DATA443 RISK MITIGATION, INC. The following discussion and analysis of the results of operations and financial
condition for the three months ended
All references to "Data443", "we", "our," "us" and the "Company" in this Item 2
refer to
The discussion in this section contains forward-looking statements. These
statements relate to future events or our future financial performance. We have
attempted to identify forward-looking statements by terminology such as
"anticipate," "believe," "can," "continue," "could," "estimate," "expect,"
"intend," "may," "plan," "potential," "predict," "should," "would" or "will" or
the negative of these terms or other comparable terminology, but their absence
does not mean that a statement is not forward-looking. These statements are only
predictions and involve known and unknown risks, uncertainties and other
factors, which could cause our actual results to differ from those projected in
any forward-looking statements we make. Several risks and uncertainties we face
are discussed in more detail under "Risk Factors" in Part I, Item 1A of the Form
10 filed by the Company with the
On
Overview
The Company believes that it is a leader in data security and privacy management, providing solutions for All Things Data Security®, across the enterprise and in the cloud. Trusted by over 10,000 clients, the Company provides the visibility and control needed to protect data at-scale, regardless of format, location or consumer and to facilitate fast changing global data privacy requirements. Our clients include leading brand name enterprises in a diverse set of industries, including financial services, government, healthcare, manufacturing, retail, technology, and telecommunications.
The mounting ransomware and data threat landscape has accelerated data security adoption rates and we believe that our extensive portfolio of data security and privacy products provide an encompassing solution set to data privacy as the new security standard. Our offering is anchored in privacy management, equipping organizations with a seamless approach to safeguard their data, protect against attacks and mitigate the most critical risks.
Data security and privacy legislation is driving significant investment by organizations to offset risks from data breaches and information breaches of various types. We provide solutions for the marketplace that are designed to protect data that is stored in the cloud, hybrid, on-premises and with remote employees. Our suite of security products focuses on protection of sensitive files and emails, confidential customer, patient and employee data, financial records, strategic and product plans, intellectual property and other data requiring protection, allowing our clients to create, share and protect their sensitive data wherever it is stored and however it is used.
20
We deliver solutions and capabilities for cloud vendors (including Microsoft
Azure, Google Cloud Platform (GCP) and
We sell substantially all our products, solutions 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 also make use of channel partners, distributors, and resellers which sell to end-user customers. This approach allows us to maintain close relationships with our customers and benefit from the global reach of our channel 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 is on targeting 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
As cloud adoption continues to accelerate, data privacy requirements get more complex, and data security becomes more challenging, we believe that Data443 is well positioned to capture market share, continue to lead in strategic data security technologies 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 clients to fully secure their data. This design extends through modular functionalities, giving our clients the flexibility to select the features they require for their business needs and the flexibility to expand their usage simply by adding a license. As the result of a recent rebranding and marketing effort by the Company, the products and services offered by the Company are now marketed under the following names:
? Data443® Ransomware Recovery Manager, a unique offering designed to recover a
workstation immediately upon infection to the last known business-operable
state, without any end user or IT administrator efforts or involvement.
? Data443® Data Identification Manager, the Company's data classification and
governance technology, which supports CCPA, LGPD and GDPR compliance in a
Software-as-a-Service (SaaS) platform that performs sophisticated data
discovery and content search of structured and unstructured data within
corporate networks, servers, content management systems, email, desktops and
laptops.
? Data443® Data Archive Manager, a leading provider of simple, secure and
cost-effective enterprise data retention management, archiving and management
solutions.
? Data443® Sensitive Content Manager , a market leading secure, cloud-based
platform for the management, protection and distribution of digital content to
the desktop and mobile devices, which protects an organization's confidential
content and intellectual property assets from leakage-malicious or
accidental-without impacting collaboration between all stakeholders.
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? Data443® Data Placement Manager, a leading data transport, transformation and
delivery product trusted by leading financial organizations worldwide;
? Data443® Access Control Manager, enables fine-grained access controls across
myriad 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, 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 data
privacy access requests-removal request-with inventory by the Data443® Data
Identification Manager ; enables the full lifecycle of data privacy access
requests, remediation, monitoring and reporting.
? Data443® IntellyWP, user experience enhancement products 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 and custom keywords for large
video conferencing platforms such as Zoom.
? Data443® - GDPR Framework, CCPA Framework, and LGPD Framework WordPress
Plugins, with over 30,000 active site owners combined, helps organizations of
all sizes to comply with European, California and Brazilian privacy rules and
regulations.
CARES Act
The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was
enacted on
Additionally, the Company applied for and received funds under the Paycheck
Protection Program (the "PPP Loan") in the amount of
The Company also received a
22
The Company received a second EID loan from the SBA under the SBA's Economic
Injury Disaster Loan program in the amount of
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
The Company bifurcates 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.
When the Company has 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.
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, re-measurement 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.
23 Outlook
Our continued objective is to further integrate our growing suite of proven industry leading data security, ransomware protection and privacy offerings and deliver the combined offering to our growing base of enterprise clients directly and via our partner channel. Data privacy concerns continue to grow in lockstep with security breaches, ongoing expansion of data storage, and reliance on telework, telehealth and remote learning requirements.
We have relied on and expect to continue to benefit from strategic acquisitions to contribute to our long-term growth objectives. During Fiscal Year 2022 we hope to continue to acquire complementary business assets and client bases. Key elements of our growth strategy include:
? Improving and extending our technological capabilities, domestically and
internationally.
? Further integrating our product offerings to provide a superior data privacy
platform.
? Focusing on underserved markets and medium-sized businesses.
? Delivering capabilities via unconventional channels, including open-source and
"freemium" trial subscription models.
? Leveraging our existing relationships for professional references,
association- and internal private industry-level promotional events and other
high value product positional activities.
? Be prepared to capture and execute on opportunities in the acquisition
marketplace.
? Continued focus on net bookings with growing long-term contract value with
inbuilt ARR increases and pre-paid consumption growth.
? Improve SaaS Services and consumption with high increasing 'attach' rate for
additional capabilities within existing customer relationships we have built
and/or acquired via our aggressive acquisitions program.
? Increase year-over-year conversions from perpetual one-time contract sales to
multiyear recurring subscription revenue agreements.
While we primarily report income based on recognized and deferred revenue, another measurement internally for the business is booked revenues. Management utilizes 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.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
Our operations for the three months endedMarch 31, 2022 and 2021 are outlined below: Three Months Ended March 31, 2022 2021 Change % Revenue$ 612,516 $ 837,868 $ (225,352 ) (27 )% Cost of revenue 199,679 166,994 32,685 20 % Gross Profit 412,837 670,874 (258,037 ) (38 )% Gross Profit Percentage 67 % 80 % (13 )% (16 )% Operating expense 1,093,957 1,528,989 (435,032 ) (28 )% Other expense (1,152,199 ) (1,318,183 ) 165,984 (13 )% Net loss$ (1,833,319 ) $ (2,176,298 ) $ 342,979 (16 )% Revenue
The decrease in revenue was primarily due to increased pull through of deals in
Q4 of 2021 - both by the Company and its clients who took advantage of prepaid
multi-year discounts and also took advantage of multi-year commitments to our
software and SaaS offerings. Significant disruption and distraction in client
operations primarily due to increased pandemic activity in
Cost of revenue
Cost of revenue consists of direct expenses, such as sales commission, shipping, and supplies. We continue to manage a requisite ratio of expenses to revenues model within the company. The increase in cost of revenue was primarily due to an increase in one-time costs, including advertising in national publications and customer outreach.
For the three months endedMarch 31, 2022 and 2021 our operating expenses were as follows: Three Months Ended March 31, 2022 2021 Change % Operating expenses General and administrative$ 973,562 $ 1,433,565 $ (460,003 ) (32 )% Sales and marketing 120,395 95,424 24,971 26 % Total operating expenses$ 1,093,957 $ 1,528,989 $ (435,032 ) (28 )%
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 increase in sales and marketing expense was primarily due to an increase in spot advertising and marketing expenses.
25 Other income (expense)
Other expenses for the three months ended
Net Loss
The net loss for the three months ended
Accumulated Losses
Prior to its first acquisition of ClassiDocs and the company name change to
LIQUIDITY AND CAPITAL RESOURCES
The following table provides selected financial data about our company as of
Working Capital
The following table provides selected financial data about our company as of
March 31, December 31,
2022 2021 Change %
Current assets $ 702,408 $ 1,297,304 $ (594,896 ) (46 )%
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 have also been required to maintain our corporate
existence, satisfy the requirements of being a public company, and have chosen
to become a mandatory filer with the
As of
As of
The revenues generated from our current operations will not be sufficient to fund our 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 the Company can attract additional investment, the future of the Company operating as a going concern is in serious doubt.
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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 the Company, or at all.
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.
Cash Flow
Three Months Ended
March 31,
2022 2021 Change
Cash provided by (used in) operating activities
$ (258,280 ) $ (79,020 ) $ (179,260 ) Cash provided by financing activities$ (919,889 ) $ 456,945 $ (1,376,834 ) Cash on hand$ 182,276 $ 53,060 $ 129,216 Operating Activities
During the three months ended
Investing Activities
During the three months ended
Financing Activities
During the three months ended
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We are dependent upon the receipt of capital investment or other financing to fund our ongoing operations and to 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 Quarterly Report have
been prepared on a going concern basis, which implies that our Company will
continue to realize its assets and discharge its liabilities and commitments in
the normal course of business. Our Company has generated 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. The continuation of
our company as a going concern is dependent upon the ability of our company 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 three months ended
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 the Company will be able to raise any additional capital.
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.
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.
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