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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended June 30, 2022

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number: 000-30542

 

DATA443 RISK MITIGATION, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   86-0914051

(State of

incorporation)

 

(I.R.S. Employer

Identification No.)

     

4000 Park Drive, Suite 400

Research Triangle Park, North Carolina

  27709
(Address of principal executive offices)   (Zip Code)

 

(919) 858-6542

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Trading Symbol(s)   Name of each exchange on which registered
N/A   N/A   N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and, (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Yes ☐ No

 

The outstanding number of shares of common stock as of August 15, 2022 was 954,561.

 

 

 

 
 

 

DATA443 RISK MITIGATION, INC.

FORM 10-Q

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
   
ITEM 1. Financial Statements 2
  Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (unaudited) 2
  Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021 (unaudited) 3
  Consolidated Statements of Stockholders’ Deficit for the three and six months ended June 30, 2022 and 2021 (unaudited) 4
  Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited) 6
  Notes to the Unaudited Consolidated Financial Statements 7
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
     
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 29
     
ITEM 4. Controls and Procedures 29
     
PART II. OTHER INFORMATION  
     
ITEM 1. Legal Proceedings 30
     
ITEM 1A. Risk Factors 30
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
     
ITEM 3. Defaults Upon Senior Securities 31
     
ITEM 4. Mine Safety Disclosures 31
     
ITEM 5. Other Information 31
     
ITEM 6. Exhibits 31
     
  SIGNATURES 35

 

1

 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

DATA443 RISK MITIGATION, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   June 30,   December 31, 
   2022   2021 
Assets          
Current assets          
Cash  $-   $1,204,933 
Accounts receivable, net   231,507    21,569 
Advance payment for acquisition   2,726,188    - 
Prepaid expense and other current assets   27,950    70,802 
Total current assets   2,985,645    1,297,304 
           
Property and equipment, net   305,196    288,406 
Operating lease right-of-use assets, net   134,198    174,282 
Intellectual property, net of accumulated amortization   809,275    1,269,819 
Deposits   21,026    31,440 
Total Assets  $4,255,340   $3,061,251 
           
Liabilities and Stockholders’ Deficit          
Current Liabilities          
Bank overdraft   3,781    - 
Accounts payable and accrued liabilities   417,466    115,673 
Deferred revenue   1,510,827    1,035,185 
Interest payable   309,180    204,915 
Notes payable, net of unamortized discount   1,799,147    1,720,777 
Convertible notes payable, net of unamortized discount   1,942,774    993,931 
Due to a related party   277,033    247,366 
Operating lease liability   118,848    112,322 
Finance lease liability   41,914    72,768 
Total Current Liabilities   6,420,970    4,502,937 
           
Series B Preferred Stock, 80,000 shares designated; $0.001 par value; Stated value $10.00; 0 and 29,750 shares issued and outstanding, net of discount as of June 30, 2022 and December 31, 2021, respectively   -    278,811 
Notes payable, net of unamortized discount - non-current   1,734,439    1,770,989 
Convertible notes payable, net of unamortized discount - non-current   98,488    22,357 
Deferred revenues - non-current   1,071,761    573,411 
Operating lease liability - non-current   64,072    125,640 
Finance lease liability - non-current   -    10,341 
Total Liabilities   9,389,730    7,284,486 
           
Stockholders’ Deficit          
Preferred stock: 337,500 authorized; $0.001 par value Series A Preferred Stock, 150,000 shares designated; $0.001 par value; 149,892 and 150,000 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively   150    150 
Common stock: 125,000,000 authorized; $0.001 par value 954,561 and 122,044 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively   954    122 
Additional paid in capital   40,842,698    37,810,380 
Accumulated deficit   (45,978,192)   (42,033,887)
Total Stockholders’ Deficit   (5,134,390)   (4,223,235)
Total Liabilities and Stockholders’ Deficit  $4,255,340   $3,061,251 

 

See the accompanying notes, which are an integral part of these unaudited consolidated financial statements.

 

2

 

 

DATA443 RISK MITIGATION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   2022   2021   2022   2021 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2022   2021   2022   2021 
                 
Revenue  $750,989   $762,352   $1,363,505   $1,600,220 
Cost of revenue   78,593    96,830    278,272    263,824 
Gross profit   672,396    665,522    1,085,233    1,336,396 
                     
Operating expenses                    
General and administrative   2,116,220    1,311,396    3,089,782    2,744,961 
Sales and marketing   59,635    49,220    180,030    144,644 
Total operating expenses   2,175,855    1,360,616    3,269,812    2,889,605 
                     
Loss from operations   (1,503,459)   (695,094)   (2,184,579)   (1,553,209)
                     
Other income (expense)                    
Interest expense   (942,753)   (671,862)   (2,037,069)   (1,577,288)
Gain (loss) on settlement of debt   -    -    -    (227,501)
Change in fair value of derivative liability   -    (178,398)   (57,883)   (363,654)
Total other expense   (942,753)   (850,260)   (2,094,952)   (2,168,443)
                     
Loss before income taxes   (2,446,212)   (1,545,354)   (4,279,531)   (3,721,652)
Provision for income taxes   -    -    -    - 
Net loss  $(2,446,212)  $(1,545,354)  $(4,279,531)  $(3,721,652)
                     
Dividend on Series B Preferred Stock   -    (5,492)   (104,631)   (9,441)
Net loss attributable to common stockholders  $(2,446,212)  $(1,550,846)  $(4,384,162)  $(3,731,093)
                     
Basic and diluted loss per Common Share  $(3.25)  $(16.90)  $(9.62)  $(44.33)
Basic and diluted weighted average number of common shares outstanding   753,561    91,430    444,824    83,948 

 

See the accompanying notes, which are an integral part of these unaudited consolidated financial statements.

 

3

 

 

DATA443 RISK MITIGATION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

Six months ended June 30, 2022

 

   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
   Series A           Additional       Total 
   Preferred Stock   Common Stock   Paid in   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                             
Balance - December 31, 2021   150,000   $150    122,044   $122   $37,810,380   $(42,033,887)  $(4,223,235)
                                    
Cumulative-effect adjustment from adoption of ASU 2020-06    -    -    -    -    (517,500)   439,857    (77,643)
Common stock issued for acquisition of Centurion assets   -    -    380,952    381    2,475,807    -    2,476,188 
Common stock issued for conversion of preferred stock   (108)   -    108,000    108    (108)        - 
Common stock issued for conversion of debt   -    -    165,273    165    29,160    -    29,325 
Common stock issued in conjunction with convertible notes   -    -    18,170    18    140,918    -    140,936 
Common stock issued for exercised cashless warrant   -    -    6,631    7    (7)   -    - 
Common stock issued for service   -    -    153,491    153    844,048    -    844,201 
Resolution of derivative liability upon exercise of warrant   -    -         -    57,883    -    57,883 
Warrant issued in conjunction with debts   -    -         -    47,628    -    47,628 
Stock-based compensation   -    -         -    (45,511)   -    (45,511)
Net loss   -    -         -    -    (4,384,162)   (4,384,162)
Balance - June 30, 2022   149,892   $150    954,561   $954   $40,842,698   $(45,978,192)  $(5,134,390)

 

Three months ended June 30, 2022

 

   Series A           Additional       Total 
   Preferred Stock   Common Stock   Paid in   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                             
Balance - March 31, 2022   150,000   $150    148,367   $148   $37,353,357   $(43,531,980)  $(6,178,325)
                                    
Common stock issued for acquisition of Centurion assets   -    -    380,952    381    2,475,807    -    2,476,188 
Common stock issued for conversion of preferred stock   (108)   -    108,000    108    (108)   -    - 
Common stock issued for conversion of debt   -    -    151,200    151    1,361    -    1,512 
Common stock issued for service   -    -    153,491    153    844,048    -    844,201 
Common stock issued in conjunction with convertible notes   -    -    12,551    13    78,431    -    78,444 
Warrant issued in conjunction with debts   -    -    -    -    47,628    -    47,628 
Stock-based compensation   -    -    -    -    42,174    -    42,174 
Adjustment of reverse stock split   -    -                   -    - 
Net loss   -    -                   (2,446,212)   (2,446,212)
Balance - June 30, 2022   149,892    150    954,561    954    40,842,698    (45,978,192)   (5,134,390)

 

See the accompanying notes, which are an integral part of these unaudited consolidated financial statements.

 

4

 

 

DATA443 RISK MITIGATION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

Six Months Ended June 30, 2021

 

                       Total 
  

Series A

Preferred Stock

   Common Stock  

Additional

Paid in

   Accumulated  

Stockholders’

Equity

 
   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
                             
Balance - December 31, 2020   150,000   $150    522,006   $522   $32,027,240   $(35,518,584)  $(3,490,672)
                                    
Common stock issued for cash   -    -    83,336    83    846,718    -    846,801 
Common stock issued for conversion of preferred stock   -    -    14,533    15    312,908         312,923 
Common stock issued for conversion of debt   -    -    101,748    102    1,523,156    -    1,523,258 
Common stock issued in conjunction with convertible note   -    -    2,863    3    88,735    -    88,738 
Common stock issued for exercised cashless warrant   -    -    8,923    9    (9)   -    - 
Resolution of derivative liability upon exercise of warrant   -    -    -    -    139,067    -    139,067 
Stock-based compensation   -    -    9,168    9    680,435    -    680,444 
Adjustment of reverse stock split   -    -    669    -    -    -    - 
Net loss attributable to common stockholders   -    -    -    -    -    (3,731,093)   (3,731,093)
Balance - June 30, 2021   150,000   $150    743,246   $743   $35,618,250   $(39,249,677)  $(3,630,534)

 

Three Months Ended June 30, 2021

 

   Series A           Additional       Total 
   Preferred Stock   Common Stock   Paid in   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                             
Balance - March 31, 2021   150,000    150    721,032    721    34,864,967    (37,698,831)   (2,832,993)
Cash received for issued stock   -    -    -    -    193,196    -    193,196 
Common stock issued for conversion of preferred stock   -    -    8,934    9    144,707    -    144,716 
Common stock issued for exercised cashless warrant             8,923    9    (9)   -    - 
Resolution of derivative liability upon exercise of warrant             -    -    139,067    -    139,067 
Stock-based compensation   -    -    3,688    4    276,322    -    276,326 
Adjustment of reverse stock split   -    -    669    -    -    -    - 
Net loss attributable to common stockholders   -    -         -    -    (1,550,846)   (1,550,846)
Balance - June 30, 2021   150,000    150    743,246    743    35,618,250    (39,249,677)   (3,630,534)

 

See the accompanying Notes, which are an integral part of these unaudited Consolidated Financial Statements

 

5

 

 

DATA443 RISK MITIGATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   2022   2021 
   Six Months Ended 
   June 30, 
   2022   2021 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
           
Net loss  $(4,279,531)  $(3,721,652)
Adjustments to reconcile net loss to net cash used in operating activities:          
Change in fair value of derivative liability   57,883    363,654 
(Gain) loss on settlement of debt   -    227,501 
Stock-based compensation expense   798,690    680,444 
Loss on impairment of intangible asset   -    - 
Depreciation and amortization   540,714    554,557 
Amortization of debt discount   1,549,752    1,448,308 
Lease liability amortization   (14,958)   (13,107)
Changes in operating assets and liabilities:          
Accounts receivable   (209,938)   22,233 
Prepaid expenses and other assets   42,852    (24,425)
Accounts payable and accrued liabilities   308,642    3,616 
Deferred revenue   973,992    (428,116)
Accrued interest   105,577    63,912 
Deposit   10,414    - 
Net Cash used in Operating Activities   (115,911)   (823,075)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Advance payment for acquisition   (250,000)   - 
Purchase of property and equipment   (96,960)   (79,020)
Net Cash used in Investing Activities   (346,960)   (79,020)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Bank overdraft   3,781    - 
Proceeds from issuance of convertible notes payable   1,207,800    100,000 
Repayment of convertible notes payable   (758,346)   - 
Proceeds from issuance of common stock   -    846,801 
Proceeds from issuance of Series B Preferred Stock   75,000    250,000 
Redemption of Series B Preferred Stock   (487,730)   - 
Finance lease payments   (41,195)   (43,931)
Proceeds from issuance of notes payable   1,186,453    2,574,647 
Repayment of notes payable   (1,957,492)   (2,734,275)
Proceeds from related parties   116,238    271,464 
Repayment to related parties   (86,571)   (414,187)
Net Cash provided by (used in) Financing Activities   (742,062)   850,519 
           
Net change in cash   (1,204,933)   (51,576)
Cash, beginning of period   1,204,933    58,783 
Cash, end of period  $-   $7,207 

 

See the accompanying notes, which are an integral part of these unaudited consolidated financial statements.

 

6

 

 

DATA443 RISK MITIGATION, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

Data443 Risk Mitigation, Inc. (the “Company”, “we”, “us” and “our”) was incorporated as a Nevada corporation on May 4, 1998. On October 15, 2019, the Company changed its name from LandStar, Inc. to Data443 Risk Mitigation, Inc. within the State of Nevada.

 

We deliver solutions and capabilities that businesses can use in conjunction with their use of established cloud vendors such as Microsoft® Azure, Google® Cloud Platform (GCP) and Amazon® Web Services (AWS), as well as with on-premises databases and database applications with virtualization platforms, such as those hosted or configured using VMWare®, Citrix® and Oracle® clouds/products).

 

On January 19, 2022, we entered into an Asset Purchase Agreement with Centurion Holdings I, LLC (“Centurion”) to acquire the intellectual property rights and certain assets collectively known as Centurion SmartShield Home and SmartShield Enterprise, patented technology that protects and recovers devices in the event of ransomware attacks. The total purchase price of $3,400,000 consists of: (i) a $250,000 cash payment at closing; (ii) a $2,900,000 promissory note issued by Data443 in favor of Centurion (“Centurion Note”); and (iii) $250,000 in the form of a contingent payment. The Centurion Note matures January 19, 2027 but provides that Data443’s repayment obligation would accelerate on the occurrence of events. One of those events was a financing event that did not occur within the originally anticipated timeframe. If that event had occurred, then Data443’s repayment obligation would have been to repay the balance of the outstanding principal and interest as follows: (i) $500,000 of the then-outstanding amount due in cash; and (ii) the remaining balance, at Data443’s option, in Common Stock or a combination of Common Stock and cash, with the number of shares of Common Stock to be determined according to a specified formula. In April 2022, Data443 and Centurion agreed that, even though the trigger for this acceleration event did not occur, Data443 would issue shares of Common Stock to Centurion in an amount then-equivalent to $2,400,000, as partial repayment of the obligation due under the Centurion Note. The number of shares of Common Stock Data443 issued to Centurion on April 20, 2022, was 380,952. Because Data443 still has some repayment obligations to fulfill under the Centurion Note, as of the filing date of these financial statements, the acquisition that is the subject of the Centurion Asset Purchase Agreement is still not completed.

 

Basis of Presentation

 

These unaudited consolidated financial statements have been prepared in accordance rules and regulations of the Securities and Exchange Commission (“SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, we have included all adjustments considered necessary for a fair presentation and such adjustments are of a normal recurring nature. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2021 and notes thereto and other pertinent information contained in our Form 10-K as filed with the SEC on March 31, 2022. The results of operations for the six months ended June 30, 2022, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2022.

 

Basis of Consolidation

 

The accompanying unaudited consolidated financial statements as of June 30, 2022 include our accounts and those of our wholly-owned subsidiary, Data 443 Risk Mitigation, Inc., a North Carolina operating company. These unaudited consolidated financial statements have been prepared on the accrual basis of accounting in accordance with GAAP.

 

7

 

 

Stock-Based Compensation

 

Employees – We account for share-based compensation under the fair value method which requires all such compensation to employees, including the grant of employee stock options, to be calculated based on its fair value at the measurement date (generally the grant date), and recognized in the consolidated statement of operations over the requisite service period.

 

Nonemployees - Under the requirements of the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), we account for share-based compensation to non-employees under the fair value method which requires all such compensation to be calculated based on the fair value at the measurement date (generally the grant date), and recognized in the statement of operations over the requisite service period.

 

We recorded approximately $798,690 in share-based compensation expense for the six months ended June 30, 2022, compared to $680,440 in share-based compensation expense for the six months ended June 30, 2021. Determining the appropriate fair value model and the related assumptions requires judgment. During the six months ended June 30, 2022, the fair value of each option grant was estimated using a Black-Scholes option-pricing model. The expected volatility represents the historical volatility of our publicly traded common stock. Due to limited historical data, we calculate the expected life based on the mid-point between the vesting date and the contractual term which is in accordance with the simplified method. The expected term for options granted to nonemployees is the contractual life. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of stock options. We have not paid and do not anticipate paying cash dividends on our shares of Common Stock; therefore, the expected dividend yield is assumed to be zero.

 

Basic and Diluted Net Loss Per Common Share

 

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method and as if converted method. Dilutive potential common shares include outstanding stock options, warrant and convertible notes.

 

For the six months ended June 30, 2022 and 2021, respectively, the following common stock equivalents were excluded from the computation of diluted net loss per share as the result of the computation was anti-dilutive:

 

   2022   2021 
   Six Months Ended 
   June 30, 
   2022   2021 
   (Shares)   (Shares) 
Series A Preferred Stock   149,892,000    150,000,000 
Stock options   1,029    1,559 
Warrants   158,441    - 
Convertible notes   -    13,183 
Preferred B stock   -    2,517 
Total   150,051,470    150,017,259 

 

COVID-19

 

In March 2020, the World Health Organization (“WHO”) declared the novel coronavirus COVID-19 (“COVID-19”) a global pandemic. The pandemic adversely affected workforces, economies, and financial markets globally in 2020 and, until contained, is still expected to disrupt general business operations. The COVID-19 pandemic and the measures taken by many governments around the world in response could in the future meaningfully impact our business, results of operations and financial condition. We are currently unable to predict the duration of that impact but continue to monitor our accounting estimates of the carrying value of certain assets and liabilities relating to our leases and will continue to do so as additional information is obtained or new events occur. Actual results could differ from our estimates and judgments, and any such differences may be material to our financial statements.

 

8

 

 

Recently Adopted Accounting Guidance

 

In August 2020, the FASB issued ASU 2020-06, ASC Subtopic 470-20 “Debt—Debt with Conversion and Other Options” and ASC subtopic 815-40 “Hedging—Contracts in Entity’s Own Equity”. The standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting; and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Due to adoption of this accounting policy on January 1, 2022, we recognized a cumulative effect adjustment to increase the opening retained earnings as of January 1, 2022 by $439,857.

 

Recently Issued Accounting Pronouncements

 

We have considered all other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our consolidated financial statements.

 

NOTE 2: LIQUIDITY AND GOING CONCERN

 

The accompanying financial statements have been prepared assuming that we will continue as a going concern. As reflected in the financial statements, we have incurred significant current period losses and negative cash flows from operating activities, and we have negative working capital and an accumulated deficit. We have relied upon loans and issuances of our equity to fund our operations. These conditions, among others, raise substantial doubt about our ability to continue as a going concern. Management’s plans regarding these matters, include raising additional debt or equity financing, the terms of which might not be acceptable. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

NOTE 3: PROPERTY AND EQUIPMENT

 

The following table summarizes the components of our property and equipment as of the dates presented:

 

   June 30,   December 31, 
   2022   2021 
Furniture and Fixtures  $2,991   $2,991 
Computer Equipment   656,613    559,654 
Property and equipment, gross   659,604    562,645 
Accumulated depreciation   (354,408)   (274,239)
Property and equipment, net of accumulated depreciation  $305,196   $288,406 

 

Depreciation expense for the six months ended June 30, 2022 and 2021, was $80,170 and $71,513, respectively.

 

During the six months ended June 30, 2022 and 2021, we purchased property and equipment of $96,960 and $79,020, respectively.

 

9

 

 

NOTE 4: INTELLECTUAL PROPERTY

 

The following table summarizes the components of our intellectual property as of the dates presented:

 

  

June 30,

2022

  

December 31,

2021

 
Intellectual property:          
Word press GDPR rights  $46,800   $46,800 
ARALOC®   1,850,000    1,850,000 
ArcMail®   1,445,000    1,445,000 
DataExpress®   1,388,051    1,388,051 
FileFacets®   135,000    135,000 
IntellyWP™   60,000    60,000 
Resilient Network Systems   305,000    305,000 
Intellectual property   5,229,851    5,229,851 
Accumulated amortization   (4,420,576)   (3,960,032)
Intellectual property, net of accumulated amortization  $809,275   $1,269,819 

 

We recognized amortization expense of $460,544 and $483,044 for the six months ended June 30, 2022, and 2021, respectively.

 

Based on the carrying value of definite-lived intangible assets as of June 30, 2022, we estimate our amortization expense for the next five years will be as follows:

 

   Amortization 
Year Ended December 31,  Expense 
2022 (excluding the six months ended June 30, 2022)  $354,940 
2023   411,585 
2024   27,000 
Thereafter   15,750 
Total   $809,275 

 

NOTE 5: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

The following table summarizes the components of our accounts payable and accrued liabilities as of the dates presented:

 

   June 30,   December 31, 
   2022   2021 
Accounts payable  $264,105   $75,628 
Credit cards   61,461    28,492 
Accrued dividend - preferred stock   -    6,849 
Accrued liabilities   91,900    4,704 
Accounts payable and accrued liabilities   $417,466   $115,673 

 

NOTE 6: DEFERRED REVENUE

 

For the six months ended June 30, 2022 and as of December 31, 2021, changes in deferred revenue were as follows:

 

   June 30,   December 31, 
   2022   2021 
Balance, beginning of period  $1,608,596   $1,518,163 
Deferral of revenue   2,182,504    2,581,801 
Recognition of deferred revenue   (1,208,512)   (2,491,368)
Balance, end of period  $2,582,588   $1,608,596 

 

10

 

 

As of June 30, 2022 and December 31, 2021, deferred revenue is classified as follows:

 

   June 30,   December 31, 
   2022   2021 
Current  $1,510,827   $1,035,185 
Non-current   1,071,761    573,411 
Deferred revenue  $2,582,588   $1,608,596 

 

NOTE 7: LEASES

 

Operating lease

 

We have two noncancelable operating leases for office facilities, one that we entered into January 2019 and that expires April 10, 2024 and another that we entered into in April 2022 and that expires April 30, 2024. Each operating lease has a renewal option and a rent escalation clause. We relocated to the expanded square footage of the premises that are the subject of the April 2022 lease to support our growing operations, and entered into a commission agreement with the landlord of the building to sublet the premises that are the subject of the January 2019 lease.

 

We recognized total lease expense of approximately $83,339 and $24,000 for the six months ended June 30, 2022 and 2021, respectively, primarily related to operating lease costs paid to lessors from operating cash flows. As of June 30, 2022 and December 31, 2021, we recorded a security deposit of $10,000.

 

At June 30, 2022, future minimum lease payments under operating leases that have initial noncancelable lease terms in excess of one year were as follows:

 

   Total 
Year Ended December 31,     
2022 (excluding the six months ended June 30, 2022)   63,650 
2023   131,150 
Thereafter   - 
Total lease payment   194,800 
Less: Imputed interest   (11,880)
Operating lease liabilities   182,920 
      
Operating lease liability - current   118,848 
Operating lease liability - non-current  $64,072 

 

The following summarizes other supplemental information about our operating leases as of June 30, 2022:

 

Weighted average discount rate   8%
Weighted average remaining lease term (years)   1.54 

 

Financing leases

 

We lease computer and hardware under non-cancellable capital leases. The term of those capital leases is 3 years and annual interest rate is 12%. At June 30, 2022 and December 31, 2021, the capital lease obligations included in current liabilities were $41,914 and $72,768, respectively, and capital lease obligations included in long-term liabilities were $0 and $10,341, respectively. As of June 30, 2022 and December 31, 2021, we recorded a security deposit of $10,944.

 

11

 

 

At June 30, 2022, future minimum lease payments under the finance lease obligations, are as follows:

 

   Total 
     
2022 (excluding the six months ended June 30, 2022)  $33,285 
2023   10,496 
Thereafter   - 
Total finance lease payment    43,781 
Less: Imputed interest   (1,867)
Finance lease liabilities   41,914 
      
Finance lease liability   41,914 
Finance lease liability - non-current  $- 

 

As of June 30, 2022 and December 31 2021, finance lease assets are included in property and equipment as follows:

 

   June 30,   December 31, 
   2022   2021 
Finance lease assets  $267,284   $267,284 
Accumulated depreciation   (231,156)   (192,928)
Finance lease assets, net of accumulated depreciation  $36,128   $74,356 

 

NOTE 8: CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable consists of the following:

 

   June 30,   December 31, 
   2022   2021 
Convertible Notes - Issued in fiscal year 2020   98,488    100,000 
Convertible Notes - Issued in fiscal year 2021   851,851    1,607,857 
Convertible Notes - Issued in fiscal year 2022   1,291,735    - 
Convertible notes payable, Gross   2,242,074    1,707,857 
Less debt discount and debt issuance cost   (200,812)   (691,569)
Convertible notes payable   2,041,262    1,016,288 
Less current portion of convertible notes payable   1,942,774    993,931