Business Context and Reporting Period
Company: Data Storage Corporation (DSC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: DSC provides disaster recovery, business continuity, and data protection services, including high availability replication, email archival, and cloud computing solutions. The company operates four data centers across Rhode Island, New York, Florida, and Massachusetts.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Revenue (Sales) | $757,224 | $280,406 |
| Gross Profit | $248,145 | $68,246 |
| Gross Margin | 32.8% | 24.3% |
| Net Loss | $(464,841) | $(532,131) |
| Net Loss Available to Common Shareholders | $(489,841) | $(557,131) |
| Cash and Cash Equivalents (End of Period) | $152,872 | $73,234 |
| Total Assets | $5,219,351 | $688,443 |
| Total Liabilities | $3,701,918 | $758,189 |
| Working Capital | $(1,973,597) | $(169,721) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 170% year-over-year, driven by the acquisition of SafeData, LLC and increased equipment sales.
- Profitability: While the company remains unprofitable, the net loss decreased by approximately 13% compared to the prior year period. Gross margins improved significantly from 24.3% to 32.8% due to higher-margin SafeData services.
- Balance Sheet Expansion: Total assets increased nearly 7.6x to over $5.2 million, primarily due to the acquisition of SafeData assets (Goodwill of $2.1M and Intangible Assets of $1.4M) and increased property and equipment.
- Liabilities: Total liabilities increased to $3.7 million, driven by the assumption of SafeData liabilities (including capital leases and deferred revenue) and new convertible debt financing.
- Operating Expenses: SG&A expenses increased by $95,144 (16%), largely due to professional fees associated with the SafeData acquisition, partially offset by a reduction in salary expenses following an executive termination.
Outlook, Risks, and Unusual Items
- Acquisition of SafeData: On June 17, 2010, DSC acquired SafeData, LLC for a total purchase price of approximately $2.86 million (cash and stock). This transaction significantly altered the company's asset base and revenue profile.
- Financing Activities: The company raised $1.3 million in May 2010 through the issuance of common stock, convertible debentures ($1M), and warrants. This financing was critical for funding the SafeData acquisition.
- Liquidity and Going Concern: Management explicitly states that the company's ability to continue as a going concern is dependent on achieving sales growth, reducing operating expenses, and obtaining necessary financing. The company has a history of funding by the CEO and majority shareholder.
- 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: For the six months ended June 30, 2010, one customer represented approximately 32% of total sales.
Investor Verification Checklist
- Debt Covenants and Terms: Verify the specific terms, interest rates, and conversion prices of the $1 million convertible debt and the assumed capital lease obligations from SafeData.
- Goodwill Valuation: Review the independent appraisal supporting the $2.1 million goodwill allocation to ensure it is not impaired in future periods.
- Related Party Transactions: Confirm the terms of the $609,754 owed to the CEO and the rent arrangements for the New York data center.
- Revenue Sustainability: Assess the retention of the single customer representing 32% of sales and the integration success of SafeData's customer base.
- Cash Burn Rate: Monitor the negative operating cash flow of $(142,264) to determine if current cash reserves ($152,872) are sufficient to meet upcoming obligations without further dilution or debt.