Data Storage Corporation 2021 Form 10-K Summary
Business Context and Reporting Period
Data Storage Corporation provides subscription-based cloud infrastructure, disaster recovery, cybersecurity, managed services, IBM Power solutions, data analytics, VoIP and internet access services. Its customers primarily operate in healthcare, financial services, distribution, manufacturing, construction, education and government.
The filing is an annual report for the fiscal year ended December 31, 2021, rather than a standalone quarterly report. Results include Flagship Solutions, LLC from its May 31, 2021 acquisition. The company trades on Nasdaq under DTST and DTSTW.
Financial Highlights
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $14.876 million | $9.321 million | +60% |
| Gross profit | $6.417 million | $3.896 million | +65% |
| Gross margin | 43.1% | 41.8% | +1.3 percentage points |
| Operating income (loss) | $(0.767) million | $(0.001) million | Lower |
| Operating margin | (5.2%) | Near breakeven | Lower |
| Net income | $0.260 million | $0.173 million | +50% |
| Net income attributable to common stockholders | $0.204 million | $0.055 million | +269% |
| Adjusted EBITDA | $0.825 million | $1.190 million | (31%) |
| Cash flow from operations | $(0.361) million | $1.111 million | Lower |
| Cash and cash equivalents | $12.136 million | $0.894 million | +1,258% |
| Working capital | $12.085 million | $(2.666) million | Improved |
Revenue growth was led by managed services, which increased to $4.662 million from $0.381 million, and cloud infrastructure and disaster recovery revenue, which increased 24% to $7.203 million. Equipment and software revenue was essentially flat at $2.080 million, while Nexxis services increased 11% to $0.772 million.
Cost of sales increased 56% to $8.459 million. Selling, general and administrative expenses increased 84% to $7.184 million, primarily because of Flagship-related staffing, professional fees, Nasdaq costs, advertising, software licenses and other expansion costs.
The company reported $0.627 million of other income, including a $0.799 million gain from forgiveness of PPP debt, partly offset by $0.127 million of net interest expense and a $0.045 million loss on asset disposals. The reported net income includes a $0.400 million income-tax benefit. The filing contains differing references to net income and net income attributable to common stockholders; investors should reconcile the MD&A discussion with the audited statements.
Liquidity, Cash Flow and Capital Structure
- Cash increased by $11.242 million to $12.136 million, primarily from $18.021 million of financing cash inflows.
- Financing inflows included approximately $16.944 million from common stock and warrant issuance and $3.381 million from warrant exercises. The company also repaid lease obligations and preferred dividend liabilities.
- Investing cash usage was $6.418 million, primarily reflecting $6.149 million of cash consideration for the Flagship acquisition and $0.456 million of capital expenditures.
- Operating cash flow was negative $0.361 million despite positive GAAP net income, reflecting working-capital changes and noncash items.
- Total liabilities were $3.720 million at year-end, compared with $5.831 million in 2020. The balance sheet showed no note payable, line-of-credit balance or PPP loan outstanding at December 31, 2021.
- Finance lease liabilities totaled $1.578 million, including $0.840 million of current related-party finance lease obligations and $0.365 million of noncurrent related-party obligations. The company leases equipment from Systems Trading, which is owned and operated by President Harold Schwartz.
- The company had no off-balance-sheet arrangements and stated that it expects to use working capital and future financing for potential acquisitions and growth.
Material Changes Versus the Prior Comparable Period
- Flagship Solutions was acquired on May 31, 2021 for reported cash consideration of $6.149 million. The transaction added IBM equipment, managed services, cloud, cybersecurity and analytics capabilities.
- The acquisition increased goodwill and intangible assets substantially. Year-end goodwill was $6.561 million and net intangible assets were $2.255 million. The purchase-price allocation remained subject to the measurement period, and valuation of acquired intangible assets was identified as a critical audit matter.
- The company completed a 1-for-40 reverse stock split in May 2021 and raised capital through a May public offering and a July institutional financing.
- Common shares outstanding increased from 3.215 million at December 31, 2020 to 6.694 million at December 31, 2021, before considering additional potential dilution.
- Outstanding options and warrants represented potential issuance of approximately 2.419 million common shares at December 31, 2021.
- The prior-year material weakness in internal control over financial reporting was reported as remediated as of December 31, 2021. Management concluded that disclosure controls and internal control over financial reporting were effective, although the external auditor was not required to provide an internal-control attestation.
Guidance, Outlook, Commentary and Risks
Management did not provide formal numerical revenue, earnings or cash-flow guidance. Its stated strategy is to expand distribution channels, increase sales and marketing activity, pursue synergistic acquisitions, broaden technology assets and grow recurring cloud, disaster recovery, cybersecurity and IBM Power offerings.
- Outstanding proposals totaled approximately $20 million in contract value, including approximately $14 million for subscription solutions.
- Backlog included more than $0.5 million of annual recurring revenue and approximately $2 million of equipment and software.
- Management reported an approximate 94% renewal rate after the initial subscription term and total subscription contract value exceeding $10 million.
- COVID-19 had not materially affected operations or financial performance as of the filing, although management continued to identify uncertainty relating to customer demand, remote work, cybersecurity and third-party operations.
- Principal risks include intense competition from larger cloud providers, dependence on customer acquisition and distributors, customer retention, cybersecurity breaches, service outages, data-center and third-party provider dependence, privacy and HIPAA compliance, acquisition integration, key-person dependence and the need for additional capital.
- The company remains exposed to related-party lease obligations and potential dilution from options and warrants. It does not expect to pay common-stock dividends in the foreseeable future.
- The company had no material pending litigation disclosed in the filing.
Important Facts for Investors to Verify
- Reconcile the reported $0.260 million net income, $0.268 million income attributable to Data Storage Corporation and $0.204 million net income attributable to common stockholders.
- Determine how much of the 60% revenue increase reflects the Flagship acquisition versus organic growth, and assess the sustainability of the sharp increase in managed-services revenue.
- Evaluate recurring-revenue conversion, renewal rates, backlog and the timing and probability of the approximately $20 million of proposals.
- Assess operating cash burn and whether positive liquidity depends primarily on equity and warrant financings rather than internally generated cash.
- Review the Flagship purchase-price allocation, goodwill and intangible-asset impairment assumptions and any subsequent measurement-period adjustments.
- Quantify fully diluted shares, including the 2.419 million outstanding options and warrants and subsequent equity awards.
- Review related-party equipment leases, payment obligations and governance safeguards involving Systems Trading and Nexxis Capital.
- Monitor remediation of internal controls, cybersecurity exposure, customer concentration and dependence on third-party data centers and infrastructure providers.