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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

  

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2024

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

Commission File Number: 001-35384

 

DATA STORAGE CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada   98-0530147
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

225 Broadhollow Road, Suite 307
Melville, NY
  11747
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (212) 564-4922

  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001 per share   DTST   The Nasdaq Capital Market
         
Warrants to purchase shares of Common Stock, par value $0.001 per share   DTSTW   The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ☐ Accelerated Filer ☐
Non-Accelerated Filer Smaller Reporting Company
  Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of August 14, 2024, was 6,995,822.

 

 

 

DATA STORAGE CORPORATION

FORM 10-Q

INDEX

 

  Page
PART I- FINANCIAL INFORMATION  
       
  Item 1 Financial Statements  
       
    Condensed Consolidated Balance Sheets as of June 30, 2024 (unaudited) and December 31, 2023 2
       
    Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2024 and 2023 (unaudited) 3
       
    Condensed Consolidated Statements of Stockholders’ Equity for three and six months ended June 30, 2024 and 2023 (unaudited) 4
       
    Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023 (unaudited) 6
       
    Notes to Condensed Consolidated Financial Statements 7
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
       
  Item 4. Control and Procedures 35
       
PART II- OTHER INFORMATION 36
   
  Item 1. Legal Proceedings 36
       
  Item 1A. Risk Factors 36
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
       
  Item 3. Defaults Upon Senior Securities 37
       
  Item 4. Mine Safety Disclosures 37
       
  Item 5. Other Information 37
       
  Item 6. Exhibits 38

 

1

 

 

DATA STORAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

           
  

June 30, 2024
(Unaudited)

  December 31,
2023
ASSETS          
Current Assets:          
Cash and cash equivalents  $779,986   $1,428,730 
Accounts receivable (less provision for credit losses of $22,596 and $7,915 in 2024 and 2023, respectively)   1,904,759    1,259,972 
 Marketable securities   11,214,006    11,318,196 
Prepaid expenses and other current assets   759,979    513,175 
Total Current Assets   14,658,730    14,520,073 
           
Property and Equipment:          
Property and equipment   8,740,796    7,838,225 
Less—Accumulated depreciation   (5,602,454)   (5,105,451)
Net Property and Equipment   3,138,342    2,732,774 
           
Other Assets:          
 Goodwill   4,238,671    4,238,671 
 Operating lease right-of-use assets   632,733    62,981 
 Other assets   109,843    48,436 
 Intangible assets, net   1,560,577    1,698,084 
Total Other Assets   6,541,824    6,048,172 
           
Total Assets  $24,338,896   $23,301,019 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities:          
Accounts payable and accrued expenses  $2,924,572   $2,608,938 
Deferred revenue   208,944    336,201 
Finance leases payable   147,769    263,600 
Finance leases payable related party   113,467    235,944 
Operating lease liabilities short term   65,983    63,983 
Total Current Liabilities   3,460,735    3,508,666 
           
Operating lease liabilities   574,182     
Finance leases payable       17,641 
Finance leases payable related party       20,297 
Total Long-Term Liabilities   574,182    37,938 
           
Total Liabilities   4,034,917    3,546,604 
           
Commitments and contingencies (Note 7)        
           
Stockholders’ Equity:          
Preferred stock, Series A par value $0.001; 10,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively        
Common stock, par value $0.001; 250,000,000 shares authorized; 6,995,822 and 6,880,460 shares issued and outstanding as of June 30, 2024, and December 31, 2023, respectively   6,995    6,881 
Additional paid in capital   39,940,436    39,490,285 
Accumulated deficit   (19,392,941)   (19,505,803)
Total Data Storage Corporation Stockholders’ Equity   20,554,490    19,991,363 
Non-controlling interest in consolidated subsidiary   (250,511)   (236,948)
Total Stockholder’s Equity   20,303,979    19,754,415 
Total Liabilities and Stockholders’ Equity  $24,338,896   $23,301,019 

 

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 June 30,   Six Months Ended June 30,
    2024   2023   2024   2023
                 
Sales   $ 4,910,492     $ 5,904,391     $ 13,146,239     $ 12,784,114  
                                 
Cost of sales     2,502,599       3,325,637       7,771,874       8,115,615  
                                 
Gross Profit     2,407,893       2,578,754       5,374,365       4,668,499  
                                 
Selling, general and administrative     2,796,679       2,472,010       5,549,356       4,602,769  
                                 
Income (Loss) from Operations     (388,786 )     106,744       (174,991 )     65,730  
                                 
Other Income (Expense)                                
Interest income     152,441       120,058       295,810       223,482  
Interest expense     (10,260 )     (20,764 )     (21,520 )     (48,111 )
Total Other Income (Expense)     142,181       99,294       274,290       175,371  
                                 
(Loss) Income before provision for income taxes     (246,605 )     206,038       99,299       241,101  
                                 
Provision for income taxes                        
                                 
Net (Loss) Income     (246,605 )     206,038       99,299       241,101  
                                 
Income in Non-controlling interest of consolidated subsidiary      2,365       20,785       13,563       36,388  
                                 
Net (Loss) Income attributable to Common Stockholders   $ (244,240 )   $ 226,823     $ 112,862     $ 277,489  
                                 
Net (Loss) Income per Share – Basic   $ (0.04 )   $ 0.03     $ 0.02     $ 0.04  
Net (Loss) Income per Share – Diluted   $ (0.04 )   $ 0.03     $ 0.02     $ 0.04  
Weighted Average Number of Shares - Basic     6,973,068       6,834,627       6,902,138       6,828,446  
Weighted Average Number of Shares - Diluted     6,973,068       7,022,275       7,499,839      

7,016,094

 

  

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 JUNE 30, 2024 AND 2023
 (Unaudited)

 

                                                                 
    Preferred Stock   Common Stock   Additional Paid-in   Accumulated   Non-Controlling   Total Stockholders’
    Shares   Amount   Shares   Amount   Capital   Deficit   Interest   Equity
                                 
Balance April 1, 2023         $       6,834,627     $ 6,835     $ 39,068,896     $ (19,836,712 )   $ (170,292 )   $ 19,068,727  
Stock-based compensation                 12,500       12       122,702                   122,714  
Net Income (Loss)                                   226,823       (20,785 )     206,038  
Balance June 30, 2023         $       6,847,127     $ 6,847     $ 39,191,598     $ (19,609,889 )   $ (191,077 )   $ 19,397,479  
                                                                 
Balance April 1, 2024         $       6,929,950       6,930       39,661,561       (19,148,701 )     (248,146 )     20,271,644  
Stock options exercised                 36,546       36       71,057                   71,093  
Stock-based compensation                 29,326       29       207,818                   207,847  
Net Loss                                   (244,240 )     (2,365 )     (246,605 )
Balance June 30, 2024         $       6,995,822      $ 6,995      $ 39,940,436     $ (19,392,941 )   $ (250,511 )   $ 20,303,979  

 

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 SIX MONTHS ENDED JUNE 30, 2024 AND 2023

(Unaudited)

 

    Preferred Stock   Common Stock   Additional Paid-in   Accumulated   Non-Controlling   Total Stockholders’
    Shares   Amount   Shares   Amount   Capital   Deficit   Interest   Equity
                                 
Balance January 1, 2023         $       6,822,127     $ 6,822     $ 38,982,440     $ (19,887,378 )   $ (154,689 )   $ 18,947,195  
Stock-based compensation                 25,000       25       209,158                   209,183  
Net Income (Loss)                                   277,489       (36,388 )     241,101  
Balance June 30, 2023         $       6,847,127     $ 6,847     $ 39,191,598     $ (19,609,889 )   $ (191,077 )   $ 19,397,479  
                                                                 
Balance January 1, 2024         $       6,880,460     $ 6,881     $ 39,490,285     $ (19,505,803 )   $ (236,948 )   $ 19,754,415  
Stock Options exercise                 36,546       36       71,057                   71,093  
Stock-based compensation                 78,816       78       379,094                   379,172  
Net Income (Loss)                                   112,862       (13,563 )     99,299  
Balance June 30, 2024         $       6,995,822     $ 6,995     $ 39,940,436     $ (19,392,941 )   $ (250,511 )   $ 20,303,979  

 

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)

 

                 
    Six Months Ended June 30,
    2024   2023
Cash Flows from Operating Activities:                
Net Income   $ 99,299     $ 241,101  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization     634,509       589,660  
Stock based compensation     379,172       209,183  
Provision for credit losses     21,816        
Changes in Assets and Liabilities:                
Accounts receivable     (666,603 )     1,281,234  
Other assets     (61,407 )      
Prepaid expenses and other current assets     (246,804 )     (151,720 )
Right of use asset     78,206       102,026  
Accounts payable and accrued expenses     315,636       (1,119,100 )
Deferred revenue     (127,257 )     33,006  
Operating lease liability     (71,776 )     (105,576 )
Net Cash Provided by Operating Activities     354,791       1,079,814  
Cash Flows from Investing Activities:                
 Capital expenditures     (902,571 )     (1,165,724 )
 Purchase of marketable securities     (295,810 )     (219,286 )
 Sale of marketable securities     400,000        
Net Cash Used in Investing Activities     (798,381 )     (1,385,010 )
Cash Flows from Financing Activities:                
Repayments of finance lease obligations related party     (142,774 )     (308,005 )
Repayments of finance lease obligations     (133,473 )     (236,482 )
Proceeds from exercise of stock options     71,093        
Net Cash Used in Financing Activities     (205,154 )     (544,487 )
                 
Decrease in Cash and Cash Equivalents     (648,744 )     (849,683 )
                 
Cash and Cash Equivalents, Beginning of Period     1,428,730       2,286,722  
                 
Cash and Cash Equivalents, End of Period   $ 779,986     $ 1,437,039  
Supplemental Disclosures:                
Cash paid for interest   $ 14,303     $ 41,062  
Cash paid for income taxes   $     $  
Non-cash investing and financing activities:                
Assets acquired by operating lease   $ 647,958     $  

  

The accompanying notes are an integral part of these condensed consolidated Financial Statements.

 

6

 

 

DATA STORAGE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024

(Unaudited)

 

Note 1 – Basis of Presentation, Organization and Other Matters

 

Data Storage Corporation (“DSC” or the “Company”) provides subscription based, long term agreements for disaster recovery solutions, cloud infrastructure, Cyber Security and Voice and Data solutions.

 

Headquartered in Melville, NY, DSC offers solutions and services to businesses within the healthcare, banking and finance, distribution services, manufacturing, construction, education, and government industries. DSC derives its revenues from subscription services and solutions, managed services, software and maintenance, equipment, and onboarding provisioning. DSC maintains infrastructure and storage equipment in six technical centers in New York, Massachusetts, Texas, North Carolina, and Canada.

 

On May 31, 2021, the Company completed a merger of Flagship Solutions, LLC (“Flagship”) (a Florida limited liability company) and the Company’s wholly-owned subsidiary, Data Storage FL, LLC. Flagship is a provider of Hybrid Cloud solutions, managed services, and cloud solutions. On January 1, 2024, Flagship Solutions, LLC was consolidated into CloudFirst Technologies Corporation.

 

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 (“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, 2023 (“2023 Form 10-K”). The Company’s accounting policies are described in the “Notes to Consolidated Financial Statements” in the 2023 Form 10-K and are updated, as necessary, in this Form 10-Q. The December 31, 2023, 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 six months ended June 30, 2024 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 Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, (i) CloudFirst Technologies Corporation, a Delaware corporation, (ii) Information Technology Acquisition Corporation, a Delaware corporation, and (iii) its majority-owned subsidiary, Nexxis Inc, a Nevada corporation. All inter-company transactions and balances have been eliminated in consolidation.

Reclassifications

 

Certain prior year amounts in the Condensed Consolidated Financial Statements and the notes thereto have been reclassified where necessary to conform to the current year’s presentation. These reclassifications did not affect the prior period’s total assets, total liabilities, stockholders’ equity, net income, or net cash provided by operating activities. During the three and six months ended June 30, 2024, the Company reclassified disaggregated revenue and had change in presentation on its Condensed Consolidated Financial Statements in order to present segments in line with how its Chief Operating Decision Maker (“CODM”) evaluates performance of each segment. Prior periods have been revised to reflect this change in the presentation.

 

7

 

 

Recently Issued and Newly Adopted Accounting Pronouncements

 

In March 2023, the FASB issued ASU 2023-01, “Leases (Topic 842): Common Control Arrangements.” The new accounting rules require that leasehold improvements associated with common control leases be amortized by the lessee over the useful life of the leasehold improvements to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset (the leased asset) through a lease. These leases should also be accounted for as a transfer between entities under common control through an adjustment to equity if, and when, the lessee no longer controls the use of the underlying asset. The Company adopted ASU 2023-01 and it did not have a material impact to our Condensed Consolidated Financial statements.

 

In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which enhances reportable segment disclosure requirements primarily through expanded disclosures around significant segment expenses. The amendments are effective for fiscal years beginning after December 15, 2024. The amendments should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact of the ASU and expects to include updated segment expense disclosures in its Annual Report on Form 10-K for the fiscal year ended December 31, 2024.

 

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires disclosure of specific categories meeting a quantitative threshold within the income tax rate reconciliation, as well as disaggregation of income taxes paid by jurisdiction. This ASU, which can be applied either prospectively or retrospectively, is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of the ASU and expects to include updated income tax disclosures.

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

Estimated Fair Value of Financial Instruments

 

The Company’s financial instruments include cash, accounts receivable, accounts payable and lease commitments. Management believes the estimated fair value of these accounts on June 30, 2024, approximate their carrying value as reflected in the balance sheet due to their short-term nature. The carrying values of the Company’s finance lease obligations and capital lease obligations approximate their fair values based upon a comparison of the interest rate and terms of such debt given the level of risk to the rates and terms of similar debt currently available to the Company in the marketplace.

 

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 our own assumptions in determining the fair value of investments)

 

8

 

 

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 June 30, 2024, 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 the Company’s finance and operating lease assets and liabilities. Their carrying value approximates their fair values based upon a comparison of the interest rate and terms of the leases.

 

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 discounted cash flow models. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

 

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. As of June 30, 2024, and December 31, 2023, the Company had cash and cash equivalents of $779,986 and $1,428,730, respectively.

 

Investments

 

Marketable securities that are bought and held principally for the purpose of selling them in the near term and are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings.

 

The following table sets forth a summary of the changes in equity investments during the six months ended June 30, 2024, and the year ended December 31, 2023:

 

     
   For the year ended December 31, 2023
   Total
As of January 1, 2023  $9,010,968 
Purchase of equity investments   2,307,228 
As of December 31, 2023  $11,318,196 

 

    For the six months ended June 30, 2024
    Total
As of December 31, 2023   $ 11,318,196  
Purchase of equity investments     295,810  
Sale of equity investments     (400,000 )
As of June 30, 2024   $ 11,214,006  

  

9

 

 

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 June 30, 2024, DSC had one customer with an accounts receivable balance representing 14% of total accounts receivable. As of December 31, 2023, the Company had one customer with an accounts receivable balance representing 20% of total accounts receivable.

 

For the three months ended June 30, 2024, the Company had one customer that accounted for 14% of revenue. For the three months ended June 30, 2023, the Company had two customers that accounted for 19% and 10% of revenue. For the six months ended June 30, 2024, the Company had two customers that accounted for 22% and 11% of revenue. For the six months ended June 30, 2023, the Company had one customer that accounted for 18% of revenue.

 

Accounts Receivable / Provision 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 receivable are typically due within 30 days. ASU 2016-13 requires the recognition of lifetime estimated credit losses expected to occur for trade accounts receivable. The guidance also requires we pool assets with similar risk characteristics and consider current economic conditions when estimating losses. During the three and six months ended June 30, 2024, the Company recorded $(39,455), and $21,816 respectively as the change in expected credit losses. Clients invoiced in advance for services are reflected in deferred revenue on the Company’s balance sheet.

 

Property and Equipment

 

Property and equipment are recorded at cost and depreciated over their estimated useful lives or the term of the lease using the straight-line method for financial statement purposes. Estimated useful lives in years for depreciation are 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 an income-based approach that directly impacts 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.

 

10

 

 

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 with 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. DSC 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 without subscribing to cloud infrastructure. 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.

 

  2) Managed Services

 

These services are performed at the inception of a contract. The Company provides professional assistance to its clients during the implementation processes. On-boarding and set-up services ensure that the solution or software is installed properly and function as designed to provide clients with the best solutions. In addition, clients that are managed service clients have a requirement for DSC to offer time and material billing 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-going monitoring of client system performance.

 

  3) Equipment and Software

 

The Company provides equipment and software and actively participates in collaboration with IBM to provide innovative business solutions to clients. The Company is a partner of IBM and the various software, infrastructure and hybrid cloud solutions provided to clients.

 

  4) Nexxis 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.

 

11

 

 

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 June 30, 2024

 

           
    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 3,037,184     $ 128,532     $ 3,165,716  
Equipment and Software     782,303             782,303  
Managed Services     642,518             642,518  
Nexxis VoIP Services     275,830             275,830  
Other     44,125             44,125  
Total Sales   $ 4,781,960     $ 128,532     $ 4,910,492  

 

For the Three Months
Ended June 30, 2023

 

    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 2,366,601     $ 51,584     $ 2,418,185  
Equipment and Software     2,379,822             2,379,822  
Managed Services     791,816       34,927       826,743  
Nexxis VoIP Services     240,712             240,712  
Other     38,929             38,929  
Total Sales   $ 5,817,880     $ 86,511     $ 5,904,391  

 

For the Three Months
Ended June 30,

 

Timing of revenue recognition   2024   2023
Products transferred at a point in time   $ 826,427     $ 2,418,750  
Products and services transferred over time     4,084,065       3,485,641  
Total Sales   $ 4,910,492     $ 5,904,391  

 

For the Six Months
Ended June 30, 2024
    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 5,890,433     $ 228,178     $ 6,118,611  
Equipment and Software     4,866,950             4,866,950  
Managed Services     1,485,925             1,485,925  
Nexxis VoIP Services     552,297             552,297  
Other     112,018       10,438       122,456  
Total Sales   $ 12,907,623     $ 238,616     $ 13,146,239  

  

12

 

 

For the Six Months
Ended June 30, 2023
    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 4,621,056     $ 103,908     $ 4,724,964  
Equipment and Software     5,902,381             5,902,381  
Managed Services     1,533,338       70,034       1,603,372  
Nexxis VoIP Services     472,484             472,484  
Other     80,913             80,913  
Total Sales   $ 12,610,172     $ 173,942     $ 12,784,114  

 

For the Six Months
Ended June 30,
Timing of revenue recognition  2024  2023
Products transferred at a point in time  $4,989,406   $5,983,294 
Products and services transferred over time   8,156,833    6,800,820 
Total Sales  $13,146,239   $12,784,114 

 

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.

 

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.

 

13

 

 

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 is when 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.

 

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.

 

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.

 

14

 

 

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 $249,147 and $226,142 for advertising costs for the three months ended June 30, 2024, and 2023, respectively. The Company incurred $481,387 and $416,020 for advertising costs for the six months ended June 30, 2024, and 2023, respectively.

 

Stock-Based Compensation

 

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.

 

Net Income Per Common Share

 

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.

 

15

 

 

The following table sets forth the information needed to compute basic and diluted earnings per share for the three and six months ended June 30, 2024, and 2023:

 

                               
    For the Three Months Ended   For the Six Months Ended
    June 30,   June 30,
    2024   2023   2024   2023
Net Income (Loss) Available to Common Shareholders   $ (244,240 )   $ 226,823     $ 112,862     $ 277,489  
                                 
Weighted average number of common shares - basic     6,973,068       6,834,627       6,902,138       6,828,446  
Dilutive securities                                
Options           185,981       363,326       185,981  
Warrants           1,667             1,667  
Restricted stock awards                 234,375        
Weighted average number of common shares - diluted     6,973,068       7,022,275       7,499,839       7,016,094  
Earnings (Loss) per share, basic   $ (0.04 )   $ 0.03     $ 0.02     $ 0.04  
Earnings (Loss) per share, diluted   $ (0.04 )   $ 0.03     $ 0.02     $ 0.04  

 

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 June 30,   Six Months Ended June 30,
    2024   2023   2024   2023
Options     701,346       393,540       338,020       393,540  
Warrants     2,495,860       2,415,860       2,495,860       2,415,860  
Restricted stock awards     234,375                    
      3,431,581       2,809,400       2,833,880       2,809,400  

  

Note 3 - Prepaids and other current assets

 

Prepaids and other current assets consist of the following:

 

               
    June 30,   December 31,
    2024   2023
Prepaid marketing & promotion   $ 173,815     $ 13,525  
Prepaid subscriptions and license     347,477       362,760  
Prepaid maintenance     144,490       31,311  
Prepaid insurance     61,744       63,247  
Other     32,453       42,332  
Total prepaids and other current assets   $ 759,979     $ 513,175  

 

16

 

 

Note 4- Property and Equipment

 

Property and equipment, at cost, consist of the following:

 

               
    June 30,   December 31,
    2024   2023
Storage equipment   $ 60,288     $ 60,288  
Furniture and fixtures     32,356       21,625  
Leasehold improvements     20,983       20,983  
Computer hardware and software     126,232       117,379  
Data center equipment     8,500,937       7,617,950  
 Gross Property and equipment     8,740,796       7,838,225  
Less: Accumulated depreciation     (5,602,454 )     (5,105,451 )
Net property and equipment   $ 3,138,342     $ 2,732,774  

 

Depreciation expense for the three months ended June 30, 2024, and 2023 was $270,952 and $231,415, respectively. Depreciation expense for the six months ended June 30, 2024, and 2023 was $497,003 and $450,394, respectively.

 

Note 5 - Goodwill and Intangible Assets

 

Goodwill and intangible assets consisted of the following:

 

                               
    Estimated life in years   Gross amount   December 31, 2023, Accumulated Amortization   Net
Intangible assets not subject to amortization                                
Goodwill     Indefinite     $ 4,238,671     $     $ 4,238,671  
Trademarks     Indefinite       514,268             514,268  
Total intangible assets not subject to amortization             4,752,939             4,752,939  
Intangible assets subject to amortization                                
Customer lists     7       2,614,099       1,434,218       1,179,881  
ABC acquired contracts     5       310,000       310,000        
SIAS acquired contracts     5       660,000       660,000        
Non-compete agreements     4       272,147       272,147        
Website and Digital Assets     3       33,002       29,067       3,935  
Total intangible assets subject to amortization             3,889,248       2,705,432       1,183,816  
Total Goodwill and Intangible Assets           $ 8,642,187     $ 2,705,432     $ 5,936,755  

 

17

 

 

    Estimated life in years   Gross amount   June 30, 2024, Accumulated Amortization   Net
Intangible assets not subject to amortization                                
Goodwill     Indefinite     $ 4,238,671     $     $ 4,238,671  
Trademarks     Indefinite       514,268             514,268  
Total intangible assets not subject to amortization             4,752,939             4,752,939  
Intangible assets subject to amortization                                
Customer lists     5-15       2,614,099       1,567,790       1,046,309  
ABC acquired contracts     5       310,000       310,000        
SIAS acquired contracts     5       660,000       660,000        
Non-compete agreements     4       272,147       272,147        
Website and Digital Assets     3       33,002       33,002        
Total intangible assets subject to amortization             3,889,248       2,842,939       1,046,309  
Total Goodwill and Intangible Assets           $ 8,642,187     $ 2,842,939     $ 5,799,248  

 

Scheduled amortization over the next five years are as follows:

 

   
Twelve months ending June 30,   
 2024   $133,571 
 2025    267,143 
 2026    267,143 
 2027    267,143 
 2028    111,309 
 Thereafter     
 Total   $1,046,309 

 

Amortization expense for the three months ended June 30, 2024, and 2023 was $68,360 and $69,535, respectively. Amortization expense for the six months ended June 30, 2024, and 2023 was $137,507 and $139,266, respectively.

 

Note 6-Leases

 

Operating Leases

 

The Company currently maintains three leases for office space located in Melville, NY, one lease for office space in Boca Raton, FL and one lease for office space in Austin, TX.

 

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 $11,856 payable in equal monthly installments of $988.

 

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 August 2, 2021. The monthly rent is approximately $4,965. The lease expires on July 31, 2024.

 

18

 

 

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 $1,470 and expires on June 30, 2022. Subsequent to June 30, 2022, the Company is on a $3,209 month-to-month lease with WeWork in Austin, TX.

 

On January 17, 2024, the Company entered into a lease agreement for office space in Melville, NY. The lease commenced on April 1, 2024, and has a term of sixty-seven months. The lease requires monthly payments of $11,931 and expires on October 30, 2029.

  

Finance Lease Obligations

 

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 $3,152. The lease carries an interest rate of 6% and is a three-year lease. The term of the lease ends November 1, 2024.

 

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 $17,718. The lease carries an interest rate of 5% and is a three-year lease. The term of the lease ends February 1, 2025.

 

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 $2,037. The lease carries an interest rate of 6% and is a three-year lease. The term of the lease ends January 1, 2025.

  

Finance Lease Obligations – Related Party

 

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 $1,567 and expired on March 1, 2024. The lease carried an interest rate of 8%.

 

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 $7,145 and expires on February 1, 2025. The lease carries an interest rate of 8%.

 

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 $6,667 and expires on March 1, 2025. The lease carries an interest rate of 8%.

 

19

 

 

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. 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 5% was used in preparation of the ROU asset and operating liabilities.

 

The components of lease expense were as follows:

 

       
    Three Months Ended June 30, 2024
Finance leases:        
Amortization of assets, included in depreciation and amortization expense   $ 127,411  
Interest on lease liabilities, included in interest expense     5,449  
Operating lease:        
Amortization of assets, included in total operating expense     64,175  
Interest on lease liabilities, included in total operating expense     258  
Total net lease cost   $ 197,293  

  

    Six Months Ended June 30, 2024
Finance leases:        
Amortization of assets, included in depreciation and amortization expense   $ 323,480  
Interest on lease liabilities, included in interest expense     14,303  
Operating lease:        
Amortization of assets, included in total operating expense     91,425  
Interest on lease liabilities, included in total operating expense     773  
Total net lease cost   $ 429,981  

 

Supplemental balance sheet information related to leases was as follows:        

 

Operating Leases:        

Operating lease right-of-use asset   $ 632,733  
         
Current operating lease liabilities   $ 65,983  
Noncurrent operating lease liabilities     574,182  
Total operating lease liabilities   $ 640,165  

 

20

 

 

    As of June 30, 2024
Finance leases:        
Property and equipment, at cost   $ 5,521,716  
Accumulated amortization     (4,816,684 )
Property and equipment, net   $ 705,032  
         
Current obligations of finance leases   $ 261,236  
Finance leases, net of current obligations      
Total finance lease liabilities   $ 261,236  

 

Supplemental cash flow and other information related to leases were as follows and included both related and non-related party finance leases combined:

 

         
    Six Months Ended June 30, 2024
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash flows related to operating leases   $ 71,776
Financing cash flows related to finance leases   $ 276,247  
         
Weighted average remaining lease term (in years):        
Operating leases     5.62  
Finance leases     0.29  
         
Weighted average discount rate:        
Operating leases     8 %
Finance leases     7 %

 

Long-term obligations under the operating and finance leases at June 30, 2024, mature as follows and included both related party and non-related finance leases combined:

 

       
For the Twelve Months Ended June 30,   Operating Leases   Finance Leases
  2024       117,857       267,459  
  2025       149,481        
  2026       154,712        
  2027       160,127        
  2028       165,732        
  Thereafter       56,682        
  Total lease payments       804,591       267,459  
  Less: Amounts representing interest       (164,426 )     (6,223 )
  Total lease obligations       640,165       261,236
  Less: long-term obligations       (574,182 )        
   Total current     $ 65,983     $ 261,236  

 

21

 

 

As of June 30, 2024, 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 June 30, 2024, and 2023 was $116,944 and $74,695, respectively. Rent expense under all operating leases for the six months ended June 30, 2024, and 2023 was $190,247 and $135,267, respectively.

 

Note 7 - Commitments and Contingencies

 

On May 7, 2024, the Company entered into a master service agreement with a vendor. The lease obligation is payable in monthly installments of $51,680. The master service agreement ends June 1, 2029.

 

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 $0.4 million in payments over the next 3 years.

 

Subsequent to March 31, 2024, the Company received communication regarding state sales and use taxes. The company received further communication on July 31, 2024. The Company is in discussions with the agency and evaluating the amount owed. Based on an examination of all information currently available to the Company, the Company has determined that it is probable that an accrual is needed related to this matter. After our analysis, the Company expects the liability range to be between $75,000 and $97,000. The Company recorded $89,000 in accrued expenses during the six months ended June 30, 2024.

 

Note 8 - Stockholders’ Equity

 

Capital Stock

 

The Company has 260,000,000 authorized shares of capital stock, consisting of 250,000,000 shares of Common Stock, par value $0.001, and 10,000,000 shares of Preferred Stock, par value $0.001 per share.

 

Common Stock Options

 

A summary of the Company’s options activity and related information follows:

 

                       
    Number of   Weighted   Weighted
    Shares   Average   Average
    Under   Exercise   Contractual
    Options   Price   Life
Options Outstanding at January 1, 2024     595,347     $ 2.48       6.87  
Options Granted     153,755       3.68       5.15  
Exercised     (39,702 )     2.30          
Expired/Cancelled     (8,054 )     4.77          
Options Outstanding at June 30, 2024     701,346     $ 2.76       6.71  
                         
Options Exercisable at June 30, 2024     270,905     $ 2.93       5.70  

 

Share-based compensation expense for options totaling $110,195 and $75,270 was recognized in the Company’s results for the three months ended June 30, 2024, and 2023, respectively. Share-based compensation expense for options totaling $214,357 and $129,704 was recognized in the Company’s results for the six months ended June 30, 2024, and 2023, respectively.

 

The intrinsic value of outstanding options as of June 30, 2024, and December 31, 2023, was $2,746,249 and $391,283, 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.

 

22

 

 

The risk-free interest rate assumption is based upon observed interest rates on zero-coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the options.

 

Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of the award. The Company’s calculation of estimated volatility is based on historical stock prices of the Company over a period equal to the expected life of the awards.

 

As of June 30, 2024, there was $739,559 of total unrecognized compensation expense related to unvested employee options granted under the Company’s share-based compensation plans that is expected to be recognized over a weighted average period of approximately 1.46 years.

 

The weighted average fair value of options granted, and the assumptions used in the Black-Scholes model during the six months ended June 30, 2024, and 2023, are set forth in the table below.

 

               
    2024   2023
Weighted average fair value of options granted   $ 3.22     $ 1.69  
Risk-free interest rate     3.94%-4.21 %     3.41%-4.01 %
Volatility     126%-159 %     195%-199 %
Expected life (years)     3.5-6.00 years       10 years  
Dividend yield   $ %   $ %

 

Share-based awards, Restricted Stock Units (‘RSUs’)

 

On January 2, 2024, the Company granted certain employees an aggregate of 70,393 RSU’s. Compensation as a group amounted to $156,251. The shares vest one third each year for three years after issuance.

 

On March 31, 2024, the Board resolved that the Company shall issue to Board members an aggregate of 14,166 RSUs. Compensation as a group amounted to $81,030. The shares vest one year after issuance.

 

On April 1, 2024, the Company granted certain employees an aggregate of 2,660 RSU’s. Compensation as a group amounted to $15,002. The shares vest on grant.

 

On June 30, 2024, the Board resolved that the Company shall issue to Board members an aggregate of 17,500 RSUs. Compensation as a group amounts to $114,800. The shares vest one year after issuance.

 

23

 

 

A summary of the activity related to RSUs for the six months ended June 30, 2024, is presented below:

 

               
Restricted Stock Units (RSUs)   Shares   Weighted Average Fair Value $
RSUs non-vested at January 1, 2024     208,472       1.90  
RSUs granted     104,719       2.88  
RSUs vested     (78,816 )     1.96  
RSUs forfeited            
RSUs non-vested at June 30, 2024     234,375       2.32  

 

Stock-based compensation for RSU’s has been recorded in the consolidated statements of operations and totaled $97,530 and $47,624 for the three months ended June 30, 2024, and 2023, respectively. Stock-based compensation for RSU’s has been recorded in the consolidated statements of operations and totaled $164,692 and $8,005 for the six months ended June 30, 2024, and 2023, respectively.

 

As of June 30, 2024, there was $423,268 of total unrecognized compensation expense related to unvested RSUs granted under the Company’s share-based compensation plans that is expected to be recognized over a weighted average period of approximately 1.33 years.

 

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 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 from Nexxis Capital $77,348 for the three and six months ended June 30, 2024, and $15,681 for the six months ended June 30, 2023, respectively.

 

Eisner & Maglione CPA’s LLC

 

Lawrence Maglione, a member of the Board of Directors, is a partner of Eisner & Maglione CPA’s LLC. The Company paid Mr. Maglione’s firm $7,783 and $2,985 for accounting and consulting services for the three months ended June 30, 2024, and 2023, respectively. The Company paid Mr. Maglione’s firm $9,767 and $3,920  for accounting and consulting services during the six months ended June 30, 2024, and 2023, respectively.

 

24

 

 

Note 12 – Segment Information

 

The Company operates in two reportable segments: Cloud First and Nexxis. Its segments were determined based on the Company’s 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 assets, liabilities, and operating income or losses. The Flagship acquisition in June of 2021 has benefited DSC with a client base, experienced sales and marketing talent, and a strong experienced technical team. Based on over two years of information and our experience with Flagship the Company decided, based on the services and product set, as well as the talented team at Flagship, to bring together both CloudFirst and Flagship. This unification on January 1, 2024 has strengthened the Company’s overall technical teams and provided for cross selling opportunities while reducing overall expenses.

 

   
Operations of:   Products and services provided:
     
CloudFirst Technologies Corporation   CloudFirst provides services from CloudFirst technological assets deployed in seven Tier 3 data centers throughout the USA and Canada. This technology has been developed by CloudFirst. Clients are invoiced for cloud infrastructure and disaster recovery on the CloudFirst platform. Services provided to clients are provided on a subscription basis on long term contracts.
Nexxis Inc.   Nexxis is a single-source solution provider that delivers fully-managed cloud-based voice services, data transport, internet access, and SD-WAN solutions focused on business continuity for today’s modern business environment.

 

The following tables present certain financial information related to the Company’s reportable segments and Corporate:

 

                               
    As of June 30, 2024
 
    CloudFirst Technologies   Nexxis Inc.   Corporate   Total
                 
Accounts receivable   $ 1,854,471     $ 50,288     $     $ 1,904,759  
Prepaid expenses and other current assets     614,989       25,037       119,953       759,979  
Net property and equipment     3,133,601       2,484       2,257       3,138,342  
Intangible assets, net     1,560,577                   1,560,577  
Goodwill     4,238,671                   4,238,671  
Operating lease right-of-use assets     632,733                   632,733  
All other assets                 12,103,835       12,103,835  
Total assets   $ 12,035,042     $ 77,809     $ 12,226,045     $ 24,338,896  
                                 
Accounts payable and accrued expenses   $ 2,411,858     $ 68,905     $ 443,809     $ 2,924,572  
Deferred revenue     208,944                   208,944  
Finance leases payable     147,769                   147,769  
Finance leases payable related party     113,467                   113,467  
Operating lease liabilities     640,165                   640,165  
Total liabilities   $ 3,522,203     $ 68,905     $ 443,809     $ 4,034,917  

  

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    As of December 31, 2023
 
    CloudFirst Technologies   Nexxis Inc.   Corporate   Total
                 
Accounts receivable   $ 1,229,820     $ 30,152     $     $ 1,259,972  
Prepaid expenses and other current assets     419,254       18,157       75,764       513,175  
Net property and equipment     2,727,225       2,905       2,644       2,732,774  
Intangible assets, net     1,698,084                   1,698,084  
Goodwill     4,238,671                   4,238,671  
Operating lease right-of-use assets     62,981                   62,981  
All other assets                 12,795,362       12,795,362  
Total assets   $ 10,376,035     $ 51,214     $ 12,873,770     $ 23,301,019  
                                 
Accounts payable and accrued expenses   $ 2,020,963     $ 65,161     $ 522,814     $ 2,608,938  
Deferred revenue     336,201                   336,201  
Finance leases payable     281,241                   281,241  
Finance leases payable related party     256,241                   256,241  
Operating lease liabilities     63,983                   63,983  
Total liabilities   $ 2,958,629     $ 65,161     $ 522,814     $ 3,546,604  

 

For the Three Months Ended June 30, 2024

 

                                 
    CloudFirst
Technologies
  Nexxis Inc.   Corporate   Total
Sales   $ 4,617,445     $ 293,047     $     $ 4,910,492  
Cost of sales     2,345,385       157,214             2,502,599  
Gross Profit     2,272,060       135,833             2,407,893  
                                 
Selling, general and administrative     1,400,718       160,044       896,606       2,457,368  
Depreciation and amortization     338,908       211       192       339,311  
Total operating expenses     1,739,626       160,255       896,798       2,796,679  
                                 
Income (Loss) from Operations     532,434       (24,422 )     (896,798 )     (388,786 )
                                 
Interest expense, net                 152,441       152,441  
Other expense     (10,260 )                 (10,260 )
Total Other Income (Expense)     (10,260 )           152,441       142,181  
Income (Loss) before provision for income taxes   $ 522,174     $  (24,422 )   $  (744,357 )   $  (246,605 )

 

                                 
For the Three Months Ended June 30, 2023
                 
    CloudFirst Technologies   Nexxis Inc.   Corporate   Total
Sales   $ 5,639,310     $ 265,081     $     $ 5,904,391  
Cost of sales     3,168,984       156,653             3,325,637  
Gross Profit     2,470,326       108,428             2,578,754  
                                 
Selling, general and administrative     1,388,712       169,328       613,020       2,171,060  
Depreciation and amortization     300,575       208       167       300,950  
Total operating expenses     1,689,287       169,536       613,187       2,472,010  
                                 
Income (Loss) from Operations     781,039       (61,108 )     (613,187 )     106,744  
                                 
Interest expense, net     (16,570 )           115,864       99,294  
Other expense                        
Total Other Income (Expense)     (16,570 )           115,864       99,294  
                                 
Income (Loss) before provision for income taxes   $ 764,469     $  (61,108 )   $  (497,323 )   $  206,038  

 

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For the Six Months Ended June 30, 2024

 

                                 
    CloudFirst
Technologies
  Nexxis Inc.   Corporate   Total
Sales   $ 12,572,403     $ 573,836     $     $ 13,146,239  
Cost of sales     7,448,020       323,854             7,771,874  
Gross Profit     5,124,383       249,982             5,374,365  
                                 
Selling, general and administrative     3,021,616       336,923       1,545,310       4,903,849  
Depreciation and amortization     644,701       422       385       645,508  
Total operating expenses     3,666,317       337,345       1,545,695       5,549,357  
                                 
Income (Loss) from Operations     1,458,066       (87,363 )     (1,545,695 )     (174,992 )
                                 
Interest expense, net                 295,810       295,810  
Other expense     (21,520 )                 (21,520 )
Total Other Income (Expense)                        
                                 
Income (Loss) before provision for income taxes   $ 1,436,546     $  (87,363 )   $  (1,249,885 )   $  99,298  

 

                                 
    For the six months ended June 30, 2023
 
    CloudFirst Technologies    Nexxis Inc.    Corporate   Total
Sales   $ 12,254,237     $ 529,877     $     $ 12,784,114  
Cost of sales     7,780,841       334,774             8,115,615  
Gross profit     4,473,396       195,103             4,668,499  
                                 
Selling, general and administrative     2,535,491       294,078       1,183,540       4,013,109  
Depreciation and amortization     589,100       279       281       589,660  
Total operating expenses     3,124,591       294,357       1,183,821       4,602,769  
                                 
Income (loss) from operations     1,348,805       (99,254 )     (1,183,821 )     65,730  
                                 
Interest income                        
Interest expense     (43,916 )           219,287       175,371  
Total Other Income (Expense)     43,916 )           219,287       175,371  
                                 
Income (loss) before provision for income taxes   $ 1,304,889     $ (99,254 )   $ (964,534 )   $ 241,101  

 

Note 13 - Subsequent Events

 

The Company has evaluated events that occurred through August 14, 2024, the date that the financial statements were issued, and determined that there have been no events that have occurred that would require adjustments to the Company’s disclosures in the financial statements other than as follows.

 

On July 18, 2024, the Company entered into an Equity Distribution Agreement (the “ED Agreement”), with Maxim Group LLC (“Maxim”), pursuant to which the Company may offer and sell, from time to time, through Maxim, as sales agent or principal, shares of its common stock with certain limitations on the amount of common stock that may be offered and sold by the Company as set forth in the ED Agreement. The aggregate market value of the shares of Common Stock eligible for sale under the ATM Prospectus Supplement is $10,600,000 which is based on the limitations of such offerings under SEC regulations. The ED Agreement provides that the Company will pay Maxim a commission of 2.5% of the aggregate gross proceeds from each sale of shares under the ED Agreement. The ED Agreement will terminate upon the earlier of (i) the sale of all shares under the ED Agreement, (ii) twelve (12) months from the date of the ED Agreement, or (iii) as provided therein. As of June 30, 2024, the Company has recorded $15,635 as deferred issuance costs relating to this ED Agreement.

 

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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, 2023, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed on March 28, 2024 (the “2023 Annual Report”) with the U.S. Securities and Exchange Commission (the “SEC”). This Quarterly Report on Form 10-Q contains forward-looking statements, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions, and adequacy of resources. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) our plans, strategies, objectives, expectations, and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth; and (iii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.

 

In some cases, you can identify forward-looking statements by terminology such as may,’ ‘will,’ ‘should,’ ‘could,’ ‘expects,’ ‘plans,’ ‘intends,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘predicts,’ ‘potential, or continue or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We are under no duty to update any of the forward-looking statements after the date of this report.

 

Company Overview

 

Data Storage Corporation is headquartered in Melville, New York. Our common stock trades on the Nasdaq under the ticker symbol DTST. We operate through two subsidiaries; CloudFirst Technologies Corporation, a Delaware corporation, formally referred to as DSC, and Nexxis Inc. 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.

  

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2024 Business Update Summary

 

The first half of 2024 has laid the foundation for our ongoing growth. Capital has been allocated for professional fees, business development, and account management. Our efforts, combined with the January 1st merger of CloudFirst Technologies and Flagship Solutions LLC into a single subsidiary of DSC position the company for our strategic initiatives. 

We are currently planning our expansion into Europe, commencing with the United Kingdom, early in 2025.  We will be deploying our unique infrastructure platform in two data centers, increasing our addressable market. Management believes the UK marketplace consist with of over 50,000 plus companies that conduct business between the USA and the UK, with over 1.6 million Americans working in the UK. We believe the business opportunities and relationships of these closely tied countries will benefit our marketing efforts to penetrate the United Kingdom’s addressable marketplace.

Our first step several years ago outside of the USA was establishing a footprint in Canada.  CloudFirst has two IBM Power platforms in Canada. The UK and Canada are large trading partners. We consider the addressable markets of the USA, UK, and Canada to be a significant opportunity for our company. Our Cloud Infrastructure offerings of cloud hosting, disaster recovery and cyber security solutions will establish Data Storage, we believe, as one of the few, single source multi-country providers, providing cloud based infrastructure solutions such as Infrastructure-as-a- Service (IaaS) and Disaster Recovery on the IBM Power platform.  

Additionally, evidence indicates that the IBM Power server migration to the cloud is underway, and accelerating, as reflected by the increase in visitors to our website of the past five years. Our web site white paper of ‘Migrating your IBM Power Systems to the Cloud’ has been a popular download. Web searching on IBM Cloud leads the corporate researcher to visit our web sites, and our solutions. IBM Corporation has stated that they expect, based on their trends and research, that ten percent of the addressable marketplace will migrate to the cloud each year. Further indications, based on a well-known survey reflect that only 15% of this addressable marketplace has moved to cloud based solutions.

Our CXO (Client Experience Officer) program, which was announced in a recent press release, is yielding positive results, fostering client relationships, boosting cross-selling activities, and striving to exceed client expectations.

We remain focused and stable. Although the future is always uncertain, we are currently in a strong cash position and expect positive EBITDA performance from our subsidiaries as DSC continues to invest in our growth.

Operational Footprint:

 

Data Storage Corporation operates from offices in New York, Florida, and Texas, equipped with data centers designed to meet client requirements effectively. The Company also employs remote staff to complement its office teams and manages a robust infrastructure across seven geographically diverse data centers in the United States and Canada, supporting its comprehensive subscription-based solutions.

 

This merger represents a pivotal step in Data Storage Corporation’s strategy to expand its service offerings and enhance its competitive edge in the rapidly evolving cloud services and IT solutions market.

 

Recent Developments

 

On May 3, 2024, the Board signed a resolution to amend the Company’s Bylaws to provide that at each meeting of stockholders, except where otherwise provided by law, the presence in person or by proxy of the holders of thirty-three and one-third percent of the outstanding shares of the Company’s voting stock shall constitute a quorum.

 

On June 20, 2024, we held our 2024 Annual Meeting of Stockholders (the “2024 Annual Meeting”). At the 2024 Annual Meeting, our stockholders approved an amendment to our 2021 Stock Incentive Plan, as amended and restated (the “Incentive Plan”) to increase the number of shares of common stock that we will have authority to grant under the Incentive Plan by an additional 1,000,000 shares of the common stock to 2,075,000.

 

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RESULTS OF OPERATIONS

 

Three months ended June 30, 2024 as compared to June 30, 2023

 

Total Sales. For the three months ended June 30, 2024, total sales were $4,910,492, a decrease of $993,899 or (17)%, compared to $5,904,391 for the three months ended June 30, 2023. The decrease is primarily attributed to lower one-time equipment and software sales during the current period and a decrease in managed services partially offset by increases in all other revenue sources.

 

Sales   For the Three Months        
    Ended June 30,        
    2024   2023   $ Change   % Change
Infrastructure & Disaster Recovery/Cloud Service   $ 3,165,716     $ 2,418,185     $ 747,531       31 %
Equipment and Software     782,303       2,379,822       (1,597,519 )     (67 )%
Managed Services     642,518       826,743       (184,225 )     (22 )%
Nexxis VoIP Services     275,830       240,712       35,118       15 %
Other     44,125       38,929       5,196       13 %
Total Sales   $ 4,910,492     $ 5,904,391     $ (993,899 )     (17 )%

 

Cost of Sales. For the three months ended June 30, 2024, cost of sales was $2,502,599, a decrease of $823,038 or 25% compared to $3,325,637 for the three months ended June 30, 2023. The decrease of 25% was mostly related to the decrease in one-time equipment related cost of sales.

 

Selling, general and administrative expenses. For the three months ended June 30, 2024, selling, general and administrative expenses were $2,796,679, an increase of $324,669 or 13%, as compared to $2,472,010 for the three months ended June 30, 2023. The net increase is reflected in the chart below.

 

Selling, general and administrative expenses   For the Three Months        
    Ended June 30,        
    2024   2023   $ Change   % Change
Increase in Salaries   $ 1,319,261     $ 1,240,822     $ 78,439       6 %
Increase in Professional Fees     493,986       287,079       206,907       72 %
Increase in Software as a Service Expense     60,409       46,459       13,950       30 %
Increase in Advertising Expenses     249,147       226,142       23,005       10 %
Decrease in Commissions Expense     298,970       379,795       (80,825 )     (21 )%
Decrease in Amortization and Depreciation Expense     71,367       74,167       (2,800 )     (4 )%
Increase in Travel and Entertainment     130,436       38,539       91,897       238 %
Increase in Rent and Occupancy     84,835       49,029       35,806       73 %
Increase in Insurance     32,070       30,934       1,136       4 %
Decrease in all other Expenses     56,198       99,044       (42,846 )     (43 )%
Total Expenses   $ 2,796,679     $ 2,472,010     $ 324,669       13 %

 

Salaries. Salaries increased as a result of an increase in headcount in addition to an increase in salaries due to annual employee performance reviews.

 

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Professional Fees. Professional fees increased primarily due to business development consulting fees and an increase in legal and accounting fees related to the filing of certain registration statements.

 

Software as a Service Expense (SaaS). SaaS increased due to a new customer relationship management platform at one of the company’s divisions.

 

Advertising Expenses. Advertising Expenses increased due to an increase in new marketing campaigns and in person customer events.

 

Commissions Expense. Commissions expense decreased due to the decrease in one-time equipment sales.

 

Travel and Entertainment. Travel and Entertainment expenses increased due to international expansion efforts in addition to travel related to domestic customer expansion efforts.

 

Rent and Occupancy. Rent and Occupancy expenses increased due to the addition of new office space in Melville, NY.

 

Other Income (Expense). Other income for the three months ended June 30, 2024 increased $42,887 to $142,181 from $99,294 for the three months ended June 30, 2023. The increase in other income is primarily attributable to the increase in interest income from investment in marketable securities.

 

Income (loss) before provision for income taxes. Loss before provision for income taxes for the three months ended June 30, 2024 was $(246,605), as compared to income of $206,038 for the three months ended June 30, 2023.

 

Six months ended June 30, 2024 as compared to June 30, 2023

 

Total Sales. For the six months ended June 30, 2024, total sales were $13,146,239, an increase of $362,125 or 3%, compared to $12,784,114 for the six months ended June 30, 2023. The increase is primarily attributed to the increase of 29% in Infrastructure & Disaster Recovery/Cloud Services offset partially by a decrease in one-time equipment sales and Managed Services during the current period.

 

Sales   For the Six Months        
    Ended June 30,        
    2024   2023   $ Change   % Change
Infrastructure & Disaster Recovery/Cloud Service   $ 6,118,611     $ 4,724,964     $ 1,393,647       29 %
Equipment and Software     4,866,950       5,902,381       (1,035,431 )     (18 )%
Managed Services     1,485,925       1,603,372       (117,447 )     (7 )%
Nexxis VoIP Services     552,297       472,484       79,813       17 %
Other     122,456       80,913       41,543       51 %
Total Sales   $ 13,146,239     $ 12,784,114     $ 362,125       3 %

  

Cost of Sales. For the six months ended June 30, 2024, cost of sales was $7,771,874, a decrease of $343,741 or 4% compared to $8,115,615 for the six months ended June 30, 2023. The decrease of 4% was mostly related to a decrease in one-time equipment sales.

 

Selling, general and administrative expenses. For the six months ended June 30, 2024, selling, general and administrative expenses were $5,549,356, an increase of $946,587 or 21%, as compared to $4,602,769 for the six months ended June 30, 2023. The net decrease is reflected in the chart below.

 

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Selling, general and administrative expenses   For the Six Months        
    Ended June 30,        
    2024   2023   $ Change   % Change
Increase in Salaries   $ 2,675,649     $ 2,397,316     $ 278,333       12 %
Increase in Professional Fees     750,569       507,906       242,663       48 %
Increase in Software as a Service Expense     121,305       86,434       34,871       40 %
Increase in Advertising Expenses     481,387       416,020       65,367       16 %
Increase in Commissions Expense     713,553       651,762       61,791       9 %
Decrease in Amortization and Depreciation Expense     143,495       147,939       (4,444 )     (3 )%
Increase in Travel and Entertainment     204,005       89,786       114,219       127 %
Increase in Rent and Occupancy     144,523       110,837       33,686       30 %
Increase in Insurance     63,866       57,424       6,442       11 %
Increase in all other Expenses     251,004       137,345       113,659       83 %
Total Expenses   $ 5,549,356     $ 4,602,769     $ 946,587       21 %

 

Salaries. Salaries increased as a result of an increase in stock based compensation, and increase in headcount in addition to an increase in salaries due to annual employee performance reviews.

 

Professional fees. Professional fees increased primarily due to business development consulting fees and an increase in legal and accounting fees related to the filing of certain registration statements.

 

Software as a Service Expense (SaaS). SaaS increased due to a new customer relationship management platform at one of the company’s divisions.

 

Advertising Expenses. Advertising Expenses increased due to an increase in new marketing campaigns and in person events.

 

Commissions Expense. Commissions expense increased due to the timing of payments relating to certain sales streams.

 

Travel and Entertainment. Travel and Entertainment expenses increased due to international expansion in efforts in addition to travel related to domestic customer expansion efforts.

 

All Other Expenses. Other expenses increased primarily due to an increase in sales and use tax expense. 

  

Other Income (Expense). Other income for the six months ended June 30, 2024, increased $98,919 to $274,290 from $175,371 for the six months ended June 30, 2023. The increase in other income is primarily attributable to the increase in interest income from investment in marketable securities.

 

Income before provision for income taxes. Income before provision for income taxes for the six months ended June 30, 2024, was $99,299, as compared to $241,101 for the six months ended June 30, 2023.

 

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.

 

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To the extent we are successful in growing our business, identifying potential acquisition targets, and negotiating the terms of such acquisition, and in the event the purchase price includes a cash component, we plan to use our working capital and the proceeds of any financing to finance such acquisition and related costs.

 

Our opinion concerning our liquidity is based on current information. If this information proves to be inaccurate, or if circumstances change, we may not be able to meet our liquidity needs, which will likely 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 continue to see an uptick in client interest distribution channel expansion and in sales proposals. In 2024, we have and 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.

 

During the six months ended June 30, 2024, our cash decreased by $648,744 to $779,986 from $1,428,730 on December 31, 2023. Net cash of $354,791 was provided by our operating activities resulting primarily from the changes in assets and liabilities. Net cash of $798,381 was used in investing activities principally related to the purchase of equipment. Net cash of $205,154 was used in financing activities primarily related to repayments of finance lease obligations, partially offset by proceeds received from the exercise of stock options.

 

The Company’s working capital was $11,197,995 on June 30, 2024, increasing by $186,588 from $11,011,407 at December 31, 2023. The increase is primarily attributable to an increase in accounts receivable and other current assets a decrease in deferred revenue and finance leases. This was offset by a decrease in cash and an increase in accounts payable.

 

Critical Accounting 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. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results may differ from the original estimates, requiring adjustments to these balances in future periods. There are accounting policies, each of which requires significant judgments and estimates on the part of management, that we believe are significant to the presentation of our consolidated financial statements. The critical accounting estimates that affect the consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of the 2023 Annual Report.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities”.

 

Non-GAAP Financial Measures

 

Adjusted EBITDA

 

To supplement our consolidated financial statements presented in accordance with GAAP and to provide investors with additional information regarding our financial results, we consider and are including herein Adjusted EBITDA, a Non-GAAP financial measure. We view Adjusted EBITDA as an operating performance measure and, as such, we believe that the GAAP financial measure most directly comparable to it is net income (loss). We define Adjusted EBITDA as net income adjusted for interest and financing fees, depreciation, amortization, stock-based compensation, and other non-cash income and expenses. We believe that Adjusted EBITDA provides us an important measure of operating performance because it allows management, investors, debtholders and others to evaluate and compare ongoing operating results from period to period by removing the impact of our asset base, any asset disposals or impairments, stock-based compensation and other non-cash income and expense items associated with our reliance on issuing equity-linked debt securities to fund our working capital.

 

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Our use of Adjusted EBITDA has limitations as an analytical tool, and this measure should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP, as the excluded items may have significant effects on our operating results and financial condition. Additionally, our measure of Adjusted EBITDA may differ from other companies’ measure of Adjusted EBITDA. When evaluating our performance, Adjusted EBITDA should be considered with other financial performance measures, including various cash flow metrics, net income and other GAAP results. In the future, we may disclose different non-GAAP financial measures in order to help our investors and others more meaningfully evaluate and compare our future results of operations to our previously reported results of operations.

 

The following table shows our reconciliation of net income to adjusted EBITDA for the three months ended June 30, 2024, and 2023, respectively:

 

For the Three Months Ended June 30, 2024

 

    CloudFirst
Technologies
  Nexxis Inc.   Corporate   Total
                 
Net income (loss)   $ 522,174     $ (24,422 )   $ (744,357 )   $ (246,605 )
                                 
Non-GAAP adjustments:                                
Depreciation and amortization     338,908       422       192       339,522  
Interest income                 (152,441 )     (152,441 )
Interest expense     10,260                     10,260  
Stock based compensation     89,819       13,387       109,651       212,857  
                               
Adjusted EBITDA   $ 961,161     $ (10,613 )   $ (786,955   $ 163,593  

 

For the Three Months Ended June 30, 2023
 
    CloudFirst Technologies   Nexxis Inc.   Corporate   Total
                 
Net income (loss)   $ 764,469     $ (61,108 )   $ (497,323 )   $ 206,038  
                                 
Non-GAAP adjustments:                                
Depreciation and amortization     298,273       279       167       298,719  
Interest and letter of credit fees     16,570             (115,863 )     (99,293 )
Stock based compensation     48,681       4,400       71,814       124,895  
                                 
Adjusted EBITDA   $ 1,127,993     $ (56,429 )   $ (541,205 )   $ 530,359  

 

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The following table shows our reconciliation of net income to adjusted EBITDA for the six months ended June 30, 2024 and 2023, respectively:

 

For the Six Months Ended June 30, 2024

 

    CloudFirst Technologies   Nexxis Inc.   Corporate   Total
                 
Net income (loss)   $ 1,436,546     $ (87,363 )   $ (1,249,884 )   $ 99,299  
                                 
Non-GAAP adjustments:                                
Depreciation and amortization     633,701       422       386       634,509  
Interest income                 (295,810 )     (295,810 )
Interest expense     21,520                   21,520  
Stock based compensation     142,788       13,387       221,336       377,511  
                                 
Adjusted EBITDA   $ 2,234,555     $ (73,554 )   $ (1,323,972 )   $ 837,029  

 

For the Six Months Ended June 30, 2023

 

    CloudFirst Technologies   Nexxis Inc.   Corporate   Total
                 
Net income (loss)   $ 1,304,889     $ (99,254 )   $ (964,534 )   $ 241,101
                                 
Non-GAAP adjustments:                                
Depreciation and amortization     589,100       279       281       589,660  
Interest and letter of credit fees     43,916             (219,287 )     (175,371
Stock based compensation     87,677       4,400       117,105       209,182  
                                 
Adjusted EBITDA     2,025,582     $ (94,575 )   $ (1,066,435 )   $ 864,572  

 

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 Quarterly Report on Form 10-Q, 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-15I 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 June 30, 2024.

 

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 Quarterly Report on Form 10-Q, 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 June 30, 2024, 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, the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. The Company is not presently a party to any legal proceedings that, if determined adversely to it, would individually or taken together have a material adverse effect on its business, operating results, financial condition, or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

 

Item 1A. Risk Factors.

 

Investing in our securities involves a high degree of risk. You should carefully consider the following risks and the risk factors set forth in our 2023 Annual Report, together with all the other information in this Quarterly Report on Form 10-Q, including our condensed financial statements and notes thereto. If any of the following risks actually materialize, our operating results, financial condition and liquidity could be materially adversely affected. The following information updates, and should be read in conjunction with, the information disclosed in Part I, Item 1A, “Risk Factors,” contained in our 2023 Annual Report. Except as disclosed below, there have been no material changes from the risk factors disclosed in our 2023 Annual Report.

 

The Company has not generated a significant amount of net income and it may not be able to sustain profitability in the future.

 

As reflected in the consolidated financial statements, the Company had net income attributable to common shareholders of $112,862 for the six months ended June 30, 2024, and $381,575 for the year ended December 31, 2023. As of June 30, 2024, the Company had cash of $779,986, marketable securities of $11,214,006, and working capital of $11,197,995. There can be no assurance that the Company will continue to generate income in the future.

 

We cannot be assured that we will be able to maintain our listing on the Nasdaq Capital Market.

 

Our securities are listed on The Nasdaq Capital Market, a national securities exchange. We cannot be assured that we will continue to comply with the rules, regulations or requirements governing the listing of our common stock on The Nasdaq Capital Market or that our securities will continue to be listed on Nasdaq Capital Market in the future. If Nasdaq should determine at any time that we fail to meet Nasdaq requirements, we may be subject to a delisting action by Nasdaq.

 

On January 18, 2024, Nasdaq notified the Company that due to the passing of Mr. Hoffman, a member of our Board of Directors and member of our Audit Committee, the Company was no longer compliant with Nasdaq’s audit committee requirements as set forth in Rule 5605(c)(2)(A) of the Nasdaq listing standards. Nasdaq further notified the Company that, consistent with Rule 5605(c)(4) of the Nasdaq listing standards, Nasdaq provided the Company a cure period in order to regain compliance until the earlier of the Company’s next annual meeting of shareholders or December 30, 2024 or, if the next annual meeting of shareholders is held before June 27, 2024, then the Company must provide evidence of compliance no later than June 27, 2024.

 

On April 2, 2024, the Company received a letter (the “Notification Letter”) from Nasdaq stating that, based on the information regarding the appointment of Nancy M. Stallone, CPA to the Company’s Board of Directors and Audit Committee, Nasdaq has determined that the Company complies with the Audit Committee requirement for continued listing on The Nasdaq Capital Market set forth in Listing Rules 5605(c)(2), which requires that the Company maintain an audit committee of at least three members, each of whom must meet specified criteria, including certain independence criteria. Accordingly, the Nasdaq staff has determined that the Company has regained compliance with Nasdaq Listing Rule 5605(c)(2) and has indicated that the matter is now closed.

 

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If Nasdaq delists our securities from trading on its exchange at some future date, we could face significant material adverse consequences, including:

 

a limited availability of market quotations for our securities;

 

reduced liquidity with respect to our securities;

 

a determination that our common stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock;

 

a limited amount of news and analyst coverage for our company; and

 

a decreased ability to issue additional securities or obtain additional financing in the future.

 

Upon exercise of the Company’s outstanding options or warrants, it will be obligated to issue a substantial number of additional shares of common stock which will dilute its present shareholders.

 

The Company is obligated to issue additional shares of its common stock in connection with any exercise or conversion, as applicable, of its outstanding options, warrants, and shares of its convertible preferred stock. As of June 30, 2024, there were options and warrants outstanding convertible into an aggregate of 3,145,014 shares of common stock. The exercise of warrants or options will cause the Company to issue additional shares of its common stock and will dilute the percentage ownership of its shareholders. In addition, the Company has in the past, and may in the future, exchange outstanding securities for other securities on terms that are dilutive to the securities held by other shareholders not participating in such an exchange.

 

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

 

(a) Unregistered Sales of Equity Securities

 

There were no unregistered sales of the Company’s equity securities during the period ended June 30, 2024, that were not previously reported in a Current Report on Form 8-K.

 

(b) Use of Proceeds

 

Not applicable.

 

(c) Issuer Purchase of Equity Securities

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

There were no defaults upon senior securities during the period ended June 30, 2024.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information.

 

During the three months ended June 30, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

 

 

37

 

 

Item 6. Exhibits.

 

Exhibit No.   Description
   
3.1   Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form SB-2 (File No. 333-148167) filed on December 19, 2007).
3.2   Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 333-148167) filed on October 24, 2008).
3.3   Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 333-148167) filed on January 9, 2009).
3.4   Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form SB-2 (File No. 333- 148167) filed on December 19, 2007).
3.5   Amended Bylaws (incorporated by reference to Exhibit 3.2 to Form 8-K (File No. 333-148167) filed on October 24, 2008).
3.6   Form of Certificate of Amendment to the Articles of Incorporation (incorporated by reference to Appendix A to the Information Statement on Schedule 14C (File No. 001-35384) filed with the Securities and Exchange Commission on March 8, 2021).
3.7   Form of Certificate of Correction to the Certificate of Amendment to the Articles of Incorporation dated October 7, 2008 (incorporated by reference to Appendix C to the Information Statement on Schedule 14C (File No. 001-35384) filed with the Securities and Exchange Commission on March 8, 2021).
3.8   Form of Certificate of Validation and Ratification of the Certificate of Correction to the Certificate of Amendment to the Articles of Incorporation dated October 7, 2008 (incorporated by reference to Appendix C to the Information Statement on Schedule 14C (File No. 001-35384) filed with the Securities and Exchange Commission on March 8, 2021).
3.9   Form of Certificate of Correction to the Certificate of Amendment to the Articles of Incorporation dated October 16, 2008 (incorporated by reference to Appendix D to the Information Statement on Schedule 14C (File No. 001-35384) filed with the Securities and Exchange Commission on March 8, 2021).
3.10   Form of Certificate of Validation and Ratification of the Certificate of Correction to the Certificate of Amendment to the Articles of Incorporation dated October 16, 2008 (incorporated by reference to Appendix D to the Information Statement on Schedule 14C (File No. 001-35384) filed with the Securities and Exchange Commission on March 8, 2021).
3.11   Form of Certificate of Correction to the Certificate of Amendment to the Articles of Incorporation dated January 6, 2009 (incorporated by reference to Appendix E to the Information Statement on Schedule 14C (File No. 001-35384) filed with the Securities and Exchange Commission on March 8, 2021).
3.12   Form of Certificate of Validation and Ratification of the Certificate of Correction to the Certificate of Amendment to the Articles of Incorporation dated January 6, 2009 (incorporated by reference to Appendix E to the Information Statement on Schedule 14C (File No. 001-35384) filed with the Securities and Exchange Commission on March 8, 2021).
3.13   Form of Certificate of Correction to the Certificate of Amendment to the Articles of Incorporation dated June 24, 2009 (incorporated by reference to Appendix F to the Information Statement on Schedule 14C (File No. 001-35384) filed with the Securities and Exchange Commission on March 8, 2021).
3.14   Form of Certificate of Validation and Ratification of the Certificate of Correction to the Certificate of Amendment to the Articles of Incorporation dated June 24, 2009 (incorporated by reference to Appendix F to the Information Statement on Schedule 14C (File No. 001-35384) filed with the Securities and Exchange Commission on March 8, 2021).
3.15   Certificate of Designations, Preferences and Rights of Series A Preferred Stock of Data Storage Corporation (incorporated by reference to Appendix F to the Information Statement on Schedule 14C (File No. 001-35384) filed with the Securities and Exchange Commission on March 8, 2021).
3.16   Amendment to Bylaws (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K (File No. 001-35384) filed with the Securities and Exchange Commission on May 6, 2024).
10.1#   

Amendment No. 1 to the Data Storage Corporation 2021 Stock Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K (File No. 001-35384) filed with the Securities and Exchange Commission on June 24, 2024). 

10.2  

Equity Distribution Agreement, dated July 18, 2024, by and between Data Storage Corporation and Maxim Group LLC (Incorporated by reference to Exhibit 1.1 to Registration Statement on Form S-3 (File No. 333-280881) filed July 18, 2024)

10.3   Employment Agreement Amendment between Data Storage Corporation and Chris H. Panagiotakos (incorporated by reference to Exhibit 10.21 to Annual Report on Form 10-K (File No. 001-35384) filed on April 1, 2024).
31.1*   Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
31.2*   Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
32.1*   Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
32.2*   Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
101.INS   XBRL Instant Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

 

38

 

 

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: August 14, 2024  
  By: /s/ Charles M. Piluso
    Charles M. Piluso
    Chief Executive Officer
    (Principal Executive Officer)

 

Date: August 14, 2024  
  By: /s/ Chris H. Panagiotakos
    Chris H. Panagiotakos
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

39