Business Context and Reporting Period
Data Storage Corporation (DSC) is a provider of Hybrid Cloud solutions, specializing in secure disk-to-disk data backup, disaster recovery, and business continuity services. The company operates four data centers in the USA and Canada. This Form 10-Q covers the quarterly period ended March 31, 2011. The company is classified as a Smaller Reporting Company and a non-shell company.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue (Sales) | $872,155 | $243,692 |
| Gross Profit | $296,833 | $79,373 |
| Gross Margin | 34.0% | 32.6% |
| Operating Loss | $(280,642) | $(195,635) |
| Net Loss | $(401,475) | $(196,992) |
| Net Loss to Common Shareholders | $(413,975) | $(209,492) |
| Cash and Equivalents (End of Period) | $1,081,493 | $65,386 |
| Working Capital Deficit | $(1,223,826) | Not Reported |
| Total Debt (Current + Long Term) | $1,604,971 | Not Reported |
Note: Total Debt includes current and long-term loans, leases, credit lines, and convertible debt.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased by 257.9% ($628,463) compared to Q1 2010, primarily driven by the acquisition of SafeData LLC in June 2010, which expanded capacity in data backup and managed services.
- Expense Increases: Operating expenses rose by $302,468 (110%) due to higher professional fees, salaries, marketing, and amortization related to the SafeData acquisition. Interest expense surged to $121,353 from $1,357, driven by convertible debt and amortization of debt discounts.
- Liquidity Improvement: Cash and cash equivalents increased by $1,031,098 to $1.08 million. This was achieved through $1.5 million in proceeds from the issuance of common stock, which offset operating cash outflows of $347,289 and debt repayments.
- Working Capital: The working capital deficit improved by $1.32 million to $(1.22) million, largely due to the equity financing.
Outlook, Risks, and Management Commentary
- Going Concern: Management states the financial statements are prepared on a going concern basis. Continued operations depend on achieving sales growth, reducing operating expenses, and obtaining necessary financing. The CEO intends to continue funding the company as needed.
- Strategic Focus: The company plans to increase its presence in the IBM marketplace (AS400 and iSeries users) leveraging the SafeData acquisition.
- Internal Controls: Management concluded that disclosure controls and procedures are not effective due to the company's size and lack of segregation of duties.
- Customer Concentration: One customer represented approximately 16.29% of sales in Q1 2011. In Q1 2010, two customers represented 35% of sales.
- Debt Obligations: Significant obligations include capital leases (secured by equipment) and convertible notes. The company has $801,511 in contingent consideration related to the SafeData acquisition.
Investor Verification Checklist
- Financing Dependency: Verify the company's ability to secure future financing, as operations rely on the CEO's funding and stock issuances to cover losses.
- Debt Service: Review the maturity schedule for capital leases and convertible debt to assess near-term cash flow pressure.
- Customer Concentration: Monitor the stability of the top customer representing 16.29% of revenue.
- Internal Controls: Assess the risk of financial misstatement given the management's admission of ineffective disclosure controls.
- Contingent Consideration: Understand the terms of the $801,511 contingent liability from the SafeData acquisition and potential future cash outflows.