UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
OR
For the transition period from ________ to ________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State of incorporation) |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(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.
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| Large accelerated filer ☐ | 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
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
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The outstanding number of shares of common stock as of August 15, 2022 was .
DATA443 RISK MITIGATION, INC.
FORM 10-Q
TABLE OF CONTENTS
| 1 |
PART I
FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Advance payment for acquisition | ||||||||
| Prepaid expense and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Intellectual property, net of accumulated amortization | ||||||||
| Deposits | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Bank overdraft | ||||||||
| Accounts payable and accrued liabilities | ||||||||
| Deferred revenue | ||||||||
| Interest payable | ||||||||
| Notes payable, net of unamortized discount | ||||||||
| Convertible notes payable, net of unamortized discount | ||||||||
| Due to a related party | ||||||||
| Operating lease liability | ||||||||
| Finance lease liability | ||||||||
| Total Current Liabilities | ||||||||
| Series B Preferred Stock, shares designated; $ par value; Stated value $; and shares issued and outstanding, net of discount as of June 30, 2022 and December 31, 2021, respectively | ||||||||
| Notes payable, net of unamortized discount - non-current | ||||||||
| Convertible notes payable, net of unamortized discount - non-current | ||||||||
| Deferred revenues - non-current | ||||||||
| Operating lease liability - non-current | ||||||||
| Finance lease liability - non-current | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock: authorized; $ par value Series A Preferred Stock, shares designated; $ par value; and shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | ||||||||
| Common stock: authorized; $ par value and shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
See the accompanying notes, which are an integral part of these unaudited consolidated financial statements.
| 2 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain (loss) on settlement of debt | ( | ) | ||||||||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Dividend on Series B Preferred Stock | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted loss per Common Share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted weighted average number of common shares outstanding | ||||||||||||||||
See the accompanying notes, which are an integral part of these unaudited consolidated financial statements.
| 3 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
Six months ended June 30, 2022
| Series A | Additional | Total | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Cumulative-effect adjustment from adoption of ASU 2020-06 | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Common stock issued for acquisition of Centurion assets | - | |||||||||||||||||||||||||||
| Common stock issued for conversion of preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | |||||||||||||||||||||||||||
| Common stock issued in conjunction with convertible notes | - | |||||||||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | ( | ) | |||||||||||||||||||||||||
| Common stock issued for service | - | |||||||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | |||||||||||||||||||||||||||
| Warrant issued in conjunction with debts | - | |||||||||||||||||||||||||||
| Stock-based compensation | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance - June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
Three months ended June 30, 2022
| Series A | Additional | Total | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance - March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Common stock issued for acquisition of Centurion assets | - | |||||||||||||||||||||||||||
| Common stock issued for conversion of preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | |||||||||||||||||||||||||||
| Common stock issued for service | - | |||||||||||||||||||||||||||
| Common stock issued in conjunction with convertible notes | - | |||||||||||||||||||||||||||
| Warrant issued in conjunction with debts | - | - | ||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Adjustment of reverse stock split | - | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance - June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||
See the accompanying notes, which are an integral part of these unaudited consolidated financial statements.
| 4 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
Six Months Ended June 30, 2021
| Total | ||||||||||||||||||||||||||||
Series A Preferred Stock | Common Stock | Additional Paid in | Accumulated | Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance - December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Common stock issued for cash | - | |||||||||||||||||||||||||||
| Common stock issued for conversion of preferred stock | - | |||||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | |||||||||||||||||||||||||||
| Common stock issued in conjunction with convertible note | - | |||||||||||||||||||||||||||
| Common stock issued for exercised cashless warrant | - | ( | ) | |||||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | - | ||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||
| Adjustment of reverse stock split | - | |||||||||||||||||||||||||||
| Net loss attributable to common stockholders | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance - June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
Three Months Ended June 30, 2021
| Series A | Additional | Total | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance - March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Cash received for issued stock | - | - | ||||||||||||||||||||||||||
| Common stock issued for conversion of preferred stock | - | |||||||||||||||||||||||||||
| Common stock issued for exercised cashless warrant | ( | ) | ||||||||||||||||||||||||||
| Resolution of derivative liability upon exercise of warrant | - | |||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||
| Adjustment of reverse stock split | - | |||||||||||||||||||||||||||
| Net loss attributable to common stockholders | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance - June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||
See the accompanying Notes, which are an integral part of these unaudited Consolidated Financial Statements
| 5 |
DATA443 RISK MITIGATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Change in fair value of derivative liability | ||||||||
| (Gain) loss on settlement of debt | ||||||||
| Stock-based compensation expense | ||||||||
| Loss on impairment of intangible asset | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Lease liability amortization | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Deferred revenue | ( | ) | ||||||
| Accrued interest | ||||||||
| Deposit | ||||||||
| Net Cash used in Operating Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Advance payment for acquisition | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net Cash used in Investing Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Bank overdraft | ||||||||
| Proceeds from issuance of convertible notes payable | ||||||||
| Repayment of convertible notes payable | ( | ) | ||||||
| Proceeds from issuance of common stock | ||||||||
| Proceeds from issuance of Series B Preferred Stock | ||||||||
| Redemption of Series B Preferred Stock | ( | ) | ||||||
| Finance lease payments | ( | ) | ( | ) | ||||
| Proceeds from issuance of notes payable | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Proceeds from related parties | ||||||||
| Repayment to related parties | ( | ) | ( | ) | ||||
| Net Cash provided by (used in) Financing Activities | ( | ) | ||||||
| Net change in cash | ( | ) | ( | ) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
See the accompanying notes, which are an integral part of these unaudited consolidated financial statements.
| 6 |
DATA443 RISK MITIGATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Data443 Risk Mitigation, Inc. (the “Company”, “we”, “us” and “our”) was incorporated as a Nevada corporation on May 4, 1998. On October 15, 2019, the Company changed its name from LandStar, Inc. to Data443 Risk Mitigation, Inc. within the State of Nevada.
We deliver solutions and capabilities that businesses can use in conjunction with their use of established cloud vendors such as Microsoft® Azure, Google® Cloud Platform (GCP) and Amazon® Web Services (AWS), as well as with on-premises databases and database applications with virtualization platforms, such as those hosted or configured using VMWare®, Citrix® and Oracle® clouds/products).
On
January 19, 2022, we entered into an Asset Purchase Agreement with Centurion Holdings I, LLC (“Centurion”) to acquire the
intellectual property rights and certain assets collectively known as Centurion SmartShield Home and SmartShield Enterprise, patented
technology that protects and recovers devices in the event of ransomware attacks. The total purchase price of $
Basis of Presentation
These unaudited consolidated financial statements have been prepared in accordance rules and regulations of the Securities and Exchange Commission (“SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, we have included all adjustments considered necessary for a fair presentation and such adjustments are of a normal recurring nature. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2021 and notes thereto and other pertinent information contained in our Form 10-K as filed with the SEC on March 31, 2022. The results of operations for the six months ended June 30, 2022, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2022.
Basis of Consolidation
The accompanying unaudited consolidated financial statements as of June 30, 2022 include our accounts and those of our wholly-owned subsidiary, Data 443 Risk Mitigation, Inc., a North Carolina operating company. These unaudited consolidated financial statements have been prepared on the accrual basis of accounting in accordance with GAAP.
| 7 |
Employees – We account for share-based compensation under the fair value method which requires all such compensation to employees, including the grant of employee stock options, to be calculated based on its fair value at the measurement date (generally the grant date), and recognized in the consolidated statement of operations over the requisite service period.
Nonemployees - Under the requirements of the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), we account for share-based compensation to non-employees under the fair value method which requires all such compensation to be calculated based on the fair value at the measurement date (generally the grant date), and recognized in the statement of operations over the requisite service period.
We recorded approximately $ in share-based compensation expense for the six months ended June 30, 2022, compared to $ in share-based compensation expense for the six months ended June 30, 2021. Determining the appropriate fair value model and the related assumptions requires judgment. During the six months ended June 30, 2022, the fair value of each option grant was estimated using a Black-Scholes option-pricing model. The expected volatility represents the historical volatility of our publicly traded common stock. Due to limited historical data, we calculate the expected life based on the mid-point between the vesting date and the contractual term which is in accordance with the simplified method. The expected term for options granted to nonemployees is the contractual life. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of stock options. We have not paid and do not anticipate paying cash dividends on our shares of Common Stock; therefore, the expected dividend yield is assumed to be zero.
Basic 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.
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| (Shares) | (Shares) | |||||||
| Series A Preferred Stock | ||||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Convertible notes | ||||||||
| Preferred B stock | ||||||||
| Total | ||||||||
COVID-19
In March 2020, the World Health Organization (“WHO”) declared the novel coronavirus COVID-19 (“COVID-19”) a global pandemic. The pandemic adversely affected workforces, economies, and financial markets globally in 2020 and, until contained, is still expected to disrupt general business operations. The COVID-19 pandemic and the measures taken by many governments around the world in response could in the future meaningfully impact our business, results of operations and financial condition. We are currently unable to predict the duration of that impact but continue to monitor our accounting estimates of the carrying value of certain assets and liabilities relating to our leases and will continue to do so as additional information is obtained or new events occur. Actual results could differ from our estimates and judgments, and any such differences may be material to our financial statements.
| 8 |
Recently Adopted Accounting Guidance
In
August 2020, the FASB issued ASU 2020-06, ASC Subtopic 470-20 “Debt—Debt with Conversion and Other Options” and ASC
subtopic 815-40 “Hedging—Contracts in Entity’s Own Equity”. The standard reduced the number of accounting models
for convertible debt instruments and convertible preferred stock. Convertible instruments that continue to be subject to separation models
are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition
of a derivative, and that do not qualify for a scope exception from derivative accounting; and (2) convertible debt instruments issued
with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this update are effective for fiscal
years beginning after December 15, 2021, including interim periods within those fiscal years. Due to adoption of this accounting policy
on January 1, 2022, we recognized a cumulative effect adjustment to increase the opening retained earnings as of January 1, 2022 by $
Recently Issued Accounting Pronouncements
We have considered all other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our consolidated financial statements.
NOTE 2: LIQUIDITY AND GOING CONCERN
The accompanying financial statements have been prepared assuming that we will continue as a going concern. As reflected in the financial statements, we have incurred significant current period losses and negative cash flows from operating activities, and we have negative working capital and an accumulated deficit. We have relied upon loans and issuances of our equity to fund our operations. These conditions, among others, raise substantial doubt about our ability to continue as a going concern. Management’s plans regarding these matters, include raising additional debt or equity financing, the terms of which might not be acceptable. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 3: PROPERTY AND EQUIPMENT
The following table summarizes the components of our property and equipment as of the dates presented:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Furniture and Fixtures | $ | $ | ||||||
| Computer Equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net of accumulated depreciation | $ | $ | ||||||
Depreciation
expense for the six months ended June 30, 2022 and 2021, was $
During
the six months ended June 30, 2022 and 2021, we purchased property and equipment of $
| 9 |
NOTE 4: INTELLECTUAL PROPERTY
The following table summarizes the components of our intellectual property as of the dates presented:
June 30, 2022 | December 31, 2021 | |||||||
| Intellectual property: | ||||||||
| Word press GDPR rights | $ | $ | ||||||
| ARALOC® | ||||||||
| ArcMail® | ||||||||
| DataExpress® | ||||||||
| FileFacets® | ||||||||
| IntellyWP™ | ||||||||
| Resilient Network Systems | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Intellectual property, net of accumulated amortization | $ | $ | ||||||
We
recognized amortization expense of $
Based on the carrying value of definite-lived intangible assets as of June 30, 2022, we estimate our amortization expense for the next five years will be as follows:
| Amortization | ||||
| Year Ended December 31, | Expense | |||
| 2022 (excluding the six months ended June 30, 2022) | $ | |||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| $ | ||||
NOTE 5: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table summarizes the components of our accounts payable and accrued liabilities as of the dates presented:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Credit cards | ||||||||
| Accrued dividend - preferred stock | ||||||||
| Accrued liabilities | ||||||||
| $ | $ | |||||||
NOTE 6: DEFERRED REVENUE
For the six months ended June 30, 2022 and as of December 31, 2021, changes in deferred revenue were as follows:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Balance, beginning of period | $ | $ | ||||||
| Deferral of revenue | ||||||||
| Recognition of deferred revenue | ( | ) | ( | ) | ||||
| Balance, end of period | $ | $ | ||||||
| 10 |
As of June 30, 2022 and December 31, 2021, deferred revenue is classified as follows:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Current | $ | $ | ||||||
| Non-current | ||||||||
| $ | $ | |||||||
NOTE 7: LEASES
Operating lease
We
recognized total lease expense of approximately $
At June 30, 2022, future minimum lease payments under operating leases that have initial noncancelable lease terms in excess of one year were as follows:
| Total | ||||
| Year Ended December 31, | ||||
| 2022 (excluding the six months ended June 30, 2022) | ||||
| 2023 | ||||
| Thereafter | ||||
| Less: Imputed interest | ( | ) | ||
| Operating lease liabilities | ||||
| Operating lease liability - current | ||||
| Operating lease liability - non-current | $ | |||
The following summarizes other supplemental information about our operating leases as of June 30, 2022:
| Weighted average discount rate | % | |||
| Weighted average remaining lease term (years) |
Financing leases
We
lease computer and hardware under non-cancellable capital leases. The term of those capital leases is
| 11 |
At June 30, 2022, future minimum lease payments under the finance lease obligations, are as follows:
| Total | ||||
| 2022 (excluding the six months ended June 30, 2022) | $ | |||
| 2023 | ||||
| Thereafter | ||||
| Less: Imputed interest | ( | ) | ||
| Finance lease liabilities | ||||
| Finance lease liability | ||||
| Finance lease liability - non-current | $ | |||
As of June 30, 2022 and December 31 2021, finance lease assets are included in property and equipment as follows:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Finance lease assets | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Finance lease assets, net of accumulated depreciation | $ | $ | ||||||
NOTE 8: CONVERTIBLE NOTES PAYABLE
Convertible notes payable consists of the following:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Convertible Notes - Issued in fiscal year 2020 | ||||||||
| Convertible Notes - Issued in fiscal year 2021 | ||||||||
| Convertible Notes - Issued in fiscal year 2022 | ||||||||
| Less debt discount and debt issuance cost | ( | ) | ( | ) | ||||
| Less current portion of convertible notes payable | ||||||||
| Long-term convertible notes payable | $ | $ | ||||||
During
the six months ended June 30, 2022 and the year ended 2021, we recognized interest expense of $
Conversion
During
the six months ended June 30, 2022, we converted notes with principal amounts and accrued interest of $
| 12 |
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 $
| ● | Terms
| |
| ● | Annual
interest rates of | |
| ● | Conversion
price fixed at $ |
Promissory Notes - Issued in fiscal year 2021
In 2021, we issued
convertible promissory notes with principal amounts totaling $
| ● | Terms
ranging from | |
| ● | Annual
interest rates of | |
| ● | ||
| ● |
The 2021 Convertible Notes also were associated with the following:
| ● | The
issuance of shares of Common Stock valued at $ | |
| ● | The
issuance of |
During
the six months ended June 30, 2022, in connection with the 2021 Convertible Notes, we repaid principal in the amount of $
Promissory Notes - Issued in fiscal year 2022
During
the six months ended June 30, 2022, we issued convertible promissory notes with principal amounts totaling $
| ● | Terms
ranging from | |
| ● | Annual
interest rates of | |
| ● | ||
| ● |
During the six months ended June 30, 2022, the 2022 Convertible Notes also were associated with the following:
| ● |
shares of common stock valued at $ |
In
connection with the adoption of ASU 2020-06 on January 1, 2022, we reclassified $
| 13 |
NOTE 9: DERIVATIVE LIABILITIES
We analyzed the conversion option for derivative accounting consideration under ASC 815, Derivatives and Hedging, and hedging, and determined that the instrument should be classified as a liability since the conversion option becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item.
We determined our derivative liabilities to be a Level 3 fair value measurement during the year based on management’s estimate of the expected future cash flows required to settle the liabilities, and used the Binomial pricing model to calculate the fair value as of June 30, 2022. As of the six months ended June 30, 2022, there were no derivative liabilities. The Binomial model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note and warrant is estimated using the Binomial valuation model.
For the six months ended June 30, 2022 and year ended December 31, 2021, the estimated fair values of the liabilities measured on a recurring basis are as follows:
We
valued the conversion feature using the Binomial pricing model. The fair value of the derivative liability for all the notes that became
convertible, including the notes issued in prior years, during the six months ended June 30, 2022 amounted to $
For the six months June 30, 2022 and year ended December 31, 2021, the estimated fair values of the liabilities measured on a recurring basis are as follows:
| Six months ended | Year ended | |||||||
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Expected term | ||||||||
| Expected average volatility | % | |||||||
| Expected dividend yield | ||||||||
| Risk-free interest rate | % | |||||||
The
aggregate loss on derivatives during the six months ended June 30, 2022 and 2021 was $
| 14 |
NOTE 10: NOTES PAYABLE
Notes payable consists of the following:
| June 30, | December 31, | Interest | ||||||||||||
| 2022 | 2021 | Maturity | Rate | |||||||||||
| Economic Injury Disaster Loan - originated in May 2020 (1, 3) | $ | $ | % | |||||||||||
| Promissory note - originated in September 2020 | $ | % | ||||||||||||
| Promissory note - originated in December 2020 | $ | % | ||||||||||||
| Promissory note - originated in January 2021 | $ | % | ||||||||||||
| Promissory note - originated in February 2021 (2) | % | |||||||||||||
| Promissory note - originated in April 2021 | % | |||||||||||||
| Promissory note - originated in July 2021 | % | |||||||||||||
| Promissory note - originated in September 2021 | $ | % | ||||||||||||
| Promissory note - originated in December 2021 | $ | % | ||||||||||||
| Promissory note - originated in December 2021 | $ | % | ||||||||||||
| Promissory note - originated in December 2021 | $ | % | ||||||||||||
| Promissory note - originated in March 2022 | $ | % | ||||||||||||
| Promissory note - originated in March 2022 | $ | % | ||||||||||||
| Promissory note - originated in April 2022 | $ | % | ||||||||||||
| Promissory note - originated in April 2022 | $ | % | ||||||||||||
| Promissory note - originated in April 2022 | $ | % | ||||||||||||
| Promissory note - originated in April 2022 | $ | % | ||||||||||||
| Promissory note - originated in June 2022 | $ | % | ||||||||||||
| Less debt discount and debt issuance cost | ( | ) | ( | ) | ||||||||||
| Less current portion of promissory notes payable | ||||||||||||||
| Long-term promissory notes payable | $ | $ | ||||||||||||
| (1) | |
| (2) | |
| (3) |
During
the six months ended June 30, 2022 and 2021, we recognized interest expense of $
During
the six months ended June 30, 2022 and 2021, we issued a total of $
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NOTE 11: COMMITMENTS AND CONTINGENCIES
We account for contingent liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 450, Contingencies. This standard requires management to assess potential contingent liabilities that may exist as of the date of the financial statements to determine the probability and amount of loss that may have occurred, which inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed in our financial statements. For loss contingencies considered remote, we generally would neither accrue any estimated liability nor disclose the nature of the contingent liability in our financial statements. Management has assessed potential contingent liabilities as of June 30, 2022, and based on that assessment, there are no probable loss contingencies requiring accrual or establishment of a reserve.
DMB Note Collection Action
On June 17, 2021, DMB Group, LLC (“DMB”) filed a lawsuit against our wholly-owned subsidiary, the North Carolina operating company Data443 Risk Mitigation, Inc., (the “Subsidiary”) in County Court in Denton County, Texas, naming the Subsidiary as defendant. The matter was settled September 2021 by mutual agreement of the involved parties. The Subsidiary has made all payments required pursuant to the settlement and the matter is now considered closed. The Court granted our motions for nonsuit and dismissal with prejudice on orders entered May 4 and May 5, 2022.
Employment Related Claims
We view most legal proceedings involving claims of former employees as routine litigation incidental to the business, and therefore not material.
Litigation
In the ordinary course of business, we are involved in a number of lawsuits incidental to our business, including litigation related to intellectual property, employees, and commercial matters. Although it is difficult to predict the ultimate outcome of these cases, management believes that any ultimate liability would not have a material adverse effect on our consolidated financial condition or results of operations. However, an unforeseen unfavorable development in any of these cases could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows in the period in which it is recorded.
NOTE 12: CAPITAL STOCK AND REVERSE STOCK SPLIT
On
March 7, 2022, we filed an amendment to our Articles of Incorporation to effect a
Preferred Stock
As of June 30, 2022, we are authorized to issue shares of preferred stock with a par value of $, of which shares have been designated as Series A, and shares have been designated as Series B.
Series A Preferred Stock
Each
share of Series A was (i) convertible into shares of common stock, and (ii)
During the six months ended June 30, 2022, shares of Series A preferred stock were converted into shares of Common Stock.
As of June 30, 2022 and December 31, 2021, and shares of Series A were issued and outstanding, respectively.
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Series B Preferred Stock
During
the six months ended June 30, 2022, we issued shares of Series B preferred stock for $
During
the six months ended June 30, 2022, we redeemed shares of Series B preferred stock, representing all outstanding shares of Series B preferred stock, for $
During
the six months ended June 30, 2022, we recorded an accrued dividend of $
As of June 30, 2022 and December 31, 2021, and shares of Series B were issued and outstanding, respectively.
Common Stock
As
of June 30, 2022, we are authorized to issue shares of Common Stock with a par value of $.
During the six months ended June 30, 2022, we issued Common Stock as follows:
| ● | shares issued for conversion of debt; | |
| ● | ||
| ● | shares issued for consideration under an asset purchase agreement; | |
| ● | shares issued for conversion of Series A preferred stock; | |
| ● | shares issued for services; and | |
| ● | shares issued as a loan fee in connection with the issuance of promissory notes. |
As of June 30, 2022 and December 31, 2021, and shares of Common Stock were issued and outstanding, respectively.
Warrants
A summary of activity during the six months ended June 30, 2022 follows:
| Warrants Outstanding | ||||||||
| Weighted Average | ||||||||
| Shares | Exercise Price | |||||||
| Outstanding, December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Forfeited/canceled | ||||||||
| Outstanding, June 30, 2022 | $ | |||||||
During
the six months ended June 30, 2022, warrants were exercised cashless and we issued
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The following table summarizes information relating to outstanding and exercisable warrants as of June 30, 2022:
| Exercisable Warrants Outstanding | ||||||||
| Weighted Average Remaining | ||||||||
Number of Shares | Contractual life (in years) | Weighted Average Exercise Price | ||||||
| $ | ||||||||
| $ | ||||||||
| $ | ||||||||
| $ | ||||||||
| $ | ||||||||
| $ | ||||||||
| $ | ||||||||
| $ | ||||||||
Stock Options
During the three months ended June 30, 2022, we granted options for the purchase of our Common Stock to certain employees as consideration for services rendered. The terms of the stock option grants are determined by our Board of Directors consistent our 2019 Omnibus Stock Incentive Plan which the Board adopted May 16, 2019. Our stock options generally vest upon the and have a maximum term of .
| Options Outstanding | Weighted-Average
Exercise Price | |||||||
| Balance as of December 31, 2021 | $ | |||||||
| Grants | ||||||||
| Exercised | ||||||||
| Cancelled | ( | ) | ||||||
| Balance as of June 30, 2022 | $ | |||||||
Number of Options | Weighted-Average Remaining Contractual Life (In Years) | Weighted- Average Exercise Price | ||||||||||
Number of Options | Weighted-Average Remaining Contractual Life (In Years) | Weighted- Average Exercise Price | ||||||||||
| Outstanding | $ | |||||||||||
| Exercisable | $ | |||||||||||
| Expected to vest | $ | |||||||||||
As of June 30, 2022 and December 31, 2021, there was $ and $, respectively, of total unrecognized compensation costs related to non-vested share-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, 2021 | $ | |||||||
| Shares of restricted stock granted | ||||||||
| Exercised | ||||||||
| Cancelled | ||||||||
| Balance as of June 30, 2022 | $ | |||||||
| Number of Restricted Stock Awards | June 30, 2022 | December 31, 2021 | ||||||
| Vested | ||||||||
| Non-vested | ||||||||
NOTE 14: RELATED PARTY TRANSACTIONS
Jason Remillard is our president and chief executive officer and the sole director. Through his ownership of Series A Preferred Shares, Mr. Remillard has voting control over all matters to be submitted to a vote of our shareholders.
On
September 16, 2019, we entered into an Asset Purchase Agreement with DMB Group, LLC (“DMB Group”). A significant part of
the purchase price was in the form of our Common Stock. As a direct result of this transaction and our Common Stock issued to DMB Group,
we determined that DMB Group was a related party. Amounts owed to DMB Group, including the note payable of $
During
the six months ended June 30, 2022, we received cash from our Chief Executive Officer of $
As
of June 30, 2022 and December 31, 2021, we had due to related party transactions in the amounts of $
NOTE 15: SUBSEQUENT EVENTS
In accordance with ASC 855-10, “Subsequent Events”, we analyzed our operations subsequent to June 30, 2022 to August 15, 2022, the date when these consolidated financial statements were issued. Our Management determined that there were no reportable events that occurred during that subsequent period to be disclosed or recorded.
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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 six months ended June 30, 2022 and for 2021 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.
The discussion in this section contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “would” or “will” or the negative of these terms or other comparable terminology, but their absence does not mean that a statement is not forward-looking. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, which could cause our actual results to differ from those projected in any forward-looking statements we make. Several risks and uncertainties we face are discussed in more detail (1) under “Risk Factors” in Part I, Item 1A of (a) the Form 10 filed with the SEC January 11, 2019; (b) the Form 10-K filed March 31, 2022; and (2) in the discussion and analysis below. You should, however, understand that it is not possible to predict or identify all risks and uncertainties and you should not consider the risks and uncertainties identified by us to be a complete set of all potential risks or uncertainties that could materially affect us. You should not place undue reliance on the forward-looking statements we make herein because some or all of them may turn out to be wrong. We undertake no obligation to update any of the forward-looking statements contained herein to reflect future events and developments, except as required by law. The following discussion should be read in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q.
Overview
We believe we are a leader in data security and privacy management, providing solutions across the enterprise and in the cloud. Trusted by 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 as well as 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 provide an encompassing solution set such that we are well-positioned to capitalize on that increased adoption rate and establish our products as new 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 businesses 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 emails, 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).
| 20 |
We sell or plan to sell substantially all 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. These 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 that Data443 is well positioned to capture 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. |
| 21 |
| ● | 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 continued objective is to further integrate our growing suite of proven industry leading data security, ransomware protection and privacy offerings and deliver the combined offering to our growing base of enterprise clients directly and via our partner channels. Data privacy concerns continue to grow in lockstep with security breaches, ongoing expansion of data storage, and reliance on telework, telehealth and remote learning requirements.
We have relied on and expect to continue to benefit from strategic acquisitions to contribute to our long-term growth objectives. During Fiscal Year 2022 we hope to continue to acquire complementary business assets and client bases. Key elements of our growth strategy include:
| ● | Improving and extending our technological capabilities, domestically and internationally. | |
| ● | Further integrating our product offerings to provide a superior data privacy platform. | |
| ● | Focusing on underserved markets and medium-sized businesses. | |
| ● | Delivering capabilities via unconventional channels, including open-source and “freemium” trial subscription models. | |
| ● | Leveraging our existing relationships for professional references, association- and internal private industry-level promotional events and other high value product positional activities. | |
| ● | Be prepared to capture and execute on opportunities in the acquisition marketplace. | |
| ● | Continued focus on net bookings with growing long-term contract value with inbuilt ARR increases and pre-paid consumption growth. |
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| ● | Improve SaaS Services and consumption with high increasing ‘attach’ rate for additional capabilities within existing customer relationships we have built and/or acquired via our aggressive acquisitions program. | |
| ● | Increase year-over-year conversions from one-time sales of perpetual licenses to multiyear sales of time-based subscription license agreements. |
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.
Results of Operations for the Three and Six Months Ended June 30, 2022 Compared to the Three and Six Months Ended June 30, 2021
Our operations for the three months ended June 30, 2022 and 2021 are outlined below:
| Three Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2022 | 2021 | Change | % | |||||||||||||
| Revenue | $ | 750,989 | $ | 762,352 | $ | (11,363 | ) | (1 | )% | |||||||
| Cost of revenue | 78,593 | 96,830 | (18,237 | ) | (19 | )% | ||||||||||
| Gross Profit | 672,396 | 665,522 | 6,874 | 1 | % | |||||||||||
| Gross Profit Percentage | 90 | % | 87 | % | ||||||||||||
| Operating expense | 2,175,855 | 1,360,616 | 815,239 | 60 | % | |||||||||||
| Other income (expense) | (942,753 | ) | (850,260 | ) | (92,493 | ) | 11 | % | ||||||||
| Net loss | $ | (2,446,212 | ) | $ | (1,545,354 | ) | $ | (900,858 | ) | 58 | % | |||||
Revenue
The decrease in revenue in part is due to our ongoing shift for some products from one-time sales perpetual licenses with annual maintenance contracts (also referred to as perpetual license “renewals”) to time-based subscriptions with multiyear upfront payments; this shift resulted in fewer customers paying for subscriptions or renewals in the quarter. We also believe customers and prospective customers were reluctant to consider deals regarding new business opportunities due to concerns based on uncertainty in the economy and other global events. However, we continue to see organic growth in increased consumption of our services that contain storage or volume components, matching our expectations and as is reflected in our continuing ARR growth.
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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 advertising in national publications and customer outreach.
Operating Expenses
For the three months ended June 30, 2022 and 2021 our operating expenses were as follows:
| Three Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2022 | 2021 | Change | % | |||||||||||||
| General and administrative | $ | 2,116,220 | $ | 1,311,396 | $ | 804,824 | 61 | % | ||||||||
| Sales and marketing | 59,635 | 49,220 | 10,415 | 21 | % | |||||||||||
| Total operating expenses | $ | 2,175,855 | $ | 1,360,616 | $ | 815,239 | 60 | % | ||||||||
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 increase in general and administrative expense was primarily due to an increase in professional service fees.
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 increase in sales and marketing expense was primarily due to an increase in trade show events, related travel and marketing expenses.
Other income (expense)
Other expenses for the three months ended June 30, 2022 consisted of interest expense. Other expenses for the June 30, 2021 consisted of interest expense and loss on change in fair value of derivative. The increase in other expenses was primarily due to an increase in interest expense.
Net Loss
The net loss for the three months ended June 30, 2022 was mainly derived from an operating loss of $1,503,459, and interest expense of $942,753. The net loss for the three months ended June 30, 2021 was mainly derived from an operating loss of $695,094, interest expense of $671,862 and loss on change in fair value of derivative liability of $178,398.
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Our operations for the six months ended June 30, 2022 and 2021 are outlined below:
| Six Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2022 | 2021 | Change | % | |||||||||||||
| Revenue | $ | 1,363,505 | $ | 1,600,220 | $ | (236,715 | ) | (15 | )% | |||||||
| Cost of revenue | 278,272 | 263,824 | 14,448 | 5 | % | |||||||||||
| Gross Profit | 1,085,233 | 1,336,396 | (251,163 | ) | (19 | )% | ||||||||||
| Gross Profit Percentage | 80 | % | 84 | % | ||||||||||||
| Operating expense | 3,269,812 | 2,889,605 | 380,207 | 13 | % | |||||||||||
| Other income (expense) | (2,094,952 | ) | (2,168,443 | ) | 73,491 | (3 | )% | |||||||||
| Net loss | $ | (4,279,531 | ) | $ | (3,721,652 | ) | $ | (557,879 | ) | 15 | % | |||||
Revenue
The decrease in revenue for the six months ended June 30, 2022 was primarily due to increased pull through of deals in Q4 of 2021 – both by the Company and our customers who took advantage of prepaid multi-year discounts and also took advantage of multi-year commitments to our SaaS products and other software product offerings. As discussed elsewhere herein, this impacted Q1 2022 revenue attainments. Significant disruption and distraction in customer operations primarily due to increased pandemic activity in January 2022 and the Russian invasion of Ukraine in February 2022 also contributed to customers deferring decisions to renew existing relationships or to sign up for new product offerings. A return to pre-first quarter activity levels has resumed midway through the first quarter of 2022 which is demonstrated in our Q2 of 2022 results.
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 six months ended June 30, 2022 and 2021 our operating expenses were as follows:
| Six Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2022 | 2021 | Change | % | |||||||||||||
| General and administrative | $ | 3,089,782 | $ | 2,744,961 | $ | 344,821 | 13 | % | ||||||||
| Sales and marketing | 180,030 | 144,644 | 35,386 | 24 | % | |||||||||||
| Total operating expenses | $ | 3,269,812 | $ | 2,889,605 | $ | 380,207 | 13 | % | ||||||||
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 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 increase in sales and marketing expense was primarily due to an increase in technology-related expenses.
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Other income (expense)
Other expenses for the six months ended June 30, 2022 consisted of interest expense and loss on change in fair value of derivative. Other expenses for the six months ended June 30, 2021 consisted of interest expense, loss on change in fair value of derivative, and loss on settlement on debt. The decrease in other expenses was primarily due to change in fair value of derivative liabilities and loss on settlement of debt.
Net Loss
The net loss for the six months ended June 30, 2022 was mainly derived from an operating loss of $2,184,579, and interest expense of $2,037,069. The net loss for the six months ended June 30, 2021 was mainly derived from an operating loss of $1,553,209, interest expense of $1,577,288, loss on settlement of debt of $227,501 and loss on change in fair value of derivative liability of $363,654.
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 the company. Subsequent to this and through June 30, 2022, 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 $9.6 million expensed for interest and amortization of debt discounts for financing and other origination fees.
Liquidity and Capital Resources
The following table provides selected financial data about our company as of June 30, 2022 and December 31, 2021, respectively.
Working Capital
The following table provides selected financial data about our company as of June 30, 2022 and December 31, 2021, respectively.
| June 30, | December 31, | |||||||||||||||
| 2022 | 2021 | Change | % | |||||||||||||
| Current assets | $ | 2,985,645 | $ | 1,297,304 | $ | 1,688,341 | 130 | % | ||||||||
| Current liabilities | $ | 6,420,970 | $ | 4,502,937 | $ | 1,918,033 | 43 | % | ||||||||
| Working capital deficiency | $ | (3,435,325 | ) | $ | (3,205,633 | ) | $ | (229,692 | ) | 7 | % | |||||
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures. As of June 30, 2022, we had no cash and a bank overdraft of $3,781 and our principal sources of liquidity were trade accounts receivable of $231,507 and prepaid, advance payment for acquisition of $2,726,188 and other current assets of $27,950, as compared to cash of $1,204,933, trade accounts receivable of $21,569 and prepaid and other current assets of $70,802 as of December 31, 2021.
During the last two 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 six months ended June 30, 2022, we reported a loss from operations of $2,184,579.
As of June 30, 2022, we had assets of cash in the amount of $0 and other current assets in the amount of $2,985,645. As of June 30, 2022, we had current liabilities of $6,420,970. Our accumulated deficit as of June 30, 2022 was $45,978,192.
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As of December 31, 2021, we had assets of cash in the amount of $1,204,933 and other current assets in the amount of $92,371. As of December 31, 2021, we had current liabilities of $4,502,937. Our accumulated deficit as of December 31, 2021 was $42,033,887.
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
| Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2022 | 2021 | Change | ||||||||||
| Cash used in operating activities | $ | (115,911 | ) | $ | (823,075 | ) | $ | 707,164 | ||||
| Cash used in investing activities | $ | (346,960 | ) | $ | (79,020 | ) | $ | (267,940 | ) | |||
| Cash provided by financing activities | $ | (742,062 | ) | $ | 850,519 | $ | (1,592,581 | ) | ||||
| Cash on hand | $ | - | $ | 7,207 | $ | (7,207 | ) | |||||
Operating Activities
During the six months ended June 30, 2022, we used $115,911 by operating activities, compared to $823,075 during the six months ended June 30, 2021. The elimination of cash on hand was primarily due to an increase in net loss.
Investing Activities
During the six months ended June 30, 2022, we used funds in investing activities of $346,960 to acquire property and equipment and advance payment for acquisition. During the six months ended June 30, 2021, we used funds in investing activities of $79,020 to acquire property and equipment.
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Financing Activities
During the six months ended June 30, 2022, we raised $75,000 through the issuance of Series B Preferred Stock; $1,207,800 from issuance of convertible debt; proceeds from related party of $116,238, bank overdraft of $3,781 and $1,186,453 from issuance of notes payable; offset in part through redemption of Series B Preferred Stock of $487,730; repayment of convertible note payable of $758,346; repayment of $1,957,492 on notes payable; repayment to related party of $86,571 and, $41,195 of capital lease payments. For June 30, 2022 we had net cash outflows for financing activities of $742,062. By comparison, during the six months ended June 30, 2021, we had net financing inflows of $850,519, having raised $846,801 through the issuance of common stock; $250,000 through the issuance of Series B Preferred Stock; $100,000 from issuance of convertible debt; $2,574,647 from issuance of notes payable; and, $271,464 from loan from a related party, offset in part through repayment of $2,734,275 on notes payable; repayment to related party of $414,187 and, $43,931 of capital 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. In addition, we are dependent upon our controlling stockholder to provide continued funding and capital resources. 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 June30, 2022, 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 U.S. GAAP (generally accepted accounting principles) 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 US 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.
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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 Share-Based Payment Accounting, re-measurement is not required. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by us in the same expense classifications in the consolidated statements of operations, as if such amounts were paid in cash. Also, refer to Note 1 – Summary of Significant Accounting Policies, in the consolidated financial statements that are included in this Annual Report.
| 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 by this 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 June 30, 2022.
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 June 30, 2022 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. | |
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● | 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 have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting. | |
| ● | 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 will add a full-time chief financial officer and appoint outside directors and establish an audit committee. Until there are sufficient personnel, independent directors, and a committee we will (i) continue to use third party specialists to address shortfalls in staffing and to assist us with accounting and finance responsibilities; and (ii) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties
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 three months ended June 30, 2022 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 litigation.
On June 17, 2021, DMB Group, LLC (“DMB”) filed a lawsuit against Data443 Risk Mitigation, Inc., a North Carolina corporation, the Company’s wholly-owned subsidiary (the “Subsidiary”), in County Court in Denton County, Texas, naming the Subsidiary as the defendant (the “Complaint”). The matter was settled on September 2021 by mutual agreement of the involved parties. As of April 2022, the Subsidiary made all payments required and the matter is now considered closed.
| ITEM 1A. | RISK FACTORS |
As a smaller reporting company, we are not required to provide information regarding this Item.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During the three months ended June 30, 2022, 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 April 7, 2022, we issued 2,402 shares of our common stock to Root Ventures, LLC pursuant to an agreement with Root Ventures, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On April 7, 2022, we issued 1,852 shares of our common stock to One44 Capital, LLC pursuant to an agreement with One44 Capital, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On April 7, 2022, we issued 933 shares of our common stock to GS Capital Partners, LLC pursuant to an agreement with GS Capital Partners, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On April 7, 2022, we issued 6,431 shares of our common stock to Westland Properties, LLC pursuant to an agreement with Westland Properties, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On April 7, 2022, we issued 2,402 shares of our common stock to Fast Capital, LLC pursuant to an agreement with Fast Capital, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On April 20, 2022, we issued 380,952 shares of our common stock to Centurion Holdings I, LLC pursuant to an agreement with Centurion Holdings I, LLC. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On May 3, 2022, we issued 75,200 shares of our common stock to SJSS Investments pursuant to an agreement with SJSS Investments. The issuance was exempt under Section 4(a)(2) of the Securities Act. | |
| ● | On May 3, 2022, we issued 76,000 shares of our common stock to Allan S. Brantley pursuant to an agreement with Allan S. Brantley. The issuance was exempt under Section 4(a)(2) of the Securities Act. |
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| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5. | OTHER INFORMATION |
None.
| ITEM 6. | EXHIBITS |
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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: August 15, 2022 | DATA443 RISK MITIGATION, INC. | |
| By: | /s/ Jason Remillard | |
| Name: | JASON REMILLARD | |
| Title: | Chief Executive Officer, (Principal Executive Officer) | |
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