Data Storage Corporation 10-Q Summary
Business Context and Reporting Period
Data Storage Corporation provides cloud infrastructure, disaster recovery, managed IT services, equipment and software, cybersecurity, VoIP, internet access and data transport solutions through CloudFirst Technologies, Flagship Solutions and Nexxis. The company serves healthcare, financial, distribution, manufacturing, construction, education and government customers through data centers in the United States and Canada.
This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. The company is a Nasdaq-listed smaller reporting company. Common shares outstanding as of August 11, 2023 were 6,834,627.
Financial Performance and Position
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Revenue | $5.90 million | $4.83 million | $12.78 million | $13.48 million |
| Gross profit | $2.58 million | $1.56 million | $4.67 million | $4.20 million |
| Gross margin | 43.7% | 32.3% | 36.5% | 31.2% |
| Operating income (loss) | $0.11 million | $(1.04) million | $0.07 million | $(0.85) million |
| Net income (loss) attributable to DSC | $0.23 million | $(1.14) million | $0.28 million | $(0.98) million |
| Diluted EPS | $0.03 | $(0.17) | $0.04 | $(0.15) |
| Adjusted EBITDA | $0.53 million | $(0.26) million | $0.86 million | $0.35 million |
Q2 revenue increased 22%, while six-month revenue declined 5%. Six-month gross profit increased 11%, and gross margin expanded to approximately 36.5%. The six-month improvement in profitability reflected lower equipment-related sales costs and reduced selling, general and administrative expense.
- Q2 revenue growth was broad-based: infrastructure and disaster recovery/cloud services increased 13%, equipment and software 24%, managed services 41% and Nexxis VoIP services 27%.
- For the first six months, infrastructure and disaster recovery/cloud services increased 13%, managed services 27% and Nexxis VoIP services 23%, while equipment and software revenue declined 23% due primarily to lower one-time equipment sales.
- Q2 SG&A decreased 5% to $2.47 million; six-month SG&A decreased 9% to $4.60 million. Lower salaries, software costs, advertising and travel offset higher professional fees and commissions.
- Interest and other income was $99,294 in Q2 and $175,371 for the six-month period, compared with expense in the prior-year periods, primarily due to interest income from marketable securities.
Cash Flow, Liquidity and Debt
| Balance or cash flow | June 30, 2023 | December 31, 2022 |
|---|---|---|
| Cash and cash equivalents | $1.44 million | $2.29 million |
| Marketable securities | $9.23 million | $9.01 million |
| Total current assets | $13.63 million | $15.39 million |
| Working capital | $10.46 million | $10.86 million |
| Total liabilities | $3.40 million | $5.14 million |
| Total stockholders’ equity | $19.40 million | $18.95 million |
- Operating activities generated $1.08 million of cash in the first six months, compared with $0.21 million used in the prior-year period.
- Investing activities used $1.39 million, including $1.17 million of capital expenditures and $0.22 million for marketable securities.
- Financing activities used $0.54 million for finance lease repayments.
- Cash declined by $0.85 million during the first six months to $1.44 million. Marketable securities were $9.23 million, consisting of publicly traded equity securities and subject to market value fluctuations.
- Total finance lease liabilities were $0.87 million, including $0.65 million current and $0.23 million long term. Related-party finance lease liabilities comprised $0.47 million of the total.
- Management stated that liquidity needs may require renegotiation of related-party equipment leases, reductions in advertising and marketing, or reductions in officer salaries if operating conditions change.
Material Changes, Outlook and Risks
Management reported increased customer interest, distribution-channel expansion and sales proposals, and intends to continue expanding its presence in IBM Power infrastructure cloud, disaster recovery and cybersecurity markets. The filing does not provide formal quantitative revenue or earnings guidance.
Management’s stated growth strategies include expanding distribution and digital marketing, developing partner relationships, pursuing synergetic acquisitions and expanding internationally. Subscription contracts generally run 12 to 36 months, and management reports an approximately 94% renewal rate after the initial contract term.
- Customer concentration increased: one customer represented 52% of accounts receivable at June 30, 2023; one customer represented 18% of six-month revenue.
- The company had approximately $1.3 million of payments over the next five years under a licensing agreement acquired with Flagship.
- Goodwill was $4.24 million and net intangible assets were $1.84 million; impairment testing depends on management estimates and discounted cash-flow assumptions.
- The company remains exposed to equity-market volatility through its $9.23 million portfolio of marketable equity securities.
- Lease obligations, including related-party finance leases, require continuing cash payments. The company also relies on long-term contracts, customer collections and operating cash generation to support liquidity.
- Management stated that no litigation or other legal proceeding is expected to have a material adverse effect, and the filing reports no material changes to previously disclosed risk factors.
- Disclosure controls and procedures were assessed as effective at a reasonable-assurance level, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether Q2 revenue growth and improved margins are sustainable after the six-month decline in total revenue and the reduction in equipment sales.
- The composition, liquidity and market-value sensitivity of the $9.23 million marketable-securities portfolio.
- Customer concentration, particularly the customer representing 52% of accounts receivable.
- Required payments and refinancing or renegotiation risks associated with finance leases and related-party leases.
- The company’s ability to maintain positive operating cash flow while funding capital expenditures, working-capital needs and potential acquisitions.
- Potential dilution from 579,521 outstanding options, 218,472 non-vested restricted stock units and warrants, including securities excluded from diluted EPS because they were anti-dilutive.
- Whether goodwill and intangible-asset carrying values remain supportable under changing operating results and valuation assumptions.