The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements
The accompanying notes are an integral part
of these condensed consolidated financial statements.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER
30, 2018 AND 2017
Note 1 - Basis of presentation, organization
and other matters
Headquartered in Melville, NY, Data Storage
Corporation (“DSC” or the “Company”) is a Managed Service Provider that specializes within the IBM community.
Our IBM Power and Intel IaaS Cloud ensures enterprise level equipment and support focusing on iSeries, AIX, Power, AS400 and our
high-processing power for Intel. Our Disaster Recovery services for both Intel and IBM has a guaranteed back-to-work window. DSC
is a one-stop source for managed services from VoIP to providing the client with equipment and software, monitoring, help desk
and a full array of business continuity solutions.
DSC maintains equipment for cloud storage and
cloud computing in our data centers located in New York 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.
Liquidity
The Company
has concluded that the initial conditions which raised substantial doubt regarding the ability to continue as a going concern
have been alleviated. As of September 30, 2018, we had cash of $204,642 and a working capital deficiency of $2,160,394 Included
in current liabilities are accrued dividends that the Company is not obligated to pay at this point in time, and the Company is
in compliance with its preferred shareholder agreement. Further, capitalized lease obligations for our enterprise level infrastructure
in our data centers are related to long term contracts with clients, in which clients are represented in the accounts receivable
as a month of billing in the current liabilities, whereas, the entire year of lease payments are recorded for future obligations.
Our Enterprise Bank obligation relates to the acquisition
of Message Logic of $350,000 is structured so that DSC can be relieved of such obligation without impact. Additionally, deferred
revenue, are obligations to perform services for clients, in which these clients have signed long term agreements with cancelation
clauses obligating them to pay for such services, even if the client cancels within term. Capital lease obligations are owed to a company owned by the President of DSC. The Company
has on previous occasions been able to renegotiate the leases to relieve pressure on its capital position.
The Company
recognized a net profit available to common shareholders of $159,807 for the nine months ended September 30, 2018 and generated
cash from operations of $373,968. Revenue growth for the quarter had a higher percentage of equipment and software sales and has
a result of the mix of product and services overall margin have been impacted. Equipment and software normally have lower margin
than subscription services such as IaaS and disaster recovery.
There is no assurance that the conditions that
raise substantial doubt regarding the Company’s ability to continue as a going concern will be mitigated by the factors enumerated
above. To further alleviate the concern, management has determined that related party capitalized leases can be refinanced. Further,
senior management is committed to funding the Company’s operations for growth and expansion for the next 12 months.
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 our continued sales efforts,
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 regards 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 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.
Principles of Consolidation
The consolidated financial statements include
the accounts of the Company, its wholly-owned subsidiaries, jointly-owned subsidiaries over which it exercises control and entities
for which it has been determined to be the primary beneficiary. Noncontrolling interest amounts relating to the Company’s
less-than-wholly owned consolidated subsidiaries are included within the “Noncontrolling interest in consolidated subsidiaries”
captions in its Consolidated Balance Sheets and within the “Noncontrolling interests” caption in its Consolidated Statements
of Income. All intercompany balances and transactions have been eliminated in consolidation.
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, prepaid expenses and other current assets, accounts payable and accrued expenses and deferred revenue.
Management believes the estimated fair value of these accounts at September 30, 2018 approximate their carrying value as reflected
in the balance sheets due to the short-term nature of these 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.
Recently Issued and Newly Adopted Accounting
Pronouncements
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. The adoption of ASU 2016-01 did not have a material impact on its consolidated financial statements.
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 adoption of ASU 2016-15 did not have a material impact 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 adoption of ASU 2016-18 did not have a material impact 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 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.
Effective January 1, 2018, the Company adopted
Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC 606”).
The Company changed its revenue recognition policy regarding set-up fees. Beginning January 2018, the company accounts for set-up
fees as separate performance obligation. Set-up services are performed one time and accordingly the revenue is recognized at the
point in time that the service is performed, and the Company is entitled to the payment. In addition, Management 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.
ASC 606 was applied using the modified retrospective
method. The Company recorded a journal entry as of January 1, 2018 to record the effect of the recognition of the deferred set
up fees. Accordingly, comparative periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue
Recognition (“ASC” 605).
The Company generates revenue by offering Cloud
Services, Infrastructure as Service (“IaaS”), Disaster Recovery as a Service, Email Archival and Compliance Solutions
as subscription-based services. The Company also sells Equipment and Software to its customer and offers Management and Support
Services. Subscription contracts allows for high level of customization of services to meet customers’ needs. In certain
instances, combination of customized products and services are determined to be essential to the functionality of the delivered
services. In others, customers can benefit from one of these services on its own.
Under ASC 606, revenue is recognized when a
customer obtains control of promised goods or services in an amount that reflects the consideration the Company expect to receive
in exchange for those goods or services. The Company measure revenue based on the consideration specified in the arrangement, and
revenue is recognized when the performance obligations are satisfied. A performance obligation is a promise in a contract to transfer
a distinct service or product to the customer. The transaction price of a contract is allocated to each distinct performance obligation
and recognized as revenue when or as, the customer receives the benefit of the performance obligation. From subscription-based
contracts, the customers continuously receive benefit of these services. With the sale of Equipment or Setup Services, the customers
usually receive the benefit at the time the product or service is delivered or provided. Substantially, all of the contracts provide
that the Company is compensated for services performed to date.
In July 2018, FASB issued ASU 2018-07
Improvement
to Nonemployee Share-based Payment Accounting.
Under the new standard, companies will no longer be required to value non-employee
awards differently from employee awards. Meaning that companies will value all equity classified awards at their grant-date under
ASC 718 and forgo revaluing the award after this date. Entities are required to value non-employee awards under ASC 718 but can
still elect to use a different methodology for establishing the expected term or selecting the amortization method. Under
ASC 718-10-30-10A, entities may elect to use the contractual term or the midpoint as the expected term when estimating the fair
value of non-employee awards. Additionally, under ASC 718-10-25-2C, the guidance states that entities are required to recognized
compensation cost for non-employee awards as if they had been paid in cash. As such, entities may still elect to apply a different
amortization method to non-employee awards. All entities that have historically issued or are currently issuing share-based compensation
to non-employee will be affected by the update. Public entities must adopt the new standard in the fiscal year beginning on
December 15, 2018. All other entities must adopt the new standard in the fiscal year beginning on December 15, 2019. Companies
can early adopt the new standard but are required to adopt ASC Topic 606 alongside their adoption of ASU 2018-07. For entities
that have recorded historical expense for non-employee awards, the non-employee awards will need to be revalued on the date of
adoption and a cumulative adjustment will be recorded to retained earnings. Companies will also need to disclose in their financial
statements, the nature of and reason for the change in accounting principle, as well as any quantitative information about the
cumulative adjustment's effect on retained earnings and other equity component.
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, 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 federal insurance provided on such deposits.
The Company’s clients 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 clients and maintains allowances for doubtful accounts on factors
surrounding the credit risk of specific clients, historical trends, and other information.
For the nine months ended September 30, 2018 the Company had one
client that accounted for 12.6% of revenue. For the nine months ended September 30, 2017 the Company did
not have any client concentrations.
Accounts Receivable/Allowance for Doubtful Accounts
The Company sells its services to clients on
an open credit basis. Accounts receivable are uncollateralized, non-interest-bearing client 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 client 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 September 30, 2018, 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 September 30, 2018 and December 31, 2017, the Company
has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. The Company’s
2017, 2016 and 2015 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 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.”
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 an 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.
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)
|
Infrastructure as a Service (Iaas) and Disaster Recovery Revenue
|
Subscription services such as IaaS/Hosting
Disaster Recovery, High Availability, Data Vault Services, IaaS, Message Logic email archival software, and Internet allows clients
to centralize and streamline their technical environment. Client’s data can be backed up, replicated, archived and restored
to meet their back to work objective in a disaster. Infrastructure as a Service (IaaS) assist clients to achieve reliable and cost-effective
computing and high availability solutions. Message Logic software helps clients to maintain message content secure and accessible.
Internet services ensure companies have connectivity in the event of outages.
These services are performed at the inception
of a contract for a fixed price. The Company offers professional assistance to its clients during the installation 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.
|
3)
|
Equipment and Software Revenue
|
The Company provides equipment and software
and actively participate in collaboration with IBM to provide innovative business solutions to clients.
To provide the best data protection, the Company
manage data backup data for clients enabling them to meet compliance regulation and improve recovery time objectives. The Company
also derives revenues from providing support and management of its software to clients. The managed services include help desk,
remote access, annual recovery tests and on-gong monitoring of client system performance.
Disaggregation of revenue
In the following table,
revenue is disaggregated by major product line and timing of revenue recognition (in thousands of USD).
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Major products/services lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure and Disaster Recovery
|
|
$
|
3,490,434
|
|
|
$
|
3,540,784
|
|
Professional Service
|
|
|
224,623
|
|
|
|
328,857
|
|
Equipment and Software
|
|
|
2,743,915
|
|
|
|
1,611,166
|
|
Managed Service
|
|
|
489,884
|
|
|
|
627,924
|
|
Other
|
|
|
311,723
|
|
|
|
278,768
|
|
Total Revenue
|
|
$
|
7,260,579
|
|
|
$
|
6,387,499
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products transferred at a point in time
|
|
$
|
2,433,899
|
|
|
$
|
1,907,764
|
|
Products and services transferred over time
|
|
|
4,826,680
|
|
|
|
4,479,734
|
|
|
|
$
|
7,260,579
|
|
|
$
|
6,387,499
|
|
Deferred revenue from 2017 of $41,000 has been
re-classified as retained earnings. During the third quarter of 2018 a total of $10,105 in onboarding fees related to the company’s
cloud-based solutions has been recorded as revenue. The amount of onboarding fees for the third quarter 2018 sales for cloud-based
solution for the company’s USA client base is immaterial when compared to revenue of $7,228,714 resulting in a total revenue
including onboarding fees of $7,260,579. Future periods may have material onboarding fees and will be reported according to the
revenue recognition standards for comparisons to previous periods.
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)
|
Disaster Recovery (“DR”)
: subscription-based service that instantly encrypted and transfers data to secure location further replicates the data to a second DSC data center where it remains encrypted. Provides 10 hour or less recovery time
|
|
2)
|
Data Vaulting
: subscription-based cloud backup solution that uses advanced data reduction technology to shorten restore time
|
|
3)
|
High Availability (“HA”)
: subscription-based service offers cost-effective mirroring replication technology, provides 1 hour or less recovery time
|
|
4)
|
Infrastructure as a Service (“IaaS”)
: subscription-based service offers “capacity on-demand” for IBM Power and Intel server systems
|
|
5)
|
Message Logic
: subscription-based service offers cost effective email archiving, data analytics, compliance monitoring and retrieval of email messages which cannot be deleted.
|
|
6)
|
Internet
: subscription-based service offers continuous internet connection in the event of outages
|
|
7)
|
Support and Maintenance
: subscription-based service offers support for servers, firewalls, desktops or software and ad hoc support and help desk
|
|
8)
|
Initial Set-Up Fees
: on boarding and set-up services
|
|
9)
|
Equipment sales
: sale of servers to the end user
|
|
10)
|
License
: granting SSL certificates and other licenses
|
Disaster Recovery with Stand-By Servers,
High Availability, Data Vaulting, IaaS, Message Logic, Support and Maintenance, and Internet
Subscription services such as the above allows
clients to access a set of data or receive services for a predetermined period of time. As the client obtains access at a point
in time but 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 should be recognized on a straight-line basis over the contract term.
Initial Set-Up Fees
The Company accounts for set-up fees as separate
performance obligation. Set-up services are performed one time and accordingly the revenue should be recognized at the point in
time that the service is performed, and the Company is entitled to the payment.
Equipment sales
For the Equipment sales performance obligation,
the control of the product transfers 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 as defined within ASC 606-10-25-27 through 29, the performance obligation is considered to be satisfied at a point in
time (ASC 606-10-25-30) 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
In the case of Licensing performance obligation,
the control of the product transfers either at point in time or over time depending on the nature of the license. The revenue standard
identifies two types of licenses of IP: a right to access IP and 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 will recognize revenue at the point in time the license is granted and/or renewed for a new period.
Payment terms
The terms of the contracts are typically ranging
from 12 months to 36 months with auto-renew options. The Company invoice clients one month in advance for the services plus any
overages or additional services provided.
Warranties
The Company offers guaranteed service levels
and performance and service guarantees on some of its contracts. These warrantees are not sold separately and according to ASC
606-10-50-12(a) are accounted as “assurance warranties”.
Significant judgement
In the instances that contract have multiple
performance obligation, the Company uses judgment to establish stand -alone price for each performance obligation separately. 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 was calculated to determine the aggregate
price for the individual services. Next the proportion of each individual service to the aggregate price was determined. That ratio
was applied to the total contract price in order to allocate the transaction price to each performance obligation.
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 $106,109 and $83,751 for advertising costs for the nine months ended September
30, 2018 and 2017, 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 have an anti-dilutive effect on diluted loss per
share and therefore they are not included in the calculation. Potentially dilutive securities at September 30, 2018 include 133,334
warrants and 3,667,227 options.
Note 3 - Property and Equipment
Property and equipment, at cost, consist of the following
:
|
September 30,
2018
|
|
December 31,
2017
|
Storage equipment
|
$
|
992,996
|
|
|
$
|
992,996
|
|
Website and software
|
|
533,418
|
|
|
|
533,418
|
|
Furniture and fixtures
|
|
14,037
|
|
|
|
14,037
|
|
Telephone System
|
|
9.690
|
|
|
|
—
|
|
Leasehold Improvements
|
|
13,104
|
|
|
|
11,719
|
|
Computer hardware and software
|
|
1,207,844
|
|
|
|
1,194,120
|
|
Data Center Equipment
|
|
2,511,853
|
|
|
|
2,491,675
|
|
|
|
5,282,942
|
|
|
|
5,237,965
|
|
Less: Accumulated depreciation
|
|
3,920,676
|
|
|
|
3,614,177
|
|
Net property and equipment
|
$
|
1,362,266
|
|
|
$
|
1,623,788
|
|
Depreciation expense for the nine months ended September 30, 2018
and 2017 was $306,499 and $293,417, respectively.
Note 4 - Goodwill and Intangible Assets
Goodwill and intangible assets consisted of the following
:
|
|
|
|
|
September 30, 2018
|
|
|
|
|
Estimated
life
in years
|
|
|
|
Gross
Amount
|
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
Indefinite
|
|
|
$
|
3,015,700
|
|
|
|
N/A
|
|
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
Indefinite
|
|
|
|
294,268
|
|
|
|
N/A
|
|
Intangible assets subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Client list
|
|
|
5 - 15
|
|
|
|
897,274
|
|
|
|
897,274
|
|
ABC Acquired contracts
|
|
|
5
|
|
|
|
310,000
|
|
|
|
118,833
|
|
SIAS Acquired contracts
|
|
|
5
|
|
|
|
660,000
|
|
|
|
253,000
|
|
Non-compete agreements
|
|
|
3 - 4
|
|
|
|
272,147
|
|
|
|
268,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets
|
|
|
|
|
|
|
2,433,689
|
|
|
|
1,537,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill and Intangible Assets
|
|
|
|
|
|
$
|
5,449,389
|
|
|
$
|
1,537,643
|
|
Scheduled amortization over the next three years as follows:
For the Twelve Months ending September 30,
|
|
|
|
|
2019
|
|
|
$
|
197,333
|
|
2020
|
|
|
|
194,278
|
|
2021
|
|
|
|
194,000
|
|
2022
|
|
|
|
16,167
|
|
Total
|
|
|
$
|
601,778
|
|
Amortization expense for the nine months ended September 30, 2018
and 2017 was $148,000 and $25,476 respectively.
Note 5– Capital Lease Obligations – Related Party
On March 7, 2018, the Company entered into
a lease with Systems Trading, Inc. ("Systems Trading"), a company owned by DSC's President, to refinance old leases and Notes payable – related party referenced above and in Note 7. The
lease calls for bi monthly payments of $23,475 and expires on April 6, 2022. It carries an interest rate of 5%.
Future minimum lease payments under the capital leases are as follows:
As of September 30, 2018
|
|
$
|
2,018,850
|
|
Less amount representing interest
|
|
|
(172,277
|
)
|
Total obligations under capital leases
|
|
|
1,846,573
|
|
Less current portion of obligations under capital leases
|
|
|
(461,941
|
)
|
Long-term obligations under capital leases
|
|
$
|
1,384,632
|
|
Long-term obligations under the capital leases at September 30,
2018 mature as follows:
For the Twelve months ending September 30,
|
|
|
|
|
2019
|
|
|
$
|
563,400
|
|
2020
|
|
|
|
563,400
|
|
2021
|
|
|
|
563,400
|
|
2022
|
|
|
|
328,650
|
|
|
|
|
$
|
2,018,850
|
|
The assets held under the capital leases are included in property
and equipment as follows:
Equipment
|
|
$
|
3,272,888
|
|
Less: accumulated depreciation
|
|
|
1,634,485
|
|
|
|
$
|
1,638,403
|
|
Note 6 - Commitments and Contingencies
Operating Leases
The Company currently leases two office spaces
in Melville, NY, and one in Warwick, RI.
Location one in Melville calls for monthly
payments of $8,382 with a lease terminating in August 31, 2019. Location two in Melville calls for monthly payments of monthly
payments of $7,189 starting April 2018, escalating to $8,334. The term of the lease is 5 years and 3 months and will end on July
31, 2023.
The lease for office space in Warwick, RI calls
for monthly payments of $2,324 beginning February 1, 2015 which escalates 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 Twelve Months Ending September 30,
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
$
|
192,803
|
|
2020
|
|
|
|
90,633
|
|
2021
|
|
|
|
93,352
|
|
2022
|
|
|
|
96,152
|
|
2023
|
|
|
|
65,458
|
|
|
|
|
$
|
538,398
|
|
Rent expense for the nine months ended September 30, 2018 and 2017
was $162,772 and $160,085, respectively.
Note 7- Long Term Debt
Note Payable – Enterprise Bank
In connection with its acquisition of Message
Logic, LLC, the Company assumed a loan with Enterprise Bank. The loan was due on April 30, 2016. 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 has requested that the bank consider all payments made to date as satisfaction of the assumed loan and the bank is
in process of a response. Interest only payments have been paid with the last monthly payment made in September 30, 2018. The interest
rate on this note was 6.5%.
Notes Payable – Related Party
On March 7, 2018, the Company entered into
a lease with Systems Trading, a company owned by DSC’s President, to refinance and
consolidate notes payable – related party and existing leases referenced in Note 5. The lease calls for bi-monthly payments
of $23,475 and expires on April 6, 2022. It carries an interest rate of 5%.
Future minimum payments under these note agreements
are reflected in Note 5 above.
Note 8 - Stockholders’ Equity
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.
Note 9 – Subsequent Events
On November 5, 2018, Nexxis Inc. ("Nexxis"), a subsidiary of the Company, entered into a Stock Purchase Agreement (the "Agreement") with Todd A. Correll ("Correll"), Thomas J. Tharrington ("Tharrington" and together with Correll, "Seller"), and Broadsmart Florida, Inc. ("Broadsmart"), a privately held provider of telecommunications services serving customers in the State of Florida, to purchase from Seller 100% of the issued and outstanding shares of common stock of Broadsmart.
Pursuant to the Agreement, on November 5, 2018 (the "Closing Date"), Nexxis purchased from Seller all of the outstanding capital stock of Broadsmart (the "Shares") and all assets related to the business of Broadsmart, with Broadsmart becoming a wholly-owned subsidiary of Nexxis on the Closing Date, in consideration of certain incidental cash consideration and 15% of the net billing of Broadsmart, not including any taxes billed on invoices, payable by Nexxis to Seller on a monthly-basis during the respective terms of each of Broadsmart's customer agreements for existing services provided Broadsmart to its customers (the "Profit-Sharing Purchase Price"); provided, however, that in the event there is no customer agreement the Profit-Sharing Purchase Price will be paid for no more than five (5) years. The Agreement contains customary representations and warranties.
In connection with the Agreement, on March
13, 2018, Nexxis and Broadsmart jointly filed with the Federal Communications Commission ("FCC") that certain Joint Application
for Consent to Acquire Control of an Authorized Provider of Domestic Interstate and International Telecommunications Services
Pursuant to Section 214 of the Communications Act of 1934, as amended, pursuant to which Nexxis and Broadsmart jointly requested
the FCC's authorization of the purchase and sale of the Shares (the "Stock Purchase"). On April 20, 2018, the FCC granted its
authorization of the Stock Purchase.