Data Storage Corporation 10-Q Summary
Business Context and Reporting Period
Data Storage Corporation provides cloud storage, cloud computing, infrastructure-as-a-service, data backup, disaster recovery, business continuity, email archiving and compliance solutions to commercial, government and other institutional customers. The unaudited report covers the three and six months ended June 30, 2014, with comparisons to the same periods in 2013. The company is a smaller reporting company and had 36,125,845 common shares outstanding as of August 15, 2014.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 |
|---|---|---|---|---|
| Sales | $1.004 million | $1.170 million | $2.052 million | $2.347 million |
| Gross profit | $466 thousand | $520 thousand | $906 thousand | $969 thousand |
| Gross margin | 46.4% | 44.4% | 44.1% | 41.3% |
| Operating loss | $(166) thousand | $(140) thousand | $(294) thousand | $(413) thousand |
| Net loss | $(183) thousand | $(175) thousand | $(351) thousand | $(479) thousand |
| Net loss available to common shareholders | $(205) thousand | $(188) thousand | $(393) thousand | $(504) thousand |
| Basic and diluted loss per share | $(0.01) | $(0.01) | $(0.01) | $(0.01) |
- Cash and cash equivalents were $208,110 at June 30, 2014, compared with $87,675 at December 31, 2013.
- Six-month operating cash flow was $5,627, compared with $134,477 in the prior-year period. No cash was used in investing activities in 2014.
- Financing activities provided $114,808, primarily from $126,489 of advances from the officer and related party.
- Total assets were $4.282 million and total liabilities were $5.084 million at June 30, 2014. Stockholders’ deficit was $802,477.
- Working capital deficiency was approximately $2.941 million, compared with $3.127 million at December 31, 2013.
- Current liabilities included $698,115 of related-party convertible debt, $350,000 of contingent collateral obligations, $100,292 under the revolving credit facility and $372,521 of dividends payable.
- Capital lease obligations totaled $894,922, including $214,042 due within one year and $680,880 classified as long term.
- The company reported no income tax provision. Interest expense was $76,256 for the first six months, including related debt costs.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 14.2%, and six-month sales declined 12.6%, principally because certain customers were assigned to the joint venture.
- Gross margins improved to 46.4% for the quarter and 44.1% year to date, attributed to lower installation costs and reduced outsourced storage costs as internal storage capacity increased.
- Operating expenses declined 4.2% in the quarter and 13.1% year to date, primarily from lower sales and officer salaries, commissions and stock-based compensation.
- Despite lower year-to-date losses, the quarterly net loss increased 4.5% because lower revenue and higher interest expense more than offset cost reductions.
- The company recognized $19,538 of equity-method income from its 50% interest in Secure Infrastructure & Services, LLC, compared with a $2,243 loss in the prior-year period.
- Existing leases were refinanced into a new capital lease in May 2014, resulting in a substantial shift from current to long-term lease obligations.
Guidance, Outlook, Risks and Unusual Items
- Management plans to expand its IBM marketplace presence, use increased storage capacity and managed-services capabilities, and expand email archiving through the Message Logic business. No quantified revenue or earnings guidance was provided.
- The company states that substantial doubt exists regarding its ability to continue as a going concern. Continued operations depend on sales growth, reduced operating expenses, profitable operations and obtaining financing. The CEO and largest shareholder has funded the company historically and intends to continue providing funds as needed.
- Two related-party convertible notes matured in 2014 and were in default; the notes were extended to February 28, 2015. Defaults may result in additional interest and additional warrants. One note also had accrued interest in arrears.
- Disclosure controls and internal control over financial reporting were deemed ineffective due to insufficient accounting expertise and inadequate segregation of duties. Management intends to add financial personnel.
- The company faces a lawsuit by its former chief operating officer seeking $67,392 of unpaid wages plus statutory damages and legal fees. The company intends to defend the action and pursue counterclaims.
- Potential dilution includes 6,921,084 outstanding options and 133,334 warrants. The filing identifies 5,616,120 options and 133,334 warrants as exercisable at June 30, 2014.
- The filing text contains a discrepancy: the MD&A states six-month cost of sales of $1,114,266, while the financial statements report $1,146,266. The financial statement value should be verified against the filed version.
Most Important Facts for Investors to Verify
- Going-concern disclosures, available financing and the CEO’s ability and willingness to continue funding the company.
- Maturity, default terms, accrued interest and potential warrant dilution associated with related-party convertible debt.
- Cash requirements for capital leases, revolving credit, contingent collateral obligations, dividends payable and other current liabilities.
- Whether revenue reductions from the joint venture are recurring and how the joint venture affects future margins and cash flow.
- Remediation of the reported material weaknesses in accounting expertise and segregation of duties.
- Status and potential financial exposure of the former executive’s litigation.
- The cost-of-sales discrepancy between the MD&A and the financial statements.