Data Storage Corporation — Form 10-Q Summary
Business Context and Reporting Period
Data Storage Corporation provides hybrid cloud, cloud storage, SaaS, disaster recovery, backup, replication, compliance, and related professional services through three technical centers. The filing covers the unaudited three and six months ended June 30, 2011, with comparisons to the same periods in 2010. The company is a smaller reporting company and reported 22,010,506 common shares outstanding as of August 18, 2011.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Sales | $898,958 in 2011; $513,533 in 2010 | $1,771,113 in 2011; $757,224 in 2010 |
| Gross profit | $295,676 in 2011; $168,773 in 2010 | $588,194 in 2011; $248,145 in 2010 |
| Gross margin | 32.9% in both periods | 33.3% in 2011; 32.8% in 2010 |
| Loss from operations | $(378,241) in 2011; $(249,494) in 2010 | $(658,883) in 2011; $(445,129) in 2010 |
| Net loss | $(534,340) in 2011; $(267,849) in 2010 | $(935,814) in 2011; $(464,841) in 2010 |
| Loss available to common shareholders | $(546,840) in 2011; $(280,349) in 2010 | $(960,814) in 2011; $(489,841) in 2010 |
| Basic and diluted loss per share | $(0.025) in 2011; $(0.017) in 2010 | $(0.048) in 2011; $(0.031) in 2010 |
- Six-month selling, general and administrative expense was $1,247,077, compared with $693,274 in the prior-year period. The filing attributes increases primarily to the SafeData acquisition, higher salaries, marketing, rent, and depreciation and amortization.
- Six-month interest expense increased to $125,620 from $19,712, and amortization of debt discount was $153,341, primarily related to convertible debt.
- Cash and cash equivalents were $505,283 at June 30, 2011, compared with $50,395 at December 31, 2010.
- Net cash used in operating activities was $253,806, compared with $142,264 in the first six months of 2010. Net cash used in investing activities was $26,470, while financing activities provided $735,164.
- Financing cash flow included $1.5 million from common stock issuance, offset by $282,731 of capital lease repayments and $482,105 of loan repayments.
- Total assets were $5,432,780 and total liabilities were $4,270,888 at June 30, 2011. Stockholders’ equity was $1,161,892.
- Current liabilities included $692,057 of deferred revenue, $322,982 of contingent SafeData acquisition consideration, $356,523 of current lease obligations, and $137,300 of current loans payable.
- Long-term liabilities included $70,734 of long-term loans, $335,879 of long-term lease obligations, $30,723 of convertible debt, and $368,685 of convertible debt owed to related parties.
Material Changes Versus the Prior Comparable Period
- Sales increased 75.1% in the second quarter and 133.9% for the six-month period, which management attributed primarily to SafeData managed services and increased data-backup capacity.
- Gross profit more than doubled for the six-month period, while gross margin improved modestly to 33.3% from 32.8%.
- Despite revenue growth, operating and net losses widened because expense growth, depreciation and amortization, interest expense, and debt-discount amortization outpaced gross-profit growth.
- The company issued 3,640,777 common shares for $1.5 million during the six months, increasing issued and outstanding common shares from 17,127,541 at December 31, 2010 to 22,010,506 at June 30, 2011.
- Net property and equipment increased to $1,020,381 from $831,323, primarily reflecting additional storage equipment. Intangible assets declined to $1,062,226 from $1,169,404 due to amortization.
- The company reported one customer representing approximately 10.8% of six-month sales, compared with two customers representing approximately 41.4% in the prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that it intends to expand its presence in the IBM marketplace using SafeData-related technical expertise, storage capacity, and managed services. No quantitative revenue or earnings guidance was provided.
- The financial statements contain a going-concern dependence: continued operations require sales growth, lower operating expenses, additional financing or shareholder support, and eventual profitable operations.
- Management stated that the CEO and largest shareholder has funded the company since inception and intends to continue funding it as needed. The company also expects to raise capital through stock issuances.
- Capital lease obligations totaled $692,402, with combined monthly installments of approximately $40,100 and maturities extending through 2014. Operating lease commitments totaled $269,776 through 2014.
- The company owed its CEO $614,628 at June 30, 2011. These advances bear no interest and have no stated repayment terms.
- Potential dilution included 3,670,169 outstanding options and 3,225,865 outstanding warrants at June 30, 2011. The filing states that these instruments were excluded from diluted loss per share because they were anti-dilutive.
- Management disclosed that disclosure controls and procedures were not effective because the company lacked sufficient segregation of duties. No material changes to internal control over financial reporting were reported during the quarter.
- The company reported no material litigation, no defaults upon senior securities, and no off-balance-sheet arrangements.
- The filing text contains an apparent inconsistency in its discussion of working capital deficiency: it reports a June 30, 2011 deficiency of $1,739,013 and describes an increase of $804,838 from $2,543,851 at December 31, 2010, although the stated figures indicate a reduction in the deficiency.
Important Facts for Investors to Verify
- Verify the company’s ability to fund operating losses and near-term obligations given negative operating cash flow, substantial current liabilities, and the stated going-concern dependence.
- Assess whether revenue growth from the SafeData acquisition can continue and generate sufficient gross profit to offset higher operating, financing, and amortization costs.
- Review the terms, maturity schedules, conversion features, and related-party status of the company’s debt, leases, and contingent SafeData consideration.
- Evaluate dilution from the 2011 stock issuance and the outstanding options and warrants.
- Investigate the disclosed ineffective disclosure controls and the company’s remediation plans.
- Reconcile the working-capital deficiency figures and confirm the underlying current-asset and current-liability calculations.