Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies (Policies)

v3.21.2
Summary of Significant Accounting Policies (Policies)
 9 Months Ended
Sep. 30, 2021
Accounting Policies [Abstract]  
Principles of Consolidation

Principles of Consolidation

 

The Condensed Consolidated Financial statements include the accounts of (i) the Company, (ii) its wholly-owned subsidiaries, Data Storage Corporation, a Delaware corporation, and Data Storage FL, LLC, a Florida limited liability company, (iii) Flagship Solutions, LLC, a Florida limited liability company, and (iv) its majority-owned subsidiary, Nexxis Inc, a Nevada corporation. All significant inter-company transactions and balances have been eliminated in consolidation.

 
Basis of Presentation

Basis of Presentation

 

The Condensed Consolidated Financial Statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).

 

Certain information and note disclosures normally included in the financial statements prepared in accordance with US GAAP have been condensed. As such, the information included in these financial statements should be read in conjunction with the audited financial statements as of and for the years ended December 31, 2020 and 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”), as filed on March 31, 2021. In the opinion of the Company’s management, these condensed consolidated financial statements include all adjustments, which are of only a normal and recurring nature, necessary for a fair presentation of the statement of financial position of the Company as of September 30, 2021 and its results of operations and cash flows for the three and nine months ended September 30, 2021 and 2020. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2021.

 
Business combinations

Business combinations.

 

We account for business combinations under the acquisition method of accounting, which requires us to recognize separately from goodwill, the assets acquired, and the liabilities assumed at their acquisition date fair values. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of operations.

 

Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include future expected cash flows from product sales, customer contracts and acquired technologies, and estimated cash flows from the projects when completed and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

 
Recently Issued and Newly Adopted Accounting Pronouncements

Recently Issued and Newly Adopted Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU-2016-13”). ASU 2016-13 affects loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. ASU 2016-13 is effective for the fiscal year beginning after December 15, 2022, including interim periods within that fiscal year. The Company expects that there would be no material impact on the Company’s condensed consolidated financial statements upon the adoption of this ASU.

 

In July 2021, the FASB issued ASU No. 2021-05, Lessors—Certain Leases with Variable Lease Payments (Topic 842), Which requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate (hereafter referred to as “variable payments”) as an operating lease on the commencement date of the lease if specified criteria are met. ASU 2021-05 is effective for the fiscal year beginning after December 15, 2022, including interim periods within that fiscal year. The Company expects that there would be no material impact on the Company’s condensed consolidated financial statements upon the adoption of this ASU.

 
Use of Estimates

Use of Estimates

 

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

 
Estimated Fair Value of Financial Instruments

 Estimated Fair Value of Financial Instruments

 

The Company’s financial instruments include cash, accounts receivable, accounts payable, line of credit, notes payable and lease commitments. Management believes the estimated fair value of these accounts at September 30, 2021 approximate their carrying value as reflected in the balance sheet due to the short-term nature of these instruments or the use of market interest rates for debt instruments. The carrying values of certain of the Company’s notes payable and capital lease obligations approximate their fair values based upon a comparison of the interest rate and terms of such debt given the level of risk to the rates and terms of similar debt currently available to the Company in the marketplace.

 
Cash and Cash Equivalents

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.

 
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.

 

The Company provides credit in the normal course of business. The Company maintains allowances for doubtful accounts on factors surrounding the credit risk of specific customers, historical trends, and other information.

 

As of September 30, 2021, DSC had three customers with an accounts receivable balance representing 47% of total accounts receivable. As of September 30, 2020, DSC had four customers with an accounts receivable balance representing 65% of total accounts receivable.

 

For the nine months ended September 30, 2021, the Company had one customer that accounted for 14% of revenue. For the nine months ended September 30, 2020, the Company had one customer that accounted for 10% of revenue.

 
Accounts Receivable/Allowance for Credit Losses

Accounts Receivable/Allowance for Credit Losses

 

The Company sells its services to customers on an open credit basis. Accounts receivables are uncollateralized, non-interest-bearing customer obligations. Accounts receivables are typically due within 30 days. The allowance for credit losses reflects the estimated accounts receivable that will not be collected due to credit losses. 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 customer standing. Provisions are also made for other accounts receivable not specifically reviewed based upon historical experience. Clients are invoiced in advance for services as 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 5 to 7 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. During the nine months ended September 30, 2021, the Company recorded a loss on disposal of equipment of $29,732.

 
Income Taxes

Income Taxes

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. At September 30, 2021 and December 31, 2020, the Company had a full valuation allowance against its deferred tax assets.

 

Per FASB ASC 740-10, disclosure is not required of an uncertain tax position unless it is considered probable that a claim will be asserted and there is a more-likely-than-not possibility that the outcome will be unfavorable. Using this guidance, as of December 31, 2020 and 2019, the Company has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. The Company’s 2020, 2019 and 2018 Federal and State tax returns remain subject to examination by their respective taxing authorities. Neither of the Company’s Federal or State tax returns are currently under examination.

 
Goodwill and Other Intangibles

Goodwill and Other Intangibles

 

In accordance with GAAP, the Company tests goodwill and other intangible assets for impairment on at least an annual basis. Impairment exists if the carrying value of a reporting unit exceeds its estimated fair value. To determine the fair value of goodwill and intangible assets, the Company uses many assumptions and estimates using a market participant approach that directly impact the results of the testing. In making these assumptions and estimates, the Company uses industry accepted valuation models and set criteria that are reviewed and approved by various levels of management.

 
Revenue Recognition

Revenue Recognition

 

Nature of goods and services

 

The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each:

 

1) Infrastructure as a Service (IaaS) and Disaster Recovery Revenue

 

Infrastructure as a Service (IaaS) provides clients the ability to migrate compute and store on DSC enterprise level technical assets in Tier 3 data centers. DSC provides a turnkey solution whereby achieving reliable and cost-effective, multi-tenant IBM Power compute, flash storage, disaster recovery and cyber security while eliminating client capital expenditures.

 

Clients can subscribe to disaster recovery solutions without subscribing to IaaS. Product offerings provided directly from DSC are High Availability, Data Vaulting and DRaaS type solutions, including standby servers which allows clients to centralize and streamline their mission critical digital information and technical environment. Client’s data is vaulted, maintenance of retention schedules for corporate governances and regulations to meet their back to work objective in a disaster.

 

  2) Managed Services

 

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

  

  The Company also derives both one time and subscription-based revenue, from providing support, management and renewal of software, hardware, third party maintenance contracts and third-party cloud services to clients. The managed services include help desk, remote access, operating system and software patch management, annual recovery tests and manufacturer support for equipment and on-gong monitoring of client system performance.

 

  3) Equipment and Software Revenue

 

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

 

  4) Nexxis VoIP and Direct Internet Access

 

The company offers VoIP, Internet access and data transport services to help keep businesses fully connected to the Internet from any location. The company provides, among other things, highly reliable Hosted VoIP solutions with equipment options for IP phones and internet speeds of up to 10Gb delivered over fiber optics. 

 

 

Disaggregation of revenue

 

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

 

                       
For the Three Months
Ended September 30, 2021
    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 1,799,488     $ 27,567     $ 1,827,055  
Equipment and Software     316,107       —       316,107  
Managed Services     1,472,261       —       1,472,261  
Nexxis VoIP Services     210,445       —       210,445  
Other     34,390       —       34,390  
Total Revenue   $ 3,832,691     $ 27,567     $ 3,860,258  

 

For the Three Months
Ended September 30, 2020
    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 1,416,847     $ 20,551     $ 1,437,398  
Equipment and Software     936,344       —       936,344  
Managed Services     169,565       —       169,565  
Nexxis VoIP Services     180,225       —       180,225  
Total Revenue   $ 2,702,981     $ 20,551     $ 2,723,532  

 

For the Three Months
Ended September 30,
Timing of revenue recognition   2021   2020
Products transferred at a point in time   $ 754,438     $ 936,344  
Products and services transferred over time     3,105,820       1,787,188  
Total Revenue   $ 3,860,258     $ 2,723,532  

 

For the Nine Months
Ended September 30, 2021
    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 5,115,212     $ 97,354     $ 5,212,566  
Equipment and Software     1,541,441       —       1,541,441  
Managed Services     2,508,515       —       2,508,515  
Nexxis VoIP Services     588,889       —       588,889  
Other     111,787       —       111,787  
Total Revenue   $ 9,865,844     $ 97,354     $ 9,963,198  

 

For the Nine Months
Ended September 30, 2020
    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 4,133,213     $ 107,583     $ 4,240,796  
Equipment and Software     1,544,786       —       1,544,786  
Managed Services     557,515       —       557,515  
Nexxis VoIP Services     484,770       —       484,770  
Total Revenue   $ 6,720,284     $ 107,583     $ 6,827,867  

 

For the Nine Months
Ended September 30,
Timing of revenue recognition   2021   2020
Products transferred at a point in time   $ 2,230,873     $ 1,544,786  
Products and services transferred over time     7,732,325       5,283,081  
Total Revenue   $ 9,963,198     $ 6,827,867  

 

Contract receivables are recorded at the invoiced amount and are uncollateralized, non-interest-bearing client obligations. Provisions for estimated uncollectible accounts receivable are made for individual accounts based upon specific facts and circumstances including criteria such as their age, amount, and client standing.

 

Sales are generally recorded in the month the service is provided. For clients who are billed on an annual basis, deferred revenue is recorded and amortized over the life of the contract.

 

Transaction price allocated to the remaining performance obligations

 

The Company has the following performance obligations:

 

  1) Data Vaulting:  subscription-based service that encrypts and transfers data to secure location further replicates the data to a second DSC technical center where it remains encrypted. Ensuring retention schedules for corporate compliance. Provides for twenty-four (24) hour or less recovery time and uses advanced data reduction reduplication technology to shorten restore time.

 

  2) High Availability (“HA”): A managed subscription-based service which offers cost-effective mirroring software replication technology and provides one (1) hour or less recovery time.
     
  3) Infrastructure as a Service (“IaaS”): subscription-based service offers “capacity on-demand” for IBM Power and Intel server systems.
     
  4) Internet: subscription-based service offers continuous internet connection along with FailSAFE providing disaster recovery.
     
  5) Support and Maintenance: subscription-based service offers support for servers, firewalls, desktops or software and ad hoc support and help desk.
     
  6) Implementation / Set-Up Fees: on boarding and set-up IaaS and DRaaS and Cyber Security.
     
  7) Equipment sales: sale of servers and data storage equipment to the client.
     
  9) License: granting SSL certificates and other licenses.
     
  10) VoIP services (VoIP) and Direct Internet Access: subscription-based business Hosted VoIP, SIP Trunk and Toll Free solutions.

 
Disaster Recovery with Stand-By Servers, High Availability, Data Vaulting, IaaS, Message Logic, Support and Maintenance and Internet

Disaster Recovery with Stand-By Servers, High Availability, Data Vaulting, IaaS, Message Logic, Support and Maintenance and Internet

 

Subscription services such as the above allows clients to access a set of data or receive services for a predetermined period of time. As the client obtains access at a point in time but continues to have access for the remainder of the subscription period, the client is considered to simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs. Accordingly, the related performance obligation is considered to be satisfied ratably over the contract term. As the performance obligation is satisfied evenly across the term of the contract, revenue is recognized on a straight-line basis over the contract term.

 
Initial Set-Up Fees

Initial Set-Up Fees

 

The Company accounts for set-up fees as separate performance obligation. Set-up services are performed one time and accordingly the revenue is recognized at the point in time that the service is performed, and the Company is entitled to the payment.

 
Equipment sales

Equipment sales

 

For the Equipment sales performance obligation, the control of the product transfers at a point in time (i.e., when the goods have been shipped or delivered to the client’s location, depending on shipping terms). Noting that the satisfaction of the performance obligation, in this sense, does not occur over time as defined within ASC 606-10-25-27 through 29, the performance obligation is considered to be satisfied at a point in time (ASC 606-10-25-30) when the obligation to the client has been fulfilled (i.e., when the goods have left the shipping facility or delivered to the client, depending on shipping terms).

 
License – granting SSL certificates and other licenses

License – granting SSL certificates and other licenses

 

In the case of licensing performance obligation, the control of the product transfers either at point in time or over time depending on the nature of the license. The revenue standard identifies two types of licenses of IP: a right to access IP and a right to use IP. To assist in determining whether a license provides a right to use or a right to access IP, ASC 606 defines two categories of IP: Functional and Symbolic. The Company’s license arrangements typically do not require the Company to make its proprietary content available to the client either through a download or through a direct connection. Throughout the life of the contract the Company does not continue to provide updates or upgrades to the license granted. Based on the guidance, the Company considers its license offerings to be akin to functional IP and recognizes revenue at the point in time the license is granted and/or renewed for a new period.

 
Payment terms

Payment terms

 

The terms of the contracts typical range from 12 to 36 months with auto-renew options. The Company invoices clients one month in advance for its services plus any overages or additional services.

 
Warranties

Warranties

 

The Company offers guaranteed service levels and service guarantees on some of its contracts. These warrantees are not sold separately and according to ASC 606-10-50-12(a) are accounted as “assurance warranties”.

 
Significant judgement

Significant judgement

 

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

 
Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

 

In accordance with FASB ASC 360-10-35, the Company reviews its long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss, measured as the amount by which the carrying value exceeds the fair value, is recognized if the carrying amount exceeds estimated undiscounted future cash flows.

 
Advertising Costs

Advertising Costs

 

The Company expenses the costs associated with advertising as they are incurred. The Company incurred $409,468 and $234,565 for advertising costs for the nine months ended September 30, 2021 and 2020, respectively.

 
Stock Based Compensation

Stock Based Compensation

 

DSC follows the requirements of FASB ASC 718-10-10, Share Based Payments with regards to stock-based compensation issued to employees and non-employees. DSC has agreements and arrangements that call for stock to be awarded to the employees and consultants at various times as compensation and periodic bonuses. The expense for this stock-based compensation is equal to the fair value of the stock price on the day the stock was awarded multiplied by the number of shares awarded.

 

The valuation methodology used to determine the fair value of the options issued during the period is the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the options. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its Common Stock and does not intend to pay dividends on its Common Stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best assessment.

 

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

 
Net Income (Loss) Per Common Share

Net Income (Loss) Per Common Share

 

In accordance with FASB ASC 260-10-5 Earnings Per Share, basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) adjusted for income or loss that would result from the assumed conversion of potential common shares from contracts that may be settled in stock or cash by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.

 

The following table sets forth the information needed to compute basic and diluted earnings per share for the three and nine months ended September 30, 2021 and 2020:

 

                               
    For the Three Months Ended September 30,   For the Nine Months Ended September 30,
    2021   2020   2021   2020
                 
Net Income Available to Common Shareholders   $ 135,630     $ 9,568     $ 213,159     $ 96,677  
                                 
Weighted average number of common shares – basic     6,350,826       3,213,485       4,530,188       3,212,821  
Dilutive securities                                
Options     128,418       166,681       187,025       149,520  
 Warrants     3,333       3,333       3,333       3,333  
Weighted average number of common shares – diluted     6,482,577       3,383,499       4,720,546       3,365,675  
                                 
Earnings per share, basic   $ 0.02     $ 0.00     $ 0.05     $ 0.03  
Earnings per share, diluted   $ 0.02     $ 0.00     $ 0.05     $ 0.03  

 

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

 

                                 
    Three Months ended September 30,   Nine Months ended September 30,
    2021   2020   2021   2020
Options       96,248       43,965       37,641       61,125  
Warrants       2,415,860       —       2,415,860       —  
        2,512,108       43,965       2,453,501       61,125