Data Storage Corporation 10-Q Summary
Business Context and Reporting Period
Data Storage Corporation provides subscription-based disaster recovery, Infrastructure as a Service, cloud, managed services, VoIP, equipment, software and maintenance solutions. The company serves business, healthcare, banking, finance, manufacturing, education and government customers through infrastructure located in multiple U.S. technical centers.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods. The company is a smaller reporting company and had 128,539,418 common shares outstanding as of November 16, 2020.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 |
|---|---|---|---|---|
| Revenue | $2.724 million | $2.014 million | $6.828 million | $6.047 million |
| Gross profit | $1.103 million | $0.781 million | $2.850 million | $2.636 million |
| Gross margin | 40.5% | 38.8% | 41.8% | 43.6% |
| Income (loss) from operations | $0.085 million | $(0.104) million | $(0.032) million | $0.070 million |
| Net income (loss) | $0.042 million | $(0.133) million | $0.185 million | $(0.044) million |
| Net income (loss) attributable to common stockholders | $0.010 million | $(0.153) million | $0.097 million | $(0.104) million |
| Operating cash flow | Not separately provided | Not separately provided | $0.696 million | $0.634 million |
- Third-quarter revenue increased 35%, driven primarily by equipment and software sales, which rose 167% to $936,344. Infrastructure and disaster recovery/cloud revenue increased 7%, while managed services declined 13% and VoIP revenue increased 37%.
- Nine-month revenue increased 13%. Infrastructure and disaster recovery/cloud revenue increased 7%, equipment and software increased 20%, managed services increased 20%, and VoIP revenue increased 44%.
- Third-quarter operating expenses increased 15% to $1.018 million, including higher salaries, officer compensation, advertising and commissions. Nine-month operating expenses increased 12% to $2.883 million.
- Nine-month net income included a $350,000 gain on a contingent liability related to discontinued use of Message Logic assets. Excluding this unusual item, reported profitability would have been materially lower.
- Cash and cash equivalents increased to $604,763 from $326,561 at December 31, 2019. Nine-month operating cash flow was $696,087, capital expenditures were $164,796, and financing activities used $253,089.
- Total assets were $8.092 million and total liabilities were $6.163 million at September 30, 2020. Stockholders’ equity was $1.929 million, including a $(85,881) non-controlling interest.
- Working capital remained negative at approximately $2.553 million. Current liabilities included $1.077 million of accrued preferred stock dividends, $1.140 million of current finance lease obligations, $294,541 of current notes payable and $1.188 million of accounts payable and accrued expenses.
- Total finance lease liabilities were approximately $2.649 million, including significant related-party obligations. The company also had $272,170 of operating lease liabilities.
- The company received a $481,977 Paycheck Protection Program loan in April 2020, bearing interest at 1% and maturing April 30, 2022. Management intended to use the proceeds for qualifying expenses and potential forgiveness.
Material Changes Versus the Prior Comparable Period
- Third-quarter results improved from a $133,288 net loss to $41,935 of net income, while net income attributable to common stockholders improved from a $152,683 loss to $9,568 of income.
- Nine-month net income improved from a $43,707 loss to $184,721 of income, and net income attributable to common stockholders improved from a $103,659 loss to $96,677 of income.
- Revenue growth was concentrated partly in equipment sales, which may be less recurring than subscription revenue. Management stated that some planned customer expansions and upgrades remained delayed.
- Gross margin improved in the quarter but declined for the nine-month period because cost of sales grew faster than revenue.
- Accounts receivable increased to $933,111 from $691,436, while four customers represented 65% of total accounts receivable, compared with three customers representing 38% at December 31, 2019.
- The company added 30 distributors during the first nine months of 2020, bringing active distribution to 51, and exercised 100,000 stock options for $5,400.
Guidance, Outlook, Risks and Unusual Items
- Management reported pending fourth-quarter installations representing more than $58,000 in new monthly recurring billing and equipment orders pending delivery of approximately $420,000. These amounts are not stated as formal financial guidance.
- Management expects continued focus on IBM Power and Intel IaaS, disaster recovery, business continuity and cybersecurity solutions, and cited increasing customer interest in cloud migration.
- The filing states that substantial doubt regarding the company’s ability to continue as a going concern initially existed because of its cash balance and working capital deficiency. Management concluded that improving operating cash flow, revenue trends and the potential renegotiation of related-party financing and leases mitigated that doubt.
- Liquidity remains constrained by the working capital deficit, accrued preferred dividends, lease obligations and other current liabilities. Management stated that additional financing, renegotiation of related-party leases or financing, or stock purchase arrangements may be required if conditions change.
- COVID-19 could disrupt equipment availability, employees, third-party relationships and customer operations. The company operated as an essential business with employees working remotely.
- The company disclosed ineffective disclosure controls and ineffective internal control over financial reporting due to insufficient internal accounting expertise and inadequate segregation of duties. Management intends to add finance and accounting resources.
- The company reported no material litigation, no defaults upon senior securities and no off-balance-sheet arrangements.
- Goodwill and indefinite-lived intangible assets totaled approximately $3.310 million and are subject to impairment testing. The filing notes that impairment assessments rely on estimates and assumptions.
Important Facts for Investors to Verify
- Whether the company can convert the reported pending installations and equipment orders into recurring revenue and cash collections.
- The collectability of accounts receivable given customer concentration and the increase in receivables.
- The company’s ability to fund near-term obligations despite the approximately $2.553 million working capital deficit.
- The terms, forgiveness status and remaining balance of the $481,977 PPP loan.
- The sustainability of profitability excluding the one-time $350,000 gain on contingent liability.
- The magnitude and maturity schedule of related-party finance leases and whether they can be renegotiated if liquidity deteriorates.
- Remediation of the disclosed material weaknesses in accounting expertise, segregation of duties and disclosure controls.
- Potential dilution from 8.426 million outstanding options, including 4.869 million exercisable options, and other potentially dilutive securities.