10-Q: DATA443 Risk Mitigation Faces Severe Liquidity Crisis Amidst Deepening Deficit and Massive Share Dilution

DATA443 Risk Mitigation, Inc. reported a reduced net loss for Q1 2025, but faces substantial doubt about its ability to continue as a going concern due to worsening liquidity, a growing accumulated deficit, and significant shareholder dilution from debt conversions.

Summary

• DATA443 Risk Mitigation, Inc. reported a net loss of $676,664 for the three months ended March 31, 2025, a 58% improvement compared to a net loss of $1,629,159 for the same period in 2024.
• Revenue decreased by 23% to $1,166,589 for Q1 2025, down from $1,511,058 in Q1 2024, primarily due to one-time catch-up payments from the Cyren Ltd. acquisition in the prior year, though organic growth in consumption-based services is noted.
• Gross profit percentage improved to 68% in Q1 2025 from 59% in Q1 2024.
• Total operating expenses decreased by 22% to $1,135,717, driven by a 93% reduction in sales and marketing expenses and a 5% decrease in general and administrative expenses, reflecting significant cost-saving efforts.
• Interest expense saw a substantial 69% decrease, falling to $331,293 in Q1 2025 from $1,065,892 in Q1 2024.
• The company's cash balance significantly declined to $17,651 as of March 31, 2025, from $168,208 at December 31, 2024.
• Working capital deficiency worsened to $(17,014,664) as of March 31, 2025, compared to $(16,781,626) at December 31, 2024.
• The accumulated deficit increased to $(62,420,682) as of March 31, 2025.
• Common shares outstanding increased dramatically to 102,163,687 as of March 31, 2025, from 1,150,223 at December 31, 2024, largely due to the conversion of debt and preferred stock.
• Several convertible notes are in default, with various default interest rates ranging from 12% to 24%.

Sentiment

Score: 2

Explanation: The company faces severe financial distress, evidenced by a critical cash shortage, worsening working capital deficiency, and an explicit 'going concern' warning. While operational cost reductions and gross margin improvements are noted, they are overshadowed by the fundamental instability, massive shareholder dilution, and multiple debt defaults, indicating a highly precarious financial position.

Positives

• Net loss significantly decreased by 58% to $676,664 in Q1 2025, compared to $1,629,159 in Q1 2024.
• Gross profit percentage improved to 68% in Q1 2025 from 59% in Q1 2024.
• Total operating expenses decreased by 22%, primarily due to significant cost-saving efforts, including a 93% reduction in sales and marketing expenses.
• Interest expense decreased substantially by 69% to $331,293 in Q1 2025.
• The company notes organic growth in increased consumption of its services that contain storage or volume components, matching expectations and reflecting continuing Annual Recurring Revenue (ARR) growth.

Negatives

• Revenue decreased by 23% to $1,166,589 in Q1 2025, compared to $1,511,058 in Q1 2024.
• The company's cash balance significantly declined to $17,651 as of March 31, 2025, from $168,208 at December 31, 2024.
• Working capital deficiency worsened to $(17,014,664) as of March 31, 2025.
• The accumulated deficit increased to $(62,420,682) as of March 31, 2025.
• Common shares outstanding increased massively from 1,150,223 to 102,163,687, indicating severe dilution for existing shareholders.
• Multiple convertible notes are in default, with outstanding balances ranging from $16,773 to $812,500, and associated default interest rates.

Risks

• The company will need additional capital to fund its operations, and there is no assurance such funding will be secured on acceptable terms or at all.
• There is substantial doubt about the company's ability to continue as a going concern due to significant current period losses, negative working capital, and an accumulated deficit.
• The company faces intense competition in its market and may lack sufficient financial and other resources to maintain and improve its competitive position.
• The company is dependent on the continued services and performance of its founder and Chief Executive Officer, Jason Remillard.
• The common stock is currently quoted on the OTC Pink and is thinly traded, reducing investors' ability to liquidate their investment.
• The company has a history of losses and may incur future losses, which may prevent it from attaining profitability.
• The market price of the common stock may be volatile and may fluctuate disproportionately to operating performance.
• Shares of preferred stock have special rights that could limit the company's ability to undertake corporate transactions, inhibit potential changes of control, and reduce proceeds available to common stockholders in the event of a change in control.
• The company has never paid and does not intend to pay cash dividends.
• The Chief Executive Officer has the ability to control all matters submitted to stockholders for approval, which limits other stockholders' ability to influence corporate affairs.
• Material weaknesses exist in internal control over financial reporting, including lack of controls for data completeness and accuracy, no written documentation of internal control policies, and insufficient segregation of duties.
• The absence of a functioning audit committee or outside directors on the board results in ineffective oversight of internal controls and procedures.
• There is a reasonable possibility that material misstatements to the financial statements could occur and not be prevented or detected on a timely basis due to internal control weaknesses.

Future Outlook

DATA443 Risk Mitigation aims to further integrate its suite of data security, ransomware protection, and privacy products, offering them to enterprise customers directly and through partner channels. The company intends to position its products to address growing data privacy concerns, security breaches, and expanding data storage needs, including those related to telework, telehealth, and remote learning. Future growth is expected to be driven by strategic acquisitions of products, talent, and established customer bases. Key elements of the growth strategy include aggressively pursuing acquisitions of cybersecurity software and service providers, increasing research and development spending, expanding the customer base, and enhancing sales capacity. The company plans to continue growing through strategic acquisitions and cross-selling/upselling across its subsidiaries and affiliated companies. It anticipates incurring costs related to SEC reporting and ongoing business operations, and will require additional operating capital, which it plans to raise through debt or equity financing.

Management Comments

• "We have incurred significant current period losses 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."
• "Managements plans regarding these matters, include raising additional debt or equity financing, the terms of which might not be acceptable."
• "The decrease in revenue is due to our acquisition of intellectual property from the Appointed Receiver for the Assets of Cyren Ltd which resulted in catchup payments which were one-time payments. 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."
• "The decrease in cost of revenue is a result of our significant efforts to reduce/minimize the operating footprint of the Cyren Assets and our significant cost saving efforts."
• "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."
• "Our plan is to continue to grow our business through strategic acquisitions, and then expand selling across our subsidiaries and affiliated companies."
• "Unless we can attract additional investment, our operating as a going concern is in doubt."
• "Our management is committed to improving its internal controls when we have adequate resources to do so, we appointed a full-time Chief Financial Officer in September but do not currently have independent directors or an audit committee."

Industry Context

DATA443 Risk Mitigation operates in the dynamic and growing data security and privacy management market. The company's solutions are designed to integrate with established cloud vendors like Microsoft Azure, Google Cloud Platform, and Amazon Web Services, as well as on-premises environments, reflecting the hybrid IT landscapes common in the industry. The market is characterized by increasing demand driven by mounting ransomware threats, evolving global data privacy regulations (e.g., CCPA, GDPR, LGPD), and the need for comprehensive data protection across diverse sectors. The company's strategy of strategic acquisitions, such as the Cyren Ltd. assets, aligns with industry trends of consolidation and expanding product portfolios to offer more comprehensive solutions and enhance technological capabilities in areas like AI, machine learning, and big-data analytics for threat intelligence.

Comparison to Industry Standards

• The document does not provide specific comparable companies, projects, or results to assess the company's performance against global industry benchmarks.

Management Changes

Corporate Governance

Legal Proceedings

• The company is not currently a party to any material litigation.

Related Party Transactions

• Jason Remillard, the Chief Executive Officer, holds 149,892 shares of Series A Preferred Stock, granting him voting control over all matters submitted to shareholders.
• During the three months ended March 31, 2025, the CEO paid $25,583 in operating expenses on behalf of the company.
• The company repaid $19,000 to the CEO during the three months ended March 31, 2025.
• As of March 31, 2025, the company had $150,886 due to related parties.
• During the three months ended March 31, 2025, the CEO converted 13 Series A Preferred Stock into 13,000,000 common stock.

Stakeholder Impact

• Shareholders face significant dilution due to the massive issuance of common stock for debt and preferred stock conversions, and potential for further dilution from future capital raises.
• Shareholders are exposed to a high risk of investment loss given the company's going concern issues and volatile stock price.
• The CEO's voting control through Series A Preferred Shares limits the influence of other common stockholders on corporate affairs.
• Creditors and lenders are impacted by multiple convertible notes being in default, indicating challenges in debt repayment.
• Employees may face uncertainty regarding job security and compensation given the company's financial difficulties and cost-saving measures, including changes in sales staffing.

Next Steps

• Raise additional debt or equity financing to fund ongoing operations and execute the business plan.
• Continue efforts to integrate the suite of data security, ransomware protection, and privacy products.
• Aggressively pursue strategic acquisitions of other cybersecurity software and service providers.
• Increase spending on research and development to create new and improve existing products.
• Expand sales capacity by adding sales and marketing employees, with a focus on customer success and leveraging existing customer relationships.
• Continue onboarding to cloud-native technology adoption portals such as Microsoft Azure Marketplace and Amazon AWS Marketplace.
• Remediate identified material weaknesses in internal control over financial reporting, including validating data completeness/accuracy, documenting policies, and improving segregation of duties.
• Appoint independent directors and establish a functioning audit committee to enhance oversight of internal controls.

Key Dates

Recommendation

Keywords

Data Security, Privacy Management, Ransomware Protection, Cybersecurity, SEC Filing, 10-Q, Convertible Notes, Liquidity, Going Concern, Share Dilution, Financial Reporting, Corporate Governance, Risk Mitigation