Data Storage Corporation — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2012. Data Storage Corporation provides hybrid cloud, cloud storage, SaaS, backup, disaster recovery, data replication, compliance, and professional services through three technical centers in the United States. The company is a smaller reporting company and its common stock traded on OTC Bulletin Board.
Financial Highlights
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Sales | $1.014 million, versus $0.899 million | $1.984 million, versus $1.771 million |
| Gross profit | $0.232 million, versus $0.296 million | $0.617 million, versus $0.588 million |
| Gross margin | 22.9%, versus 32.9% | 31.1%, versus 33.2% |
| Operating loss | $0.754 million, versus $0.378 million | $1.268 million, versus $0.659 million |
| Net loss | $0.790 million, versus $0.534 million | $1.340 million, versus $0.936 million |
| Loss available to common shareholders | $0.802 million, versus $0.547 million | $1.365 million, versus $0.961 million |
| Basic and diluted loss per share | $0.028 loss, versus $0.025 loss | $0.047 loss, versus $0.048 loss |
- Operating expenses were $985,497 in the quarter and $1.885 million year to date, increasing 46.2% and 51.2%, respectively. Increases were driven primarily by sales salaries, executive salaries, and stock-based compensation.
- Six-month net cash used in operating activities was $557,496, compared with $253,806 in the prior year. Capital expenditures used $68,769, compared with $26,740.
- Financing activities provided $500,491, including $500,000 of convertible debt and $115,274 of officer advances, partially offset by lease and loan repayments.
- Cash and cash equivalents declined to $42,716 at June 30, 2012 from $168,490 at December 31, 2011.
- Working capital deficiency was $2.551 million at June 30, 2012, compared with $2.282 million at year-end 2011.
- Total liabilities were $4.915 million, compared with $4.168 million at December 31, 2011. Stockholders’ equity fell to $221,279 from $1.140 million.
- Debt and financing obligations included a $500,000 three-year convertible note issued to a director at 10% interest, convertible at $0.85 per share; $100,292 under a revolving credit facility; $106,514 of loan payable; and $1.187 million of capital lease obligations, including $674,523 current and $512,962 long term.
- The company had 29,056,622 common shares outstanding at June 30, 2012. It also had 3,703,476 options outstanding and 28,642 warrants outstanding.
Material Changes Versus Prior Comparable Period
- Quarterly sales increased 12.8% and six-month sales increased 12.0%, which management attributed primarily to increased sales personnel.
- Quarterly gross profit decreased 21.7% despite higher sales, while six-month gross profit increased modestly. Management attributed margin pressure to additional operations personnel, prior-period installation charges, and additional hardware costs.
- Quarterly operating loss increased 99.3%; six-month operating loss increased 92.5%.
- Quarterly net loss increased 47.8%; six-month net loss increased 43.2%.
- Interest expense and related debt discount expense declined substantially because convertible notes had been converted in December 2011.
- Stock-based compensation increased to $169,016 for the six months, from $31,960 in the prior-year period.
Outlook, Liquidity, Risks, and Unusual Items
Management stated that continued operations depend on sales growth, reduced operating expenses, obtaining financing, and achieving profitable operations. The filing expressly identifies substantial doubt-related liquidity conditions associated with recurring losses, negative operating cash flow, and the working capital deficiency. Management expected continued funding from the CEO and largest shareholder and intended to pursue stock issuances and other financing as needed.
Management planned to increase its presence in the IBM marketplace using expanded technical expertise, storage capacity, and managed services. No quantified revenue, earnings, or cash-flow guidance was provided.
- Disclosure controls and procedures were concluded to be ineffective because the company lacks sufficient size and complexity to segregate duties properly.
- The company reported no material litigation, no defaults upon senior securities, and no separately identified risk factors in Item 1A.
- Market risks include interest-rate and currency-exchange exposure; the company stated that it does not take specific actions to limit those exposures.
- Related-party obligations included $740,091 owed to the CEO, bearing no interest and having no stated repayment terms, and a $500,000 convertible note issued to a director.
- The company recorded $25,000 of preferred stock dividends for the six months and had $187,500 of dividend payable at June 30, 2012.
- Goodwill and other intangible assets totaled $3.050 million net, and the filing states that impairment testing is required when circumstances indicate potential impairment.
Important Facts for Investors to Verify
- Whether the company can secure sufficient financing or continued related-party support to fund operations and meet near-term obligations.
- Whether sales growth can offset rising sales, executive, operations, and stock-based compensation costs.
- The repayment schedule and refinancing or conversion implications of the convertible note, capital leases, credit facility, and other debt.
- The adequacy of cash of only $42,716 relative to current liabilities of $3.143 million and the reported working capital deficiency.
- The potential dilution from 3.703 million outstanding options, 28,642 warrants, and the convertible note.
- Management’s remediation plans for ineffective disclosure controls and segregation-of-duties limitations.
- The recoverability of goodwill and intangible assets and the effect of any future impairment charges.