Business Context and Reporting Period
Data Storage Corporation (the "Company") filed this Form 8-K on February 10, 2021, to disclose the entry into a Material Definitive Agreement. On February 4, 2021, the Company entered into an Agreement and Plan of Merger to acquire Flagship Solutions, LLC ("Flagship"), a provider of IBM solutions, managed services, and cloud solutions worldwide. The transaction is expected to close on or before May 31, 2021.
Key Financial Metrics and Transaction Terms
The filing details the financial structure of the proposed acquisition rather than the Company's historical financial performance.
- Total Consideration: Up to $10,500,000.
- Cash Component: $5,550,000, subject to reductions for excluded liabilities and net working capital adjustments.
- Stock Component: Up to $4,950,000 in common stock, subject to valuation adjustments based on Flagship's 2018-2020 financial statements.
- Indemnification Cap: The Company's indemnification obligations for breaches of representations and warranties are capped at 20% of the merger consideration, except for Fundamental Representations or fraud, which are uncapped.
- Termination Fee: If the deal fails due to financing issues or lack of Nasdaq listing, the Company must pay up to $100,000 in transaction expenses.
The filing text does not provide clear values for the Company's current revenue, profit, cash flow, margins, debt, or liquidity.
Material Changes and Strategic Rationale
This filing represents a material change in the Company's business strategy through the proposed acquisition of Flagship. The Company anticipates the merger will create synergies with its existing IBM business and improve operational efficiency. The combined entity aims to become a comprehensive one-stop provider for multicloud IT solutions, including Infrastructure as a Service (IaaS), Disaster Recovery as a Service (DRaaS), Cyber Security as a Service (CSaaS), and Data Analytics as a Service.
Outlook, Risks, and Contingencies
Management Commentary: Management believes the merger will enable cross-selling solutions to enterprise and middle-market customers.
Key Risks and Contingencies:
- Financing and Listing: The Merger Agreement may be terminated if the Company cannot obtain sufficient financing or if its capital stock is not listed on the Nasdaq Capital Markets by the Outside Closing Date.
- Valuation Adjustments: The final consideration is contingent on the "Flagship Valuation" derived from audited financial statements. If the valuation is less than $10,500,000, the stock portion is reduced, and a potential cash adjustment may be required post-closing based on the 2021 Audit.
- Working Capital: The cash consideration is subject to dollar-for-dollar adjustments based on Flagship's net working capital at closing versus the target amount.
- Executive Retention: Flagship CEO Mark Wyllie will continue as CEO of Flagship and join the Company's Board, with his employment agreement guaranteed by the Company.
Investor Verification Checklist
- Verify the Company's ability to secure the necessary financing to close the transaction by May 31, 2021.
- Confirm the Company's listing status on the Nasdaq Capital Markets, as failure to list could trigger termination.
- Review the full text of the Merger Agreement (Exhibit 10.1) for specific definitions of "excluded liabilities" and the target net working capital amount.
- Assess the impact of the potential issuance of up to $4,950,000 in new common stock on existing shareholder dilution.
- Monitor the results of the 2021 Audit of Flagship, which could trigger additional cash payments to Equityholders.