Data Storage Corporation — Q1 2022 Form 10-Q Summary
Business context and reporting period
Data Storage Corporation provides subscription-based disaster recovery, cloud infrastructure, cybersecurity, managed services, equipment and software, and Voice and Data solutions to customers primarily in the United States. The company operates through Data Storage, Flagship Solutions and Nexxis, and maintains infrastructure in seven technical centers.
This report covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The financial statements are unaudited and prepared under U.S. GAAP. Flagship Solutions was acquired on May 31, 2021, making the prior-year comparison not fully comparable.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $8.657 million | $2.575 million | Up 236% |
| Gross profit | $2.646 million | $1.154 million | Up 129% |
| Gross margin | 30.6% | 44.8% | Down approximately 14.2 percentage points |
| Income from operations | $186 thousand | $35 thousand | Up $151 thousand |
| Operating margin | 2.1% | 1.4% | Improved |
| Net income | $143 thousand | $0.3 thousand | Improved |
| Net income attributable to common stockholders | $156 thousand | $(37) thousand | Improved |
| Adjusted EBITDA | $604 thousand | $345 thousand | Up approximately 75% |
| Net cash provided by operating activities | $1.644 million | $349 thousand | Up $1.295 million |
Revenue growth was driven primarily by the Flagship acquisition, higher monthly subscription revenue, and increased equipment and software sales. Equipment and software revenue increased to $5.319 million from $465 thousand, while managed services revenue increased to $1.183 million from $227 thousand. Cloud infrastructure and disaster recovery revenue increased 16% to $1.926 million. Nexxis VoIP revenue was essentially unchanged at $195 thousand.
Cost of sales increased 323% to $6.011 million, outpacing revenue growth and reducing gross margin. Selling, general and administrative expense increased 120% to $2.460 million, primarily due to higher salaries, commissions, professional fees, software costs and expenses associated with the Flagship acquisition and Nasdaq listing.
Cash flow, liquidity and obligations
- Cash and cash equivalents increased to $13.421 million at March 31, 2022 from $12.136 million at December 31, 2021.
- Operating activities generated $1.644 million of cash, principally reflecting net income, depreciation and amortization, higher accounts payable and accrued expenses, partially offset by increases in accounts receivable and prepaid assets.
- Investing activities used $26 thousand, primarily for capital expenditures.
- Financing activities used $333 thousand, primarily for repayments of finance lease obligations, partly offset by $7 thousand from option exercises.
- Working capital was $12.241 million at March 31, 2022, compared with $12.085 million at December 31, 2021.
- Current assets were $18.201 million and current liabilities were $5.961 million, implying a current ratio of approximately 3.1x.
- Total liabilities were $7.131 million. Finance lease liabilities totaled $2.120 million, including $993 thousand classified as current and $1.127 million classified as noncurrent.
- Related-party finance lease liabilities totaled $1.173 million, including $741 thousand current and $433 thousand noncurrent. The related-party lessor is owned by the company’s President.
Material changes and unusual items
- The Flagship acquisition materially expanded reported revenue and expenses and remains the principal comparability issue versus Q1 2021. The reported purchase price was approximately $6.149 million, with provisional goodwill of approximately $3.258 million and acquired customer relationships, trade names and workforce-related intangibles.
- Property and equipment increased to $7.502 million gross, and the company recognized $881 thousand of assets acquired through finance leases during the quarter.
- Stock-based compensation expense increased to $67 thousand from $42 thousand. Options outstanding increased to 318,676 at March 31, 2022.
- Accounts receivable increased to $3.524 million from $2.384 million, and accounts payable and accrued expenses increased to $4.335 million from $1.343 million.
- One customer represented 58% of accounts receivable at March 31, 2022, and two customers represented 55% of Q1 2022 revenue, indicating significant customer concentration.
Outlook, management commentary and risks
Management stated that the company entered 2022 with baseline annual recurring revenue exceeding $12 million and continues to pursue growth in IBM Power cloud infrastructure, disaster recovery, cybersecurity, managed cloud services and distribution channels. Management cited an approximate 94% renewal rate after initial subscription terms and reported continuing customer interest and sales proposals. No formal revenue, earnings or margin guidance was provided.
Management believes existing liquidity and operating cash flow are adequate, but stated that an adverse change in conditions could require renegotiation of related-party equipment leases, reductions in advertising and marketing, renegotiation of the Nexxis arrangement or reductions in officer salaries. Subscription contracts are generally invoiced monthly, and management stated that the total contract value of existing subscription contracts exceeds $10 million.
- COVID-19 and remote work could disrupt equipment supply, employees, third-party relationships and operations, while increasing cybersecurity and data-protection risks.
- Customer and accounts-receivable concentration could increase collection or revenue volatility.
- Growth depends on successful integration of Flagship, execution of sales and marketing initiatives, and the company’s ability to manage expanding operations.
- Goodwill and intangible assets totaled approximately $8.746 million net and are subject to impairment risk.
- Lease obligations, including related-party obligations, create ongoing fixed payment requirements. Total finance lease payments were approximately $2.250 million before interest.
- The filing reports no material litigation, no defaults upon senior securities, no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
- Management concluded that disclosure controls and internal control over financial reporting were effective and that no material weaknesses existed as of March 31, 2022.
Important facts for investors to verify
- Determine how much of the 236% revenue increase reflects Flagship acquisition accounting, equipment sales and nonrecurring transactions versus recurring subscription growth.
- Monitor gross margin, which declined materially despite strong revenue growth.
- Assess whether operating cash flow is sustainable given the large increase in accounts payable and accrued expenses and the increase in accounts receivable.
- Review customer concentration, collection performance and the adequacy of the $47,523 allowance for credit losses.
- Evaluate the company’s ability to service finance leases, including related-party obligations and newly entered leases.
- Assess goodwill and intangible-asset impairment exposure and the provisional nature of portions of the Flagship purchase-price allocation.
- Reconcile the filing’s MD&A reference to $156 thousand of income before taxes with the financial statements, which report $143 thousand of income before taxes and $143 thousand of consolidated net income.