Data Storage Corporation: Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Data Storage Corporation provides cloud infrastructure, disaster recovery, cybersecurity, managed services, equipment and software, maintenance, and VoIP and internet services through CloudFirst, Flagship Solutions, and Nexxis. Its customers operate across healthcare, financial services, distribution, manufacturing, construction, education, and government. The company operates technical centers in the United States and Canada.
This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company is a smaller reporting company and non-accelerated filer. Common stock trades on Nasdaq under DTST and warrants under DTSTW.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $6.880 million | $8.657 million | Down 21% |
| Gross profit | $2.090 million | $2.646 million | Down 21% |
| Gross margin | 30.4% | 30.6% | Down approximately 20 bps |
| Operating income (loss) | $(41,014) | $186,044 | Declined $227,058 |
| Operating margin | (0.6%) | 2.1% | Down approximately 270 bps |
| Net income | $35,063 | $143,384 | Down 76% |
| Net income attributable to common stockholders | $50,666 | $156,010 | Down 68% |
| Adjusted EBITDA | $336,465 | $604,492 | Down 44% |
| Cash flow from operations | $449,139 | $1.644 million | Down 73% |
| Capital expenditures | $426,671 | $25,946 | Increased materially |
| Cash and cash equivalents | $1.882 million | $13.421 million at March 31, 2022 | Down materially year over year |
Revenue was concentrated in equipment and software ($3.523 million), infrastructure and disaster recovery/cloud services ($2.190 million), and managed services ($894,000). One customer represented 33% of quarterly revenue and 61% of accounts receivable at March 31, 2023.
At March 31, 2023, total assets were $24.352 million, total liabilities were $5.283 million, and total stockholders’ equity was $19.069 million. Working capital was $10.632 million, compared with $10.855 million at December 31, 2022. Marketable securities were $9.114 million, consisting of publicly traded equity securities.
Lease liabilities totaled $1.094 million for finance leases, including $593,400 payable to a related party, and $180,213 for operating leases. The filing does not identify conventional bank debt.
Material Changes Versus the Prior Comparable Period
- Total revenue declined $1.777 million, primarily because of lower one-time equipment sales, which fell 34% to $3.523 million.
- Infrastructure and disaster recovery/cloud revenue increased 14% to $2.190 million, while Nexxis VoIP revenue increased 19% to $232,000.
- Managed services revenue declined 24% to $894,000.
- Cost of sales declined 20%, broadly tracking the decrease in equipment revenue. Gross margin was relatively stable at approximately 30%.
- Selling, general and administrative expense declined 13% to $2.131 million, mainly from lower salaries and commissions, partially offset by higher professional fees and advertising.
- Advertising expense increased to $189,878 from approximately $90,000, reflecting a new marketing plan.
- Interest income and other income improved to $76,077 from a $42,660 expense, primarily because of higher income from marketable securities.
- Operating cash flow decreased substantially because the prior-year period benefited from a $2.992 million increase in accounts payable and accrued expenses.
- Cash declined $404,683 during Q1 2023. Investing activities used $530,094, including $426,671 of capital expenditures and $103,423 for equity investments. Financing activities used $323,728 for finance lease repayments.
- Common shares outstanding increased to 6,834,627 at March 31, 2023, from 6,822,127 at December 31, 2022, primarily due to share-based awards.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide quantified revenue or earnings guidance. Management stated that it intends to expand distribution, digital and direct marketing, cybersecurity offerings, cloud infrastructure, and potential strategic acquisitions. The company also expects to continue targeting the IBM Power cloud and business-continuity market.
Management reported that the total contract value of subscription contracts in place exceeds $10 million and that the renewal rate for subscription solutions is approximately 94% after the initial contract term. These are management statements and are not presented as forecasts or guarantees.
- Liquidity depends on operating cash flow, working capital, and potential financing. Management stated that weaker-than-expected results could require renegotiation of related-party equipment leases, reductions in advertising and marketing, or reductions in officer salaries.
- The company has approximately $1.3 million of payments over the next five years under a licensing agreement for marketing materials with a National Football League team.
- Customer concentration is significant, with one customer representing 33% of revenue and 61% of accounts receivable in Q1 2023.
- The company holds $9.114 million of marketable equity securities subject to market-price fluctuations; the filing states that related unrealized gains and losses are recognized in earnings.
- Goodwill and intangible assets totaled $6.145 million, including $4.239 million of goodwill. These balances depend on impairment assessments using significant management estimates.
- The company reported no material litigation, no defaults on senior securities, and no material changes to previously disclosed risk factors.
- Management stated that there were no material weaknesses in internal control over financial reporting and that disclosure controls were effective as of March 31, 2023.
- Forward-looking statements are subject to risks including managing growth, changing plans, customer concentration, market conditions, acquisition execution, and liquidity needs.
Most Important Facts for Investors to Verify
- Whether the decline in equipment sales is temporary and whether recurring cloud, disaster recovery, managed services, and VoIP revenue can offset lower hardware-related revenue.
- The sustainability and quality of operating cash flow, particularly after the large year-over-year decline and increased capital expenditures.
- The composition, liquidity, and market risk of the $9.114 million marketable securities portfolio.
- The company’s ability to fund finance lease obligations, including related-party lease payments, while maintaining adequate cash reserves.
- The exposure created by the largest customer’s 33% revenue contribution and 61% accounts receivable concentration.
- The valuation and impairment risk associated with goodwill and other intangible assets.
- The assumptions supporting management’s stated subscription contract value exceeding $10 million and approximately 94% renewal rate.
- The effect of stock-based compensation, options, warrants, and restricted stock awards on future dilution. At March 31, 2023, 515,783 options were outstanding, and 2,801,117 potential shares were excluded from diluted EPS as anti-dilutive.