Data Storage Corporation — Form 10-Q Summary
Business Context and Reporting Period
Data Storage Corporation provides hybrid cloud, cloud storage, SaaS, backup, disaster recovery, business continuity, data replication, compliance, and related professional services through three data centers serving customers primarily in the United States and Canada. This unaudited quarterly report covers the three months ended March 31, 2012, with comparison to March 31, 2011. The company is a smaller reporting company and its common stock trades on OTC.BB.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Sales | $970,399 | $872,155 | 11.3% increase |
| Gross profit | $385,407 | $292,517 | 31.8% increase |
| Gross margin | 39.7% | 33.5% | 620 basis-point increase |
| Operating loss | $(514,166) | $(280,642) | Loss increased |
| Net loss | $(550,861) | $(401,475) | Loss increased 37.2% |
| Net loss available to common shareholders | $(563,361) | $(413,975) | Loss increased |
| Basic and diluted loss per share | $(0.02) | $(0.02) | No reported change |
| Net cash used in operating activities | $(448,949) | $(347,289) | Use increased |
| Cash and cash equivalents at period-end | $178,014 | $1,081,493 | Prior-year comparison declined |
At March 31, 2012, total assets were $5.14 million, total liabilities were $4.55 million, and stockholders’ equity was $596,337. Current assets were $709,044 versus current liabilities of $2.98 million, producing a working-capital deficiency of approximately $2.27 million. Cash increased by $9,524 from December 31, 2011.
Debt and financing obligations included a $100,292 revolving credit balance, $129,428 of loan payable, $990,214 of capital lease obligations, and a $500,000 convertible promissory note issued on January 31, 2012 to a company director. The convertible note is convertible into common stock at $0.85 per share. The company also owed its CEO $624,818 under advances with no interest and no stated repayment terms.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $98,244, attributed primarily to increased sales personnel.
- Cost of sales increased only 0.9%, resulting in higher gross margin due to increased revenue over a relatively fixed cost base and certain operating-cost reductions.
- Operating expenses increased 57% to $899,573. Sales salaries, executive salaries, and sales commissions increased by $73,085, $123,376, and $70,483, respectively.
- Interest expense declined by $84,576, principally because of lower accrued interest and the amortization of a convertible note converted in December 2011.
- Net loss increased despite higher revenue and gross profit because operating expense growth exceeded gross-profit growth.
- Operating cash use increased by $101,660. Financing activities provided $470,619 in Q1 2012, including $500,000 from convertible debt, compared with $1.38 million in Q1 2011, which included $1.5 million from common-stock issuance.
- Common shares outstanding increased to 29,056,622 at March 31, 2012 from 28,912,712 at December 31, 2011.
Outlook, Risks, Contingencies, and Unusual Items
Management intends to expand its presence in the IBM marketplace using increased technical expertise, storage capacity, and managed services obtained through the SafeData asset acquisition. Management expects to continue raising funds through stock issuances and relying on CEO funding as needed.
The company states that its ability to continue as a going concern depends on achieving sales growth, reducing operating expenses, obtaining necessary financing, meeting obligations as they become due, and achieving profitable operations. The filing does not provide a specific revenue, earnings, or cash-flow guidance target.
- Disclosure controls and procedures were determined to be ineffective because the company lacks sufficient size and complexity to segregate duties adequately.
- The company is exposed to interest-rate and currency risks and does not undertake specific actions to limit those exposures.
- Two customers represented approximately 11.0% of Q1 2012 sales; one customer represented approximately 16.2% of Q1 2011 sales.
- Capital lease obligations totaled $990,214, with $563,555 classified as current.
- Potential dilution included 2,563,115 outstanding options and 28,642 outstanding warrants at March 31, 2012.
- Management reported no material litigation, no defaults upon senior securities, and no separately disclosed risk-factor updates.
Investor Verification Items
- Verify the company’s ability to fund ongoing operating cash deficits and its dependence on additional financing and related-party support.
- Review the terms, maturity, and potential dilution from the $500,000 convertible note and outstanding equity awards.
- Assess whether the increased sales and gross margin can offset substantially higher selling, general, and administrative expenses.
- Examine near-term capital lease, loan, credit-line, and other current-liability obligations relative to the $178,014 cash balance.
- Review remediation plans and future reporting implications associated with ineffective disclosure controls.
- Evaluate customer concentration and the carrying values of goodwill and intangible assets, including potential impairment risk.