DATA443 RISK MITIGATION, INC. The following discussion and analysis of the results of operations and financial
condition for the six 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
Overview
Our company was incorporated as
The share exchange with Rebound Rubber (and other transactions occurring in
Prior to 2001 we had no revenues. In 2001 and 2002 revenues were derived from management services rendered to a rubber recycling company.
20
In
In
We were effectively dormant for a number of years. In or around
In or around
In
In
In
In
21
On or about
On or about
On or around
On
On
On
On
22
On
On
On
On
On
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23
On
(1) Amendment of our articles of incorporation (the "Articles of Incorporation") to provide for a decrease in the authorized shares of the Company's common stock from 1,800,000,000 to a number of not less than 10,000,000 and not more than 1,000,000,000 (the "Authorized Common Stock Reduction"), at any time prior to the one year anniversary of the filing of the Definitive Information Statement on Schedule 14C with respect to these actions the "Definitive Information Statement"), with the Board of Directors of the Company (the "Board") having the discretion to determine whether or not the Authorized Common Stock Reduction is to be effected, and if effected, the exact number of the Authorized Common Stock Reduction within the above range.
(2) That the Board be authorized to implement through the amendment to our Articles of Incorporation a reverse stock split of the Company's Common Stock by a ratio of not less than 1-for-10 and not more than 1-for-2,000, (the "Reverse Split"), at any time prior to the one year anniversary of the filing of the Definitive Information Statement, with the Board having the discretion to determine whether or not the Reverse Split is to be effected, and if effected, the exact ratio for the Reverse Split within the above range.
On
On
As of
The 1-for-2,000 Reverse Stock split was processed by
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The Company is a leader in data security and privacy management (a critical element of IT security), providing solutions for All Things Data Security™, across the enterprise and in the cloud. Trusted by over 170 clients, including over 1% of the Fortune 500, the Company provides the necessary visibility and control needed to protect at-scale, obtain compliance objectives, and enhance operational efficiencies. Our clients include leading brand name enterprises in a diverse set of industries, including financial services, healthcare, manufacturing, retail, technology, and telecommunications.
The mounting threat landscape has accelerated security adoption rates and our extensive portfolio of data security and privacy products provide a holistic methodology to data privacy as a new security standard. Our offering is anchored in privacy management, equipping organizations with a seamless approach to safeguarding their data, protecting against attacks, and mitigating the most critical risks.
Data security and privacy legislation is driving significant investment by organizations to offset risks from data breaches and damaging information disclosures of various types. We provide solutions for the marketplace that are designed to protect data via the cloud, hybrid, and on-premises architectures. Our suite of security products focus on protection of: sensitive files and emails; confidential customer, patient, and employee data; financial records; strategic and product plans; intellectual property; and any other data requiring security, allowing our clients to create, share, and protect their data wherever it is stored.
We deliver solutions and capabilities via all technical architectures, and in formats designed for each client. Licensing and subscription models are available to conform to customer purchasing requirements. Our solutions are driven by several proprietary technologies and methodologies that we have developed or acquired, giving us our primary competitive advantage.
We sell substantially all of our products, solutions, and services through a sales model which combines the leverage of channel sales with the account control of direct sales, thereby providing us with significant opportunities to grow our current customer base and successfully 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. While our products serve customers of all sizes in all industries, the marketing focus and majority of our sales focus is on targeting organizations with 100 users or more which can make larger purchases with us over time and have a greater potential lifetime value.
Each of our major product lines provide features and functionality which enable our clients to fully secure the value of their data. This architecture easily 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™, built for the modern enterprise, its
capabilities are 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.
? Data Identification Manager™ (previously marketed as ClassiDocs™ and
FileFacets®), the Company's award-winning 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.
? Data Archive Manager™ (previously marketed as ArcMail®), a leading provider of
simple, secure and cost-effective enterprise data retention management,
archiving and management solutions.
? Sensitive Content Manager™ (previously marketed as ARALOC™), 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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? Data Placement Manager™ (previously marketed as DATAEXPRESS®), the leading
data transport, transformation and delivery product trusted by leading
financial organizations worldwide;
? Access Control Manager™ (previously marketed as Resilient Access™), 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.
? Data Identification Manager™ (previously marketed as ClassiDocs for
Blockchain), 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 ClassiDocs™ to do the delivery
portions of GDPR and CCPA as well as process Data Privacy Access Requests -
removal request - with inventory by ClassiDocs™; enables the full lifecycle of
Data Privacy Access Requests, Remediation, Monitoring and Reporting.
? IntellyWP, a leading purveyor of user experience enhancement products for
webmasters for the world's largest content management platform, WordPress.
? Data443® Chat History Scanner, which scans chat messages for compliance,
security, PII, PI, PCI & custom keywords.
? GDPR Framework, CCPA Framework, and LGPD Framework WordPress Plugins, with
over 30,000 active site owners combined, enables organizations of all sizes to
comply with European, California and Brazilian privacy rules and regulations.
COVID-19 Update
The Company continues to closely monitor developments and is taking steps to mitigate the potential risks related to the COVID-19 pandemic to the Company, its employees and its customers. The extent to which the COVID-19 pandemic will impact our business and operations will depend on future developments that are highly uncertain. While in the near-term we may experience reductions in our billing and revenue growth rates, we are proactively managing expenditures, including reductions of non-critical and discretionary expenses, while preserving strategic investment in sales capacity and still seeking new acquisition targets and opportunities. To protect our employees while continuing to provide the services needed by our clients the Company continues to limit customer contact, and continues to minimize employee contact with other employees by having our employees work remotely while they shelter in place as required by local regulations. The dedication of our employees and their work ethic have allowed us to continue providing critical services to our customers during these challenging times.
Due to the pandemic, we have been forced to adapt and change the way we have historically operated. At the end of the first quarter of 2020, we temporarily closed our office and instructed our employees to work remotely as a precautionary measure intended to minimize the risk of the virus to them, our customers, partners, and the communities in which we operate. Towards the end of the second quarter of 2021, we cautiously and gradually started to open our office. While we did not require employees to work from our office, we did ensure all required adjustments were made and all local regulations and recommendations were met to ensure the safety of our employees should they voluntarily choose to work from our office. As part of the move to remote work and virtual-only customer experience, we have had to postpone or cancel customer and industry events, as well as travel to visit potential customers, or conduct them virtually. We cannot predict with certainty the impact these changes may have on our sales.
We believe that the impact of COVID-19 has increased the long-term opportunity that we see to help our customers protect their data and detect threats, as well as achieve regulatory compliance. Nevertheless, in the early stages of the pandemic, we experienced some negative impact on our results of operations in the last two weeks of the first quarter of 2020, as we believe our customers' focus turned primarily to the safety of their employees and to positioning themselves to operate under a work-from-home environment. However, since that time, we have seen companies pivot from that emergency mode to become more focused on the elevated risks associated with having a highly distributed workforce. Companies around the world now have the majority of their employees working from potentially vulnerable home networks, accessing critical on-premises data stores and infrastructure through VPNs and in cloud data stores. We believe that the COVID-19 pandemic has significantly increased the threat of cybercrime, and that we remain positioned to help our clients protect against data and infrastructure against cybercrime. This has resulted in increase in traffic to our website. During the third and fourth quarters of 2020, as existing customers and prospects continued to adjust to the new working practices, we saw some of this interest convert into new business or the expansion of existing business. While we are encouraged by these trends, we continue to see corporate expenditures subject to elevated scrutiny in the current environment. We have also been unable to travel to meet with prospective new clients, which has impacted our ability to convert prospects into new clients. We anticipate that as the COVID-19 pandemic continues, it will continue to be challenging to estimate conversion rates of prospective business into actual new client.
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Through
Through
CARES Act
The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was
enacted on
Additionally, the Company has applied for, and has received, funds under the
Paycheck Protection Program (the "PPP Loan") after the period covered in these
financial statements in the amount of
The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The promissory note issued in connection with the PPP Loan contains events of default and other provisions customary for a loan of this type.
The PPP Loan is being used to retain our employees, as well as for other permitted uses under the terms and conditions of the PPP Loan.
The Company also received a
Recent Accounting Pronouncements
From time-to-time, new accounting pronouncements are issued by the
27 Critical Accounting Policies
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements which we have
been prepared in accordance with
Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material.
These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the consolidated financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.
Actual results could differ from those estimates.
While our significant accounting policies are described in more detail in Note 2 of our consolidated Quarterly financial statements included in this Quarterly Report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements:
Assumption as a Going Concern
Management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. However, given our current financial position and lack of liquidity, there is substantial doubt about our ability to continue as a going concern.
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.
28 Beneficial Conversion Feature
The issuance of the convertible debt issued by the Company generated a beneficial conversion feature ("BCF"), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, resulting in a discount on the convertible debt (recorded as a component of additional paid in capital).
Fair Value of Financial Instruments
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined as follows:
? Level 1-Observable inputs that reflect quoted market prices (unadjusted) for
identical assets or liabilities in active markets;
? Level 2-Observable inputs other than quoted prices in active markets that are
observable either directly or indirectly in the marketplace for identical or
similar assets and liabilities; and
? Level 3-Unobservable inputs that are supported by little or no market data,
which require the Company to develop its own assumptions.
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
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, remeasurement 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.
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Deferred Tax Assets and Income Taxes Provision
The Company adopted the provisions of paragraph 740-10-25-13 of the FASB Accounting Standards Codification. Paragraph 740-10-25-13 which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under paragraph 740-10-25-13, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Paragraph 740-10-25-13 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of paragraph 740-10-25-13.
The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its balance sheets and provides valuation allowances as management deems necessary.
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management's opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Management assumes that the realization of the Company's net deferred tax assets resulting from its net operating loss ("NOL") carry-forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses and presently has no revenue-producing business; (b) general economic conditions; and, (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors.
Outlook
Our continued objective is to further integrate our growing suite of proven industry leading data security and privacy offerings and deliver the combined offering to our growing stable of enterprise and medium-sized clients directly and via our partner channel. Data privacy concerns continue to grow lockstep with security breaches and ongoing expansion of data storage, consumption and spread of telework, telehealth and remote learning requirements.
We have utilized, and expect to continue to utilize, acquisitions to contribute to our long-term growth objectives. During fiscal 2021 we hope to continue to acquire complimentary business assets and client bases. Some of the key element to our growth strategy include, without limitation:
? Improve and extend our technological capabilities, domestically and
internationally.
? Further integrate our product offerings to provide an unmatched data privacy
platform.
? Focus on underserved markets, such as sports teams (at all levels) and
medium-sized businesses.
? Deliver capabilities via unconventional channels, including open-source and
"freemium" and trial subscription models.
? Leverage our existing relationships for professional references, association
and internal private industry level promotional events and other high-value
and successful product positional activities.
? Be prepared to capture and execute on opportunities in the acquisition
marketplace.
? Continued focus on net bookings with minimum long-term contract value.
? Improve SaaS Services with high increasing 'attach' rate for additional
capabilities.
? Increase year-over-year conversions from perpetual one-time contract sales to
multiyear recurring subscription revenue agreements.
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While we report primarily 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 entered into 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.
In
While we are actively managing our response to the COVID-19 pandemic, its impact on our year 2021 results and beyond is uncertain. We continue to conduct business as usual with modifications to employee travel, employee work locations, customer interactions, and cancellation of certain marketing events, among other things. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, and stockholders. The extent to which the COVID-19 pandemic may impact our longer-term operational and financial performance remains uncertain. Furthermore, due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods, if at all. The extent of the impact of the COVID-19 pandemic will depend on several factors, including the pace of reopening the economy around the world; the possible resurgence in the spread of the virus; the development cycle of therapeutics and vaccines; the impact on our customers and our sales cycles; the impact on our customer, employee, and industry events; and the effect on our vendors. Please see Item 1A, "Risk Factors," in this Quarterly Report for a further description of the material risks we currently face, including the risks related to the COVID-19 pandemic.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
Revenue
We recognized
General and Administrative Expenses
General and administrative expenses for the three and six months ended
31
Sales and Marketing Expenses
Sales and marketing expense for the three and six months ended
Net Income (Loss)
The net loss for the three and six months ended
Provision for Income Tax
No provision for income taxes was recorded in either the three and six months
ended
Related Party Transactions
The following individuals and entities have been identified as related parties
based on their affiliation with our CEO and sole director,
Jason Remillard
The following amounts were owed to related parties, affiliated with the CEO and Chairman of the Board, at the dates indicated:
June 30 ,December 31, 2021 2020
CASH FLOW FOR THE SIX MONTHS ENDED
Liquidity and Capital Resources
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
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As of
As of
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.
We are 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. We also continue to monitor the effects COVID-19 could have on our operations and liquidity including our ability to collect account receivable timely from our customers due to the economic impacts COVID-19 could have on the general economy. 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 shareholders will be reduced, shareholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock.
Investing Activities
During the six months ended
Financing Activities
During the six months ended
We are dependent upon the receipt of capital investment or other financing to fund our ongoing operations and to execute our business plan for growth in the data security market. If continued funding and capital resources are unavailable at reasonable terms, we may not be able to implement our plan of operations.
33 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 six 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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