Data Storage Corporation 10-Q Summary
Business Context and Reporting Period
Data Storage Corporation provides cloud storage, cloud computing, infrastructure-as-a-service, disaster recovery, data backup, email archiving, compliance, and business continuity solutions to business and government customers. The filing covers the unaudited three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2015 | Nine Months Ended September 30, 2015 |
|---|---|---|
| Sales | $930,686 | $2,988,503 |
| Gross profit | $317,770 | $1,123,123 |
| Gross margin | 34.1% | 37.6% |
| Operating loss | $(98,214) | $(323,733) |
| Net loss | $(138,481) | $(515,587) |
| Net loss attributable to common stockholders | $(162,775) | $(586,693) |
| Loss per share, basic and diluted | $(0.00) | $(0.02) |
- Nine-month operating cash flow was $22,957, compared with cash used in operations of $31,259 in 2014.
- Cash decreased to $38,085 at September 30, 2015 from $110,448 at December 31, 2014.
- Working capital deficit was $2,972,918, compared with $2,551,389 at year-end 2014.
- Current liabilities were $3,415,348 against current assets of $442,430. Total liabilities were $5,131,051, compared with total assets of $3,531,427, resulting in a stockholders’ deficit of $1,599,624.
- Material obligations included $90,292 under the revolving credit facility, $350,000 owed to Enterprise Bank, $2,091,363 of convertible debt to related parties, and $638,626 of capital lease obligations.
- The revolving credit facility had $100,000 of availability and bore interest at prime plus 0.5%, or 3.75% at September 30, 2015.
Material Changes Versus Prior Comparable Period
- Third-quarter sales declined 8.2% to $930,686, primarily due to lower infrastructure revenue. Nine-month sales declined 2.5% to $2,988,503.
- Cost of sales increased 14.5% in the quarter and 10.9% year to date, attributed to increased infrastructure services.
- Gross margin decreased from 47.2% to 34.1% in the quarter and from 45.2% to 37.6% for the nine months.
- Operating expenses declined 27.5% in the quarter and 18.4% year to date, primarily due to lower sales and management salaries and reduced advertising expense.
- Third-quarter net loss improved by 11.6% to $138,481, but nine-month net loss increased 1.6% to $515,587 because lower operating losses were offset by higher interest expense.
- Interest expense increased to $218,828 for the nine months from $138,589 in 2014. Equity-method income from the joint venture increased to $26,972 from $20,595.
- Cash flow from financing was negative $95,320, reflecting $165,320 of capital lease repayments, $10,000 of revolving-credit repayments, and $80,000 of new convertible debt.
- Debt owed to the CEO and a related party was converted into convertible notes totaling approximately $1.31 million during 2015; an additional $80,000 convertible note was issued to the CEO in February 2015.
Outlook, Risks, Contingencies, and Unusual Items
- Management states that continuation as a going concern depends on sales growth, expense reductions, obtaining financing, and achieving profitable operations. The company has historically relied on funding from its CEO and largest shareholder, Charles M. Piluso, and expects that support to continue as needed.
- Management intends to expand its IBM marketplace presence and may use working capital and financing proceeds for potential acquisitions, although no specific acquisition commitment is identified in the filing.
- Disclosure controls and internal control over financial reporting were determined to be ineffective because of insufficient internal accounting expertise and inadequate segregation of duties. Management intends to add financial staff resources.
- The company disclosed significant near-term liquidity pressure, including a $2.97 million working capital deficit, only $38,085 of cash, capital lease payments of $235,374 due in the following twelve months, and a $350,000 Enterprise Bank principal payment due April 30, 2016.
- Several related-party convertible notes carry 10% interest. Certain notes had previously defaulted and were subject to additional interest and warrant provisions; their maturities were extended to May 6, 2016.
- The company settled a former chief operating officer’s lawsuit involving alleged unpaid wages of $67,392 plus potential statutory damages and legal fees. The settlement terms were confidential.
- On October 16, 2015, the board approved 69,240 stock options for a vendor at an exercise price of $0.65 per share and approved a compensation plan linked to potential mergers and acquisitions milestones.
- The company reported no material litigation currently pending and no equity securities sales or repurchases during the reporting period. No formal financial guidance was provided.
Most Important Facts for Investors to Verify
- Whether the company can obtain sufficient financing or continued related-party support to meet obligations through the next twelve months.
- The maturity, repayment terms, accrued interest, default provisions, and potential dilution associated with the convertible debt and Enterprise Bank note.
- Whether infrastructure revenue and gross margins can recover after the 2015 decline.
- Management’s remediation of the material weaknesses in accounting expertise and segregation of duties.
- The recoverability of goodwill, intangible assets, and other noncurrent assets given the company’s recurring losses and stockholders’ deficit.
- The potential dilution from 6,221,222 outstanding options, 133,334 warrants, and convertible debt.