funds, LP, a Delaware
limited partnership (“Triton”), an unrelated third party. Triton agreed to invest $1 million in the Company in the
form of common stock purchases. Subject to the terms and conditions set forth in the CSPA, the Company agreed to sell to Triton common
shares of the Company having an aggregate value of One Million Dollars ($1,000,000). The price of the shares to be sold will be $0.006
per shares. Triton’s obligation to purchase securities is conditioned on certain factors including, but not limited, to the Company
having an effective registration available for resale of the securities being purchased; a minimum closing price of $0.009 per share
for the Company’s common stock on the delivery date for the shares; and, Triton’s ownership not exceeding 9.9% of the issued
and outstanding shares of the Company at any time. The Company filed a registration statement on Form S-1 with the SEC on December 28,
2020. The S-1 was declared effective by the SEC as of January 26, 2021.
Effective
January 31, 2021, the Company closed an Asset Sale Agreement with the creditors of Mr. Welch and ArcMail (the creditors had taken ownership
of the ArcMail Assets) for the Company’s purchase and continued use of the ArcMail Assets. In consideration thereof, the Company
issued notes payable of $1,404,000 to settle license fee payable of $1,094,691. It was considered as an unrecognized subsequent event
for the extinguishment of debt.
As
of March 31, 2021, the Company has sold to Triton 166,666,667 shares of its common stock pursuant to the CSPA, and which shares were
registered under the S-1. All sales occurred during the three month period ended March 31, 2021 and resulted in the receipt by the Company
of net proceeds in the amount of $653,604.62. The Company is owed $166,104.38 by an unrelated third party for shares of our common stock
acquired from Triton. The Company is also owed $167,791.00 by Triton for shares issued to Triton and for which it has not yet paid.
The
Company is now the de facto industry leader in data privacy solutions for All Things Data Security™, providing software
and services to enable secure data across local devices, network, cloud, and databases, at rest and in flight. Its suite of products
and services is highlighted by: (i) ARALOC™, which is a market leading secure, cloud-based platform for the management,
protection and distribution of digital content to the desktop and mobile devices, which protects an organization’s confidential
content and intellectual property assets from leakage - malicious or accidental - without impacting collaboration between all stakeholders;
(ii) DATAEXPRESS®, the leading data transport, transformation and delivery product trusted by leading financial organizations
worldwide; (iii) ArcMail™, which is a leading provider of simple, secure and cost-effective email and enterprise archiving
and management solutions; (iv) ClassiDocs® the Company’s award-winning data classification and governance technology,
which supports CCPA, LGPD, and GDPR compliance; (v) ClassiDocs™ for Blockchain, which provides an active implementation
for the Ripple XRP that protects blockchain transactions from inadvertent disclosure and data leaks; (vi) Data443® Global
Privacy Manager, the privacy compliance and consumer loss mitigation platform which is integrated with ClassiDocs™ to
do the delivery portions of GDPR and CCPA as well as process Data Privacy Access Requests – removal request – with inventory
by ClassiDocs™; (vii) Resilient Access™, which enables fine-grained access controls across myriad platforms
at scale for internal client systems and commercial public cloud platforms like Salesforce, Box.Net, Google G Suite, Microsoft OneDrive
and others; (viii) Data443™ Chat History Scanner, which scans chat messages for Compliance, Security, PII, PI, PCI &
custom keywords; (ix) the CCPA Framework WordPress plugin, which enables organizations of all sizes to comply with the CCPA privacy framework;
(x) 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; (xi) the GDPR Framework
WordPress plugin, with over 30,000 active users and over 400,000 downloads it enables organizations of all sizes to comply with the GDPR
and other privacy frameworks; and (xii) IntellyWP™, a leading purveyor of user experience enhancement products for webmasters
for the world’s largest content management platform, WordPress.
COVID-19
Update
The
Company continues to closely monitor developments and is taking steps to mitigate the potential risks related to the COVID-19 pandemic
to the Company, its employees and its customers. The extent to which the COVID-19 pandemic will impact our business and operations will
depend on future developments that are highly uncertain. While in the near-term we may experience reductions in our billing and revenue
growth rates, we are proactively managing expenditures, including reductions of non-critical and discretionary expenses, while preserving
strategic investment in sales capacity and still seeking new acquisition targets and opportunities. To protect our employees while continuing
to provide the services needed by our clients the Company continues to limit customer contact, and continues to minimize employee contact
with other employees by having our employees work remotely while they shelter in place as required by local regulations. The dedication
of our employees and their work ethic have allowed us to continue providing critical services to our customers during these challenging
times.
Due
to the pandemic, we have been forced to adapt and change the way we have historically operated. At the end of the first quarter, we temporarily
closed our office and instructed our employees to work remotely as a precautionary measure intended to minimize the risk of the virus
to them, our customers, partners and the communities in which we operate. Towards the end of the second quarter, we cautiously and gradually
started to open our office. While we did not require employees to work from our office, we did ensure all required adjustments were made
and all local regulations and recommendations were met to ensure the safety of our employees should they voluntarily choose to work from
our office. As part of the move to remote work and virtual-only customer experience, we have had to postpone or cancel customer and industry
events, as well as travel to visit potential customers, or conduct them virtually. We cannot predict with certainty the impact these
changes may have on our sales.
We
believe that the impact of COVID-19 has increased the long-term opportunity that we see to help our customers protect their data and
detect threats, as well as achieve regulatory compliance. Nevertheless, in the early stages of the pandemic, we experienced some negative
impact on our results of operations in the last two weeks of the first quarter, as we believe our customers’ focus turned primarily
to the safety of their employees and to positioning themselves to operate under a work-from-home environment. However, since that time,
we have seen companies pivot from that emergency mode to become more focused on the elevated risks associated with having a highly distributed
workforce. Companies around the world now have the majority of their employees working from potentially vulnerable home networks, accessing
critical on-premises data stores and infrastructure through VPNs and in cloud data stores. We believe that the COVID-19 pandemic has
significantly increased the threat of cybercrime, and that we remain positioned to help our clients protect against data and infrastructure
against cybercrime. This has resulted in increase in traffic to our website. During the third and fourth quarters of 2020, as existing
customers and prospects continued to adjust to the new working practices, we saw some of this interest convert into new business or the
expansion of existing business. While we are encouraged by these trends, we continue to see corporate expenditures subject to elevated
scrutiny in the current environment. We have also been unable to travel to meet with prospective new clients, which has impacted our
ability to convert prospects into new clients. We anticipate that as the COVID-19 pandemic continues, it will continue to be challenging
to estimate conversion rates of prospective business into actual new client.
Through
March 31, 2021, there has not been a noticeable increase in accounts receivable for the Company. However, it is likely that if the COVID-19
pandemic persists and state stay-at-home orders remain in place, it is likely that more customers will be unable to keep their bills
current. Further, while we have not yet experienced any interruption to our normal materials and supplies process, it is impossible to
predict whether COVID-19 will cause future interruptions and delays.
Through
March 31, 2021 we have not had any of our employees contract the COVID-19 virus. Should we have a significant number of our employees
contract the COVID-19 virus it could have a negative impact on our ability to serve customers in a timely fashion.
CARES
Act
The
Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. There are several
different provisions with the CARES Act that impact income taxes for corporations. While we continue to evaluate the tax implications,
we believe these provisions will not have a material impact to the financial statements.
Additionally,
the Company has applied for, and has received, funds under the Paycheck Protection Program (the “PPP Loan”) after
the period covered in these financial statements in the amount of $339,000. The receipt of these funds, and the forgiveness of the loan
attendant to these funds, is dependent on our having initially qualified for the loan and qualifying for the forgiveness of such loan
based on our future adherence to the forgiveness criteria.
The
PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for
six months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The
promissory note issued in connection with the PPP Loan contains events of default and other provisions customary for a loan of this type.
The
PPP Loan is being used to retain our employees, as well as for other permitted uses under the terms and conditions of the PPP Loan.
The
Company also received a $150,000 loan (the “EID Loan”) from the U.S. Small Business Administration (the “SBA”)
under the SBA’s Economic Injury Disaster Loan program. The Company received the loan proceeds on or around May 27, 2020. The EID
Loan has a thirty year term and bears interest at a rate of 3.75% per annum. Monthly principal and interest payments are deferred for
twelve months after the date of disbursement. The EID Loan may be prepaid at any time prior to maturity with no prepayment penalties,
and is otherwise repaid at the rate of $731 per month. The proceeds from the EID Loan must be used for working capital. The Loan Authorization
and Agreement and the Note executed by the Company in connection with the EID Loan contains events of default and other provisions customary
for a loan of this type.
Recent
Accounting Pronouncements
From
time-to-time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other standard
setting bodies, relating to the treatment and recording of certain accounting transactions. Unless otherwise discussed herein, management
of the Company has determined that these recent accounting pronouncements will not have a material impact on the financial position or
results of operations of the Company. For further discussion of recently issued and adopted accounting pronouncements, please see Note
1 to the consolidated financial statements included herein.
Critical
Accounting Policies
Critical
Accounting Policies and Significant Judgments and Estimates
Our
management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial
statements which we have been prepared in accordance with U.S. generally accepted accounting principles. In preparing our consolidated
financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting periods.
Critical
accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment
necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate
on financial condition or operating performance is material.
These
significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these
estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the consolidated
financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources.
Management
regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes
in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates
are adjusted accordingly.
Actual
results could differ from those estimates.
While
our significant accounting policies are described in more detail in Note 2 of our consolidated Quarterly financial statements included
in this Quarterly Report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation
of our consolidated financial statements:
Assumption
as a Going Concern
Management
assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation
of liabilities in the normal course of business. However, given our current financial position and lack of liquidity, there is substantial
doubt about our ability to continue as a going concern.
Convertible
Financial Instruments
The
Company bifurcates conversion options from their host instruments and accounts for them as free standing derivative financial instruments
if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument
that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable
generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument
with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when
the host instrument is deemed to be conventional, as that term is described under applicable GAAP.
When
the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, discounts are recorded
for the intrinsic value of conversion options embedded in the instruments based upon the differences between the fair value of the underlying
common stock at the commitment date of the transaction and the effective conversion price embedded in the instrument.
Beneficial
Conversion Feature
The
issuance of the convertible debt issued by the Company generated a beneficial conversion feature (“BCF”), which arises
when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception
because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment
date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common
stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common
stock per share on the commitment date, resulting in a discount on the convertible debt (recorded as a component of additional paid in
capital).
Fair
Value of Financial Instruments
The
Company 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:
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Level
1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
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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
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Level
3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.
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Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar
techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and
the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than
one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of
the instrument.
Transactions
involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive,
free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related
party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations
can be substantiated.
Stock-Based
Compensation
We
measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees
and directors, the fair value of the award is measured on the grant date. For non-employees, as per ASU No. 2018-7, Compensation-Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, remeasurement is not required. The fair value
amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting
period. Stock-based compensation expense is recorded by us in the same expense classifications in the consolidated statements of operations,
as if such amounts were paid in cash. Also, refer to Note 1 – Summary of Significant Accounting Policies, in the consolidated financial
statements that are included in this Annual Report.
Deferred
Tax Assets and Income Taxes Provision
The
Company adopted the provisions of paragraph 740-10-25-13 of the FASB Accounting Standards Codification. Paragraph 740-10-25-13 which
addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated
financial statements. Under paragraph 740-10-25-13, the Company may recognize the tax benefit from an uncertain tax position only if
it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits
of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on
the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Paragraph 740-10-25-13
also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires
increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the
provisions of paragraph 740-10-25-13.
The
estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying
balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred
tax assets recorded on its balance sheets and provides valuation allowances as management deems necessary.
Management
makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates
of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions.
In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction
varies from estimates, additional allowances or reversals of reserves may be necessary.
Management
assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”)
carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely
than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management
made this assumption based on (a) the Company has incurred recurring losses and presently has no revenue-producing business; (b) general
economic conditions; and, (c) its ability to raise additional funds to support its daily operations by way of a public or private offering,
among other factors.
Outlook
Our
continued objective is to further integrate our growing suite of proven industry leading data security and privacy offerings and deliver
the combined offering to our growing stable of enterprise and medium-sized clients directly and via our partner channel. Data privacy
concerns continue to grow lockstep with security breaches and ongoing expansion of data storage, consumption and spread of telework,
telehealth and remote learning requirements.
We
have utilized, and expect to continue to utilize, acquisitions to contribute to our long-term growth objectives. During fiscal 2021 we
hope to continue to acquire complimentary business assets and client bases. Some of the key element to our growth strategy include, without
limitation:
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●
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Improve
and extend our technological capabilities, domestically and internationally.
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|
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●
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Further
integrate our product offerings to provide an unmatched data privacy platform.
|
|
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●
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Focus
on underserved markets, such as sports teams (at all levels) and medium-sized businesses.
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●
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Deliver
capabilities via unconventional channels, including open-source and “freemium” and trial subscription models.
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●
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Leverage
our existing relationships for professional references, association and internal private industry level promotional events and other
high-value and successful product positional activities.
|
|
|
●
|
Be
prepared to capture and execute on opportunities in the acquisition marketplace.
|
|
|
●
|
Continued
focus on net bookings with minimum long-term contract value.
|
|
|
●
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Improve
SaaS Services with high increasing ‘attach’ rate for additional capabilities.
|
|
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●
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Increase
year-over-year conversions from perpetual one-time contract sales to multiyear recurring subscription revenue agreements.
|
While
we report primarily income based on recognized and deferred revenue, another measurement internally for the business is booked revenues.
Management utilizes this measure to track numerous indicators such as: contract value growth; initial contract value per customer; and,
certain other values that change quarter-over-quarter. These results may also be subject to, and impacted by, sales compensation plans,
internal performance objectives, and other activities. We continue to increase revenue from our existing operations. We generally recognize
revenue from customers ratably over the terms of their subscription, which is generally one year at a time. As a result, a substantial
portion of the revenue we report in each period is attributable to the recognition of deferred revenue relating to agreements that we
entered into during previous periods. Consequently, any increase or decline in new sales or renewals in any one period will not be immediately
reflected in our revenue for that period. Any such change, however, would affect our revenue in future periods. Accordingly, the effect
of downturns or upturns in new sales and potential changes in our rate of renewals may not be fully reflected in our results of operations
until future periods.
In
December 2019, COVID-19 was reported in China; in January 2020 the World Health Organization (“WHO”) declared it a
Public Health Emergency of International Concern;, and, in March 2020 the WHO declared it a pandemic. The long-term impact of COVID-19
on our operational and financial performance will depend on certain developments including the duration, spread, severity, and potential
recurrence of the virus. Our future performance will also depend on the impact of COVID-19 on our customers, partners, employee productivity,
and sales cycles, including as a result of travel restrictions. These potential developments are uncertain and cannot be predicted and
as such, the extent to which COVID-19 will impact our business, operations, financial condition and results of operations over the long
term is unknown. Furthermore, due to our shift to a predominantly subscription model, the effect of COVID-19 may not be fully reflected
in our results of operations until future periods.
While
we are actively managing our response to the COVID-19 pandemic, its impact on our year 2021 results and beyond is uncertain. We continue
to conduct business as usual with modifications to employee travel, employee work locations, customer interactions, and cancellation
of certain marketing events, among other things. We will continue to actively monitor the situation and may take further actions that
alter our business operations as may be required by federal, state, or local authorities, or that we determine are in the best interests
of our employees, customers, partners, suppliers, and stockholders. The extent to which the COVID-19 pandemic may impact our longer-term
operational and financial performance remains uncertain. Furthermore, due to our subscription-based business model, the effect of the
COVID-19 pandemic may not be fully reflected in our results of operations until future periods, if at all. The extent of the impact of
the COVID-19 pandemic will depend on several factors, including the pace of reopening the economy around the world; the possible resurgence
in the spread of the virus; the development cycle of therapeutics and vaccines; the impact on our customers and our sales cycles; the
impact on our customer, employee, and industry events; and the effect on our vendors. Please see Item 1A, “Risk Factors,”
in this Quarterly Report for a further description of the material risks we currently face, including the risks related to the COVID-19
pandemic.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2021 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2020
Revenue
We
recognized $838,000 of revenue during the three months ended March 31, 2021, compared to $478,000 in revenue for the three months ended
March 31, 2020. We had net billings for the three months ended March 31, 2021 of $624,000 compared to $603,000 in the prior year period.
Deferred revenues are $1,287,000 as of March 31, 2021, a decrease of $231,000 from $1,518,000 as of December 31, 2020.
General
and Administrative Expenses
General
and administrative expenses for the three months ended March 31, 2021 amounted to $1,434,000 as compared to $1,425,000 for the three
months ended year ended March 31, 2020, an increase of $8,000, or 1%. The expenses for the three months ended March 31, 2021, primarily
consisted of management costs, costs to integrate assets we acquired and to expand sales, audit and review fees, filing fees, professional
fees, and other expenses, including the re-classification of sales-related management expenses, in connection with the projected growth
of the Company’s business. Expenses for the three months ended March 31, 2020 consisted of primarily the same items.
Sales
and Marketing Expenses
Sales
and marketing expense for the three months ended March 31, 2021 amounted to $95,000 as compared to $121,000 for the three months ended
year ended March 31, 2020, a decrease of $25,000, or 21%. The expenses for the three months ended March 31, 2021 primarily consisted
of developing a sales operation, with some previously reported expenses, primarily management costs, reclassified to general and administrative
expenses. Expenses for the three months ended March 31, 2020 consisted of primarily the same items.
Net
Loss
The
net loss for the three months ended March 31, 2021 was $2,176,000 as compared to net loss of $10,181,000 for the three months ended March
31, 2020. The net loss for the three months ended March 31, 2021 was mainly derived from operating loss of $858,000, interest expense
of $905,000, loss on settlement of debt of $228,000 and a loss from change in fair value of derivative liability of $185,000. The net
loss of $10,181,000 was mainly due to a net operating loss 1,103,000 and a loss from change in fair value of derivative liability of
$8,506,000, associated with convertible notes payable.
Provision
for Income Tax
No
provision for income taxes was recorded in either the three months ended March 31, 2021 or 2020, as we have incurred taxable losses in
both periods.
Related
Party Transactions
The
following individuals and entities have been identified as related parties based on their affiliation with our CEO and sole director,
Jason Remillard:
Jason
Remillard
Myriad
Software Productions, LLC
The
following amounts were owed to related parties, affiliated with the CEO and Chairman of the Board, at the dates indicated:
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Jason Remillard
|
|
$
|
172,335
|
|
|
$
|
155,848
|
|
CASH
FLOW FOR THE THREE MONTHS ENDED MARCH 31, 2021 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2020
Liquidity
and Capital Resources
We
require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of March
31, 2021, our principal sources of liquidity were cash or cash equivalents of $53,000; trade accounts receivable of $37,000; and, other
current assets of $9,000, as compared to cash or cash equivalents of $59,000; and trade accounts receivable of $137,000 as of December
31, 2020.
During
the last two years, and through the date of this Quarterly Report, we have faced an increasingly challenging liquidity situation that
has impacted our ability to execute our operating plan. We started generating revenue in the fourth quarter of 2018, and we have continued
to increase revenue through the date of this Quarterly Report as we have actively sought to grow our business in the data security market.
We have also been required to maintain our corporate existence; satisfy the requirements of being a public company; and, have chosen
to become a mandatory filer with the SEC. We will need to obtain capital to continue operations. There is no assurance that our Company
will be able to secure such funding on acceptable (or any) terms. During the three months ended March 31, 2021 and 2020, we reported
a loss from operations of $858,000 and $1,102,000, respectively; and, used cash flows from operating activities totaling $384,000 and
$343,000, respectively, for the same periods. We had a beginning cash balance of $59,000 as of January 01, 2021, and a beginning cash
balance of $19,000 as of January 01, 2020.
As
of March 31, 2021, we had assets of cash in the amount of $53,000 and other current assets in the amount of $46,000. As of March 31,
2021, we had current liabilities of $3,236,000. The Company’s accumulated deficit was $37,699,000.
As
of March 31, 2020, we had assets of cash in the amount of $70,000 and other current assets in the amount of $40,000. As of March 31,
2020, we had current liabilities of $17,899,000. The Company’s accumulated deficit was $31,792,000.
The
revenues, if any, generated from our acquisitions alone will not be sufficient to fund our operations or planned growth. We will require
additional capital to continue to operate our business, and to further expand our business. Sources of additional capital through various
financing transactions or arrangements with third parties may include equity or debt financing, bank loans or revolving credit facilities.
We may not be successful in locating suitable financing transactions in the time period required or at all, and we may not obtain the
capital we require by other means. Unless the Company can attract additional investment, the future of the Company operating as a going
concern is in serious doubt.
We
are now obligated to file annual, quarterly and current reports with the SEC pursuant to the Exchange Act. In addition, the Sarbanes-Oxley
Act of 2002 (“Sarbanes-Oxley”) and the rules subsequently implemented by the SEC and the Public Company Accounting
Oversight Board have imposed various requirements on public companies, including requiring changes in corporate governance practices.
We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities of ours more time-
consuming and costly. In order to meet the needs to comply with the requirements of the Securities Exchange Act, we will need investment
of capital.
Management
has determined that additional capital will be required in the form of equity or debt securities. There is no assurance that management
will be able to raise capital on terms acceptable to the Company.
If
we are unable to obtain sufficient amounts of additional capital, we may have to cease filing the required reports and cease operations
completely. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future
obligations, the percentage ownership of our shareholders will be reduced, shareholders may experience additional dilution, or the equity
securities may have rights preferences or privileges senior to the common stock.
Cash
Flow
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Cash used in operating activities
|
|
$
|
(383,648
|
)
|
|
$
|
(342,836
|
)
|
|
$
|
(40,812
|
)
|
|
Cash used in investing activities
|
|
$
|
(79,020
|
)
|
|
$
|
(4,068
|
)
|
|
$
|
(74,952
|
)
|
|
Cash provided by financing activities
|
|
$
|
456,945
|
|
|
$
|
397,874
|
|
|
$
|
59,071
|
|
|
Cash on hand
|
|
$
|
53,060
|
|
|
$
|
69,643
|
|
|
$
|
(16,583
|
)
|
Operating
Activities
During
the three months ended March 31, 2021, our Company used $384,000 in operating activities, compared to $343,000 during the three months
ended March 31, 2020. Cash used in operation activities was primarily due to an increase in operating liabilities.
Investing
Activities
During
the three months ended March 31, 2021, we used funds in investing activities of $79,000 to acquire equipment. During the three months
ended March 31, 2020, we used funds in investing activities of $4,000 to acquire furniture and fixtures.
Financing
Activities
During
the three months ended March 31, 2021 we raised net proceeds of $160,000 through the issuance of our Series B Convertible Stock in the
gross amount of $169,000. We also raised net proceeds of $654,000 through the issuance of our common stock. We raised proceeds of $65,000
through loans from related parties and repaid $168,000 to related parties. We raised net proceeds of $100,000 through the issuance of
our convertible note and net proceeds of $925,000 through the issuance of our notes payable, and repaid 1,257,000 on notes payable. By
comparison, during the three months ended March 31, 2020, we raised net proceeds of $497,000 through the issuance of our convertible
promissory notes in the gross amount of $540,000. We also raised net proceeds of $190,000 through the issuance of our promissory notes
and repaid 203,245 on a note payable. We raised proceeds of $83,000 through loans from related parties and repaid $161,000 to related
parties.
We
are dependent upon the receipt of capital investment or other financing to fund our ongoing operations and to execute our business plan
for growth in the data security market. If continued funding and capital resources are unavailable at reasonable terms, we may not be
able to implement our plan of operations.
Going
Concern
The
consolidated financial statements accompanying this Quarterly Report have been prepared on a going concern basis, which implies that
our Company will continue to realize its assets and discharge its liabilities and commitments in the normal course of business. Our Company
has generated very limited revenues since inception and has never paid any dividends and is unlikely to pay dividends or generate earnings
in the immediate or foreseeable future. The continuation of our company as a going concern is dependent upon the ability of our company
to obtain necessary financing to achieve our operating objectives, and the attainment of profitable operations. As of March 31, 2021,
our Company has an accumulated deficit of $37,699,000. We do not have sufficient working capital to enable us to carry out our plan of
operation for the next twelve months.
Due
to the uncertainty of our ability to meet our current operating expenses and the capital expenses noted above in their report on the
consolidated financial statements for the three months ended March 31, 2021, our independent auditors included an explanatory paragraph
regarding concerns about our ability to continue as a going concern. Our consolidated financial statements contain additional note disclosures
describing the circumstances that lead to this disclosure by our independent auditors.
The
continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity or debt securities
by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming
those loans would be available, will increase our liabilities and future cash commitments. There can be no assurance that the Company
will be able to raise any additional capital.
Off-Balance
Sheet Arrangements
There
are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that
are material to investors.
Management’s
Plans
Our
plan is to continue to grow our business through strategic acquisitions, and then expand selling across our subsidiaries and affiliated
companies. During the next twelve months, we anticipate incurring costs related to (i) filing of Exchange Act reports; and, (ii) operating
our businesses. We will require additional operating capital to maintain and continue operations. We will need to raise additional capital
through debt or equity financing, and there is no assurance we will be able to raise the necessary capital.
