10-K: DATA443 Risk Mitigation Reports Widening Losses Amid Revenue Decline and Going Concern Doubts

DATA443 Risk Mitigation, Inc. (ATDS) reported a significant increase in net loss for fiscal year 2024, coupled with a decline in revenue and a substantial working capital deficiency, raising significant doubts about its ability to continue as a going concern.

Summary

• For the fiscal year ended December 31, 2024, DATA443 Risk Mitigation, Inc. reported a net loss of $6,087,182, a 43% increase from the $4,244,708 net loss in 2023.
• Revenue decreased by 13% to $4,872,422 in 2024, down from $5,578,942 in 2023, primarily due to one-time catch-up payments in 2023 related to the Cyren Ltd. asset acquisition and economic uncertainty impacting new business.
• Gross profit declined by 26% to $2,848,799 in 2024 from $3,852,755 in 2023, with the gross profit percentage falling from 69% to 58%.
• The company's working capital deficiency worsened to $(16,781,626) as of December 31, 2024, compared to $(13,377,611) at the end of 2023.
• An accumulated deficit of $61,744,018 was reported as of December 31, 2024, up from $55,656,836 in the prior year.
• 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.
• The company continues to rely on debt and equity financings, including funding from its CEO, to sustain operations.
• Strategic acquisitions, such as the Cyren Ltd. assets, are a primary component of the company's growth strategy, aiming to enhance product offerings and expand the customer base.
• The company is pursuing a Nasdaq listing and has updated its corporate governance documents, including its Articles of Incorporation and Bylaws, and approved a 2023 Equity Incentive Plan in preparation.
• Material weaknesses in internal control over financial reporting were identified, including a lack of segregation of duties, absence of written documentation for internal control policies, and no functioning audit committee or independent directors.

Sentiment

Score: 2

Explanation: The overall sentiment is highly negative due to significant financial distress, including widening net losses, declining revenue, a worsening working capital deficiency, and an explicit 'going concern' doubt from auditors. While there are strategic acquisitions and plans for growth and uplisting, the current financial state and reliance on external funding, coupled with multiple debt defaults, indicate severe challenges.

Positives

• The company acquired certain assets of Cyren Ltd. in December 2023, including threat intelligence, URL categorization, and email security services, which are expected to enhance its product portfolio and accelerate next-generation solutions.
• Cyren's technology, based on AI, machine learning, and big-data analytics, is believed to enable real-time threat identification and mitigation, strengthening the company's competitive position.
• The company continues to see organic growth in increased consumption of services with storage or volume components, reflected in continuing Annual Recurring Revenue (ARR) growth.
• Net cash provided by operating activities increased to $1,275,006 in 2024 from $782,101 in 2023.
• The company is actively working towards a Nasdaq Capital Markets uplisting, which is expected to reduce fundraising costs and increase the value of equity components for acquisitions.
• A 2023 Equity Incentive Plan was approved, reserving 800,000 shares of Common Stock to attract, retain, and motivate talent.

Negatives

• Net loss increased by 43% to $6,087,182 in 2024 from $4,244,708 in 2023.
• Revenue decreased by 13% to $4,872,422 in 2024, down from $5,578,942 in 2023.
• Gross profit decreased by 26% to $2,848,799 in 2024, and the gross profit percentage declined from 69% to 58%.
• The working capital deficiency worsened to $(16,781,626) in 2024 from $(13,377,611) in 2023.
• The company has an accumulated deficit of $61,744,018 as of December 31, 2024, indicating a history of losses.
• The independent auditor's report includes an explanatory paragraph raising substantial doubt about the company's ability to continue as a going concern.
• Several convertible notes are in default, with outstanding balances ranging from $16,773 to $812,500, and some carrying high default interest rates (up to 24%).
• The company's common stock is thinly traded on the OTC Pink, making it difficult for investors to liquidate their investment and potentially not reflecting the company's true value.
• The company is highly dependent on its CEO, Jason Remillard, for continued services and funding, and there is no assurance of future financing from him on satisfactory terms.
• The company has secured debt, which could limit its ability to obtain additional financing and place it at a competitive disadvantage.

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.
• The company faces intense competition in its market, especially from larger, well-established companies, 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 loss of whom 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, which could slow growth.
• Inability to maintain successful relationships with channel partners could adversely affect the business.
• Breaches in security, cyberattacks, or other cyber risks could expose the company to significant liability and harm its business and reputation.
• 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 compliance challenges.
• 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.
• 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, which could disrupt operations.
• 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 remediate weaknesses in internal accounting controls could result in material misstatements in financial statements and limit investor protections.
• The company has secured debt, which could have adverse consequences, including limiting additional financing and flexibility.
• The common stock will rank junior to all liabilities to third-party creditors and any senior preferred stock in the event of bankruptcy, liquidation, or winding up.
• 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 CEO has the ability to control all matters submitted to stockholders for approval, limiting minority stockholders' influence.
• The company will continue to incur substantial costs as a public reporting company, requiring management to devote significant time to compliance initiatives.
• Future issuance of additional shares of common stock may have a dilutive effect on current stockholders.
• Adverse or uncertain macroeconomic or geopolitical conditions or reduced IT spending may adversely impact business, revenues, and profitability.
• Public health threats or outbreaks of communicable diseases could have a material adverse effect on operations and overall financial performance.
• Prolonged economic uncertainties or downturns could materially adversely affect the business.

Future Outlook

The company's objective is to further integrate its suite of data security, ransomware protection, and privacy products, offering them to enterprise customers directly and via partner channels. It aims to meet challenges related to data privacy, security breaches, expanding data storage, and remote work requirements. The company expects to continue benefiting from strategic acquisitions of products, talent, and established customer bases to contribute to long-term growth. Management plans to continue growing through strategic acquisitions and expanding sales across subsidiaries, with a heavy focus on renewals and customer success. The company anticipates incurring costs related to SEC reporting and operations, requiring additional capital through debt or equity financing, with an expectation that fundraising costs will decrease 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 intend to aggressively pursue acquisitions of other cybersecurity software and services providers focused on the data security sector."
• "We intend to increase our spending on research and development to drive innovation to improve existing products and deliver new products."
• "We believe that continuing to expand our sales force will be a key to achieving our expansion and growth."
• "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."
• "Management has determined that additional capital will be required in the form of equity or debt securities."
• "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. It highlights increasing threats like ransomware, growing cloud adoption, and complex global data privacy regulations (CCPA, LGPD, GDPR) as key market drivers. The industry is experiencing consolidation through buyouts and acquisitions, which the company views as opportunities. Its focus on comprehensive solutions for cloud, on-premises, and hybrid environments, along with OEM services for major security providers, positions it within the broader cybersecurity and IT infrastructure ecosystem. The company aims to capitalize on the accelerated adoption of data security solutions driven by these market conditions.

Comparison to Industry Standards

• NA The document does not provide specific comparable companies, projects, or results to global benchmarks. It generally discusses competition from larger software vendors and smaller point solution companies without naming specific entities or providing comparative performance metrics.

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 President, Chief Executive Officer, and sole director, holds 149,492 shares of Series A Preferred Stock, giving him voting control over all matters submitted to shareholders.
• In 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, $144,303 was owed to related parties (primarily the CEO).
• 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. As of December 31, 2023, $341,437 was owed to related parties.
• The company has historically relied on funding from Jason Remillard for working capital and expects to continue to be dependent on him for funding and capital resources.
• The company intends to establish formal policies and procedures for the review, approval, or ratification of related party transactions in the future, once it has sufficient resources and has appointed additional directors.

Stakeholder Impact

• **Shareholders:** Face significant dilution risk from future equity issuances and conversions of outstanding debt. The common stock is thinly traded and subject to penny stock rules, limiting liquidity. The CEO's concentrated voting power limits minority shareholder influence. There is substantial doubt about the company's ability to continue as a going concern, posing a risk of losing their entire investment.
• **Employees:** The company had 19 full-time employees, 1 part-time employee, and 10 independent contractors as of April 1, 2025. The 2023 Equity Incentive Plan aims to attract, retain, and motivate employees through equity ownership opportunities. However, the company's financial instability and going concern doubt could impact job security and future compensation.
• **Customers:** The company aims to provide essential data security and privacy solutions, which are in high demand. However, financial instability and potential operational disruptions could affect service quality and continuity. The acquisition of Cyren assets is intended to enhance product offerings and customer value.
• **Creditors:** The company has substantial current liabilities and a significant working capital deficiency. Multiple convertible notes are in default, indicating a high risk for creditors. Secured debt further prioritizes certain creditors over common stockholders in liquidation.

Next Steps

• Continue to grow the business through strategic acquisitions.
• Expand selling across subsidiaries and affiliated companies.
• Increase spending on research and development to drive innovation and improve existing products.
• Expand sales capacity by adding sales and marketing employees, with a focus on customer success and leveraging existing customer relationships.
• Onboard to cloud-native technology adoption portals such as Microsoft Azure Marketplace and Amazon AWS Marketplace.
• 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.
• Establish formal policies and procedures for related party transactions once sufficient resources and additional independent directors are in place.
• Continue efforts towards listing common stock on Nasdaq, which includes establishing audit and compensation committees comprised of independent directors.

Key Dates

Recommendation

Keywords

Data Security, Privacy Management, Cybersecurity, Ransomware Recovery, Data Classification, Data Governance, Threat Intelligence, Email Security, Web Security, Cloud Security, SaaS, Compliance, GDPR, CCPA, LGPD, Enterprise Software, SEC Filing, 10-K, Going Concern, Convertible Notes, Intellectual Property, Acquisitions