UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including
area code:
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 | ||
| The Capital Market | ||||
| The 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.
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).
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 ☐ |
| 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 ☐
The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of November 11, 2021, was .
DATA STORAGE CORPORATION
FORM 10-Q
INDEX
| i |
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONSOLIDATED BALANCE SHEETS |
| September 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable (less allowance for doubtful accounts of $ | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment: | ||||||||
| Property and equipment | ||||||||
| Less—Accumulated depreciation | ( | ) | ( | ) | ||||
| Net Property and Equipment | ||||||||
| Other Assets: | ||||||||
| Goodwill | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other assets | ||||||||
| Intangible assets, net | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Dividend payable | ||||||||
| Deferred revenue | ||||||||
| Line of credit | ||||||||
| Finance leases payable | ||||||||
| Finance leases payable related party | ||||||||
| Operating lease liabilities short term | ||||||||
| Note payable | ||||||||
| Total Current Liabilities | ||||||||
| Note payable long term | ||||||||
| Deferred tax liability long term | ||||||||
| Operating lease liabilities long term | ||||||||
| Finance leases payable, long term | ||||||||
| Finance leases payable related party, long term | ||||||||
| Total Long Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders' Equity: | ||||||||
| Preferred stock, Series A par value $; shares authorized; and shares issued and outstanding in 2021 and 2020, respectively | ||||||||
| Common stock, par value $; shares authorized; and shares issued and outstanding in 2021 and 2020, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Data Storage Corp Stockholders' Equity | ||||||||
| Non-controlling interest in consolidated subsidiary | ( | ) | ( | ) | ||||
| Total Stockholder's Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||
| The accompanying notes are an integral part of these consolidated Financial Statements. |
| 1 |
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| (Unaudited) |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Income (loss) from Operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on contingent liability | ||||||||||||||||
| Loss on disposal of equipment | ( | ) | ||||||||||||||
| Gain on forgiveness of debt | ||||||||||||||||
| Total Other Income (Expense) | ( | ) | ||||||||||||||
| Income before provision for income taxes | ||||||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net Income | ||||||||||||||||
| Non-controlling interest in consolidated subsidiary | ||||||||||||||||
| Net Income attributable to Data Storage Corp | ||||||||||||||||
| Preferred Stock Dividends | ( | ) | ( | ) | ( | ) | ||||||||||
| Net Income Attributable to Common Stockholders | $ | $ | $ | $ | ||||||||||||
| Earning per Share – Basic | $ | $ | $ | $ | ||||||||||||
| Earning per Share – Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted Average Number of Shares – Basic | ||||||||||||||||
| Weighted Average Number of Shares – Diluted | ||||||||||||||||
| The accompanying notes are an integral part of these consolidated Financial Statements. |
| 2 |
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2021 |
| (Unaudited) |
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Total Stockholders' | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||
| Balance January 1, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||
| Stock options Exercise | — | $ | ||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | ( | ) | ||||||||||||||||||||||||||||
| Preferred stock dividend | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Balance January 1, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Conversion of preferred series to common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Proceeds from issuance of common stock and warrants | — | |||||||||||||||||||||||||||||||
| Stock options exercise | — | ( | ) | |||||||||||||||||||||||||||||
| Stock warrants exercise | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | ( | ) | ||||||||||||||||||||||||||||
| Preferred stock dividends | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| The accompanying notes are an integral part of these consolidated Financial Statements |
| 3 |
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
| FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2021 |
| (Unaudited) |
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Total Stockholders' | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||
| Balance July 1, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | ( | ) | ||||||||||||||||||||||||||||
| Preferred stock dividends | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Balance July 1, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Proceeds from issuance of common stock and warrants | — | |||||||||||||||||||||||||||||||
| Stock Warrants Exercise | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | ( | ) | ||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| The accompanying notes are an integral part of these condensed consolidated Financial Statements |
| 4 |
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock based compensation | ||||||||
| Gain on forgiveness of debt | ( | ) | ||||||
| Gain on contingent liability | ( | ) | ||||||
| Loss on disposal of equipment | ||||||||
| Changes in Assets and Liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Right of use asset | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Deferred tax liability | ( | ) | ||||||
| Operating lease liability | ( | ) | ||||||
| Net Cash Provided by Operating Activities | ||||||||
| Cash Flows from Investing Activities: | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Cash acquired in business acquisition | | |||||||
| Cash consideration for business acquisition | ( | ) | ||||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from issuance of note payable | ||||||||
| Proceeds from line of credit | ||||||||
| Repayments of finance lease obligations related party | ( | ) | ( | ) | ||||
| Repayments of finance lease obligations | ( | ) | ( | ) | ||||
| Proceeds from issuance of common stock and warrants | ||||||||
| Cash received for the exercise of warrants | ||||||||
| Cash received for the exercised of options | ||||||||
| Repayments of dividend payable | ( | ) | ||||||
| Repayment of line of credit | ( | ) | ( | ) | ||||
| Net Cash Provided by (Used) in Financing Activities | ( | ) | ||||||
| Increase in Cash and Cash Equivalents | ||||||||
| Cash and Cash Equivalents, Beginning of Period | ||||||||
| Cash and Cash Equivalents, End of Period | $ | $ | ||||||
| Supplemental Disclosures: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Accrual of preferred stock dividend | $ | $ | ||||||
| Assets acquired by finance lease | $ | $ | ||||||
| The accompanying notes are an integral part of these consolidated Financial Statements. |
| 5 |
DATA STORAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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), Cyber Security and Voice and Data 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, Florida and North Carolina.
On May 31, 2021, the Company completed a merger (the “Merger”) under an Agreement and Plan of Merger (the “Merger Agreement”) with Flagship Solutions, LLC (“Flagship”) (a Florida limited liability company) and the Company’s wholly-owned subsidiary, Data Storage FL, LLC, a Florida limited liability company, a Florida limited liability company. Flagship is a provider of IBM solutions, managed services and cloud solutions. The Company expects that Flagship’s business will be synergistic with the Company’s existing IBM business and anticipates meaningful operation efficiency through the integration of the two organizations. The Company also believes the Merger will provide the combined entities a comprehensive one-stop provider to cross-sell solutions across each organization’s respective enterprise, as well as middle-market customers. Key offerings for the combined companies are expected to include a wide array of multicloud information technology solutions in highly secure, reliable enterprise level cloud services for companies using IBM Power systems, Microsoft Windows and Linux, including: Infrastructure as a Service (IaaS), Disaster Recovery of digital information (DRaaS), Cyber Security as a Service (CSaaS), and Data Analytics as a Service.
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, (iii) Flagship Solutions, LLC, a Florida limited liability company, and (iv) 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 September 30, 2021 and its results of operations and cash flows for the three and nine months ended September 30, 2021 and 2020. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2021.
| 6 |
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.
In July 2021, the FASB issued ASU No. 2021-05, Lessors—Certain Leases with Variable Lease Payments (Topic 842), Which requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate (hereafter referred to as “variable payments”) as an operating lease on the commencement date of the lease if specified criteria are met. ASU 2021-05 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.
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 September 30, 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.
| 7 |
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 maintains allowances for doubtful accounts on factors surrounding the credit risk of specific customers, historical trends, and other information.
As of September 30, 2021,
DSC had three customers with an accounts receivable balance representing
For the nine months ended
September 30, 2021, the Company had one customer that accounted for
Accounts Receivable/Allowance for Credit Losses
The Company sells its services
to customers on an open credit basis. Accounts receivables are uncollateralized, non-interest-bearing customer obligations. Accounts
receivables are typically due within
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
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 September 30, 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
| 8 |
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 |
Infrastructure as a Service (IaaS) provides clients the ability to migrate compute and store on DSC enterprise level technical assets in Tier 3 data centers. DSC provides a turnkey solution whereby achieving reliable and cost-effective, multi-tenant IBM Power compute, flash storage, disaster recovery and cyber security while eliminating client capital expenditures.
Clients can subscribe to disaster recovery solutions without subscribing to IaaS. Product offerings provided directly from DSC are High Availability, Data Vaulting and DRaaS type solutions, including standby servers which allows clients to centralize and streamline their mission critical digital information and technical environment. Client’s data is vaulted, maintenance of retention schedules for corporate governances and regulations to meet their back to work objective in a disaster.
| 2) | Managed Services |
These services are performed at the inception of a contract. The Company provides professional assistance to its clients during the implementation 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 both one time and subscription-based revenue, from providing support, management and renewal of software, hardware, third party maintenance contracts and third-party cloud services to clients. The managed services include help desk, remote access, operating system and software patch management, 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, infrastructure and hybrid cloud solutions provided to clients.
| 4) | Nexxis VoIP and Direct Internet Access |
The company offers VoIP, Internet access and data transport services to help keep businesses fully connected to the Internet from any location. The company provides, among other things, highly reliable Hosted VoIP solutions with equipment options for IP phones and internet speeds of up to 10Gb delivered over fiber optics.
| 9 |
Disaggregation of revenue
In the following table, revenue is disaggregated by major product line, geography, and timing of revenue recognition.
| For the Three Months | ||||||||||||
| Ended September 30, 2021 | ||||||||||||
| United States | International | Total | ||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | $ | $ | |||||||||
| Equipment and Software | ||||||||||||
| Managed Services | ||||||||||||
| Nexxis VoIP Services | ||||||||||||
| Other | ||||||||||||
| Total Revenue | $ | $ | $ | |||||||||
| For the Three Months | ||||||||||||
| Ended September 30, 2020 | ||||||||||||
| United States | International | Total | ||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | $ | $ | |||||||||
| Equipment and Software | ||||||||||||
| Managed Services | ||||||||||||
| Nexxis VoIP Services | ||||||||||||
| Total Revenue | $ | $ | $ | |||||||||
| For the Three Months | ||||||||
| Ended September 30, | ||||||||
| Timing of revenue recognition | 2021 | 2020 | ||||||
| Products transferred at a point in time | $ | $ | ||||||
| Products and services transferred over time | ||||||||
| Total Revenue | $ | $ | ||||||
| For the Nine Months | ||||||||||||
| Ended September 30, 2021 | ||||||||||||
| United States | International | Total | ||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | $ | $ | |||||||||
| Equipment and Software | ||||||||||||
| Managed Services | ||||||||||||
| Nexxis VoIP Services | ||||||||||||
| Other | ||||||||||||
| Total Revenue | $ | $ | $ | |||||||||
| For the Nine Months | ||||||||||||
| Ended September 30, 2020 | ||||||||||||
| United States | International | Total | ||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | $ | $ | |||||||||
| Equipment and Software | ||||||||||||
| Managed Services | ||||||||||||
| Nexxis VoIP Services | ||||||||||||
| Total Revenue | $ | $ | $ | |||||||||
| For the Nine Months | ||||||||
| Ended September 30, | ||||||||
| Timing of revenue recognition | 2021 | 2020 | ||||||
| Products transferred at a point in time | $ | $ | ||||||
| Products and services transferred over time | ||||||||
| Total Revenue | $ | $ | ||||||
| 10 |
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.
Transaction price allocated to the remaining performance obligations
The Company has the following performance obligations:
| 1) | Data Vaulting: subscription-based service that encrypts and transfers data to secure location further replicates the data to a second DSC technical center where it remains encrypted. Ensuring retention schedules for corporate compliance. Provides for twenty-four (24) hour or less recovery time and uses advanced data reduction reduplication technology to shorten restore time. |
| 2) | High Availability (“HA”): A managed subscription-based service which offers cost-effective mirroring software replication technology and provides one (1) hour or less recovery time. | |
| 3) | Infrastructure as a Service (“IaaS”): subscription-based service offers “capacity on-demand” for IBM Power and Intel server systems. | |
| 4) | Internet: subscription-based service offers continuous internet connection along with FailSAFE providing disaster recovery. | |
| 5) | Support and Maintenance: subscription-based service offers support for servers, firewalls, desktops or software and ad hoc support and help desk. | |
| 6) | Implementation / Set-Up Fees: on boarding and set-up IaaS and DRaaS and Cyber Security. | |
| 7) | Equipment sales: sale of servers and data storage equipment to the client. | |
| 9) | License: granting SSL certificates and other licenses. | |
| 10) | VoIP services (VoIP) and Direct Internet Access: subscription-based business Hosted VoIP, SIP Trunk and Toll Free solutions. |
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.
| 11 |
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.
Warranties
The Company offers guaranteed service levels 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.
Advertising Costs
The Company expenses the
costs associated with advertising as they are incurred. The Company incurred $
| 12 |
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.
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 information needed to compute basic and diluted earnings per share for the three and nine months ended September 30, 2021 and 2020:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net Income Available to Common Shareholders | $ | $ | $ | $ | ||||||||||||
| Weighted average number of common shares – basic | ||||||||||||||||
| Dilutive securities | ||||||||||||||||
| Options | ||||||||||||||||
| Warrants | ||||||||||||||||
| Weighted average number of common shares – diluted | ||||||||||||||||
| Earnings per share, basic | $ | $ | $ | $ | ||||||||||||
| Earnings per share, diluted | $ | $ | $ | $ | ||||||||||||
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:
| 13 |
| Three Months ended September 30, | Nine Months ended September 30, | ||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||
| Options | |||||||||||||||||
| Warrants | |||||||||||||||||
Note 3 - Property and Equipment
Property and equipment, at cost, consist of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Storage equipment | $ | $ | ||||||
| Website and software | ||||||||
| Furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Computer hardware and software | ||||||||
| Data center equipment | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Net property and equipment | $ | $ | ||||||
Depreciation expense for the nine months ended September 30, 2021
and 2020 was $
Note 4 - Goodwill and Intangible Assets
Goodwill and intangible assets consisted of the following:
| September 30, 2021 | ||||||||||||||||
| Estimated life | Accumulated | |||||||||||||||
| in years | Gross amount | Amortization | Net | |||||||||||||
| Intangible assets not subject to amortization | ||||||||||||||||
| Goodwill | $ | $ | $ | |||||||||||||
| Trademarks | ||||||||||||||||
| Total intangible assets not subject to amortization | ||||||||||||||||
| Intangible assets subject to amortization | ||||||||||||||||
| Customer lists | ||||||||||||||||
| ABC acquired contracts | ||||||||||||||||
| SIAS acquired contracts | ||||||||||||||||
| Non-compete agreements | ||||||||||||||||
| Website and Digital Assets | ||||||||||||||||
| Total intangible assets subject to amortization | ||||||||||||||||
| Total Goodwill and Intangible Assets | $ | $ | $ | |||||||||||||
Scheduled amortization over the next three years are as follows:
| Twelve months ending September 30, | |||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total | $ | ||||
Amortization expense for the nine months ended September 30, 2021
and 2020 were $
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 commenced 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 $
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 $
| 14 |
The lease for office space
in Warwick, RI, called for monthly payments of $
On July 31, 2021, the Company
signed a
The Company leases technical
space in New York, Massachusetts, North Carolina and Florida. These leases are month to month and the monthly rent is
approximately $
In 2020, the Company entered
into a new technical space lease agreement in Dallas, TX. The lease term is
Finance Lease Obligations
On June 1, 2020, the
Company entered into a lease agreement with a finance company to lease equipment. The lease obligation is payable in
monthly installments of $
On June 29, 2020, the Company
entered into a lease agreement with a finance company to lease equipment. The lease obligation is payable in monthly installments of $
On July 31, 2020, the
Company entered into a lease agreement with a finance company to lease equipment under a finance lease. The lease
obligation is payable in monthly installments of $
Subsequent to September
30, 2021, the Company entered into a lease agreement with a finance company to lease equipment under a finance lease. The lease
commenced in the fourth quarter of 2021 whereas the Company is obligated to pay monthly installments of $
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 $
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 $
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 $
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 $
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 $
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. 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
| 15 |
The components of lease expense were as follows:
| Components of lease expense | ||||
| Nine
Months Ended September 30, 2021 | ||||
| Finance leases: | ||||
| Amortization of assets, included in depreciation and amortization expense | $ | |||
| Interest on lease liabilities, included in interest expense | ||||
| Operating lease: | ||||
| Amortization of assets, included in total operating expense | ||||
| Interest on lease liabilities, included in total operating expense | ||||
| Total net lease cost | $ | |||
| Supplemental balance sheet information related to leases was as follows | ||||
| Operating Leases | ||||
| Operating lease right-of-use asset | $ | |||
| Current operating lease liabilities | $ | |||
| Noncurrent operating lease liabilities | ||||
| Total operating lease liabilities | $ | |||
| September 30, 2021 | ||||
| Finance leases: | ||||
| Property and equipment, at cost | $ | |||
| Accumulated amortization | ( | ) | ||
| Property and equipment, net | $ | |||
| Current obligations of finance leases | $ | |||
| Finance leases, net of current obligations | ||||
| Total finance lease liabilities | $ | |||
Supplemental cash flow and other information related to leases was as follows:
| 16 |
| Nine Months Ended September 30, 2021 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows related to operating leases | $ | |||
| Financing cash flows related to finance leases | $ | |||
| Weighted average remaining lease term (in years): | ||||
| Operating leases | ||||
| Finance leases | ||||
| Weighted average discount rate: | ||||
| Operating leases | % | |||
| Finance leases | % | |||
Long-term obligations under the operating and finance leases at September 30, 2021 mature as follows:
| For the Twelve Months Ended September 30, | Operating Leases | Finance Leases | ||||||
| 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| Total lease payments | ||||||||
| Less: Amounts representing interest | ( | ) | ( | ) | ||||
| Total lease obligations | ||||||||
| Less: Current | ( | ) | ( | ) | ||||
| $ | $ | |||||||
As of September 30, 2021,
the Company had no additional significant operating or finance leases that had not yet commenced. Rent expense under all operating
leases for the nine months ended September 30, 2021 and 2020 was $
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.
| 17 |
Revolving Credit Facility
On January 31, 2008, the
Company entered into a revolving credit line with a bank. The credit facility provides for $
On March 24, 2017, Flagship
entered into a revolving demand note with a bank for an amount not to exceed $750,000. The line of credit may be cancelled by either
party at any time for any reason by written notice to the other and is collateralized by all of Flagship’s assets and the
personal guarantee of two members of the Company. The stated interest rate is adjustable with interest equal to the Prime Rate plus
four percent per annum. Repayment terms consist of interest only due monthly with all principal and remaining interest due on
demand. The line of credit balance outstanding as of September 30, 2021 was $
Note 7 – Note payable
On
April 30, 2020, the Company was granted a loan from a banking institution, in the principal amount of $
On June 1, 2021 the Company
assumed the PPP loan of Flagship Solutions, LLC in the amount of $
Note 8 - Stockholders’ (Deficit)
Capital Stock
The Company has
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. 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 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
| 18 |
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 units (the “Units), each consisting of one share of the Company’s common stock, par value $ 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 $ per share of Common Stock.
The public offering price
was $
Pursuant to the Underwriting
Agreement, the Company issued warrants to purchase up to a total of
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.
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 July 21, 2021, the Company
entered into a securities purchase agreement with certain accredited institutional investors resulting in the raise of $
Maxim Group LLC acted as
the sole placement agent for the Company in connection with the Offering. Pursuant to that certain Placement Agency Agreement,
dated as of July 19, 2021, between the Company and the Placement Agent (the “Placement Agency Agreement”), the Placement
Agent will be entitled to a cash fee of 6.5% of the gross proceeds of the Offering and the reimbursement for certain out-of-pocket
expenses up to $
| 19 |
The Company received net
proceeds of $
During the nine months ended September 30, 2021, employees exercised options via cashless exercise, into shares of common stock.
During the nine months
ended September 30, 2021, warrant holders exercised warrants into common stock. The Company received $
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 | $ | - | $ | |||||||||||||
| Options Granted | - | |||||||||||||||
| Exercised | ( | ) | — | |||||||||||||
| Expired/Cancelled | ( | ) | - | — | ||||||||||||
| Options Outstanding at September 30, 2021 | $ | - | $ | |||||||||||||
| Options Exercisable at September 30, 2021 | $ | - | $ | |||||||||||||
Share-based compensation expense for options totaling $ and $ was recognized in our results for the nine months ended September 30, 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 the Company over a period equal to the expected life of the awards.
As of September 30, 2021, there was $ 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 years.
The weighted average fair value of options granted, and the assumptions used in the Black-Scholes model during the nine months ended September 30, 2021 are set forth in the table below.
| 2021 | ||||
| Weighted average fair value of options granted | $ | |||
| Risk-free interest rate | % - % | |||
| Volatility | % - % | |||
| Expected life (years) | ||||
| Dividend yield | % | |||
Common Stock Warrant
A summary of the Company’s warrant activity and related information follows:
| Number of Shares Under Options | Range of Option Price Per Share | Weighted Average Exercise Price | Weighted Average Contractual Life | |||||||||||||
| Warrant Outstanding at December 31, 2020 | $ | $ | ||||||||||||||
| Warrant Granted | – | |||||||||||||||
| Exercised | ( | ) | 7.43 | — | ||||||||||||
| Expired/Cancelled | — | — | ||||||||||||||
| Warrant Outstanding at September 30, 2021 | $ | – | $ | |||||||||||||
| Warrant Exercisable at September 30, 2021 | $ | – | $ | |||||||||||||
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 (
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 nine months ended September 30, 2021 the Company entered into one related party finance lease obligations. See Note 5 for details.
| 20 |
Nexxis Capital LLC
Charles M. 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 $
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”). The Company acquired Flagship on May 31, 2021, and became its wholly-owned subsidiary.
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, was converted into the
right to receive an aggregate amount equal to up to $
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 net working capital at Closing is more or is less than the target working capital amount specified in the Merger Agreement.
Concurrently
with the Closing, Flagship and Mark Wyllie, Flagship’s Chief Executive Officer, entered into an Employment Agreement, which
was 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 $
| 21 |
Following the closing of the transaction, Flagship’s financial statements as of the Closing were consolidated with the Consolidated Financial Statements of the Company. These amounts are provisional and may be adjusted during the measurement period.
The following sets forth the components of the purchase price:
| Purchase price: | ||||
| Cash paid to seller | $ | |||
| Total purchase price | ||||
| Assets acquired: | ||||
| Cash | ||||
| Accounts Receivable | ||||
| Prepaid Expenses | ||||
| Fixed Assets | ||||
| Website and Digital Assets | ||||
| Security Deposits | ||||
| Total assets acquired | ||||
| Liabilities assumed: | ||||
| Accounts payable and accrued expenses | ||||
| Deferred Revenue | ||||
| PPP Loan Payable | ||||
| Deferred Tax Liability | ||||
| Total liabilities assumed | ||||
| Net assets acquired | ||||
| Excess purchase price | $ |
Due to the limited amount of time since the acquisition date, the assets and liabilities of Flagship were recorded based primarily on their acquisition date carrying values. Management believes the estimated fair value of these accounts on the acquisition date approximates their carrying value as reflected in the table above due to the short-term nature of these instruments. The remaining assets and liabilities primarily consisted of goodwill and customer relationships. We will adjust the remaining assets and liabilities to fair value as valuations are completed and we obtain information necessary to complete the analyses, but no later than one year from the acquisition data. For purposes of the preliminary allocation of the purchase price, the excess purchase price has been recorded as goodwill.
The following presents the unaudited pro-forma combined results of operations of the Company with Flagship Solutions as if the entities were combined on January 1, 2020.
| Three Months Ended | ||||
| September 30, 2020 | ||||
| Revenues | $ | |||
| Net loss attributable to common shareholders | $ | ( |
) | |
| Net loss per share | $ | ( |
) | |
| Weighted average number of shares outstanding | ||||
| Nine Months Ended | ||||
| September 30, 2020 | ||||
| Revenues | $ | |||
| Net loss attributable to common shareholders | $ | ( |
) | |
| Net loss per share | $ | ( |
) | |
| Weighted average number of shares outstanding | ||||
| Nine Months Ended | ||||
| September 30, 2021 | ||||
| Revenues | $ | |||
| Net income attributable to common shareholders | $ | |||
| Net income per share | $ | |||
| Weighted average number of shares outstanding | ||||
| 22 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of our financial condition and results of operations should be read 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, the company provides 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 throughout the USA and Canada. DSC’s contracted distributors have the ability to provide disaster recovery and hybrid cloud solutions, 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 2021, we added new distributors, completed our merger with Flagship Solutions Group and are focused on expansion of sales and marketing distribution. We also recently expanded our offering of cybersecurity solutions for remote tele-computing with ezSecurity™, a new 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 industry information. While Infrastructure as a Service and Disaster Recovery as a Service solutions are 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 improved 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.
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On May 31, 2021, the Company completed a merger (the “Merger”) under an Agreement and Plan of Merger (the “Merger Agreement”) with Flagship Solutions, LLC (“Flagship”) (a Florida limited liability company) and the Company’s wholly-owned subsidiary, Data Storage FL, LLC, a Florida limited liability company. Flagship is a provider of IBM solutions, managed services, data analytics, cyber security and cloud solutions. The Company expects that Flagship’s business will be synergistic with the Company’s existing IBM business and anticipates meaningful operation efficiency through the integration of the two organizations. The Company also believes the Merger will provide the combined entities a comprehensive one-stop provider to cross-sell solutions across each organization’s respective enterprise, as well as middle-market customers. Key offerings for the combined companies are expected to include a wide array of multicloud information technology solutions in highly secure, reliable enterprise level cloud services for companies using IBM Power systems, Microsoft Windows and Linux, including: Infrastructure as a Service (IaaS), Disaster Recovery of digital information (DRaaS), Cyber Security as a Service (CSaaS), and Data Analytics as a Service.
Flagship focuses on the IBM user community with solutions and services such as, equipment, software, cyber security, data analytics, managed cloud solutions globally. The Company expects that Flagship’s business will be synergistic with the Company’s existing IBM user community focus and anticipates meaningful operation efficiency through the integration the organizations. The Company also believes the Merger will also provide the combined entities a comprehensive one-stop provider to cross-sell solutions across each organization’s respective enterprise, as well as middle-market customers. Key offerings for the combined companies are expected to include a wide array of multicloud information technology solutions in highly secure, reliable enterprise level cloud services for companies using IBM Power systems, Microsoft Windows and Linux, including: Infrastructure as a Service (IaaS), Disaster Recovery of digital information (DRaaS), Cyber Security as a Service (CSaaS), and Data Analytics as a Service. We intend to continue our strategy of growth through synergistic acquisitions.
Our offices are in New York and Florida including technology centers, which are adapted to meet the requirements 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 six geographically diverse data centers located in New York, Massachusetts, Texas, Florida, North Carolina and Canada.
RESULTS OF OPERATIONS
Three months ended September 30, 2021 as compared to September 30, 2020
Total Revenue. For the three months ended September 30, 2021 total revenue was $3,860,258 an increase of $1,136,726 or 42% compared to $2,723,532 for the three months ended September 30, 2020. The increase is primarily attributed to the additional sales from the Flagship merger and an increase in monthly subscription revenue. This was offset by a decrease in equipment sales for the three months ended September 30, 2021.
| Revenue | For the Three Months | |||||||||||||||
| Ended September 30, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | 1,827,055 | $ | 1,437,398 | $ | 389,657 | 27 | % | ||||||||
| Equipment and Software | 316,107 | 936,344 | (620,237 | ) | (66 | )% | ||||||||||
| Managed Services | 1,472,261 | 169,565 | 1,302,696 | 768 | % | |||||||||||
| Nexxis VoIP Services | 210,445 | 180,226 | 30,220 | 17 | % | |||||||||||
| Other | 34,390 | — | 34,390 | — | % | |||||||||||
| Total Revenue | $ | 3,860,258 | $ | 2,723,532 | $ | 1,136,726 | 42 | % | ||||||||
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Cost of Sales. For the three months ended September 30, 2021, cost of sales was $2,167,622, an increase of $546,614 or 34% compared to $1,621,008 for the three months ended September 30, 2020. The increase of $546,614 was mostly related to the variable nature of costs incurred to produce and sell our products or services.
Selling, general and administrative expenses. For the three months ended September 30, 2021, selling, general and administrative expenses were $2,024,304, an increase of $1,006,441, or 99%, as compared to $1,017,863 for the three months ended September 30, 2020. The net increase is reflected in the chart below.
| Selling, general and administrative expenses | For the Three Months | |||||||||||||||
| Ended September 30, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Increase in Salaries | $ | 1,102,665 | $ | 428,376 | $ | 674,289 | 157 | % | ||||||||
| Increase in Professional Fees | 178,042 | 32,441 | 145,601 | 449 | % | |||||||||||
| Increase in Software as a Service Expense | 49,932 | 36,741 | 13,191 | 36 | % | |||||||||||
| Increase in Advertising Expenses | 119,275 | 96,633 | 22,642 | 23 | % | |||||||||||
| Increase in Commissions Expense | 308,319 | 253,500 | 54,819 | 22 | % | |||||||||||
| Increase in all other Expenses | 266,071 | 170,172 | 95,899 | 56 | % | |||||||||||
| Total Expenses | $ | 2,024,304 | $ | 1,017,863 | $ | 1,006,441 | 99 | % | ||||||||
Salaries. Salaries increased as a result of the increased staff due to the Flagship merger and the hiring of our Chief Financial Officer.
Professional fees. Professional fees increased primarily due to fees incurred for the Flagship merger, engagement of two new investor relations firms, and an increase in fees associated with being a public company.
Software as a Service Expense (SaaS). SaaS increased due to additional costs paid to existing vendors to make improvements to our customer relationship management software and purchases of new user licenses.
Advertising Expense. Advertising expense increased primarily due to additional Flagship marketing campaigns launched after the merger.
Commissions Expense. 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. Other expenses increased primarily due to the Flagship merger and an increase in amortization expense related to our intangible assets. This was offset by a decrease in bad debt expense.
Other Income (Expense). Other income (expense) for the three months ended September 30, 2021 increased $508,977 to $466,251 from $(42,727) for the three months ended September 30, 2020. The increase in other income is primarily attributable to the gain on forgiveness of debt from the PPP loan and the decrease in interest expense for the three months ended September 30, 2021.
Net Income before provision for income taxes. Net income before provision for income taxes for the three months ended September 30, 2020 was $134,583, as compared to a net income of $41,935 for the three months ended September 30, 2020.
Nine months ended September 30, 2021 as compared to September 30, 2020
Total Revenue. For the nine months ended September 30, 2021 total revenue was $9,963,198 an increase of $3,135,331 or 46%. The increase is primarily attributed to the additional sales from the Flagship merger and an increase in monthly subscription revenue.
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| Revenue | For the Nine Months | |||||||||||||||
| Ended September 30, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | 5,212,566 | $ | 4,240,796 | $ | 971,770 | 23 | % | ||||||||
| Equipment and Software | 1,541,441 | 1,544,786 | (3,345 | ) | — | % | ||||||||||
| Managed Services | 2,508,515 | 557,515 | 1,951,000 | 350 | % | |||||||||||
| Nexxis VoIP Services | 588,889 | 484,770 | 104,119 | 21 | % | |||||||||||
| Other | 111,787 | — | 111,787 | — | % | |||||||||||
| Total Revenue | $ | 9,963,198 | $ | 6,827,867 | $ | 3,135,331 | 46 | % | ||||||||
Cost of Sales. For the nine months ended September 30, 2021, cost of sales was $5,609,845, an increase of $1,632,299 or 41% compared to $3,977,546 for the nine months ended September 30, 2020. The increase of $1,632,299 was mostly related to variable cost incurred to produce and sell our products or services.
Selling, general and administrative expenses. For the nine months ended September 30, 2021, selling, general and administrative expenses were $4,795,306, an increase of $1,912,511, or 66%, as compared to $2,882,755 for the nine months ended September 30, 2020. The net increase is reflected in the chart below.
| Selling, general and administrative expenses | For the Nine Months | |||||||||||||||
| Ended September 30, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Increase in Salaries | $ | 2,255,158 | $ | 1,372,591 | $ | 882,567 | 64 | % | ||||||||
| Increase in Professional Fees | 529,886 | 115,984 | 413,902 | 357 | % | |||||||||||
| Increase in Software as a Service Expense | 155,393 | 104,879 | 50,514 | 48 | % | |||||||||||
| Increase in Advertising Expenses | 371,561 | 234,564 | 136,997 | 58 | % | |||||||||||
| Increase in Commissions Expense | 820,482 | 682,448 | 138,034 | 20 | % | |||||||||||
| Increase in all other Expenses | 612,542 | 372,289 | 240,253 | 65 | % | |||||||||||
| Total Expenses | $ | 4,745,022 | $ | 2,882,755 | $ | 1,862,267 | 65 | % | ||||||||
Salaries. Salaries increased as a result of the increased staff due to the Flagship merger, the hiring of our Chief Financial Officer and two other employees, and raises granted to employees.
Professional fees. Professional fees increased primarily due to fees incurred for the Flagship merger, two new investor relations firms, and an increase in fees associated with being a public company.
Software as a Service Expense (SaaS). SaaS increased due to additional costs paid to existing vendors to make improvements to our customer relationship management software and purchases of new user licenses.
Advertising Expense. Advertising expense increased primarily due to additional marketing campaigns for the Flagship merger and an increase in existing advertising campaigns.
Commissions Expense. 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. Other expenses increased primarily due to a combination of an increase in online training and continuing education, increase in travel after the flagship merger, and the increase in bad debt expense. This was partially offset by a reduction in 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). Other income for the nine months ended September 30, 2021, increased $444,998 to $662,153 from $217,155 for the nine months ended September 30, 2020. The increase in other income is primarily attributable to the gain on forgiveness of debt from the PPP loans and a decrease in interest expense. This was offset by the gain on contingent liability recorded in the prior year and the loss on disposal of equipment recorded during the current period.
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Net Income before provision for income taxes. Net income before provision for income taxes for the nine months ended September 30, 2021 was $270,484, as compared to a net income of $184,721 for the nine months ended September 30, 2020.
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.
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.
During the nine months ended September 30, 2021, DSC’s cash increased $11,995,434 to $12,889,032 from $893,598 December 31, 2020. Net cash of $153,045 was provided by DSC’s operating activities resulting primarily from the changes in assets and liabilities. Net cash of $6,355,697 was used in investing activities primarily from the purchase of Flagship. Net cash of $18,198,086 was provided by financing activities resulting primarily from the sale of common stock and warrants. This was offset by the repayment of dividends and finance lease obligations.
DSC’s working capital was $12,343,329 on September 30, 2021, increasing by $15,009,777 from $(2,666,448) at December 31, 2020. The increase is primarily attributable to an increase in cash, accounts receivable, and a decrease in dividend payable. This was offset by an increase in accounts payable and line of credit payable.
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”.
Non-GAAP Financial Measures
Adjusted EBITDA
To supplement our consolidated financial statements presented in accordance with GAAP and to provide investors with additional information regarding our financial results, we consider and are including herein Adjusted EBITDA, a Non-GAAP financial measure. We view Adjusted EBITDA as an operating performance measure and, as such, we believe that the GAAP financial measure most directly comparable to it is net income (loss). We define Adjusted EBITDA as net income adjusted for interest and financing fees, depreciation, amortization, stock-based compensation, and other non-cash income and expenses. We believe that Adjusted EBITDA provides us an important measure of operating performance because it allows management, investors, debtholders and others to evaluate and compare ongoing operating results from period to period by removing the impact of our asset base, any asset disposals or impairments, stock-based compensation and other non-cash income and expense items associated with our reliance on issuing equity-linked debt securities to fund our working capital.
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Our use of Adjusted EBITDA has limitations as an analytical tool, and this measure should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP, as the excluded items may have significant effects on our operating results and financial condition. Additionally, our measure of Adjusted EBITDA may differ from other companies’ measure of Adjusted EBITDA. When evaluating our performance, Adjusted EBITDA should be considered with other financial performance measures, including various cash flow metrics, net income and other GAAP results. In the future, we may disclose different non-GAAP financial measures in order to help our investors and others more meaningfully evaluate and compare our future results of operations to our previously reported results of operations.
The following table shows our reconciliation of net income to adjusted EBITDA for the three and nine months ended September 30, 2021 and 2020, respectively:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income | $ | 134,583 | $ | 41,935 | $ | 270,484 | $ | 184,721 | ||||||||
| Non-GAAP adjustments: | ||||||||||||||||
| Depreciation and amortization | 370,625 | 259,776 | 947,669 | 754,243 | ||||||||||||
| Flagship acquisition costs | 21,998 | — | 125,537 | — | ||||||||||||
| Interest income and expense | 15,726 | 42,726 | 97,392 | 132,845 | ||||||||||||
| Gain on contingent liability | — | — | — | (350,000 | ) | |||||||||||
| Loss on disposal of equipment | — | — | 29,732 | — | ||||||||||||
| Gain on forgiveness of debt | (481,977 | ) | — | (789,277 | ) | — | ||||||||||
| Stock based compensation | 44,030 | 42,171 | 120,251 | 116,557 | ||||||||||||
| Adjusted EBITDA | $ | 104,985 | $ | 386,608 | $ | 801,788 | $ | 838,366 | ||||||||
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, 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 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 SEC rules based on the material weakness described below.
The material weaknesses identified during management’s assessment was a lack of sufficient internal accounting expertise to provide reasonable assurance that our financial statements and notes thereto are prepared in accordance with GAAP.
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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 September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. As previously reported, during the second quarter of 2021, the Company hired as Chief Financial Officer Chris H. Panagiotakos, who has over 23 years of public company accounting experience and brings a broad range of experience related to public company accounting matters.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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.
Item 1A. Risk Factors.
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 nine months ended September 30, 2021, we had a net income of $270,484 and a net income attributable to shareholders of $0.05. As of September 30, 2020, DSC had cash and cash equivalents of $12,889,032 and a working capital of $12,343,329.
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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 September 30, 2021, our principal executive 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 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.
We will be required to expend time and resources to further improve our internal controls over financial reporting. 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.
On May 18, 2021 the company hired Chris H. Panagiotakos to serve as the company’s Chief Financial Officer. Chris has over 23 years of public company accounting experience, and brings a broad range of experience related to public company accounting matters.
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.
There were no unregistered sales of the Company’s equity securities during the period ended September 30, 2021 that were not previously reported in a Current Report on Form 8-K.
Item 3. Defaults Upon Senior Securities.
There were no defaults upon senior securities during the period ended September 30, 2021.
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Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information.
There is no other information required to be disclosed under this item which was not previously disclosed.
Item 6. Exhibits.
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| 101.INS | XBRL Instant Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith.
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 15, 2021 | ||
| By: | /s/ Charles M. Piluso | |
| Charles M. Piluso | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 15, 2021 | ||
| By: | /s/ Chris H. Panagiotakos | |
| Chris H. Panagiotakos | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
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