|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
|
COMPANY
OVERVIEW
Data Storage Corporation (“DSC”
or the “Company”) focuses on business continuity solutions, cloud and compliance. DSC provides a Hybrid Cloud, Infrastructure
as a Service, Disaster Recovery as a Service and Email Archival and Compliance Solutions. Our mission: Protecting our client’s
data, ensuring business continuity, assisting in their compliance requirements and providing better control over their digital
information. The Company’s October 2016 acquisition of the assets of ABC Services, Inc. and ABC Services II, Inc. (collectively,
“ABC”), and the remaining 50% of Secure Infrastructure and Services LLC supports the Companys acquisition strategy.
These acquisitions accelerated our strategy into managed services, expanded cyber security solutions and our hybrid cloud solutions
with the ability to provide equipment and expanded technical support.
The
Company sells its services through direct sales and distributors. DSC owns intellectual property with our proprietary email
archival and data analytics software, Message Logic. We provide Recovery Cloud solutions and Infrastructure as a Service. Our
distributors, typically Managed Service Providers, have a lower barrier of entry to provide these solutions to their client base.
DSC
is a 17-year veteran in cloud storage and cloud computing providing data protection, disaster recovery, business continuity and
compliance solutions that assist organizations in protecting their data, minimizing downtime while ensuring regulatory compliance.
Serving the business continuity market, DSC’s clients save time and money, gain more control and better access to data and
enable a high level of security for their data. Solutions include: Infrastructure as a Service; data backup recovery and restore,
high availability data replication; email archival and compliance; and eDiscovery; continuous data protection; data de-duplication;
and, virtualized system recovery.
DSC
has forged significant relationships with leading organizations creating valuable partnerships.
Headquartered
in Melville, NY, and Warwick, RI, 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 the sale and subscription of services and solutions, managed services and equipment and sales provisioning.
DSC has infrastructure and storage equipment in several technical centers in New York State and Massachusetts.
DSC
services clients from its staffed technical offices in New York and Rhode Island, which consist of modern offices and a technology
suite adapted to meet the needs of a technology-based business. DSC’s mission is to provide a high level of service to our
clients.
DSC
varies its use of resource, technology and work processes to meet the changing opportunities and challenges presented by the market
and the internal customer requirements.
RESULTS
OF OPERATIONS
Year
ended December 31, 2017 as compared to December 31, 2016
Net
Sales.
Net sales for the year ended December 31, 2017 were $8,256,918 an increase of $3,871,988 or 88.3%, compared to $4,384,930
for the year ended December 31, 2016. The increase is attributable to the acquisition of ABC 1 and ABC 2 and the increase in equipment
and software sales.
Cost
of Sales.
For the year ended December 31, 2017, cost of sales was $4,910,331 an increase of $1,806,317 from $3,104,014 for
the year ended December 31, 2016. The increase in cost of sales is a result of an increase in infrastructure services The Company’s
gross margin is 40% for the year ended December 31, 2017 as compared to 29% for the year ended December 31, 2016.
Operating
Expenses.
For the year ended December 31, 2017, operating expenses were $3,431,344 an increase of $1,517,533 as compared to
$1,913,811 for the year ended December 31, 2016. The net increase is a result an increase in staffing salaries and consulting
expenses. Technical/Management salaries increased to $365,076 to $438,826 the year ended December 31, 2017 as compared to $73,750
for the year ended December 31, 2016. Officer’s Salaries increased $278,248 to $535,150 for the year ended December 31,
2017 as compared to $256,901 for the year ended December 31, 2016 as a result of the prior year’s acquisition of ABC 1 and
ABC 2 and the remaining 50% of Secure Infrastructure and Services. Consulting fees increased $178,370 to $211,122 for the year
ended December 31, 2017 as compared to $32,752 for the year ended December 31, 2016. This was a result of adding IBM hosting and
investor relations consulting.
Other
Income (Expense)
Interest income for year ended December 31, 2017 and 2016 was $34 and $2 an increase of $32. Interest expense
for the year ended December 31, 2017 decreased $121,371 to $106,906 from $228,277 as compared to the year ended December 31, 2016.
Net
Profit (Loss).
Net Loss for the year ended December 31, 2017 was ($188,493) a decrease of $737,230 as compared to net loss
of $(925,723) for the year ended December 31, 2016. DSC’s profit was primarily a result of an increase in sales.
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. In 2018, we intend to continue to work to increase our presence in the cloud and business
continuity marketplace specializing in IBM Power i utilizing our technical expertise, software and our capacity in our data centers.
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. 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.
During
the year ended December 31, 2017, DSC’s cash decreased $150,678 to $105,139 from $255,817 at December 31, 2016. Net cash of $478,679
was provided by DSC’s operating activities. Net cash of ($696,357) was used in financing activities. This result is an increase
in account receivable collections offset by $578,945 in capital lease and debt payments.
DSC’s
working capital deficit was $2,951,388 at December 31, 2017, increasing $495,412 from $2,491,976 at December 31, 2016. The increase
is primarily attributable to a reduction of accounts receivable of $401,122 and cash of $150,678.
Share
Based Compensation
DSC
follows the requirements of FASB ASC 718-10-10,
Share Based Payments
with regards to stock-based compensation issued to
employees. DSC has agreements and arrangements that call for stock to be awarded to the employees and consultants at various times
as compensation and periodic bonuses. The expense for this stock based compensation is equal to the fair value of the stock price
on the day the stock was awarded multiplied by the number of shares awarded.
The
valuation methodology used to determine the fair value of the options issued during the year was the Black-Scholes option-pricing
model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average
risk- free interest rate, and the weighted average expected life of the options. 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 warrants
and is calculated by using the average daily historical stock prices through the day preceding the grant date.
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 estimated volatility is an average of the historical volatility of peer entities whose stock prices
were publicly available. DSC’s calculation of estimated volatility is based on historical stock prices of these peer entities
over a period equal to the expected life of the awards. DSC uses the historical volatility of peer entities due to the lack of
sufficient historical data of its stock price.
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” (“SPE” s).
CRITICAL
ACCOUNTING POLICIES
DSC’s
financial statements and related public financial information are based on the application of GAAP. GAAP requires the use of estimates;
assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities,
revenue, and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures
including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting
assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation
of our financial statements.
Our
significant accounting policies are summarized in Note 2 of our financial statements. While all these significant accounting policies
impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to
be critical are those policies that have the most significant impact on our financial statements and require management to use
a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given
current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause
effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
RECENTLY
ISSUED AND NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09,
“Revenue from Contracts with Customers”
(“ASU 2014-09”), which supersedes nearly all
existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised
goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled
for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment
and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In addition,
this guidance requires new or expanded disclosures related to the judgments made by companies when following this framework and
additional quantitative disclosures regarding contract balances and remaining performance obligations. ASU No. 2014-09 may be
applied using either a full retrospective approach, under which all years included in the financial statements will be presented
under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the
revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulative
catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance
by the entity.
ASU
No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those
annual reporting periods. The Company developed an implementation plan to adopt this new guidance, which included an assessment
of the impact of the new guidance on our financial position and results of operations. The Company has substantially completed
its assessment and has determined that this standard will have no impact on its financial position or results of operations, except
enhanced disclosure regarding revenue recognition, including disclosures of revenue streams, performance obligations, variable
consideration and the related judgments and estimates necessary to apply the new standard. On January 1, 2018, the Company adopted
the new accounting standard ASC 606,
Revenue from Contracts with Customers
and for all open contracts and related amendments
as of January 1, 2018 using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 will
be presented under ASC 606, while the comparative information will not be restated and will continue to be reported under the
accounting standards in effect for those periods.
During
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments — Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities
, (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. This ASU is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain provisions related to
the presentation of other comprehensive income.
In
February 2016, the FASB issued ASU 2016-02,
Leases,
(“ASC 842”), which supersedes FASB ASC 840,
Leases
and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors.
The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on
the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine
whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.
A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve
months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance
for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption
permitted upon issuance. The Company is currently evaluating the method of adoption and the impact of adopting ASU 2016-02 on
its results of operations, cash flows and financial position.
In
August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
(“ASC 230”)
: Classification of Certain
Cash Receipts and Cash Payments,
(“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts
and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning
after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply,
in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently
in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
In
October 2016, the FASB issued ASU 2016-16,
Income Taxes
(“ASC 740”)
: Intra-Entity Transfers of Assets Other
than Inventory
, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for
intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance
is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early
adoption of the update is permitted. The Company is currently in the process of evaluating the impact of ASU 2016-16 on its consolidated
financial statements.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows
(“ASC 230”), requiring that the statement
of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December
15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which
requires application of the guidance for all periods presented. The Company is currently in the process of evaluating the impact
of ASU 2016-18 on its consolidated financial statements.
In
January 2017, the FASB issued ASU No 2017-04
Intangibles-Goodwill and Other
(“ASC 350”):
Simplifying the
Accounting for Goodwill Impairment
(“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill
by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity
had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including
unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired
and liabilities assumed in a business combination. Instead, under ASU 2017-04, an entity should perform its annual or interim
goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize
an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider
income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment
loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests for fiscal years beginning after
December 15, 2019 and an entity should apply the amendments of ASU 2017-04 on a prospective basis. Early adoption is permitted
for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating
the effects of ASU 2017-04 on its audited consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share
(“ASC 260”)
, Distinguishing Liabilities from
Equity
(“ASC 480”)
, and Derivatives and Hedging
(“ASC 815”). ASU No. 2017-11 is intended to
simplify the accounting for financial instruments with characteristics of liabilities and equity. Among the issues addressed are:
(i) determining whether an instrument (or embedded feature) is indexed to an entity’s own stock; (ii) distinguishing liabilities
from equity for mandatorily redeemable financial instruments of certain nonpublic entities; and (iii) identifying mandatorily
redeemable non-controlling interests. ASU No. 2017-11 is effective for the Company on January 1, 2019. The Company is currently
evaluating the potential impact of ASU No. 2017-11 on the Company’s consolidated financial statements.
OFF-BALANCE
SHEET TRANSACTIONS
DSC
has no off-balance sheet arrangements.
|
ITEM 8.
|
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and
Stockholders of
Data Storage Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Data Storage Corporation (the Company) as of December 31, 2017 and 2016, and the related consolidated statements
of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2017,
and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and
the results of its operations and its cash flows for each of the two years in period ended December 31, 2017, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion of the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the Financial Statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Rosenberg Rich Baker Berman, P.A.
We have served as the Company’s auditor
since 2008
Somerset, New Jersey
April 17, 2018
DATA STORAGE CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
105,139
|
|
|
$
|
255,817
|
|
Accounts receivable (less allowance for doubtful accounts of $90,000 in 2017 and $90,000 in 2016)
|
|
|
406,393
|
|
|
|
807,515
|
|
Prepaid expenses and other current assets
|
|
|
120,217
|
|
|
|
231,432
|
|
Total Current Assets
|
|
|
631,749
|
|
|
|
1,294,764
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
5,237,965
|
|
|
|
3,401,251
|
|
Less—Accumulated depreciation
|
|
|
(3,614,177
|
)
|
|
|
(3,222,591
|
)
|
Net Property and Equipment
|
|
|
1,623,788
|
|
|
|
178,660
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,015,700
|
|
|
|
3,015,700
|
|
Employee loans
|
|
|
3,000
|
|
|
|
—
|
|
Other assets
|
|
|
75,356
|
|
|
|
54,504
|
|
Intangible assets, net
|
|
|
1,044,046
|
|
|
|
1,266909
|
|
Total Other Assets
|
|
|
4,138,102
|
|
|
|
4,337,113
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
6,393,639
|
|
|
|
5,810,537
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
1,087,351
|
|
|
|
1,219,247
|
|
Revolving credit facility
|
|
|
—
|
|
|
|
50,412
|
|
Accounts payable from acquisition
|
|
|
—
|
|
|
|
374,762
|
|
Dividend payable
|
|
|
733,673
|
|
|
|
619,138
|
|
Deferred revenue
|
|
|
566,731
|
|
|
|
919,103
|
|
Capital leases payable related party
|
|
|
658,476
|
|
|
|
254,078
|
|
Notes payable related party
|
|
|
186,906
|
|
|
|
—
|
|
Note payable – Enterprise Bank
|
|
|
350,000
|
|
|
|
350,000
|
|
Total Current Liabilities
|
|
|
3,583,137
|
|
|
|
3,786,740
|
|
|
|
|
|
|
|
|
|
|
Deferred rental obligation
|
|
|
1,061
|
|
|
|
1,904
|
|
Convertible debt related parties
|
|
|
—
|
|
|
|
—
|
|
Notes payable related party
|
|
|
99,915
|
|
|
|
190,000
|
|
Capital leases payable related party, long-term
|
|
|
1,130,764
|
|
|
|
133,825
|
|
Total Long-Term Liabilities
|
|
|
1,231,740
|
|
|
|
325,729
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
4,814,877
|
|
|
|
4,112,469
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity (Deficit):
|
|
|
|
|
|
|
|
|
Preferred stock, Series A par value $.001; 10,000,000 shares authorized; 1,401,786 shares issued and outstanding in each period
|
|
|
1,402
|
|
|
|
1,402
|
|
Common stock, par value $0.001; 250,000,000 shares authorized; 128,139,418 and 128,039,418 shares issued and outstanding in 2017 and 2016, respectively
|
|
|
128,139
|
|
|
|
128,039
|
|
Additional paid in capital
|
|
|
17,377,986
|
|
|
|
17,194,383
|
|
Accumulated deficit
|
|
|
(15,924,376
|
)
|
|
|
(15,625,756
|
)
|
Total Data Storage Corp Stockholders’ Equity(Deficit)
|
|
|
1,583,151
|
|
|
|
1,698,068
|
|
Non-controlling interest in consolidated subsidiary
|
|
|
(4,389
|
)
|
|
|
—
|
|
Total Stockholder’s Equity(Deficit)
|
|
|
1,578,762
|
|
|
|
1,698,068
|
|
Total Liabilities and Stockholders’ Equity(Deficit)
|
|
$
|
6,393,639
|
|
|
$
|
5,810,537
|
|
The accompanying notes are an integral part
of these consolidated Financial Statements.
DATA STORAGE CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Sales
|
|
$
|
8,256,918
|
|
|
$
|
4,384,930
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
4,910,331
|
|
|
|
3,104,014
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
3,346,587
|
|
|
|
1,280,916
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative
|
|
|
3,431,344
|
|
|
|
1,913,811
|
|
|
|
|
|
|
|
|
|
|
Income Loss from Operations
|
|
|
(84,757
|
)
|
|
|
(632,895
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
34
|
|
|
|
2
|
|
Other income
|
|
|
3,136
|
|
|
|
1,876
|
|
Loss on sale and abandoned equipment
|
|
|
—
|
|
|
|
—
|
|
Net gain on equity method investment
|
|
|
—
|
|
|
|
17,863
|
|
Loan impairment
|
|
|
—
|
|
|
|
(85,800
|
)
|
Bad debt recovery
|
|
|
—
|
|
|
|
1,508
|
|
Interest expense
|
|
|
(106,906
|
)
|
|
|
(228,277
|
)
|
Total Other (Expense)
|
|
|
(103,736
|
)
|
|
|
(292,828
|
)
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
|
(188,493
|
)
|
|
|
(925,723
|
)
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(188,493
|
)
|
|
|
(925,723
|
)
|
Net Loss attributable to non-controlling interest
|
|
|
4,409
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net Loss attributable to Data Storage Corp
|
|
|
(184,084
|
)
|
|
|
(925,723
|
)
|
|
|
|
|
|
|
|
|
|
Preferred Stock Dividend
|
|
|
(114,536
|
)
|
|
|
(106,065
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Available to Common Shareholders
|
|
$
|
(298,620
|
)
|
|
$
|
(1,031,788
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per Share – Basic and Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Shares - Basic and Diluted
|
|
|
128,092,569
|
|
|
|
53,375,169
|
|
The accompanying notes are an integral part
of these consolidated Financial Statements.
DATA STORAGE CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(188,493
|
)
|
|
$
|
(925,723
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
614,449
|
|
|
|
221,622
|
|
Net gain on equity method investment
|
|
|
—
|
|
|
|
(17,863
|
)
|
Bad debt
|
|
|
—
|
|
|
|
22,157
|
|
Impairment of employee loans
|
|
|
—
|
|
|
|
85,800
|
|
Stock-based compensation
|
|
|
183,703
|
|
|
|
48,560
|
|
Changes in Assets and Liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
401,122
|
|
|
|
(254,934
|
)
|
Other assets
|
|
|
(20,832
|
)
|
|
|
22,430
|
|
Prepaid expenses and other current assets
|
|
|
111,215
|
|
|
|
12
|
|
Employee loan
|
|
|
(3,000
|
)
|
|
|
—
|
|
Accounts payable and accrued expenses
|
|
|
(266,270
|
)
|
|
|
701,747
|
|
Deferred revenue
|
|
|
(352,372
|
)
|
|
|
152,683
|
|
Deferred rent
|
|
|
(843
|
)
|
|
|
653
|
|
Net Cash Provided by Operating Activities
|
|
|
478,679
|
|
|
|
57,144
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Cash acquired in acquisition
|
|
|
—
|
|
|
|
241,583
|
|
Net Cash Provided by Investing Activities
|
|
|
—
|
|
|
|
241,583
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Repayments of capital lease obligations
|
|
|
(428,559
|
)
|
|
|
(200,663
|
)
|
Repayments of credit line
|
|
|
(50,412
|
)
|
|
|
(99,292
|
)
|
Proceeds from related party loans
|
|
|
—
|
|
|
|
190,000
|
|
Repayments of related party loans
|
|
|
(150,386
|
)
|
|
|
—
|
|
Net Cash Used in Financing Activities
|
|
|
(629,357
|
)
|
|
|
(109,955
|
)
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(150,678
|
)
|
|
|
188,772
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, Beginning of Year
|
|
|
255,817
|
|
|
|
67,045
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Year
|
|
$
|
105,139
|
|
|
$
|
255,817
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
106,906
|
|
|
$
|
228,276
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Acquisition of equipment under capital lease in connection with asset purchase agreement
|
|
$
|
—
|
|
|
$
|
25,292
|
|
Assets acquired by capital lease
|
|
$
|
1,836,714
|
|
|
$
|
—
|
|
Accrual of preferred stock dividend
|
|
$
|
114,536
|
|
|
$
|
106,065
|
|
Stock issued in connection with Asset Purchase Agreement
|
|
$
|
—
|
|
|
$
|
64,670
|
|
Stock issued in connection with convertible debt conversion
|
|
$
|
—
|
|
|
$
|
26,781
|
|
The accompanying
notes are an integral part of these consolidated Financial Statements.
DATA STORAGE CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIT)
|
|
|
|
|
|
|
|
Additional
Paid in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Non-
Controlling
Interest
|
|
|
Total
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
Description
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2016
|
|
|
1,401,786
|
|
|
$
|
1,402
|
|
|
|
36,588,240
|
|
|
$
|
36,588
|
|
|
$
|
12,805,332
|
|
|
$
|
(14,593,968
|
)
|
|
$
|
—
|
|
|
(1,750,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
48,560
|
|
|
|
—
|
|
|
|
—
|
|
|
48,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock Issued
|
|
|
|
|
|
|
|
|
|
|
64,669,936
|
|
|
|
64,670
|
|
|
|
1,699,282
|
|
|
|
—
|
|
|
|
—
|
|
|
1,763,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Convertible debt
|
|
|
|
|
|
|
|
|
|
|
26,781,241
|
|
|
|
26,781
|
|
|
|
2,641,209
|
|
|
|
—
|
|
|
|
—
|
|
|
2,667,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(925,723
|
)
|
|
|
—
|
|
|
(925,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(106,065
|
)
|
|
|
—
|
|
|
(106,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2016
|
|
|
1,401,786
|
|
|
$
|
1,402
|
|
|
|
128,039,418
|
|
|
$
|
128,039
|
|
|
$
|
17,194,384
|
|
|
$
|
(15,625,756
|
)
|
|
|
—
|
|
$
|
1,698,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
169,702
|
|
|
|
—
|
|
|
|
—
|
|
|
169,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock Issued
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
13,900
|
|
|
|
—
|
|
|
|
—
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(184,084
|
)
|
|
|
(4,409
|
)
|
|
(188,493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest stock issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(114,536
|
)
|
|
|
—
|
|
|
(114,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2017
|
|
|
1,401,786
|
|
|
$
|
1,402
|
|
|
|
128,139,418
|
|
|
$
|
128,139
|
|
|
$
|
17,377,986
|
|
|
$
|
(15,924,376
|
)
|
|
$
|
(4,389
|
)
|
$
|
1,578,762
|
|
The accompanying notes are an integral part
of these consolidated Financial Statements
DATA
STORAGE CORPORATION AND SUBSIDIARY
N
OTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2017 AND 2015
Note
1 - Basis of Presentation, Organization and Other Matters
Headquartered in Melville, NY, Data Storage
Corporation (“DSC” or the “Company”) offers its solutions and services to businesses within the healthcare,
banking and finance, distribution services, manufacturing, construction, education, and government sectors. The Company focuses
on business continuity solutions, cloud solutions and compliance services. DSC provides a Hybrid Cloud, Infrastructure as a Service,
Disaster Recovery as a Service and Email Archival and Compliance Solutions. Over 35% of our revenue is derived from equipment sales
for cyber security, storage and managed service solutions. Our mission: Protecting our client’s data, ensuring business continuity,
assisting in their compliance requirements and providing better control over their digital information.
DSC
maintains equipment for cloud storage and cloud computing in our data centers in New York State and Massachusetts DSC delivers
its solutions over highly reliable, redundant and secure fiber optic networks with separate and diverse routes to the Internet.
DSC’s network and geographical diversity is important to clients seeking storage hosting and disaster recovery solutions,
ensuring protection of data and continuity of business in the case of a network interruption.
Going
Concern Analysis
The
Company had a net loss available to common shareholders of $298,620 and $1,031,788 for the years ended December 31, 2017 and 2016, respectively.
As of December 31, 2017, we had cash of $105,139 and a working capital deficiency of $2,951,388. As a result, these conditions
raised substantial doubt regarding our ability to continue as a going concern. During the year ended December 31, 2017, the Company
generated cash from operations of $478,679. The continued revenue growth coupled with improved gross margins and control of expenses
leads management to conclude that it is probable that the Company’s cash resources will be sufficient to meet our cash requirements
through the first quarter of fiscal year ended December 31, 2019. If necessary, management also determined that it is possible
that related party sources of debt financing could be obtained based on management’s history of being able to raise and
refinance debt through related parties. As a result of both management’s plans and current favorable trends in improving
cash flow, the Company concluded that the initial conditions which raised substantial doubt regarding the ability to continue
as a going concern have been alleviated. Therefore, the accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern.
The
consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein.
While we believe in the viability of management’s strategy to generate sufficient revenue, control costs and the ability
to raise additional funds if necessary, there can be no assurances to that effect. The Company’s ability to continue as
a going concern is dependent upon the ability to further implement the business plan, generate sufficient revenues and to control
operating expenses.
Note
2 - Summary of Significant Accounting Policies
Stock Based Compensation
The
Company follows the requirements of FASB ASC 718-10-10,
Share-Based Payments
with regard to stock-based compensation issued
to employees. The Company has stock-based incentives for consultants and employees that over achieve. This plan is discretionary.
The expense for this stock-based compensation is equal to the fair value of the stock that was determined by using closing price
on the day the stock was awarded multiplied by the number of shares awarded. The Company records its options at fair value using
the Black-Scholes valuation model.
Recently
Issued and Newly Adopted Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09,
“Revenue from Contracts with Customers”
(“ASU 2014-09”), which supersedes nearly all
existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised
goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled
for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment
and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In addition,
this guidance requires new or expanded disclosures related to the judgments made by companies when following this framework and
additional quantitative disclosures regarding contract balances and remaining performance obligations. ASU No. 2014-09 may be
applied using either a full retrospective approach, under which all years included in the financial statements will be presented
under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the
revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulative
catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance
by the entity.
ASU
No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those
annual reporting periods. The Company developed an implementation plan to adopt this new guidance, which included an assessment
of the impact of the new guidance on our financial position and results of operations. The Company has substantially completed
its assessment and has determined that this standard will have no impact on its financial position or results of operations, except
enhanced disclosure regarding revenue recognition, including disclosures of revenue streams, performance obligations, variable
consideration and the related judgments and estimates necessary to apply the new standard. On January 1, 2018, the Company adopted
the new accounting standard ASC 606,
Revenue from Contracts with Customers
and for all open contracts and related amendments
as of January 1, 2018 using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 will
be presented under ASC 606, while the comparative information will not be restated and will continue to be reported under the
accounting standards in effect for those periods.
During
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments — Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities
, (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. This ASU is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain provisions related to
the presentation of other comprehensive income.
In
February 2016, the FASB issued ASU 2016-02,
Leases,
(“ASC 842”), which supersedes FASB ASC 840,
Leases
and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors.
The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on
the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine
whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.
A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve
months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance
for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption
permitted upon issuance. The Company is currently evaluating the method of adoption and the impact of adopting ASU 2016-02 on
its results of operations, cash flows and financial position.
In
August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
(“ASC 230”)
: Classification of Certain
Cash Receipts and Cash Payments,
(“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts
and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning
after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply,
in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently
in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
In
October 2016, the FASB issued ASU 2016-16,
Income Taxes
(“ASC 740”)
: Intra-Entity Transfers of Assets Other
than Inventory
, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for
intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance
is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early
adoption of the update is permitted. The Company is currently in the process of evaluating the impact of ASU 2016-16 on its consolidated
financial statements.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows
(“ASC 230”), requiring that the statement
of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December
15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which
requires application of the guidance for all periods presented. The Company is currently in the process of evaluating the impact
of ASU 2016-18 on its consolidated financial statements.
In
January 2017, the FASB issued ASU No 2017-04
Intangibles-Goodwill and Other
(“ASC 350”):
Simplifying the
Accounting for Goodwill Impairment
(“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill
by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity
had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including
unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired
and liabilities assumed in a business combination. Instead, under ASU 2017-04, an entity should perform its annual or interim
goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize
an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider
income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment
loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests for fiscal years beginning after
December 15, 2019 and an entity should apply the amendments of ASU 2017-04 on a prospective basis. Early adoption is permitted
for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating
the effects of ASU 2017-04 on its audited consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share
(“ASC 260”)
, Distinguishing Liabilities from
Equity
(“ASC 480”)
, and Derivatives and Hedging
(“ASC 815”). ASU No. 2017-11 is intended to
simplify the accounting for financial instruments with characteristics of liabilities and equity. Among the issues addressed are:
(i) determining whether an instrument (or embedded feature) is indexed to an entity’s own stock; (ii) distinguishing liabilities
from equity for mandatorily redeemable financial instruments of certain nonpublic entities; and (iii) identifying mandatorily
redeemable non-controlling interests. ASU No. 2017-11 is effective for the Company on January 1, 2019. The Company is currently
evaluating the potential impact of ASU No. 2017-11 on the Company’s consolidated financial statements.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company. All significant inter-company transactions and balances
have been eliminated in consolidation. Operations for the year ended December 31, 2016 include the operations of ABC Services,
Inc., ABC Services II, Inc. and Secure Infrastructure and Services, LLC from October 26, 2016 to December 31, 2016. Operations
for the year ended December 31, 2017 include these companies for the entire year as well as Nexxis Inc. from October 19, 2017 to December 31, 2017.
Business
combinations.
We
account for business combinations under the acquisition method of accounting, which requires us to recognize separately from goodwill
the assets acquired and the liabilities assumed at their acquisition date fair values. While we use our best estimates and assumptions
to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where
applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which
may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the
corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets
acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements
of operations.
Accounting
for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition
date including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition
contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made
in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from
the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible
assets we have acquired include future expected cash flows from product sales, customer contracts and acquired technologies, and
estimated cash flows from the projects when completed and discount rates. Unanticipated events and circumstances may occur that
may affect the accuracy or validity of such assumptions, estimates or actual results.
Reclassification
Certain
amounts reported in previous years have been reclassified to conform to the 2017 presentation.
Equity
Investments
Equity
investments in which the Company exercises significant influence but does not control and is not the primary beneficiary are accounted
for using the equity method. The Company’s share of its former method investee’s earnings or losses is included in
other income in the accompanying Consolidated Statements of Operations.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles 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, line of credit and due to related
parties. Management believes the estimated fair value of these accounts at December 31, 2017 approximate their carrying value
as reflected in the balance sheets 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,
Cash Equivalents and Short-Term Investments
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 performs ongoing credit evaluations of its customers and
maintains allowances for doubtful accounts on factors surrounding the credit risk of specific customers, historical trends, and
other information.
For the year ended December 31, 2016, DSC did not have any customer
concentrations. For the year ended December 31, 2017, DSC had one customer with an accounts receivable balance representing 11.2%
of total accounts receivable.
Accounts Receivable/Allowance for
Doubtful Accounts
The
Company sells its services to customers on an open credit basis. Accounts receivable are uncollateralized, non-interest-bearing
customer obligations. Accounts receivables are due within 30 days. The allowance for doubtful accounts reflects the estimated
accounts receivable that will not be collected due to credit losses and allowances. 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 is recorded at cost and depreciated over their estimated useful lives or the term of the lease using the straight-line method for financial statement purposes. Estimated useful lives in years for depreciation are 5 to 7 years for property and
equipment. Additions, betterments and replacements are capitalized, while expenditures for repairs and maintenance are charged
to operations when incurred. As units of property are sold or retired, the related cost and accumulated depreciation are removed
from the accounts, and any resulting gain or loss is recognized in income.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. At December 31, 2017 and 2016, the Company
had a full valuation allowance against its deferred tax assets.
In
December 2017, the 2017 Tax Cuts and Jobs Act (Tax Act) was enacted into law and the new legislation contains several key tax
provisions that affected us, including a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others.
We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition
tax, re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax
assets and liabilities.
Per
FASB ASC 740-10, disclosure is not required of an uncertain tax position unless it is considered probable that a claim will be
asserted and there is a more-likely-than-not possibility that the outcome will be unfavorable. Using this guidance, as of December
31, 2017, the Company has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
The Company’s 2016, 2015 and 2014 Federal and State tax returns remain subject to examination by their respective taxing authorities.
Neither of the Company’s Federal or State tax returns are currently under examination.
Goodwill
and Other Intangibles
In
accordance with GAAP, the Company tests goodwill and other intangible assets for impairment on at least an annual basis. Goodwill
impairment exists if the net book value of a reporting unit exceeds its estimated fair value. The impairment testing is performed
in two steps: (i) the Company determines impairment by comparing the fair value of a reporting unit with its carrying value, and
(ii) if there is impairment, the Company measures the amount of impairment loss by comparing the implied fair value of goodwill
with the carrying amount of that goodwill. To determine the fair value of these 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.
In
September 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment”, to allow entities to use a qualitative
approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded
that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step
goodwill impairment test is not required. The Company adopted ASU 2011-08 in fiscal 2013 and thus performed a qualitative assessment.
In
January 2017, FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other Simplifying the Accounting for Goodwill”
(ASU 2017-04”) requires goodwill impairment loss to be measured as the excess of a reporting unit’s carrying amount
over its fair value (not to exceed the total goodwill allocated to that reporting unit). The new guidance eliminates Step 2, which
an entity used to measure goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with
the carrying amount of that goodwill. “In computing the implied fair value of goodwill under Step 2, an entity had to perform
procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets
and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities
assumed in a business combination,” the ASU states. “Instead, under the amendments in this update, an entity should
perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.”
The
Company’s revenues consist principally of cloud storage and cloud computing revenues, SaaS and IaaS. Storage revenues consist
of monthly charges related to the storage of materials or data (generally on a per unit basis). Sales are generally recorded in
the month the service is provided. For customers who are billed on an annual basis, deferred revenue is recorded and amortized
over the life of the contract. Set up fees charged in connection with storage contracts are deferred and recognized on a straight-line
basis over the life of the contract.
Impairment
of Long-Lived Assets
In
accordance with FASB ASC 360-10-35, we review our long-lived assets for impairment whenever events and circumstances indicate
that the carrying value of an asset might not be recoverable. An impairment loss, measured as the amount by which the carrying
value exceeds the fair value, is recognized if the carrying amount exceeds estimated undiscounted future cash flows.
Advertising
Costs
The
Company expenses the costs associated with advertising as they are incurred. The Company incurred $189,922 and $84,423 for advertising
costs for the years ended December 31, 2017 and 2016, respectively.
Net
Income (Loss) Per Common Share
In
accordance with FASB ASC 260-10-5 Earnings Per Share, basic income (loss) per share is computed by dividing net income (loss)
by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed
by dividing net income (loss) adjusted for income or loss that would result from the assumed conversion of potential common shares
from contracts that may be settled in stock or cash by the weighted average number of shares of common stock, common stock equivalents
and potentially dilutive securities outstanding during each period. The inclusion of the potential common shares to be issued
would have an anti-dilutive effect on diluted loss per share and therefore they are not included in the calculation. Potentially
dilutive securities at December 31, 2017 include 5,052,148 options and 133,334 warrants.
Note
3 - Property and Equipment
Property
and equipment, at cost, consist of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Storage
equipment
|
|
$
|
2,100,931
|
|
|
$
|
2,100,931
|
|
Website and software
|
|
|
533,418
|
|
|
|
533,418
|
|
Furniture and fixtures
|
|
|
14,037
|
|
|
|
14,037
|
|
Leasehold improvements
|
|
|
11,719
|
|
|
|
—
|
|
Computer hardware
and software
|
|
|
1,194,120
|
|
|
|
86,184
|
|
Data
center equipment
|
|
|
2,491,675
|
|
|
|
666,680
|
|
|
|
|
5,237,965
|
|
|
|
3,401,251
|
|
Less:
Accumulated depreciation
|
|
|
3,614,177
|
|
|
|
3,222,591
|
|
Net
property and equipment
|
|
$
|
1,623,788
|
|
|
$
|
178,660
|
|
Depreciation
expense for the years ended December 31, 2017 and 2016 was $391,586 and $158,099, respectively.
Note
4 - Goodwill and Intangible Assets
Goodwill
and intangible assets consisted of the following:
|
|
|
|
|
December
31, 2017
|
|
|
|
Estimated
life
in years
|
|
|
Gross
amount
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
Indefinite
|
|
|
$
|
3,015,700
|
|
|
|
—
|
|
Intangible
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
not subject to amortization Trademarks
|
|
|
Indefinite
|
|
|
|
294,268
|
|
|
|
—
|
|
Intangible assets
subject to amortization Customer list
|
|
|
5
- 15
|
|
|
|
897,274
|
|
|
|
897,274
|
|
ABC Acquired
contracts
|
|
|
5
|
|
|
|
310,000
|
|
|
|
72,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIAS Acquired contracts
|
|
|
5
|
|
|
|
660,000
|
|
|
|
154,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
|
4
|
|
|
|
272,147
|
|
|
|
266,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible
Assets
|
|
|
|
|
|
|
2,433,689
|
|
|
|
1,389,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill
and Intangible Assets
|
|
|
|
|
|
$
|
5,449,389
|
|
|
$
|
1,389,643
|
|
Scheduled amortization over
the next five years as follows:
Years
ending December 31,
|
|
|
|
|
2018
|
|
|
|
197,333
|
|
2019
|
|
|
|
196,778
|
|
2020
|
|
|
|
194,000
|
|
2021
|
|
|
|
161,667
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
749,778
|
|
Amortization
expense for the years ended December 31, 2017 and 2016 were $222,863 and $63,524 respectively.
Fair values are primarily determined through
the use of inputs that are not observable from market-based information. Under ASC 805-10-25-13, management may adjust the fair
values of acquired assets or assumed liabilities for a period of up to one year from the date of the acquisition to reflect new
information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have an effect
on the measurement of the amounts recognized as of that date. During the fourth quarter of 2017 and within the measurement period,
the Company made a net adjustment of $937,667 to the intangibles acquired from in the ABC acquisition which reduced the
previous goodwill recorded from the transaction by $970,000 in 2016. The Company also recorded $32,333 in amortization for
the same period in 2016. The effect of the change to 2016 increased the net loss by $32,333 and reduced retained deficit $32,333
and had no effect on loss per share.
Note 5 –
Capital
Lease Obligations – Related Party
On January 24, 2017, the Company entered into a lease with Systems Trading, Inc. (“Systems Trading”),
a company owned by DSC’s President, to refinance old leases referenced above and to add newly acquired data center equipment.
The lease calls for monthly payments of $59,940 and expires on February 1, 2020. It carries an interest rate of 6%.
On April 27, 2017, the Company
entered into a lease with Systems Trading to add newly-acquired data center equipment. The lease is for calls for monthly payments
of $2,300 and expires on May 1, 2020. It carries an interest rate of 4%.
Future minimum lease payments under the capital leases are as follows:
As of December 31, 2017
|
|
$
|
1,932,757
|
|
Less amount representing
interest
|
|
|
(143,517
|
)
|
Total obligations under capital leases
|
|
|
1,789,240
|
|
Less current portion
of obligations under capital leases
|
|
|
(658,476
|
)
|
Long-term obligations
under capital leases
|
|
$
|
1,130,764
|
|
Long-term obligations under capital
leases at December 31, 2017 mature as follows:
Year
ending December 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
929,000
|
|
2019
|
|
|
746,880
|
|
2020
|
|
|
256,877
|
|
|
|
$
|
1,932,757
|
|
The assets held under the capital leases
are included in property and equipment as follows:
Equipment
|
|
$
|
3,194,988
|
|
Less: accumulated
depreciation
|
|
|
1,338,814
|
|
|
|
$
|
1,856,174
|
|
Note 6 - Commitments and Contingencies
Revolving Credit Facility
On January 31, 2008, the Company
entered into a revolving credit line with a bank. The credit facility provides for $100,000 at prime plus 0.5%, 3.75% at December
31, 2017, and is secured by all assets of the Company and personally guaranteed by the Company’s principal shareholder. As
of December 31, 2017, the Company has paid this in full.
Operating Leases
The Company currently leases office
space in Melville, NY, and Warwick, RI.
The lease for office space
in Melville, NY calls for monthly payments of $3,498 beginning July 1, 2016. This lease commenced on June 1, 2016 and continued
through December 31, 2017. On July 20, 2017, the Company rented additional office space in Melville, NY and commences on August
1, 2017 and continued through December 31, 2017. This new lease for the additional office space calls for monthly payments of $1,464.
A second location that was part of the
acquisition of ABC is also located in Melville and calls for monthly payments of $8,382 with a lease terminating in August 31,
2019.
A new lease for office space in Melville, NY was entered into on November 20, 2017 for expanded office
space. This lease will commence upon completion of the new office space. The term of this lease is for five years and three months
and has a fixed rent schedule.
The lease for office space
in Warwick, RI calls for monthly payments of $2,324 beginning February 1, 2015 which escalated to $2,460 on February 1, 2017. This
lease commenced on February 1, 2015 and continues through January 31, 2019.
Minimum obligations under these lease agreements are as follows:
For the Year Ending December 31,
|
|
|
|
|
|
2018
|
|
|
|
203,002
|
|
2019
|
|
|
|
186,070
|
|
2020
|
|
|
|
91,299
|
|
2021
|
|
|
|
94,038
|
|
2022
|
|
|
|
96,859
|
|
Thereafter
|
|
|
|
41,184
|
|
|
|
|
$
|
712,453
|
|
Rent expense for the year ended December
31, 2017 and 2016 was $215,436 and $147,808 respectively.
Note 7 – Long Term Debt
Note Payable –
Enterprise Bank
There has been no default notice from Enterprise Bank.
Enterprise Bank has requested that we move from an interest only payment to a self-amortized arrangement. The Company is in the
process of renegotiating a new payment plan. Interest only payments have been paid with the last monthly payment made in December
2017. The interest rate on this note was 6.5%. The Company is in current negotiations to either modify or extend this loan.
Notes Payable – Related Party
On February 1, 2017, the Company entered
into a note with Systems Trading to refinance old liabilities. The note calls for monthly payments of $10,293 and matures on January
31, 2019. It carries an interest rate of 0%.
On May 1, 2017, the Company entered into a note with Systems Trading to refinance advances made by DSC’s
President. The note calls for monthly payments of $5,283 and matures on April 1, 2020. It carries an interest rate of 0%.
Future minimum payments under these notes note agreements are as follows:
Year ending December 31,
|
|
|
|
|
|
2018
|
|
$
|
186,906
|
|
2019
|
|
|
73,689
|
|
2020
|
|
|
26,226
|
|
|
|
$
|
286,821
|
|
Note 8 - Investment in Subsidiary
The Company has an 80% controlling ownership interest in Nexxis
Inc., a majority-owned subsidiary of the Company. The entity was formed to provide VOIP services.
Note 9 - Stockholders’ (Deficit)
Capital
Stock
The Company has 260,000,000 shares of
capital stock authorized, consisting of 250,000,000 shares of Common Stock, par value $0.001, 10,000,000 shares of Preferred
Stock, par value $0.001 per share.
Common Stock Options
2008 Equity Incentive
Plan
In October 2008, the Company’s
board of directors (the “Board”) adopted, the 2008 Equity Incentive Plan (the “2008 Plan). Under the 2008 Plan,
we may grant options (including incentive stock options) to purchase our common stock or restricted stock awards to our employees,
consultants or non-employee directors. The 2008 Plan is administered by the Board. Awards may be granted pursuant to the 2008 Plan
for 10 years from the date the Board approved the 2008 Plan. Any grant under the 2008 Plan may be repriced, replaced or regranted
at the discretion of the Board.
The material terms of options
granted under the 2008 Plan (all of which have been nonqualified stock options) are consistent with the terms described in the
footnotes to the “Outstanding Equity Awards at Fiscal Year-End December 31, 2011,” including five-year graded vesting
schedules and exercise prices equal to the fair market value of our common stock on the date of grant. Stock grants made under
the 2008 Plan have not been subject to vesting requirements. The 2008 Plan was terminated with respect to the issuance of new awards
as of February 3, 2013. There are 481,510 options outstanding under this plan as of December 31, 2017.
2010 Incentive Award Plan
The Company has reserved 5,000,000
shares of common stock for issuance under the terms of the DSC 2010 Incentive Award Plan (the “2010 Plan”). The 2010
Plan is intended to promote the interests of the Company by attracting and retaining exceptional employees, consultants, directors,
officers and independent contractors (collectively referred to as the “Participants”) and enabling such Participants
to participate in the long-term growth and financial success of the Company. Under the 2010 Plan, the Company may grant stock options,
which are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code of 1986,
as amended, non-qualified stock options, stock appreciation rights and restricted stock awards, which are restricted shares of
common stock (collectively referred to as “Incentive Awards”). Incentive Awards may be granted pursuant to the 2010
Plan for 10 years from the Effective Date. From time to time, we may issue Incentive Awards pursuant to the 2010 Plan. Each of
the awards will be evidenced by and issued under a written agreement.
On April 23, 2013, the Board
of Directors of the Company amended and restated the DSC 2010 Plan. The 2010 Plan, as amended and restated, has been renamed the
“Amended and Restated DSC Incentive Award Plan”. The new plan provides for flexibility in vesting periods and includes
a limit of $100,000 per employee per year for incentive stock options.
In June 2017 the board approved
to increase the number of available stock options for distribution from the current 5,000,000 shares to 8,000,000 shares.
There are 5,052,148 options outstanding under this plan as of
December 31, 2017.
There are 3,409,923 shares available for future grants under the plans.
A summary of the Company’s option
activity and related information follows:
|
|
Number
of
Shares
Under Options
|
|
|
Range
of
Option Price
Per Share
|
|
|
Weighted
Average
Exercise Price
|
|
Options Outstanding at January 1, 2016
|
|
|
6,854,802
|
|
|
$
|
0.02
- 0.85
|
|
|
$
|
0.28
|
|
Options Granted
|
|
|
250,000
|
|
|
|
0.35
|
|
|
|
0.35
|
|
Expire/Cancelled
|
|
|
(363,142
|
)
|
|
|
0.02
– 0.41
|
|
|
|
0.27
|
|
Options Outstanding at December 31, 2016
|
|
|
6,741,660
|
|
|
|
0.02
- 0.85
|
|
|
|
0.26
|
|
Options Granted
|
|
|
2,017,447
|
|
|
|
0.05
|
|
|
|
0.05
|
|
Expire/Cancelled
|
|
|
(3,706,959
|
)
|
|
|
0.15
- .041
|
|
|
|
0.11
|
|
Options Outstanding at December 31,
2017
|
|
|
5,052,148
|
|
|
$
|
0.02
- 0.65
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at December 31,
2017
|
|
|
2,588,738
|
|
|
$
|
0.02
- 0.65
|
|
|
$
|
0.32
|
|
Share-based compensation expense
for options totaling $169,703 was recognized in our results for the year ended December 31, 2017 is based on awards vested.
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 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 and is calculated by using the average daily historical stock prices through the day preceding the grant date.
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 estimated volatility is an average of the historical volatility of peer entities whose stock prices
were publicly available. The Company’s calculation of estimated volatility is based on historical stock prices of these peer
entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due
to the lack of sufficient historical data of its stock price.
As of December 31, 2017, there
was $4,103 of 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 1 year.
The weighted average fair
value of options granted and the assumptions used in the Black-Scholes model during the year ended December 31, 2017 are set forth
in the table below.
|
|
2017
|
|
Weighted average fair value of options granted
|
|
$
|
0.08
|
|
Risk-free interest rate
|
|
|
2.35
|
%
|
Volatility
|
|
|
231.47
|
%
|
Expected life (years)
|
|
|
10
|
|
Dividend yield
|
|
|
0.00
|
%
|
Common Stock Warrants
A summary of the Company’s
warrant activity and related information follows:
|
|
Number of
Shares Under
Warrants
|
|
|
Range of
Warrants
Price
Per Share
|
|
|
Weighted
Average
Exercise Price
|
|
Warrants Outstanding at January 1, 2016
|
|
|
133,334
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Warrants Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Warrants Outstanding at December 31, 2016
|
|
|
133,334
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Warrants Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Warrants Outstanding at December 31, 2017
|
|
|
133,334
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Exercisable at December 31, 2017
|
|
|
133,334
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Preferred Stock
Liquidation preference
Upon any liquidation, dissolution,
or winding up of the Corporation, whether voluntary or involuntary, before any distribution or payment shall be made to the holders
of any Common Stock, the holders of Series A Preferred Stock shall be entitled to be paid out of the assets of the Corporation
legally available for distribution to stockholders, for each share of Series A Preferred Stock held by such holder, an amount per
share of Series A Preferred Stock equal to the Original Issue Price for such share of Series A Preferred Stock plus all accrued
and unpaid dividends on such share of Series A Preferred Stock as of the date of the Liquidation Event.
Conversion
The number of shares of Common Stock
to which a share of Series A Preferred Stock may be converted shall be the product obtained by dividing the Original Issue
Price of such share of Series A Preferred Stock by the then-effective Conversion Price (as defined herein) for such share of
Series A Preferred Stock. The Conversion Price for the Series A Preferred Stock shall initially be equal to $0.02 and shall
be adjusted from time to time.
Voting
Each holder of shares of Series A Preferred
Stock shall be entitled to the number of votes, upon any meeting of the stockholders of the Corporation (or action taken by written
consent in lieu of any such meeting) equal to the number of shares of Class B Common Stock into which such shares of Series A
Preferred Stock could be converted.
Dividends
Each share of Series A Preferred Stock,
in preference to the holders of all Common Stock (as defined below), shall entitle its holder to receive, but only out of funds
that are legally available therefore, cash dividends at the rate of ten percent (10%) per annum from the Original Issue Date on
the Original Issue Price for such share of Series A Preferred Stock, compounding annually unless paid by the Corporation. Accrued
dividends at December 31, 2017 and 2016 were $733,673 and $619,138, respectively.
Note 10 - Income Taxes –
Due to losses, the Company did
not have current income tax expense.
The components of deferred taxes are as follows:
Deferred Tax Assets:
Net operating loss carry-forward
|
|
$
|
(1,438,243
|
)
|
|
$
|
(2,570,982
|
)
|
Less: valuation allowance
|
|
|
1,438,243
|
|
|
|
(2,570,982
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company had federal and
state net operating tax loss carry-forwards of $5,758,244 and $3,225,512, respectively as of December 31, 2017. The tax loss carry-forwards
are available to offset future taxable income with the federal and state carry-forwards beginning to expire in 2028.
In 2017 and 2016, net deferred
tax assets did not change due to the full allowance. The gross amount of the asset is entirely due to the Net operating loss carry
forward. The realization of the tax benefits is subject to the sufficiency of taxable income in future years. The combined deferred
tax assets represent the amounts expected to be realized before expiration.
The Company periodically assesses
the likelihood that it will be able to recover its deferred tax assets. The Company considers all available evidence, both positive
and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income
and ongoing prudent and feasible profits. As a result of this analysis of all available evidence, both positive and negative, the
Company concluded that it is more likely than not that its net deferred tax assets will ultimately not be recovered and, accordingly,
a valuation allowance was recorded as of December 31, 2017 and 2016.
The difference between the expected income tax expense
(benefit) and the actual tax expense (benefit) computed by using the Federal statutory rate of 34% is as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Expected income tax benefit (loss) at statutory rate of 34%
|
|
$
|
124,982
|
|
|
$
|
293,316
|
|
State and local tax benefit, net of federal
|
|
|
26,099
|
|
|
|
61,251
|
|
Change in valuation account
|
|
|
(151,081
|
)
|
|
|
(354,567
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 11 - 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 12 - Subsequent Events
In 2018, The Company entered into a new
lease agreement with Systems Trading to refinance all 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%.
A new lease for office space in Melville,
NY was entered into on November 20, 2017 for expanded office space. This lease will commence upon completion of the new office
space. The term of this lease is for five years and three months and has a fixed rent schedule.