10-Q: Data443 Risk Mitigation Reports Increased Revenue but Widens Net Loss in Q2 2024

Data443 Risk Mitigation reports increased revenue year-over-year, driven by the Cyren acquisition, but also a significant increase in net loss due to higher costs and interest expenses.

Summary

• Data443 Risk Mitigation, Inc. reported financial results for the second quarter of 2024, showing an increase in revenue compared to the same period in 2023.
• Revenue for the three months ended June 30, 2024, was $1,149,085, up from $619,040 in 2023, primarily due to the acquisition of intellectual property from Cyren Ltd.
• The company's cost of revenue increased significantly to $807,071 from $244,881 in the same period, attributed to costs associated with the Cyren acquisition.
• Operating expenses decreased to $1,095,799 from $1,699,878, mainly due to a reduction in general and administrative expenses.
• The company experienced a net loss of $1,510,797 for the quarter, compared to a net income of $89,540 in the prior year, driven by increased costs and interest expenses.
• For the six months ended June 30, 2024, revenue increased to $2,660,143 from $1,998,846 in 2023.
• The net loss for the six-month period was $3,139,956, compared to a net loss of $648,353 in the prior year.
• The company's management has identified material weaknesses in internal control over financial reporting.
• The company is pursuing acquisitions and focusing on organic growth, particularly targeting organizations with 500 or more users adopting cloud services.
• Data443 is actively working to reduce the operating footprint of the acquired Cyren assets.

Sentiment

Score: 4

Explanation: The document presents a mixed picture. While revenue increased, the significant increase in net loss and the identification of material weaknesses in internal control over financial reporting weigh heavily on the sentiment. The need for additional capital also adds to the negative outlook.

Positives

• Revenue increased by 86% for the three months ended June 30, 2024, reaching $1,149,085, driven by the Cyren acquisition.
• Operating expenses decreased by 36% to $1,095,799 due to a reduction in general and administrative expenses.
• For the six months ended June 30, 2024, revenue increased to $2,660,143, a 33% increase year-over-year.
• The company is pursuing acquisitions and focusing on organic growth, particularly targeting organizations with 500 or more users adopting cloud services.
• Data443 is actively working to reduce the operating footprint of the acquired Cyren assets.

Negatives

• Cost of revenue increased by 230% to $807,271 due to the data center cost footprint from the Cyren acquisition.
• Net loss increased to $1,510,797 for the quarter, compared to a net income of $89,540 in the prior year.
• The net loss for the six-month period was $3,139,956, compared to a net loss of $648,353 in the prior year.
• The company's management has identified material weaknesses in internal control over financial reporting.

Risks

• The company has identified material weaknesses in its internal control over financial reporting, which could lead to misstatements in financial reporting.
• The company has a history of losses and may incur future losses, which may prevent it from attaining profitability.
• The company requires additional capital to fund its operations, and there is no assurance that it will be able to raise the necessary capital.
• The company faces intense competition in its market, and it 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 company's common stock is currently quoted on the OTC Pink and is thinly traded, reducing the ability to liquidate investments.
• The company has shares of preferred stock that have special rights that could limit its ability to undertake corporate transactions.
• The company is in default of a promissory note related to the Centurion acquisition, and the acquisition is still not completed.
• A lawsuit was filed against Data443's subsidiary by the Appointed Receiver for the Assets of Cyren Ltd.

Future Outlook

The company aims to further integrate its suite of data security, ransomware protection, and privacy products and offer them to enterprise customers directly and via partner channels, positioning its products to meet the challenges of data privacy, security breaches, data storage expansion, and remote work requirements.

Management Comments

• Management uses booked revenues to track contract value growth and initial contract value per customer.
• Management has determined that additional capital will be required in the form of equity or debt securities.

Industry Context

The company operates in the data security and privacy management solutions market, which is experiencing increased demand due to the mounting ransomware landscape and other threats to data.

Comparison to Industry Standards

• The document does not provide specific comparisons to industry standards or benchmarks.
• Without specific benchmarks, it's difficult to assess Data443's performance relative to competitors like Palo Alto Networks, CrowdStrike, or smaller, specialized firms in data privacy and security.
• A thorough industry comparison would require analyzing metrics such as customer acquisition cost, recurring revenue growth, and customer retention rates against those of similar companies.

Corporate Governance

Legal Proceedings

• On August 9, 2024, Plaintiff Guy Gissin, Adv., in his capacity as the Appointed Receiver for the Assets of Cyren Ltd. (Plaintiff) filed a lawsuit against Data443 Risk Mitigation, Inc., a North Carolina corporation, the Company's wholly-owned subsidiary (the Subsidiary), in US District Court Eastern District of North Carolina, naming the Subsidiary as the defendant (the Complaint).

Related Party Transactions

• During the six months ended June 30, 2024, the Company borrowed $0 from our CEO, our CEO paid operating expenses of $ 154,862 on behalf of the Company and the Company repaid $ 200,297 to our CEO.
• As of June 30, 2024 and December 31, 2023, we had due to related party transactions in the amounts of $ 291,002 and $ 341,437 , respectively.

Stakeholder Impact

• Shareholders may be concerned about the increased net loss and the identified material weaknesses in internal control.
• Employees may be affected by potential cost-cutting measures or restructuring efforts to improve financial performance.
• Customers may be impacted by any changes in product offerings or service quality as the company integrates the Cyren assets and focuses on strategic growth.
• Creditors may be concerned about the company's ability to repay its debts, given its negative working capital and accumulated deficit.

Next Steps

• The company intends to aggressively pursue acquisitions of other cybersecurity software and service providers focused on the data security sector.
• The company intends to increase its spending on research and development to create new and innovative products and to improve existing products.
• The company intends to expand its sales capacity by adding sales and marketing employees, with heavy focus on customer success and leveraging existing customer relationships.

Key Dates

Keywords

revenue, net loss, Data443, Cyren, acquisition, financial results, internal control, promissory notes, convertible notes, risk mitigation