Data Storage Corporation

05/16/2022 | Press release | Distributed by Public on 05/16/2022 13:17

Quarterly Report (Form 10-Q)

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 March 31, 2022

☐ TRANSITION REPORT UNDER 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.)
48 South Service Road
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: None

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 per share DTST The NasdaqCapital Market
Warrants to purchase shares of Common Stock,
par value $0.001 per share

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 filer. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

DTSTW The NasdaqCapital Market
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 May 13, 2022, was 6,697,127.

DATA STORAGE CORPORATION

FORM 10-Q

INDEX

Page
PART I- FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021 1
Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021 (unaudited) 2
Condensed Consolidated Statements of Stockholders' Equity for three months ended March 31, 2022 and 2021 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (unaudited) 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Control and Procedures 27
PART II- OTHER INFORMATION 27
Item 1. Legal Proceedings 27
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Mine Safety Disclosures 28
Item 5. Other Information 28
Item 6. Exhibits 28
DATA STORAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2022 December 31, 2021
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 13,420,707 $ 12,135,803
Accounts receivable (less allowance for credit losses of $47,523 and $30,000 in 2021 and 2020, respectively) 3,524,464 2,384,367
Prepaid expenses and other current assets 1,256,243 536,401
Total Current Assets 18,201,414 15,056,571
Property and Equipment:
Property and equipment 7,502,490 6,595,236
Less-Accumulated depreciation (4,939,373 ) (4,657,765 )
Net Property and Equipment 2,563,117 1,937,471
Other Assets:
Goodwill 6,560,671 6,560,671
Operating lease right-of-use assets 374,356 422,318
Other assets 78,045 103,226
Intangible assets, net 2,184,836 2,254,566
Total Other Assets 9,197,908 9,340,781
Total Assets $ 29,962,439 $ 26,334,823
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses $ 4,335,372 $ 1,343,391
Deferred revenue 292,450 366,859
Finance leases payable 386,323 216,299
Finance leases payable related party 740,530 839,793
Operating lease liabilities short term 206,231 205,414
Total Current Liabilities 5,960,906 2,971,756
Operating lease liabilities 177,348 226,344
Finance leases payable 560,187 157,424
Finance leases payable related party 432,530 364,654
Total Long Term Liabilities 1,170,065 748,422
Total Liabilities 7,130,971 3,720,178
Commitments and contingencies (Note XX)
Stockholders' Equity:
Preferred stock, Series A par value $0.001; 10,000,000shares authorized; 0and 0shares issued and outstanding in 2022 and 2021, respectively - -
Common stock, par value $.001; 250,000,000shares authorized; 6,697,127and 6,693,793shares issued and outstanding in 2022 and 2021, respectively 6,697 6,694
Additional paid in capital 38,314,591 38,241,155
Accumulated deficit (15,374,566 ) (15,530,576 )
Total Data Storage Corp Stockholders' Equity 22,946,722 22,717,273
Non-controlling interest in consolidated subsidiary (115,254 ) (102,628 )
Total Stockholder's Equity 22,831,468 22,614,645
Total Liabilities and Stockholders' Equity $ 29,962,439 $ 26,334,823

The accompanying notes are an integral part of these condensed consolidated Financial Statements

1

DATA STORAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
2022 2021
Sales $ 8,657,199 $ 2,574,691
Cost of sales 6,011,289 1,420,899
Gross Profit 2,645,910 1,153,792
Selling, general and administrative 2,459,866 1,118,407
Income from Operations 186,044 35,385
Other Expense
Interest expense, net (42,660 ) (35,045 )
Total Other Expense (42,660 ) (35,045 )
Income before provision for income taxes 143,384 340
Provision for income taxes - -
Net Income 143,384 340
Non-controlling interest in net loss of consolidated subsidiary 12,626 1,759
Net Income attributable to Data Storage Corp 156,010 2,099
Preferred Stock Dividends - (38,883 )
Net Income (Loss) Attributable to Common Stockholders $ 156,010 $ (36,784 )
Earnings per Share - Basic $ 0.02 $ (0.01 )
Earning pers Share - Diluted $ 0.02 $ (0.01 )
Weighted Average Number of Shares - Basic 6,695,966 3,213,485
Weighted Average Number of Shares - Diluted 6,955,900 3,213,485

The accompanying notes are an integral part of these condensed consolidated Financial Statements

2

DATA STORAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(Unaudited)
Preferred Stock Common Stock Additional Paid-in Accumulated Non-Controlling Total Stockholders'
Shares Amount Shares Amount Capital Deficit Interest Equity
Balance January 1, 2021 1,401,786 $ 1,402 3,213,485 $ 3,213 $ 17,745,785 $ (15,734,737 ) $ (94,705 ) $ 1,920,958
Stock-based compensation - - - - 42,171 - - 42,171
Net Income (Loss) - - - - - 2,099 (1,759 ) 340
Preferred stock dividends - - - - - (38,883 ) - (38,883 )
Balance, March 31, 2021 1,401,786 $ 1,402 3,213,485 $ 3,213 $ 17,787,956 $ (15,771,521 ) $ (96,464 ) $ 1,924,586
Balance January 1, 2022 - $ - 6,693,793 $ 6,694 $ 38,241,155 $ (15,530,576 ) $ (102,628 ) $ 22,614,645
Stock options exercise - - 3,334 3 6,931 - - 6,934
Stock-based compensation - - - - 66,505 - - 66,505
Net Income (Loss) - - - - - 156,010 (12,626 ) 143,384
Balance, March 31, 2022 - $ - 6,697,127 $ 6,697 $ 38,314,591 $ (15,374,566 ) $ (115,254 ) $ 22,831,468

The accompanying notes are an integral part of these condensed consolidated Financial Statements

3

DATA STORAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2022 2021
Cash Flows from Operating Activities:
Net Income $ 143,384 $ 340
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 351,338 267,189
Stock based compensation 66,505 42,171
Changes in Assets and Liabilities:
Accounts receivable (1,140,097 ) (170,096 )
Other assets 25,180 (345 )
Prepaid expenses and other current assets (719,842 ) (290,018 )
Right of use asset 47,962 21,492
Accounts payable and accrued expenses 2,991,981 558,679
Deferred revenue (74,409 ) (59,489 )
Operating lease liability (48,179 ) (21,364 )
Net Cash Provided by Operating Activities 1,643,823 348,559
Cash Flows from Investing Activities:
Capital expenditures (25,946 ) (257,238 )
Net Cash Used in Investing Activities (25,946 ) (257,238 )
Cash Flows from Financing Activities:
Repayments of finance lease obligations related party (274,393 ) (313,925 )
Repayments of finance lease obligations (65,515 ) (36,682 )
Cash received for the exercised of options 6,935 -
Net Cash Used in Financing Activities (332,973 ) (350,607 )
Increase (decrease) in Cash and Cash Equivalents 1,284,904 (259,286 )
Cash and Cash Equivalents, Beginning of Period 12,135,803 893,598
Cash and Cash Equivalents, End of Period $ 13,420,707 $ 634,312
Supplemental Disclosures:
Cash paid for interest $ 41,040 $ 31,971
Cash paid for income taxes $ - $ -
Non-cash investing and financing activities:
Accrual of preferred stock dividend $ - $ 38,883
Assets acquired by finance lease $ 881,308 $ 50,000

The accompanying notes are an integral part of these condensed consolidated Financial Statements

4

DATA STORAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2022

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 data analytics 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, Florida, 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.

Note 2 - Summary of Significant Accounting Policies

Principles of Consolidation

The Condensed Consolidated Financial statements include the accounts of (i) the Company, (ii) its wholly-owned subsidiaries, Data Storage Corporation, a Delaware corporation, and Data Storage FL, LLC, a Florida limited liability company, (iii) Flagship Solutions, LLC, a Florida limited liability company, and (iv) its majority-owned subsidiary, Nexxis Inc, a Nevada corporation. All 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 March 31, 2022 and its results of operations and cash flows for the three months ended March 31, 2022 and 2021. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2022.

5

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

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 March 31, 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.

6

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 March 31, 2022, DSC had one customer with an accounts receivable balance representing 58% of total accounts receivable. As of March 31, 2021, DSC had two customers with an accounts receivable balance representing 58% of total accounts receivable.

For the three months ended March 31, 2022, the Company had two customers that accounted for 55% of revenue. For the three months ended March 31, 2021, the Company had two customers that accounted for 36% 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 30days. 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.

7

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 compute and store on DSC enterprise-level technical assets in Tier 3 data centers. Data Storage Corporation provides a turnkey solution whereby achieving reliable and cost-effective, multi-tenant IBM Power compute, flash storage, disaster recovery and cyber security while eliminating client capital expenditures.

Clients can subscribe to disaster recovery solutions without subscribing to IaaS. Product offerings provided directly from DSC are High Availability, Data Vaulting and 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, highly reliable Hosted VoIP solutions with equipment options for IP phones and internet speeds of up to 10Gb delivered over fiber optics.

Disaggregation of revenue

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

For the Three Months
Ended March 31, 2022
United States International Total
Infrastructure & Disaster Recovery/Cloud Service $ 1,888,387 $ 37,463 $ 1,925,850
Equipment and Software 5,319,459 - 5,319,459
Managed Services 1,149,503 33,307 1,182,810
Nexxis VoIP Services 194,934 - 194,934
Other 34,146 - 34,146
Total Revenue $ 8,586,429 $ 70,770 $ 8,657,199

8

For the Three Months
Ended March 31, 2021
United States International Total
Infrastructure & Disaster Recovery/Cloud Service $ 1,629,773 $ 30,575 $ 1,660,348
Equipment and Software 464,883 - 464,883
Managed Services 226,767 - 226,767
Nexxis VoIP Services 195,326 - 195,326
Other 27,367 - 27,367
Total Revenue $ 2,544,116 $ 30,575 $ 2,574,691
For the Three Months
Ended March 31,
Timing of revenue recognition 2022 2021
Products transferred at a point in time $ 5,402,996 $ 687,576
Products and services transferred over time 3,254,203 1,887,115
Total Revenue $ 8,657,199 $ 2,574,691

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.
10) Voice over Internet and Direct Internet Access: Cloud based business subscription solutions of hosted Voice, SIP Trunking and Toll-Free solutions integrated with Microsoft Teams.

9

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.

Warranties

The Company offers guaranteed service levels and service guarantees on some of its contracts. These warranties are not sold separately are accounted as "assurance warranties".

Significant Judgement

In the instances 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.

10

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 $89,731and $95,776for advertising costs for the three months ended March 31, 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

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

The following table sets forth the information needed to compute basic and diluted earnings per share for the three months ended March 31, 2022 and 2021:

For the Three Months Ended March 31,
2022 2021
Net Income (Loss) Available to Common Shareholders $ 156,010 $ (36,784 )
Weighted average number of common shares - basic 6,695,966 3,213,485
Dilutive securities
Options 256,601 -
Warrants 3,333 -
Weighted average number of common shares - diluted 6,955,900 3,213,485
Earnings (Loss) per share, basic $ 0.02 $ (0.01 )
Earnings (Loss) per share, diluted $ 0.02 $ (0.01 )

11

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 March 31,
2022 2021
Options 62,074 207,650
Warrants 2,415,860 3,333
2,477,934 210,983

Note 3 - Property and Equipment

Property and equipment, at cost, consist of the following:

March 31, December 31,
2022 2021
Storage equipment $ 476,887 $ 476,887
Furniture and fixtures 19,491 19,491
Leasehold improvements 20,983 20,983
Computer hardware and software 321,266 317,729
Data center equipment 6,663,863 5,760,146
7,502,490 6,595,236
Less: Accumulated depreciation (4,939,373 ) (4,657,765 )
Net property and equipment $ 2,563,117 $ 1,937,471

Depreciation expense for the three months ended March 31, 2022 and 2021 was $281,608and $218,689, respectively.

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Note 4 - Goodwill and Intangible Assets

Goodwill and intangible assets consisted of the following:

March 31, 2022
Estimated life Accumulated
in years Gross amount Amortization Net
Intangible assets not subject to amortization
Goodwill Indefinite $ 6,560,671 $ - $ 6,560,671
Trademarks Indefinite 514,268 - 514,268
Total intangible assets not subject to amortization 7,074,939 - 7,074,939
Intangible assets subject to amortization
Customer lists 7 2,614,099 966,717 1,647,382
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 9,816 23,186
Total intangible assets subject to amortization 3,889,248 2,218,680 1,670,568
Total Goodwill and Intangible Assets $ 10,964,187 $ 2,218,680 $ 8,745,507

Scheduled amortization over the next five years are as follows:

Twelve months ending March 31,
2023 278,922
2024 276,976
2025 268,717
2026 267,143
2027 267,143
Thereafter 311,667
Total $ 1,670,568

Amortization expense for the three months ended March 31, 2022 and 2021 were $69,730and $48,500respectively.

Note 5 -Leases

Operating Leases

The Company currently maintains two leases for office space located in Melville, NY.

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 our existing lease in the same building. The base annual rent is $10,764payable in equal monthly installments of $897.A second lease for office space in Melville, NY, was entered into on November 20, 2017, which commenced on April 2,2018. The term of this lease is five years and three months at $86,268per year with an escalation of 3% per year and expires on July 31, 2023.

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 1, 2021. The monthly rent is $4,500.

The Company leases cages and racks for technical space in Tier 3 data centers in New York, Massachusetts, North Carolina and Florida. These leases are month to month. The monthly rent is approximately $39,000.

In 2020, the Company entered into a Tier 3 data center technical space lease. The lease is in Dallas, TX. The lease term is thirteen months and monthly payments are $1,403. The lease term expires on July 31, 2023.

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On January 1, 2022 the Company entered into a lease agreement for office space for marketing and business development with WeWork in Austin, TX. The lease term is six months and requires monthly payments of $1,470and expires on June 30, 2022.

Finance Lease Obligations

On June 1, 2020, the Company entered into a lease agreement with a finance company to lease technical equipment. The lease obligation is payable in monthly installments of $5,008. The lease carries an interest rate of 7% and is a three-year lease. The term of the lease ends June 1, 2023.

On June 29, 2020, the Company entered into a lease agreement for technical equipment with a finance company. The lease obligation is payable in monthly installments of $5,050. The lease carries an interest rate of 7% and is a three-year lease. The term of the lease ends June 29, 2023.

On July 31, 2020, the Company entered into a lease agreement for technical equipment with a finance company. The lease obligation is payable in monthly installments of $4,524. The lease carries an interest rate of 7% and is a three-year lease. The term of the lease ends July 31, 2023.

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 September 21, 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 January 1, 2025.

On January 1, 2022, the Company entered into a technical equipment lease with a finance company. 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 April 1, 2018, the Company entered into a lease agreement with Systems Trading Inc. ("Systems Trading") to refinance all equipment leases into one lease. This lease obligation is payable to Systems Trading with bi-monthly installments of $23,475. The lease carries an interest rate of 5% and is a four-year lease. The term of the lease ends April 16, 2022. Systems Trading is owned and operated by the Company's President, Harold Schwartz.

On January 1, 2019, the Company entered into a lease agreement with Systems Trading. This lease obligation is payable to Systems Trading with monthly installments of $29,592. The lease carries an interest rate of 6.75% and is a five-year lease. The term of the lease ends December 31, 2023.

On April 1, 2019, the Company entered into two lease agreements with Systems Trading to add new data center equipment. The first lease calls for monthly installments of $1,328and expires on March 1, 2022. It carries an interest rate of 7%. The second lease calls for monthly installments of $461and expires on March 1, 2022. It carries an interest rate of 6.7%.

On January 1, 2020, the Company entered into a new lease agreement with Systems Trading to lease equipment. The lease obligation is payable to Systems Trading with monthly installments of $10,534. The lease carries an interest rate of 6% and is a three-year lease. The term of the lease ends January 1, 2023.

On March 4, 2021, the Company entered into a new lease agreement with Systems Trading effective April 1, 2021. This lease obligation is payable to Systems Trading with monthly installments of $1,567and expires on March 31, 2024. The lease carries an interest rate of 8%.

On January 1, 2022, the Company entered into a new lease agreement with Systems Trading effective January 1, 2022. This lease obligation is payable to Systems Trading with monthly installments of $7,145and expires on February 1, 2025. The lease carries an interest rate of 8%.

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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. 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 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
March 31, 2022
Finance leases:
Amortization of assets, included in depreciation and amortization expense $ 319,686
Interest on lease liabilities, included in interest expense 110,998
Operating lease:
Amortization of assets, included in total operating expense 50,883
Interest on lease liabilities, included in total operating expense 5,153
Total net lease cost $ 486,720
Supplemental balance sheet information related to leases was as follows:
Operating Leases:
Operating lease right-of-use asset $ 374,356
Current operating lease liabilities $ 206,231
Noncurrent operating lease liabilities 177,348
Total operating lease liabilities $ 383,579
March 31, 2022
Finance leases:
Property and equipment, at cost $ 5,412,726
Accumulated amortization (3,006,462 )
Property and equipment, net $ 2,406,264
Current obligations of finance leases $ 992,717
Finance leases, net of current obligations 1,126,853
Total finance lease liabilities $ 2,119,570

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Supplemental cash flow and other information related to leases were as follows:

Three Months Ended March 31, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows related to operating leases $ 48,179
Financing cash flows related to finance leases $ 339,908
Weighted average remaining lease term (in years):
Operating leases 1.93
Finance leases 1.58
Weighted average discount rate:
Operating leases 5 %
Finance leases 7 %

Long-term obligations under the operating and finance leases at March 31, 2022 mature as follows:

For the Twelve Months Ended March 31, Operating Leases Finance Leases
2023 $ 221,227 $ 1,130,435
2024 143,959 704,863
2025 36,733 242,034
2026 - 18,799
2027 - 18,799
Thereafter - 135,450
Total lease payments 401,919 2,250,381
Less: Amounts representing interest (18,340 ) (130,811 )
Total lease obligations 383,579 2,119,570
Less: Current (206,231 ) (1,126,853 )
$ 177,348 $ 992,717

As of March 31, 2022, 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 March 31, 2022 and 2021 was $34,219and $20,263, respectively.

Note 6 - Commitments and Contingencies

COVID-19

The COVID-19 pandemic has created significant worldwide uncertainty, volatility and economic disruption. The extent to which COVID-19 will adversely impact the Company's business, financial condition and results of operations is dependent upon numerous factors, many of which are highly uncertain, rapidly changing and uncontrollable. These factors include, but are not limited to: (i) the duration and scope of the pandemic; (ii) governmental, business and individual actions that have been and continue to be taken in response to the pandemic, including travel restrictions, quarantines, social distancing, work-from-home and shelter-in-place orders and shut-downs; (iii) the impact on U.S. and global economies and the timing and rate of economic recovery; (iv) potential adverse effects on the financial markets and access to capital; (v) potential goodwill or other impairment charges; (vi) increased cybersecurity risks as a result of pervasive remote working conditions; and (vii) the Company's ability to effectively carry out its operations due to any adverse impacts on the health and safety of its employees and their families.

Under NYS Executive Order 202.6, "Essential Business," DSC is an "Essential Business" based on the following in the Executive order number 2: Essential infrastructure including telecommunications and data centers; and, number 12: Vendors that provide essential services or products, including logistics and technology support. Further, as a result of the pandemic, all employees, including the Company's specialized technical staff, are working remotely or in a virtual environment. DSC always maintains the ability for team members to work virtually and the Company is on a hybrid schedule with team members. The significant increase in remote working, particularly for an extended period of time, could exacerbate certain risks to the Company's business, including an increased risk of cybersecurity events and improper dissemination of personal or confidential information, though the Company does not believe these circumstances have, or will, materially adversely impact its internal controls or financial reporting systems. If the COVID-19 pandemic should worsen, the Company may experience disruptions to our business including, but not limited to: equipment, its workforce, or to its business relationships with other third parties. The extent to which COVID-19 impacts the Company's operations or those of its third-party partners will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. Any such disruptions or losses we incur could have a material adverse effect on the Company's financial results and our ability to conduct business as expected.

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Note 7 - Stockholders' (Deficit)

Capital Stock

The Company has 260,000,000authorized shares of capital stock, consisting of 250,000,000shares of common stock, par value $0.001, and 10,000,000shares of Preferred Stock, par value $0.001per share.

During the three months ended March 31, 2022, employees exercised 3,334options into shares of common stock. The Company received $6,934for these warrants.

Common Stock Options

A summary of the Company's options activity and related information follows:

Number of
Shares
Under Options 		Range of
Option Price
Per Share 		Weighted
Average
Exercise Price 		Weighted
Average
Contractual
Life
Options Outstanding at December 31, 2021 267,467 $ 2.00- 16.00 $ 5.19 6.94
Options Granted 54,543 5.87- 3.63 3.30 10
Exercised (3,334 ) 2.00- 2.16 2.08 -
Expired/Cancelled - - -
Options Outstanding at March 31, 2022 318,676 $ 2.00- 16.00 $ 2.61 7.24
Options Exercisable at March 31, 2022 159,039 $ 2.00- 16.00 $ 2.39 5.06

Share-based compensation expense for options totaling $66,505and $42,171was recognized in our results for the three months ended March 31, 2022 and 2021, respectively.

The valuation methodology used to determine the fair value of the options issued during the year was 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.

The risk-free interest rate assumption is based upon observed interest rates on zero-coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the options.

Estimated volatility is a measure of the amount by which the Company'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 of the Company over a period equal to the expected life of the awards.

As of March 31, 2022, there was $536,813of total unrecognized compensation expense related to unvested employee options granted under the Company's share-based compensation plans that is expected to be recognized over a weighted average period of approximately 2.36years.

The weighted average fair value of options granted, and the assumptions used in the Black-Scholes model during the three months ended March 31, 2022 are set forth in the table below.

2022
Weighted average fair value of options granted $ 3.30
Risk-free interest rate 1.63% - 2.32%
Volatility 212% - 214%
Expected life (years) 10years
Dividend yield -

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Note 8 - Litigation

We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting DSC, its common stock, any of its subsidiaries or of DSC's or DSC's subsidiaries' officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Note 9 - Related Party Transactions

Finance Lease Obligations - Related Party

During the three months ended March 31, 2022, the Company entered into one related party finance lease obligations. See Note 5 for details.

Nexxis Capital LLC

Charles M. Piluso (Chairman and CEO) and Harold Schwartz (President) collectively own 100% of Nexxis Capital LLC ("Nexxis Capital"). Nexxis Capital was formed to purchase equipment and provide leases to Nexxis Inc.'s customers. The Company received funds of $2,328 and $3,968 during the three months ended March 31, 2022 and 2021 respectively.

Note 10 - Merger

Flagship Solutions, LLC

On February 4, 2021, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Data Storage FL, LLC, a Florida limited liability company and the Company's wholly-owned subsidiary (the "Merger Sub"), Flagship Solutions, LLC ("Flagship"), a Florida limited liability company, and the owners (collectively, the "Equityholders") of all of the issued and outstanding limited liability company membership interests in Flagship (collectively, the "Equity Interests"). The Company acquired Flagship on May 31, 2021 and became its wholly-owned subsidiary. The purchase price was $5.5million.

In addition, the cash merger consideration paid by the Company to the Equityholders at Closing shall be adjusted, on a dollar-for-dollar basis, by the amount by which Flagship's net working capital at Closing is more or is less than the target working capital amount specified in the Merger Agreement.

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Concurrently with the Closing, Flagship and Mark Wyllie, Flagship's Chief Executive Officer, entered into an Employment Agreement, which was effective upon consummation of the Closing, pursuant to which Mr. Wyllie will continue to serve as Chief Executive Officer of Flagship following the Closing on the terms and conditions set forth therein. Flagship's obligations under the Wyllie Employment Agreement will also be guaranteed by the Company. The Wyllie Employment Agreement provides for: (i) an annual base salary of $170,000, (ii) management bonuses comprised of twenty-five percent (25%) of Flagship's net income available in free cash flow as determined in accordance with GAAP for each calendar quarter during the term, (iii) an agreement to issue him stock options of the Company, subject to approval by the Board, commensurate with his position and performance and reflective of the executive compensation plans that the Company has in place with its other subsidiaries of similar size to Flagship, (iv) life insurance benefits in the amount of $400,000, and (v) four weeks paid vacation. In the event Mr. Wyllie's employment is terminated by him for good reason (as defined in the Wyllie Employment Agreement) or by Flagship without cause, he will be entitled to receive his annual base salary through the expiration of the initial three-year employment term and an amount equal to his last annual bonus paid, payable quarterly. Pursuant to the Wyllie Employment Agreement, we have agreed to elect Mr. Wyllie to the Board and the board of directors of Flagship to serve so long as he continues to be employed by the Company. The employment agreement contains customary non-competition provisions that apply during its term and for a period of two years after the term expires. In addition, pursuant to the Wyllie Employment Agreement, Mr. Wyllie will be appointed to serve as a member of the Company's Board of Directors and the board of directors of Flagship to serve so long as he continues to be employed by us.

Following the closing of the transaction, Flagship's financial statements as of the Closing were consolidated with the Consolidated Financial Statements of the Company. These amounts are provisional and may be adjusted during the measurement period.

The following sets forth the components of the purchase price:

Purchase price:
Cash paid to the seller $ 6,149,343
Total purchase price 6,149,343
Tangible Assets Acquired:
Cash 212,068
Accounts Receivable 1,389,263
Prepaid Expenses 127,574
Fixed Assets 4,986
Website and Digital Assets 33,002
Security Deposits 22,500
Total Tangible Assets Acquired 1,789,393
Tangible Liabilities Assumed:
Accounts Payable and Accrued Expenses 514,354
Deferred Revenue 68,736
Deferred Tax Liability 399,631
PPP Loan Payable 307,300
Total Tangible Liabilities Assumed 1,290,021
Net Tangible Assets Acquired 499,372
Excess Purchase Price $ 5,649,971

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The excess purchase price amounts are provisional and may be adjusted during the one-year measurement period as required by U.S. GAAP. The following table provides a summary of the allocation of the excess purchase price.

Customer Relationships $ 1,870,000
Trade Names 235,000
Assembled Workforce 287,000
Goodwill 3,257,971
Excess Purchase Price $ 5,649,971

The intangible assets acquired include the trade names, customer relationships, assembled workforce, and goodwill. The deferred tax liability represents the tax effected timing differences relating to the acquired intangible assets to the extent they are not offset by acquired deferred tax assets.

The goodwill represents the assembled workforce, acquired capabilities, and future economic benefits resulting from the acquisition. No portion of the goodwill is deductible for tax purposes.

The following presents the unaudited pro-forma combined results of operations of the Company with Flagship Solutions as if the entities were combined on January 1, 2021.

Three Months Ended
March 31, 2021
Revenues $ 6,485,772
Net income attributable to common shareholders $ (76,867 )
Net loss per share $ (0.02 )
Weighted average number of shares outstanding 4,857,291

Note 11 - Subsequent Events

Management did not identify any subsequent events.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto for the year ended December 31, 2021, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed on March 31, 2022 (the "Annual Report") with the U.S. Securities and Exchange Commission (the "SEC"). This Quarterly Report on Form 10-Q contains forward looking statements, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth; and (iii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.

In some cases, you can identify forward-looking statements by terminology such as 'may,' 'will,' 'should,' 'could,' 'expects,' 'plans,' 'intends,' 'anticipates,' 'believes,' 'estimates,' 'predicts,' 'potential,' or 'continue' or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We are under no duty to update any of the forward-looking statements after the date of this report.

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The Industry Overview

Hybrid and Multi-Cloud have become mainstream technological offerings of the Cloud Managed Services industry as companies have moved away from legacy, on-premise technology solutions. This approach is growing more complex, as companies utilize disparate technical environments, including on-premises equipment and software, multi-clouds interfacing with Software as a Service providers, Cloud Managed Service Providers assist businesses in achieving their desired security levels, technical cloud infrastructure and financial objectives while optimizing the value of these technologies and cloud resources through multi-cloud management, ensuring business continuity, governance, and operational efficiencies.

This is a $500 billion-industry. One subset, of this $500 billion, is IBM Power cloud infrastructure and disaster recovery. Globally estimated at over one million virtual IBM Power servers. According to the most recent information received from IBM typical industries utilizing IBM Power servers are finance, retail, healthcare, government, and distribution organizations.

According to Fortune Business Insights, the Cloud Managed Services industry in North America was $16.3 billion in 2019 and has been growing at a rate of 13.8% CAGR bringing us to $24 billion by the end of 2022. Disaster Recovery is projected to be a $3.6 billion in the US by the end of 2022 which is 35% of the $10.3 billion globally based on Grandview Research Disaster Recovery Solutions Market Size report. Cyber Security, specifically the MDR segment, is an established market recognized by buyers. Gartner observed a 35% growth in end users' inquiries on the topic in the last year. Gartner estimates that by 2025, the MDR market will reach $2.15 billion in revenue, up from $1.03 billion in 2021, for a compound annual growth rate (CAGR) of 20.2%. The Company's VOIP solutions fit well into this steadily growing segment which is expected to reach $90 billion worldwide in 2022 with a CAGR of 3.1% with $17 billion in the US according to Globe Newswire Market Analysis and Insights: Global VoIP Market. Data and Analytics is another market that is growing rapidly and the Company is breaking into, according to Globe Newswire this market was valued at $198 billion in 2020 and with a projected 13.5% CAGR we see this hitting $263 billion by the end of 2022 and based on the Big Data Business Analytics market share report posted on statista.com the US has 51% of that growth.

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Company Overview

Data Storage Corporation, headquartered in Melville, New York, with three subsidiaries, DSC (CloudFirst), Flagship Solutions LLC and Nexxis, Inc., provides solutions and services to a broad range of clients in several industries, including healthcare, banking and finance, distribution services, manufacturing, construction, education, and government. The subsidiaries maintain business development teams, as well as independent distribution companies. As an example, the Company's distribution channel of companies provides long-term subscription-based disaster recovery and cloud infrastructure without investing in the infrastructure, data centers, telecommunications or specialized technical staff.

During 2021, based on the May capital raise and the up list to Nasdaq, the Company accelerated organic growth strategies by added distribution, business development representatives, marketing, and technical personnel. Management continues to be focused on building the Company's sales and marketing strategy and expanding its technology assets throughout its data center network.

DSC is a leader in providing IBM Power cloud infrastructure, disaster recovery and the creation of unique offering.

The opportunity, for the Company, in the IBM Power server portfolio segment is to capture a share of this annual recurring revenue marketplace that is currently under migration to cloud infrastructure.

The Company believes businesses are increasingly under pressure to improve the proficiency of their information and storage systems accelerating the migration from self-managed technical equipment and solutions to fully managed multi-cloud technologies to reduce cost and compete effectively. These trends create an opportunity for cloud technology service providers.

DSC's market opportunity is derived from the demand for fully managed cloud and cybersecurity services across all major operating systems.

The Company's addressable market is estimated at $48 billion in annual recurring revenuein the United States and Canada.

The Company has designed and built its solutions and services to support the demanding IBM Power System workload, manage hybrid cloud deployments and continue to provide solutions that keep data and workloads protected from disasters and security attacks.

The Company's business offices are located in New York and Florida. The offices include a technology center and lab, adapted to meet the technical requirements of the Company's clients. The Company maintains its own infrastructure, storage, and networking equipment required to provide subscription solutions in seven geographically diverse data centers located in New York, Massachusetts, Texas, Florida and North Carolina, and in Canada, Toronto, and Barrie, serving clients in the United States and Canada.

The Company's disaster recovery and business continuity solutions allow clients to quickly recover from system outages, human and natural disasters, and cyber security attacks, such as Ransomware. The Company's managed cloud services begin with migration to the cloud and provide ongoing system support and management that enables its clients to run their software applications and technical workloads in a multi-cloud environment. The Company's cyber security offerings include comprehensive consultation and a suite of data security, disaster recovery, and remote monitoring services and technologies that is incorporated into the Company's cloud solutions or be delivered as a standalone managed security offering covering the client site endpoint devices, users, servers, and equipment.

Solution architects and the Company's business development teams work with organizations identifying and solving critical business problems. The Company carefully plans and manages the migration and configuration process, continuing the relationship and advising its clients long after the services have been implemented. Reflecting on client satisfaction, the Company's renewal rate on client subscription solutions is approximately 94% after their initial contract term expired.

The Company provides its clients subscription-based, long-term agreements for cloud disaster recovery, cloud infrastructure, data analytics, cyber security,telecommunications solutions, and high processing on-site computing power and software solutions. While a significant portion of the Company's revenue has been subscription-based, it also generates revenue from the sale of equipment and software for cybersecurity, data storage, IBM Power systems equipment and managed service solutions.

The company entered into 2022 with a baseline annual recurring revenue of over $12 million.

The Company's Core Services: The Company provides an array of multi-cloud information technology solutions in highly secure, enterprise-level cloud services for companies using IBM Power Systems, Microsoft Windows, and Linux. Specifically, the Company's support services cover:

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Cyber Security Solutions:

● ezSecurity™ offers a suite of comprehensive cyber security solutions that can be utilized on systems at the client's location or on systems hosted in the Company. These solutions include fully managed endpoint (PCs and other user devices) security with active threat mitigation, system security assessments, risk analysis, and applications to ensure continuous security. ezSecurity™ contains a specialized offering for protecting and auditing IBM systems including a package designed to protect IBM systems against Ransomware attacks.

Data Protection and Recovery Solutions:

● ezVault™ solution is at the core of the Company's data protection services and allows its clients to have their data protected and stored offsite with unlimited data retention in a secure location that uses encrypted, enterprise-grade storage which allows for remote recovery from system outages, human and natural disasters, and cyber security attacks like Ransomware and viruses allowing restoration of data from a known good point in time prior to an attack.
● ezRecovery™ provides standby systems, networking, and storage in the Company's cloud infrastructure that allows for faster recovery from client backups stored using ezVault™ at the same cloud based hosted location.
● ezAvailability™ solution offers reliable real-time data replication for mission-critical applications with Recovery Time Objective under fifteen minutes and near-zero Recovery Point Objective, with optional, fully managed replication services. The Company's ezAvailability™ service consists of a full-time enterprise system, storage, and network resources, allowing quick and easily switched production workloads to the Company's cloud when needed. The Company's ezAvailability™ services are backed by a Service-Level Agreement ("SLA") to help assure performance, availability, and access.
● ezMirror™ solution provides replication services that mirror the clients' data at the storage level and allows for similar near-zero Recovery Point Objective as ezAvailability with less application management and Recovery Time Objective under 1 hour.

Cloud Hosted Production Systems:ezHost™ solution provides managed cloud services that removes the burden off system management from its clients and ensures that their software applications and IT workloads are running smoothly. ezHost™ provides full-time, scalable compute, storage, and network infrastructure resources to run clients' workloads on the Company's enterprise-class infrastructure. ezHost™ replaces the cost of support, maintenance, system administration, space, electrical power, and cooling of the typical hardware on-premises systems with a predictable monthly expense. The Company's ezHost services are backed by an SLA governing performance, availability, and access.

Voice & Data Solutions: Nexxis, our voice and data division, specializes in fully-managed VoIP, Internet Access, and Data Transport solutions that satisfy the requirements of corporate and remote workforce. Services are delivered over fiber optic, coaxial, and wireless networks to assist businesses fully connected from any location. Nexxis provides dedicated internet access with speeds of up to 10 Gbps, FailSAFE, a cloud-first SD-WAN solution, that delivers industry-leading connectivity to cloud services, cloud-based Hosted VoIP and Unified Communications that provide business continuity and integration with Microsoft Teams.

Data Analytics: The Company's trademarked Infralytics™ offering was developed to empower IT organizations to respond quickly and intelligently to business-impact issues as they arise. With Infralytics custom dashboards, a client can monitor physical servers, virtual machines, network devices, applications, and services across multiple platforms - whether on-premises, virtual, or in the Cloud. It also allows the Company's clients to gain enhanced visibility and control over their physical, virtual, and cloud IT infrastructure via customized, interactive dashboards. In addition, utilizing IBM's Watson the Company is taking disparate data sources and developing algorithms to provide greater insight into the aggregation of that data. All of this is provided as a service with the primary deliverable a real-time dashboard.

RESULTS OF OPERATIONS

Three months ended March 31, 2022, as compared to March 31, 2021

Total Revenue. For the three months ended March 31, 2022, total revenue was $8,657,199 an increase of $6,082,508 or 236% compared to $2,574,691 for the three months ended March 31, 2021. The increase is primarily attributed to the additional sales from the Flagship merger and an increase in monthly subscription revenue.

Revenue For the Three Months
Ended March 31,
2022 2021 $ Change % Change
Infrastructure & Disaster Recovery/Cloud Service $ 1,925,850 $ 1,660,348 $ 265,502 16 %
Equipment and Software 5,319,459 464,883 4,854,576 1,044 %
Managed Services 1,182,810 226,767 956,043 422 %
Nexxis VoIP Services 194,934 195,326 (392 ) - %
Other 34,146 27,367 6,779 25 %
Total Revenue $ 8,657,199 $ 2,574,691 $ 6,082,508 236 %

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Cost of Sales. For the three months ended March 31, 2022, cost of sales was $6,011,289, an increase of $4,590,390 or 323% compared to $1,420,899 for the three months ended March 31, 2021. The increase of $4,590,390 was mostly related to the Flagship merger and the variable nature of costs incurred to produce and sell our products or services.

Selling, general and administrative expenses. For the three months ended March 31, 2022, selling, general and administrative expenses were $2,459,866, an increase of $1,341,459, or 120%, as compared to $1,118,407 for the three months ended March 31, 2021. The net increase is reflected in the chart below.

Selling, general and administrative expenses For the Three Months
Ended March 31,
2022 2021 $ Change % Change
Increase in Salaries $ 1,471,735 $ 503,672 $ 968,063 192 %
Increase in Professional Fees 188,627 135,278 53,349 39 %
Increase in Software as a Service Expense 70,058 52,143 17,915 34 %
Increase in Advertising Expenses 90,873 95,776 (4,903 ) (5 )%
Increase in Commissions Expense 345,264 213,254 132,010 62 %
Increase in all other Expenses 293,309 118,284 175,025 148 %
Total Expenses $ 2,459,866 $ 1,118,407 $ 1,341,459 120 %

Salaries. Salaries increased as a result of the increased staff due to the Flagship merger and the hiring of our Chief Financial Officer.

Professional fees. Professional fees increased primarily due to new investor relations firms, and an increase in fees associated with being on NASDAQ.

Software as a Service Expense (SaaS). SaaS increased due to additional costs paid to existing vendors to improve to our customer relationship management software and sales quoting process.

Commissions Expense. Commissions expenses increased due to the Flagship merger and the sales associated with Flagship.

All Other Expenses. Other expenses increased primarily due to the Flagship merger.

Other Expense. Other expenses for the three months ended March 31, 2022 increased $7,615 to $42,660 from $35,045 for the three months ended March 31, 2021. The increase in other income is primarily attributable to the increase interest expense for the three months ended March 31, 2022.

Net Income before provision for income taxes. Net income before provision for income taxes for the three months ended March 31, 2022 was $156,010, as compared to a net income of $340 for the three months ended March 31, 2021.

LIQUIDITY AND CAPITAL RESOURCES

The consolidated financial statements have been prepared using generally accepted accounting principles in the United States of America ("GAAP") applicable for a going concern, which assumes that DSC will realize its assets and discharge its liabilities in the ordinary course of business.

To the extent we are successful in growing our business, identifying potential acquisition targets and negotiating the terms of such acquisition, and the purchase price includes a cash component, we plan to use our working capital and the proceeds of any financing to finance such acquisition costs.

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Our opinion concerning our liquidity is based on current information. If this information proves to be inaccurate, or if circumstances change, we may not be able to meet our liquidity needs, which will require a renegotiation of related party capital equipment leases, a reduction in advertising and marketing programs, renegotiation of our arrangement with Nexxis and/or a reduction in salaries for officers that are major shareholders.

We have long-term contracts to supply our subscription-based solutions that are invoiced to clients monthly. We believe the total contract value of our subscription contracts with clients based on the actual contracts that we have to date, exceeds $10 million. Further, we continue to see an uptick in client interest distribution channel expansion and in sales proposals. In 2021, we intend to continue to work to increase our presence in the IBM "Power I" infrastructure cloud and business continuity marketplace in the niche of IBM "Power "and in the disaster recovery global marketplace utilizing our technical expertise, data centers utilization, assets deployed in the data centers, 24 x 365 monitoring and software.

During the three months ended March 31, 2022, DSC's cash increased by $1,284,904 to $13,420,707 from $12,135,803 on December 31, 2021. Net cash of $1,643,823 was provided by DSC's operating activities resulting primarily from the changes in assets and liabilities. Net cash of $25,946 was used in investing activities from the purchase of equipment. Net cash of $332,973 was used by financing activities resulting primarily from payments on capital lease obligations. This was offset by the cash received for the exercised options.

DSC's working capital was $12,240,508 on March 31, 2022, increasing by $155,693 from $12,084,815 at December 31, 2021. The increase is primarily attributable to an increase in cash, accounts receivable, prepaids, other current assets, and a decrease in deferred revenue. This was offset by an increase in accounts payable and leases payable.

Off-Balance Sheet Arrangements

DSC does not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "special purpose entities".

Non-GAAP Financial Measures

Adjusted EBITDA

To supplement our consolidated financial statements presented in accordance with GAAP and to provide investors with additional information regarding our financial results, we consider and are including herein Adjusted EBITDA, a Non-GAAP financial measure. We view Adjusted EBITDA as an operating performance measure and, as such, we believe that the GAAP financial measure most directly comparable to it is net income (loss). We define Adjusted EBITDA as net income adjusted for interest and financing fees, depreciation, amortization, stock-based compensation, and other non-cash income and expenses. We believe that Adjusted EBITDA provides us an important measure of operating performance because it allows management, investors, debtholders and others to evaluate and compare ongoing operating results from period to period by removing the impact of our asset base, any asset disposals or impairments, stock-based compensation and other non-cash income and expense items associated with our reliance on issuing equity-linked debt securities to fund our working capital.

Our use of Adjusted EBITDA has limitations as an analytical tool, and this measure should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP, as the excluded items may have significant effects on our operating results and financial condition. Additionally, our measure of Adjusted EBITDA may differ from other companies' measure of Adjusted EBITDA. When evaluating our performance, Adjusted EBITDA should be considered with other financial performance measures, including various cash flow metrics, net income and other GAAP results. In the future, we may disclose different non-GAAP financial measures in order to help our investors and others more meaningfully evaluate and compare our future results of operations to our previously reported results of operations.

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The following table shows our reconciliation of net income to adjusted EBITDA for the three months ended March 31, 2022 and 2021, respectively:

For the Three Months Ended
March 31, March 31,
2022 2021
Net income $ 143,384 340
Non-GAAP adjustments:
Depreciation and amortization 351,338 267,189
Flagship acquisition costs 605 -
Interest income and expense 62,882 35,045
Stock based compensation 66,505 42,171
Adjusted EBITDA $ 604,492 344,745

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company this item is not required.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this Report, under the supervision and with the participation of DSC's management, including its principal executive officer, DSC conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation, management has determined that, there were no material weaknesses in our internal control over financial reporting and, management has concluded that, as of March 31, 2022, the Company maintained effective internal control over financial reporting.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Changes in Internal Control Over Financial Reporting.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting DSC, its common stock, any of its subsidiaries or of DSC's or DSC's subsidiaries' officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

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Item 1A. Risk Factors.

Our business, financial condition, results of operations, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our most recent Annual Report on Form 10-K for the year ended December 31, 2021, the occurrence of any one of which could have a material adverse effect on our actual results.

There have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

There were no unregistered sales of the Company's equity securities during the period ended March 31, 2022 that were not previously reported in a Current Report on Form 8-K.

Item 3. Defaults Upon Senior Securities.

There were no defaults upon senior securities during the period ended March 31, 2022.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information.

There is no other information required to be disclosed under this item that was not previously disclosed.

Item 6. Exhibits.

Exhibit No. Description
31.1* Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
31.2* Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
32.1* Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instant Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATA STORAGE CORPORATION
Date: May 16, 2022
By: /s/ Charles M. Piluso
Charles M. Piluso
Chief Executive Officer
(Principal Executive Officer)
Date: May 16, 2022
By: /s/ Chris Panagiotakos
Chris H. Panagiotakos
Chief Financial Officer
(Principal Financial Officer)

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