Data Storage Corporation: Q3 2023 Form 10-Q Summary
Business Context and Reporting Period
Data Storage Corporation provides cloud infrastructure, disaster recovery, managed IT, cybersecurity, equipment and software, and VoIP and internet services through CloudFirst, Flagship Solutions, and Nexxis. The company serves healthcare, financial services, distribution, manufacturing, construction, education, and government customers using infrastructure in seven technical centers across the United States and Canada.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. The company had 6,859,627 common shares outstanding as of November 14, 2023.
Financial Performance and Key Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $5.99 million | $4.42 million | $18.77 million | $17.90 million |
| Gross profit | $2.33 million | $1.85 million | $7.00 million | $6.06 million |
| Gross margin | 38.9% | 41.9% | 37.3% | 33.8% |
| Operating income (loss) | $14,141 | $(223,224) | $79,871 | $(1.07 million) |
| Net income (loss) | $157,738 | $(252,963) | $398,839 | $(1.26 million) |
| Net income (loss) attributable to DSC | $179,011 | $(245,619) | $456,500 | $(1.23 million) |
| Adjusted EBITDA | $486,625 | $162,390 | $1.35 million | $504,206 |
- Q3 revenue increased 35%, driven by higher infrastructure and disaster recovery/cloud services, equipment and software, managed services, and Nexxis VoIP revenue.
- Nine-month revenue increased 5%. Infrastructure and disaster recovery/cloud revenue rose 14% and VoIP revenue rose 24%, partially offset by a 3% decline in equipment and software revenue.
- Q3 gross margin declined from 41.9% to 38.9% as cost of sales increased 42%, faster than revenue. Nine-month gross margin improved to 37.3% from 33.8%, aided partly by negotiated pricing at Flagship.
- Q3 SG&A increased 12% to $2.32 million, primarily from higher salaries, professional fees, software services, and commissions. Nine-month SG&A decreased 3% to $6.92 million.
- Interest and other income was $143,597 in Q3 and $318,968 for the nine months, compared with expense of $29,739 and $186,063, respectively, in the prior-year periods. The improvement was primarily attributable to interest income on marketable securities.
- Reported diluted EPS was $0.02 for Q3 and $0.06 for the nine months, compared with $(0.04) and $(0.18), respectively, in 2022.
Cash Flow, Liquidity, and Debt
| Balance or cash flow | September 30, 2023 | December 31, 2022 |
|---|---|---|
| Cash | $993,388 | $2.29 million |
| Marketable securities | $10.53 million | $9.01 million |
| Accounts receivable | $2.34 million | $3.50 million |
| Working capital | $10.94 million | $10.86 million |
| Total liabilities | $3.94 million | $5.14 million |
| Total stockholders’ equity | $19.68 million | $18.95 million |
- Operating activities generated $2.16 million of cash during the first nine months of 2023, compared with $145,692 in the prior-year period.
- Investing activities used $2.77 million, including $1.25 million of capital expenditures and $1.52 million for marketable securities purchases.
- Financing activities used $686,809, primarily for repayments of finance lease obligations.
- Finance lease liabilities totaled $731,166, including $590,745 current and $140,421 long term. Related-party finance lease liabilities were included in these amounts.
- Management stated that expected operating cash flow should be sufficient for cash requirements during the next twelve months and beyond, but acknowledged that inaccurate assumptions or changed circumstances could require renegotiation of related-party leases, reduced marketing, or reduced officer salaries.
Material Changes, Outlook, and Unusual Items
- The company returned to operating profitability and net profitability in both the quarter and year-to-date period, following losses in the comparable 2022 periods.
- CloudFirst was the primary operating contributor, generating Q3 operating income of $831,961 and nine-month operating income of $2.01 million. Flagship and Nexxis remained loss-making for Q3 and Nexxis remained loss-making year to date.
- Management continues to emphasize growth in IBM Power cloud infrastructure, disaster recovery, cybersecurity, managed services, distribution channels, digital marketing, and potential synergistic acquisitions.
- The company reported an approximately 94% renewal rate after the initial contract term for subscription solutions and stated that the total contract value of existing subscription contracts exceeds $10 million.
- Marketable equity securities increased to $10.53 million and generated significant interest and investment-related income. Investors should distinguish this income from recurring operating performance.
- Stock-based compensation was $338,146 for the first nine months, and the company had $996,857 of unrecognized compensation expense related to unvested options and restricted stock units.
- The company has approximately $1.3 million of payments due over five years under a licensing agreement acquired in the Flagship transaction.
- No material litigation, senior-security defaults, unregistered securities sales, or material changes to previously disclosed risk factors were reported. Management stated that disclosure controls were effective at the reasonable-assurance level.
Key Risks and Investor Verification Items
- Verify the sustainability of positive operating cash flow and profitability excluding interest income, marketable-securities gains or income, and other non-operating items.
- Assess concentration risk: three customers represented 16%, 14%, and 10% of accounts receivable at September 30, 2023; two customers represented 15% and 11% of nine-month revenue.
- Review the valuation and liquidity of the $10.53 million marketable-securities portfolio, including exposure to publicly traded equity securities.
- Monitor gross-margin trends, particularly the Q3 margin decline and the company’s reliance on equipment sales, pricing negotiations, and segment mix.
- Evaluate finance lease obligations, related-party lease arrangements, and the approximately $1.3 million Flagship licensing commitment.
- Consider dilution from 579,521 outstanding options, 218,472 non-vested restricted stock units, and 2.42 million anti-dilutive warrants reported at September 30, 2023.
- Reconcile the MD&A reference to nine-month other income of $318,698 with the financial statements, which report $318,968.
- Review the company’s forward-looking assumptions regarding acquisitions, sales-channel expansion, subscription renewals, and cash sufficiency, as the filing provides no formal numerical revenue or earnings guidance.