Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2022
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

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) Data Storage FL, LLC, a Florida limited liability company, (iii) Flagship Solutions, LLC, a Florida limited liability company, (iv) Information Technology Acquisition Corporation, a Delaware Corporation, and (v) its majority-owned subsidiary, Nexxis Inc, a Nevada corporation. All inter-company transactions and balances have been eliminated in consolidation.


Basis of Presentation


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


Certain information and note disclosures normally included in the financial statements prepared in accordance with US GAAP have been condensed. As such, the information included in these financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”), as filed on March 31, 2022. In the opinion of the Company’s management, these condensed consolidated financial statements include all adjustments, which are of only a normal and recurring nature, necessary for a fair presentation of the statement of financial position of the Company as of September 30, 2022, statement of cash flows for the nine months ended September 30, 2022 and 2021 and the results of operations for the three and nine months ended September 30, 2022, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2022.




Certain prior period amounts in the condensed consolidated financial statements 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’ deficit, net loss or net cash used in operating activities. During the nine months ended September 30, 2022, we adopted a change in presentation on our condensed consolidated statements of operations in order to present technician salaries in cost of sales, the presentation of which is consistent with our peers. Prior periods have been revised to reflect this change in presentation.


Recently Issued and Newly Adopted Accounting Pronouncements


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



In November 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, issued by the Financial Accounting Standards Board. This ASU requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The update will generally result in the recognition of contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. The adoption of ASU 2021-08 did not have a material impact on the consolidated financial statements.


Use of Estimates


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


Estimated Fair Value of Financial Instruments


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, 2022, approximate their carrying value as reflected in the balance sheet due to the short-term nature of these instruments or the use of market interest rates for debt instruments. The carrying values of certain of the Company’s notes payable and capital lease obligations approximate their fair values based upon a comparison of the interest rate and terms of such debt given the level of risk to the rates and terms of similar debt currently available to the Company in the marketplace.


Cash and Cash Equivalents


The Company considers all highly liquid investments with an original maturity or remaining maturity at the time of purchase, of three months or less to be cash equivalents.


Concentration of Credit Risk and Other Risks and Uncertainties


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


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


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


As of September 30, 2022, DSC had two customers with an accounts receivable balance representing 18% and 14% of total accounts receivable. As of December 31, 2021, the Company had one customer with an accounts receivable balance representing 16% of total accounts receivable.


For the three months ended September 30, 2022, the Company had one customer that accounted for 14% of revenue. For the three months ended September 30, 2021, the Company had one customer that accounted for 13% of revenue.


For the nine months ended September 30, 2022, the Company had two customers that accounted for 20% and 14% of revenue. For the nine months ended September 30, 2021, the Company had one customer that accounted for 14% of revenue.


Accounts Receivable/Allowance for Credit Losses


The Company sells its services to customers on an open credit basis. Accounts receivables are uncollateralized, non-interest-bearing customer obligations. Accounts receivables are typically due within 30 days. The allowance for credit losses reflects the estimated accounts receivable that will not be collected due to credit losses. Provisions for estimated uncollectible accounts receivable are made for individual accounts based upon specific facts and circumstances including criteria such as their age, amount, and customer standing. Provisions are also made for other accounts receivable not specifically reviewed based upon historical experience. Clients are invoiced in advance for services as reflected in deferred revenue on the Company’s balance sheet.


Property and Equipment


Property and equipment 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 a market participant approach that directly impact the results of the testing. In making these assumptions and estimates, the Company uses industry accepted valuation models and set criteria that are reviewed and approved by various levels of management.


Revenue Recognition


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 the ability to migrate their on-premise computing and digital storage to DSC’s enterprise-level technical compute and digital storage assets located in Tier 3 data centers. Data Storage Corporation 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-gong monitoring of client system performance.


  3) Equipment and Software


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


  4) Nexxis 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, 2022
    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 2,120,592     $ 47,039     $ 2,167,631  
Equipment and Software     1,021,451             1,021,451  
Managed Services     966,346       33,307       999,653  
Nexxis VoIP Services     203,191             203,191  
Other     27,359             27,359  
Total Revenue   $ 4,338,939     $ 80,346     $ 4,419,285  


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


For the Three Months
Ended September 30,
Timing of revenue recognition   2022   2021
Products transferred at a point in time   $ 1,112,748     $ 754,438  
Products and services transferred over time     3,306,537       3,105,820  
Total Revenue   $ 4,419,285     $ 3,860,258  


For the Nine Months
Ended September 30, 2022
    United States   International   Total
Infrastructure & Disaster Recovery/Cloud Service   $ 5,964,383     $ 142,904     $ 6,107,287  
Equipment and Software     7,309,400             7,309,400  
Managed Services     3,709,657       99,921       3,809,578  
Nexxis VoIP Services     587,051             587,051  
Other     90,917             90,917  
Total Revenue   $ 17,661,408     $ 242,825     $ 17,904,233  


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


For the Nine Months
Ended September 30,
Timing of revenue recognition   2022   2021
Products transferred at a point in time   $ 7,400,316     $ 2,230,873  
Products and services transferred over time     10,503,917       7,732,325  
Total Revenue   $ 17,904,233     $ 9,963,198  


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 our 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 the payment.


Equipment Sales


The obligation for the equipment sales is such 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 that 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.




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 $263,485 and $157,182 for advertising costs for the three months ended September 30, 2022 and 2021, respectively. The Company incurred $669,278 and $409,468 for advertising costs for the nine months ended September 30, 2022 and 2021, respectively.


Stock-Based Compensation


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


Net Income (Loss) Per Common Share


Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) adjusted for income or loss that would result from the assumed conversion of potential common shares from contracts that may be settled in stock or cash by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.


The following table sets forth the information needed to compute basic and diluted earnings per share for the three and nine months ended September 30, 2022 and 2021:


    For the Three Months Ended   For the Nine Months Ended
    September 30,   September 30,
    2022   2021   2022   2021
Net Income (Loss) Available to Common Shareholders   $ (245,619 )   $ 135,630     $ (1,228,708 )   $ 213,159  
Weighted average number of common shares - basic     6,822,127       6,350,826       6,759,247       4,530,188  
Dilutive securities                                
Options           128,418             187,025  
Warrants           3,333             3,333  
Weighted average number of common shares - diluted     6,822,127       6,482,577       6,759,247       4,720,546  
Earnings (Loss) per share, basic   $ (0.04 )   $ 0.02     $ (0.18 )   $ 0.05  
Earnings (Loss) per share, diluted   $ (0.04 )   $ 0.02     $ (0.18 )   $ 0.05  


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


    Three Months ended September 30,   Nine Months ended September 30,
    2022   2021   2022   2021
Options     290,330       96,248       290,330       37,641  
Warrants     2,419,193       2,415,860       2,419,193       2,415,860  
 Total common stock equivalents     2,709,523       2,512,108       2,709,523       2,453,501