Data Storage Corporation — Q1 2013 Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three months ended March 31, 2013. Data Storage Corporation provides cloud storage, disaster recovery, business continuity, compliance, SaaS, IaaS and PaaS solutions. Its operations include assets acquired from SafeData and Message Logic, as well as distribution and strategic relationships involving IBM, Amazon AWS and Dell.
The company reported 33,165,915 common shares outstanding as of May 17, 2013 and is classified as a smaller reporting company. The filing was signed May 20, 2013.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Sales | $1.176 million | $0.970 million | 21.2% increase |
| Gross profit | $449,064 | $385,407 | 16.5% increase |
| Gross margin | 38.2% | 39.7% | Down 1.5 percentage points |
| Operating loss | $(272,331) | $(514,166) | 48.0% improvement |
| Net loss | $(304,093) | $(550,861) | 44.8% improvement |
| Net loss attributable to common shareholders | $(316,593) | $(563,361) | 43.8% improvement |
| Basic and diluted loss per share | $(0.01) | $(0.02) | Improved |
| Cash flow from operations | $(65,027) | $(448,949) | Lower cash use |
| Capital expenditures | $0 | $12,146 | Decreased |
Recurring revenue increased $252,409, or approximately 28.3%, to $1.145 million. Non-recurring revenue declined $51,636 to $30,224. Cost of sales rose 24.3%, exceeding revenue growth and reducing gross margin. SG&A declined $178,178, or 19.8%, primarily due to lower professional fees, sales salaries and commissions, partially offset by higher executive salaries.
- Cash and cash equivalents were $84,054 at March 31, 2013, compared with $72,756 at December 31, 2012 and $178,014 at March 31, 2012.
- Net cash provided by financing activities was $76,325, primarily from a $100,000 convertible debt issuance and $7,847 of shareholder advances, partially offset by $28,417 of capital lease repayments.
- Working capital was negative $3.169 million at March 31, 2013, compared with negative $3.064 million at December 31, 2012.
- Total assets were $5.078 million and total liabilities were $5.213 million, resulting in stockholders’ deficit of $134,677.
- Current liabilities included $1.175 million of accounts payable and accrued expenses, $783,381 of current capital lease obligations, $683,269 of deferred revenue, $362,414 of contingent Message Logic consideration and $225,000 of dividends payable.
- Debt and debt-like obligations included a $100,292 credit line, $59,199 loan payable, $586,638 of related-party convertible debt, and $1.069 million of capital lease obligations.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by recurring subscription services, while non-recurring revenue declined.
- Gross margin declined despite higher gross profit because recurring revenue carries higher associated costs.
- Operating and net losses narrowed substantially as SG&A decreased.
- Operating cash outflow improved by $383,922, although operations continued to consume cash.
- Cash at quarter-end was materially below the $178,014 reported at March 31, 2012.
- The company issued a $100,000 convertible promissory note to director John F. Coghlan on February 28, 2013. The note bears 10% interest, matures February 27, 2014 and is convertible at $0.15 per share. The related warrant covers 66,667 shares at a $0.15 exercise price and expires February 28, 2023.
- Depreciation and amortization increased to $225,032 from $170,248, and stock-based compensation increased to $58,126 from $25,824.
Guidance, Outlook, Risks and Unusual Items
The filing provides no formal numerical revenue or earnings guidance. Management expects to pursue sales growth, cost reductions, expanded presence in the IBM marketplace, additional financing and possible acquisitions of complementary service providers.
Management states that substantial doubt regarding the company’s ability to continue as a going concern exists because of recurring losses, negative working capital and the need to obtain financing, achieve sales growth and reduce operating expenses. The company has historically relied on funding from CEO and largest shareholder Charles M. Piluso and states that he intends to continue funding the company as needed. There is no assurance that such funding or other financing will be available.
- Internal controls over financial reporting were deemed ineffective due to insufficient accounting expertise and inadequate segregation of duties. Management intends to add financial staff.
- Capital lease payments total $1.069 million, including $783,381 due within the following year.
- Message Logic acquisition consideration may require up to $800,000 in cash and 769,290 additional common shares, subject to performance metrics.
- The company had 6,232,992 outstanding options and 95,309 outstanding warrants at March 31, 2013, creating potential dilution.
- The company reported no material litigation, no defaults upon senior securities and no applicable risk-factor update.
- Goodwill and indefinite-lived intangible assets are subject to impairment testing; the filing states that recently adopted accounting standards did not materially affect results.
Important Facts for Investors to Verify
- Whether management can obtain sufficient financing and shareholder support to address the $3.169 million working capital deficit and near-term obligations.
- The collectability of $247,325 in accounts receivable and the adequacy of the related allowance for doubtful accounts.
- The timing and amount of contingent consideration payable under the Message Logic acquisition.
- Whether recurring revenue growth can offset its higher cost structure and restore positive operating margins.
- Progress in remediating the material weaknesses in accounting personnel and segregation of duties.
- Potential dilution from convertible debt, options, warrants and contingent acquisition consideration.
- The company’s ability to meet capital lease, related-party, dividend and other current liability obligations with only $84,054 of reported cash.