Data Storage Corporation: Q2 2022 Form 10-Q Summary
Business Context and Reporting Period
Data Storage Corporation provides subscription-based disaster recovery, cloud infrastructure, cybersecurity, managed services, software, equipment, and voice and data solutions. The company serves healthcare, financial, distribution, manufacturing, construction, education, and government customers through infrastructure located in seven technical centers.
This unaudited Form 10-Q covers the three and six months ended June 30, 2022, with comparisons to the corresponding 2021 periods. The Flagship Solutions acquisition, completed May 31, 2021, materially affects comparability.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $4.83 million | $3.53 million | $13.48 million | $6.10 million |
| Gross profit | $1.85 million | $1.51 million | $4.50 million | $2.66 million |
| Gross margin | 38.3% | 42.7% | 33.3% | 43.6% |
| Operating loss | $(0.74) million | $(0.10) million | $(0.56) million | $(0.06) million |
| Operating margin | (15.4)% | (2.7)% | (4.1)% | (1.0)% |
| Net income attributable to common stockholders | $(0.85) million | $0.11 million | $(0.69) million | $0.08 million |
| Adjusted EBITDA | $0.03 million | $0.25 million | $0.64 million | $0.59 million |
| Basic and diluted EPS | $(0.13) | $0.03 | $(0.10) | $0.02 |
- Second-quarter revenue increased 37%, primarily from Flagship and higher monthly subscription revenue. Six-month revenue increased 121%.
- Gross profit increased in dollars, but gross margin declined because cost of sales grew faster than revenue.
- Second-quarter SG&A was $2.59 million, up 62%, and six-month SG&A was $5.05 million, up 86%. The increases primarily reflected personnel, advertising, commissions, professional fees, and costs associated with Flagship and Nasdaq operations.
- Cash and cash equivalents were $11.21 million at June 30, 2022, compared with $12.14 million at December 31, 2021.
- Working capital was $11.77 million at June 30, 2022, compared with $12.08 million at year-end 2021.
- Total assets were $26.36 million and total liabilities were $3.90 million at June 30, 2022. Stockholders’ equity was $22.46 million, including a $(0.13) million non-controlling interest.
- Finance lease liabilities totaled $2.00 million, including $1.13 million current and $0.87 million long-term. Operating lease liabilities totaled $0.34 million.
Cash Flow, Liquidity, and Capital Resources
- Operating activities used $0.21 million during the first six months of 2022, compared with $0.83 million provided in the 2021 period.
- Investing activities used $0.05 million, primarily for capital expenditures. The prior-year period included $5.94 million of cash consideration for the Flagship acquisition.
- Financing activities used $0.66 million, primarily for repayments of finance lease obligations, including $0.49 million of related-party lease repayments.
- Cash declined by $0.92 million during the first six months of 2022, ending at $11.21 million.
- Management stated that liquidity needs may require renegotiation of related-party equipment leases, reductions in advertising and marketing, renegotiation of the Nexxis arrangement, or reductions in salaries if operating conditions or available information change.
- Management reported subscription contract value exceeding $10 million and a baseline annual recurring revenue of more than $12 million entering 2022. These are management estimates and are not reconciled in the filing to reported revenue.
Material Changes and Unusual Items
- Revenue growth was led by equipment and software revenue, which increased 413% for the six-month period, and managed services revenue, which increased 171%.
- The company incurred $0.55 million of stock-based compensation in the first six months of 2022, compared with $0.08 million in the prior-year period.
- The prior-year results included a $0.31 million gain from forgiveness of debt; no comparable gain was recorded in 2022.
- Common shares outstanding increased to 6,822,127 at June 30, 2022, from 6,693,793 at December 31, 2021. The increase included 125,000 restricted shares issued to employees and 3,334 shares issued upon option exercises.
- The company entered into additional finance leases for technical equipment, including related-party leases with Systems Trading, which is owned by the company’s president.
- Goodwill was $6.56 million at June 30, 2022, and net intangible assets were $2.12 million. The filing reports no goodwill or long-lived asset impairment for the period.
Guidance, Outlook, and Risks
The filing does not provide formal revenue, earnings, or cash-flow guidance. Management expects to pursue organic growth, expand distribution and sales capabilities, increase recurring revenue, and grow its IBM Power cloud infrastructure, disaster recovery, cybersecurity, and managed-services offerings.
- Management identifies growth execution, the ability to manage expansion, customer demand, and the availability of liquidity as important uncertainties.
- Customer concentration is material: two customers represented 24% and 17% of six-month 2022 revenue, and two customers represented 20% and 14% of accounts receivable at June 30, 2022.
- Lease obligations, including related-party finance leases, create recurring cash requirements.
- The company is exposed to changes in technology markets, cybersecurity threats, service-level obligations, customer retention, acquisition integration, and competitive conditions.
- Management reported no material litigation, no defaults upon senior securities, no material changes to previously disclosed risk factors, and no material weaknesses in internal control over financial reporting.
- The company reported no material subsequent events and no additional significant commitments or contingencies beyond those disclosed.
Important Facts for Investors to Verify
- Whether revenue growth from Flagship and equipment sales translates into sustainable recurring revenue and improved gross margins.
- The timing and amount of future finance lease payments, particularly obligations to related parties.
- Whether operating cash flow becomes consistently positive given the reported six-month operating cash outflow.
- The effect of stock-based compensation, option and warrant dilution, and the increase in common shares outstanding.
- The recoverability of the company’s $6.56 million goodwill balance and other intangible assets.
- The filing contains an apparent presentation inconsistency: the six-month MD&A revenue table lists 2021 Infrastructure and Disaster Recovery/Cloud Service revenue as $3.385 million, while the revenue-disaggregation note lists $3.386 million. Investors should reconcile this minor difference to the filed financial statements.