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 ___________
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code:
Securities registered pursuant to Section 12(b) of the Act:
| 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
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Indicate by check mark whether the registrant has
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The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of November 14, 2023, was .
DATA STORAGE CORPORATION
FORM 10-Q
INDEX
1
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED BALANCE SHEETS |
| September 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts Receivable (less allowance for credit losses of $ | ||||||||
| Marketable securities | ||||||||
| 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’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable and Accrued Expenses | $ | $ | ||||||
| Deferred Revenue | ||||||||
| Finance Leases Payable Short Term | ||||||||
| Finance Leases Payable Related Party Short Term | ||||||||
| Operating Lease Liabilities Short Term | ||||||||
| Total Current Liabilities | ||||||||
| Operating Lease Liabilities | ||||||||
| Finance Leases Payable | ||||||||
| Finance Leases Payable Related Party | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 6) | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred Stock, Series A par value $; shares authorized; and shares issued and outstanding in 2023 and 2022, respectively | ||||||||
| Common Stock, par value $; shares authorized; and shares issued and outstanding in 2023 and 2022, respectively | ||||||||
| Additional Paid in Capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Data Storage Corporation 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 condensed consolidated Financial Statements. |
2
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
| (Unaudited) |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of Sales | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Selling, General and Administrative | ||||||||||||||||
| Income (Loss) from Operations | ( | ) | ( | ) | ||||||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest Income (Expense), net | ( | ) | ( | ) | ||||||||||||
| Total Other Income (Expense) | ( | ) | ( | ) | ||||||||||||
| Income (Loss) Before Provision for Income Taxes | ( | ) | ( | ) | ||||||||||||
| Benefit from Income Taxes | ||||||||||||||||
| Net Income (Loss) | ( | ) | ( | ) | ||||||||||||
| Loss in Non-Controlling Interest of Consolidated Subsidiary | ||||||||||||||||
| Net Income (Loss) attributable to Data Storage Corporation | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Earnings Per Share – Basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Earnings Per Share – Diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted Average Number of Shares - Basic | ||||||||||||||||
| Weighted Average Number of Shares - Diluted | ||||||||||||||||
| The accompanying notes are an integral part of these condensed consolidated Financial Statements. |
3
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
| FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022 |
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||
| Balance July 1, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-Based Compensation | — | — | ||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Balance July 1, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-Based Compensation | — | |||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | ( | ) | ||||||||||||||||||||||||||||
| Balance September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| The accompanying notes are an integral part of these condensed consolidated Financial Statements |
4
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022 |
| (Unaudited) |
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||
| Balance January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock Options Exercise | — | |||||||||||||||||||||||||||||||
| Stock-Based Compensation | — | |||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Balance January 1, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-Based Compensation | — | |||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | ( | ) | ||||||||||||||||||||||||||||
| Balance September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| The accompanying notes are an integral part of these condensed consolidated Financial Statements |
5
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (Unaudited) |
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Income (Loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock based compensation | ||||||||
| 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 | ( | ) | ( | ) | ||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net Cash Provided by Operating Activities | ||||||||
| Cash Flows from Investing Activities: | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Purchase of marketable securities | ( | ) | ||||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Repayments of finance lease obligations related party | ( | ) | ( | ) | ||||
| Repayments of finance lease obligations | ( | ) | ( | ) | ||||
| Cash received for the exercised of options | ||||||||
| Net Cash Used in Financing Activities | ( | ) | ( | ) | ||||
| Decrease 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: | ||||||||
| Assets acquired by finance lease | $ | $ | ||||||
| The accompanying notes are an integral part of these condensed consolidated Financial Statements. |
6
DATA STORAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023
(Unaudited)
Note 1 – Basis of Presentation, Organization and Other Matters
Data Storage Corporation (“DSC” or the “Company”) headquartered in Melville, NY, provides cloud-based solutions and IT services to businesses within the healthcare, banking and finance, distribution services, manufacturing, construction, education, and government industries. DSC derives its revenues from subscription managed cloud services and solutions, IT managed services, equipment, software and maintenance, and onboarding implementation. DSC maintains cloud-based infrastructure and storage equipment in seven technical centers in New York, Massachusetts, Texas, Florida, North Carolina, and Canada.
On May 31, 2021, the Company completed an acquisition of Flagship Solutions, LLC (“Flagship”) (a Florida limited liability company) and its wholly-owned subsidiary, Data Storage FL, LLC. Flagship is a provider of Hybrid Cloud solutions, IT managed services and equipment.
On January 27, 2022, the Company formed Information Technology Acquisition Corporation a special purpose acquisition company for the purpose of entering into a merger, capital stock exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination with one or more businesses or entities.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial statements for interim periods in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The information included in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”). The Company’s accounting policies are described in the “Notes to Consolidated Financial Statements” in the 2022 Form 10-K and are updated, as necessary, in this Form 10-Q. The December 31, 2022, condensed consolidated balance sheet data presented for comparative purposes was derived from the audited financial statements but does not include all disclosures required by U.S. GAAP. The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.
Note 2 – Summary of Significant Accounting Policies
Principles of Consolidation
The Consolidated Financial statements include the accounts of the Company and its wholly-owned subsidiaries, (i) CloudFirst Technologies Corporation, a Delaware corporation (“CloudFirst”), (ii) Data Storage FL, LLC, a Florida limited liability company, (iii) Flagship Solutions, LLC, a Florida limited liability company, (iv) Information Technology Acquisition Corporation, a Delaware Corporation, and (v) its majority-owned subsidiary, Nexxis Inc., a Nevada corporation. All inter-company transactions and balances have been eliminated in consolidation.
7
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 fair value measurement disclosures are grouped into three levels based on valuation factors:
● Level 1 – quoted prices in active markets for identical investments
● Level 2 – other significant observable inputs (including quoted prices for similar investments and market corroborated inputs)
● Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)
The Company’s Level 1 assets/liabilities include cash, accounts receivable, marketable securities, accounts payable, prepaid, and other current assets. Management believes the estimated fair value of these accounts at September 30, 2023 approximate their carrying value as reflected in the balance sheets due to the short-term nature of these instruments.
The Company’s Level 2 assets/liabilities include certain of the Company’s operating lease right-of-use assets. Their carrying value approximates 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.
The Company’s Level 3 assets/liabilities include goodwill and intangible assets. Inputs to determine fair value are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including discounted cash flow models. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.
The Company’s marketable
equity securities are publicly traded stocks measured at fair value using quoted prices for identical assets in active markets and classified
as Level 1 within the fair value hierarchy. Marketable equity securities as of September 30,
2023 and December 31, 2022 are $
Recently adopted accounting standards:
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2023. These standards replace the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measure at amortized cost to be presented at the net amount expected to be collected. The Company determined that this change does not have a material impact to the financial statements or financial statement disclosures.
8
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis. Assets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property, plant and equipment, operating lease right-of-use assets, goodwill, and other intangible assets. These assets are measured using Level 3 inputs, if determined to be impaired.
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.
Investments
The Company invests in equity securities and reports them in accordance with ASU 2016-01. Equity securities are reported at fair value with unrealized gains and losses, net of the related tax effect, reflected as a gain or loss on the statement of operations. Dividends and interest are recognized when earned.
The following table sets forth a summary of the changes in equity investments, at cost that are measured at fair value on a non-recurring basis:
| For the nine months ended September 30, 2023 | ||||
| Total | ||||
| As of January 1, 2023 | $ | |||
| Purchase of equity investments | ||||
| As of March 31, 2023 | ||||
| Purchase of equity investments | ||||
| As of June 30, 2023 | $ | |||
| Purchase of equity investments | ||||
| As of September 30, 2023 | $ | |||
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.
As of September 30, 2023, the Company had three customers
with an accounts receivable balance representing
For the three months ended September 30, 2023, the
Company had one customer that accounted for
9
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 five to seven years for property and equipment. Additions, betterments, and replacements are capitalized, while expenditures for repairs and maintenance are charged to operations when incurred. As units of property are sold or retired, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income.
Goodwill and Other Intangibles
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.
The Company tests goodwill for impairment on an annual basis on December 31, or more frequently if events occur or circumstances change indicating that the fair value of the goodwill may be below its carrying amount. The Company has four reporting units. The Company uses an income-based approach to determine the fair value of the reporting units. This approach uses a discounted cash flow methodology and the ability of the Company’s reporting units to generate cash flows as measures of fair value of its reporting units.
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) | Cloud Infrastructure and Disaster Recovery Revenue |
Cloud Infrastructure provides clients the ability to migrate their on-premises computing and digital storage to DSC’s enterprise-level technical compute and digital storage assets located in Tier 3 data centers. Data Storage Corporation owns the assets and provides a turnkey solution whereby achieving reliable and cost-effective, multi-tenant IBM Power compute, x86/intel, flash digital storage, while providing disaster recovery and cyber security while eliminating client capital expenditures. The client pays a monthly fee and can increase capacity as required.
Clients can subscribe to an array of disaster recovery solutions. Product offerings provided directly from DSC are High Availability, Data Vaulting and retention solutions, including standby servers which allows clients to centralize and streamline their mission-critical digital information and technical environment while ensuring business continuity if they experience a cyber-attack or natural disaster Client’s data is vaulted, at two data centers with the maintenance of retention schedules for corporate governances and regulations all to meet their back to work objective in a disaster.
10
| 2) | Managed Services |
These services are performed at the inception and continue through the term of the agreement. 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 supplementing the client’s staff.
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 |
The Company provides equipment and software and actively participates in collaboration with IBM and other equipment manufacturers and software companies to provide innovative business solutions to clients.
| 4) | Nexxis Voice over Internet and Direct Internet Access |
The Company provides VoIP, Internet access and data transport services to ensure businesses are fully connected to the internet from any location, remote and on premise. The Company provides Hosted VoIP solutions with equipment options for IP phones and internet speeds of up to 10Gb delivered over fiber optics.
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, 2023 |
| 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, 2022 |
| United States | International | Total | ||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | $ | $ | |||||||||
| Equipment and Software | ||||||||||||
| Managed Services | ||||||||||||
| Nexxis VoIP Services | ||||||||||||
| Other | ||||||||||||
| Total Revenue | $ | $ | $ | |||||||||
11
| For the Three Months | ||||||||
| Ended September 30, | ||||||||
| Timing of revenue recognition | 2023 | 2022 | ||||||
| Products transferred at a point in time | $ | $ | ||||||
| Products and services transferred over time | ||||||||
| Total Revenue | $ | $ | ||||||
| For the Nine Months | ||||||||||||
| Ended September 30, 2023 | ||||||||||||
| 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, 2022 | ||||||||||||
| 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, | ||||||||
| Timing of revenue recognition | 2023 | 2022 | ||||||
| Products transferred at a point in time | $ | $ | ||||||
| Products and services transferred over time | ||||||||
| Total Revenue | $ | $ | ||||||
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 cloud service that encrypts and transfers data to a secure Tier 3 data center and further replicates the data to a second Tier 3 DSC technical center where it remains encrypted. Ensuring client retention schedules for corporate compliance and disaster recovery. Provides for twenty-four (24) hour or less recovery time and utilizes advanced data reduction, reduplication technology to shorten back-up and restore time. |
12
| 2) | High Availability: A managed cloud subscription-based service that provides cost-effective mirroring software replication technology and provides one (1) hour or less recovery time for a client to be back in business. |
| 3) | Cloud Infrastructure: Subscription-based cloud service provides for “capacity on-demand” for IBM Power and X86 Intel server systems. |
| 4) | Internet: Subscription-based service, offering continuous internet connection combined with FailSAFE which provides disaster recovery for both a clients’ voice and data environments. |
| 5) | Support and Maintenance: Subscription based service offers support for clients on their servers, firewalls, desktops, or software. Services are provided 24x7x365 to the Company’s clients. |
| 6) | Implementation / Set-Up Fees: Onboarding and set-up for cloud infrastructure and disaster recovery as well as Cyber Security. |
| 7) | Equipment sales: Sale of servers and data storage equipment to the client. |
| 9) | License: Granting SSL certificates and licenses. |
Disaster Recovery and Business Continuity Solutions
Subscription services allow clients to access data or receive services for a predetermined period of time. As the client obtains access at a point in time and 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 a separate performance obligation. Set-up services are performed one-time and accordingly the revenue is recognized at the point in time, and is non-refundable, and the Company is entitled to the payment.
Equipment Sales
The obligation for the equipment sales is such that the control of the product transfer is 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, the performance obligation is considered to be satisfied at a point in time 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
Performance obligations as it relates to licensing means that the control of the product transfers, either at a point in time or over time, depending on the nature of the license. The revenue standard identifies two types of licenses of IP: (i) a right to access IP; and (ii) 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.
13
Payment Terms
The typical terms of subscription contracts range from 12 to 36 months, with auto-renew options extending the contract for an additional term. The Company invoices clients one month in advance for its services, in addition to any contractual data overages or for additional services. Equipment, software, and managed services are typically invoiced on net 30-day terms and are non-subscription based.
Warranties
The Company offers guaranteed service levels and service guarantees on some of its contracts. These warranties are not sold separately and are accounted as “assurance warranties”.
Significant Judgement
In the instance where contracts have multiple performance obligations the Company uses judgment to establish a stand-alone price for each performance obligation. 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 is calculated to determine the aggregate price for the individual services. The proportion of each individual service to the aggregate price is determined. The ratio is applied to the total contract price in order to allocate the transaction price to each performance obligation.
Impairment of Long-Lived Assets
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 un-discounted future cash flows.
Advertising Costs
The Company expenses the costs associated with
advertising as they are incurred. The Company incurred $
The Company follows the requirements of FASB ASC 718-10-10, Share-Based Payments with regards to stock-based compensation issued to employees and non-employees. The Company 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 Company has a relatively low forfeiture rate of stock-based compensation and forfeitures are recognized as they occur.
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 the 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. The Company’s calculation of estimated volatility is based on historical stock prices over a period equal to the expected life of the awards.
14
Basic income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income 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, 2023, and 2022:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net Income (Loss) Available to Common Shareholders | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Weighted average number of common shares - basic | ||||||||||||||||
| Dilutive Securities | ||||||||||||||||
| Options | ||||||||||||||||
| Warrants | ||||||||||||||||
| Weighted average number of common shares - diluted | ||||||||||||||||
| Earnings (Loss) per share, basic | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Earnings (Loss) 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 because their effect was anti-dilutive:
| Three Months ended September 30, | Nine Months ended September 30, | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| Options | |||||||||||||||||
| Warrants | |||||||||||||||||
15
Note 3 - Prepaids and other current assets
Prepaids and other current assets consist of the following:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Prepaid Marketing & Promotion | $ | $ | ||||||
| Prepaid Subscriptions and Licenses | ||||||||
| Prepaid Maintenance | ||||||||
| Prepaid Insurance | ||||||||
| Other | ||||||||
| Total prepaid and other current assets | $ | $ | ||||||
Note 4- Property and Equipment
Property and equipment, at cost, consist of the following:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Storage Equipment | $ | $ | ||||||
| Furniture and Fixtures | ||||||||
| Leasehold Improvements | ||||||||
| Computer Hardware and Software | ||||||||
| Data Center Equipment | ||||||||
| Gross Property and equipment | ||||||||
| Less: Accumulated Depreciation | ( | ) | ( | ) | ||||
| Net Property and Equipment | $ | $ | ||||||
Depreciation
expense for the three months ended September 30, 2023, and 2022 was $
Note 5 - Goodwill and Intangible Assets
Goodwill and intangible assets consisted of the following:
| Estimated life in years | Gross amount | December 31, 2022, Accumulated 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 | $ | $ | $ | |||||||||||||
16
| Estimated life in years | Gross amount | September 30, 2023, Accumulated 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 five years are as follows:
| Twelve months ending September 30, | |||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total | $ | ||||
Amortization
expense for the three months ended September 30, 2023, and 2022 was $
Note 6-Leases
Operating Leases
The Company currently maintains 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 the Company’s existing lease in the same building. The base annual rent is $
17
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 $
On July 31,
2021, the Company signed a three-year lease for approximately 2,880 square feet of office space at 980 North Federal Highway, Boca Raton,
FL. The commencement date of the lease was
The Company
leases cages and racks for technical space in Tier 3 data centers in New York, Massachusetts, and North Carolina. These leases are month
to month. The monthly rent is approximately $
On January 1,
2022, the Company entered into a lease agreement for office space with WeWork in Austin, TX. The lease term is six months and requires
monthly payments of $
Finance Lease Obligations
On June 1, 2020,
the Company entered into a lease agreement with a finance company to lease technical equipment. The lease obligation is payable in monthly
installments of $
On June 29,
2020, the Company entered into a lease agreement for technical equipment with a finance company. The lease obligation is payable in monthly
installments of $
On July 31,
2020, the Company entered into a lease agreement for technical equipment with a finance company. The lease obligation is payable in monthly
installments of $
On November
1, 2021, the Company entered into a lease agreement with a finance company for technical equipment. The lease obligation is payable in
monthly installments of $
On January 1,
2022, the Company entered into a lease agreement with a finance company for technical equipment. The lease obligation is payable in monthly
installments of $
On January 1,
2022, the Company entered into a technical equipment lease with a finance company. The lease obligation is payable in monthly installments
of $
Finance Lease Obligations – Related Party
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 $
18
On January 1,
2020, the Company entered into a 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 lease agreement with Systems Trading effective April 1, 2021. This lease obligation is payable to Systems
Trading with monthly installments of $
On January 1,
2022, the Company entered into a lease agreement with Systems Trading effective January 1, 2022. This lease obligation is payable to Systems
Trading with monthly installments of $
On April 1,
2022, the Company entered into a lease agreement with Systems Trading effective May 1, 2022. 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
The components of lease expense were as follows and include both related party and non-related finance leases combined:
| Three Months Ended September 30, 2023 | ||||
| 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 | $ | |||
| Nine Months Ended September 30, 2023 | ||||
| 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 | $ | |||
19
| September 30, 2023 | ||||
| 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 were as follows and include both related party and non-related finance leases combined:
| Nine Months Ended September 30, 2023 | ||||
| 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, 2023, mature as follows and include both related party and non-related finance leases combined:
| For the Twelve Months Ended September 30, | Operating Leases | Finance Leases | ||||||
| 2023 | $ | $ | ||||||
| 2024 | ||||||||
| Total lease payments | ||||||||
| Less: Amounts representing interest | ( |
) | ( |
) | ||||
| Total lease obligations | ||||||||
| Less: long-term obligations | ( |
) | ||||||
| Total current | $ | $ | ||||||
20
As of September
30, 2023, the Company had no additional significant operating or finance leases that had not yet commenced. Rent expense under all operating
leases for the three months ended September 30, 2023, and 2022 was $
Note 7 - Commitments and Contingencies
As part of the
Flagship acquisition the Company acquired a licensing agreement for marketing related materials with a National Football League team.
The Company has approximately $
Note 8 – Stockholders’ (Deficit)
Capital Stock
The Company
has
Common Stock Options
On June 2, 2023 the Company registered an additional shares of common stock under the 2021 Stock Incentive Plan.
A summary of the Company’s options activity and related information follows:
| Number of | Weighted | Weighted | ||||||||||||||
| Shares | Range of | Average | Average | |||||||||||||
| Under | Option Price | Exercise | Contractual | |||||||||||||
| Options | Per Share | Price | Life | |||||||||||||
| Options Outstanding at January 1, 2023 | $ | - | $ | |||||||||||||
| Options Granted | - | |||||||||||||||
| Exercised | — | |||||||||||||||
| Expired/Cancelled | ( | ) | - | — | ||||||||||||
| Options Outstanding at September 30, 2023 | $ | - | $ | |||||||||||||
| Options Exercisable at September 30, 2023 | $ | - | $ | |||||||||||||
Share-based compensation expense for options totaling $ and $ was recognized in the Company’s results for the three months ended September 30, 2023, and 2022, respectively. Share-based compensation expense for options totaling $ and $ was recognized in the Company’s results for the nine months ended September 30, 2023, and 2022, 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 the 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.
21
As of September 30, 2023, 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 three months ended September 30, 2023, and 2022, are set forth in the table below.
| 2023 | 2022 | |||||||
| Weighted average fair value of options granted | $ | $ | ||||||
| Risk-free interest rate | %- | % | % – | % | ||||
| Volatility | %- | % | % – | % | ||||
| Expected life (years) | years | years | ||||||
| Dividend yield | $ | % | $ | % | ||||
Share-based awards, restricted stock award (“RSAs”)
On
March 1, 2023, the Company granted certain employees an aggregate of
RSAs. Compensation expense as a group amounted to $
On
March 28, 2023, the Company granted certain employees an aggregate of
RSAs. Compensation expense as a group amounted to $
On
March 31, 2023, the Board resolved that the Company shall issue to Board members an aggregate of
RSAs. Compensation expense as a group amounted to $
On
April 10, 2023, the Company granted certain employees an aggregate of
RSA’s. Compensation expense as a group amounted to $
On June 30, 2023, the Board resolved that the Company shall issue to Board members an aggregate of 12,500 RSAs. Compensation expense as a group amounted to $29,125. The shares vest one year after issuance.
On
September 30, 2023, the Board resolved that the Company shall issue to Board members an aggregate of
RSAs to each member of the Board. Compensation expense as a group amounted to $
A summary of the activity related to RSUs for the nine months ended September 30, 2023, is presented below:
| Total | Grant Date | |||||||
| Restricted Stock Units (RSUs) | Shares | Fair Value | ||||||
| RSU’s non-vested at January 1, 2023 | $ | - | ||||||
| RSU’s granted | $ | - | ||||||
| RSU’s vested | ( | ) | $ |
| ||||
| RSU’s forfeited | $ | |||||||
| RSU’s non-vested September 30, 2023 | $ | - | ||||||
22
Stock-based compensation for RSUs has been recorded in the consolidated statements of operations and totaled $ and $ for the three months ended September 30, 2023 and 2022, respectively. Stock-based compensation for RSUs has been recorded in the consolidated statements of operations and totaled $ and $ for the nine months ended September 30, 2023 and 2022, respectively.
As of September
30, 2023, there was $
Note 9 – Litigation
The Company is currently not involved in any litigation that it believes could have a materially adverse effect on its financial condition or results of operations. There is no action, suit, proceeding, inquiry, or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company’s company or any of its 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
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 from
Nexxis Capital of $
Note 11 – Segment Information
The Company operates in three reportable segments: Nexxis Inc., Flagship Solutions Group, and CloudFirst. The Company’s segments were determined based on its internal organizational structure, the manner in which its operations are managed, and the criteria used by its Chief Operating Decision Maker (CODM) to evaluate performance, which is generally the segment’s operating income or losses.
| Operations of: | Products and services provided: | |
| Nexxis Inc. | ||
| Flagship Solutions, LLC | ||
| CloudFirst Technologies Corporation |
The following tables present certain financial information related to the Company’s reportable segments and Corporate:
23
| As of September 30, 2023 | ||||||||||||||||||||
| CloudFirst Technologies Corporation | Flagship Solutions LLC | Nexxis Inc. | Corporate | Total | ||||||||||||||||
| Accounts receivable | $ | $ | $ | $ | $ | |||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||||||||
| Net Property and Equipment | ||||||||||||||||||||
| Intangible assets, net | ||||||||||||||||||||
| Goodwill | ||||||||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||||||||
| All other assets | ||||||||||||||||||||
Total Assets
| $ | $ | $ | $ | $ | |||||||||||||||
| Accounts payable and accrued expenses | $ | $ | $ | $ | $ | |||||||||||||||
| Deferred revenue | ||||||||||||||||||||
| Total Finance leases payable | ||||||||||||||||||||
| Total Finance leases payable related party | ||||||||||||||||||||
| Total Operating lease liabilities | ||||||||||||||||||||
| Total Liabilities | $ | $ | $ | $ | $ | |||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||
| CloudFirst Technologies Corporation | Flagship Solutions LLC | Nexxis Inc. | Corporate | Total | ||||||||||||||||
| Accounts receivable | $ | $ | $ | $ | $ | |||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||||||||
| Net Property and Equipment | ||||||||||||||||||||
| Intangible assets, net | ||||||||||||||||||||
| Goodwill | ||||||||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||||||||
| All other assets | ||||||||||||||||||||
| Total Assets | $ | $ | $ | $ | $ | |||||||||||||||
| Accounts payable and accrued expenses | $ | $ | $ | $ | $ | |||||||||||||||
| Deferred revenue | ||||||||||||||||||||
| Total Finance leases payable | ||||||||||||||||||||
| Total Finance leases payable related party | ||||||||||||||||||||
| Total Operating lease liabilities | ||||||||||||||||||||
| Total Liabilities | $ | $ | $ | $ | $ | |||||||||||||||
24
| For the three months ended September 30, 2023 | ||||||||||||||||||||
| CloudFirst Technologies Corporation | Flagship Solutions LLC | Nexxis Inc. | Corporate | Total | ||||||||||||||||
| Sales | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of Sales | ||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||
| Selling, General and Administrative | ||||||||||||||||||||
| Depreciation and Amortization | ||||||||||||||||||||
| Total Operating Expenses | ||||||||||||||||||||
| Income (Loss) from Operations | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Interest Expense, net | ( | ) | ||||||||||||||||||
| Other Expense | ||||||||||||||||||||
| Total Other Income (Expense) | ( | ) | ||||||||||||||||||
| Income (Loss) before provision for income taxes | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||
| For the three months ended September 30, 2022 | ||||||||||||||||||||
| CloudFirst Technologies Corporation | Flagship Solutions LLC | Nexxis Inc. | Corporate | Total | ||||||||||||||||
| Sales | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of Sales | ||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||
| Selling, General and Administrative | ||||||||||||||||||||
| Depreciation and Amortization | ||||||||||||||||||||
| Total Operating Expenses | ||||||||||||||||||||
| Income (Loss) from Operations | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Interest Expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Loss on Disposal of Equipment | ||||||||||||||||||||
| Gain on Forgiveness of Debt | ||||||||||||||||||||
| All Other Expenses | ||||||||||||||||||||
| Total Other Income (Expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Income (Loss) before Provision for Income Taxes | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||
25
| For the nine months ended September 30, 2023 | ||||||||||||||||||||
| CloudFirst Technologies Corporation |
Flagship Solutions LLC | Nexxis Inc. | Corporate | Total | ||||||||||||||||
| Sales | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of Sales | ||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||
| Selling, General and Administrative | ||||||||||||||||||||
| Depreciation and Amortization | ||||||||||||||||||||
| Total Operating Expenses | ||||||||||||||||||||
| Income (Loss) from Operations | ( |
) | ( |
) | ||||||||||||||||
| Interest Expense, net | ( |
) | ||||||||||||||||||
| Total Other Income (Expense) | ( |
) | ||||||||||||||||||
| Income (Loss) before Provision for Income Taxes | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||
| For the nine months ended September 30, 2022 | ||||||||||||||||||||
| CloudFirst Technologies Corporation | Flagship Solutions LLC | Nexxis Inc. | Corporate | Total | ||||||||||||||||
| Sales | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of Sales | ||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||
| Selling, General and Administrative | ||||||||||||||||||||
| Depreciation and Amortization | ||||||||||||||||||||
| Total Operating expenses | ||||||||||||||||||||
| Income (Loss) from Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Interest Expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Loss on Disposal of Equipment | ||||||||||||||||||||
| Gain on Forgiveness of Debt | ||||||||||||||||||||
| All Other Expenses | ||||||||||||||||||||
| Total Other Income (Expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Income (Loss) before Provision for Income Taxes | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
26
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, 2022, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed on March 31, 2023 (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 SEC.
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.
The Industry and Opportunity
Data Storage Corporation provides managed technologies across multiple platforms. Our technical assets are in geographically diverse, Tier 3 compliant data centers throughout the USA and Canada.
Hybrid and Multi-Cloud have become mainstream technological offerings of the Cloud infrastructure managed services industry as companies have moved away from legacy, on-premises technology solutions. This approach has grown more complex, as companies utilize disparate technical environments, including on-premises equipment and software, multi-clouds interfacing with Software as a Service providers.
Cloud Managed Service Providers assist businesses in achieving their desired cyber security levels, technical cloud infrastructure and financial objectives while optimizing the value of these technologies ensuring business continuity, governance, and operational efficiencies.
One subset and a highly focused segment of ours is the Power server, manufactured by IBM. This niche cloud infrastructure subset has a multi-billion-dollar addressable market. The marketplace is global. This addressable marketplace today is not a focus for AWS, Google, or Microsoft. It is estimated that mid and enterprise businesses in USA and Canada are operating over one million virtual IBM Power servers, with few qualified cloud service providers to assist in migration of their infrastructure to the cloud. According to the most recent information received from IBM, the typical industries utilizing IBM Power servers are finance, retail, healthcare, government, and distribution organizations with only 15% utilizing some type of cloud service.
We, through our subsidiary, CloudFirst Technologies Corporation, a Delaware corporation (“CloudFirst”), are a leader in providing cloud infrastructure to this niche marketplace along with disaster recovery and have provided these unique offerings for over 15 years.
We believe businesses are increasingly under pressure to improve the efficiency of their information and storage systems accelerating the migration from self-managed technical equipment and solutions to fully managed multi-cloud technologies to reduce cost, protect capital, ensure disaster recovery, protect the custom applications developed for these systems, and compete effectively. These trends create an opportunity for cloud technology service providers.
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The Company’s market opportunity is derived from the demand for fully managed cloud and cybersecurity services across all major operating systems.
The Company operates through three subsidiaries:
CloudFirst’s addressable market in the niche addressable marketplace is approximately $3.6 billion in annual recurring revenue, if only one virtual infrastructure partition was provided, where most mid and enterprise level organizations run multiple partitions on one server. This unit has technical assets deployed in six Tier 3 data centers, with technical support and a distribution channel.
Our subsidiary, Flagship Solutions, LLC, a Florida limited liability company (“Flagship”), provides business continuity and infrastructure solutions combining on-premises equipment and software with its value-added managed services to mid and enterprise level business customers. Flagship maintains strong partner relationships with some of the largest IT manufactures, such as the IBM Corporation in supplying the technology behind the highly technical designs built for business customers. Flagship’s vision is to expand its multi-cloud infrastructure solutions with more managed services, highlighted by its expanding Cyber Security offerings to capture more of the marketplace outside of the CloudFirst sales and marketing programs.
Our subsidiary, Nexxis Inc., a Nevada corporation (“Nexxis”), is a voice and data solution provider that utilizes major nationwide carriers and providers. The subsidiary provides a suite of communications services including Hosted VoIP, Internet Access, Data Transport, and SD-WAN. The complete voice and data solution combines elements of services into a fully managed solution that delivers high reliability and is engineered to further enhance the clients’ business continuity. Nexxis Inc.’s goal is to provide a higher level of technology with simplified management and deliver cost savings wherever possible.
According to Fortune Business Insights, the Cloud Managed Services industry in North America was $16.3 billion in 2019 and has been growing at a rate of 13.8% CAGR bringing us to $24 billion by the end of 2022. Disaster Recovery is projected to be a $3.6 billion in the US by the end of 2022 which is 35% of the $10.3 billion globally based on Grandview Research Disaster Recovery Solutions Market Size report. Cyber Security, specifically the MDR segment, is an established market recognized by buyers. Gartner observed a 35% growth in end users’ inquiries on the topic in the last year. Gartner estimates that by 2025, the MDR market will reach $2.15 billion in revenue, up from $1.03 billion in 2021, for a compound annual growth rate (CAGR) of 20.2%. The Company’s VOIP solutions fit well into this steadily growing segment which is expected to reach $90 billion worldwide in 2022 with a CAGR of 3.1% with $17 billion in the US according to Globe Newswire Market Analysis and Insights: Global VoIP Market.
Company Overview
Data Storage Corporation (“DSC”, the “Company,” “we,” “us,” or “our”) is headquartered in Melville, New York. Our common stock and warrants are traded on the Nasdaq under the ticker symbols “DTST” and “DTSTW”. We operate through three subsidiaries; CloudFirst; Flagship; and Nexxis. These subsidiaries provide solutions and services to a broad range of clients in several industries including healthcare, banking and finance, distribution services, manufacturing, construction, education, and government. The subsidiaries maintain business development teams, as well as independent distribution channels.
We typically provide long-term subscription-based disaster recovery, and cloud infrastructure, cyber security, third party cloud management, managed services, dedicated internet access and UCaaS / VoIP services.
During 2022, based on the May 2021 capital raise and the up list to Nasdaq, we accelerated our organic growth strategies by adding distribution, marketing, and technical personnel. Management continues to be focused on building our sales and marketing strategy and expanding our technology assets throughout its data center network.
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We believe businesses are increasingly under pressure to improve the reliability and efficiency of their information and storage systems accelerating the migration from self-managed technical equipment and solutions to fully managed multi-cloud technologies to reduce cost and compete effectively. Further, in today’s environment, capital preservation is an encouragement to move from a capital-intensive, on-premises technology to a pay as you grow, CapEx to OpEx model. These trends create an opportunity for Cloud Technology Service providers.
Our market opportunity is derived from the demand for fully managed cloud and cybersecurity services across all major operating systems.
We have designed and built our solutions and services to support demand for cloud-based IBM Power System that support client critical workloads and custom in-house developed applications, manage hybrid cloud deployments and continue to provide solutions that keep data and workloads protected from disasters and security attacks.
Our business offices are in New York, Florida, and Texas. The New York and Florida offices include a technology center and labs adapted to meet the technical requirements of our clients. We maintain our own infrastructure, storage, and networking equipment required to provide subscription solutions in seven geographically diverse data centers located in New York, Massachusetts, Texas, North Carolina, and in Canada, Toronto, and Barrie, serving clients in the United States and Canada.
Our disaster recovery and business continuity solutions allow clients to quickly recover from system outages, human and natural disasters, and cyber security attacks, such as Ransomware. Our managed cloud services begin with migration to the cloud and provide ongoing system support and management that enables its clients to run their software applications and technical workloads in a multi-cloud environment. Our cyber security offerings include comprehensive consultation and a suite of data security, disaster recovery, and remote monitoring services and technologies that are incorporated into our cloud solutions or are delivered as a standalone managed security offering covering the client site endpoint devices, users, servers, and equipment.
Our solution architects and business development teams work with organizations identifying and solving critical business problems. We carefully plan and manage the migration and configuration process, continuing the relationship and advising its clients long after the services have been implemented. Reflecting on client satisfaction, our renewal rate on client subscription solutions is approximately 94% after their initial contract term expired.
Growth Strategies
We will continue to drive revenues by expanding distribution channels while expanding digital and direct marketing programs. We will accelerate building upon its social and digital lead generation programs. Further, we will continue to seek synergetic acquisitions that expand distribution, leading a technology trend, add to our existing technical staff and create economies of scale improving gross profit margins.
We increase revenue and drive growth by developing and managing collaborative solutions as well as joint marketing initiatives. We have a diverse community of distribution partners, ranging from IBM Business Partners, Software Vendors, IT resellers, Managed Service Providers, application support providers, consultants, and other cloud infrastructure providers.
We believe there is a significant need for our solutions on a global basis and, accordingly, the opportunity for us to grow our business through international expansion as these markets increase their use of multi-cloud solutions.
Our Core Services: We provide an array of multi-cloud information technology solutions in highly secure, enterprise-level cloud services for companies using IBM Power Systems, Microsoft Windows, and Linux. Specifically, our support services cover:
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Cyber Security Solutions:
| ● | ezSecurity™ offers a suite of comprehensive cyber security solutions that can be utilized on systems at the client’s location or on systems hosted by us. These solutions include fully managed endpoint (PCs and other user devices) security with active threat mitigation, system security assessments, risk analysis, and applications to ensure continuous security. ezSecurity™ contains a specialized offering for protecting and auditing IBM systems including a package designed to protect IBM systems against Ransomware attacks. |
Data Protection and Recovery Solutions:
| ● | ezVault™ solution is at the core of our data protection services and allows our clients to have their data protected and stored offsite with unlimited data retention in a secure location that uses encrypted, enterprise-grade storage which allows for remote recovery from system outages, human and natural disasters, and cyber security attacks like Ransomware and viruses allowing restoration of data from a known good point in time prior to an attack. |
| ● | ezRecovery™ provides standby systems, networking, and storage in our cloud infrastructure that allows for faster recovery from client backups stored using ezVault™ at the same cloud based hosted location. |
| ● | ezAvailability™ solution offers reliable real-time data replication for mission-critical applications with Recovery Time Objective under fifteen minutes and near-zero Recovery Point Objective, with optional, fully managed replication services. Our ezAvailability™ service consists of a full-time enterprise system, storage, and network resources, allowing quick and easily switched production workloads to our cloud when needed. Our ezAvailability™ services are backed by a Service-Level Agreement (“SLA”) to help assure performance, availability, and access. |
| ● | ezMirror™ solution provides replication services that mirror the clients’ data at the storage level and allows for similar near-zero Recovery Point Objective as ezAvailability with less application management and Recovery Time Objective under 1 hour. |
Cloud Hosted Production Systems: ezHost™ solution provides managed cloud services that removes the burden of system management from its clients and ensures that their software applications and IT workloads are running smoothly. ezHost™ provides full-time, scalable compute, storage, and network infrastructure resources to run clients’ workloads on our enterprise-class infrastructure. ezHost™ replaces the cost of support, maintenance, system administration, space, electrical power, and cooling of the typical hardware on-premises systems with a predictable monthly expense. Our ezHost services are backed by an SLA governing performance, availability, and access.
Voice & Data Solutions: Nexxis, our voice and data division, specializes in stand-alone and fully-managed VoIP, Internet Access, and Data Transport solutions that satisfy the requirements of the traditional corporate and modern remote workforce. Nexxis dedicated internet access services with speeds of up to 10 Gbps and data transport circuits are typically delivered over fiber-optic networks while shared internet access is typically delivered via fiber, coaxial, and wireless networks to help businesses stay fully connected from any location. SD-WAN options provide the ability for multi-site companies to prioritize their data traffic from site to site while FailSAFE, a Cloud-first SD-WAN solution, can be used by a single location to gain industry-leading connectivity to cloud services and the internet. Nexxis Hosted VoIP with Unified Communications is a full-featured cloud-based PBX solution with built-in redundancy that provides business continuity and includes the option to integrate with Microsoft Teams.
RESULTS OF OPERATIONS
Three months ended September 30, 2023, as compared to September 30, 2022
Total Revenue. For the three months ended September 30, 2023, total revenue was $5,986,625, an increase of $1,567,340 or 35% compared to $4,419,285 for the three months ended September 30, 2022. The increase is attributed to an increase in all our revenue streams during the current period. The increased revenue in Infrastructure & Disaster Recovery/Cloud was primarily to increased sales at out CloudFirst division. The increased revenue in Equipment and Software was attributed to an increase in sales at CloudFirst by approximately $263,459 and Flagship by approximately $726,550, offset by a slight decrease at Nexxis of approximately $7.050. The increase in Managed Services was attributed to an increase in sales at CloudFirst of approximately $169,159 and an increase at Flagship of approximately $32,303. The increase in Nexxis VoIP services is attributable to an increase in sales at our Nexxis division.
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| Revenue | For the Three Months | |||||||||||||||
| Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | 2,489,489 | $ | 2,167,631 | $ | 321,858 | 15 | % | ||||||||
| Equipment and Software | 2,004,410 | 1,021,451 | 982,959 | 96 | % | |||||||||||
| Managed Services | 1,201,115 | 999,653 | 201,462 | 20 | % | |||||||||||
| Nexxis VoIP Services | 255,963 | 203,191 | 52,772 | 26 | % | |||||||||||
| Other | 35,648 | 27,359 | 8,289 | 30 | % | |||||||||||
| Total Revenue | $ | 5,986,625 | $ | 4,419,285 | $ | 1,567,340 | 35 | % | ||||||||
Cost of Sales. For the three months ended September 30, 2023, cost of sales was $3,656,271, an increase of $1,089,287 or 42% compared to $2,566,984 for the three months ended September 30, 2022. The increase of 42% was mostly related to the increase in sales. Cost of Sales at CloudFirst, Flagship and Nexxis increased by approximately $465,245, $591,231, and $32,903 respectively all related to increase in sales.
Selling, General and Administrative Expenses. For the three months ended September 30, 2023, selling, general and administrative expenses were $2,316,213, an increase of $240,688, or 12%, as compared to $2,075,525 for the three months ended September 30, 2022. The net increase is reflected in the chart below.
| Selling, General and Administrative expenses | For the Three Months | |||||||||||||||
| Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Increase in Salaries | $ | 1,203,134 | $ | 1,028,084 | $ | 175,050 | 17 | % | ||||||||
| Increase in Professional Fees | 264,928 | 203,032 | 61,896 | 30 | % | |||||||||||
| Increase in Software as a Service Expense | 54,168 | 42,744 | 11,424 | 27 | % | |||||||||||
| Decrease in Advertising Expenses | 165,403 | 263,485 | (98,082 | ) | (37 | )% | ||||||||||
| Increase in Commissions Expense | 348,779 | 279,789 | 68,990 | 25 | % | |||||||||||
| Decrease in Amortization and Depreciation Expense | 72,931 | 73,747 | (816 | ) | (1 | )% | ||||||||||
| Decrease in Travel and Entertainment | 41,369 | 44,739 | (3,370 | ) | (8 | )% | ||||||||||
| Increase in Rent and Occupancy | 56,876 | 55,851 | 1,025 | 2 | % | |||||||||||
| Decrease in Insurance | 30,623 | 33,860 | (3,237 | ) | (10 | )% | ||||||||||
| Increase in all other Expenses | 78,002 | 50,194 | 27,808 | 55 | % | |||||||||||
| Total Expenses | $ | 2,316,213 | $ | 2,075,525 | $ | 240,688 | 12 | % | ||||||||
Salaries. Salaries increased as a result of an increase in personnel cost and in increase in other employee benefits across all divisions.
Professional Fees. Professional fees increased primarily due to an increase in legal fees relating to employment matters and other corporate projects.
Software as a Service Expense (SaaS). SaaS increased due to the consulting engagements related to one of our CRM platforms across all divisions.
Advertising Expenses. Advertising Expenses decreased due to non-renewal of a marketing program at Flagship.
Commissions Expense. Commissions expenses increased due to an increase in sales across all divisions.
Travel And Entertainment. Travel And Entertainment expenses decreased due to less travel by executives and reduced corporate events.
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Other Income (Expense). Other income for the three months ended September 30, 2023, increased $173,336 to $143,597 from $(29,739) for the three months ended September 30, 2022. The increase in other income is primarily attributable to the increase in interest income from the marketable securities.
Net Income (Loss) before provision for income taxes. Net income before provision for income taxes for the three months ended September 30, 2023, was $157,738, as compared to a net loss of $(252,963) for the three months ended September 30, 2022.
Nine months ended September 30, 2023, as compared to September 30, 2022
Total Revenue. For the nine months ended September 30, 2023, total revenue was $18,770,739, an increase of $866,506 or 5% compared to $17,904,233 for the nine months ended September 30, 2022. The increase is primarily attributed to an increase in Infrastructure & Disaster Recovery/Cloud Service and Managed Services and Nexxis VoIP Services offset by a decrease in one-time equipment sales during the current period. The increased revenue in Infrastructure & Disaster Recovery/Cloud was primarily to increased sales at out CloudFirst division. The decreased revenue in Equipment and Software was attributed to a decrease of one-time equipment sales at Flagship by approximately $1,009,177 offset by an increase of $779,618 in one time equipment sales at CloudFirst. The increase in Managed Services was attributed to an increase in sales at CloudFirst of approximately $96,159 offset by a decrease at Flagship of approximately $115,040. The increase in Nexxis VoIP services is attributable to an increase in sales at our Nexxis division.
| Revenue | For the Nine Months | |||||||||||||||
| Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | 6,958,552 | $ | 6,107,287 | $ | 851,265 | 14 | % | ||||||||
| Equipment and Software | 7,076,116 | 7,309,400 | (233,284 | ) | (3 | )% | ||||||||||
| Managed Services | 3,891,063 | 3,809,578 | 81,485 | 2 | % | |||||||||||
| Nexxis VoIP Services | 728,447 | 587,051 | 141,396 | 24 | % | |||||||||||
| Other | 116,561 | 90,917 | 25,644 | 28 | % | |||||||||||
| Total Revenue | $ | 18,770,739 | $ | 17,904,233 | $ | 866,506 | 5 | % | ||||||||
Cost of Sales. For the nine months ended September 30, 2023, cost of sales was $11,771,886, a decrease of $75,574 or 1% compared to $11,847,460 for the nine months ended September 30, 2022. The decrease of 1% was mostly related to new negotiated pricing at Flagship offset by an increase in Cost of Sales at CloudFirst and Nexxis due to the increase in revenue.
Selling, General and Administrative Expenses. For the nine months ended September 30, 2023, selling, general and administrative expenses were $6,918,982, a decrease of $210,613, or 3%, as compared to $7,129,595 for the nine months ended September 30, 2022. The net decrease is reflected in the chart below.
| Selling, General and Administrative Expenses | For the Nine Months | |||||||||||||||
| Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Decrease in Salaries | $ | 3,600,450 | $ | 3,918,745 | $ | (318,295 | ) | (8 | )% | |||||||
| Increase in Professional Fees | 772,834 | 590,661 | 182,173 | 31 | % | |||||||||||
| Decrease in Software as a Service Expense | 140,602 | 189,643 | (49,041 | ) | (26 | )% | ||||||||||
| Decrease in Advertising Expenses | 581,423 | 669,278 | (87,855 | ) | (13 | )% | ||||||||||
| Increase in Commissions Expense | 1,000,541 | 918,882 | 81,659 | 9 | % | |||||||||||
| Increase in Amortization and Depreciation Expense | 220,870 | 220,694 | 176 | 0 | % | |||||||||||
| Decrease in Travel and Entertainment | 131,155 | 160,665 | (29,510 | ) | (18 | )% | ||||||||||
| Increase in Rent and Occupancy | 167,713 | 163,965 | 3,748 | 2 | % | |||||||||||
| Decrease in Insurance | 88,047 | 94,251 | (6,204 | ) | (7 | )% | ||||||||||
| Decrease in all other Expenses | 215,347 | 202,811 | 12,536 | 6 | % | |||||||||||
| Total Expenses | $ | 6,918,982 | $ | 7,129,595 | $ | (210,613 | ) | (3 | )% | |||||||
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Salaries. Salaries decreased as a result of a reduction in stock-based compensation at Flagship.
Professional Fees. Professional fees increased primarily due to an increase in legal fees relating to employment matters and other corporate projects.
Software as a Service Expense (SaaS). SaaS decreased due to the completion of certain consulting engagements related to one of our CRM platforms.
Advertising Expenses. Advertising Expenses decreased due to non-renewal of a marketing program at Flagship.
Commissions Expense. Commissions expenses increased due to an increase in sales at Cloudfirst.
Travel and Entertainment. Travel And Entertainment expense decreased due to less travel by executives and reduced corporate events.
All Other Expenses. Other expenses decreased primarily due to reduction of bad debt expense, tax expense and reductions across all other expenses such as computer, training and dues and subscriptions.
Other Income (Expense). Other income for the nine months ended September 30, 2023, increased $505,031 to $318,698 from $(186,063) for the nine months ended September 30, 2022. The increase in other income is primarily attributable to the increase in interest income from the marketable securities.
Net Income (Loss) before provision for income taxes. Net income before provision for income taxes for the nine months ended September 30, 2023, was $398,839, as compared to a net loss of $(1,258,885) for the nine months ended September 30, 2022.
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 we will realize our assets and discharge our 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 may include a cash component, we plan to use our working capital and the proceeds of any financing to finance such acquisition costs.
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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, 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 the 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 2023, 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 its technical expertise, data centers utilization, assets deployed in the data centers, 24 x 365 monitoring, and software. We believe that the cash generated from operations will be sufficient to meet our cash requirements for the next twelve months and beyond the next twelve months.
During the nine months ended September 30, 2023, our cash decreased by $1,293,334 to $993,388 from $2,286,722 on December 31, 2022. Net cash of $2,161,424 was provided by our operating activities resulting primarily from the changes in assets and liabilities. Net cash of $2,767,949 was used in investing activities from the purchase of equipment and short-term investments. Net cash of $686,809 was used by financing activities resulting primarily from repayments on capital lease obligations.
Our working capital was $10,941,697 on September 30, 2023, increasing by $86,290 from $10,855,407 at December 31, 2022. The increase is primarily attributable to an increase in cash and accounts receivable. This was offset by a decrease in accounts payable and finance and operating leases.
Off-Balance Sheet Arrangements
We do 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.
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 months ended September 30, 2023 and 2022, respectively:
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| For the three months ended September 30, 2023 | ||||||||||||||||||||
| CloudFirst Technologies Corporation | Flagship Solutions LLC | Nexxis Inc. | Corporate | Total | ||||||||||||||||
| Net Income (Loss) | $ | 818,892 | $ | (142,864 | ) | $ | (68,196 | ) | $ | (450,094 | ) | $ | 157,738 | |||||||
| Non-GAAP adjustments: | ||||||||||||||||||||
| Depreciation and Amortization | 267,440 | 70,691 | 213 | 176 | 338,520 | |||||||||||||||
| Interest and Letter of Credit Fees | 13,069 | — | — | (151,666 | ) | (138,597 | ) | |||||||||||||
| Stock Based Compensation | 15,603 | 24,016 | 6,827 | 82,518 | 128,964 | |||||||||||||||
| Adjusted EBITDA | $ | 1,115,004 | $ | (48,157 | ) | $ | (61,156 | ) | $ | (519,066 | ) | $ | 486,625 | |||||||
| For the three months ended September 30, 2022 | ||||||||||||||||||||
| CloudFirst Technologies Corporation | Flagship Solutions LLC | Nexxis Inc. | Corporate | Total | ||||||||||||||||
| Net Income (Loss) | $ | 645,291 | $ | (454,792 | ) | $ | 41 | $ | (443,504 | ) | $ | (252,964 | ) | |||||||
| Non-GAAP adjustments: | ||||||||||||||||||||
| Flagship Acquisition Costs | — | — | — | — | — | |||||||||||||||
| Depreciation and Amortization | 220,810 | 70,929 | — | — | 291,739 | |||||||||||||||
| Interest and Letter of Credit Fees | 30,960 | 137 | — | 479 | 31,576 | |||||||||||||||
| Stock Based Compensation | 26,175 | 28,805 | 1,824 | 35,235 | 92,039 | |||||||||||||||
| Adjusted EBITDA | $ | 923,236 | $ | (354,921 | ) | $ | 1,865 | $ | (407,790 | ) | $ | 162,390 | ||||||||
The following table shows our reconciliation of net income to adjusted EBITDA for the nine months ended September 30, 2023 and 2022, respectively:
| For the nine months ended September 30, 2023 | ||||||||||||||||||||
| CloudFirst Technologies Corporation | Flagship Solutions LLC | Nexxis Inc. | Corporate | Total | ||||||||||||||||
| Net Income (Loss) | $ | 1,954,483 | $ | 26,434 | $ | (167,450 | ) | $ | (1,414,628 | ) | $ | 398,839 | ||||||||
| Non-GAAP adjustments: | ||||||||||||||||||||
| Depreciation and Amortization | 714,585 | 212,646 | 492 | 457 | 928,180 | |||||||||||||||
| Interest and Letter of Credit Fees | 56,985 | — | — | (370,953 | ) | (313,968 | ) | |||||||||||||
| Stock Based Compensation | 50,662 | 76,634 | 11,227 | 199,623 | 338,146 | |||||||||||||||
| Adjusted EBITDA | $ | 2,776,715 | $ | 315,714 | $ | (155,731 | ) | $ | (1,585,501 | ) | $ | 1,351,197 | ||||||||
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| For the nine months ended September 30, 2022 | ||||||||||||||||||||
| CloudFirst Technologies Corporation | Flagship Solutions LLC | Nexxis Inc. | Corporate | Total | ||||||||||||||||
| Net Income (Loss) | $ | 1,369,952 | $ | (1,195,254 | ) | $ | (32,291 | ) | $ | (1,401,292 | ) | $ | (1,258,885 | )) | ||||||
| Non-GAAP adjustments: | ||||||||||||||||||||
| Flagship Acquisition Costs | — | — | — | 770 | 770 | |||||||||||||||
| Depreciation and Amortization | 720,571 | 211,755 | — | — | 932,326 | |||||||||||||||
| Interest and Letter of Credit Fees | 108,054 | 75,695 | — | 2,316 | 186,065 | |||||||||||||||
| Stock Based Compensation | 79,976 | 488,007 | 5,380 | 70,567 | 643,930 | |||||||||||||||
| Adjusted EBITDA | $ | 2,278,553 | $ | (419,797 | ) | $ | (26,911 | ) | $ | (1,327,639 | ) | $ | 504,206 | |||||||
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 and principal financial officer, DSC conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Rule 13a-15(e) under the Exchange Act defines “disclosure controls and procedures” as controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to a company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level at September 30, 2023.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Due to 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. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. As set forth above, our Chief Executive Officer and Chief Financial Officer have concluded, based on the evaluation as of the end of the period covered by this Report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.
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, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 1A. Risk Factors.
Our business, financial condition, results of operations, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our most recent Annual Report on Form 10-K for the year ended December 31, 2022, the occurrence of any one of which could have a material adverse effect on our actual results.
There have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.
There were no unregistered sales of our equity securities during the period ended September 30, 2023, that were not previously reported in our filings with the SEC.
Item 3. Defaults Upon Senior Securities.
There were no defaults upon senior securities during the period ended September 30, 2023.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information.
There is no other information required to be disclosed under this item that was not previously disclosed.
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Item 6. Exhibits.
* Filed herewith.
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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 14, 2023 | ||
| By: | /s/ Charles M. Piluso | |
| Charles M. Piluso | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 14, 2023 | ||
| By: | /s/ Chris H. Panagiotakos | |
| Chris H. Panagiotakos | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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