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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