Business Context and Reporting Period
Company: Data Storage Corporation (DSC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: DSC provides technical professional services focused on data protection, management, and cloud computing. Key offerings include offsite data backup, disaster recovery, business continuity planning, virtualization, and Electronic Medical Records (EMR) solutions for the healthcare sector. The company operates data centers in Westbury, New York, and maintains a disaster recovery facility over 1,000 miles away.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Sales | $585,285 | $629,675 |
| Gross Profit | $125,482 | $283,668 |
| Gross Margin | 21.4% | 45.0% |
| Operating Expenses | $1,170,903 | $823,475 |
| Net Loss | ($1,050,215) | ($537,959) |
| Cash and Cash Equivalents | $28,160 | $289,061 |
| Working Capital | ($169,721) | $38,809 |
| Total Liabilities | $758,189 | $303,619 |
| Stockholders' Equity (Deficit) | ($69,746) | $573,680 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased by 7.1% ($44,390) primarily due to industry-wide price compression.
- Margin Compression: Gross margin dropped significantly from 45.0% to 21.4%. This was driven by the addition of lower-margin managed services and hardware resale, combined with price compression on core data backup services.
- Expense Increase: Operating expenses rose by 42.2% ($347,428). The primary driver was a $221,176 increase in sales salaries and a $108,651 increase in marketing and administrative salaries as the company expanded into new business lines.
- Liquidity Deterioration: Cash reserves decreased by approximately 90% to $28,160. Working capital turned negative, moving from a surplus of $38,809 to a deficit of $169,721.
- Debt and Related Party Obligations: Total liabilities more than doubled. Notable increases include "Due to officer" (long-term) rising to $379,025 and "Due to related party" (current) increasing to $34,718.
Guidance, Outlook, and Risks
- Revenue Outlook: Management forecasts revenue of $6 million for 2010 and $11 million for 2011, driven by organic growth and acquisitions.
- Acquisition Strategy: The company plans to acquire synergistic data protection and cloud storage businesses. A term sheet was signed in February 2010 to acquire assets of SafeData, LLC for $3 million ($2.5M cash, $500k stock).
- Liquidity Risk: The financial statements are prepared on a "going concern" basis. The company's ability to continue operations depends on achieving sales growth, reducing expenses, and obtaining necessary financing. The company has historically been funded by the CEO and majority shareholder.
- Internal Controls: Management identified material weaknesses in internal control over financial reporting, specifically citing a lack of sufficient internal accounting expertise and a lack of segregation of duties.
- Market Risk: The company holds no derivative instruments and does not engage in hedging activities.
Investor Verification Checklist
- Going Concern Status: Verify the company's ability to secure additional financing given the negative working capital of ($169,721) and cash balance of only $28,160.
- Related Party Transactions: Review the significant increase in liabilities "Due to officer" ($379,025) and "Due to related party" ($34,718) to understand the terms and repayment schedules.
- Revenue Quality: Assess the sustainability of the revenue mix, noting the shift toward lower-margin hardware resale and managed services which compressed gross margins.
- Acquisition Funding: Confirm the source of funds for the proposed $3 million SafeData acquisition, as current cash reserves are insufficient.
- Internal Controls: Evaluate the remediation plan for the identified material weaknesses in financial reporting and segregation of duties.