UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
 
o  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
 
Commission File No. 333-148167
 
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.)
 
401 Franklin Avenue
    
Garden City, N.Y
  
11530
(Address of principal executive offices)
 
  
(Zip Code)
Registrant’s telephone number, including area code:  (212) 564-4922
 
Securities registered under Section 12(b) of the Exchange Act:
None
 
Securities registered under Section 12(g) of the Exchange Act:
Title of each class registered:
  
Name of each exchange on which registered:
Common Stock, par value $.001 per share
  
OTC.BB
 
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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer      o
Accelerated Filer                        o
Non-Accelerated Filer        o
(Do not check if a smaller reporting company)
Smaller Reporting Company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

As of November 19, 2012, 32,439,681 shares of common stock, par value $0.001 per share, were outstanding.
 
 
 
 
 
Explanatory Note:  The deadline for filing this Form 10-Q for the quarterly period ended September 30, 2012 (the “Form 10-Q”) with the Securities and Exchange Commission (the “Commission”) was 5:30 p.m.  Eastern Standard time on Wednesday, November 14, 2012.  Data Storage Corporation (the “Company”) did not file the Form 10-Q by such deadline and is relying upon Release No. 68224 issued by the Commission, titled “Order Under Section 17A and Section 36 of the Securities Exchange Act of 1934 Granting Exemptions From Specified Provisions of the Exchange Act and Certain Rules Thereunder,” dated November 14, 2012.
 
The Company is located in Garden City, NY on Long Island.  The Company’s offices were without power and internet access from when Hurricane Sandy struck Long Island on October 29, 2012 through mid-November.  Moreover, certain members of the Company’s executive team were also without electrical power and internet access at their personal residences on Long Island during approximately the same period. In addition, the Company’s auditors, Rosenberg Rich Baker Berman & Company (“RRBBC”), located in Somerset, NJ, also experienced disruptions as a result of the hurricane.  RRBBC was unable to access their offices and experienced disruptions in accessing firm email and telephone networks until mid-November. Due to these disruptions, the Company was not able meet the deadline for filing the Form 10-Q.
 
 
 
 
 
DATA STORAGE CORPORATION
FORM 10-Q
September 30, 2012
INDEX
 
 
Page
PART I-- FINANCIAL INFORMATION
  
   
 
Item 1
Financial Statements
2
       
   
Consolidated Balance Sheets as of  September 30, 2012 (unaudited) and December 31, 2011
2
       
   
Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011(unaudited)
3
       
   
Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011(unaudited)
4
       
   
Notes to Consolidated Financial Statements
5 - 13
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14 - 16
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
17
       
 
Item 4.
Control and Procedures
17
       
PART II-- OTHER INFORMATION
  
   
 
Item 1.
Legal Proceedings
18
       
 
Item1A.
Risk Factors
18
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
18
       
 
Item 3.
Defaults Upon Senior Securities
18
       
 
Item 4.
Mine Safety Disclosures
18
       
 
Item 5.
Other Information
18
       
 
Item 6.
Exhibits
18
 
 
 
 
 
PART I
 
ITEM 1.       Financial Statements
 
DATA STORAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 
 
 
   
September 30, 2012
    
December 31, 2011
  
ASSETS
  
(UNAUDITED)
        
Current Assets:
            
Cash and cash equivalents
  
$
183,982
    
$
168,490
  
Accounts receivable (less allowance for doubtful accounts of $58,000 2012 and $48,000 in 2011)
    
359,901
      
294,306
  
Deferred compensation
    
21,104
      
37,041
  
Deferred financing fees
    
57,088
      
38,132
  
Prepaid expense
    
213,463
      
218,675
  
Total Current Assets
    
835,538
      
756,644
  
Property and Equipment:
                
Property and equipment
    
3,433,426
      
3,024,302
  
Less—Accumulated depreciation
    
(2,041,248
)
    
(1,680,484
)
Net Property and Equipment
    
1,392,178
      
1,343,818
  
Other Assets:
                
Goodwill
    
2,201,828
      
2,201,828
  
Deferred compensation
    
13,442
      
26,614
  
Other assets
    
19,154
      
23,791
  
Intangible Assets, net
    
794,280
      
955,048
  
Employee loan
    
4,823
      
-
  
Total Other Assets
    
3,033,527
      
3,207,281
  
Total Assets
    
5,261,243
      
5,307,743
  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
Current Liabilities:
                
Accounts payable and accrued expenses
    
1,088,662
      
1,171,856
  
Credit line payable
    
100,292
      
100,292
  
Due to related party
    
138,253
      
124,752
  
Dividend payable
    
200,000
      
162,500
  
Deferred revenue
    
651,786
      
641,381
  
Leases payable
    
684,593
      
499,325
  
Loans payable
    
94,022
      
128,182
  
Liabilities to be settled in stock
    
155,000
      
172,000
  
Total Current Liabilities
    
3,112,608
      
3,000,288
  
Deferred rental obligation
    
16,419
      
21,341
  
Due to officer
    
753,196
      
624,818
  
Loan payable long term
    
-
      
11,887
  
Convertible debt
    
500,000
          
Leases payable long term
    
480,929
      
509,628
  
Total Long Term Liabilities
    
1,750,544
      
1,167,674
  
Total Liabilities
    
4,863,152
      
4,167,962
  
Commitments and contingencies
    
-
      
-
  
Stockholders’ Equity
                
Preferred Stock, $0.001 par value; 10,000,000 shares authorized; 1,401,786 issued and outstanding in each period
    
1,402
      
1,402
  
Common stock, par value $0.001; 250,000,000 shares authorized; 32,439,681 and 28,912,712  shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively
    
32,440
      
28,913
  
Additional paid in capital
    
11,706,549
      
10,705,470
  
Accumulated deficit
    
(11,342,300
)
    
(9,596,004
)
Total Stockholders' Equity
    
398,091
      
1,139,781
  
Total Liabilities and Stockholders' Equity
  
$
5,261,243
    
$
5,307,743
  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
2
 
 
DATA STORAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
Three Months Ended
    
Nine Months Ended
  
   
September 30,
    
September 30,
  
   
2012
    
2011
    
2012
    
2011
  
                         
Sales
  
$
1,012,613
    
$
1,088,944
    
$
2,996,677
    
$
2,860,058
  
                                 
Cost of sales
    
629,752
      
694,786
      
1,996,725
      
1,877,706
  
                                 
Gross Profit
    
382,861
      
394,158
      
999,952
      
982,352
  
                                 
Selling, general and administrative
    
714,840
      
    1,015,861
      
    2,599,911
      
    2,262,939
  
                                 
Loss from Operations
    
      (331,979
)
    
      (621,703
)
    
  (1,599,959
)
    
   (1,280,587
)
                                 
Other Income (Expense)
                                
      Gain on settlement of contingent consideration
    
-
      
176,497
      
-
      
176,497
  
      Interest income
    
26
      
192
      
135
      
2,223
  
      Amortization of debt discount
    
-
      
     (76,671
 )
    
-
      
(230,013
)
      Interest expense
    
        (36,415
)
    
        (77,595
)
    
      (108,970
)
    
      (203,215
)
                  Total Other (Expense)
    
        (36,389
)
    
        (22,423
)
    
      (108,837
)
    
      (254,508
)
                                 
Loss before provision for income taxes
    
(368,368
)
    
(599,280
)
    
(1,708,794
)
    
(1,535,095
)
                                 
Provision for income taxes
    
                   -
      
                   -
      
                   -
      
                   -
  
                                 
Net Loss
    
(368,368
)
    
(599,280
)
    
(1,708,794
)
    
(1,535,095
)
                                 
Preferred Stock Dividend
    
        (12,500
)
    
        (12,500
)
    
        (37,500
)
    
        (37,500
)
                                 
Net Loss Available to Common Shareholders
  
$
      (380,868
)
  
$
     (611,780
)
  
$
   (1,746,294
)
  
$
   (1,572,595
)
                                 
Loss per Share – Basic and Diluted
  
$
            (0.01
)
  
$
            (0.03
)
  
$
            (0.06
)
  
$
            (0.08
)
                                 
Weighted Average Number of Shares - Basic and Diluted
    
  29,749,738
      
  22,505,475
      
  29,275,911
      
  20,867,185
  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
3
 
 
DATA STORAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Nine Months Ended
September 30,
  
   
2012
    
2011
  
Cash Flows from Operating Activities:
            
Net loss
  
$
(1,708,794
)
  
$
(1,535,095
)
Adjustments to reconcile net loss to net cash used in operating activities:
                
Depreciation and amortization
    
521,533
      
516,459
  
Noncash interest expense
    
33,288
      
67,923
  
Stock based compensation
    
196,986
      
52,420
  
Amortization of debt discount
    
-
      
230,014
  
Deferred compensation
    
29,111
      
35,790
  
Allowance for doubtful accounts
    
10,000
      
18,000
  
Gain on settlement of Contingent Consideration
    
-
      
(176,495
)
Changes in Assets and Liabilities:
                
Accounts receivable
    
(75,595
)
    
34,671
  
Prepaid expenses
    
5,212
      
(106,761
)
Other assets
    
(187)
      
(31,524
) 
Accounts payable & accrued expenses
    
168,679
      
268,653
  
Deferred revenue
    
10,405
      
212,061
  
Deferred rent
    
(4,922
)
    
(3,270
)
Due to related party
    
                  -
      
        13,500
  
Net Cash Used in Operating Activities
    
     (814,284
)
    
     (403,654
)
                 
Cash Flows from Investing Activities:
                
 Capital expenditures
    
       (99,827
)
    
      (54,983)
  
Net Cash Used in Investing Activities
    
       (99,827
)
    
      (54,983)
  
                 
Cash Flows from Financing Activities:
                
Proceeds from the issuance of common stock
    
500,000
      
1,500,000
  
Proceeds from issuance of convertible debt
    
500,000
      
-
  
Advances from (payments on) credit line
    
-
      
322
  
Advances from officer
    
128,379
      
-
  
Repayments of capital lease obligations
    
(152,729
)
    
(290,952
)
                 
Repayments of loan obligations
    
       (46,047
)
    
     (673,674
)
Net Cash Provided by Financing Activities
    
      929,603
      
      535,696
  
                 
Increase in Cash and Cash Equivalents
    
15,492
      
77,059
  
                 
Cash and Cash Equivalents, Beginning of Period
    
      168,490
      
        50,395
  
                 
Cash and Cash Equivalents, End of Period
  
$
      183,982
    
$
      127,454
  
                 
Supplemental Disclosure of Cash Flow Information:
                
                 
  Cash paid for interest
  
$
2,968
    
$
7,820
  
                 
  Cash paid for income taxes
  
$
      
$
-
  
                 
Noncash Investing and Financing Activities:
                
  Stock issued for deferred financing fees
  
$ 
42,500
    
$
- 
  
                 
  Accrual of preferred stock dividend
  
$
37,500
    
$
37,500
  
  Fixed assets acquired under capital leases
  
$
309,297
    
$
496,578
  
  Issuance of capital stock in connection with acquisition of Safedata, LLC
  
$
-
    
$
150,000
  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
4
 
 
DATA STORAGE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
  
Note 1 - Basis of presentation, organization and other matters

Data Storage Corporation, (the “Company” or “DSC”) provides Hybrid Cloud solutions and services as the result of several transactions: a share exchange with Euro Trend Inc. incorporated on March 27, 2007 under the laws of the State of Nevada; Ownership of DSC incorporated in 2001; and an Asset Acquisition from SafeData LLC in 2010. On October 20, 2008 we completed a Share Exchange Agreement whereby we acquired all of the outstanding capital stock and ownership interests of Data Storage Corporation. In exchange we issued 13,357,143 shares of our common stock to the Data Storage Corporation’s shareholders, a cloud storage and SaaS organization, providing services for disaster recovery. This transaction was accounted for as a reverse merger for accounting purposes. Accordingly, Data Storage Corporation, the accounting acquirer, is regarded as the predecessor entity. On June 17, 2010 we entered into an Asset Purchase Agreement with SafeData, a provider of Cloud Storage and Cloud Computing mostly to IBM’s Mid-Range Equipment users, namely, AS400 and iSeries users under which we acquired all right, title and interest in the end user customer base of SafeData and all related current and fixed assets and contracts including the transfer of all of SafeData’s current liabilities arising out of the business or the assets acquired. Pursuant to the Agreement, we paid an aggregate purchase price equal to $3,000,000. Giving effect to certain holdback and contingency clauses as defined in the agreement, we paid $1,229,952 in cash and $850,000 in shares of our common stock as well as assumption of SafeData Accounts Payable and Receivables.

The Company was incorporated in Delaware on August 29, 2001. The Company is a provider of data backup services.  The Company specializes in secure disk-to-disk data backup and restoration solutions for disaster recovery, business continuity, and regulatory compliance.
 
The Company is a provider of Hybrid Cloud solutions on a subscription basis in the USA and Canada and Professional Services focusing on data protection and business continuity that assist organizations in protecting their data, minimize downtime, ensure regulatory compliance and recover and restore data within their objectives.  Through our three data centers and by leveraging leading technologies, DSC delivers and supports a broad range of premium solutions for both Windows and IBM environments that assist clients save time and money, gain more control of and better access to data and enable the highest level of security for that data.

The Company derives its revenues from the sale and subscription of services and solutions that provide businesses protection of critical electronic data. The Company’s solutions include: offsite data protection and recovery services, high availability (HA) replication services, email compliance solutions for e-discovery, continuous data protection, data de-duplication, virtualized system recovery and telecom recovery services. The Company has equipment in three Technical Centers: Westbury, New York; Boston, MA and Warwick, RI.    

Condensed Consolidated Financial Statements
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation of the results of operations have been included. The results of operations for the nine months ended September 30, 2012 are not necessarily indicative of the results of operations for the full year. When reading the financial information contained in this Quarterly Report, reference should be made to the financial statements, schedule and notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
 
Liquidity
 
The financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. For the nine months ended September 30, 2012, the Company has generated revenues of $2,996,677 but has incurred a net loss of $1,708,794. Its ability to continue as a going concern is dependent upon achieving sales growth, reduction of operation expenses and ability of the Company to obtain the necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due, and upon profitable operations. The Company has been funded by the Mr. Charles M. Piluso, the Company’s Chief Executive Officer (“CEO”) and largest shareholder since inception as well as several Directors. It is the intention of Mr. Piluso to continue to fund the Company on an as needed basis.
 
 
5
 
 
Note 2 - Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiary, Data Storage Corporation, a Delaware Corporation.  All significant inter-company transactions and balances have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 and due to related parties. Management believes the estimated fair value of these accounts at September 30, 2012 approximate their carrying value as reflected in the balance sheets 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.  It is not practical to estimate the fair value of certain notes payable, the convertible debt and the liability for contingent compensation from acquisition. In order to do so, it would be necessary to obtain an independent valuation of these unique instruments. The cost of that valuation would not be justified in light of the circumstances.

 
6
 
 
Goodwill and Other Intangibles
 
Goodwill is not subject to amortization and is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. Intangible assets were evaluated to determine if they are finite or indefinite-lived. The intangible assets that are finite lived are amortized over the useful life of the asset. Indefinite-lived intangible assets are also tested for impairment annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable.
 
Revenue Recognition
 
The Company’s revenues consist principally of cloud storage and cloud computing revenues, SaaS and IaaS. Storage revenues consist of monthly charges related to the storage of materials or data (generally on a per unit basis).  Sales are generally recorded in the month the service is provided.  For customers who are billed on an annual basis, deferred revenue is recorded and amortized over the life of the contract. Set up fees charged in connection with storage contracts are deferred and recognized on a straight line basis over the life of the contract.
 
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 inclusion of the potential common shares to be issued have an anti-dilutive effect on diluted loss per share and therefore they are not included in the calculation. Potentially dilutive securities at September 30, 2012 include 4,218,837 options, 28,642 warrants and 588,235 shares upon the conversion of debt.
 
Recently Issued and Newly Adopted Accounting Pronouncements
 
FASB ASU No. 2012-02, which provides, subject to certain conditions, an entity the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with ASC 350-30, “Intangibles - Goodwill and Other - General Intangibles Other than Goodwill.”
 
In September 2011, the FASB issued Accounting Standards Update No. 2011-08 (“ASU 2011-08”), which updates the guidance in ASC Topic 350, Intangibles – Goodwill & Other.  The amendments in ASU 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than fifty percent. If, after assessing the totality of events or circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in ASU 2011-08 include examples of events and circumstances that an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. However, the examples are not intended to be all-inclusive and an entity may identify other relevant events and circumstances to consider in making the determination. The examples in this ASU 2011-08 supersede the previous examples under ASC Topic 350 of events and circumstances an entity should consider in determining whether it should test for impairment between annual tests, and also supersede the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to perform the second step of the impairment test. Under the amendments in ASU 2011-08, an entity is no longer permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as previously permitted under ASC Topic 350. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. ASU 2011-08 is not expected to have a material impact on the Company’s financial position or results of operations.
 
 
7
 
 
Note 3 - Property and Equipment
 
Property and equipment, at cost, consist of the following:
 
   
September 30,
    
December 31,
  
   
2012
    
2011
  
Storage equipment  
   $ 2,200,372     $  2,149,294  
Website and software  
     216,086       169,833  
Furniture and fixtures  
     22,837       22,837  
Computer hardware and software  
     91,687       91,687  
Data Center  
     902,444       590,651  
    
     3,433,426       3,024,302  
Less: Accumulated depreciation  
     2,041,248       1,680,484  
Net property and equipment  
   $ 1,392,178     $ 1,343,818  
 
Depreciation expense for the nine months ended September 30, 2012 and 2011 was $360,764 and $160,767, respectively.
 
Note 4 - Goodwill and Intangible Assets
 
Goodwill and Intangible assets consisted of the following:
 
         
September 30, 2012
    
December 30, 2011
  
   
Estimated life in Years
    
Gross amount
    
Accumulated Amortization
    
Gross amount
    
Accumulated Amortization
  
Goodwill
  
Indefinite
     $ 2,201,828       -     $ 2,201,828       -  
Intangible assets not subject to amortization
     -       -       -               -  
Trademarks
  
Indefinite
       279,268       -       279,268       -  
Intangible assets subject to amortization
                                        
Customer list
     5       854,178       451,123       854,178       339,514  
Non-compete agreements
     4       262,147       150,190       262,147       101,031  
       Total Intangible Assets
             1,395,593       601,313       1,395,593       440,545  
       Total Goodwill and Intangible Assets
           $ 3,597,421       601,313     $ 3,597,421     $ 440,545  
 
 
 
8
 
 
Scheduled amortization over the next five years
 
For the twelve months ending September 30,
        
2013
    
214,356
  
2014
    
195,240
  
2015
    
105,416
  
Total
  
$
      515,012
  
 
Amortization expense for the nine months ended September 30, 2012 and 2011 was $160,767 and $160,767 respectively.

Note 5 – Capital lease obligations
 
The Company acquired capital leases in the acquisition of SafeData. The economic substance of the leases is that the Company is financing the acquisitions through the leases and accordingly, they are recorded in the Company’s assets and liabilities. The leases are payable to Systems Trading, Inc. and IBM with combined monthly installments of $47,819 through various dates in 2011 and 2015. The leases are secured with the computer equipment.  Interest rates on capitalized leases vary from 6%-12% and are imputed based on the lower of the Company’s incremental borrowing rate at the inception of each lease or the lessor’s implicit rate of return.

Future minimum lease payments under the capital leases are as follows:

As of September 30, 2012
  
$
1,245,118
  
Less amount representing interest
    
       (79,596
)
Total obligations under capital leases
    
1,165,522
  
Less current portion of obligations under capital leases
    
(684,593
)
Long-term obligations under capital leases
  
$
      480,929
  
 
 Long-term obligations under capital leases at September 30, 2012 mature as follows:

For the twelve months ending September 30,
      
2013
   $ 684,593  
2014
     330,798  
2015
     150,131  
    $ 1,165,522  
 
 
9
 
 
The assets held under the capital leases are included in property and equipment as follows:
  
       
Equipment
  
$
1,571,784
  
Less: accumulated depreciation
    
    (404,390
)
   
$
1,167,394
  
 
Note 6 - Commitments and Contingencies
 
Revolving Credit Facility
 
On January 31, 2008 the Company entered into a revolving credit line with a JP Morgan Chase. The credit facility provides for $100,000 at prime plus .5%, 3.75% at September 30, 2012, and is secured by all assets of the Company and personally guaranteed by Mr. Piluso. As of September 30, 2012, the Company owed $100,292 underthe revolving credit line.
 
Loan Payable
 
On August 4, 2010, the Company entered into a note payable with Systems Trading, LLC in settlement of past due balances owed by SafeData related to certain capital leases. The note bears interest at 4%, and is due in 24 equal installments of $11,927 commencing February 4, 2011 through January 4, 2013. The note payable balance as of September 30, 2012 is $94,022.
 
Operating Leases

The Company currently leases office space in Garden City, NY and Warwick, RI.
 
The lease for office space in Warwick, RI calls for monthly payments of $5,400 plus a portion of the operating expenses beginning in April 2012 and ending in December 2012. The lease is currently on a month to month basis.

The lease for office space in Garden City, NY calls for escalating monthly payments ranging from $6,056 to $6,617 plus a portion of the operating expenses through June 2014.
 
 
10
 
 
Minimum obligations under these lease agreements are as follows:

For the twelve months ending September 30,
      
2013
  
$
77,681
  
2014
    
59,562
  
   
$
      137,243
  
 
Rent expense for the nine months ended September 30, 2012 and September 30, 2011 was $150,761 and $124,153 respectively.

Note 7 - Related Party Transactions
 
Due to related party represents rent accrued to a partnership controlled by the Mr. Piluso for the New York Data Center in New York. The rent expense for the data center is $1,500 per month.
 
As of September 30, 2012 the Company owed Mr. Piluso $753,196. These advances bear no interest and have no stated terms of repayment.  Mr. Piluso advanced the Company $128,379 during the nine months ended September 30, 2012.

Note 8 – Convertible debt

Related parties

On January 31, 2012 the Company entered into a $500,000, three year convertible promissory note with interest at 10% with Cliff Stein, a director of the Company.  The note is convertible into the Company’s common stock at $0.85 per share.
 
Note 9 - Stockholders’ Equity
 
Capital Stock
 
During the nine months ended September 30, 2012 the Company issued Three Million Three Hundred Thirty Three Thousand Three Hundred Thirty-Three (3,333,333) shares of the Company’s common stock, $0.001 par value per share (the “Common Stock) at a price of $0.15 for an aggregate purchase price of $500,000.  The shares were issued to Charles M. Piluso, Cliff Stein, John Coghlan and Jan Burman four directors and their affiliates and the proceeds were used for general working capital.
 
The Company has 260,000,000 shares of capital stock authorized, consisting of 250,000,000 shares of common stock, par value $0.001, 10,000,000 shares of Series A Preferred Stock, par value $0.001 per share.

Common Stock Options
 
2008 Equity Incentive Plan

In October 2008, the Company’s board of directors (the “Board”) adopted, the Euro Trend, Inc. 2008 Equity Incentive Plan (the “2008 Plan).  Under the 2008 Plan, we may grant options (including incentive stock options) to purchase our common stock or restricted stock awards to our employees, consultants or non-employee directors. The 2008 Plan is administered by the Board. Awards may be granted pursuant to the 2008 Plan for 10 years from the date the Board approved the 2008 Plan. Any grant under the 2008 Plan may be repriced, replaced or regranted at the discretion of the Board. From time to time, we may issue awards pursuant to the 2008 Plan.  
 
The material terms of options granted under the 2008 Plan (all of which have been nonqualified stock options) are consistent with the terms described in the footnotes to the "Outstanding Equity Awards at Fiscal Year-End December 31, 2011”, including 5 year graded vesting schedules and exercise prices equal to the fair market value of our common stock on the date of grant.  Stock grants made under the 2008 Plan have not been subject to vesting requirements. The 2008 Plan was terminated with respect to the issuance of new awards as of February 3, 2012.  There are 3,075,938 options outstanding under this plan as of September 30, 2012.
 
2010 Incentive Award Plan

The Company has reserved 2,000,000 shares of common stock for issuance under the terms of the Data Storage Corporation 2010 Incentive Award Plan (the “2010 Plan”). The 2010 Plan is intended to promote the interests of the Company by attracting and retaining exceptional employees, consultants, directors, officers and independent contractors (collectively referred to as the “Participants”), and enabling such Participants to participate in the long-term growth and financial success of the Company. Under the 2010 Plan, the Company may grant stock options, which are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, stock appreciation rights and restricted stock awards, which are restricted shares of common stock (collectively referred to as “Incentive Awards”). Incentive Awards may be granted pursuant to the 2010 Plan for 10 years from the Effective Date.  From time to time, we may issue Incentive Awards pursuant to the 2010 Plan.  Each of the awards will be evidenced by and issued under a written agreement.  

On April 23, 2012, the Board of Directors of the Company amended and restated the Data Storage Corporation 2010 Plan. The 2010 Plan, as amended and restated, has been renamed the “Amended and Restated Data Storage Corporation Incentive Award Plan”.  The new plan provides for flexibility in vesting periods and includes a limit of $100,000 per employee per year for incentive stock options

There are 1,142,899 options outstanding under this plan as of September 30, 2012. There were 857,101 shares available for future grants under the plans.
 
 
11
 
 
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
  
Options Outstanding at January 1, 2012
     2,563,115     $ 0.02 - 0.85     $ 0.28  
   Options Granted
     1,692,501       .34-.39       0.39  
   Options Exercised
     -       -       -  
   Options Expired
     (36,779 )       0.85       0.85  
Options Outstanding at September 30, 2012
     4,218,837     $ 0.02 - 0.85     $ 0.31  
                         
Options Exercisable at September 30, 2012
     2,741,638       0.02 - 0.85     $ 0.28  
 
Share-based compensation expense for options totaling $196,986 and $52,420 was recognized in our results for the nine months ended September 30, 2012 and 2011, respectively is based on awards vested. The 2012 options were valued at the grant date at $400,015 and are being amortized over five (5) years.

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 Warrants and is calculated by using the average daily historical stock prices through the day preceding the grant date.

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 estimated volatility is an average of the historical volatility of peer entities whose stock prices were publicly available. 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.

The weighted average fair value of options granted and the assumptions used in the Black-Scholes model during the nine months ended September 30, 2012 are set forth in the table below.

   
2012
    
2011
  
Weighted average fair value of options granted
  
$
0.35
    
$
0.41
  
Risk-free interest rate
    
1.59
%
    
2.20
%
Volatility
    
98.00
%
    
74.98
%
Expected life (years)
    
10
      
10
  
 
As of September 30, 2012, there was $400,264 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 2.8 years.

Common Stock Warrants
 
There were no common stock warrants granted during the nine months ended September 30, 2012.
 
A summary of the Company's warrant activity and related information follows:
 
   
Number of
Shares
Under Warrants
    
Range of
Warrants Price Per Share
    
Weighted
Average
Exercise Price
  
Warrants Outstanding at January 1, 2012
    
173,427
    
$
0.01-0.02
    
$
0.01
  
   Warrants Granted
    
-
      
-
      
-
  
   Warrants Exercised
    
(144,785)
      
0.01
      
0.01
  
   Warrants Cancelled
    
                  -
      
                  -
      
                  -
  
Warrants Outstanding at September 30,2012
    
        28,642
      
            0.02
      
            0.02
  
                         
Warrants exercisable at September 30, 2012
    
28,642
      
0.02
      
0.02
  
 
 
12
 
 
Note 10. - Subsequent Events
 
On October 31, 2012 the Company entered into an asset purchase agreement to purchase substantially all of the assets of Message Logic, Inc.  In connection with the acquisition, Data Storage Corporation issued 1,495,190 shares of its common stock, assumed liabilities totaling $373,051 and is scheduled to pay $800,000 over a period of two years providing certain benchmarks are attained.
 
Of the 1,495,190 shares the Company issued were 187,532 shares issued to Zojax Group, LLC  under stock purchase agreement. This stock was issued in exchange for $121,896 of debt Message Logic, Inc. owed to Zojax Group, LLC.
 
In connection with the acquisition of these assets, the Company entered into a two year employment agreement with Stephen Catanzano, the CEO of Message Logic, Inc.  The agreement calls for a base salary of $150,000 plus 20% of the annual revenue in excess of $1,000,000 related to the Message Logic.
 
 
13
 
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The information contained in Item 2 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.
 
Company Overview
 
Data Storage Corporation (the “Company” or “DSC”) was incorporated in Delaware on August 29, 2001. The Company provides professional technology services that encompass disaster recovery and business continuity of data with a focus on regulatory compliance of electronic information under the current environment.
 
Data Storage Corporation derives its revenues from the sale and subscription of solutions that provide businesses protection of critical electronic information. Primarily, these services consist of professional services implementing high availability replication (mirroring of data) of client data between the client’s data center or one of DSC’s three data centers; email storage and archival; off-site data back-up and recovery; continuous data protection; data de-duplication; telecom recovery services; and, virtual tape libraries.  The Company maintains and operates Data Centers in Rhode Island and New York; and, maintains DSC equipment under a strategic alliance or vendor relations in both and Massachusetts, totaling three data centers providing clients with data replication and redundant data protection in specific applications.

On June 17, 2010, DSC’s wholly owned subsidiary Data Storage Corporation, a Delaware corporation (“Data Storage DE”) and SafeData, LLC, a Delaware Limited Liability Company (“SafeData”) entered into an Asset Purchase Agreement (the “Agreement”), setting forth the acquisition of Safe Data’s assets.

DSC delivers and supports a broad range of premium technology solutions which store, protect, optimize and leverage information; minimize downtime and recovery of information.  Clients depend on DSC to manage data growth, ensure disaster recovery and business continuity, strengthen security, reduce capital and operational expenses, and to meet increasing industry state and federal regulations.

DSC provides solutions and services to business, government, education and healthcare industries by leveraging leading technologies such as Virtualization, Cloud Computing and Green IT.
 
 
14
 
 
RESULTS OF OPERATIONS

For the three months ended September 30, 2012 as compared to the three months ended September 30, 2011

Net Sales.  Net sales for the three months ended September 30, 2012 were $1,012,613, a decrease of $76,331, or 7%, compared to $1,088,944 for the three months ended September 30, 2011. The decrease is attributable to a decline in equipment sales and professional services revenue for the three months ended September 30, 2012. 
 
Cost of Sales. For the nine months ended September 30, 2012, cost of sales was $1,996,725, an increase of $119,019, or 6.4%, compared to $1,877,706 for the nine months ended September 30, 2011.  The increase in cost of sales is directly attributable to the increase in sales personnel and related costs over the prior period. The Company's gross margin is 33.4 % for the nine months ended September 30, 2012 as compared to 34.3 % for the nine months ended September 30, 2011.  The decrease is gross margin is due to an increase in increase in technical staff for the nine months ended September 30, 2012.
 
Operating Expenses.  For the three months ended September 30, 2012, operating expenses were $714,840, a decrease of $301,021, or 29.7%, as compared to $1,015,861 for the three months ended September 30, 2011. The majority of the decrease in operating expenses for the three months ended September 30, 2012 is a result of a decrease in officer’s salary of $157,267, a decrease in sales commissions of $53,688 and a decrease in advertising expense of $32,347.
 
Other Income (expense).  Gain on settlement of contingent consideration for the three months ended September 30, 2012 decreased to $0 from $176,497  for the three months ended September 30, 2011. Interest expense and related debt discounts for the three months ended September 30, 2012 decreased $117,851 to $36,415 from $154,266 for the three months ended September 30, 2011. This is principally due to a reduction of accrued interest and the amortization of the debt discount on the convertible note that was converted in December 2011.
 
Net Loss.  Net loss for the three months ended September 30, 2012 was $368,368 a decrease of $230,912, or 38.6%, as compared to net loss of $599,280 for the three months ended September 30, 2011.
 
For the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011
 
Net Sales.  Net sales for the nine months ended September 30, 2012 were $2,996,677, an increase of $136,619, or 4.8%, compared to $2,860,058 for the nine months ended September 30, 2011. The increase is attributable to an increase in sales personnel for the nine months ended September 30, 2012. 
 
Cost of Sales. For the nine months ended September 30, 2012, cost of sales was $1,996,725, an increase of $119,019, or 6.4%, compared to $1,877,706 for the nine months ended September 30, 2011.  The increase in cost of sales is directly attributable to the increase in sales and related costs over the prior period. The Company's gross margin is 33.4 % for the nine months ended September 30, 2012 as compared to 34.3 % for the nine months ended September 30, 2011.  The decrease is gross margin is due to an increase in increase in technical staff for the nine months ended September 30, 2012.
 
Operating Expenses.  For the nine months ended September 30, 2012, operating expenses were $2,599,911, an increase of $336,972, or 14.9%, as compared to $2,262,939 for the nine months ended September 30, 2011. The majority of the increase in operating expenses for the nine months ended September 30, 2012 is a result of increased officer’s salaries and sales salaries. Sales salaries increased $310,719 to $608,675, as compared to $297,956 for the nine months ended September 30, 2011. Executive salaries expense increased $52,927 to $384,327, as compared to $331,400 for the nine months ended September 30, 2011. Stock based compensation increased $125,924 to $210,157 for the nine months ended September 30, 2012 as compared to $84,233 for the nine months ended September 30, 2011. 

Other Income (Expenses).  Gain on settlement of contingent consideration for the nine months ended September 30, 2012  decreased to $0 from $176,497.   Interest expense and related debt discounts for the nine months ended September 30, 2012 decreased $324,258 to $108,970 from $433,228 for the nine months ended September30, 2011. This is principally due to the fact that convertible notes were converted in December 2011.
 
Net Loss.  Net loss for the nine months ended September 30, 2012 was $1,708,794 an increase of $173,699, or 11.4%, as compared to net loss of $1,535,095 for the nine months ended September 30, 2011.  The increased loss is directly attributable to the increase in sales personnel for the nine months ended September 30, 2011.
 
 
15
 
 
LIQUIDITY AND CAPITAL RESOURCES

The financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business.  The Company has been funded by the CEO and largest shareholder combined with private placements of the Company’s stock. The Company has been successful in raising money as needed.  Further it is the intention of management to continue to raise money through stock issuances and to fund the Company on an as needed basis.  During the remainder of 2012 and in 2013, we intend to continue to work to increase our presence in the IBM marketplace utilizing our increased technical expertise, capacity for data storage and managed services with our asset acquisition of SafeData.
 
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.

During the nine months ended September 30, 2012 the Company’s cash increased $15,492 to $183,982 from $168,490 at December 31, 2011. Net cash of $814,284 was used in the Company’s operating activities and cash of $99,827 was used in investing activities, primarily funding capital expenditures. Net cash of $929,603 was provided by the Company’s financing activities, primarily due to the issuance of convertible debt of $500,000 proceeds from the sale of common stock of $500,000 and officer advances of $128,379 offset by capital lease and loan payments of $198,776.
 
The Company's working capital deficiency was $2,270,070 at September 30, 2012, increasing $33,426 or 1.5% from $2,198,776 at December 31, 2011. 
 
 
16
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to certain market risks, including changes in interest rates and currency exchange rates.  The Company does not undertake any specific actions to limit those exposures. 
 
Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures .  Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. The Company lacks the size and complexity to segregate duties sufficiently for proper controls. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting . There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
17
 
 
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings.
 
We are currently not involved in any litigation that we believe could have a material 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 the Company or any of our subsidiaries, threatened against or affecting the Company, our common stock, any of our subsidiaries any of the Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
 
Item 1A. Risk Factors.
 
None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the nine months ended September 30, 2012 the company issue three Million Three Hundred Thirty Three Thousand Three Hundred Thirty-Three (3,333,333) shares of the Company’s common stock, $0.001 par value per share (the “Common Stock) at a price of $0.15 for an aggregate purchase price of $500,000.  The shares were issued to Charles M. Piluso, John Coghlan, Cliff Stein and Jan Burman, four existing directors and their affiliates,  The funds were used for working capital. The shares were issued in reliance upon applicable exemptions from registration under Section 4(2) and Regulation D of the Securities Act of 1933, as amended.
 
Item 3. Defaults Upon Senior Securities.
 
There were no defaults upon senior securities during the period ended September 30, 2012
 
Item 4. Mine Safety Disclosures
 
None.
 
Item 5. Other Information.
 
There is no information required to be disclosed under this item which was not previously disclosed.
 
Item 6. Exhibits
 
(a)   Exhibits

Exhibits.
No.
  
Description
31.1
  
Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
  
Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS *
  
XBRL Instance Document
101.SCH *
  
XBRL Taxonomy Schema
101.CAL *
  
XBRL Taxonomy Calculation Linkbase
101.DEF *
  
XBRL Taxonomy Definition Linkbase
101.LAB *
  
XBRL Taxonomy Label Linkbase
101.PRE *
  
XBRL Taxonomy Presentation Linkbase
 
 
18
 
 
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: November 20, 2012
By:  
/s/ Charles M. Piluso
   
Charles M. Piluso
President, Chief Executive Officer
Principal Financial Officer
(Duly Authorized Officer and
Principal Executive Officer)
 
 
19