Data Storage Corporation

Good day, ladies and gentlemen, and welcome to the Data Storage Corporation second quarter 2021 conference call. At this time, all participants have been placed on the listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, David Waldman of Investor Relations. Sir, the floor is yours.

Thank you, Holly. Good morning, everyone, and welcome to Data Storage Corporation's second quarter 2021 business update conference call. On the call with us this morning are Chuck Peluso, Chairman and Chief Executive Officer, and Chris Panagiotakos, Chief Financial Officer. The company issued a press release this morning containing second quarter 2021 financial results, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications. at 212-671-1020. Before we begin, I'd like to remind listeners that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended that are intended to be covered by the safe harbor created thereby. Forward-looking statements are subject to risks and uncertainties that could cause actual results, performance, or achievements to differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements. Statements preceded by, followed by, or that otherwise include the words believes, expects, anticipates, intends, projects, estimates, plans, and similar expressions or forward conditional verbs such as will, should, would, may, and could are generally forward looking in nature and not historical facts, although not all forward looking statements include the foregoing. Although the company believes that the expectations reflected in such forward looking statements are reasonable, it can provide no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the company's expectations include but are not limited to the company's ability to leverage the scalability and performance of flagship solutions, the company's ability to benefit from the IBM cloud migration underway, the company's ability to position itself for future profitability, and the company's ability to maintain its NASDAQ listing. These risks should not be construed as exhaustive and should be read together with other cautionary statements included in the company's annual report on Form 10-K for the year ended December 31, 2020. Subsequent quarterly reports on Form 10Q and current reports on Form 8K filed with the Securities and Exchange Commission. Any forward-looking statements speak only as of the date on which it was initially made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or otherwise. I'd now like to turn the call over to Chuck Peluso. Please go ahead, Chuck.

Thanks, David. Good morning, everyone. I'm pleased to report that during the second quarter, we made progress financially and operationally. In addition, we uplifted the NASDAQ successfully and completed our merger with Flagship. First, in terms of our results, we achieved 76% increase in revenue for the three months ended June 30th, 2021, compared to the same period last year. Not only did our revenue increase, but we reported growth across all product lines and expect to maintain strong organic growth going forward. Revenue for infrastructure and disaster recovery, which are our subscription-based cloud solutions, increased 25%. Revenue for equipment and software increased 208%, and revenue for managed services increased 269%. Revenue for Nexus VoIP services increased 19%. We attribute success to the increase in monthly subscription revenue and the additional sales from the flagship solutions merger. It's important to note that the second quarter results only reflect the month of June, since we completed the merger in May 31st, 2021. I'd like to highlight that on a pro forma basis, for the three months, revenue would have been over $7.8 million, and on a pro forma basis for the full year of 2020, if we look back, the revenue would have been over $18 million. During the call today, I'd like to discuss several items in greater detail. Our accomplishments to date, second, the importance of the flagship merger, and finally, I'd like to discuss our organic growth strategy. I'll start by providing a brief background on the company. Some of you may be new to us following the recent NASDAQ uplisting. The company overall, since we completed several acquisitions, is a 25-year veteran in providing business continuity services, such as disaster recovery, infrastructure to service, and cybersecurity. We provide these solutions and services, a broad range of customers in several industries, and maintain our own internal business development team. In addition to the business development team, we also have distribution channels that we refer to as channel partners. For the past two decades, our mission has been to protect client's data, ensure business continuity, and assist in the compliance requirements of the client, typically providing better management and control over our client's digital information. Since the company's establishment in 2008, we've completed some meaningful acquisitions, all focused within the IBM i space, the latest being Flagship. We have limited competition, and it's extremely important to note that we do not compete with Amazon Web Services or Microsoft in this space. There has been a massive migration on Intel and Windows service to the cloud, from on-premise to off-premise. We are now seeing that same migration in the IBM Power Market. This transition to the IBM Power Market has only begun when we were at the forefront of this transformation. Let's discuss Flagship and why this is so exciting and highly synergistic for us. Flagship is a provider of IBM solutions, managed services, cloud solutions, and extremely complementary to our own IBM business. We anticipate meaningful operational efficiency and have begun to realize the synergies and advantages of the combined companies this quarter. By combining Flagship with data storage, we are now a comprehensive, one-stop provider with the ability to provide each other's solutions and allowing some significant cross-selling opportunities that we intend to leverage. In connection with Emerger, we are pleased to welcome Mark Riley. Mark continues to serve as CEO of Flagship Subsidiary and has also joined the Board of Directors of Data Storage Corporation. In total, we have added 15 Flagship employees increasing our headcount to over 44 full-time employees. The flagship merger followed a successful uplisting and capital raise. The public offering resulted in proceeds of $10.8 million, and subsequent to the flagship merger, we received approximately $3.4 million from voluntary exercise of a portion of our loans. Additionally, we recently completed registered direct offering that resulted in approximately $8.3 million in gross proceeds or $7.6 million in net proceeds. As a result, we have significantly strengthened our balance sheet, enabling us to execute on our organic growth strategy, as well as explore opportunistic and accretive acquisitions. Given our expanded offerings following the acquisition, we have positioned our sales and marketing organization to focus more heavily on four key verticals. where we have particularly strong sector experience and have seen significant growth opportunities. Our new core marketing verticals include sports, banking and finance, healthcare, and the government sector. We have already have a number of well-recognized customers within each one of these sectors, which provide us an immediate credibility as we target new customers. That said, we will not neglect other industries but we believe the new strategy will accelerate our organic growth. With respect to the sports division, Flagship brings the knowledge and experience working with billion-dollar sports franchises that understand the requirement, the solution that can deliver key insight for sporting entertainment venues, helping to turn fan engagement into breakthrough revenue. Today, stadiums require a sophisticated mix of hardware, software, wireless connectivity to establish communications between stadium operators and fans. Sports arenas require breaking down audience data into relevant actionable insights, including data from cameras, infrastructure sensors, historical databases, concession systems, stores at the team stadiums, ticketing systems, and more. In turn, they're using these insights for marketing and programming strategies or to optimize and personalize the fan experience. This is a large market, and we intend to focus on continuing sales in this space and have seasoned executives spearheading these opportunities. As for banking and finance, technology is truly changing the way banks do business, and the rise in financial technology solutions require a new approach to information technology and banking. We are proud to have served customers within this sector that rely on us to help them through these transitions. Over time, our strategy is to assist them in transforming financial data into actionable insight, as well as optimize the customer experience and operations. We plan to introduce new tools and capabilities, such as artificial intelligence, implementing quality cybersecurity programs, and leveraging all the benefits that cloud computing and modern infrastructure has to offer. There is a large market opportunity for us and an untapped customer base that we intend to aggressively penetrate. Let's discuss healthcare sector. The healthcare industry basically has the largest IBM user community next to government. Many of the providers are turned to digital innovations to respond to COVID-19 pandemic and the new normal. Our goal is to provide solutions that make real-time data-driven decisions and optimize healthcare asset availability and performance with tools such as predictive analytics, proactive maintenance to enhance operations. With our dedicated division compromised of knowledgeable employees, we intend to strengthen our marketing within this industry and leverage our existing contacts to gain additional traction. Last but not least, the government. This is probably the most largest of the IBM users. Over the years, we've worked with a number of government agencies and intend to grow the customer base within this segment for years to come. The government, we believe, represents the largest IBM community, providing significant opportunities to deploy products and services and deliver smart technology solutions that help mitigate risk, reduce cost, and increase productivity. In total, the total marketplace for infrastructures of service and disaster recovery globally is estimated over 1 million virtual IBM servers called LPARs. And yet we have barely scratched the surface. The latest survey shows that globally only 15% of the community is using some type of cloud-based solution. Our strategy is to build with our customers and establish long-term contracts to supply our monthly subscription-based solutions. The total value of these recurring contracts we already have in place with our clients is over $10 million and growing. I believe the renewal rate is over 94% on our term subscription agreements. Our subscription-based model is also highly scalable and provides high return on capital. As an example, a platform custom-built under our design can serve 20 clients averaging $3,000 per month per client, which equates to $60,000 per month, or $720,000 of revenue per year, at a cost of $365,000. Our average term is typically 36 months. Alone, it's an attractive model. However, it's important to note that for each additional client we add, the incremental cost is $10,000 in CapEx, versus over $18,000 per client on the initial bill, This represents a 55% reduction in incremental costs, and our payback period is less than four months. Clearly, return on capital under this model is attractive and should contribute to our margin expansion as we continue to capture new clients. This does not include technical support and networking. However, we believe the return is excellent. We have seen a strong uptick in client interest in sales proposals. From January to July alone, we had over 26,000 visitors to our website. This illustrates the growing interest among the IBM community to find solutions on migration to the cloud. We are also expanding our distribution channels through new partnerships, as well as relationships with cable companies. We are also looking at opportunities internationally, and we'll work with local partners. While a significant portion of revenue has been subscription-based, we also generate revenue from the sale of equipment and software, cybersecurity, data storage, IBM power systems equipment and software, and managed service solutions. Moving forward, we intend to shift customers to subscription-based services as they provide predictable, higher margin recurring revenue, whereas with equipment, They're meaningful dollars but can be less predictive and subject to seasonality and refresh and tend to be a lower margin. To wrap it up, we accomplished a number of significant achievements in just a short amount of time. Revenue for the quarter increased 76% over the same period last year. We uplisted to NASDAQ. We completed the acquisition of Flagship and significantly enhanced our balance sheet. As a result, we believe we are well positioned to execute on our organic growth strategy as well as explore synergistic acquisitions. Overall, I'm pleased with our performance and I truly believe the best is yet to come. With that, I'd like to turn this over to Chris, our CFO, to discuss the second quarter financials. Go ahead, Chris.

Thank you, Chuck. Follow revenue for the three months ended June 30th, 2021 was $3.5 million. for an increase of 76% compared to 2 million during the same period last year. The increase was primarily attributable to additional sales from the flagship merger and an increase in software and equipment sales and infrastructure and disaster recovery cloud services. Cost of sales for the three months ended June 30th, 2021 was 2 million, an increase of 77% compared to 1.1 million for the three months ended June 30th, 2020. The increase was mostly related to variable costs incurred to produce and sell our products or services. For the three months ended June 30, 2021, selling, general, and administrative expenses were $1.6 million, an increase of 62% as compared to $1 million for the three months ended June 30, 2020. The increase primarily was attributable to an increase in salaries related to higher headcount professional fees related to the merger, and advertising expenses due to the additional flagship marketing campaigns launched post-merger. Net income before provision for income taxes for the three months ended June 30, 2020, was $135,561, as compared to a net income of $183,259 for the three months ended June 30, 2020. Cash and cash equivalents at June 30, 2021 were 3.1 million. Subsequent to June 30, 2021, investors exercised 455,390 warrants into 455,390 shares of common stock for 3.4 million. Additionally, on July 21, 2021, The company completed an equity offering, whereas the company sold 1,375,000 shares of common stock and 1,031,250 warrants for net proceeds of $7.6 million. The warrants have an exercise price of $6.14 and a term of five and a half years. Thank you. I will now turn the call back over to Chuck.

Thanks, Chris. So I believe we can move into the Q&A if we could, David.

Yep, Holly, if you could provide the instructions.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question is coming from Sam Hesker. Please announce your affiliation, then pose your question.

Hi there. I'm from Boulder Capital. Congratulations on your quarter, by the way. My first question is regarding your recent announcement of your agreement with AbleOne. Would you be able to walk me through your marketing programs in Canada and any updates you have regarding your business there? Sure.

Thanks for the question. We did have a press release that went out on AbleOne. AbleOne is a provider in the Toronto metropolitan area with two data centers. in that region. They are considered a channel partner. What we did in this particular case is in their data centers, we placed our model, our equipment that I described earlier in there, and so we're able to serve the ABLE One clients. So ABLE One is a provider of IBM iServices, typically selling equipment and software and providing IBM solutions surrounding the IMI. And with that, now, through the customer base that they've had for many years, have the ability to provide infrastructures of service and disaster recovery off of our platform in Canada. They have a customer base. So, for example, for their prospects and their customers, it's either if they're looking to migrate to the cloud, They're either going to use ABLE 1 or come basically directly to us for that because this migration is underway right now. So we have a great relationship with ABLE 1. We fully support them, and our tech teams work closely together to be able to assist in the migration.

Okay, thank you. Another question, you mentioned earlier in the call that you're selling distributors or channel partners. I'd like to get a better idea of how they do their prospecting and selling.

Very, very interesting on that. We believe that the best way to approach this marketplace is by working with companies that sell software and hardware to the IBM community, the IBM I community. So with that, we have marketing programs, templates basically, where we fully support and do programs for them to generate awareness. And then with that, calls and programs begin to be able to educate their client base of the ability finally to be able to move to disaster recovery in the cloud or infrastructure and move from off-premise to offline. I'm sorry, on-premise to off-premise. So when they're ready to refresh their equipment, they know that the option is there for them to be able to refresh. In the meanwhile, instead of spending tens of thousands of dollars just for the software alone for backup and recovery of their information, they're able to move to our solutions, which is subscription-based. So they have the customer base, and they're the trusted advisors. So it's been a very successful program for us to date.

Okay. Thank you for answering my questions, and congrats again on the great course.

Thank you.

As a reminder, if there are any questions or comments, please press star 1 on your phone.

You must have done a good job explaining.

Your next question is coming from Evan Greenberg. Please announce your affiliation, then pose your question.

Legend Cap Opportunity Fund. How are you, Chuck?

Good, Evan. How are you?

Good. Two questions. Number one, I saw that the gross margins really started to expand quite a bit. I don't know if it was substantial, but I would anticipate as the mix grows and as you get more recurring revenue, that gross margin will continue to be incremental. Is that part of the plan?

Yeah. First of all, we love equipment sales, frankly. It puts cash on the balance sheet, but at the beginning of every month, it's a new life. So we continue to grow subscription-based services, but we don't turn away, obviously, the equipment. But the more of that mix happens. If you went back a few years ago, 65% of our revenue prior to Flagship was subscription sales, 35%. It was equipment, 65% subscription. Now that mix has changed. And so we were seeing 80% on subscription, 20% on equipment. Now with Flagship, Flagship does a great job. They have very large clients that are not going to necessarily move so fast to off-premise, but there are other data analytics and other programs that they're working with, sports franchises and other large customers. And so, you know, that mix, we'll see how that turns out over the course of the remainder of this year and the beginning of next year, but the companies are working together to build more subscription services. But it's according to what happens with that blend and when a client, not to mention names in some of the larger ones, but You know, what happens is, is that, you know, when a very large sale comes in, it pushes off that margin and takes it down. Typically, equipment's around a 25 to 28 percent margin on equipment, where subscription, when we price them out, are typically around 50 percent on subscription-based services for infrastructure and DR. So, it's according to what's going on for that quarter.

Male Speaker The second question I had had to do with depreciation and amortization. What is, you know, your EBITDA is a lot greater than your earnings because of the DNA. So I wanted to understand what the DNA was from and whether that's going to be, it seems like it's a continuing situation for the company, though declining as a percentage of sales.

Well, we have capitalized leases, and so it's not going to show the full amount on the depreciation side as we're talking about gross profit margin. But overall, prior to, you know, we were on OTC, up listed in NASDAQ, and finally have some great capital on our balance sheets and good cash on our balance sheets. So, you know, most of the earnings that we have were put back into sales and marketing programs. You know, the companies, you know, especially in the case of Flagship, when you're purchasing a company like Flagship, and, you know, that money is being reinvested into the company, into those types of programs. So it's tough to see. Now, for the most part, you know, I believe that the companies are going to use the term profitable cash flow profitable, and we'll use the new cash. for organic growth strategies. So I believe that there'll be a difference now on the profitability because we don't have to continue to reinvest into the sales and marketing programs.

Great. The final question I was going to ask... Working with IBM and what they do, are you integrated into their Linux UX business and their Red Hat business, and do you do joint sales and presentations with those businesses?

Flagship is very involved with IBM. You know, with us prior to Flagship, you know, we buy all of our equipment. That's all IBM, the latest and the greatest equipment. and have deployed millions in assets into those data centers, and we've assembled the product. In the case of Flagship, they work very, very closely with co-marketing programs and solutions. So Flagship is very much engaged with IBM on that, different than, you know, prior with data storage, with infrastructure and DR. But yes, they're very much involved with Red Hat and all of that.

Okay, thanks a lot for your time.

There are no more questions in queue. I would now like to turn the floor back over to management for any closing comments.

A few closing points. Overall, we believe we are well positioned in the IBM power system space. To assist companies in the migration, it's clearly under way. Let's also keep in mind that the company also provides our clients the ability to migrate their Windows applications, Office 365, all that exists in the Intel cloud environment, such as disaster recovery, cloud hosting, cybersecurity, data analytics. We do that really on the Windows x86 side. But our core, our marketing activities today are based around serving the IBM client community. As mentioned, our goal for the remainder of 2021 is to increase our presence in the IBM Power infrastructure cloud and business continuity marketplace and to continue to grow our position as a leader in our market. We continue to be highly encouraged by the activity and the outlook for the business. I'd just like to thank everyone for joining today, and have a great day.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.