Data Storage Corp 10-Q for FY2021 Q1
Data Storage Corp (DTST)
About this 10-Q
Data Storage Corp filed this 10-Q on May 17, 2021, covering the quarter ended March 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.57M
- up 22.7% from $2.1M a year earlier
- Net income
- $2099
- compared with a net loss of $34.41K a year earlier
- Diluted EPS
- -$0.01
- compared with -$0.02 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2021
| ☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission File No. 001-35384
DATA STORAGE CORPORATION
(Exact name of registrant as specified in its charter)
| NEVADA | 98-0530147 | |
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
| 48
South Service Road Melville, NY |
11747 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (212) 564-4922
Securities registered pursuant to Section 12(b) of the Act: None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Class A common Stock, par value $0.001 per share | DTST | The Nasdaq Stock Market, LLC (The Nasdaq Capital Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company filer. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | Accelerated Filer ☐ |
| Non-Accelerated Filer ☒ | Smaller Reporting Company ☒ |
| Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of May 17, 2021, was 3,215,063.
DATA STORAGE CORPORATION
FORM 10-Q
INDEX
2
DATA STORAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 634,312 | $ | 893,598 | ||||
| Accounts receivable (less allowance for credit losses of $30,000 in 2021 and 2020) | 724,683 | 554,587 | ||||||
| Prepaid expenses and other current assets | 529,490 | 239,472 | ||||||
| Total Current Assets | 1,888,485 | 1,687,657 | ||||||
| Property and Equipment: | ||||||||
| Property and equipment | 8,152,661 | 7,845,423 | ||||||
| Less—Accumulated depreciation | (5,762,511 | ) | (5,543,822 | ) | ||||
| Net Property and Equipment | 2,390,150 | 2,301,601 | ||||||
| Other Assets: | ||||||||
| Goodwill | 3,015,700 | 3,015,700 | ||||||
| Operating lease right-of-use assets | 220,419 | 241,911 | ||||||
| Other assets | 49,654 | 49,310 | ||||||
| Intangible assets, net | 407,435 | 455,935 | ||||||
| Total Other Assets | 3,693,208 | 3,762,856 | ||||||
| Total Assets | $ | 7,971,843 | $ | 7,752,114 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 1,538,231 | $ | 979,552 | ||||
| Dividend payable | 1,154,556 | 1,115,674 | ||||||
| Deferred revenue | 402,404 | 461,893 | ||||||
| Line of credit | 24 | 24 | ||||||
| Finance lease payable | 171,099 | 168,139 | ||||||
| Finance leases payable related party | 1,102,488 | 1,149,403 | ||||||
| Operating lease liabilities short term | 105,319 | 104,549 | ||||||
| Note payable | 455,200 | 374,871 | ||||||
| Total Current Liabilities | 4,929,321 | 4,354,105 | ||||||
| Note payable long term | 26,777 | 107,106 | ||||||
| Operating lease liabilities long term | 125,391 | 147,525 | ||||||
| Finance leases payable, long term | 208,035 | 247,677 | ||||||
| Finance leases payable related party, long term | 757,733 | 974,743 | ||||||
| Total Long Term Liabilities | 1,117,936 | 1,477,051 | ||||||
| Total Liabilities | $ | 6,047,257 | $ | 5,831,156 | ||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, Series A par value $0.001; 10,000,000 shares authorized; 1,401,786 shares issued and outstanding in each year | 1,402 | 1,402 | ||||||
| Common stock, par value $0.001; 250,000,000 shares authorized; 3,215,063 shares issued and outstanding in 2021 and 2020 | 3,213 | 3,213 | ||||||
| Additional paid in capital | 17,787,956 | 17,745,785 | ||||||
| Accumulated deficit | (15,771,521 | ) | (15,734,737 | ) | ||||
| Total Data Storage Corp Stockholders’ Equity | 2,021,050 | 2,015,663 | ||||||
| Non-controlling interest in consolidated subsidiary | (96,464 | ) | (94,705 | ) | ||||
| Total Stockholders’ Equity | 1,924,586 | 1,920,958 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 7,971,843 | $ | 7,752,114 | ||||
The accompanying notes are an integral part of these condensed consolidated Financial Statements.
3
DATA STORAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Sales | $ | 2,574,691 | $ | 2,098,710 | ||||
| Cost of sales | 1,420,899 | 1,216,117 | ||||||
| Gross Profit | 1,153,792 | 882,593 | ||||||
| Selling, general and administrative | 1,118,407 | 876,626 | ||||||
| Income from Operations | 35,385 | 5,967 | ||||||
| Other Income (Expense) | ||||||||
| Interest income | 2 | 20 | ||||||
| Interest expense | (35,047 | ) | (46,460 | ) | ||||
| Total Other Income (Expense) | (35,045 | ) | (46,440 | ) | ||||
| Income (Loss) before provision for income taxes | 340 | (40,473 | ) | |||||
| Provision for income taxes | — | — | ||||||
| Net Income (Loss) | 340 | (40,473 | ) | |||||
| Non-controlling interest in consolidated subsidiary | 1,759 | 6,063 | ||||||
| Net Income (Loss) attributable to Data Storage Corp | 2,099 | (34,410 | ) | |||||
| Preferred Stock Dividends | (38,883 | ) | (34,186 | ) | ||||
| Net Loss attributable to Common Stockholders | $ | (36,784 | ) | $ | (68,596 | ) | ||
| Earning (Loss) per Share – Basic | $ | (0.01 | ) | $ | (0.02 | ) | ||
| Earning (Loss) per Share – Diluted | $ | (0.01 | ) | $ | (0.02 | ) | ||
| Weighted Average Number of Shares - Basic | 3,213,485 | 3,212,152 | ||||||
| Weighted Average Number of Shares - Diluted | 3,213,485 | 3,212,152 | ||||||
The accompanying notes are an integral part of these condensed consolidated Financial Statements.
4
DATA STORAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2021
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount (1) | Capital (1) | Deficit | Interest | Equity | |||||||||||||||||||||||||
| Balance, January 1, 2020 | 1,401,786 | $ | 1,402 | 3,210,985 | $ | 3,211 | $ | 17,581,659 | $ | (15,790,076 | ) | $ | (68,048 | ) | $ | 1,728,148 | ||||||||||||||||
| Stock-based Compensation | — | — | — | — | 33,048 | — | — | 33,048 | ||||||||||||||||||||||||
| Stock Options Exercise | — | — | 2,500 | 3 | 5,397 | — | — | 5,400 | ||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | (34,410 | ) | (6,063 | ) | (40,473 | ) | |||||||||||||||||||||
| Preferred Stock | — | — | — | — | — | (34,186 | ) | — | (34,186 | ) | ||||||||||||||||||||||
| Balance, March 31, 2020 | 1,401,786 | $ | 1,402 | 3,213,485 | $ | 3,214 | $ | 17,620,104 | $ | (15,858,672 | ) | $ | (74,111 | ) | $ | 1,691,937 | ||||||||||||||||
| Balance, January 1, 2021 | 1,401,786 | $ | 1,402 | 3,213,485 | $ | 3,213 | $ | 17,745,785 | $ | (15,734,737 | ) | (94,705 | ) | $ | 1,920,958 | |||||||||||||||||
| Stock-based Compensation | — | — | — | — | 42,171 | — | — | 42,171 | ||||||||||||||||||||||||
| Net Income | — | — | — | — | — | 2,099 | (1,759 | ) | 340 | |||||||||||||||||||||||
| Preferred Stock | — | — | — | — | — | (38,883 | ) | — | (17,278 | ) | ||||||||||||||||||||||
| Balance, March 31, 2021 | 1,401,786 | $ | 1,402 | 3,213,485 | $ | 3,213 | $ | 17,787,956 | $ | (15,771,521 | ) | $ | (96,464 | ) | $ | 1,924,586 | ||||||||||||||||
(1) Amounts have been retroactively restated for all periods to reflect the one-for-forty reverse split of common stock on May 14, 2021
The accompanying notes are an integral part of these condensed consolidated Financial Statements.
5
DATA STORAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Income (Loss) | $ | 340 | $ | (40,473 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 267,189 | 241,658 | ||||||
| Stock based compensation | 42,171 | 33,048 | ||||||
| Changes in Assets and Liabilities: | ||||||||
| Accounts receivable | (170,096 | ) | (145,521 | ) | ||||
| Other assets | (345 | ) | — | |||||
| Prepaid expenses and other current assets | (290,018 | ) | (29,657 | ) | ||||
| Right of use asset | 21,492 | 20,067 | ||||||
| Accounts payable and accrued expenses | 558,679 | 123,890 | ||||||
| Deferred revenue | (59,489 | ) | 113,901 | |||||
| Operating lease liability | (21,364 | ) | (19,193 | ) | ||||
| Net Cash Provided by Operating Activities | 348,559 | 297,720 | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Capital expenditures | (257,238 | ) | (56,812 | ) | ||||
| Net Cash Used in Investing Activities | (257,238 | ) | (56,812 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Repayments of capital lease obligations | — | (169,711 | ) | |||||
| Repayments of finance lease obligations related party | (313,925 | ) | — | |||||
| Repayments of finance lease obligations | (36,682 | ) | — | |||||
| Cash received for the exercised of options | — | 5,400 | ||||||
| Repayment of Credit Line | — | (74,976 | ) | |||||
| Net Cash Used in Financing Activities | (350,607 | ) | (239,287 | ) | ||||
| Net change in in Cash and Cash Equivalents | (259,286 | ) | 1,621 | |||||
| Cash and Cash Equivalents, Beginning of Period | 893,598 | 326,561 | ||||||
| Cash and Cash Equivalents, End of Period | $ | 634,312 | $ | 328,182 | ||||
| Supplemental Disclosures: | ||||||||
| Cash paid for interest | $ | 31,971 | $ | 177,451 | ||||
| Cash paid for income taxes | $ | — | $ | — | ||||
| Non-cash investing and financing activities: | ||||||||
| Accrual of preferred stock dividend | $ | 38,883 | $ | 34,186 | ||||
| Assets acquired by finance lease | $ | 50,000 | $ | 336,165 | ||||
The accompanying notes are an integral part of these condensed consolidated Financial Statements.
6
DATA STORAGE CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2021
Note 1 - Basis of Presentation, Organization and Other Matters
Data Storage Corporation (“DSC” or the “Company”) provides subscription based, long term agreements for disaster recovery solutions, Infrastructure as a Service (IaaS) and VoIP type solutions.
Headquartered in Melville, NY, DSC offers solutions and services to businesses within the healthcare, banking and finance, distribution services, manufacturing, construction, education, and government industries. DSC derives its revenues from subscription services and solutions, managed services, software and maintenance, equipment and onboarding provisioning. DSC maintains infrastructure and storage equipment in several technical centers in New York, Massachusetts, Texas and North Carolina.
Going Concern Analysis
As reflected in the Condensed Consolidated Financial statements, the Company had a net loss attributable to common shareholders of $(36,784) and $(68,596) for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, DSC had cash and cash equivalents of $634,312 and a working capital deficiency of $3,040,836. As a result, these conditions initially raised substantial doubt regarding our ability to continue as a going concern.
During the three months ended March 31, 2021, the Company provided cash from operations of $348,559 with continued revenue growth of subscription solutions. Further, the Company has no capital expenditure commitments and the Company’s offices have been consolidated and fully staffed and with sufficient room for growth.
If necessary, management also determined that it is probable that related party sources of debt financing and capitalized leases can be renegotiated based on management’s history of being able to raise and refinance debt through related parties.
As a result of the foregoing and current favorable trends of improving cash flow, and after further analysis, the Company concluded that the initial conditions which raised substantial doubt regarding the ability to continue as a going concern has been alleviated.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The Condensed Consolidated Financial statements include the accounts of (i) the Company, (ii) its wholly-owned subsidiaries, Data Storage Corporation, a Delaware corporation, and Data Storage FL, LLC, a Florida limited liability company and (iii) its majority-owned subsidiary, Nexxis Inc, a Nevada corporation. All significant inter-company transactions and balances have been eliminated in consolidation.
Basis of Presentation
The Condensed Consolidated Financial Statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).
Certain information and note disclosures normally included in the financial statements prepared in accordance with US GAAP have been condensed. As such, the information included in these financial statements should be read in conjunction with the audited financial statements as of and for the years ended December 31, 2020 and 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”), as filed on March 31, 2021. In the opinion of the Company’s management, these condensed consolidated financial statements include all adjustments, which are of only a normal and recurring nature, necessary for a fair presentation of the statement of financial position of the Company as of March 31, 2021 and its results of operations and cash flows for the three months ended March 31, 2021 and 2020. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2021.
7
Business combinations.
We account for business combinations under the acquisition method of accounting, which requires us to recognize separately from goodwill, the assets acquired, and the liabilities assumed at their acquisition date fair values. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of operations.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include future expected cash flows from product sales, customer contracts and acquired technologies, and estimated cash flows from the projects when completed and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Recently Issued and Newly Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU-2016-13”). ASU 2016-13 affects loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. ASU 2016-13 is effective for the fiscal year beginning after December 15, 2022, including interim periods within that fiscal year. The Company expects that there would be no material impact on the Company’s condensed consolidated financial statements upon the adoption of this ASU.
On November 15, 2019, the FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, ASU 2019-10 changes some effective dates for certain new standards on the following topics in the FASB Accounting Standards Codification (ASC). As a smaller reporting company, the effective date for the Company is noted next to each major standard.
8
| ● | Derivatives and Hedging (ASC 8152) – January 1, 2021 | |
| ● | Leases (ASC 842) – January 1, 2021 | |
| ● | Financial Instruments — Credit Losses (ASC 326) – January 1, 2023 | |
| ● | Intangibles — Goodwill and Other (ASC 350) – January 1, 2023 |
The Company expects that there would be no material impact on the Company’s condensed consolidated financial statements upon the adoption of these ASU’s.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
Estimated Fair Value of Financial Instruments
The Company’s financial instruments include cash, accounts receivable, accounts payable, line of credit, notes payable and lease commitments. Management believes the estimated fair value of these accounts at March 31, 2021 approximate their carrying value as reflected in the balance sheet due to the short-term nature of these instruments or the use of market interest rates for debt instruments. The carrying values of certain of the Company’s notes payable and capital lease obligations approximate their fair values based upon a comparison of the interest rate and terms of such debt given the level of risk to the rates and terms of similar debt currently available to the Company in the marketplace.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity or remaining maturity at the time of purchase, of three months or less to be cash equivalents.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments and assets subjecting the Company to concentration of credit risk consist primarily of cash and cash equivalents, short-term investments and trade accounts receivable. The Company’s cash and cash equivalents are maintained at major U.S. financial institutions. Deposits in these institutions may exceed the amount of insurance provided on such deposits.
The Company’s customers are primarily concentrated in the United States.
The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts on factors surrounding the credit risk of specific customers, historical trends, and other information.
For the three months ended March 31, 2021, DSC had two customers with an accounts receivable balance representing 58% of total accounts receivable. For the three months ended March 31, 2020, DSC had two customers with an accounts receivable balance representing 30% of total accounts receivable.
For the three months ended March 31, 2021 the Company had two customers that accounted for 36% of revenue. For the three months ended March 31, 2020 the Company had one customer that accounted for 14% of revenue.
Accounts Receivable/Allowance for Credit Losses
The Company sells its services to customers on an open credit basis. Accounts receivable are uncollateralized, non-interest-bearing customer obligations. Accounts receivables are typically due within 30 days. The allowance for credit losses reflects the estimated accounts receivable that will not be collected due to credit losses. Provisions for estimated uncollectible accounts receivable are made for individual accounts based upon specific facts and circumstances including criteria such as their age, amount, and customer standing. Provisions are also made for other accounts receivable not specifically reviewed based upon historical experience. Clients are invoiced in advance for services as reflected in deferred revenue on the Company’s balance sheet.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives or the term of the lease using the straight-line method for financial statement purposes. Estimated useful lives in years for depreciation are 5 to 7 years for property and equipment. Additions, betterments and replacements are capitalized, while expenditures for repairs and maintenance are charged to operations when incurred. As units of property are sold or retired, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income.
9
Deferred Offering Costs
The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of equity financings, these costs are recorded in stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a result of the offering. Should the planned equity financings be abandoned, the deferred offering costs are expensed immediately as a charge to other income (expense) in the consolidated statement of operations. For the three months ended March 31, 2021, the Company recorded deferred offering costs of $273,423, which are included in prepaid expenses.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. At March 31, 2021 and December 31, 2020, the Company had a full valuation allowance against its deferred tax assets.
Per FASB ASC 740-10, disclosure is not required of an uncertain tax position unless it is considered probable that a claim will be asserted and there is a more-likely-than-not possibility that the outcome will be unfavorable. Using this guidance, as of December 31, 2020 and 2019, the Company has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. The Company’s 2019, 2018 and 2017 Federal and State tax returns remain subject to examination by their respective taxing authorities. Neither of the Company’s Federal or State tax returns are currently under examination.
Goodwill and Other Intangibles
In accordance with GAAP, the Company tests goodwill and other intangible assets for impairment on at least an annual basis. Impairment exists if the carrying value of a reporting unit exceeds its estimated fair value. To determine the fair value of goodwill and intangible assets, the Company uses many assumptions and estimates using a market participant approach that directly impact the results of the testing. In making these assumptions and estimates, the Company uses industry accepted valuation models and set criteria that are reviewed and approved by various levels of management.
Revenue Recognition
Nature of goods and services
The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each:
| 1) | Infrastructure as a Service (IaaS) and Disaster Recovery Revenue |
Subscription services such as Infrastructure as a Service, Platform as a Service and Disaster Recovery, High Availability, Data Vault Services and DRaaS type solutions (cloud) allows clients to centralize and streamline their technical and mission critical digital information and technical environment. Client’s data can be backed up, replicated, archived and restored to meet their back to work objective in a disaster. Infrastructure as a Service (IaaS) assist clients to achieve reliable and cost-effective computing and high availability solutions while eliminating or supplementing capital expenditures.
| 2) | Managed Services |
These services are performed at the inception of a contract. The Company offers professional assistance to its clients during the installation processes. On-boarding and set-up services ensure that the solution or software is installed properly and function as designed to provide clients with the best solutions. In addition, clients that are managed service clients have a requirement for DSC to offer time and material billing.
The Company also derives revenue from providing support and management of its software to clients. The managed services include help desk, remote access, annual recovery tests and manufacturer support for equipment and on-gong monitoring of client system performance.
| 3) | Equipment and Software Revenue |
The Company provides equipment and software and actively participate in collaboration with IBM to provide innovative business solutions to clients. The Company is a partner of IBM and the various software solutions provided to clients.
Disaggregation of revenue
In the following table, revenue is disaggregated by major product line, geography, and timing of revenue recognition.
10
| For the Three Months | ||||||||||||
| Ended March 31, 2021 | ||||||||||||
| United States | International | Total | ||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | 1,629,773 | $ | 30,575 | $ | 1,660,348 | ||||||
| Equipment and Software | 464,883 | — | 464,883 | |||||||||
| Managed Services | 226,767 | — | 226,767 | |||||||||
| Nexxis VoIP Services | 195,326 | — | 195,326 | |||||||||
| Other | 27,367 | — | 27,367 | |||||||||
| Total Revenue | $ | 2,544,116 | $ | 30,575 | $ | 2,574,691 | ||||||
| For the Three Months | ||||||||||||
| Ended March 31, 2020 | ||||||||||||
| United States | International | Total | ||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | 1,359,921 | $ | 33,799 | $ | 1,393,720 | ||||||
| Equipment and Software | 328,733 | — | 328,733 | |||||||||
| Managed Services | 220,475 | — | 220,475 | |||||||||
| Nexxis VoIP Services | 153,197 | — | 153,197 | |||||||||
| Other | 2,585 | — | 2,585 | |||||||||
| Total Revenue | $ | 2,064,911 | $ | 33,799 | $ | 2,098,710 | ||||||
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| Timing of revenue recognition | 2021 | 2020 | ||||||
| Products transferred at a point in time | $ | 687,576 | $ | 328,733 | ||||
| Products and services transferred over time | 1,887,115 | 1,769,977 | ||||||
| Total Revenue | $ | 2,574,691 | $ | 2,098,710 | ||||
Contract receivables are recorded at the invoiced amount and are uncollateralized, non-interest-bearing client obligations. Provisions for estimated uncollectible accounts receivable are made for individual accounts based upon specific facts and circumstances including criteria such as their age, amount, and client standing.
Sales are generally recorded in the month the service is provided. For clients who are billed on an annual basis, deferred revenue is recorded and amortized over the life of the contract.
11
Transaction price allocated to the remaining performance obligations
The Company has the following performance obligations:
| 1) | Disaster Recovery (“DR”): subscription-based service that instantly encrypts and transfers data to secure location further replicates the data to a second DSC data center where it remains encrypted. Provides ten (10) hour or less recovery time |
| 2) | Data Vaulting: subscription-based cloud backup solution that uses advanced data reduction technology to shorten restore time |
| 3) | High Availability (“HA”): subscription-based service which offers cost-effective mirroring replication technology and provides one (1) hour or less recovery time |
| 4) | Infrastructure as a Service (“IaaS”): subscription-based service offers “capacity on-demand” for IBM Power and Intel server systems |
| 5) | Message Logic: subscription-based service offers cost effective email archiving, data analytics, compliance monitoring and retrieval of email messages which cannot be deleted |
| 6) | Internet: subscription-based service offers continuous internet connection in the event of outages |
| 7) | Support and Maintenance: subscription-based service offers support for servers, firewalls, desktops or software and ad hoc support and help desk |
| 8) | Initial Set-Up Fees: on boarding and set-up services |
| 9) | Equipment sales: sale of servers to the end user |
| 10) | License: granting SSL certificates and other licenses |
Disaster Recovery with Stand-By Servers, High Availability, Data Vaulting, IaaS, Message Logic, Support and Maintenance and Internet
Subscription services such as the above allows clients to access a set of data or receive services for a predetermined period of time. As the client obtains access at a point in time but continues to have access for the remainder of the subscription period, the client is considered to simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs. Accordingly, the related performance obligation is considered to be satisfied ratably over the contract term. As the performance obligation is satisfied evenly across the term of the contract, revenue is recognized on a straight-line basis over the contract term.
Initial Set-Up Fees
The Company accounts for set-up fees as separate performance obligation. Set-up services are performed one time and accordingly the revenue is recognized at the point in time that the service is performed, and the Company is entitled to the payment.
Equipment sales
For the Equipment sales performance obligation, the control of the product transfers at a point in time (i.e., when the goods have been shipped or delivered to the client’s location, depending on shipping terms). Noting that the satisfaction of the performance obligation, in this sense, does not occur over time as defined within ASC 606-10-25-27 through 29, the performance obligation is considered to be satisfied at a point in time (ASC 606-10-25-30) when the obligation to the client has been fulfilled (i.e., when the goods have left the shipping facility or delivered to the client, depending on shipping terms).
License – granting SSL certificates and other licenses
In the case of licensing performance obligation, the control of the product transfers either at point in time or over time depending on the nature of the license. The revenue standard identifies two types of licenses of IP: a right to access IP and a right to use IP. To assist in determining whether a license provides a right to use or a right to access IP, ASC 606 defines two categories of IP: Functional and Symbolic. The Company’s license arrangements typically do not require the Company to make its proprietary content available to the client either through a download or through a direct connection. Throughout the life of the contract the Company does not continue to provide updates or upgrades to the license granted. Based on the guidance, the Company considers its license offerings to be akin to functional IP and recognizes revenue at the point in time the license is granted and/or renewed for a new period.
Payment terms
The terms of the contracts typical range from 12 to 36 months with auto-renew options. The Company invoices clients one month in advance for its services plus any overages or additional services provided in the previous month.
Warranties
The Company offers guaranteed service levels and performance and service guarantees on some of its contracts. These warrantees are not sold separately and according to ASC 606-10-50-12(a) are accounted as “assurance warranties”.
Significant judgement
In the instances that contracts have multiple performance obligations, the Company uses judgment to establish stand-alone price for each performance obligation separately. The price for each performance obligation is determined by reviewing market data for similar services as well as the Company’s historical pricing of each individual service. The sum of each performance obligation was calculated to determine the aggregate price for the individual services. Next the proportion of each individual service to the aggregate price was determined. That ratio was applied to the total contract price in order to allocate the transaction price to each performance obligation.
Impairment of Long-Lived Assets
In accordance with FASB ASC 360-10-35, the Company reviews its long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss, measured as the amount by which the carrying value exceeds the fair value, is recognized if the carrying amount exceeds estimated undiscounted future cash flows.
12
Advertising Costs
The Company expenses the costs associated with advertising as they are incurred. The Company incurred a net impact of $95,776 and $65,380 for advertising costs for the three months ended March 31, 2021 and 2020, respectively.
Stock Based Compensation
DSC follows the requirements of FASB ASC 718-10-10, Share Based Payments with regards to stock-based compensation issued to employees and non-employees. DSC has agreements and arrangements that call for stock to be awarded to the employees and consultants at various times as compensation and periodic bonuses. The expense for this stock-based compensation is equal to the fair value of the stock price on the day the stock was awarded multiplied by the number of shares awarded.
The valuation methodology used to determine the fair value of the options issued during the period is the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the options. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its Common Stock and does not intend to pay dividends on its Common Stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best assessment.
Estimated volatility is a measure of the amount by which DSC’s stock price is expected to fluctuate each year during the expected life of the award. DSC’s calculation of estimated volatility is based on historical stock prices of these entities over a period equal to the expected life of the awards. DSC uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price.
Net Income (Loss) Per Common Share
In accordance with FASB ASC 260-10-5 Earnings Per Share, basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) adjusted for income or loss that would result from the assumed conversion of potential common shares from contracts that may be settled in stock or cash by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.
The following table sets forth the number of potential shares of common stock that have been excluded from diluted net income (loss) per share net income (loss) per share because their effect was anti-dilutive:
| March 31, | |||||||||
| 2021 | 2020 | ||||||||
| Options | 207,650 | 208,146 | |||||||
| Warrants | 3,333 | 3,333 | |||||||
| 210,983 | 211,479 | ||||||||
Note 3 - Property and Equipment
Property and equipment, at cost, consist of the following:
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Storage equipment | $ | 756,236 | $ | 756,236 | ||||
| Website and software | 533,417 | 533,417 | ||||||
| Furniture and fixtures | 27,131 | 17,441 | ||||||
| Leasehold improvements | 20,983 | 20,983 | ||||||
| Computer hardware and software | 1,228,520 | 1,236,329 | ||||||
| Data center equipment | 5,586,374 | 5,281,017 | ||||||
| 8,152,661 | 7,845,423 | |||||||
| Less: Accumulated depreciation | (5,762,511 | ) | (5,543,822 | ) | ||||
| Net property and equipment | $ | 2,390,150 | $ | 2,301,601 | ||||
Depreciation expense for the three months ended March 31, 2021 and 2020 was $218,689 and $193,158, respectively.
13
Note 4 - Goodwill and Intangible Assets
Goodwill and intangible assets consisted of the following:
| March 31, 2021 | ||||||||||||||||
| Estimated life | Accumulated | |||||||||||||||
| in years | Gross amount | Amortization | Net | |||||||||||||
| Intangible assets not subject to amortization | ||||||||||||||||
| Goodwill | Indefinite | $ | 3,015,700 | $ | — | $ | 3,015,700 | |||||||||
| Trademarks | Indefinite | 294,268 | — | 294,268 | ||||||||||||
| Total intangible assets not subject to amortization | 3,309,968 | — | 3,309,968 | |||||||||||||
| Intangible assets subject to amortization | ||||||||||||||||
| Customer lists | 5-15 | 897,274 | 897,274 | — | ||||||||||||
| ABC acquired contracts | 5 | 310,000 | 273,833 | 36,167 | ||||||||||||
| SIAS acquired contracts | 5 | 660,000 | 583,000 | 77,000 | ||||||||||||
| Non-compete agreements | 4 | 272,147 | 272,147 | — | ||||||||||||
| Total intangible assets subject to amortization | 2,139,421 | 2,026,254 | 113,167 | |||||||||||||
| Total Goodwill and Intangible Assets | $ | 5,449,389 | $ | 2,026,254 | $ | 3,423,135 | ||||||||||
Scheduled amortization over the next year is as follows:
| Twelve months ending March 31, | |||||
| 2022 | $ | 113,167 | |||
Amortization expense for the three months ended March 31, 2021 and 2020 were $48,500 and $48,500 respectively.
Note 5 –Leases
Operating Leases
The Company currently has two leases for office space located in Melville, NY.
The first lease for office space in Melville, NY, was assumed as part of the Company’s acquisition of ABC in 2016 and called for monthly payments of $8,382 and expiring August 31, 2019. Upon termination of the lease in August 2019, the Company entered into a new lease for a technology lab in a smaller space commencing on September 1, 2019. The term of this lease is for three years and eleven months and runs co-terminus with our existing lease in the same building. The base annual rent is $10,764 payable in equal monthly installments of $897.
A second lease for office space in Melville, NY, was entered into on November 20, 2017, which commenced on April 2, 2018. The term of this lease is five years and three months at $86,268 per year with an escalation of 3% per year and expires on July 31, 2023.
The lease for office space in Warwick, RI, called for monthly payments of $2,324 beginning February 1, 2015 which escalated to $2,460 on February 1, 2017. This lease commenced on February 1, 2015 and expired on January 31, 2019. The Company extended this lease until January 31, 2020. This lease was further extended until January 31, 2021. The annual base rent was $31,176 payable in equal monthly installments of $2,598. The Company satisfied the terms of the lease and no longer occupies this premise.
The Company leases rack space in New York, Massachusetts and North Carolina. These leases are month to month and the monthly rent is approximately $25,000.
In 2020, the Company entered into a new rack space lease agreement in Dallas, TX. The lease term is 13 months and requires monthly payments of $1,905.
Finance Lease Obligations
On June 1, 2020, the Company entered into a lease agreement with Arrow Capital Solutions, Inc. to lease equipment. The lease obligation is payable to Arrow Capital Solutions with monthly installments of $5,008. The lease carries an interest rate of 7% and is a three-year lease. The term of the lease ends June 1, 2023.
14
On June 29, 2020, the Company entered into a lease agreement with Arrow Capital Solutions, Inc. to lease equipment. The lease obligation is payable to Arrow Capital Solutions with monthly installments of $5,050. The lease carries an interest rate of 7% and is a three-year lease. The term of the lease ends June 29, 2023.
On July 31, 2020, the Company entered into a lease agreement with Arrow Capital Solutions, Inc. to lease equipment under a finance lease. The lease obligation is payable to Arrow Capital Solutions with monthly installments of $4,524. The lease carries an interest rate of 7% and is a three-year lease.
Finance Lease Obligations – Related Party
On April 1, 2018, the Company entered into a lease agreement with Systems Trading Inc. (“Systems Trading”) to refinance all equipment leases into one lease. This lease obligation is payable to Systems Trading with bi-monthly installments of $23,475. The lease carries an interest rate of 5% and is a four-year lease. The term of the lease ends April 16, 2022. Systems Trading is owned and operated by the Company’s President, Harold Schwartz.
On January 1, 2019, the Company entered into a lease agreement with Systems Trading. This lease obligation is payable to Systems Trading with monthly installments of $29,592. The lease carries an interest rate of 6.75% and is a five-year lease. The term of the lease ends December 31, 2023.
On April 1, 2019, the Company entered into two lease agreements with Systems Trading to add new data center equipment. The first lease calls for monthly installments of $1,328 and expires on March 1, 2022. It carries an interest rate of 7%. The second lease calls for monthly installments of $461 and expires on March 1, 2022. It carries an interest rate of 6.7%.
On January 1, 2020, the Company entered into a new lease agreement with Systems Trading to lease equipment. The lease obligation is payable to Systems Trading with monthly installments of $10,534. The lease carries an interest rate of 6% and is a three-year lease. The term of the lease ends January 1, 2023.
On March 4, 2021, the Company entered into a new lease agreement with Systems Trading effective April 1, 2021. This lease obligation is payable to Systems Trading with monthly installments of $1,567 and expires on March 31, 2024. The lease carries an interest rate of 8%.
15
The Company determines if an arrangement contains a lease at inception. Right of Use “ROU” assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company’s lease term includes options to extend the lease when it is reasonably certain that it will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet, per the election of the practical expedient noted above. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company recognizes variable lease payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are recognized in the period incurred. A discount rate of 7% was used in preparation of the ROU asset and operating liabilities.
The components of lease expense were as follows:
| Three Months Ended March 31, 2021 | ||||
| Finance leases: | ||||
| Amortization of assets, included in depreciation and amortization expense | $ | 350,607 | ||
| Interest on lease liabilities, included in interest expense | 26,941 | |||
| Operating lease: | ||||
| Amortization of assets, included in total operating expense | 25,652 | |||
| Interest on lease liabilities, included in total operating expense | 4,287 | |||
| Total net lease cost | $ | 407,487 | ||
Supplemental balance sheet information related to leases was as follows
Operating Leases
| Operating lease ROU asset | $ | 220,419 | ||
| Current operating lease liabilities | 105,319 | |||
| Noncurrent operating lease liabilities | 125,391 | |||
| Total operating lease liabilities | $ | 230,710 |
| March 31, 2021 | ||||
| Finance leases: | ||||
| Property and equipment, at cost | $ | 4,416,665 | ||
| Accumulated amortization | (2,305,689 | ) | ||
| Property and equipment, net | 2,110,976 | |||
| Current obligations of finance leases | $ | 1,273,587 | ||
| Finance leases, net of current obligations | 965,768 | |||
| Total finance lease liabilities | $ | 2,239,355 | ||
Supplemental cash flow and other information related to leases was as follows:
| Three Months Ended March 31, 2021 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows related to operating leases | $ | 21,364 | ||
| Financing cash flows related to finance leases | $ | 350,607 | ||
| Weighted average remaining lease term (in years): | ||||
| Operating leases | 1.47 | |||
| Finance leases | 2.07 | |||
| Weighted average discount rate: | ||||
| Operating leases | 7 | % | ||
| Finance leases | 6 | % | ||
Long-term obligations under the operating and finance leases at March 31, 2021 mature as follows:
| For the Twelve Months Ended March 31, | Operating Leases | Finance Leases | ||||||
| 2022 | $ | 105,319 | $ | 1,260,160 | ||||
| 2023 | 108,534 | 773,155 | ||||||
| 2024 | 37,120 | 377,276 | ||||||
| Total lease payments | 250,973 | 2,410,591 | ||||||
| Less: Amounts representing interest | (20,263 | ) | (171,236 | ) | ||||
| Total lease obligations | 230,710 | 2,239,355 | ||||||
| Less: Current | (105,319 | ) | (1,273,587 | ) | ||||
| $ | 125,391 | $ | 965,768 | |||||
As of March 31, 2021, the Company had no additional significant operating or finance leases that had not yet commenced. Rent expense under all operating leases for the three months ended March 31, 2021 and 2020 was $20,263 and $24,905, respectively.
16
Note 6 - Commitments and Contingencies
COVID-19
The COVID-19 pandemic has created significant worldwide uncertainty, volatility and economic disruption. The extent to which COVID-19 will adversely impact the Company’s business, financial condition and results of operations is dependent upon numerous factors, many of which are highly uncertain, rapidly changing and uncontrollable. These factors include, but are not limited to: (i) the duration and scope of the pandemic; (ii) governmental, business and individual actions that have been and continue to be taken in response to the pandemic, including travel restrictions, quarantines, social distancing, work-from-home and shelter-in-place orders and shut-downs; (iii) the impact on U.S. and global economies and the timing and rate of economic recovery; (iv) potential adverse effects on the financial markets and access to capital; (v) potential goodwill or other impairment charges; (vi) increased cybersecurity risks as a result of pervasive remote working conditions; and (vii) the Company’s ability to effectively carry out its operations due to any adverse impacts on the health and safety of its employees and their families.
Under NYS Executive Order 202.6, “Essential Business,” DSC is an “Essential Business” based on the following in the Executive order number 2: Essential infrastructure including telecommunications and data centers; and, number 12: Vendors that provide essential services or products, including logistics and technology support. Further, as a result of the pandemic, all employees, including the Company’s specialized technical staff, are working remotely or in a virtual environment. DSC always maintains the ability for team members to work virtually and the Company will continue to stay virtual, until the State and or the Federal government indicate the environment is safe to return to work. The significant increase in remote working, particularly for an extended period of time, could exacerbate certain risks to the Company’s business, including an increased risk of cybersecurity events and improper dissemination of personal or confidential information, though the Company does not believe these circumstances have, or will, materially adversely impact its internal controls or financial reporting systems. If the COVID-19 pandemic should worsen, the Company may experience disruptions to our business including, but not limited to: equipment, its workforce, or to its business relationships with other third parties. The extent to which COVID-19 impacts the Company’s operations or those of its third-party partners will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. Any such disruptions or losses we incur could have a material adverse effect on the Company’s financial results and our ability to conduct business as expected.
Revolving Credit Facility
On January 31, 2008, the Company entered into a revolving credit line with a bank. The credit facility provides for $100,000 at prime plus 0.5% and is secured by all assets of the Company and personally guaranteed by the Company’s CEO. As of March 31, 2021 and December 31, 2020 the balance was $24 and $24 respectively.
Note 7 – Long Term Debt
On April 30, 2020, the Company was granted a loan from a banking institution, in the principal amount of $481,977 (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The Loan, which was in the form of a Note dated April 30, 2020, matures on April 30, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing on November 5, 2020. Funds from the loan may only be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments. Management used the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company has applied for the loan forgiveness.
As of March 31, 2021, if not forgiven, remaining scheduled principal payments due on notes payable are as follows:
| For the twelve months ending March 31, | |||||
| 2022 | $ | 455,200 | |||
| 2023 | 26,777 | ||||
| $ | 481,977 | ||||
17
Note 8 - Stockholders’ (Deficit)
Capital Stock
The Company has 260,000,000 authorized shares of capital stock, consisting of 250,000,000 shares of common stock, par value $0.001, and 10,000,000 shares of Preferred Stock, par value $0.001 per share.
On March 8, 2021 the Company’s shareholders approved an amendment to the Company’s articles of incorporation, as amended, to effect a reverse stock split of the Company’s issued and outstanding shares of common stock, at a ratio to be determined at the discretion of the Board of Directors within a range of one (1) share of common stock for every two (2) to sixty (60) shares of common stock, such amendment to be effected only in the event the Board of Directors still deems it advisable. See Note 12 – Subsequent Events.
On May 6, 2021 the Company filed with the Securities and Exchange Commission Amendment No. 4 to Form S-1 - Registration Statement Under the Securities Act of 1993 to offer 1,162,790 Units (Each Unit Consisting of One Share of Common Stock and One Warrant to Purchase One Share of Common Stock).
During the three months ended March 31, 2021, the Company received cash of $5,400 from the exercise of 2,500 options.
Common Stock Options
A summary of the Company’s option activity and related information follows:
| Number of Shares Under Options | Range of Option Price Per Share | Weighted Average Exercise Price | Weighted Average Contractual Life | |||||||||||||
| Options Outstanding at December 31, 2020 | 207,650 | $ | 2.0-15.6 | $ | 5.2 | 6.6 | ||||||||||
| Options Granted | — | — | — | |||||||||||||
| Exercised | — | — | — | |||||||||||||
| Expired/Cancelled | — | — | — | |||||||||||||
| Options Outstanding at March 31, 2021 | 207,650 | $ | 2.0-15.6 | $ | 5.2 | 6.38 | ||||||||||
| Options Exercisable at March 31, 2021 | 139,541 | $ | 2.0-15.6 | $ | 6.4 | 5.50 | ||||||||||
Share-based compensation expense for options totaling $42,171 and $33,048 was recognized in our results for the three months ended March 31, 2021 and 2020, respectively.
The valuation methodology used to determine the fair value of the options issued during the year was the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the options.
The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the options.
Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of the award. The Company’s calculation of estimated volatility is based on historical stock prices of these peer entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price.
As of March 31, 2021, there was $221,939 of total unrecognized compensation expense related to unvested employee options granted under the Company’s share-based compensation plans that is expected to be recognized over a weighted average period of approximately 1.5 years.
18
Preferred Stock
Dividends
Each share of Series A Preferred Stock, in preference to the holders of all common stock, shall entitle its holder to receive, but only out of funds that are legally available therefore, cash dividends at the rate of ten percent (10%) per annum from the Original Issue Date on the Original Issue Price for such share of Series A Preferred Stock, compounding annually unless paid by the Company. Accrued dividends at March 31, 2021 were $1,154,556.
Note 9 - Litigation
We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting DSC, its common stock, any of its subsidiaries or of DSC’s or DSC’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Note 10 - Related Party Transactions
Finance Lease Obligations – Related Party
During the three months ended March 31, 2021 the Company entered into one related party finance lease obligations. See Note 5 for details.
Nexxis Capital LLC
Charles Piluso (Chairman and CEO) and Harold Schwartz (President) collectively own 100% of Nexxis Capital LLC (“Nexxis Capital”). Nexxis Capital was formed to purchase equipment and provide leases to Nexxis Inc.’s customers.
The Company received funds of $3,968 and $0 during the three months ended March 31, 2021 and 2020 respectively.
Note 11 - Merger
Flagship Solutions, LLC
On February 4, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Data Storage FL, LLC, a Florida limited liability company and the Company’s wholly-owned subsidiary (the “Merger Sub”), Flagship Solutions, LLC (“Flagship”), a Florida limited liability company, and the owners (collectively, the “Equityholders”) of all of the issued and outstanding limited liability company membership interests in Flagship (collectively, the “Equity Interests”), pursuant to which, upon the Closing (as defined below), the Company will acquire Flagship through the merger of Merger Sub with and into Flagship (the “Merger”), with Flagship being the surviving company in the Merger and becoming as a result its wholly-owned subsidiary. The closing of the Merger (the “Closing”) is expected to take place on or before May 31, 2021 (the “Outside Closing Date”).
Pursuant to the Merger, all of the Equity Interests that are issued and outstanding immediately prior to the effectiveness of the filing of the Articles of Merger by Flagship and Merger Sub with the Secretary of State of the State of Florida, will be converted into the right to receive an aggregate amount equal to up to $10,500,000, consisting of $5,550,000, payable in cash, subject to reduction by the amount of any excluded liabilities assumed by the Company at Closing and subject to adjustment as set forth below in connection with a net working capital adjustment, and up to $4,950,000, payable in shares of the Company’s common stock, subject to reduction by the amount by which the valuation of Flagship (the “Flagship Valuation”), as calculated based on Flagship’s unaudited pro forma 2018 financial statements and audited 2019 and 2020 financial statements (the “2020 Audit”), is less than $10,500,000. In the event that the Flagship Valuation, as calculated based on the 2020 Audit, is less than $10,500,000, then, within fifteen (15) days after completion of the audit of Flagship’s financial statements for its 2019, 2020 and 2021 fiscal years (the “2021 Audit”), the Company has agreed to pay the Equityholders, in shares of the Company’s common stock, the amount by which the Flagship Valuation, as calculated based on the 2021 Audit, exceeds the sum of $5,550,000 and the value of the shares merger consideration paid by us to the Equityholders at Closing, subject to a cap of $4,950,000. In addition, the cash merger consideration paid by the Company to the Equityholders at Closing shall be adjusted, on a dollar-for-dollar basis, by the amount by which Flagship’s estimated net working capital at Closing is more or is less than the target working capital amount specified in the Merger Agreement.
19
The parties have agreed to indemnify each other for any losses that may be incurred by them as a result of their breach of any of their representations, warranties and covenants contained in the Merger Agreement. The Company’s indemnification obligations are capped at 20% of the aggregate merger consideration paid to the Equityholders for any breach of our representations and warranties contained in the Merger Agreement, other than the representations and warranties set forth under Section 4.1 (Existence; Good Standing; Authority; Enforceability), Section 4.2 (No Conflict) and Section 4.4 (Brokers) (herein, “Fundamental Representations”). The Company’s indemnification obligations in respect of any breach by the Company of the Fundamental Representations or in the event of our willful or intentional breach of the Merger Agreement (or acts of fraud), are not capped.
Concurrently with the Closing, Flagship and Mark Wyllie, Flagship’s Chief Executive Officer, will enter into an Employment Agreement (the “Wyllie Employment Agreement”), which will become effective upon consummation of the Closing, pursuant to which Mr. Wyllie will continue to serve as Chief Executive Officer of Flagship following the Closing on the terms and conditions set forth therein. Flagship’s obligations under the Wyllie Employment Agreement will also be guaranteed by the Company. The Wyllie Employment Agreement provides for: (i) an annual base salary of $170,000, (ii) management bonuses comprised of twenty-five percent (25%) of Flagship’s net income available in free cash flow as determined in accordance with GAAP for each calendar quarter during the term, (iii) an agreement to issue him stock options of the Company, subject to approval by the Board, commensurate with his position and performance and reflective of the executive compensation plans that the Company has in place with its other subsidiaries of similar size to Flagship, (iv) life insurance benefits in the amount of $400,000, and (v) four weeks paid vacation. In the event Mr. Wyllie’s employment is terminated by him for good reason (as defined in the Wyllie Employment Agreement) or by Flagship without cause, he will be entitled to receive his annual base salary through the expiration of the initial three-year employment term and an amount equal to his last annual bonus paid, payable quarterly. Pursuant to the Wyllie Employment Agreement, we have agreed to elect Mr. Wyllie to the Board and the board of directors of Flagship to serve so long as he continues to be employed by the Company. The employment agreement contains customary non-competition provisions that apply during its term and for a period of two years after the term expires. In addition, pursuant to the Wyllie Employment Agreement, Mr. Wyllie will be appointed to serve as a member of the Company’s Board of Directors and the board of directors of Flagship to serve so long as he continues to be employed by us.
The Merger Agreement further provides that it may be terminated by Flagship and the Equityholders (a “Flagship Termination”) in the event the Company has not consummated an underwritten public offering of its securities or listed its shares of common stock on national securities exchange such as the Nasdaq, by the Outside Closing Date, as long as such failure was not due to the breach of, or non-compliance with, the Merger Agreement by the Company or any of the Equityholders. In the event of a Flagship Termination, the Company will be required to pay Flagship and the Equityholders an amount equal to two (2) times their reasonable, documented, out-of-pocket attorneys’ and accountants’ transaction fees and expenses incurred prior to such Flagship Termination in connection with the Merger, up to a maximum aggregate amount of $100,000.
Note 12 -Subsequent Events
On May 13, 2021, the Company’s registration statement on Form S-1 (File No. 333-23506) was declared effective (the “S-1 Registration Statement”). On May 13, 2021, the Company filed a registration statement on Form S-1 (File No. 333-256111) with the “Securities and Exchange Commission pursuant to Rule 462(b) of the Securities Act of 1933, as amended to register additional securities which was immediately declared effective.
On May 14, 2021, the Company effected a 1-for-40 reverse stock split. As a result, all share information in the accompanying condensed financial statements has been adjusted as if the reverse stock split happened on the earliest date presented.
On May 13, 2021, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Maxim Group LLC, as representative of the several underwriters named therein (the “Representative”), for an underwritten public offering (the “Offering”) of an aggregate of 1,600,000 units (the “Units), each consisting of one share of the Company’s common stock, par value $0.001 per share (the “Common Stock”), together with one warrant to purchase one share of Common Stock (each a “Warrant” and collectively, the “Warrants”) at an exercise price equal to $7.425 per share of Common Stock.
The public offering price was $6.75 per Unit and the underwriters agreed to purchase 1,600,000 Units at an 7.5% discount to the public offering price. The Company granted the Representative a 45-day option to purchase an additional 240,000 shares of Common Stock and/or an additional 240,000 Warrants, in any combination thereof, to cover over-allotments, if any. On May 15, 2021, the Representative partially exercised the over-allotment option to purchase an additional 240,000 Warrants to purchase 240,000 shares of Common Stock. The gross proceeds from the Offering are estimated to be $10.8 million, or approximately $12.4 million if the Representative exercises in full its over-allotment option, before deducting underwriting discounts and commissions and other Offering expenses.
Pursuant to the Underwriting Agreement, the Company agreed to issue to the Representative, as a portion of the underwriting compensation payable to the Representative, warrants to purchase up to a total of 80,000 shares of Common Stock (the “Representative’s Warrants”). The Representative’s Warrants are exercisable at $7.425 per share, are initially exercisable 180 days from the commencement of sales of the securities issued in connection with the Offering, or November 14, 2021, and have a term of five years from their initial issuance date, or May 18, 2026. Pursuant to FINRA rules, the Representative’s Warrants are subject to a lock-up agreement pursuant to which the Representative will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these warrants, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from the beginning on the date of commencement of sales of the securities issued in connection with this offering.
The Underwriting Agreement contains customary representations, warranties, and covenants by the Company and customary conditions to closing, obligations of the parties and termination provisions. Additionally, under the terms of the Underwriting Agreement, the Company has agreed to indemnify the underwriters for losses, expenses and damages arising out of or in connection with the Offering, including for liabilities under the Securities Act, or contribute to payments the underwriters may be required to make with respect to these liabilities.
Pursuant to the Underwriting Agreement, subject to certain exceptions, each director and executive officer of the Company and certain of its stockholders have agreed to a 180-day “lock-up” from the date of the closing of the Offering of shares of Common Stock that they beneficially own, and the Company agreed to a 120-day lock-up, not to offer, sell, contract to sell, pledge or otherwise dispose of any shares of Common Stock or securities convertible into Common Stock, without first obtaining the consent of the Representative.
20
ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto for the year ended December 31, 2020, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed on March 31, 2021 (the “Annual Report”) with the U.S. Securities and Exchange Commission (the “SEC”). This Quarterly Report on Form 10-Q contains forward looking statements, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth; and (iii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.
In some cases, you can identify forward-looking statements by terminology such as ’may,’ ’will,’ ’should,’ ’could,’ ’expects,’ ’plans,’ ’intends,’ ’anticipates,’ ’believes,’ ’estimates,’ ’predicts,’ ’potential,’ or ’continue’ or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We are under no duty to update any of the forward-looking statements after the date of this report.
COMPANY OVERVIEW
The Company is a 25-year veteran in providing Business Continuity services, such as Disaster Recovery, Infrastructure as a Service, Cyber Security and Data Analytics. We provide our clients subscription based, long term agreements ranging from 12 to 60 months. Services are provided from Tier 3 data centers geographically diverse in the USA. While a significant portion of our revenue has been subscription based, we also generate revenue from the sale of equipment and software for cybersecurity, data storage, IBM Power systems equipment and managed service solutions.
Headquartered in Melville, NY, we provide solutions and services to a broad range of customers in several industries, including healthcare, banking and finance, distribution services, manufacturing, construction, education, and government. We maintain an internal business development team as well as a contracted independent distribution channel. DSC’s contracted distributors have the ability to provide disaster recovery and hybrid cloud solutions and IBM and Intel Infrastructure as a Service cloud-based solutions, without having to invest in infrastructure, data centers or telecommunication services or, in specialized technical staff, which substantially lowers the barrier of entry to provide our solutions to their client base.
During 2020, we added new distributors, hired additional management focused on building our sales and marketing distribution, and expanded our technology assets in Dallas, TX. We also recently expanded our offering of cybersecurity solutions for remote tele-computing with ezSecurity™, a new 2020 product.
Our target marketplace for Infrastructure as a Service and Disaster Recovery as a Service globally is estimated at over one million Virtual IBM Power servers in the finance, retail, healthcare, government, and distribution industries and sectors according to the most recent information received from IBM. While Infrastructure as a Service and Disaster Recovery as a Service solutions are our core products, we also continue to provide ancillary solutions in this market.
For the past two decades, our mission has been to protect our clients’ data twenty-four hours a day, ensuring business continuity, and assisting in their compliance requirements, while providing better management and control over the clients’ digital information.
Our October 2016 acquisition of the assets of ABC Services, Inc. and ABC Services II, Inc. (collectively, “ABC”), including the remaining 50% of the assets of Secure Infrastructure & Services LLC, accelerated our strategy into cloud based managed services, expanded cybersecurity solutions and our hybrid cloud solutions with the ability to provide equipment and expanded technical support. We intend to continue our strategy of growth through synergistic acquisitions.
Our offices in New York include a technology center and lab, which are adapted to meet technology needs of our clients. In addition to office staffing, we employ additional remote staff. DSC maintains its infrastructure, storage and networking equipment required to provide our subscription solutions in four geographically diverse data centers located in New York, Massachusetts, Texas and North Carolina.
21
RESULTS OF OPERATIONS
Three months ended March 31, 2021 as compared to March 31, 2020
Total Revenue For the three months ended March 31, 2021 increased by $475,981 or 23%. The increase is primarily attributed to an increase in monthly subscription revenue.
| Revenue | For the Three Months | |||||||||||||||
| Ended March 31, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | 1,660,348 | $ | 1,393,720 | $ | 266,628 | 19 | % | ||||||||
| Equipment and Software | 464,883 | 328,733 | 136,150 | 41 | % | |||||||||||
| Managed Services | 226,767 | 220,475 | 6,292 | 3 | % | |||||||||||
| Nexxis VoIP Services | 195,326 | 153,197 | 42,129 | 27 | % | |||||||||||
| Other | 27,367 | 2,585 | 24,782 | N/M | ||||||||||||
| Total Revenue | $ | 2,574,691 | $ | 2,098,710 | $ | 475,981 | 23 | % | ||||||||
Cost of Sales. For the three months ended March 31, 2021, cost of sales was $1,420,899, an increase of $204,782 or 17% compared to $1,216,117 for the three months ended March 31, 2020. The increase is primarily attributable to an increase in revenue.
Selling, general and administrative expenses. For the three months ended March 31, 2021, selling, general and administrative expenses were $1,118,407, an increase of $241,781, or 28%, as compared to $876,626 for the three months ended March 31, 2020. The net increase is reflected in the chart below.
| Selling, general and administrative expenses | For the Three Months | |||||||||||||||
| Ended March 31, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Increase in Salaries | $ | 503,672 | $ | 442,732 | $ | 60,940 | 14 | % | ||||||||
| Increase in Professional Fees | 135,278 | 46,342 | 88,936 | 192 | % | |||||||||||
| Increase in Software as a Service Expense | 52,143 | 34,768 | 17,375 | 50 | % | |||||||||||
| Increase in Advertising Expenses | 95,776 | 65,380 | 30,396 | 46 | % | |||||||||||
| Increase in Commissions Expense | 213,254 | 185,868 | 27,386 | 15 | % | |||||||||||
| Increase in all other Expenses | 118,284 | 101,536 | 16,748 | 16 | % | |||||||||||
| Total Expenses | $ | 1,118,407 | $ | 876,626 | $ | 241,781 | 28 | % | ||||||||
Salaries increased due to raises granted to senior management.
Professional fees increased primarily due to fees incurred for services provided by a migration specialist, and an investment banking firm and investor relations firm.
Software as a Service Expense (SaaS) increased due to additional costs paid to existing vendors to make improvements in Salesforce and purchases of new user licenses.
Advertising Expense increased primarily due to additional marketing campaigns.
Commissions Expense increased due to the increase in revenues. Commission expense varies due to different contractual agreements with both contracted distributors and employees.
All Other Expenses increased primarily due to a combination of an increase in online training and continuing education, partially offset by a reduction in travel and costs associated with employees working from home due to the pandemic as well as a reduction in expenses related to our office space in Melville, New York.
Other Income (Expense). Interest income (expense) for the three months ended March 31, 2021 decreased $11,393 to $35,047 from $46,440 for the three months ended March 31, 2020.
Net Income (Loss)before provision for income taxes. Net income before provision for income taxes for the three months ended March 31, 2020 was $42,511, as compared to a net loss of $40,473 for the three months ended March 31, 2020.
22
LIQUIDITY AND CAPITAL RESOURCES
The consolidated financial statements have been prepared using generally accepted accounting principles in the United States of America (“GAAP”) applicable for a going concern, which assumes that DSC will realize its assets and discharge its liabilities in the ordinary course of business.
To the extent we are successful in growing our business, identifying potential acquisition targets and negotiating the terms of such acquisition, and the purchase price includes a cash component, we plan to use our working capital and the proceeds of any financing to finance such acquisition costs.
Our opinion concerning our liquidity is based on current information. If this information proves to be inaccurate, or if circumstances change, we may not be able to meet our liquidity needs, which will require a renegotiation of related party capital equipment leases, a reduction in advertising and marketing programs, renegotiation of our arrangement with Nexxis and/or a reduction in salaries for officers that are major shareholders.
23
We have long term contracts to supply our subscription-based solutions that are invoiced to clients monthly. We believe our total contract value of our subscription contracts with clients based on the actual contracts that we have to date, exceeds $10 million. Further, we continue to see an uptick in client interest, distribution channel expansion and in sales proposals. In 2021, we intend to continue to work to increase our presence in the IBM “Power I” infrastructure cloud and business continuity marketplace in the niche of IBM “Power ” and in the disaster recovery global marketplace utilizing our technical expertise, data centers utilization, assets deployed in the data centers, 24 x 365 monitoring and software.
If the Merger is consummated, we will require additional funding to finance the cash consideration and the Merger Agreement provides for a right of termination by us and the Flagship Equityholders if we have not consummated an underwritten public offering by May 31, 2021. There can be no assurance that we can complete an underwritten public offering by May 31, 2021 or that such offering will result in adequate funding to finance the Merger. We currently do not have any committed sources of outside financing.
During the three months ended March 31, 2021, DSC’s cash decreased $259,286 to $634,312 from $893,598 December 31, 2020. Net cash of $348,559 was provided by DSC’s operating activities resulting primarily from the changes in assets and liabilities. Net cash of $350,607 was used in financing activities resulting primarily from payments on capital lease obligations.
DSC’s working capital deficit was $3,040,836 on March 31, 2021, increasing by $374,388 from $2,666,448 at December 31, 2020. The increase is primarily attributable to a decrease in cash.
Off-Balance Sheet Arrangements
DSC does not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities”.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company this item is not required.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this Report, under the supervision and with the participation of DSC’s management, including its principal executive officer who also serves as its principal financial officer, DSC conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, DSC’s principal executive officer who also serves as its principal financial officers concluded that DSC’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by DSC in the reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules based on the material weakness described below.
The material weaknesses identified during management’s assessment were (i) a lack of sufficient internal accounting expertise to provide reasonable assurance that our financial statements and notes thereto are prepared in accordance with GAAP and (ii) a lack of segregation of duties to ensure adequate review of financial statement preparation. As defined by the Public Company Accounting Oversight Board Auditing Standard No. 5, a material weakness is a deficiency or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. In order to ensure the effectiveness of DSC’s disclosure controls in the future DSC intends on adding financial staff resources to our internal accounting and finance department and has executed an offer letter with an individual to serve as chief financial officer, subject to the consummation of its planned public offering and uplisting to the Nasdaq Stock market.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Changes in Internal Control Over Financial Reporting.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
25
We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting DSC, its common stock, any of its subsidiaries or of DSC’s or DSC’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Investing in our common stock involves a high degree of risk. You should consider carefully the following risks, together with all the other information in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and notes thereto. If any of the following risks actually materializes, our operating results, financial condition and liquidity could be materially adversely affected. As a result, the trading price of our common stock could decline and you could lose part or all of your investment. The following information updates, and should be read in conjunction with, the information disclosed in Part I, Item 1A, “Risk Factors,” contained in the Annual Report. Except as disclosed below, there have been no material changes from the risk factors disclosed in the Annual Report.
We have not generated a significant amount of net income and we may not be able to sustain profitability or positive cash flow in the future.
As reflected in the consolidated audited financial statements for the years ended December 31, 2020 and 2019, we had a net income (loss) attributable to shareholders of $55,339 and $(54,452) for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, DSC had cash and cash equivalents of $893,598 and a working capital deficiency of $2,666,448. As reflected in the consolidated unaudited financial statements for the quarter ended March 31, 2021, we had a net income of $340 and a net income (loss) attributable to shareholders of ($36,784). As of March 31, 2020, DSC had cash and cash equivalents of $634,312 and a working capital deficiency of $3,040,836.
We have identified weaknesses in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future.
We have identified material weaknesses in our internal control over financial reporting for the year ended December 31, 2020. At March 31, 2021, our principal executive and financial officer concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules based on the material weakness described below A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weaknesses identified during management’s assessment were (i) a lack of sufficient internal accounting expertise to provide reasonable assurance that our financial statements and notes thereto are prepared in accordance with generally accepted accounting principles and (ii) a lack of segregation of duties to ensure adequate review of financial statement preparation.
We will be required to expend time and resources to further improve our internal controls over financial reporting, including by expanding our staff. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.
We have not yet retained sufficient staff or engaged sufficient outside consultants with appropriate experience in GAAP presentation, especially of complex instruments, to devise and implement effective disclosure controls and procedures, or internal controls. We will be required to expend time and resources hiring and engaging additional staff and outside consultants with the appropriate experience to remedy these weaknesses. We cannot assure you that management will be successful in locating and retaining appropriate candidates; that newly engaged staff or outside consultants will be successful in remedying material weaknesses thus far identified or identifying material weaknesses in the future; or that appropriate candidates will be located and retained prior to these deficiencies resulting in material and adverse effects on our business.
Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business, including increased complexity resulting from our international expansion. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of management reports and independent registered public accounting firm audits of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures, and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
There were no defaults upon senior securities during the period ended March 31, 2021.
Item 4. Mine Safety Disclosures
Not applicable.
None.
26
* Filed herewith.
# Indicates management contract or compensatory plan.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DATA STORAGE CORPORATION | ||
| Date: May 17, 2021 | ||
| By: | /s/ Charles M. Piluso | |
| Charles M. Piluso | ||
| Chief Executive Officer | ||
| Chief Financial Officer | ||
| (Principal Executive, Financial and Accounting Officer) | ||
28
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL
FINANCIAL
OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Charles M. Piluso, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Data Storage Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | As the registrant’s certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and I have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| 5. | As the registrant’s certifying officer, I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Data Storage Corporation | ||
| /s/Charles M. Piluso | ||
| Charles M. Piluso | ||
| Chief Executive Officer and Chief Financial Officer | ||
| (Principal Executive, Financial and Accounting Officer) |
Date: May 17, 2021
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL
FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report on Form 10-Q of Data Storage Corporation, for the period ended March 31, 2021, I, Charles M. Piluso, Chief Executive Officer and Chief Financial Officer of Data Storage Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:
1. Such Quarterly Report on Form 10-Q for the period ended March 31, 2021, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such Quarterly Report on Form 10-Q for the period ended March 31, 2021, fairly represents in all material respects, the financial condition and results of operations of Data Storage Corporation.
| Data Storage Corporation | ||
| /s/Charles M. Piluso | ||
| Charles M. Piluso | ||
| Chief Executive Officer and Chief Financial Officer | ||
| (Principal Executive, Financial and Accounting Officer) |
Date: May 17, 2021