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 September 30, 2023
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 Sancar Way, 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 our common stock as of November 17, 2023 was .
DATA443 RISK MITIGATION, INC.
FORM 10-Q
TABLE OF CONTENTS
| 1 |
PART I
FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
DATA443 RISK MITIGATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of September 30, | As of December 31, | |||||||
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | 4,890 | $ | 1,712 | ||||
| Accounts receivable, net | 35,623 | 31,978 | ||||||
| Prepaid expense and other current assets | 647,990 | 91,204 | ||||||
| Total current assets | 688,503 | 124,894 | ||||||
| Property and equipment, net | 475,066 | 427,031 | ||||||
| Operating lease right-of-use assets, net | 168,189 | 405,148 | ||||||
| Advance payment for acquisition | 4,826,188 | 2,726,188 | ||||||
| Intellectual property, net of accumulated amortization | 80,334 | 454,331 | ||||||
| Deposits | 45,673 | 45,673 | ||||||
| Total Assets | $ | 6,283,953 | $ | 4,183,265 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | 2,909,110 | 1,031,931 | ||||||
| Deferred revenue | 1,619,711 | 1,704,249 | ||||||
| Interest payable | 826,187 | 478,712 | ||||||
| Notes payable, net of unamortized discount | 2,100,549 | 918,785 | ||||||
| Convertible notes payable, net of unamortized discount | 3,142,476 | 4,134,155 | ||||||
| Due to a related party | 370,509 | 112,062 | ||||||
| Operating lease liability | 235,299 | 213,831 | ||||||
| Finance lease liability | 10,341 | |||||||
| Total Current Liabilities | 11,203,841 | 8,604,066 | ||||||
| Notes payable, net of unamortized discount - non-current | 1,364,865 | 3,104,573 | ||||||
| Convertible notes payable, net of unamortized discount - non-current | 97,946 | 97,946 | ||||||
| Deferred revenues - non-current | 330,540 | 788,902 | ||||||
| Operating lease liability - non-current | 354,631 | |||||||
| Total Liabilities | 12,997,192 | 12,950,118 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Deficit | ||||||||
| Series A Preferred Stock, shares designated; $ par value; shares issued and outstanding, respectively | 150 | 150 | ||||||
| Series B Preferred Stock, designated; $ par value; shares issued and outstanding | ||||||||
| Common Stock: authorized; $ par value and shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively ⁽ⁱ⁾ | 61,556 | 2,611 | ||||||
| Additional paid in capital | 47,265,212 | 42,642,514 | ||||||
| Accumulated deficit | (54,040,157 | ) | (51,412,128 | ) | ||||
| Total Stockholders’ Deficit | (6,713,239 | ) | (8,766,853 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 6,283,953 | $ | 4,183,265 | ||||
| ⁽ⁱ⁾ | Reflects retrospectively the 1-for-600 reverse stock split that became effective September 20, 2023. Refer to Note 1, “Summary of Business Operations and Significant Accounting Policies” |
See the accompanying notes, which are an integral part of these unaudited condensed consolidated financial statements.
| 2 |
DATA443 RISK MITIGATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | 693,835 | $ | 916,172 | $ | 2,692,681 | $ | 2,279,677 | ||||||||
| Cost of revenue | 190,425 | 104,322 | 644,288 | 382,594 | ||||||||||||
| Gross profit | 503,410 | 811,850 | 2,048,393 | 1,897,083 | ||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 1,471,024 | 1,557,584 | 4,507,332 | 4,647,366 | ||||||||||||
| Sales and marketing | 34,430 | 40,929 | 130,983 | 220,959 | ||||||||||||
| Total operating expenses | 1,505,454 | 1,598,513 | 4,638,315 | 4,868,325 | ||||||||||||
| Loss from operations | (1,002,044 | ) | (786,663 | ) | (2,589,922 | ) | (2,971,242 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | (983,100 | ) | (796,057 | ) | (4,947,656 | ) | (2,833,126 | ) | ||||||||
| Gain (loss) on settlement of debt | 5,468 | 4,909,549 | ||||||||||||||
| Change in fair value of derivative liability | (57,883 | ) | ||||||||||||||
| Total other expense | (977,632 | ) | (796,057 | ) | (38,107 | ) | (2,891,009 | ) | ||||||||
| Loss before income taxes | (1,979,676 | ) | (1,582,720 | ) | (2,628,029 | ) | (5,862,251 | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Loss | $ | (1,979,676 | ) | $ | (1,582,720 | ) | $ | (2,628,029 | ) | $ | (5,862,251 | ) | ||||
| Dividend on Series B Preferred Stock | (104,631 | ) | ||||||||||||||
| Loss attributable to common stockholders | $ | (1,979,676 | ) | $ | (1,582,720 | ) | $ | (2,628,029 | ) | $ | (5,966,882 | ) | ||||
| Basic and diluted loss per Common Share ⁽ⁱ⁾ | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Basic and diluted weighted average number of common shares outstanding ⁽ⁱ⁾ | ||||||||||||||||
| ⁽ⁱ⁾ | Reflects retrospectively the 1-for-600 reverse stock split that became effective September 20, 2023. Refer to Note 1, “Summary of Business Operations and Significant Accounting Policies” |
See the accompanying notes, which are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
DATA443 RISK MITIGATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(UNAUDITED)
Nine Months Ended September 30, 2023
| Series A | Additional | Total | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance - December 31, 2022 ⁽ⁱ⁾ | 149,892 | $ | 150 | 4,360 | $ | 2,611 | $ | 42,642,514 | $ | (51,412,128 | ) | $ | (8,766,853 | ) | ||||||||||||||
| Common Stock issued for acquisition of Cyren Assets ⁽ⁱ⁾ | - | 165,290 | 165 | 1,999,835 | 2,000,000 | |||||||||||||||||||||||
| Common Stock issued for conversion of debt ⁽ⁱ⁾ | - | 21,428 | 12,857 | 344,735 | 357,592 | |||||||||||||||||||||||
| Common Stock issued for adjustment to investors in private placement ⁽ⁱ⁾ | - | 77,010 | 45,619 | (45,619 | ) | |||||||||||||||||||||||
| Warrant issued in conjunction with debts ⁽ⁱ⁾ | - | - | 1,682,499 | 1,682,499 | ||||||||||||||||||||||||
| Stock-based compensation ⁽ⁱ⁾ | - | 1,036 | 304 | 641,248 | 641,552 | |||||||||||||||||||||||
| Net loss | - | - | (2,628,029 | ) | (2,628,029 | ) | ||||||||||||||||||||||
| Balance – September 30, 2023 ⁽ⁱ⁾ | 149,892 | $ | 150 | 269,124 | $ | 61,556 | $ | 47,265,212 | $ | (54,040,157 | ) | $ | (6,713,239 | ) | ||||||||||||||
Three Months Ended September 30, 2023
| Series A | Additional | Total | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance – June 30, 2023 ⁽ⁱ⁾ | 149,892 | $ | 150 | 98,940 | $ | 59,360 | $ | 43,458,946 | $ | (52,060,481 | ) | $ | (8,542,025 | ) | ||||||||||||||
| Common Stock issued for cash – Reversal | (20,000 | ) | (20,000 | ) | ||||||||||||||||||||||||
| Common Stock issued for acquisition of Cyren Assets ⁽ⁱ⁾ | - | 165,290 | 165 | 1,999,835 | 2,000,000 | |||||||||||||||||||||||
| Common Stock issued for conversion of debt ⁽ⁱ⁾ | - | 4,394 | 2,049 | 22,951 | 25,000 | |||||||||||||||||||||||
| Warrant issued in conjunction with debts ⁽ⁱ⁾ | - | - | 1,682,499 | 1,682,499 | ||||||||||||||||||||||||
| Stock-based compensation ⁽ⁱ⁾ | - | 500 | (18 | ) | 120,981 | 120,963 | ||||||||||||||||||||||
| Net income | - | - | (1,979,676 | ) | (1,979,676 | ) | ||||||||||||||||||||||
| Balance – September 30, 2023 ⁽ⁱ⁾ | 149,892 | $ | 150 | 269,124 | $ | 61,556 | $ | 47,265,212 | $ | (54,040,157 | ) | $ | (6,713,239 | ) | ||||||||||||||
| ⁽ⁱ⁾ | Reflects retrospectively the 1-for-600 reverse stock split that became effective September 20, 2023. Refer to Note 1, “Summary of Business Operations and Significant Accounting Policies” |
See the accompanying notes, which are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
DATA443 RISK MITIGATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (Continued)
(UNAUDITED)
Nine Months Ended September 30, 2022
| Series A | Additional | Total | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance - December 31, 2021 ⁽ⁱ⁾ | 150,000 | $ | 150 | 203 | $ | 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 ⁽ⁱ⁾ | - | 635 | 381 | 2,475,807 | 2,476,188 | |||||||||||||||||||||||
| Subscription for share issuance | - | - | 829,000 | 829,000 | ||||||||||||||||||||||||
| Common Stock issued for conversion of preferred stock ⁽ⁱ⁾ | (108 | ) | 180 | 108 | (108 | ) | ||||||||||||||||||||||
| Common Stock issued for conversion of debt ⁽ⁱ⁾ | - | 481 | 289 | 130,799 | 131,088 | |||||||||||||||||||||||
| Common Stock issued in conjunction with convertible notes ⁽ⁱ⁾ | - | 30 | 18 | 140,919 | 140,937 | |||||||||||||||||||||||
| Common Stock issued for exercised cashless warrants ⁽ⁱ⁾ | - | 11 | 7 | (7 | ) | |||||||||||||||||||||||
| Common Stock issued for service ⁽ⁱ⁾ | - | 256 | 153 | 844,048 | 844,201 | |||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrants | - | - | 57,883 | 57,883 | ||||||||||||||||||||||||
| Warrants issued in conjunction with debts | - | - | 47,628 | 47,628 | ||||||||||||||||||||||||
| Stock-based compensation | - | - | (14,280 | ) | (14,280 | ) | ||||||||||||||||||||||
| Net loss | - | - | (5,966,882 | ) | (5,966,882 | ) | ||||||||||||||||||||||
| Balance – September 30, 2022 ⁽ⁱ⁾ | 149,892 | $ | 150 | 1,796 | $ | 1,078 | $ | 41,804,569 | $ | (47,560,912 | ) | $ | (5,755,115 | ) | ||||||||||||||
Three months ended September 30, 2022
| Series A | Additional | Total | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance – June 30, 2022 ⁽ⁱ⁾ | 149,892 | $ | 150 | 1,591 | $ | 954 | $ | 40,842,698 | $ | (45,978,192 | ) | $ | (5,134,390 | ) | ||||||||||||||
| Subscription for share issuance | - | - | 829,000 | 829,000 | ||||||||||||||||||||||||
| Common Stock issued for conversion of debt ⁽ⁱ⁾ | - | 205 | 124 | 101,640 | 101,764 | |||||||||||||||||||||||
| Stock-based compensation | - | - | 31,231 | 31,231 | ||||||||||||||||||||||||
| Net loss | - | - | (1,582,720 | ) | (1,582,720 | ) | ||||||||||||||||||||||
| Balance – September 30, 2022 ⁽ⁱ⁾ | 149,892 | $ | 150 | 1,796 | $ | 1,078 | $ | 41,804,569 | $ | (47,560,912 | ) | $ | (5,755,115 | ) | ||||||||||||||
| ⁽ⁱ⁾ | Reflects retrospectively the 1-for-600 reverse stock split that became effective September 20, 2023. Refer to Note 1, “Summary of Business Operations and Significant Accounting Policies” |
See the accompanying notes, which are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
DATA443 RISK MITIGATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (2,628,029 | ) | $ | (5,862,251 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Change in fair value of derivative liability | 57,883 | |||||||
| (Gain) loss on settlement of debt | (5,057,970 | ) | ||||||
| Stock-based compensation expense | 641,552 | 829,921 | ||||||
| Depreciation and amortization | 511,485 | 816,944 | ||||||
| Amortization of debt discount | 1,239,686 | 1,878,976 | ||||||
| Bad debt | 345,775 | |||||||
| Lease liability amortization | (96,204 | ) | 42,339 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (3,645 | ) | (328,466 | ) | ||||
| Prepaid expenses and other assets | (556,786 | ) | 25,172 | |||||
| Accounts payable and accrued liabilities | 1,877,179 | 675,723 | ||||||
| Deferred revenue | (542,900 | ) | 1,043,786 | |||||
| Accrued interest expense | 5,136,419 | 203,512 | ||||||
| Accrued Dividend | (14,233 | ) | ||||||
| Net Cash (used in ) provided by Operating Activities | 520,787 | (284,919 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Advance payment for acquisition | (100,000 | ) | (250,000 | ) | ||||
| Purchase of property and equipment | (185,523 | ) | (298,839 | ) | ||||
| Net Cash used in Investing Activities | (285,523 | ) | (548,839 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of convertible notes payable | 1,067,631 | 1,257,800 | ||||||
| Repayment of convertible notes payable | (294,868 | ) | (895,783 | ) | ||||
| Proceeds from stock subscription for share issuance | 829,000 | |||||||
| Proceeds from issuance of Series B Preferred Stock | 75,000 | |||||||
| Redemption of Series B Preferred Stock | (487,730 | ) | ||||||
| Finance lease payments | (10,341 | ) | (57,325 | ) | ||||
| Proceeds from issuance of notes payable | 2,516,912 | |||||||
| Repayment of notes payable | (1,252,955 | ) | (3,430,411 | ) | ||||
| Proceeds from related parties | 318,447 | 224,778 | ||||||
| Repayment to related parties | (60,000 | ) | (174,431 | ) | ||||
| Net Cash used in Financing Activities | (232,086 | ) | (142,190 | ) | ||||
| Net change in cash | 3,178 | (975,948 | ) | |||||
| Cash, beginning of period | 1,712 | 1,204,933 | ||||||
| Cash, end of period | $ | 4,890 | $ | 228,985 | ||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | 701,427 | $ | 454,366 | ||||
| Cash paid for taxes | $ | $ | ||||||
| Non-cash Investing and Financing transactions: | ||||||||
| Common Stock issued for purchase of intangibles | $ | 2,000,000 | $ | 2,476,188 | ||||
| Common Stock issued for exercised cashless warrant | $ | $ | 7 | |||||
| Settlement of convertible notes payable through issuance of common stock | $ | 357,592 | $ | 131,087 | ||||
| Common Stock issued in conjunction with convertible note | $ | $ | 140,936 | |||||
| Warrant issued in conjunction with debts | $ | 1,682,499 | $ | 47,628 | ||||
| Resolution of derivative liability upon exercise of warrant | $ | $ | 57,883 | |||||
| Cumulative-effect adjustment from adoption of ASU 2020-06 | $ | $ | 77,642 | |||||
See the accompanying notes, which are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Data443 Risk Mitigation, Inc. (“we,” “us,” “our” or the “Company”) was incorporated as a Nevada corporation on May 4, 1998. On October 15, 2019, we changed our name from LandStar, Inc. to Data443 Risk Mitigation, Inc..
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.
Reverse Stock Split
Our Board of Directors and stockholders approved a reverse stock split of the outstanding shares of our common stock, par value $ (the “Common Stock”) on the basis of one share of Common Stock for every 600 shares of Common Stock, which reverse stock split became effective on September 20, 2023. Unless noted otherwise, all shares and per share amounts and information presented herein have been retroactively adjusted to reflect the reverse stock split for all periods presented.
Advance Payment for Acquisition
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 us in favor of Centurion (“Centurion Note”); and (iii) $250,000 in the form of a contingent payment. The Centurion Note matures on January 19, 2027 but provides that our repayment obligation accelerates upon the occurrence of certain events. In April 2022, we and Centurion agreed that we would issue shares of Common Stock to Centurion in an amount then-equivalent to $2,400,000, as partial repayment of amount due under the Centurion Note. We issued Centurion shares of Common Stock on April 20, 2022. 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, and is expected to be completed in 2023.
On May 11, 2023, we entered into an agreement to purchase certain assets (the “Purchase Agreement”) with the Appointed Receiver for the Assets of Cyren Ltd (the “Receiver”). Pursuant to the Purchase Agreement, the Receiver sold, transferred, assigned, conveyed and delivered to us, and we purchased from Receiver, all right, title, and interest in and to certain assets in the Purchase Agreement (the “Assets”). In exchange for the Assets, we will pay (i) $500,000 payable in cash, (ii) shares of our Common Stock equivalent to $2,000,000 and (iii) $1,000,000 in the form of an earn out payment, as further described in the Purchase Agreement. We issued the Receiver shares of Common Stock on September 26, 2023 and $100,000 cash payment as an advance on the cash payable obligation. As of the filing of this Quarterly Report, the transaction has not yet closed.
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with 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 condensed 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 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2022 and notes thereto and other pertinent information contained in our Form 10-K as filed with the SEC on February 24, 2023 and amended on August 24, 2023. The results of operations for the nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2023.
Basis of Consolidation
The accompanying unaudited consolidated financial statements as of September 30, 2023 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 US GAAP. All inter company balances and transactions have been eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on the net loss or and financial position.
| 7 |
Accounts Receivable
Trade receivables are generally recorded at the invoice amount mostly for a one-year period, net of an allowance for bad debt. For the three months ended September 30, 2023, and September 30, 2022, we recorded bad debt expense of $0 and $345,775, respectively. For the nine months ended September 30, 2023, and September 30, 2022, we recorded bad debt expense of $ and $345,775, respectively.
Employees – We account for stock-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 Stock-Based Payment Accounting (“ASU 2018-07”), we account for stock-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 $ in stock-based compensation expense for the three months ended September 30, 2023, compared to $ in stock-based compensation expense for the three months ended September 30, 2022.
We recorded approximately $ in stock-based compensation expense for the nine months ended September 30, 2023, compared to $ in stock-based compensation expense for the nine months ended September 30, 2022. Determining the appropriate fair value model and the related assumptions requires judgment. During the three and nine months ended September 30, 2023, 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.
Contingencies
We account for contingent liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 450, Contingencies. This standard requires management to assess potential contingent liabilities that may exist as of the date of the financial statements to determine the probability and amount of loss that may have occurred, which inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed in our financial statements. For loss contingencies considered remote, we generally would neither accrue any estimated liability nor disclose the nature of the contingent liability in our financial statements. Management has assessed potential contingent liabilities as of September 30, 2023, and based on that assessment, there are no probable or possible loss contingencies requiring accrual or establishment of a reserve.
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.
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| (Shares) | (Shares) | |||||||
| Series A Preferred Stock | 149,892,000 | 149,892,000 | ||||||
| Stock options | 5,034 | 1 | ||||||
| Warrants | 753,976 | 264 | ||||||
| Total | 150,651,010 | 149,892,265 | ||||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| (Shares) | (Shares) | |||||||
| Series A Preferred Stock | 149,892,000 | 149,892,000 | ||||||
| Stock options | 9,765 | 1 | ||||||
| Warrants | 754,240 | 264 | ||||||
| Total | 150,656,005 | 149,892,265 | ||||||
| 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” (“Standard”). The Standard reduced the number of accounting models available for convertible debt instruments and convertible preferred stock. Pursuant to the Standard, convertible debt 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 Standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Due to adoption of this Standard on January 1, 2022, we recognized a cumulative effect adjustment to increase the opening retained earnings as of January 1, 2022 by $439,857.
To compute the transition adjustment for a convertible instrument under both the modified retrospective and full retrospective methods, entities need to recompute the basis of that instrument at transition (i.e., the beginning of year of adoption for the modified retrospective method or the beginning of earliest year presented for the full retrospective method) as if the conversion option had not been separated. We use the modified retrospective method to adjust.
Recently Issued Accounting Pronouncements
We have 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 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 of $2,628,029 for the nine months ended September 30, 2023 and we have negative working capital of $10,669,338 and an accumulated deficit $54,040,157 as of September 30, 2023. 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:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Furniture and Fixtures | $ | 6,103 | $ | 6,103 | ||||
| Computer Equipment | 1,053,193 | 867,670 | ||||||
| 1,059,296 | 873,773 | |||||||
| Accumulated depreciation | (584,230 | ) | (446,742 | ) | ||||
| Property and equipment, net of accumulated depreciation | $ | 475,066 | $ | 427,031 | ||||
Depreciation expense for the three months ended September 30, 2023 and 2022, was $ 46,272.00 and $ 45,958.00, respectively.
Depreciation expense for the nine months ended September 30, 2023 and 2022, was $137,488 and $126,128, respectively.
During the nine months ended September 30, 2023 and 2022, we purchased property and equipment of $185,523 and $298,839, respectively.
| 9 |
NOTE 4: INTELLECTUAL PROPERTY
The following table summarizes the components of our intellectual property as of the dates presented:
| September 30, 2023 | December 31, 2022 | |||||||
| Intellectual property: | ||||||||
| WordPress® 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 | ||||||
| 5,229,851 | 5,229,851 | |||||||
| Accumulated amortization | (5,149,517 | ) | (4,775,520 | ) | ||||
| Intellectual property, net of accumulated amortization | $ | 80,334 | $ | 454,331 | ||||
We recognized amortization expense of $124,663 and $230,272 for the three months ended September 30, 2023, and 2022, respectively.
We recognized amortization expense of $373,998 and $690,816 for the nine months ended September 30, 2023, and 2022, respectively.
Based on the carrying value of definite-lived intangible assets as of September 30, 2023, we estimate our amortization expense for the next five years will be as follows:
| Amortization | ||||
| Expense | ||||
| Year ended December 31, | ||||
| 2023 (excluding the nine months ended September 30, 2023) | $ | 37,584 | ||
| 2024 | 27,000 | |||
| 2025 | 15,750 | |||
| Thereafter | ||||
| $ | 80,334 | |||
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:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accounts payable | $ | 1,415,034 | $ | 427,553 | ||||
| Credit cards | 83,662 | 50,302 | ||||||
| Accrued liabilities | 1,410,414 | 554,076 | ||||||
| $ | 2,909,110 | $ | 1,031,931 | |||||
NOTE 6: DEFERRED REVENUE
For the nine months ended September 30, 2023 and as of December 31, 2022, changes in deferred revenue were as follows:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Balance, beginning of period | $ | 2,493,151 | $ | 1,608,596 | ||||
| Deferral of revenue | 1,424,478 | 3,511,678 | ||||||
| Recognition of deferred revenue | (1,967,378 | ) | (2,627,123 | ) | ||||
| Balance, end of period | $ | 1,950,251 | $ | 2,493,151 | ||||
As of September 30, 2023 and December 31, 2022, deferred revenue is classified as follows:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Current | $ | 1,619,711 | $ | 1,704,249 | ||||
| Non-current | 330,540 |
788,902 | ||||||
| $ | 1,950,251 | $ | 2,493,151 | |||||
NOTE 7: LEASES
Operating lease
We have two noncancelable operating leases for office facilities, one that we entered into January 2019 and that expires January 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. In the summer of 2022, 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 $55,389 and $54,474 for the three months ended September 30, 2023 and 2022, respectively, primarily related to operating lease costs paid to lessors from operating cash flows. We recognized total lease expense of approximately $202,383 and $137,813 for the nine months ended September 30, 2023 and 2022, respectively, primarily related to operating lease costs paid to lessors from operating cash flows. As of September 30, 2023 and December 31, 2022, we recorded a security deposit of $33,467.
| 10 |
At September 30, 2023, 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, | ||||
| 2023 (excluding the nine months ended September 30, 2023) | 121,190 | |||
| 2024 | 121,406 | |||
| Thereafter | ||||
| 242,596 | ||||
| Less: Imputed interest | (7,297 | ) | ||
| Operating lease liabilities | 235,299 | |||
| Operating lease liability – current | 235,299 | |||
| Operating lease liability - non-current | $ | |||
The following summarizes other supplemental information about our operating leases as of September 30, 2023:
| Weighted average discount rate | 8 | % | ||
| Weighted average remaining lease term (years) | .58 |
Financing leases
We do not have any financing leases as of September 30, 2023 and $10,341 as of December 31, 2022.
NOTE 8: CONVERTIBLE NOTES PAYABLE
Convertible notes payable consists of the following:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Convertible Notes - Issued in fiscal year 2020 | 97,946 | 97,946 | ||||||
| Convertible Notes - Issued in fiscal year 2021 | 508,440 | 600,400 | ||||||
| Convertible Notes - Issued in fiscal year 2022 | 1,712,194 | 3,710,440 | ||||||
| Convertible Notes - Issued in fiscal year 2023 | 2,211,083 | |||||||
| 4,529,663 | 4,408,786 | |||||||
| Less debt discount and debt issuance cost | (1,289,241 | ) | (176,685 | ) | ||||
| 3,240,422 | 4,232,101 | |||||||
| Less current portion of convertible notes payable | 3,142,476 | 4,134,155 | ||||||
| Long-term convertible notes payable | $ | 97,946 | $ | 97,946 | ||||
During the nine months ended September 30, 2023 and September 30, 2022, we recognized interest expense of $431,806 and $433,940, respectively, and amortization of debt discount expense of $544,675 and $651,383, respectively.
During the three months ended September 30, 2023 and September 30, 2022, we recognized interest expense of $145,164 and $59,002 and amortization of debt discount, included in interest expense of $398,838 and $15,373, respectively.
Conversion
During the nine months ended September 30, 2023, we converted notes with principal amounts and accrued interest of $357,592 into shares of Common Stock.
| 11 |
Convertible notes payable consists of the following:
Promissory Notes - Issued in fiscal year 2020
In 2020, we issued convertible promissory notes with principal amounts totaling $100,000. The 2020 Promissory Notes have the following key provisions:
| ● | Terms 60 months. | |
| ● | Annual interest rates of 5%. | |
| ● | Conversion price fixed at $0.01. |
Promissory Notes - Issued in fiscal year 2021
In 2021, we issued convertible promissory notes with principal amounts totaling $1,696,999, which resulted in cash proceeds of $1,482,000 after financing fees of $214,999 were deducted. The 2021 Convertible Notes have the following key provisions:
| ● | Terms ranging from 90 days to 12 months. | |
| ● | Annual interest rates of 5% to 12%. | |
| ● | Convertible at the option of the holders after varying dates. | |
| ● | Conversion price based on a formula corresponding to a discount (39% discount) off the average closing price or lowest trading price of our Common Stock for the 20 prior trading days including the day on which a notice of conversion is received. | |
| ● | The Mast Hill Fund, LLC convertible promissory note matured on October 19, 2022. The default annual interest rate of 16% is the effective interest rate on the past due principal and interest. As of September 30, 2023 the note had a principle balance of $508,440 and accrued interest of $60,286. |
The 2021 Convertible Notes also were associated with the following:
| ● | The issuance of shares of Common Stock valued at $133,663. | |
| ● | The issuance of 197 warrants to purchase shares of Common Stock with an exercise price a range from $4,464 to $21,600. The term in which the warrants can be exercised is 5 years from issue date. (Note 12) |
During the nine months ended September 30, 2023, in connection with the 2021 Convertible Notes, we repaid principal in the amount of $38,490 and interest expense of $39,822.
Promissory Notes - Issued in fiscal year 2022
During the year ended December 31, 2022, we issued convertible promissory notes with principal amounts totaling $2,120,575, which resulted in cash proceeds of $1,857,800 after deducting a financing fee of $262,775. The 2022 Convertible Notes have the following key provisions:
| ● | Terms ranging from 3 to 12 months. |
| 12 |
| ● | Annual interest rates of 9% to 20%. | |
| ● | Convertible at the option of the holders after varying dates. | |
| ● | Conversion price based on a formula corresponding to a discount (20% or 39% discount) off the lowest trading price of our Common Stock for the 20 prior trading days including the day on which a notice of conversion is received, although one of the 2022 Convertible Notes establishes a fixed conversion price of $2,700 per share. | |
| ● | shares of Common Stock valued at $473,691 issued in conjunction with convertible notes. | |
| ● | On June 30, 2023, we entered into a Note Exchange Agreement (the “Note Exchange Agreement”) with Westland Properties LLC (the “Noteholder”), pursuant to which we agreed with Westland Properties LLC to exchange one outstanding note with a total outstanding balance of $5,398,299 for a new note with an aggregate value of $665,000 (the “New Note”). The New Note matures on June 1, 2024, and calls for payments of (i) $115,000 on or prior to July 25, 2023, (ii) nine monthly payments to the noteholder in the amount of $38,889 each, with the first payment beginning September 1, 2023 and (iii) $200,000 on the earlier of (a) three business days following our successful listing on any of the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange or (b) the receipt of not less than $4,000,000 in funding from a single transaction. If the conditions for payment of the above $200,000 are not met, but we raise capital in excess of $500,000 in a single closing, then 25% of any capital raised in such closing shall be used to satisfy the $200,000 payment. We followed ASC470 Trouble Debt Restructuring, to record a gain on settlement of debt for $4,904,081. |
In connection with the adoption of ASU 2020-06 on January 1, 2022, we reclassified $517,500, previously allocated to the conversion feature, from additional paid-in capital to convertible notes on our balance sheet. The reclassification was recorded to combine the two legacy units of account into a single instrument classified as a liability. As of January 1, 2022, we also recognized a cumulative effect adjustment of $439,857 to accumulated deficit on our balance sheet, that was primarily driven by the derecognition of interest expense related to the accretion of the debt discount as required under the legacy accounting guidance. Under ASU 2020-06, we will no longer incur non-cash interest expense related to the accretion of the debt discount associated with the embedded conversion option.
Promissory Notes - Issued in fiscal year 2023
During the nine months ended September 30, 2023, we issued convertible promissory notes with principal amounts totaling $2,211,083, which resulted in cash proceeds of $2,015,000 after deducting a financing fee of $462,112. The 2023 Convertible Notes have the following key provisions:
| ● | Terms ranging from 9 to 12 months. | |
| ● | Annual interest rates of 9% to 20%. | |
| ● | Convertible at the option of the holders after varying dates. | |
| ● | Conversion price based on a formula corresponding to a discount (20% or 30% discount) off the lowest trading price of our Common Stock for the 20 prior trading days including the day on which a notice of conversion is received, although one of the 2023 Convertible Notes establishes a fixed conversion price of $.50 per share and two of the 2023 Convertible Notes have a fixed conversion price of $.005 per share. | |
| ● | As of the nine months ended September 30, 2023, there were no derivative liabilities. |
| 13 |
NOTE 9: DERIVATIVE LIABILITIES
We analyzed the conversion option of convertible notes for derivative accounting consideration under ASC 815, Derivatives and Hedging, and hedging, and determined that the instrument should be classified as a liability since the conversion option becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item.
We determined our derivative liabilities to be a Level 3 fair value measurement during the year based on management’s estimate of the expected future cash flows required to settle the liabilities, and used the Binomial pricing model to calculate the fair value as of September 30, 2023. 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. As of the nine months ended September 30, 2023, there were no derivative liabilities.
For the nine months ended September 30, 2023 there was no derivative outstanding, and no loss recorded. For the nine months ended September 30, 2022, the change in fair value of the derivative liability was $57,883 and the loss on the derivative was $57,883.
The fair value of the derivative liability for all the notes that became convertible, including the notes issued in prior years, during the year ended December 31, 2022 amounted to $57,883 recognized as a derivative loss.
The inputs used to calculate the derivative values are as follows:
| Nine months ended | Year ended | |||||||
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Expected term | - | * | ||||||
| Expected average volatility | - | % | 280 | % | ||||
| Expected dividend yield | ||||||||
| Risk-free interest rate | - | % | 3.65 | % | ||||
| * | There is no excepted term on the convertible notes. |
| 14 |
NOTE 10: NOTES PAYABLE
Notes payable consists of the following:
| September, | December 31, | Interest | ||||||||||||
| 2023 | 2022 | Maturity | Rate | |||||||||||
| Economic Injury Disaster Loan - originated in May 2020 (1, 2) | $ | 500,000 | $ | 500,000 | 30 years | 3.75 | % | |||||||
| Promissory note - originated in September 2020 | 20,182 | $2,873.89 monthly payment for 36 months | 14.0 | % | ||||||||||
| Promissory note - originated in December 2020 | 3,303 | 16,047 | $1,854.41 monthly payment for 36 months | 8.0 | % | |||||||||
| Promissory note - originated in January 2021 | 4,683 | 22,243 | $2,675.89 monthly payment for 36 months | 18.0 | % | |||||||||
| Promissory note - originated in February 2021 (3) | 1,305,373 | 1,305,373 | 5 years | 4.0 | % | |||||||||
| Promissory note - originated in April 2021(4) | 866,666 | 866,666 | 1 year | 12 | % | |||||||||
| Promissory note - originated in July 2021(4) | 352,500 | 352,500 | 1 year | 12 | % | |||||||||
| Promissory note - originated in September 2021 | 34,735 | 43,667 | $1,383.56 monthly payment for 60 months | 28 | % | |||||||||
| Promissory note - originated in April 2022 | 60,418 | 73,204 | $1,695.41 monthly payment for 36 months | 16.0 | % | |||||||||
| Promissory note - originated in April 2022 | 61,392 | 239,858 | $7,250 daily payment for 168 days | 25 | % | |||||||||
| Promissory note – originated in June 2022 | 149,011 | $20,995 weekly payment for 30 weeks | 49 | % | ||||||||||
| Promissory note - originated in July 2022 | 45,575 | 54,557 | $1,485.38 monthly payment for 60 months | 18 | % | |||||||||
| Promissory note - originated in July 2022 | 70,393 | 94,878 | $3,546.87 monthly payment for 36 months | 10 | % | |||||||||
| Promissory note - originated in August 2022 | 21,753 | 26,538 | $589.92 monthly payment for 60 months | 8 | % | |||||||||
| Promissory note - originated in October 2022 | 1,111,032 | 635,745 | $1,749.00 daily payment for 30 days | 66 | % | |||||||||
| Promissory note - originated in January 2023 | 4,660 | $237.03 monthly payment for 36 months | 25 | % | ||||||||||
| Promissory note - originated in March 2023 | 50,543 | $1,521.73 monthly payment for 60 months | 18 | % | ||||||||||
| Promissory note - originated in March 2023 | 12,189 | $559.25 monthly payment for 36 months | 17 | % | ||||||||||
| Promissory note - originated in April 2023 | 21,115 | $3,999.00 monthly payment for 12 months | 12 | % | ||||||||||
| Promissory note - originated in April 2023 | 25,709 | $3,918.03 monthly payment for 12 months | 6 | % | ||||||||||
| Promissory note - originated in May 2023 | 250,000 | 3 months | 29 | % | ||||||||||
| Promissory note - originated in August 2023 | 17,406 | 36 months | 14 | % | ||||||||||
| 4,819,445 | 4,400,469 | |||||||||||||
| Less debt discount and debt issuance cost | (1,354,031 | ) | (377,111 | ) | ||||||||||
| 3,465,414 | 4,023,358 | |||||||||||||
| Less current portion of promissory notes payable | 2,100,549 | 918,785 | ||||||||||||
| Long-term promissory notes payable | $ | 1,364,865 | $ | 3,104,573 | ||||||||||
During the nine months ended September 30, 2023 and 2022, we recognized interest expense of $313,069 and $172,371, and amortization of debt discount, of $695,011 and $927,505, respectively, included in interest expense.
During the three months ended September 30, 2023 and 2022, we recognized interest expense of $76,962 and $58,678, and amortization of debt discount, included in interest expense of $215,065 and $301,884, respectively
During the nine months ended September 30, 2023 and the year ended December 31, 2022, we issued promissory notes for a total of $1,617,868 and $4,840,215 , less discount of $1,671,868 and $1,381,970 , and repaid $1,252,955 and 4,408,240 , respectively.
During the three months ended September 30, 2023 and 2022, we issued promissory notes for a total of $18,096 and $431,112, less discount of $18,096 and $20,965, and repaid $205,737 and $1,472,919, respectively.
| 15 |
NOTE 11: COMMITMENTS AND CONTINGENCIES
DMB Note Collection Action
On June 17, 2021, DMB Group, LLC (“DMB”) filed a lawsuit against our wholly-owned subsidiary, the North Carolina operating company Data443 Risk Mitigation, Inc., (the “Subsidiary”) in County Court in Denton County, Texas, naming the Subsidiary as defendant. The matter was settled September 2021 by mutual agreement of the involved parties. The Subsidiary has made all payments required pursuant to the settlement and the matter is now considered closed. The Court granted our motions for nonsuit and dismissal with prejudice on orders entered May 4 and May 5, 2022 respectively.
Employment Related Claims
We view most legal proceedings involving claims of former employees as routine litigation incidental to the business, and therefore not material.
Litigation
In the ordinary course of business, we are involved in a number of lawsuits incidental to our business, including litigation related to intellectual property, employees, and commercial matters. Although it is difficult to predict the ultimate outcome of these cases, management believes that any ultimate liability would not have a material adverse effect on our consolidated financial condition or results of operations. However, an unforeseen unfavorable development in any of these cases could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows in the period in which it is recorded.
NOTE 12: CAPITAL STOCK AND REVERSE STOCK SPLIT
On September 14, 2023, we filed an amendment to its Articles of Incorporation to effect a 1-for-600 reverse stock split of its issued and outstanding shares of common stock, each with $0.001 par value (“Common Stock”). 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 September 30, 2023, we are authorized to issue shares of preferred stock with a par value of $, of which shares have been designated as Series A Preferred Stock, and shares have been designated as Series B Preferred Stock with a par value of $ per share.
Series A Preferred Stock
As of September 30, 2023, we are authorized to issue of Series A Preferred stock with par value of $. Each share of Series A Preferred Stock was (i) convertible into shares of Common Stock, and (ii) entitled to vote 15,000 shares of Common Stock on all matters submitted to a vote by holders of Common Stock. All issued and outstanding shares of Series A Preferred Stock are held by our Chief Executive Officer.
As of September 30, 2023 and December 31, 2022, shares of Series A Preferred Stock were issued and outstanding, respectively.
| 16 |
Series B Preferred Stock
As of September 30, 2023, we are authorized to issue of Series A Preferred Stock with par value of $. Each share of Series B Preferred Stock (i) is convertible into Common Stock at a price per share equal to sixty one percent (61%) of the lowest price for our Common Stock during the twenty (20) days of trading preceding the date of the conversion; (ii) earns dividends at the rate of nine percent (9%) per annum; and, (iii) has no voting rights.
As of September 30, 2023 and December 31, 2022, and shares of Series B Preferred Stock were issued and outstanding, respectively.
Common Stock
As of September 30, 2023, we are authorized to issue shares of Common Stock with a par value of $. All shares of Common Stock have equal voting rights, are non-assessable, and have one vote per share.
During the nine months ended September 30, 2023, we issued Common Stock as follows:
| ● | shares issued for conversion of debt; | |
| ● | shares issued for adjustment to PPM investors; | |
| ● | shares issued for stock-based compensation; | |
| ● | shares issued for partial payment on acquisition of select assets from Cyren Ltd bankruptcy trustee. |
As of September 30, 2023 and December 31, 2022, and shares of Common Stock were issued and outstanding, respectively.
Warrants
A summary of activity during the nine months ended September 30, 2023 follows:
| Warrants Outstanding | ||||||||
| Weighted Average | ||||||||
| Number | Exercise Price | |||||||
| Outstanding, December 31, 2022 | 267 | $ | 13,242.00 | |||||
| Granted | 753,973 | .60 | ||||||
| Exercised | ||||||||
| Forfeited/canceled | ||||||||
| Outstanding, September 30, 2023 | 754,240 | $ | 8.03 | |||||
During the nine months ended September 30, 2023, warrants were exercised and we issued 0 shares of Common Stock as a result.
| 17 |
The following table summarizes information relating to outstanding and exercisable warrants as of September 30, 2023:
| Exercisable Warrants Outstanding | ||||||||||
| Weighted Average Remaining | ||||||||||
| Number
of Warrants |
Contractual
life (in years) |
Weighted
Average Exercise Price |
||||||||
| 10 | 2.20 | $ | 96,000.00 | |||||||
| 12 | 2.56 | $ | 72,000.00 | |||||||
| 26 | 2.82 | $ | 21,600.00 | |||||||
| 5 | 3.00 | $ | 21,600.00 | |||||||
| 55 | 3.05 | $ | 5,929.10 | |||||||
| 124 | 3.23 | $ | 4,464.00 | |||||||
| 32 | 3.61 | $ | 3,600.00 | |||||||
| 3 | 3.61 | $ | 3,600.00 | |||||||
| 270,833 | .75 | $ | 0.60 | |||||||
| 250,000 | .75 | $ | 0.60 | |||||||
| 191,473 | .19 | $ | 0.60 | |||||||
| 41,667 | .76 | $ | 0.60 | |||||||
| 754,240 | .59 | $ | 5.09 | |||||||
Stock Options
During the nine months ended September 30, 2023, we granted options for the purchase of our Common Stock to certain employees as consideration for salary compensation and services rendered. The terms of the stock option grants are determined by our Board of Directors consistent with our 2019 Omnibus Stock Incentive Plan which the Board adopted May 16, 2019. Our stock options generally vest upon the -year anniversary date of the grant and have a maximum term of .
| Options Outstanding | Weighted-Average Exercise Price | |||||||
| Balance as of December 31, 2022 | 1,442 | $ | 1,002.00 | |||||
| Grants | 8,322 | 25.23 | ||||||
| Exercised | ||||||||
| Cancelled | 1 | 40,400.00 | ||||||
| Balance as of September 30, 2023 | 9,765 | $ | 173.61 | |||||
| Number of Options | Weighted- Average Remaining Contractual Life (In Years) | Weighted- Average Exercise Price | ||||||||||
| Outstanding | 9,765 | $ | 1,459.50 | |||||||||
| Exercisable | 990 | $ | 247.56 | |||||||||
| Expected to vest | 1,637 | $ | 1,459.50 | |||||||||
As
of September 30, 2023 and December 31, 2022, there was $ and $, respectively, of total compensation costs related to non-vested
stock-based compensation arrangements which we expect to recognized within the next 12 months.
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Restricted Stock Awards
| Weighted-Average | ||||||||
| Shares | Fair Value | |||||||
| Balance as of December 31, 2022 | 538 | $ | 282,659 | |||||
| Shares of restricted stock granted | 11,750 | 270,000 | ||||||
| Exercised | 1,036 | 15,761 | ||||||
| Cancelled | ||||||||
| Balance as of September 30, 2023 | 13,324 | $ | 237,659 | |||||
| Number of Restricted Stock Awards | September
30, 2023 |
December
31, 2022 |
||||||
| Vested | 1,036 | 2 | ||||||
| Non-vested | 11,250 | 536 | ||||||
NOTE 14: RELATED PARTY TRANSACTIONS
Jason Remillard is our president and Chief Executive Officer and the sole director. Through his ownership of Series A Preferred Stock, Mr. Remillard has voting control over all matters to be submitted to a vote of our shareholders. Greg McCraw is our Chief Financial Officer and owns shares of our Common Stock.
During the nine months ended September 30, 2023, we borrowed $73,200 from our CEO and $150,000 from our CFO. Our CEO paid operating expenses of $90,247 on our behalf and we repaid $60,000 to our CEO.
As of September 30, 2023 and December 31, 2022, we owed $370,509 and $112,062, respectively, to related parties.
NOTE 15: SUBSEQUENT EVENTS
The Company does not have any events subsequent to September 30, 2023 through November 17, 2023, the date of the financial statements were issued for disclosure consideration.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of the results of operations and financial condition for the nine months ended September 30, 2023 and for the year ended December 31, 2022 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 on Form 10-Q for the quarter ended September 30, 2023 (the “Quarterly Report”).
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions, or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements.” All statements other than statements of historical facts contained in this Quarterly Report may be forward-looking statements. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “continues,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “would” or “should” or, in each case, their negative or other variations or comparable terminology. They appear in a number of places throughout this Quarterly Report, and include statements regarding our intentions, beliefs, or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, future acquisitions, and the industry in which we operate.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the “Risk Factors” section of the Annual Report, which include, but are not limited to, the following:
| ● | we will need significant additional capital to fund our operations; | |
| ● | there is substantial doubt about our ability to continue as a going concern; | |
| ● | we will face intense competition in our market, and we may lack sufficient financial and other resources to maintain and improve our competitive position; | |
| ● | we are dependent on the continued services and performance of our founder and Chief Executive Officer, Jason Remillard; | |
| ● | our Common Stock is currently quoted on the OTC Pink and is thinly traded, reducing your ability to liquidate your investment in us; | |
| ● | we have had a history of losses and may incur future losses, which may prevent us from attaining profitability; | |
| ● | the market price of our Common Stock may be volatile and may fluctuate in a way that is disproportionate to our operating performance; | |
| ● | we have shares of preferred stock that have special rights that could limit our ability to undertake corporate transactions, inhibit potential changes of control, and reduce the proceeds available to holders of our Common Stock in the event of a change in control; | |
| ● | we have never paid and do not intend to pay cash dividends; | |
| ● | our Chief Executive Officer has the ability to control all matters submitted to stockholders for approval, which limits our stockholders’ ability to influence corporate affairs; and | |
| ● | the other factors described in “Risk Factors.” |
Those factors should not be construed as exhaustive and should be read with the other cautionary statements in this quarterly report.
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Although we have based these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in the Annual Report. The matters summarized under “Overview”, “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in the Annual Report could cause our actual results to differ significantly from those contained in our forward-looking statements. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods.
In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments, except as required by applicable law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.
Overview
We provide data security and privacy management solutions across the enterprise and in the cloud. With over 10,000 customers, we provide the visibility and control needed to protect data at scale, regardless of format, location, or consumer, and to facilitate compliance with fast-changing global data privacy requirements. Our customers include established leaders and up-and-coming businesses spanning the private and public/government sectors across diverse industries and fields, including financial services, healthcare, manufacturing, retail, technology, and telecommunications.
The mounting ransomware landscape and other threats to data have accelerated the rate at which businesses are adopting data security solutions and we believe that our portfolio of data security and privacy products provides a comprehensive solution set that we believe positions us to capitalize on that increased adoption rate and to establish our products as new data privacy and security standards. Our offerings are anchored in reliable and comprehensive privacy management and equip organizations with a seamless approach to safeguard data, protect against attacks, and otherwise mitigate the most critical risks.
Sector-specific US laws, state-level legislation, and outside-the-United States (OUS) regulations are confounding enterprises of all sizes for whom safeguarding and stewarding data is key, but for whom becoming specialists in privacy and security is not an element of their strategic roadmap. For many of these enterprises, we can bridge the gap between their need to protect data and their need to use their resources to grow their core business by offering turnkey solutions and related counseling and technical support to offset risks from data breaches and security incidents of various types. We provide products and services for the marketplace that are designed to protect data that is stored in the cloud, on-premises, and in hybrid cloud/on-premises environments, and data that is transmitted throughout the enterprise, including but not limited to by remote employees. Our suite of security products focuses on protecting sensitive files and email, confidential customer, patient and employee data, financial records, strategic and product plans, intellectual property and other proprietary information, allowing our customers to create, share, and protect their sensitive data wherever it is stored and however it is used.
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 and with virtualization platforms, such as those hosted or configured using VMWare®, Citrix®, and Oracle® products.
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We sell or plan to sell substantially all of our products and services through a sales model that combines the leverage of a channel sales model or direct account management, thereby providing us with opportunities to grow our current customer base and deliver our value proposition for data privacy and security. We endeavor to use subscription models to license products and services, commonly for a paid in-advance, multiyear term that is auto-renewing. We also make use of channel partners, distributors, and resellers which sell to end-users of the products and services. This approach allows us to maintain close relationships with our customers and benefit from the global reach of our partners. Additionally, we are enhancing our product offerings and go-to-market strategy by establishing technology alliances within the IT infrastructure and security vendor ecosystem. Our sales and marketing focus for new organic growth is on organizations with 500 or more users who are adopting cloud services and can make larger purchases with us over time and have a greater potential lifetime value.
We continue to onboard to cloud-native technology adoption portals such as the Microsoft® Azure Marketplace and the Amazon® AWS Marketplace. Vendors may offer incentives to us as a software and services provider to onboard and market via their marketplace portals.
We strive to create new and innovative products and to improve existing products, proactively identifying and solving the data security needs of our customers.
As cloud adoption continues to accelerate, data privacy requirements get more complex, and data security becomes more challenging, we believe we are well positioned to capture more market share, continue to lead in strategic data security technology development, and prepare organizations for the next epoch in IT data privacy services.
Our Products
Each of our major product lines provides features and functionality which we believe enable our customers to optimally secure their data. The products are modular, giving our customers the flexibility to select what they require for their business needs and the flexibility to expand their usage simply by adding a license. We currently offer the following products and services:
| ● | Data443® Ransomware Recovery Manager (also known as SmartShield™), a unique offering designed to recover a workstation immediately upon infection to the last known business-operable state, without requiring any end user or IT administrator intervention. | |
| ● | Data443® Data Identification Manager (also known as ClassiDocs® and FileFacets®), our data classification and governance technology, which supports CCPA (California), LGPD (Brazil) and GDPR (Europe) compliance in a Software-as-a-Service (SaaS) platform that performs sophisticated data discovery and content searching of structured and unstructured data within corporate networks, servers, content management systems, email, desktops, and laptops. | |
| ● | Data443® Data Archive Manager (also known as ArcMail®), a simple, secure, and cost-effective enterprise data retention management and archiving. | |
| ● | Data443® Sensitive Content Manager (also known as ARALOC®), a secure, cloud-based platform for managing, protecting and distributing digital content to desktop and mobile devices, which protects an organization’s confidential content and intellectual property assets from accidental leakage or intentional misappropriation - without impeding all other authorized users of the content and other stakeholder from collaborating. | |
| ● | Data443® Data Placement Manager (also known as DATAEXPRESS®), a data transport, transformation, and delivery product trusted by leading financial organizations worldwide. |
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| ● | Data443® Access Control Manager (also known as “Resilient Access”), enables fine-grained access controls across a wide variety of platforms at scale for internal client systems and commercial public cloud platforms like Salesforce®, Box.Net, Google® G Suite, Microsoft® OneDrive, and others. | |
| ● | Data443® Blockchain Protection Manager (also known as ClassiDocs® for Blockchain), provides an active implementation for the Ripple XRP that protects blockchain transactions from inadvertent disclosure and data leaks. | |
| ● | Data443® Global Privacy Manager, the privacy compliance and consumer loss mitigation platform which is integrated with Data443® Data Identification Manager to do the delivery portions of GDPR and CCPA as well as process privacy-related requests under such laws, and therefore enables customers to manage the full range of privacy-law driven requirements, such as responding to permitted consumer demands for access or removal, as well as to remediate issues and monitor and report on status and compliance. | |
| ● | Data443® IntellyWP, products for enhancing the user experience for the world’s largest content management platform, WordPress. | |
| ● | Data443® Chat History Scanner, which scans chat messages for compliance, security, personally identifiable information (PII), personal information (PI), payment card industry (PCI) information as well as any custom keywords selected by the customer, and which can be used with third party platforms such as the Zoom Video Communications, Inc. video conferencing platform. | |
| ● | Data443® - GDPR Framework, CCPA Framework, and LGPD Framework WordPress® Plugins, which help organizations of all sizes comply with Europe, California and Brazil privacy rules and regulations and are currently used by over 30,000 active site owners. We offer the plugins with a “freemium” business model, i.e., basic features at no cost and additional or more advanced features at a premium. |
Outlook
Our objective is to further integrate our suite of data security, ransomware protection, and privacy products and offer the products alone or in combination to enterprise customers directly and via our partner channels. We aim to position our products to meet the challenges our customers face - data privacy concerns grow in lockstep with security breaches, the need to continually expand data storage, and to meet telework, telehealth, and remote learning requirements.
We have relied on and expect to continue to benefit from strategic acquisitions of products, talent, and an established customer base to contribute to our long-term growth objectives.
Key elements of our growth strategy may be summarized as follows:
Acquisitions. We intend to aggressively pursue acquisitions of other cybersecurity software and service providers focused on the data security sector. We target companies with a developed and/or steady client base, as well as companies with offerings that complement our existing suite of products.
Research & Development; Innovation. We intend to increase our spending on research and development to create new and innovative products and to improve existing products, proactively identifying and solving the data security needs of our clients.
Grow Our Customer Base. We believe the continued challenges businesses face in managing their enterprise data and the ever-evolving landscape of cybersecurity threats will keep the demand high for the type of products and services we offer. We intend to capitalize on this demand by continually developing and curating a collection of products and services that are attractive and relevant to both our established revenue base and to new customers.
Expand Our Sales Capacity. We believe that continuing to expand our sales force will be essential to achieving our expansion and growth. We intend to expand our sales capacity by adding sales and marketing employees, with heavy focus on customer success and leveraging our existing customer relationships.
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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.
While we primarily report income based on recognized and deferred revenue, another measurement internally for the business is booked revenues. Management uses 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 executed 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.
Recent Developments
On May 11, 2023, we entered into an agreement to purchase certain assets (the “Purchase Agreement”) with the Appointed Receiver for the Assets of Cyren Ltd (the “Receiver”). Pursuant to the Purchase Agreement, the Receiver sold, transferred, assigned, conveyed and delivered to us, and we purchased from Receiver, all right, title, and interest in and to certain assets in the Purchase Agreement (the “Assets”). In exchange for the Assets, we will pay (i) $500,000 payable in cash, (ii) shares of our Common Stock equivalent to $2,000,000 and (iii) $1,000,000 in the form of an earn out payment, as further described in the Purchase Agreement. As of the filing of this Quarterly Report, the transaction has not yet closed.
Results of Operations for the Three and Nine Months Ended September 30, 2023 Compared to the Three and NineMonths Ended September 30, 2022
Our operations for the three months ended September 30, 2023 and 2022 are outlined below:
| Three Months Ended | ||||||||||||||||
| September 30 | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Revenue | $ | 693,835 | $ | 916,172 | $ | (222,337 | ) | (24 | )% | |||||||
| Cost of revenue | 190,425 | 104,322 | 86,103 | 83 | % | |||||||||||
| Gross Profit | 503,410 | 811,850 | (308,440 | ) | (38 | )% | ||||||||||
| Gross Profit Percentage | 73 | % | 89 | % | ||||||||||||
| Operating expense | 1,505,454 | 1,598,513 | (93,059 | ) | (6 | )% | ||||||||||
| Other income (expense) | (977,632) | (796,057 | ) | (181,575 | ) | 23 | % | |||||||||
| Net loss | $ | (1,979,676 | ) | $ | (1,582,720 | ) | $ | (396,956 | ) | 25 | % | |||||
Revenue
The decrease in revenue has partially resulted from some sales that were originally forecasted for the third quarter of 2023 being pulled forward to the first and second quarter of 2023. In addition, two of our larger customers opted for annual renewals instead of a multi-year, paid-up-front renewals. We have restarted several of our lead generation and funnel movement activities throughout the third quarter of 2023. Our existing customers continue to evaluate our offerings for multiple products at a time, rather than singular use cases, which continues to build on organic growth from our customers that come from our acquisitions.
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Cost of Revenue
Cost of revenue consists of direct expenses, such as labor, shipping, and supplies. The increase in cost of revenue in part is due to the rise in inflation for products and services. We also incurred additional software and contractor costs related to new business activities.
Operating Expenses
For the three months ended September 30, 2023 and 2022 our operating expenses were as follows:
| Three Months Ended | ||||||||||||||||
| September 30, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| General and administrative | $ | 1,471,024 | $ | 1,557,584 | $ | (86,560 | ) | (6 | )% | |||||||
| Sales and marketing | 34,430 | 40,929 | (6,499 | ) | (16 | )% | ||||||||||
| Total operating expenses | $ | 1,505,454 | $ | 1,598,513 | $ | (93,059 | ) | (6 | )% | |||||||
General and Administrative Expenses
The general and administrative expenses primarily consisted of management costs, costs to integrate assets we acquired and to expand sales, product enhancements, audit and review fees, filing fees, professional fees, and other expenses related to SEC reporting, including the re-classification of sales-related management expenses, in connection with the projected growth of our business. Additionally, we continue to incur specific one-time costs in relation to our planned Nasdaq Capital Markets uplist, additional financing activities and related functions. The decrease in general and administrative expense was primarily due to an increase in cost cutting measures.
Sales and Marketing Expenses
The sales and marketing expenses primarily consisted of continuing to shift our sales operation toward an inbound model, continued high focus on renewals and customer success operations and previously reported expenses, which are, primarily management costs, reclassified to general and administrative expenses.
Other income (expense)
Other expenses for the three months ended September 30, 2023 consisted primarily of interest. Other expenses for September 30, 2022 consisted of interest expense and loss on change in fair value of derivative. The increase in other expenses was primarily due to a increase in interest expense.
Net Income
Net loss increased 25% from $1,582,720 for the three months ended September 30, 2022 to net loss of $1,979,676 for the three months ended September 30, 2023. The net income was mainly derived from an operating loss of $1,002,044, and interest expense of $983,100. The net loss for the three months ended September 30, 2022 was mainly derived from an operating loss of $786,663, and interest expense of $796,057. The increase in net loss was primarily due to the decrease in recognized revenue and an increase in interest expense.
Our operations for the nine months ended September 30, 2023 and 2022 are outlined below:
| Nine Months Ended | ||||||||||||||||
| September 30, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Revenue | $ | 2,692,681 | $ | 2,279,677 | $ | 413,004 | 18 | % | ||||||||
| Cost of revenue | 644,288 | 382,594 | 261,694 | 68 | % | |||||||||||
| Gross Profit | 2,048,393 | 1,897,083 | 151,310 | 8 | % | |||||||||||
| Gross Profit Percentage | 76 | % | 83 | % | ||||||||||||
| Operating expense | 4,638,315 | 4,868,325 | (230,010 | ) | (5 | )% | ||||||||||
| Other income (expense) | (38,107 | ) | (2,891,009 | ) | 2,852,902 | 99 | % | |||||||||
| Net loss | $ | (2,628,029 | ) | $ | (5,862,251 | ) | $ | 3,234,222 | (55 | )% | ||||||
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Revenue
Revenues increased 18% from $2,279,677 for the nine months ended September 30, 2022 to $2,692,681 for the nine months ended September 30, 2023. The increase in revenues was driven by existing customer organic growth customers, new customer acquisitions and our high renewal rate.
Cost of Revenue
Cost of revenue consists of direct expenses, such as sales commission, shipping, and supplies. The increase in cost of revenue was primarily due to an increase in one-time costs, including sales commissions for some larger deal closings and customer outreach.
Operating Expenses
For the nine months ended September 30, 2023 and 2022 our operating expenses were as follows:
| Nine Months Ended | ||||||||||||||||
| September 30, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| General and administrative | $ | 4,507,332 | $ | 4,647,366 | $ | (140,034 | ) | (3 | )% | |||||||
| Sales and marketing | 130,983 | 220,959 | (89,976 | ) | (41 | )% | ||||||||||
| Total operating expenses | $ | 4,638,315 | $ | 4,868,325 | $ | (230,010 | ) | (5 | )% | |||||||
General and Administrative Expenses
The general and administrative expenses primarily consisted of management costs, costs to integrate assets we acquired and to expand sales, product enhancements, audit and review fees, filing fees, professional fees, and other expenses related to SEC reporting, including the re-classification of sales-related management expenses, in connection with the projected growth of our business. Additionally, we continue to incur specific costs in relation to our planned uplist to the Nasdaq Capital Markets, additional financing activities and related functions. The increase in general and administrative expense was primarily due to a increases in professional services fees related to uplist activities, increased overhead costs associated with our continued public OTC Pink Market listing, and acquisition-related costs.
Sales and Marketing Expenses
The sales and marketing expenses primarily consisted of continuing to shift our sales operation toward an inbound model, continued high focus on renewals and customer success operations and previously reported expenses, primarily management costs, reclassified to general and administrative expenses. The decrease in sales and marketing expense was primarily due to not having dedicated sales and marketing staff to drive efforts expenses.
Other income (expense)
Other income (expenses) for the nine months ended September 30, 2023 consisted primarily of interest expense and an forgiveness of debt on note payable of $4,724,299. Other expenses for the nine months ended September 30, 2022 consisted of interest expense and loss on change in fair value of derivative. The decrease in other expenses was primarily due to a decrease in interest expense and the forgiveness of debt.
Net Loss
Net loss decreased 55% from $5,862,251 for the nine months ended September 30, 2022 to $2,628,029 for the nine months ended September 30, 2023. The net loss was mainly derived from an operating loss of $2,589,922 and interest expense of $4,947,656 and settlement of debt of $4,909,549. The net loss for the nine months ended September 30, 2022 was mainly derived from an operating loss of $2,971,242, and interest expense of $2,833,126.
Accumulated Losses
We had a net operating loss carryfowards of approximately $6 million from prior operations in 2017, before our current President and Chief Executive Officer acquired a controlling interest in us. Subsequent to this and through September 30, 2023, we have relied on convertible notes and other debt instruments that may contain unfavorable discounts, origination fees, and have embedded conversion features that are subject to derivative treatment for accounting purposes. Due primarily to this treatment of convertible notes, debt and related derivative accounting, since 2017, we have accumulated deficits of approximately $14.1 million due to derivative valuations and $15.5 million expensed for interest and amortization of debt discounts for financing and other origination fees.
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Liquidity and Capital Resources
Working Capital
The following table provides selected financial data about our company as of September 30, 2023 and December 31, 2022, respectively.
| September 30, | December 31, | Change | ||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Current assets | $ | 688,503 | $ | 124,894 | $ | 563,609 | 451 | % | ||||||||
| Current liabilities | $ | 11,203,841 | $ | 8,604,066 | $ | 2,599,775 | 30 | % | ||||||||
| Working capital deficiency | $ | (10,515,338 | ) | $ | (8,479,172 | ) | $ | (2,036,166 | ) | (24 | )% | |||||
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of September 30, 2023, we had cash balance of $4,890 and our principal sources of liquidity were trade accounts receivable of $35,623, and prepaid expenses and other current assets of $647,990, as compared to cash of $1,712 trade accounts receivable of $31,978, and prepaid expenses and other current assets of $91,204 as of December 31, 2022.
During the last three years, and through the date of this Report, we have faced an increasingly challenging liquidity situation that has limited our ability to execute our operating plan. We will need to obtain capital to continue operations. There is no assurance that we will be able to secure such funding on acceptable terms. During the nine months ended September 30, 2023, we reported a loss from operations of $2,589,922.
As of September 30, 2023, we had assets of cash in the amount of $4,890 and other current assets in the amount of $683,613. As of September 30, 2023, we had current liabilities of $11,203,841. Our accumulated deficit as of September 30, 2023 was $54,040,157.
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As of December 31, 2022, we had assets of cash in the amount of $1,712 and other current assets in the amount of $123,182. As of December 31, 2022, we had current liabilities of $8,604,066. Our accumulated deficit as of December 31, 2022 was $51,412,128.
The revenues generated from our current operations will not be sufficient to fund our 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 we can attract additional investment, our operating as a going concern is in doubt.
We are now obligated to file annual, quarterly and current reports with the SEC pursuant to the Securities Exchange Act of 1934, as amended (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 (“PCAOB”) have imposed various requirements on public companies, including requiring changes in corporate governance practices. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities of ours more time-consuming and costly. In order to meet the needs to comply with the requirements of the Exchange Act, we will need investment of capital.
Management has determined that additional capital will be required in the form of equity or debt securities. There is no assurance that management will be able to raise capital on terms acceptable to us, or at all.
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 stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the Common Stock.
Cash Flow
| Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2023 | 2022 | Change | ||||||||||
| Cash provided by (used in) operating activities | $ | 520,787 | $ | (284,919 | ) | $ | 805,706 | |||||
| Cash used in investing activities | $ | (285,523 | ) | $ | (548,839 | ) | $ | (263,316 | ) | |||
| Cash provided by (used in) financing activities | $ | (232,086 | ) | $ | (142,190 | ) | $ | (89,896 | ) | |||
| Cash on hand | $ | 4,890 | $ | 228,985 | $ | (224,095 | ) | |||||
Operating Activities
During the nine months ended September 30, 2023, we used $520,787 in operating activities, compared to $284,919 used by during the nine months ended September 30, 2022.
Investing Activities
During the nine months ended September 30, 2023, we used funds in investing activities of $285,523 to acquire property and equipment and advance payment for acquisition. During the nine months ended September 30, 2022, we used funds in investing activities of $548,839 to acquire property and equipment.
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Financing Activities
During the nine months ended September 30, 2023, we (i) raised $1,067,631 from issuance of convertible debt; (ii) received proceeds from a related party of $318,447; and (iii) repaid of convertible note payable of $294,868; (iv) repaid of $1,252,955 on notes payable; and (v) repaid to a related party of $60,000. For September 30, 2023 we had net cash outflows for financing activities of $232,086. By comparison, during the nine months ended September 30, 2022, we (i) raised $75,000 through the issuance of Series B Preferred Stock; (ii) raised $1,257,800 from issuance of convertible debt; (iii) received proceeds from related party of $224,778, (iv) $829,000 from issuance of Common Stock; and (v) $2,516,912 from issuance of notes payable; offset in part through redemption of Series B Preferred Stock of $487,730; (vi) repayment of convertible note payable of $895,783; (vii) repayment of $3,430,411 on notes payable; (viii) repayment to related party of $174,431 and, (ix) $57,325 of finance lease payments.
We are dependent upon the receipt of capital investment or other financing to fund our ongoing operations and to execute our business plan. If continued funding and capital resources are unavailable at reasonable terms, we may not be able to implement our plan of operations.
Off-Balance Sheet Arrangements
As of September 30, 2023, we did not have any off-balance sheet arrangements.
Critical Accounting Policies
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of income and expense during the reporting periods presented.
Our critical estimates include revenue recognition and intangible assets. Although we believe that these estimates are reasonable, actual results could differ from those estimates given a change in conditions or assumptions that have been consistently applied. We also have other policies that we consider key accounting policies, such as our policy for revenue recognition, however, the application of these policies does not require us to make significant estimates or judgments that are difficult or subjective.
The critical accounting policies used by management and the methodology for its estimates and assumptions are as follows:
Convertible Financial Instruments
We bifurcate 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 we have 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 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. We recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of Common Stock per share on the commitment date, resulting in a discount on the convertible debt (recorded as a component of additional paid-in capital). The discount is amortized to interest expense over the term of the convertible debt.
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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 Stock-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 Quarterly Report.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information regarding this Item.
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. However, our chief executive officer and our chief financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under Exchange Act) as of the end of the period reported on this Quarterly Report on Form 10-Q and have concluded that we have material weaknesses and significant deficiencies in our internal control over financial reporting as described below. Accordingly, our disclosure controls and procedures were not sufficient to accomplish their objectives at the reasonable assurance level as of September 30, 2023.
Management’s Report of Internal Control over Financial Reporting
Our chief executive officer and our chief financial officer are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. An evaluation was performed of the effectiveness of our internal control over financial reporting. The evaluation was based on the framework in 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on our evaluation under the criteria set forth in 2013 Internal Control — Integrated Framework, our management concluded that, as of September 30, 2023 our internal control over financial reporting was not effective because of the identification of material weaknesses described as follows:
| ● | We did not have controls designed to validate the completeness and accuracy of underlying data used in the determination of accounting transactions. Accordingly, we believe we have a material weakness because there is a reasonable possibility that a material misstatement to the interim or annual consolidated financial statements would not be prevented or detected on a timely basis. | |
|
● | We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. |
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| ● | We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. | |
| ● | We do not have a functioning audit committee or outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. |
Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting
Our management is committed to improving its internal controls when we have adequate resources to do so, we appointed a full-time Chief Financial Officer in September 2022 but do not currently have independent directors or an audit committee. Until there are independent directors and an audit committee, we will mitigate the lack of segregation of duties by (i) continuing to use third party specialists to assist us with accounting and finance; and (ii) commissioning frequent reconciliations of significant accounts using independent auditors.
Our Management has discussed the material weaknesses noted above with our independent registered public accounting firm. Due to the nature of these material weaknesses, it is reasonably possible that misstatements which could be material to the annual or interim consolidated financial statements could occur that would not be prevented or detected during our financial close and reporting process.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the nine months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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ITEM 1A. RISK FACTORS
Investing in our Common Stock involves a high degree of risk. You should carefully consider the risk factors in our Annual Report, as well as other information in this Quarterly Report, before deciding whether to invest in the shares of our Common Stock. The occurrence of any of the events described in our Annual Report could have a material adverse effect on our business, financial condition or results of operations. In the case of such an event, the trading price of our Common Stock may decline and you may lose all or part of your investment.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2023, we issued shares of our Common Stock as follows, pursuant to exemption from registration pursuant to Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder:
| ● | On July 7, 2023, we issued 3,415 shares of Common Stock to Root Ventures, LLC pursuant to an agreement with Root Ventures, LLC, in exchange for $25,000 in note payable principal. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default on a convertible promissory note between the Company and Mast Hill Fund LP (the “Mast Hill Note”) due to non-payment of amounts owed. The Mast Hill Note was issued on October 19, 2021, and default occurred on October 23, 2023. The Company owes a total of $568,726 under the Mast Hill Note, consisting of $508,440 of principal and $60,286 of interest.
In addition, the Company is in default on a promissory note between the Company and Jason Gladwell (the “Gladwell Note”) due to non-payment of amounts owed. The Gladwell Note was issued on May 18, 2023, and default occurred on August 18, 2023. The Company owes a total of $335,861 under the Gladwell Note, consisting of $250,000 of principal and $85,861 of interest.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| Exhibit | Incorporated by Reference | |||||||
| Number | Exhibit Description | Form | Exhibit | Filing Date/ Period End Date | ||||
| 4.1 | Convertible Promissory Note issued the Company in favor of 1800 Diagonal Lending LLC on 11 September 2023 in the original principal amount of $120,750. | |||||||
| 4.2 | Convertible Promissory Note issued the Company in favor of 1800 Diagonal Lending LLC on 22 September 2023 in the original principal amount of $149,500. | |||||||
| 31.1 | Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer. | |||||||
| 31.2 | Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer. | |||||||
| 32.1 | Section 1350 Certification of Chief Executive Officer. | |||||||
| 32.2 | Section 1350 Certification of Chief Financial Officer. | |||||||
| 101 | Inline XBRL Document Set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q. | |||||||
| 104 | Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set. | |||||||
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, our Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 17, 2023 | DATA443 RISK MITIGATION, INC. | |
| By: | /s/ Jason Remillard | |
| Name: | JASON REMILLARD | |
| Title: | Chief Executive Officer (Principal Executive Officer) | |
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Exhibit 4.1
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL:BESELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
| THE ISSUE PRICE OF THIS NOTE IS $120,750.00 |
| THE ORIGINAL ISSUE DISCOUNT IS $15,750.00 |
| Principal Amount: $120,750.00 | Issue Date: September 11, 2023 |
| Purchase Price: $105,000.00 |
PROMISSORY NOTE
FOR VALUE RECEIVED, DATA443 RISK MITIGATION, INC., a Nevada corporation {hereinafter called the “Borrower”), hereby promises to pay to the order of 1800 DIAGONAL LENDING LLC, a Virginia limited liability company, or registered assigns (the “Holder”) the sum of $120,750.00 together with any interest as set forth herein, on May 15, 2024 (the “Maturity Date”), and to pay interest on the unpaid principal balance hereof from the date hereof (the “Issue Date”) as set forth herein. This Note may not be prepaid in whole or in part except as otherwise explicitly set forth herein. Any amount of principal or interest on this Note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date thereof until the same is paid (“Default Interest”). All payments due hereunder (to the extent not converted into common stock, $0.001 par value per share (the “Common Stock”) in accordance with the terms hereof) shall be made in lawful money of the United States of America. All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Note. Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in that certain Securities Purchase Agreement dated the date hereof, pursuant to which this Note was originally issued (the “Purchase Agreement”).
This Note is free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of shareholders of the Borrower and will not impose personal liability upon the holder thereof.
The following terms shall apply to this Note:
ARTICLE I. GENERAL TERMS
1.1 Interest. A one-time interest charge offifteen percent (15%) (the “Interest Rate”) shall be applied on the Issuance Date to the Principal ($120,750.00 * fifteen percent (15%) = $18,112.00) . Interest hereunder shall be paid as set forth herein to the Holder or its assignee in whose name this Note is registered on the records of the Company regarding registration and transfers of Notes in cash or, in the Event of Default, at the Option of the Holder, converted into share of Common Stock as set forth herein.
1.2 Mandatory Monthly Payments. Accrued, unpaid Interest and outstanding principal, subject to adjustment, shall be paid in eight (8) payments each in the amount of $17,357.75 (a total payback to the Holder of $138,862.00). The first payment shall be due October 15, 2023 with nine (9) subsequent payments each month thereafter. The Company shall have a five (5) day grace period with respect to each payment. The Company has right to accelerate payments or prepay in full at any time with no prepayment penalty. All payments shall be made by bank wire transfer to the Holder’s wire instructions, attached hereto as Exhibit A. For the avoidance of doubt, a missed payment shall be considered an Event of Default.
1.3 Security. This Note shall not be secured by any collateral or any assets pledged to the Holder
ARTICLE II. CERTAIN COVENANTS
2.1 Sale of Assets. So long as the Borrower shall have any obligation under this Note, the Borrower shall not, without the Holder’s written consent, sell, lease or otherwise dispose of any significant portion of its assets outside the ordinary course of business. Any consent to the disposition of any assets may be conditioned on a specified use of the proceeds of disposition.
ARTICLE Ill. EVENTS OF DEFAULT
If any of the following events of default (each, an “Event of Default”) shall occur:
3.1 Failure to Pay Principal and Interest. The Borrower fails to pay the principal hereof or interest thereon when due on this Note, whether at maturity, upon acceleration or otherwise and such breach continues for a period of five (5) days after written notice from the Holder.
3.2 Breach of Covenants. The Borrower breaches any material covenant or other material term or condition contained in this Note and any collateral documents including but not limited to the Purchase Agreement and such breach continues for a period oftwenty (20) days after written notice thereof to the Borrower from the Holder.
3.3 Breach of Representations and Warranties. Any representation or warranty of the Borrower made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Purchase Agreement), shall be false or misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.
3.4 Receiver or Trustee. The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed.
3.5 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the Borrower.
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3.6 Delisting of Common Stock. The Borrower shall fail to maintain the listing of the Common Stock on at least one of the OTC (which specifically includes the quotation platforms maintained by the OTC Markets Group) or an equivalent replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock Exchange.
3.7 Failure to Comply with the Exchange Act. The Borrower shall fail to comply with the reporting requirements of the Exchange Act; and/or the Borrower shall cease to be subject to the reporting requirements of the Exchange Act.
3.8 Liquidation. Any dissolution, liquidation, or winding up of Borrower or any substantial portion of its business.
3.9 Cessation of Operations. Any cessation of operations by Borrower or Borrower admits it is otherwise generally unable to pay its debts as such debts become due, provided, however, that any disclosure of the Borrower’s ability to continue as a “going concern” shall not be an admission that the Borrower cannot pay its debts as they become due.
3.10 Financial Statement Restatement. The restatement of any financial statements filed by the Borrower with the SEC at any time after 180 days after the Issuance Date for any date or period until this Note is no longer outstanding, if the result of such restatement would, by comparison to the un-restated financial statement, have constituted a material adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.
3.11 Replacement of Transfer Agent. In the event that the Borrower proposes to replace its transfer agent, the Borrower fails to provide, prior to the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions in a form as initially delivered pursuant to the Purchase Agreement (including but not limited to the provision to irrevocably reserve shares of Common Stock in the Reserved Amount) signed by the successor transfer agent to Borrower and the Borrower.
3.12 Cross-Default.· Notwithstanding anything to the contrary contained in this Note or the other related or companion documents, a breach or default by the Borrower of any covenant or other term or condition contained in any of the Other Agreements, after the passage of all applicable notice and cure or grace periods, shall, at the option of the Holder, be considered a default under this Note and the Other Agreements, in which event the Holder shall be entitled (but in no event required) to apply all rights and remedies of the Holder under the terms of this Note and the Other Agreements by reason of a default under said Other Agreement or hereunder. “Other Agreements” means, collectively, all agreements and instruments between, among or by: (1) the Borrower, and, or for the benefit of, (2) the Holder and any affiliate of the Holder, including, without limitation, promissory notes; provided, however, the term “Other Agreements” shall not include the related or companion documents to this Note. Each of the loan transactions will be cross-defaulted with each other loan transaction and with all other existing and future debt of Borrower to the Holder.
Upon the occurrence and during the continuation of any Event of Default, the Note shall become immediately due and payable and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to 150% times the sum of (w) the then outstanding principal amount of this Note I!!fil (x) accrued and unpaid interest on the unpaid principal amount of this Note to the date of payment (the “Mandatory Prepayment Date”) I!!fil (y) Default Interest, if any, on the amounts referred to in clauses (w) and/or (x) I!!fil (z) any amounts owed to the Holder pursuant to Article IV hereof (the then outstanding principal amount of this Note to the date of payment the amounts referred to in clauses (x), (y) and (z) shall collectively be known as the “Default Amount”) and all other amounts payable hereunder shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, legal fees and expenses, of collection, and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity.
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If the Borrower fails to pay the Default Amount within five (S) business days of written notice that such amount is due and payable, then the Holder shall have the right at any time, to convert the balance owed pursuant to the note including the Default Amount into shares of common stock of the Company as set forth herein.
ARTICLE IV. CONVERSION RIGHTS
4.1 Conversion Right. At any time following an Event of Default, the Holder shall have the right, to convert all or any part of the outstanding and unpaid amount of this Note into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at the conversion price determined as provided herein (a “Conversion”); provided, however, that in no event shall the Holder be entitled to convert any portion of this Note in excess of that portion of this Note upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Notes or the unexercised or unconverted portion of any other security of the Borrower subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversion of the portion of this Note with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such proviso. The beneficial ownership limitations on conversion as set forth in the section may NOT be waived by the Holder. The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in effect on the date specified in the notice of conversion, in the form attached hereto as Exhibit B(the “Notice of Conversion”), delivered to the Borrower by the Holder in accordance with Section 4.4 below; provided that the Notice of Conversion is submitted by facsimile or e-mail (or by other means resulting in, or reasonably expected to result in, notice) to the Borrower before 6:00 p.m., New York, New York time on such conversion date (the “Conversion Date”); however, if the Notice of Conversion is sent after 6:00pm, New York, New York time the Conversion Date shall be the next business day. The term “Conversion Amount” means, with respect to any conversion of this Note, the sum of (1) the principal amount of this Note to be converted in such conversion (2) at the Holder’s option, accrued and unpaid interest, if any, on such principal amount at the interest rates provided in this Note to the Conversion Date, (3) at the Holder’s option, Default Interest, if any, on the amounts referred to in the immediately preceding clauses (1) and/or (2) plus (4) at the Holder’s option, any amounts owed to the Holder pursuant to Sections 4.4 hereof.
4.2 Conversion Price. The conversion price (the “Conversion Price”) shall mean 61% multiplied by the lowest Trading Price for the Common Stock during the ten (10) Trading Days prior to the Conversion Date (representing a discount rate of 39%) (subject to equitable adjustments by the Borrower relating to the Borrower’s securities or the securities of any subsidiary of the Borrower, combinations,recapitalization, reclassifications, extraordinary distributions and similar events). “Trading Price” means, for any security as of any date, the closing bid price on the OTCQB, OTCQX, Pink Sheets electronic quotation system or applicable trading market (the “OTC”) as reported by a reliable reporting service (“Reporting Service”) designated by the Holder (i.e. Bloomberg) or, if the OTC is not the principal trading market for such security, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded or, if no closing bid price of such security is available in any of the foregoing manners, the average of the closing bid prices of any market makers for such security that are listed in the “pink sheets”. If the Trading Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Borrower and the holders of a majority in interest of the Notes being converted for which the calculation of the Trading Price is required in order to determine the Conversion Price of such Notes. “Trading Day” shall mean any day on which the Common Stock is tradable for any period on the OTC, or on the principal securities exchange or other securities market on which the Common Stock is then being traded.
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4.3 Authorized Shares. The Borrower covenants that during the period that the Note is outstanding, the Borrower will reserve from its authorized and unissued Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of this Note issued pursuant to the Purchase Agreement. The Borrower is required at all times to have authorized and reserved six times the number of shares that is actually issuable upon full conversion of the Note (based on the Conversion Price of the Note in effect from time to time initially 52,216,216 shares) (the “Reserved Amount”). The Reserved Amount shall be increased from time to time in accordance with the Borrower’s obligations hereunder. The Borrower represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the Borrower shall issue any securities or make any change to its capital structure which would change the number of shares of Common Stock into which the Notes shall be convertible at the then current Conversion Price, the Borrower shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Note. The Borrower (i) acknowledges that it has irrevocably instructed its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Note, and (ii) agrees that its issuance of this Note shall constitute full authority to its officers and agents who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of this Note.
If, at any time the Borrower does not maintain the Reserved Amount it will be considered an Event of Default under this Note.
4.4 Method of Conversion.
(a) Mechanics of Conversion. As set forth in Section 4.1 hereof, at any time following an Event of Default, the balance due pursuant to this Note may be converted by the Holder in whole or in part at any time from time to time after the Issue Date, by (A) submitting to the Borrower a Notice of Conversion (by facsimile, e-mail or other reasonable means of communication dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time) and (B) subject to Section 4.4(b), surrendering this Note at the principal office of the Borrower (upon payment in full of any amounts owed hereunder).
(b) Surrender of Note Upon Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Borrower unless the entire unpaid principal amount of this Note is so converted. The Holder and the Borrower shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method I reasonably satisfactory to the Holder and the Borrower, so as not to require physical surrender of this Note upon each such conversion.
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(c) Delivery of Common Stock Upon Conversion. Upon receipt by the Borrower from the Holder of a facsimile transmission or e-mail (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section 4.4, the Borrower shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder certificates for the Common Stock issuable upon such conversion within three (3) business days after such receipt (the “Deadline”) (and, solely in the case of conversion of the entire unpaid principal amount hereof, surrender of this Note) in accordance with the terms hereof and the Purchase Agreement. Upon receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid interest on this Note shall be reduced to reflect such conversion, and, unless the Borrower defaults on its obligations hereunder, all rights with respect to the portion of this Note being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If the Holder shall have given a Notice of Conversion as provided herein, the Borrower’s obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Borrower to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Borrower, and irrespective of any other circumstance which might otherwise limit such obligation of the Borrower to the Holder in connection with such conversion.
(d) Delivery of Common Stock by Electronic Transfer. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Borrower is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of the Holder and its compliance with the provisions set forth herein, the Borrower shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder’s Prime Broker with DTC through its Deposit and Withdrawal at Custodian (“DWAC”) system.
(e) Failure to Deliver Common Stock Prior to Deadline. Without in any way limiting the Holder’s right to pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this Note is not delivered by the Deadline due to action and/or inaction of the Borrower, the Borrower shall pay to the Holder $2,000 per day in cash, for each day beyond the Deadline that the Borrower fails to deliver such Common Stock (the “Fail to Deliver Fee”); provided; however that the Fail to Deliver Fee shall not be due if the failure is a result of a third party (i.e., transfer agent; and not the result of any failure to pay such transfer agent) despite the best efforts of the Borrower to effect delivery of such Common Stock. Such cash amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or, at the option of the Holder (by written notice to the Borrower by the first day of the month following the month in which it has accrued), shall be added to the principal amount of this Note, in which event interest shall accrue thereon in accordance with the terms of this Note and such additional principal amount shall be convertible into Common Stock in accordance with the terms of this Note. The Borrower agrees that the right to convert is a valuable right to the Holder. The damages resulting from a failure, attempt to frustrate, interference with such conversion right are difficult if not impossible to qualify. Accordingly, the parties acknowledge that the liquidated damages provision contained in this Section 4.4(e) are justified.
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4.5 Concerning the Shares. The shares of Common Stock issuable upon conversion of this Note may not be sold or transferred unless: (i) such shares are sold pursuant to an effective registration statement under the Act or (ii) the Borrower or its transfer agent shall have been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration (such as Rule 144 or a successor rule) (“Rule 144”); or (iii) such shares are transferred to an “affiliate” (as defined in Rule 144) of the Borrower who agrees to sell or otherwise transfer the shares only in accordance with this Section 4.5 and who is an Accredited Investor (as defined in the Purchase Agreement) .
Any restrictive legend on certificates representing shares of Common Stock issuable upon conversion of this Note shall be removed and the Borrower shall issue to the Holder a new certificate therefore free of any transfer legend if the Borrower or its transfer agent shall have received an opinion of counsel from Holder’s counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that (i) a public sale or transfer of such Common Stock may be made without registration under the Act, which opinion shall be accepted by the Company so that the sale or transfer is effected; or (ii) in the case of the Common Stock issuable upon conversion of this Note, such security is registered for sale by the Holder under an effective registration statement filed under the Act; or otherwise may be sold pursuant to an exemption from registration. In the event that the Company does not reasonably accept the opinion of counsel provided by the Holder with respect to the transfer of Securities pursuant to an exemption from registration (such as Rule 144), it will be considered an Event of Default pursuant to this Note.
4.6 Effect of Certain Events.
(a) Effect of Merger, Consolidation, Etc. At the option of the Holder, the sale, conveyance or disposition of all or substantially all of the assets of the Borrower, the effectuation by the Borrower of a transaction or series of related transactions in which more than 50% of the voting power of the Borrower is disposed of, or the consolidation, merger or other business combination of the Borrower with or into any other Person (as defined below) or Persons when the Borrower is not the survivor shall be deemed to be an Event of Default (as defined in Article Ill) pursuant to which the Borrower shall be required to pay to the Holder upon the consummation of and as a condition to such transaction an amount equal to the Default Amount (as defined in Article Ill). “Person” shall mean any individual, corporation, limited liability company, partnership, association, trust or other entity or organization.
(b) Adjustment Due to Merger. Consolidation. Etc. If, at any time when this Note is issued and outstanding and prior to conversion of all of the Note, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Borrower shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Borrower or another entity, or in case of any sale or conveyance of all or substantially all of the assets of the Borrower other than in connection with a plan of complete liquidation of the Borrower, then the Holder of this Note shall thereafter have the right to receive upon conversion of this Note, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the Holder would have been entitled to receive in such transaction had this Note been converted in full immediately prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder of this Note to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Note) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion hereof. The Borrower shall not affect any transaction described in this Section 4.6(b) unless (a) it first gives, to the extent practicable, ten (10) days prior written notice (but in any event at least five (5) days prior written notice) of the record date of the special meeting of shareholders to approve, or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during which time the Holder shall be entitled to convert this Note) and (b) the resulting successor or acquiring entity (if not the Borrower) assumes by written instrument the obligations of this Note. The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges.
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(c) Adjustment Due to Distribution. If the Borrower shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to the Borrower’s shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a “Distribution”), then the Holder of this Note shall be entitled, upon any conversion of this Note after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution.
ARTICLE V. MISCELLANEOUS
5.1 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.
5.2 Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be:
If to the Borrower, to:
DATA443 RISK MITIGATION, INC.
101 J Morris Commons Lane, Suite 105
Morrisville, North Carolina 27560
Attn: Jason Remillard, Chief Executive Officer
Email: jason@data443.com
If to the Holder:
1800 DIAGONAL LENDING LLC
1800 Diagonal Road, Suite 623
Alexandria VA 22314
Attn: Curt Kramer, President
Email: ckramer@sixthstreetlending.com
5.3 Amendments. This Note and any provision hereof may only be amended by an instrument in writing signed by the Borrower and the Holder. The term “Note” and all reference thereto, as used throughout this instrument, shall mean this instrument (and the other Notes issued pursuant to the Purchase Agreement) as originally executed, or if later amended or supplemented, then as so amended or supplemented.
5.4 Assignability. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to be the benefit of the Holder and its successors and assigns. Each transferee of this Note must be an “accredited investor” (as defined in Rule 501(a) of the Securities and Exchange Commission). Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with a bona fide margin account or other lending arrangement; and may be assigned by the Holder without the consent of the Borrower.
5.5 Cost of Collection. If default is made in the payment of this Note, the Borrower shall pay the Holder hereof costs of collection, including reasonable attorneys’ fees.
5.6 Governing Law. This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Note shall be brought only in the Circuit Court of Fairfax County, Virginia or in the Alexandria Division of the United States District Court for the Eastern District of Virginia. The parties to this Note hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any• objection or defense based on lack of jurisdiction or venue or based upon forum non conveniens. The Borrower and Holder waive trial by jury. The Holder shall be entitled to recover from the Borrower its reasonable attorney’s fees and costs incurred in connection with or related to any Event of Default by the Company, as defined in Article Ill hereof. In the event that any provision of this Note or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof or any agreement delivered in connection herewith. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Note, any agreement or any other document delivered in connection with this Note by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.
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5.7 Purchase Agreement. By its acceptance of this Note, each party agrees to be bound by the applicable terms of the Purchase Agreement.
5.8 Remedies. The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law for a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by the Borrower of the provisions of this Note, that the Holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer this on September 11, 2023
| DATA443 RISK MITIGATION, INC. | ||
| By | /s/ Jason Remillard | |
| Jason Remillard | ||
| Chief Executive Officer | ||
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EXHIBIT A - WIRE INSTRUCTIONS
[to be provided via email]
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EXHIBIT B — NOTICE OF CONVERSION
The undersigned hereby elects to convert $ principal amount of the Note (defined below) into that number of shares of Common Stock to be issued pursuant to the conversion of the Note (“Common Stock”) as set forth below, of DATA443 RISK MITIGATION, INC., a Nevada corporation (the “Borrower”) according to the conditions of the convertible note of the Borrower dated as of September 11, 2023 (the “Note”), as of the date written below. No fee will be charged to the Holder for any conversion, except for transfer taxes, if any.
Box Checked as to applicable instructions:
| ☐ | The Borrower shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal Agent Commission system (“DWAC Transfer”). |
Name of DTC Prime Broker:
Account Number:
| ☐ | The undersigned hereby requests that the Borrower issue a certificate or certificates for the number of shares of Common Stock set forth below (which numbers are based on the Holder’s calculation attached hereto) in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto: |
| Date of conversion: | |||
| Applicable Conversion Price: | $ | ||
| Number of shares of common stock to be issued | |||
| pursuant to conversion of the Notes: | |||
| Amount of Principal Balance due remaining | |||
| under the Note after this conversion: |
| 1800 DIAGONAL LENDING LLC | ||
| By: | ||
| Name: | Curt Kramer | |
| Title: | Presdient | |
| Date: | ||
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Exhibit 4.2
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
| THE ISSUE PRICE OF THIS NOTE IS$149,500.00 |
| THE ORIGINAL ISSUE DISCOUNT IS $19,500.00 |
| Principal Amount: $149,500.00 | Issue Date: September 22, 2023 |
| Purchase Price: $130,000.00 |
PROMISSORY NOTE
FOR VALUE RECEIVED, DATA443 RISK MITIGATION, INC., a Nevada corporation (hereinafter called the “Borrower”), hereby promises to pay to the order of 1800 DIAGONAL LENDING LLC, a Virginia limited liability company, or registered assigns (the “Holder”) the sum of $149,500.00 together with any interest as set forth herein, on June 30, 2024 (the “Maturity Date”), and to pay interest on the unpaid principal balance hereof from the date hereof (the “Issue Date”) as set forth herein. This Note may not be prepaid in whole or in part except as otherwise explicitly set forth herein. Any amount of principal or interest on this Note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date thereof until the same is paid (“Default Interest”). All payments due hereunder (to the extent not converted into common stock, $0.001 par value per share (the “Common Stock”) in accordance with the terms hereof) shall be made in lawful money of the United States of America. All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Note. Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in that certain Securities Purchase Agreement dated the date hereof, pursuant to which this Note was originally issued (the “Purchase Agreement”).
This Note is free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of shareholders of the Borrower and will not impose personal liability upon the holder thereof.
The following terms shall apply to this Note:
ARTICLE I. GENERAL TERMS
1.1 Interest. A one-time interest charge of fifteen percent (15%) (the “Interest Rate”) shall be applied on the Issuance Date to the Principal ($149,500.00 * fifteen percent (15%) = $22,425.00). Interest hereunder shall be paid as set forth herein to the Holder or its assignee in whose name this Note is registered on the records of the Company regarding registration and transfers of Notes in cash or, in the Event of Default, at the Option of the Holder, converted into share of Common Stock as set forth herein.
1.2 Mandatory Monthly Payments. Accrued, unpaid Interest and outstanding principal, subject to adjustment, shall be paid in nine (9) payments each in the amount of $19,102.78 (a total payback to the Holder of $171,925.00). The first payment shall be due October 15, 2023 with eight (8) subsequent payments each month thereafter. The Company shall have a five (5) day grace period with respect to each payment. The Company has right to accelerate payments or prepay in full at any time with no prepayment penalty. All payments shall be made by bank wire transfer to the Holder’s wire instructions, attached hereto as Exhibit A. For the avoidance of doubt, a missed payment shall be considered an Event of Default.
1.3 Security. This Note shall not be secured by any collateral or any assets pledged
to the Holder
ARTICLE II. CERTAIN COVENANTS
2.1 Sale of Assets. So long as the Borrower shall have any obligation under this Note, the Borrower shall not, without the Holder’s written consent, sell, lease or otherwise dispose of any significant portion of its assets outside the ordinary course of business. Any consent to the disposition of any assets may be conditioned on a specified use of the proceeds of disposition.
ARTICLE III. EVENTS OF DEFAULT
If any of the following events of default (each, an “Event of Default”) shall occur:
3.1 Failure to Pay Principal and Interest. The Borrower fails to pay the principal hereof or interest thereon when due on this Note, whether at maturity, upon acceleration or otherwise and such breach continues for a period of five (5) days after written notice from the Holder.
3.2 Breach of Covenants. The Borrower breaches any material covenant or other material term or condition contained in this Note and any collateral documents including but not limited to the Purchase Agreement and such breach continues for a period of twenty (20) days after written notice thereof to the Borrower from the Holder.
3.3 Breach of Representations and Warranties. Any representation or warranty of the Borrower made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Purchase Agreement), shall be false or misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.
3.4 Receiver or Trustee. The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed.
3.5 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the Borrower.
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3.6 Delisting of Common Stock. The Borrower shall fail to maintain the listing of the Common Stock on at least one of the OTC (which specifically includes the quotation platforms maintained by the OTC Markets Group) or an equivalent replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock Exchange.
3.7 Failure to Comply with the Exchange Act. The Borrower shall fail to comply with the reporting requirements of the Exchange Act; and/or the Borrower shall cease to be subject to the reporting requirements of the Exchange Act.
3.8 Liquidation. Any dissolution, liquidation, or winding up of Borrower or any substantial portion of its business.
3.9 Cessation of Operations. Any cessation of operations by Borrower or Borrower admits it is otherwise generally unable to pay its debts as such debts become due, provided, however, that any disclosure of the Borrower’s ability to continue as a “going concern” shall not be an admission that the Borrower cannot pay its debts as they become due.
3.10 Financial Statement Restatement. The restatement of any financial statements filed by the Borrower with the SEC at any time after 180 days after the Issuance Date for any date or period until this Note is no longer outstanding, if the result of such restatement would, by comparison to the un-restated financial statement, have constituted a material adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.
3.11 Replacement of Transfer Agent. In the event that the Borrower proposes to replace its transfer agent, the Borrower fails to provide, prior to the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions in a form as initially delivered pursuant to the Purchase Agreement (including but not limited to the provision to irrevocably reserve shares of Common Stock in the Reserved Amount) signed by the successor transfer agent to Borrower and the Borrower.
3.12 Cross-Default. Notwithstanding anything to the contrary contained in this Note or the other related or companion documents, a breach or default by the Borrower of any covenant or other term or condition contained in any of the Other Agreements, after the passage of all applicable notice and cure or grace periods, shall, at the option of the Holder, be considered a default under this Note and the Other Agreements, in which event the Holder shall be entitled (but in no event required) to apply all rights and remedies of the Holder under the terms of this Note and the Other Agreements by reason of a default under said Other Agreement or hereunder. “Other Agreements” means, collectively, all agreements and instruments between, among or by: (1) the Borrower, and, or for the benefit of, (2) the Holder and any affiliate of the Holder, including, without limitation, promissory notes; provided, however, the term “Other Agreements” shall not include the related or companion documents to this Note. Each of the loan transactions will be cross-defaulted with each other loan transaction and with all other existing and future debt of Borrower to the Holder.
Upon the occurrence and during the continuation of any Event of Default, the Note shall become immediately due and payable and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to 150% times the sum of (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note to the date of payment (the “Mandatory Prepayment Date”) plus (y) Default Interest, if any, on the amounts referred to in clauses (w) and/or (x) plus (z) any amounts owed to the Holder pursuant to Article IV hereof (the then outstanding principal amount of this Note to the date of payment plus the amounts referred to in clauses (x), (y) and (z) shall collectively be known as the “Default Amount”) and all other amounts payable hereunder shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, legal fees and expenses, of collection, and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity.
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If the Borrower fails to pay the Default Amount within five (5) business days of written notice that such amount is due and payable, then the Holder shall have the right at any time, to convert the balance owed pursuant to the note including the Default Amount into shares of common stock of the Company as set forth herein.
ARTICLE IV. CONVERSION RIGHTS
4.1 Conversion Right. At any time following an Event of Default, the Holder shall have the right, to convert all or any part of the outstanding and unpaid amount of this Note into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at the conversion price determined as provided herein (a “Conversion”); provided, however, that in no event shall the Holder be entitled to convert any portion of this Note in excess of that portion of this Note upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Notes or the unexercised or unconverted portion of any other security of the Borrower subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversion of the portion of this Note with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such proviso. The beneficial ownership limitations on conversion as set forth in the section may NOT be waived by the Holder. The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in effect on the date specified in the notice of conversion, in the form attached hereto as Exhibit B(the “Notice of Conversion”), delivered to the Borrower by the Holder in accordance with Section 4.4 below; provided that the Notice of Conversion is submitted by facsimile or e-mail (or by other means resulting in, or reasonably expected to result in, notice) to the Borrower before 6:00 p.m., New York, New York time on such conversion date (the “Conversion Date”); however, if the Notice of Conversion is sent after 6:00pm, New York, New York time the Conversion Date shall be the next business day. The term “Conversion Amount” means, with respect to any conversion of this Note, the sum of (1) the principal amount of this Note to be converted in such conversion plus (2) at the Holder’s option, accrued and unpaid interest, if any, on such principal amount at the interest rates provided in this Note to the Conversion Date, plus (3) at the Holder’s option, Default Interest, if any, on the amounts referred to in the immediately preceding clauses (1) and/or (2) plus (4) at the Holder’s option, any amounts owed to the Holder pursuant to Sections 4.4 hereof.
4.2 Conversion Price. The conversion price (the “Conversion Price”) shall mean 61% multiplied by the lowest Trading Price for the Common Stock during the ten (10) Trading Days prior to the Conversion Date (representing a discount rate of 39%) (subject to equitable adjustments by the Borrower relating to the Borrower’s securities or the securities of any subsidiary of the Borrower, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). “Trading Price” means, for any security as of any date, the closing bid price on the OTCQB, OTCQX, Pink Sheets electronic quotation system or applicable trading market (the “OTC”) as reported by a reliable reporting service (“Reporting Service”) designated by the Holder (i.e. Bloomberg) or, if the OTC is not the principal trading market for such security, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded or, if no closing bid price of such security is available in any of the foregoing manners, the average of the closing bid prices of any market makers for such security that are listed in the “pink sheets”. If the Trading Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Borrower and the holders of a majority in interest of the Notes being converted for which the calculation of the Trading Price is required in order to determine the Conversion Price of such Notes. “Trading Day” shall mean any day on which the Common Stock is tradable for any period on the OTC, or on the principal securities exchange or other securities market on which the Common Stock is then being traded.
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4.3 Authorized Shares. The Borrower covenants that during the period that the Note is outstanding, the Borrower will reserve from its authorized and unissued Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of this Note issued pursuant to the Purchase Agreement. The Borrower is required at all times to have authorized and reserved six times the number of shares that is actually issuable upon full conversion of the Note (based on the Conversion Price of the Note in effect from time to time initially 5,695,238 shares) (the “Reserved Amount”). The Reserved Amount shall be increased from time to time in accordance with the Borrower’s obligations hereunder. The Borrower represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the Borrower shall issue any securities or make any change to its capital structure which would change the number of shares of Common Stock into which the Notes shall be convertible at the then current Conversion Price, the Borrower shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Note. The Borrower (i) acknowledges that it has irrevocably instructed its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Note, and (ii) agrees that its issuance of this Note shall constitute full authority to its officers and agents who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of this Note.
If, at any time the Borrower does not maintain the Reserved Amount it will be considered an Event of Default under this Note.
4.4 Method of Conversion.
(a) Mechanics of Conversion. As set forth in Section 4.1 hereof, at any time following an Event of Default, the balance due pursuant to this Note may be converted by the Holder in whole or in part at any time from time to time after the Issue Date, by (A) submitting to the Borrower a Notice of Conversion (by facsimile, e-mail or other reasonable means of communication dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time) and (B) subject to Section 4.4(b), surrendering this Note at the principal office of the Borrower (upon payment in full of any amounts owed hereunder).
(b) Surrender of Note Upon Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Borrower unless the entire unpaid principal amount of this Note is so converted. The Holder and the Borrower shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Borrower, so as not to require physical surrender of this Note upon each such conversion.
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(c) Delivery of Common Stock Upon Conversion. Upon receipt by the Borrower from the Holder of a facsimile transmission or e-mail (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section 4.4, the Borrower shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder certificates for the Common Stock issuable upon such conversion within three (3) business days after such receipt (the “Deadline”) (and, solely in the case of conversion of the entire unpaid principal amount hereof, surrender of this Note) in accordance with the terms hereof and the Purchase Agreement. Upon receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid interest on this Note shall be reduced to reflect such conversion, and, unless the Borrower defaults on its obligations hereunder, all rights with respect to the portion of this Note being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If the Holder shall have given a Notice of Conversion as provided herein, the Borrower’s obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Borrower to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Borrower, and irrespective of any other circumstance which might otherwise limit such obligation of the Borrower to the Holder in connection with such conversion.
(d) Delivery of Common Stock by Electronic Transfer. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Borrower is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of the Holder and its compliance with the provisions set forth herein, the Borrower shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder’s Prime Broker with DTC through its Deposit and Withdrawal at Custodian (“DWAC”) system.
(e) Failure to Deliver Common Stock Prior to Deadline. Without in any way limiting the Holder’s right to pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this Note is not delivered by the Deadline due to action and/or inaction of the Borrower, the Borrower shall pay to the Holder $2,000 per day in cash, for each day beyond the Deadline that the Borrower fails to deliver such Common Stock (the “Fail to Deliver Fee”); provided; however that the Fail to Deliver Fee shall not be due if the failure is a result of a third party (i.e., transfer agent; and not the result of any failure to pay such transfer agent) despite the best efforts of the Borrower to effect delivery of such Common Stock. Such cash amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or, at the option of the Holder (by written notice to the Borrower by the first day of the month following the month in which it has accrued), shall be added to the principal amount of this Note, in which event interest shall accrue thereon in accordance with the terms of this Note and such additional principal amount shall be convertible into Common Stock in accordance with the terms of this Note. The Borrower agrees that the right to convert is a valuable right to the Holder. The damages resulting from a failure, attempt to frustrate, interference with such conversion right are difficult if not impossible to qualify. Accordingly, the parties acknowledge that the liquidated damages provision contained in this Section 4.4(e) are justified.
4.5 Concerning the Shares. The shares of Common Stock issuable upon conversion of this Note may not be sold or transferred unless: (i) such shares are sold pursuant to an effective registration statement under the Act or (ii) the Borrower or its transfer agent shall have been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration (such as Rule 144 or a successor rule) (“Rule 144”); or (iii) such shares are transferred to an “affiliate” (as defined in Rule 144) of the Borrower who agrees to sell or otherwise transfer the shares only in accordance with this Section 4.5 and who is an Accredited Investor (as defined in the Purchase Agreement).
Any restrictive legend on certificates representing shares of Common Stock issuable upon conversion of this Note shall be removed and the Borrower shall issue to the Holder a new certificate therefore free of any transfer legend if the Borrower or its transfer agent shall have received an opinion of counsel from Holder’s counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that (i) a public sale or transfer of such Common Stock may be made without registration under the Act, which opinion shall be accepted by the Company so that the sale or transfer is effected; or (ii) in the case of the Common Stock issuable upon conversion of this Note, such security is registered for sale by the Holder under an effective registration statement filed under the Act; or otherwise may be sold pursuant to an exemption from registration. In the event that the Company does not reasonably accept the opinion of counsel provided by the Holder with respect to the transfer of Securities pursuant to an exemption from registration (such as Rule 144), it will be considered an Event of Default pursuant to this Note.
4.6 Effect of Certain Events.
(a) Effect of Merger, Consolidation, Etc. At the option of the Holder, the sale, conveyance or disposition of all or substantially all of the assets of the Borrower, the effectuation by the Borrower of a transaction or series of related transactions in which more than 50% of the voting power of the Borrower is disposed of, or the consolidation, merger or other business combination of the Borrower with or into any other Person (as defined below) or Persons when the Borrower is not the survivor shall be deemed to be an Event of Default (as defined in Article III) pursuant to which the Borrower shall be required to pay to the Holder upon the consummation of and as a condition to such transaction an amount equal to the Default Amount (as defined in Article III). “Person” shall mean any individual, corporation, limited liability company, partnership, association, trust or other entity or organization.
(b) Adjustment Due to Merger, Consolidation, Etc. If, at any time when this Note is issued and outstanding and prior to conversion of all of the Note, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Borrower shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Borrower or another entity, or in case of any sale or conveyance of all or substantially all of the assets of the Borrower other than in connection with a plan of complete liquidation of the Borrower, then the Holder of this Note shall thereafter have the right to receive upon conversion of this Note, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the Holder would have been entitled to receive in such transaction had this Note been converted in full immediately prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder of this Note to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Note) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion hereof. The Borrower shall not affect any transaction described in this Section 4.6(b) unless (a) it first gives, to the extent practicable, ten (10) days prior written notice (but in any event at least five (5) days prior written notice) of the record date of the special meeting of shareholders to approve, or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during which time the Holder shall be entitled to convert this Note) and (b) the resulting successor or acquiring entity (if not the Borrower) assumes by written instrument the obligations of this Note. The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges.
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(c) Adjustment Due to Distribution. If the Borrower shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to the Borrower’s shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a “Distribution”), then the Holder of this Note shall be entitled, upon any conversion of this Note after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution.
ARTICLE V. MISCELLANEOUS
5.1 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.
5.2 Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be:
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If to the Borrower, to:
DATA443 RISK MITIGATION, INC.
4000 Sancar Way, Suite 400
Research Triangle Park, NC 27709
Attn: Jason Remillard, Chief Executive Officer
Email: jason@data443.com
If to the Holder:
1800 DIAGONAL LENDING LLC
1800 Diagonal Road, Suite 623
Alexandria VA 22314
Attn: Curt Kramer, President
Email: ckramer@sixthstreetlending.com
5.3 Amendments. This Note and any provision hereof may only be amended by an instrument in writing signed by the Borrower and the Holder. The term “Note” and all reference thereto, as used throughout this instrument, shall mean this instrument (and the other Notes issued pursuant to the Purchase Agreement) as originally executed, or if later amended or supplemented, then as so amended or supplemented.
5.4 Assignability. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to be the benefit of the Holder and its successors and assigns. Each transferee of this Note must be an “accredited investor” (as defined in Rule 501(a) of the Securities and Exchange Commission). Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with a bona fide margin account or other lending arrangement; and may be assigned by the Holder without the consent of the Borrower.
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5.5 Cost of Collection. If default is made in the payment of this Note, the Borrower shall pay the Holder hereof costs of collection, including reasonable attorneys’ fees.
5.6 Governing Law. This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Note shall be brought only in the Circuit Court of Fairfax County, Virginia or in the Alexandria Division of the United States District Court for the Eastern District of Virginia. The parties to this Note hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any objection or defense based on lack of jurisdiction or venue or based upon forum non conveniens. The Borrower and Holder waive trial by jury. The Holder shall be entitled to recover from the Borrower its reasonable attorney’s fees and costs incurred in connection with or related to any Event of Default by the Company, as defined in Article III hereof. In the event that any provision of this Note or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof or any agreement delivered in connection herewith. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Note, any agreement or any other document delivered in connection with this Note by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.
5.7 Purchase Agreement. By its acceptance of this Note, each party agrees to be bound by the applicable terms of the Purchase Agreement.
5.8 Remedies. The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law for a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by the Borrower of the provisions of this Note, that the Holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer this on September 22, 2023
| DATA443 RISK MITIGATION, INC. | ||
| By: | /s/ Jason Remillard | |
| Jason Remillard | ||
| Chief Executive Officer | ||
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EXHIBIT A – WIRE INSTRUCTIONS
[to be provided via email]
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EXHIBIT B — NOTICE OF CONVERSION
The undersigned hereby elects to convert $ ________________principal amount of the Note (defined below) into that number of shares of Common Stock to be issued pursuant to the conversion of the Note (“Common Stock”) as set forth below, of DATA443 RISK MITIGATION, INC., a Nevada corporation (the “Borrower”) according to the conditions of the convertible note of the Borrower dated as of September 22, 2023 (the “Note”), as of the date written below. No fee will be charged to the Holder for any conversion, except for transfer taxes, if any.
Box Checked as to applicable instructions:
| ☐ | The Borrower shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal Agent Commission system (“DWAC Transfer”). | |
| Name of DTC Prime Broker: | ||
| Account Number: | ||
| ☐ | The undersigned hereby requests that the Borrower issue a certificate or certificates for the number of shares of Common Stock set forth below (which numbers are based on the Holder’s calculation attached hereto) in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto: |
| Date of conversion: | |||
| Applicable Conversion Price: | $ | ||
| Number of shares of common stock to be issued | |||
| pursuant to conversion of the Notes: | |||
| Amount of Principal Balance due remaining | |||
| under the Note after this conversion: |
| 1800 DIAGONAL LENDING LLC | ||
| By: | ||
| Name: | Curt Kramer | |
| Title: | Presdient | |
| Date: | ||
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EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Jason Remillard, Chief Executive Officer of Data443 Risk Mitigation, Inc. certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Data443 Risk Mitigation, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process summarize and report financial information; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: November 17, 2023 | By: | /s/ Jason Remillard |
| Name: | Jason Remillard | |
| Title: | Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Gregory McCraw, Chief Financial Officer of Data443 Risk Mitigation, Inc. certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Data443 Risk Mitigation, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process summarize and report financial information; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: November 17, 2023 | By: | /s/ Gregory McCraw |
| Name: | Gregory McCraw | |
| Title: | Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the period ended September 30, 2023 of Data443 Risk Mitigation, Inc. (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”), I, Jason Remillard, Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Quarterly Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and |
| 2. | The information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operation of the Company. |
| Date: November 17, 2023 | By: | /s/ Jason Remillard |
| Name: | Jason Remillard | |
| Title: | Chief Executive Officer |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the period ended September 30, 2023 of Data443 Risk Mitigation, Inc. (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Quarterly Report”), I, Gregory McCraw, Chief Financial Officer of the Company certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Quarterly Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and |
| 2. | The information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operation of the Company. |
| Date: November 17, 2023 | By: | /s/ Gregory McCraw |
| Name: | Gregory McCraw | |
| Title: | Chief Financial Officer |