DATA443 RISK MITIGATION, INC. The following discussion and analysis of the results of operations and financial
condition for the years ended
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual 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 annual 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 annual 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 this annual report, which include, but are not limited to, the following:
? we will need 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;
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? 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 our common stockholders 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 annual report.
Although we base 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 this 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 this 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 annual 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 annual 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 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 an encompassing solution set such that we are well positioned to capitalize on this trend and 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-
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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.
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®
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 (
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.
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? Data443® Data Placement Manager (also known as DATAEXPRESS®), a data
transport, transformation, and delivery product trusted by leading financial
organizations worldwide.
? 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.
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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.
Focus on EU Opportunities. We believe there is a significant opportunity for our products and services in the EU and other international markets in order to enable compliance with the GDPR. We believe that a focus on international markets will be a key component of our growth strategy.
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 Year Ended
Our operations for the year ended
Years Ended
December 31,
2022 2021 Change %
Revenue 2,627,123 3,609,494 (982,371 ) (27 )%
Cost of revenue 518,843 546,888 $ (28,045 ) (5 )%
Gross Profit 2,108,280 3,062,606 (954,326 ) (31 )%
Gross Profit Percentage 80 % 85 % (7 )% (5 )%
Operating expense 5,784,408 5,699,845 (84,563 ) (1 )%
Other expense (6,037,339 ) (3,837,915 ) (2,199,424 ) (57 )%
Net loss (9,713,467 ) (6,475,154 ) (3,238,313 ) (50 )%
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 year. We also believe customers and prospective customers were reluctant to consider deals regarding new business opportunities due to concerns based on economic uncertainty 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 Annual Recurring Revenue ("ARR') growth.
Cost of revenue
Cost of revenue consists of direct expenses, such as labor, shipping, and supplies.
35 For the years endedDecember 31, 2022 and 2021 our operating expenses are as follows: Years Ended December 31, 2022 2021 Change % Operating expenses General and administrative 5,552,936 5,433,113 (119,823 ) (2 )% Sales and marketing 231,472 266,732 35,260 13 % Total operating expenses 5,784,408 5,699,845 (84,563 ) (1 )%
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
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 a decrease in trade show events, related travel and marketing expenses.
Other income (expense)
Other expenses for the year ended
Net Loss
The net loss for the year ended
Cash Flow for the Year Ended
Liquidity and Capital Resources
The following table provides selected financial data about us as of
36 Working Capital
The following table provides selected financial data about us as of
December 31, December 31,
2022 2021 Change %
Current assets $ 2,851,082 $ 1,297,304 $ 1,553,778 120 %
Current liabilities
We require cash to fund our operating expenses and working capital requirements,
including outlays for capital expenditures. As of
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 year ended
As of
As of
The revenues, if any, generated from our acquisitions alone will not be sufficient to fund our operations or planned growth. We will require additional capital to continue to operate our business, and to further expand our business. Sources of additional capital through various financing transactions or arrangements with third parties may include equity or debt financing, bank loans or revolving credit facilities. We may not be successful in locating suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means. Unless we can attract additional investment, our future operating as a going concern is in serious doubt.
We are now obligated to file annual, quarterly and current reports with the
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.
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.
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Cash Flow
Years Ended
December 31,
2022 2021 Change
Cash used in operating activities
$ 1,712 $ 1,204,933 $ (1,203,221 ) Operating Activities
During the year ended
Investing Activities
During the year ended
Financing Activities
During the year ended
We depend upon receiving capital investment or other financing to fund our ongoing operations and 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.
Going Concern
The consolidated financial statements accompanying this Annual Report have been
prepared on a going concern basis, which implies that we will continue to
realize its assets and discharge its liabilities and commitments in the normal
course of business. We have generated very limited revenues since inception and
has never paid any dividends and is unlikely to pay dividends or generate
earnings in the immediate or foreseeable future. Our continuation as a going
concern is dependent upon our ability to obtain necessary financing to achieve
our operating objectives, and the attainment of profitable operations. As of
Due to the uncertainty of our ability to meet our current operating expenses and
the capital expenses noted above in their report on the consolidated financial
statements for the year ended
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The continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity or debt securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. There can be no assurance that we will be able to raise any additional capital.
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. We continue to focus heavily on our renewals business that we inherit from our acquisitions. 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. We expect our cost basis for fundraising to be significantly less if we are able to be listed on a major stock exchange. We also expect our equity components to have more value as part of our acquisitions and by virtue be less costly for us.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information under this Item.
Critical Accounting Policies
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in
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.
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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.
Stock-Based Compensation
We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date. For non-employees, as per ASU No. 2018-7, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, remeasurement is not required. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by us in the same expense classifications in the consolidated statements of operations, as if such amounts were paid in cash. Also, refer to Note 1 - Summary of Significant Accounting Policies, in the consolidated financial statements that are included in this Annual Report.
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