10-K/A: DATA443 Risk Mitigation Reports Deepening Losses and Going Concern Doubts for FY2024 Amidst Strategic Shifts

DATA443 Risk Mitigation, Inc. reported a significant increase in net loss and a worsening working capital deficiency for fiscal year 2024, prompting an auditor's going concern warning, despite strategic acquisitions and efforts to enhance product offerings.

Summary

• DATA443 Risk Mitigation, Inc. reported a net loss of $6,087,182 for the fiscal year ended December 31, 2024, marking a 43% increase from the $4,244,708 net loss in 2023.
• Revenue decreased by 13% to $4,872,422 in 2024 from $5,578,942 in 2023, attributed partly to one-time catch-up payments in 2023 from the Cyren acquisition and broader economic uncertainty.
• Gross profit declined by 26% to $2,848,799 in 2024, with the gross profit percentage falling from 69% in 2023 to 58% in 2024.
• The company's working capital deficiency worsened by 25%, reaching $(16,781,626) in 2024 compared to $(13,377,611) in 2023.
• Cash provided by operating activities increased to $1,275,006 in 2024 from $782,101 in 2023, but cash flow from financing activities shifted from a positive $986,280 in 2023 to a negative $1,076,368 in 2024.
• The independent registered public accounting firm included an explanatory paragraph in their report, raising substantial doubt about the company's ability to continue as a going concern.
• DATA443 acquired certain assets of Cyren Ltd. in December 2023, including threat intelligence, URL categorization, and email security technologies, aiming to bolster its product portfolio.
• The company approved and adopted the 2023 Equity Incentive Plan, reserving 800,000 shares of Common Stock for awards to attract and retain talent.
• Significant corporate governance changes were implemented, including amendments to Articles of Incorporation and Bylaws, in preparation for a planned Nasdaq listing.
• Material weaknesses in internal control over financial reporting were identified, specifically a lack of segregation of duties and the absence of written documentation for internal control policies and procedures.

Sentiment

Score: 2

Explanation: The company faces severe financial distress, evidenced by increasing net losses, a worsening working capital deficiency, and an explicit 'going concern' warning from its auditors. While strategic acquisitions and product development are noted, the fundamental financial instability and heavy reliance on dilutive financing, including defaulted notes, indicate a very high risk profile. The positive operational cash flow is overshadowed by the overall financial health and debt burden.

Positives

• The company successfully acquired certain assets of Cyren Ltd. in December 2023, including threat intelligence, URL categorization, and email security, which are expected to enhance its product portfolio and technological capabilities.
• Cash provided by operating activities increased to $1,275,006 in 2024, up from $782,101 in 2023, indicating improved operational cash generation.
• General and administrative expenses decreased by 14% in 2024 due to cost-cutting measures.
• The company continues to observe organic growth in the consumption of its services that include storage or volume components, contributing to ongoing Annual Recurring Revenue (ARR) growth.
• The adoption of the 2023 Equity Incentive Plan, reserving 800,000 shares, is intended to attract, retain, and motivate key personnel through equity ownership opportunities.
• The company is actively pursuing a Nasdaq listing, which management believes could lead to a significantly lower cost basis for fundraising and increased equity valuation.

Negatives

• Net loss increased significantly by 43% to $6,087,182 in 2024 from $4,244,708 in 2023.
• Revenue decreased by 13% to $4,872,422 in 2024, partly due to the absence of one-time payments received in 2023 and general economic uncertainty.
• Gross profit declined by 26% and the gross profit percentage dropped from 69% in 2023 to 58% in 2024.
• The working capital deficiency worsened by 25% to $(16,781,626) in 2024, indicating a deteriorating short-term financial position.
• The company's accumulated deficit grew to $61,744,018 as of December 31, 2024.
• Cash flow from financing activities shifted from a positive $986,280 in 2023 to a negative $1,076,368 in 2024, reflecting increased repayments and reduced new financing proceeds.
• Several convertible notes payable are in default, with some triggering higher default interest rates (e.g., 16%, 24%, 18%, 22%, 12%).
• The company remains heavily dependent on its CEO, Jason Remillard, for working capital and future funding, with no assurance of continued availability or favorable terms.
• The company has a history of operating losses since its inception and does not anticipate paying cash dividends in the foreseeable future.
• Material weaknesses in internal control over financial reporting were identified, including a lack of segregation of duties and absence of written documentation, which could impact financial reporting reliability.

Risks

• The company will require additional funds in the future to achieve its current business strategy, and an inability to obtain funding could cause the business to fail.
• There is substantial doubt about the company's ability to continue as a going concern due to recurring losses from operations, negative working capital, and an accumulated deficit.
• The company faces intense competition in its market, especially from larger, well-established companies with greater financial and other resources.
• The company is dependent on the continued services and performance of its founder and Chief Executive Officer, Jason Remillard, and his loss could adversely affect the business.
• The company may be unable to attract new customers and/or expand sales to existing customers, both domestically and internationally.
• The company may be unable to maintain successful relationships with its channel partners, which could adversely affect its business.
• The company may be subject to breaches in its security, cyberattacks, or other cyber risks, exposing it to significant liability and reputational damage.
• Failure to protect proprietary technology and intellectual property rights could substantially harm the business.
• Real or perceived errors, failures, or bugs in the company's technology could adversely affect growth prospects.
• The company is subject to federal, state, and industry privacy and data security regulations, which could result in additional costs and liabilities or inhibit software sales.
• The business is susceptible to risks associated with international operations, including political instability, currency fluctuations, and potentially adverse tax consequences.
• The business is subject to risks of pandemic, fire, power outages, floods, earthquakes, and other catastrophic events, and to interruption by manmade problems such as terrorism and war.
• Operations may continue to increase in complexity as the company grows, adding challenges to business management.
• There is no assurance that future financing from Mr. Remillard will be available or, if available, that it will be on terms that are satisfactory to the company.
• The company may not be able to identify suitable acquisition candidates or consummate acquisitions on acceptable terms, or may be unable to successfully integrate acquisitions.
• The JOBS Act allows the company to postpone compliance with certain laws and regulations intended to protect investors, potentially reducing information provided to stockholders.
• Failure to implement proper and effective internal controls or to remediate weaknesses in internal accounting controls could result in material misstatements in financial statements.
• The company has secured debt, which could limit its ability to obtain additional financing or react to business changes, and could place it at a competitive disadvantage.
• Conversions of currently-outstanding debt into equity will have a dilutive effect and may adversely affect investment.
• Future issuances of debt securities and preferred stock may adversely affect the return of investment.
• The common stock is subject to the SEC's penny stock rules, which may make it difficult for broker-dealers to complete customer transactions and could adversely affect trading activity.
• The common stock has historically experienced low trading volume on the OTC Pink, and therefore the price may not accurately reflect its value, with no assurance of an active market developing.
• The market price of the common stock may be volatile and fluctuate disproportionately to operating performance.
• The company has outstanding shares of preferred stock with special rights that could limit its ability to undertake corporate transactions, inhibit potential changes of control, and reduce proceeds for common stockholders.
• The Chief Executive Officer has the ability to control all matters submitted to stockholders for approval, which limits minority stockholders' ability to influence corporate affairs.
• The company will continue to incur substantial costs as a public reporting company, requiring significant management time for compliance initiatives.
• Future issuance of additional common stock may have a dilutive effect on current stockholders.
• An investment in the Common Stock is speculative and there is no assurance that investors will obtain any return on their investment, with the risk of losing their entire investment.
• Adverse or uncertain macroeconomic or geopolitical conditions or reduced IT spending may adversely impact business, revenues, and profitability.
• Prolonged economic uncertainties or downturns could materially adversely affect the business.

Future Outlook

DATA443 Risk Mitigation aims to be a leading provider of data security products and services by further integrating its product suite and offering them directly to enterprise customers and via partner channels. The company plans to increase spending on research and development to drive innovation and improve existing products, proactively identifying and solving client data security needs. Growth is also expected through expanding its sales capacity, with a heavy focus on customer success and leveraging existing customer relationships. The company anticipates continued benefit from strategic acquisitions of products, talent, and established customer bases to contribute to long-term growth objectives. Management expects to incur costs related to filing Exchange Act reports and operating businesses, requiring additional operating capital through debt or equity financing, with an expectation of lower fundraising costs if listed on a major stock exchange.

Management Comments

• "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 that increased adoption rate and establish our products as new data privacy and security standards."
• "We believe that sector-specific US laws, state-level legislation, and outside-the-United States 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 feasible. For many of these enterprises, we can bridge the gap between their need to protect data and their need to use their resources to grow their core business, by offering turnkey solutions and related counseling and technical support to offset risks from data breaches and security incidents of various types."
• "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."
• "We expect that current market conditions, recent data thefts, ransomware shutdowns and continued variability in the worldwide worker and retail marketplace will continue to position our product line front and center for many strategic IT and critical board-level opportunities with customers."
• "We believe that these changes in ownership, closure of product lines and general turmoil in certain product segments represent opportunities for us."
• "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."
• "We also believe that some 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."
• "Our management is committed to improving its internal controls when we have adequate resources to do so."
• "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."

Industry Context

The company operates in the highly competitive and rapidly evolving data security and privacy management industry, which is driven by increasing cyber threats like ransomware, complex global data privacy regulations (e.g., CCPA, GDPR, LGPD), and accelerated cloud adoption. The market is experiencing consolidation through buyouts and take-private transactions, which DATA443 views as opportunities due to potential product line closures and market turmoil. The company positions itself to bridge the gap for enterprises that need data protection but lack specialized privacy and security expertise, offering turnkey solutions. Its focus on cloud-native technology adoption portals like Microsoft Azure Marketplace and Amazon AWS Marketplace aligns with broader industry trends towards cloud-based security solutions.

Comparison to Industry Standards

• The company's gross profit percentage of 58% in 2024, down from 69% in 2023, suggests a decline in profitability per unit of revenue, which could indicate pricing pressures or increased cost of revenue compared to industry leaders in cybersecurity software.
• The significant accumulated deficit of over $61 million and recurring losses, coupled with a substantial working capital deficiency of $(16.78) million, indicate a financial position far below the stability and profitability typically seen in established, publicly traded cybersecurity firms like Palo Alto Networks, CrowdStrike, or Zscaler.
• The reliance on debt financing, including convertible notes with high interest rates and default provisions, and the continuous issuance of common stock for debt conversion, suggest a capital structure that is less robust and more dilutive than industry peers with stronger balance sheets and access to more conventional, less costly capital.
• The auditor's 'going concern' opinion is a critical red flag, indicating severe financial distress not commonly found in healthy, publicly traded companies in the cybersecurity sector, which are generally characterized by strong growth, positive cash flows, and robust balance sheets.
• While the acquisition of Cyren assets (threat intelligence, URL categorization, email security) is a strategic move, the financial impact and integration challenges, as evidenced by the increased cost of revenue and continued losses, suggest that the benefits are not yet translating into improved financial health comparable to successful industry M&A activities.

Management Changes

Corporate Governance

Legal Proceedings

• The company is not presently a party to any legal proceedings that, in the opinion of management, are likely to have a material adverse effect on its business.
• The company may from time to time be involved in various claims and legal proceedings of a nature believed to be normal and incidental to its business, including product liability, intellectual property, employment, personal injury, and other general claims.

Related Party Transactions

• Jason Remillard, the CEO and sole director, holds 149,492 shares of Series A Preferred Stock and 402,627 shares of Common Stock, giving him voting control over all matters submitted to shareholders.
• During 2024, the CEO paid $260,648 in operating expenses on the company's behalf, and the company repaid $405,541 to the CEO.
• As of December 31, 2024, the company owed $144,303 to related parties, down from $341,437 as of December 31, 2023.
• In 2023, the company borrowed $19,700 from the CEO and $150,000 from the CFO. The CEO paid $194,735 in operating expenses on the company's behalf, and the company repaid $193,560 to the CEO.
• The company has not adopted formal policies and procedures for the review, approval, or ratification of transactions with executive officers, directors, and significant stockholders, but intends to establish them in the future.
• On a moving forward basis, the sole director (Jason Remillard) will continue to approve any related party transactions.

Stakeholder Impact

• **Shareholders**: Face significant dilution risk from ongoing and future equity issuances for debt conversion and capital raises. The 'going concern' warning indicates a high risk of losing their entire investment. The CEO's concentrated voting power limits minority shareholder influence.
• **Employees**: The company had 19 full-time, 1 part-time, and 10 independent contractors as of April 1, 2025. The 2023 Equity Incentive Plan aims to attract and retain talent, potentially benefiting employees through equity opportunities. However, the company's financial instability could pose job security risks.
• **Customers**: The company's focus on product development, strategic acquisitions (like Cyren assets), and customer success operations aims to provide enhanced data security and privacy solutions. However, the financial instability and internal control weaknesses could raise concerns about long-term service continuity and data integrity.
• **Creditors**: Holders of secured debt face risks due to the company's recurring losses, negative working capital, and numerous defaulted convertible notes. The security interests in all company assets provide some protection, but the overall financial health is precarious.
• **Suppliers**: May face payment delays or increased risk due to the company's liquidity challenges and negative working capital position.

Next Steps

• Further integrate the suite of data security, ransomware protection, and privacy products.
• Offer products alone or in combination to enterprise customers directly and via partner channels.
• Position products to meet challenges related to data privacy concerns, security breaches, expanding data storage, and telework/telehealth/remote learning requirements.
• Aggressively pursue acquisitions of other cybersecurity software and service providers focused on the data security sector, targeting companies with steady client bases or complementary offerings.
• Increase spending on research and development to drive innovation, improve existing products, and deliver new products.
• Proactively identify and solve the data security needs of clients.
• Capitalize on demand by continually developing and curating attractive and relevant products and services for established and new customers.
• Expand sales capacity by adding sales and marketing employees, with a heavy focus on customer success and leveraging existing customer relationships.
• Continue to onboard to cloud-native technology adoption portals such as Microsoft Azure Marketplace and Amazon AWS Marketplace.
• Raise additional capital through debt or equity financing to fund ongoing operations and execute the business plan.
• Remediate material weaknesses in internal control over financial reporting by hiring and training additional personnel, using third-party specialists, and commissioning frequent reconciliations of significant accounts using independent auditors.
• Establish audit and compensation committees comprised only of independent directors upon listing on The Nasdaq Capital Market.
• Adopt formal policies and procedures for the review, approval, or ratification of related party transactions once sufficient resources are available and additional directors are appointed.

Key Dates

Recommendation

Keywords

Data Security, Privacy Management, Cybersecurity, Ransomware Recovery, Data Classification, Threat Intelligence, Cloud Security, SaaS, Compliance, GDPR, CCPA, LGPD, Enterprise Software, SEC Filing, 10-K/A, Going Concern, Dilution, Convertible Debt, OTC Pink, Asset Acquisition, Internal Controls