Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies (Policies)

v3.24.3
Summary of Significant Accounting Policies (Policies)
 9 Months Ended
Sep. 30, 2024
Accounting Policies [Abstract]  
Principles of Consolidation

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 (“CloudFirst Technologies”), (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. The accounts of UK Cloud Host Technologies Ltd., a wholly-owned subsidiary of CloudFirst Technologies, are not reflected in the Condensed Consolidated Financial Statements because there has been no activity to report since inception. The Company expects to report activity for UK Cloud Host Technologies Ltd. in the fourth quarter of 2024.
Reclassifications

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 nine months ended September 30, 2024, the Company reclassified disaggregated revenue and had a 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.

 
Recently Issued and Newly Adopted Accounting Pronouncements

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 its 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

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

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 September 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 the Company’s own assumptions in determining the fair value of investments)

 

The Company’s Level 1 assets/liabilities include cash, accounts receivable, marketable securities, accounts payable, prepaid, and other current assets. Management believes the estimated fair value of these accounts at September 30, 2024, approximates 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

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.

 
Cash and Cash Equivalents

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 September 30, 2024, and December 31, 2023, the Company had cash and cash equivalents of $513,718 and $1,428,730, respectively.

 
Investments

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 nine months ended September 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 nine months ended September 30, 2024
    Total
As of December 31, 2023   $ 11,318,196  
Purchase of equity investments     456,573  
Sale of equity investments     (400,000 )
As of September 30, 2024   $ 11,374,769  

 
Concentration of Credit Risk and Other Risks and Uncertainties

Concentration of Credit Risk and Other Risks and Uncertainties

 

Financial instruments and assets subjecting the Company to concentration of credit risk consist primarily of cash and cash equivalents, short-term investments, and trade accounts receivable. The Company’s cash and cash equivalents are maintained at major U.S. financial institutions. Deposits in these institutions may exceed the amount of insurance provided on such deposits.

 

The Company’s customers are primarily concentrated in the United States.

 

As of September 30, 2024, DSC had two customers with an accounts receivable balance representing 15% and 13% 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 September 30, 2024, the Company had two customers that accounted for 13% and 11% of revenue. For the three months ended September 30, 2023, the Company had one customer that accounted for 13% of revenue. For the nine months ended September 30, 2024, the Company had two customers that accounted for 15% and 12% of revenue. For the nine months ended September 30, 2023, the Company had two customers that accounted for 15% and 11% of revenue.

 
Accounts Receivable / Provision for Credit Losses

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 the Company to pool assets with similar risk characteristics and consider current economic conditions when estimating losses. During the three and nine months ended September 30, 2024, the Company recorded $8,860, and $31,456 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

 

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

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.

 
Revenue Recognition

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.

 

Disaggregation of revenue

 

In the following table, revenue is disaggregated by major product line, geography, and timing of revenue recognition.

 

For the Three Months
Ended September 30, 2024

 

                       
    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 3,146,805     $ 182,824     $ 3,329,629  
Equipment and Software     1,404,134       —       1,404,134  
Managed Services     718,830       —       718,830  
Nexxis VoIP Services     312,365       —       312,365  
Other     38,377       5,500       43,877  
Total Sales   $ 5,620,511     $ 188,324     $ 5,808,835  

  

For the Three Months
Ended September 30, 2023

 

    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 2,535,794     $ 86,857     $ 2,622,651  
Equipment and Software     2,185,061       —       2,185,061  
Managed Services     887,302       —       887,302  
Nexxis VoIP Services     255,963       —       255,963  
Other     35,648       —       35,648  
Total Sales   $ 5,899,768     $ 86,857     $ 5,986,625  

 

For the Three Months
Ended September 30,

 

Timing of revenue recognition   2024   2023
Products transferred at a point in time   $ 1,448,010     $ 2,220,708  
Products and services transferred over time     4,360,825       3,765,917  
Total Sales   $ 5,808,835     $ 5,986,625  

 

For the Nine Months
Ended September 30, 2024
    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 9,037,238     $ 411,002     $ 9,448,240  
Equipment and Software     6,271,084       —       6,271,084  
Managed Services     2,204,755       —       2,204,755  
Nexxis VoIP Services     864,662       —       864,662  
Other     150,395       15,938       166,333  
Total Sales   $ 18,528,134     $ 426,940     $ 18,955,074  

 

For the Nine Months
Ended September 30, 2023
    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 7,040,818     $ 260,799     $ 7,301,617  
Equipment and Software     8,087,442       —       8,087,442  
Managed Services     2,536,672       —       2,536,672  
Nexxis VoIP Services     728,447       —       728,447  
Other     116,561       —       116,561  
Total Sales   $ 18,509,940     $ 260,799     $ 18,770,739  

 

For the Nine Months
Ended September 30,
Timing of revenue recognition   2024   2023
Products transferred at a point in time   $ 6,437,416     $ 8,204,003  
Products and services transferred over time     12,517,658       10,566,736  
Total Sales   $ 18,955,074     $ 18,770,739  

 

Contract receivables are recorded at the invoiced amount and represent uncollateralized, non-interest-bearing client obligations. Provisions for estimated uncollectible accounts receivable are made on an account-by-account basis, considering specific factors such as age, amount, and the client’s creditworthiness.

 

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.

 

During the three months ended September 2024 and 2023, $62,387 and $48,968 of revenue was recognized, respectively, that was included in the contract liabilities at the beginning of the respective periods. During the nine months ended September 2024 and 2023, $214,385 and $195,323 of revenue was recognized, respectively, that was included in the contract liabilities at the beginning of the respective periods.

 

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.

 
Disaster Recovery and Business Continuity Solutions

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

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 payment.

 
Equipment Sales

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

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

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

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

Significant Judgement

 

In the instance where contracts have multiple performance obligations the Company uses judgment to establish a stand-alone price for each performance obligation. The price for each performance obligation is determined by reviewing market data for similar services as well as the Company’s historical pricing of each individual service. The sum of each performance obligation is calculated to determine the aggregate price for the individual services. The proportion of each individual service to the aggregate price is determined. The ratio is applied to the total contract price in order to allocate the transaction price to each performance obligation.

 
Impairment of Long-Lived Assets

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

Advertising Costs

 

The Company expenses the costs associated with advertising as they are incurred. The Company incurred $144,755 and $165,403 for advertising costs for the three months ended September 30, 2024, and 2023, respectively. The Company incurred $626,142 and $581,423 for advertising costs for the nine months ended September 30, 2024, and 2023, respectively.

 
Stock-Based Compensation

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 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

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.

 

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

 

                                 
    For the Three Months Ended   For the Nine Months Ended
    September 30,   September 30,
    2024   2023   2024   2023
Net Income Attributable to Common Shareholders   $ 122,397     $ 179,011     $ 235,259     $ 456,500  
                                 
Weighted average number of common shares - basic     6,999,447       6,847,264       6,918,253       6,834,811  
Dilutive securities                                
Options     181,842       398,986       192,135       377,237  
Warrants     —       —       —       —  
Restricted stock awards     224,375       —       224,375       —  
Weighted average number of common shares - diluted     7,405,664       7,246,250       7,334,763       7,212,048  
Earnings per share, basic   $ 0.02     $ 0.03     $ 0.03     $ 0.06  
Earnings per share, diluted   $ 0.02     $ 0.02     $ 0.03     $ 0.06  

 

The following table sets forth the number of potential shares of common stock that have been excluded from diluted net income per share because their effect was anti-dilutive:

 

                                 
    Three Months Ended September 30,   Nine Months Ended September 30,
    2024   2023   2024   2023
Options       510,953       210,211       500,660       231,960  
Warrants       2,495,860       2,415,860       2,495,860       2,415,860  
        3,006,813       2,626,071       2,996,520       2,647,820