UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area
code: (
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The Capital Market | ||||
| The Capital Market |
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
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).
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 ☐ |
| 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 November 14, 2024, was .
DATA STORAGE CORPORATION
FORM 10-Q
INDEX
1
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED BALANCE SHEETS |
| September 30, 2024 (Unaudited) |
December 31, 2023 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
Accounts receivable (less provision for credit losses of $ |
||||||||
| Marketable securities | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment: | ||||||||
| Property and equipment | ||||||||
| Less—Accumulated depreciation | ( |
) | ( |
) | ||||
| Net Property and Equipment | ||||||||
| Other Assets: | ||||||||
| Goodwill | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other assets | ||||||||
| Intangible assets, net | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Deferred revenue | ||||||||
| Finance leases payable | ||||||||
| Finance leases payable related party | ||||||||
| Operating lease liabilities short term | ||||||||
| Total Current Liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Finance leases payable | ||||||||
| Finance leases payable related party | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies (Note 7) | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, Series A par value $; shares authorized; shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively | ||||||||
| Common stock, par value $; shares authorized; and shares issued and outstanding as of September 30, 2024, and December 31, 2023, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total Data Storage Corporation Stockholders’ Equity | ||||||||
| Non-controlling interest in consolidated subsidiary | ( |
) | ( |
) | ||||
| Total Stockholder’s Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
| The accompanying notes are an integral part of these condensed consolidated Financial Statements. |
2
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
| (Unaudited) |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Income (Loss) from Operations | ( | ) | ( | ) | ||||||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on disposal of equipment | ( | ) | ( | ) | ||||||||||||
| Total Other Income (Expense) | ||||||||||||||||
| Income before provision for income taxes | ||||||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net Income | ||||||||||||||||
| (Income) Loss in Non-controlling interest of consolidated subsidiary | ( | ) | ||||||||||||||
| Net Income attributable to Common Stockholders | $ | $ | $ | $ | ||||||||||||
| Net Income per Share – Basic | $ | $ | $ | $ | ||||||||||||
| Net Income per Share – Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted Average Number of Shares - Basic | ||||||||||||||||
| Weighted Average Number of Shares – Diluted | ||||||||||||||||
| The accompanying notes are an integral part of these condensed consolidated Financial Statements. |
3
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
| FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | ( | ) | ||||||||||||||||||||||||||||
| Balance March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | ( | ) | ||||||||||||||||||||||||||||
| Balance June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | ( | ) | ||||||||||||||||||||||||||||
| Balance September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Balance January 1, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | ( | ) | ||||||||||||||||||||||||||||
| Balance March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock options exercised | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||
| Net (Loss) | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock options exercised | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||
| Net Income | — | — | ||||||||||||||||||||||||||||||
| Balance September 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| The accompanying notes are an integral part of these condensed consolidated Financial Statements |
4
| DATA STORAGE CORPORATION AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (Unaudited) |
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Provision for credit losses | ||||||||
| Loss on disposal of equipment | ||||||||
| Changes in Assets and Liabilities: | ||||||||
| Accounts receivable | ( |
) | ||||||
| Other assets | ( |
) | ||||||
| Prepaid expenses and other current assets | ( |
) | ( |
) | ||||
| Right of use asset | ||||||||
| Accounts payable and accrued expenses | ( |
) | ||||||
| Deferred revenue | ( |
) | ( |
) | ||||
| Operating lease liability | ( |
) | ( |
) | ||||
| Net Cash Provided by Operating Activities | ||||||||
| Cash Flows from Investing Activities: | ||||||||
| Capital expenditures | ( |
) | ( |
) | ||||
| Purchase of marketable securities | ( |
) | ( |
) | ||||
| Sale of marketable securities | ||||||||
| Net Cash Used in Investing Activities | ( |
) | ( |
) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Repayments of finance lease obligations related party | ( |
) | ( |
) | ||||
| Repayments of finance lease obligations | ( |
) | ( |
) | ||||
| Proceeds from exercise of stock options | ||||||||
| Net Cash Used in Financing Activities | ( |
) | ( |
) | ||||
| Decrease in Cash and Cash Equivalents | ( |
) | ( |
) | ||||
| Cash and Cash Equivalents, Beginning of Period | ||||||||
| Cash and Cash Equivalents, End of Period | $ | $ | ||||||
| Supplemental Disclosures: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Assets acquired by operating lease | $ | $ | ||||||
| The accompanying notes are an integral part of these condensed consolidated Financial Statements. |
5
DATA STORAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 seven technical centers in New York, Massachusetts, Texas, North Carolina, Chicago 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.
On August 12, 2024 the Company formed UK Cloud Host Technologies Ltd., a company formed under the laws of the United Kingdom, for the purpose of establishing an executive presence in London, United Kingdom and managing the business and affairs of the Company within Europe.
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 nine months ended September 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 (“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
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.
6
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
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 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.
7
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.
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 $
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 | $ | |||
| Purchase of equity investments | ||||
| As of December 31, 2023 | $ | |||
| For the nine months ended September 30, 2024 | ||||
| Total | ||||
| As of December 31, 2023 | $ | |||
| Purchase of equity investments | ||||
| Sale of equity investments | ( |
) | ||
| As of September 30, 2024 | $ | |||
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
8
For the three months ended September 30, 2024, the
Company had two customers that accounted for
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 $
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.
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.
9
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 | $ | $ | $ | |||||||||
| Equipment and Software | ||||||||||||
| Managed Services | ||||||||||||
| Nexxis VoIP Services | ||||||||||||
| Other | ||||||||||||
| Total Sales | $ | $ | $ | |||||||||
| For the Three Months |
| Ended September 30, 2023 |
| United States | International | Total | ||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | $ | $ | |||||||||
| Equipment and Software | ||||||||||||
| Managed Services | ||||||||||||
| Nexxis VoIP Services | ||||||||||||
| Other | ||||||||||||
| Total Sales | $ | $ | $ | |||||||||
10
| For the Three Months |
| Ended September 30, |
| Timing of revenue recognition | 2024 | 2023 | ||||||
| Products transferred at a point in time | $ | $ | ||||||
| Products and services transferred over time | ||||||||
| Total Sales | $ | $ | ||||||
| For the Nine Months | ||||||||||||
| Ended September 30, 2024 | ||||||||||||
| United States | International | Total | ||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | $ | $ | |||||||||
| Equipment and Software | ||||||||||||
| Managed Services | ||||||||||||
| Nexxis VoIP Services | ||||||||||||
| Other | ||||||||||||
| Total Sales | $ | $ | $ | |||||||||
| For the Nine Months | ||||||||||||
| Ended September 30, 2023 | ||||||||||||
| United States | International | Total | ||||||||||
| Infrastructure & Disaster Recovery/Cloud Service | $ | $ | $ | |||||||||
| Equipment and Software | ||||||||||||
| Managed Services | ||||||||||||
| Nexxis VoIP Services | ||||||||||||
| Other | ||||||||||||
| Total Sales | $ | $ | $ | |||||||||
| For the Nine Months | ||||||||
| Ended September 30, | ||||||||
| Timing of revenue recognition | 2024 | 2023 | ||||||
| Products transferred at a point in time | $ | $ | ||||||
| Products and services transferred over time | ||||||||
| Total Sales | $ | $ | ||||||
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.
11
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
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 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.
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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.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss, measured as the amount by which the carrying value exceeds the fair value, is recognized if the carrying amount exceeds estimated un-discounted future cash flows.
Advertising Costs
The Company expenses the costs associated with advertising
as they are incurred. The Company incurred $
The Company follows the requirements of FASB ASC 718-10-10, Share-Based Payments with regards to stock-based compensation issued to employees and non-employees. The Company has agreements and arrangements that call for stock to be awarded to 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.
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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 | $ | $ | $ | $ | ||||||||||||
| Weighted average number of common shares - basic | ||||||||||||||||
| Dilutive securities | ||||||||||||||||
| Options | ||||||||||||||||
| Warrants | ||||||||||||||||
| Restricted stock awards | ||||||||||||||||
| Weighted average number of common shares - diluted | ||||||||||||||||
| Earnings per share, basic | $ | $ | $ | $ | ||||||||||||
| Earnings per share, diluted | $ | $ | $ | $ | ||||||||||||
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 | |||||||||||||||||
| Warrants | |||||||||||||||||
Note 3 - Prepaids and other current assets
Prepaids and other current assets consist of the following:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Prepaid marketing & promotion | $ | $ | ||||||
| Prepaid subscriptions and license | ||||||||
| Prepaid maintenance | ||||||||
| Prepaid insurance | ||||||||
| Other | ||||||||
| Total prepaids and other current assets | $ | $ | ||||||
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Note 4- Property and Equipment
Property and equipment, at cost, consist of the following:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Storage equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Leasehold improvements | ||||||||
| Computer hardware and software | ||||||||
| Data center equipment | ||||||||
| Gross Property and equipment | ||||||||
| Less: Accumulated depreciation | ( |
) | ( |
) | ||||
| Net property and equipment | $ | $ | ||||||
Depreciation expense for the three months ended September
30, 2024, and 2023 was $
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 | $ | $ | $ | |||||||||||||
| Trademarks | ||||||||||||||||
| Total intangible assets not subject to amortization | ||||||||||||||||
| Intangible assets subject to amortization | ||||||||||||||||
| Customer lists | ||||||||||||||||
| ABC acquired contracts | ||||||||||||||||
| SIAS acquired contracts | ||||||||||||||||
| Non-compete agreements | ||||||||||||||||
| Website and Digital Assets | ||||||||||||||||
| Total intangible assets subject to amortization | ||||||||||||||||
| Total Goodwill and Intangible Assets | $ | $ | $ | |||||||||||||
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| Estimated life in years | Gross amount | September 30, 2024, Accumulated Amortization | Net | |||||||||||||
| Intangible assets not subject to amortization | ||||||||||||||||
| Goodwill | $ | $ | $ | |||||||||||||
| Trademarks | ||||||||||||||||
| Total intangible assets not subject to amortization | ||||||||||||||||
| Intangible assets subject to amortization | ||||||||||||||||
| Customer lists | ||||||||||||||||
| ABC acquired contracts | ||||||||||||||||
| SIAS acquired contracts | ||||||||||||||||
| Non-compete agreements | ||||||||||||||||
| Website and Digital Assets | ||||||||||||||||
| Total intangible assets subject to amortization | ||||||||||||||||
| Total Goodwill and Intangible Assets | $ | $ | $ | |||||||||||||
Scheduled amortization over the next five years are as follows:
| Twelve months ending September 30, | |||||
| 2025 | $ | ||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 | |||||
| Thereafter | |||||
| Total | $ | ||||
Amortization expense for the three months ended September 30, 2024,
and 2023 was $
Note 6 - Leases
Operating Leases
The Company currently maintains two leases for office space located in Melville, NY, and one lease for office space in Austin, TX.
The 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 $
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 $
On January 1, 2022, the Company entered into a
lease agreement for office space with WeWork in Austin, TX. On September 3, 2024 the company amended this agreement and is on an
eight month lease agreement with payments of a $
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 $
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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 $
On January 1, 2022, the Company entered into a lease
agreement with a finance company for technical equipment. The lease obligation is payable in monthly installments of $
On January 1, 2022, the Company entered into a lease
agreement with a finance company for technical equipment. The lease obligation is payable in monthly installments of $
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 $
On January 1, 2022, the Company entered into a lease
agreement with Systems Trading effective January 1, 2022. This lease obligation is payable to Systems Trading with monthly installments
of $
On April 1, 2022, the Company entered into a lease
agreement with Systems Trading effective May 1, 2022. This lease obligation is payable to Systems Trading with monthly installments of
$
During the nine months ended September 30, 2024, the
Company exercised its right and bought out a fair market value lease of equipment at the end of its Systems Trading lease for $
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
The components of lease expense were as follows:
| Three Months Ended September 30, 2024 | ||||
| Finance leases: | ||||
| Amortization of assets, included in depreciation and amortization expense | $ | |||
| Interest on lease liabilities, included in interest expense | ||||
| Operating lease: | ||||
| Amortization of assets, included in total operating expense | ||||
| Interest on lease liabilities, included in total operating expense | ||||
| Total net lease cost | $ | |||
17
| Nine Months Ended September 30, 2024 | ||||
| Finance leases: | ||||
| Amortization of assets, included in depreciation and amortization expense | $ | |||
| Interest on lease liabilities, included in interest expense | ||||
| Operating lease: | ||||
| Amortization of assets, included in total operating expense | ||||
| Interest on lease liabilities, included in total operating expense | ||||
| Total net lease cost | $ | |||
| Supplemental balance sheet information related to leases was as follows: |
| Operating Leases: | ||||
| Operating lease right-of-use asset | $ | |||
| Current operating lease liabilities | $ | |||
| Noncurrent operating lease liabilities | ||||
| Total operating lease liabilities | $ | |||
| As of September 30, 2024 | ||||
| Finance leases: | ||||
| Property and equipment, at cost | $ | |||
| Accumulated amortization | ( |
) | ||
| Property and equipment, net | $ | |||
| Current obligations of finance leases | $ | |||
| Finance leases, net of current obligations | ||||
| Total finance lease liabilities | $ | |||
Supplemental cash flow and other information related to leases were as follows and included both related and non-related party finance leases combined:
| Nine Months Ended September 30, 2024 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows related to operating leases | $ | |||
| Financing cash flows related to finance leases | $ | |||
| Weighted average remaining lease term (in years): | ||||
| Operating leases | ||||
| Finance leases | ||||
| Weighted average discount rate: | ||||
| Operating leases | % | |||
| Finance leases | % | |||
18
Long-term obligations under the operating and finance leases at September 30, 2024, mature as follows and included both related party and non-related finance leases combined:
| For the Twelve Months Ended September 30, | Operating Leases | Finance Leases | |||||||
| 2025 | $ | $ | |||||||
| 2026 | |||||||||
| 2027 | |||||||||
| 2028 | |||||||||
| 2029 | |||||||||
| Thereafter | |||||||||
| Total lease payments | |||||||||
| Less: Amounts representing interest | ( |
) | ( |
) | |||||
| Total lease obligations | |||||||||
| Less: long-term obligations | ( |
) | |||||||
| Total current | $ | $ | |||||||
As of September 30, 2024, the Company had no additional
significant operating or finance leases that had not yet commenced. Rent expense under all operating leases for the three months ended
September 30, 2024, and 2023 was $
Note 7 - Commitments and Contingencies
On May 7, 2024, the Company entered into a master
service agreement with a vendor. The lease obligation is payable in monthly installments of $
As part of the Flagship acquisition the Company acquired
a licensing agreement for marketing related materials with a National Football League team. The Company has approximately $
During the year, the Company received communication regarding state sales and use taxes. The Company received further communication on July 31, 2024. The Company is in discussions with the agency and evaluating the amount owed. Based