Data Storage Corp 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company this item is not required ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 30 Index to the Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm 32 Consolidated Balance Sheets as of December 31, 2020 and 2019 33 Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019 34 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 35 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019 36 Notes to Consolidated Financial Statements 37 31 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Data Storage Corporation and Subsidiaries Opinion on the Financial Statements We have audited the accompanying balance sheets of Data Storage Corporation and Subsidiaries (the Company) as of December 31, 2020 and 2019, and the related statements of income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, 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 the 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 on 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. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. As described in Notes 2 and 4 to the consolidated financial statements, the Company’s goodwill at December 31, 2020 was $3,015,700, which arose as a result of the purchase price of business acquisitions exceeding the estimated fair value of identified tangible and intangible assets acquired. The Company’s intangible assets at December 31, 2020, were $455,935 which principally consist of trademarks and customer relationships. Goodwill and intangible assets are tested for impairment as follows: · Goodwill is tested for impairment at least annually at the reporting unit level or more frequently when events occur, or circumstances change. The evaluation requires a comparison of the estimated fair value of the asset to the carrying value of the asset. The fair value is estimated based upon discounted future cash flow projections. If the carrying value of the asset exceeds its fair value, an impairment charge is recorded. · Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If impairment indicators exist, the undiscounted future cash flows associated with the expected service potential of the asset are compared to the carrying value of the asset. If the projection of undiscounted cash flows is less than the carrying value of a intangible asset, an impairment charge would be recorded. The Company utilized a valuation consultant to perform an impairment test on both goodwill and intangible assets. There was no impairment loss identified during 2020 as a result of the test. The determination of the future cash flows of the goodwill and intangible assets requires management to make significant estimates and assumptions related to forecasts of future revenues, operating margins and discount rates. As disclosed by management, changes in these assumptions could have a significant impact on either the future cash flows and therefore, on the amount of any impairment charge. The determination of an impairment indicator on goodwill and intangible assets requires management judgments and involves significant assumptions. We identified the impairment assessment of goodwill and intangible assets as a critical audit matter. Auditing management’s judgments regarding the evaluation of impairment indicators, forecasts of future revenue and operating margin, and the discount rate to be applied involve a high degree of subjectivity. How the Critical Matter Was Addressed in the Audit The primary audit procedures we performed to address this critical audit matter included: · Reviewing management’s evaluation of relevant events and circumstances to determine whether it is more likely than not that the fair value of the Company is less than its carrying value, and then corroborate that analysis with external information and evidence obtained in other areas of the audit. · Utilizing a firm employed valuation specialist with the skills and knowledge to assist in: (i) evaluating the appropriateness of the valuation techniques used in management’s discounted cash flow model, (ii) evaluating the significant assumptions used by management including comparing with third party market data, (iii) performing a retrospective review of forecasts to historical operating results and evaluating whether the assumptions used were reasonable considering current information as well as future expectations as well as using additional evidence obtained in other areas of the audit, (iv) performing recalculations of the methods utilized by management. · Testing completeness and accuracy of the data used in the impairment analysis. /s/ Rosenberg Rich Baker Berman & Company, P.A. We have served as the Company’s auditor since 2008. Somerset, New Jersey March 31, 2021 32 DATA STORAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2020 2019 ASSETS Current Assets: Cash and cash equivalents $ 893,598 $ 326,561 Accounts receivable (less allowance for doubtful accounts of $30,000 in 2020 and 2019) 554,587 691,436 Prepaid expenses and other current assets 239,472 80,728 Total Current Assets 1,687,657 1,098,725 Property and Equipment: Property and equipment 7,845,423 6,894,087 Less—Accumulated depreciation (5,543,822 ) (4,705,256 ) Net Property and Equipment 2,301,601 2,188,831 Other Assets: Goodwill 3,015,700 3,015,700 Operating lease right-of-use assets 241,911 324,267 Other assets 49,310 65,433 Intangible assets, net 455,935 649,934 Total Other Assets 3,762,856 4,055,334 Total Assets $ 7,752,114 $ 7,342,890 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current Liabilities: Accounts payable and accrued expenses $ 979,552 $ 906,716 Dividend payable 1,115,674 970,997 Deferred revenue 461,893 432,942 Line of credit 24 75,000 Finance leases payable 168,139 - Finance leases payable related party 1,149,403 833,148 Operating lease liabilities short term 104,549 101,505 Note payable 374,871 350,000 Total Current Liabilities 4,354,105 3,670,308 Note payable long term 107,106 -- Operating lease liabilities long term 147,525 231,312 Finance leases payable, long term 247,677 -- Finance leases payable related party, long term 974,743 1,713,122 Total Long Term Liabilities 1,477,051 1,944,434 Total Liabilities 5,831,156 5,614,742 Stockholders’ Equity: Preferred stock, Series A par value $.001; 10,000,000 shares authorized; 1,401,786 shares issued and outstanding in each year 1,402 1,402 Common stock, par value $.001; 250,000,000 shares authorized; 128,539,418 and 128,439,418 shares issued and outstanding in 2020 and 2019, respectively 128,539 128,439 Additional paid in capital 17,620,459 17,456,431 Accumulated deficit (15,734,737 ) (15,790,076 ) Total Data Storage Corp Stockholders’ Equity 2,015,663 1,796,196 Non-controlling interest in consolidated subsidiary (94,705 ) (68,048 ) Total Stockholders’ Equity 1,920,958 1,728,148 Total Liabilities and Stockholders’ Equity $ 7,752,114 $ 7,342,890 The accompanying notes are an integral part of these consolidated Financial Statements. 33 DATA STORAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2020 2019 Sales $ 9,320,933 $ 8,483,608 Cost of sales 5,425,205 4,746,031 Gross Profit 3,895,728 3,737,577 Selling, general and administrative 3,896,791 3,531,053 (Loss) Income from Operations (1,063 ) 206,524 Other Income (Expense) Interest income 24 250 Interest expense (175,602 ) (177,451 ) Gain on extinguishment of contingent liability 350,000 - Total Other Income (Expense) 174,422 (177,201 ) Income before provision for income taxes 173,359 29,323 Provision for income taxes -- — Net Income 173,359 29,323 Non-controlling interest in consolidated subsidiary 26,657 40,537 Net Income attributable to Data Storage Corporation 200,016 69,860 Preferred Stock Dividends (144,677 ) (124,312 ) Net Income (Loss) Attributable to Common Stockholders $ 55,339 $ (54,452 ) Earnings (Loss) per Share – Basic $ 0.00 $ 0.00 Earnings (Loss) per Share – Diluted $ 0.00 $ 0.00 Weighted Average Number of Shares - Basic 128,526,267 128,156,678 Weighted Average Number of Shares - Diluted 134,640,419 128,156,678 The accompanying notes are an integral part of these consolidated Financial Statements. 34 DATA STORAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2020 2019 Cash Flows from Operating Activities: Net Income $ 173,359 $ 29,323 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,032,566 896,697 Stock based compensation 158,728 41,340 Gain on extinguishment of contingent liability (350,000 ) -- Changes in Assets and Liabilities: Accounts receivable 136,849 (160,191 ) Other assets 16,126 -- Prepaid expenses and other current assets (132,132 ) 87,163 Right of use asset 82,356 (324,267 ) Accounts payable and accrued expenses 44,620 (81,862 ) Deferred revenue 28,951 (2,464 ) Deferred rent -- (18,890 ) Operating lease liability (80,743 ) 332,817 Net Cash Provided by Operating Activities 1,110,679 799,666 Cash Flows from Investing Activities: Capital expenditures (181,072 ) (40,355 ) Net Cash Used in Investing Activities (181,072 ) (40,355 ) Cash Flows from Financing Activities: Repayments of capital lease obligations -- -- Proceeds from issuance of note payable 481,977 - Repayments of finance lease obligations related party (718,690 ) (741,940 ) Repayments of finance lease obligations (56,281 ) -- Cash received for the exercised of options 5,400 5,400  Advance from Credit Line -- 75,000  Repayment of Credit Line (74,976 ) -- Net Cash Used in Financing Activities (362,570 ) (661,540 ) Increase in Cash and Cash Equivalents 567,037 97,771 Cash and Cash Equivalents, Beginning of Year 326,561 228,790 Cash and Cash Equivalents, End of Year $ 893,598 $ 326,561 Supplemental Disclosures: Cash paid for interest $ 168,837 $ 177,451 Cash paid for income taxes $ -- $ -- Non-cash investing and financing activities: Accrual of preferred stock dividend $ 144,677 $ 124,312 Assets acquired by finance lease $ 808,261 $ 1,560,021 The accompanying notes are an integral part of these consolidated Financial Statements. 35 DATA STORAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE YEAR ENDED DECEMBER 31, 2020 AND 2019 Preferred Stock Common Stock Additional Paid-in Accumulated Non- Controlling Total Stockholders’ Equity/ Shares Amount Shares Amount Capital Deficit Interest (Deficit) Balance, January 1, 2019 1,401,786 $ 1,402 128,139,418 $ 128,139 $ 17,409,989 $ (15,735,624 ) $ (27,511 ) $ 1,776,395 Stock Options Issued as Compensation — — — — 15,342 — — 15,342 Net Income — — — — 69,860 (40,537 ) 29,323 Common Stock Issued as Compensation — — 200,000 200 25,800 -- — 26,000 Stock Options Exercise 100,000 100 5,300 5,400 Preferred Stock — — — — — (124,312 ) — (124,312 ) Balance, December 31, 2019 1,401,786 1,402 128,139,418 128,139 17,456,431 (15,790,076 ) (68,048 ) 1,728,148 Stock Options Issued as Compensation 158,728 158,728 Stock Options Exercise 100,000 100 5,300 5,400 Net Income 200,016 (26,657 ) 173,359 Preferred Stock (144,677 ) (144,677 ) Balance, December 31, 2020 1,401,786 $ 1,402 128,539,418 $ 128,539 $ 17,620,459 (15,734,737 ) $ (94,705 ) $ 1,920,958 The accompanying notes are an integral part of these consolidated Financial Statements 36 DATA STORAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2020 AND 2019 Note 1 - Basis of Presentation, Organization and Other Matters Data Storage Corporation (“DSC” or the “Company”) provides subscription based, long term agreements for disaster recovery solutions, Infrastructure as a Service (IaaS) and VoIP type solutions. Headquartered in Melville, NY, with additional offices in 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 subscription services and solutions, managed services, software and maintenance, equipment and onboarding provisioning. DSC maintains infrastructure and storage equipment in several technical centers in New York, New Jersey, Massachusetts, North Carolina and Texas. Going Concern Analysis Under ASU 2014-15 Presentation of Financial Statements-Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40. As reflected in the consolidated financial statements, the Company had a net income (loss) available to common stockholders of $55,339 and $(54,452) for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, DSC had cash of $893,598 and a working capital deficiency of $2,666,448. As a result, these conditions raised substantial doubt regarding our ability to continue as a going concern, which as described below we have concluded has been alleviated. During the year ended December 31, 2020, the Company generated cash from operations of $1,110,679 with continued revenue growth. Further, the Company has no capital expenditure commitments and the Company’s offices have been consolidated and fully staffed and with sufficient room for growth. If necessary, management also determined that it is probable that related party sources of debt financing and capitalized leases can be renegotiated based on management’s history of being able to raise and refinance debt through related parties. As a result of the current favorable trends of improving cash flow, the Company concluded that the initial conditions which raised substantial doubt regarding the ability to continue as a going concern has been alleviated. Note 2 - Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of (i) the Company, (ii) its wholly-owned subsidiary, Data Storage Corporation, a Delaware corporation, and (iii) its majority-owned subsidiary, Nexxis Inc, a Nevada corporation. All significant inter-company transactions and balances have been eliminated in consolidation. 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. Recently Issued and Newly Adopted Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU-2016-13”). ASU 2016-13 affects loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. ASU 2016-13 is effective for the fiscal year beginning after December 15, 2022, including interim periods within that fiscal year. The Company expects that there would be no material impact on the Company’s consolidated financial statements upon the adoption of this ASU. 37 In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 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 adoption of ASU 2016-16 did not have a material impact on the consolidated financial statements. In January 2017, the FASB issued ASU 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 adoption of ASU 2017-04 did not have a material impact on the consolidated financial statements. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements for fair value measurements. The updated guidance was adopted on January 1, 2020 and did not have a material impact on the consolidated financial statements. In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This guidance requires companies to apply the internal-use software guidance in Accounting Standards Codification (“ASC”) 350-40 to implementation costs incurred in a hosting arrangement that is a service contract to determine whether to capitalize certain implementation costs or expense them as incurred. The new guidance, is effective for fiscal years beginning after December 15, 2019. The adoption of ASU 2018-15 did not have a material impact on the consolidated financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Reclassifications Certain prior year amounts in the consolidated financial statements and the notes thereto have been reclassified where necessary to conform to the current year presentation. These reclassifications did not affect the prior period total assets, total liabilities, stockholders’ deficit, net loss or net cash used in operating activities. Fair Value Measurements The fair value measurement disclosures are grouped into three levels based on valuation factors: ● Level 1 – quoted prices in active markets for identical investments ● Level 2 – other significant observable inputs (including quoted prices for similar investments and market corroborated inputs) ● Level 3 – significant unobservable inputs (including our own assumptions in determining the fair value of investments) The Company’s Level 1 assets/liabilities include cash, accounts receivable, accounts payable, prepaid and other current assets, line of credit and due to related parties. Management believes the estimated fair value of these accounts at December 31, 2020 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 Company’s Level 2 assets/liabilities include the Company’s notes payable and capital lease obligations. Their carrying value approximates their fair values based upon a comparison of the interest rate and terms of such debt given the level of risk to the rates and terms of similar debt currently available to the Company in the marketplace. The Company’s Level 3 assets/liabilities include goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. As such, the Company measures goodwill and intangible assets on a non-recurring basis. Inputs to determine fair value are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. 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. 38 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, 2020, DSC had three customers with an accounts receivable balance representing 45% of total accounts receivable. For the year ended December 31, 2019, DSC had three customers with an accounts receivable balance representing 38% 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 typically 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 remaining 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, 2020 and 2019, the Company had a full valuation allowance against its deferred tax assets. 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, 2020 and 2019, the Company has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. The Company’s 2019, 2018, 2017 and 2016 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. 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 Infrastructure as a Service, Platform as a Service and Disaster Recovery, High Availability, Data Vault Services and DRaaS type solutions (cloud) allows clients to centralize and streamline their technical and mission critical digital information and 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 while eliminating or supplementing Capex. 2) Managed Services These services are performed at the inception of a contract. 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. The Company also derives revenues in the area from providing support and management of its software to clients. The managed services include help desk, remote access, annual recovery tests and manufacturer support for equipment and on-gong monitoring of client system performance. 39 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. The Company is a partner of IBM and the various software solutions provided to clients. Disaggregation of revenue In the following table, revenue is disaggregated by major product line, geography, and timing of revenue recognition. For the Year Ended December 31, 2020 United States International Total Infrastructure & Disaster Recovery/Cloud Service $ 5,691,133 $ 115,237 $ 5,806,370 Equipment and Software 2,074,911 - 2,074,911 Managed Services 380,701 - 380,701 Professional Fees 362,375 - 362,375 Nexxis VoIP Services 696,576 - 696,576 Total Revenue $ 9,205,696 $ 115,237 $ 9,320,933 For the Year Ended December 31, 2019 United States International Total Infrastructure & Disaster Recovery/Cloud Service $ 5,223,868 $ 213,816 $ 5,437,684 Equipment and Software 1,784,658 — 1,784,658 Managed Services 365,767 — 365,767 Professional Fees 411,475 — 411,475 Nexxis VoIP Services 484,024 — 484,024 Total Revenue $ 8,269,792 $ 213,816 $ 8,483,608 For the Year Ended December 31, Timing of revenue recognition 2020 2019 Products transferred at a point in time $ 2,817,987 $ 2,196,133 Products and services transferred over time 6,502,946 6,287,475 Total Revenue $ 9,320,933 $ 8,483,608 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 a quarterly or 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 as a Service (“DRaaS”) : subscription-based service that instantly encrypts 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 which offers cost-effective mirroring replication technology and provides one (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. 40 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 typical range from 12 to 36 months with auto-renew options. The Company invoices clients one month in advance for its 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 a net impact of $309,003 and $259,920 for advertising costs for the years ended December 31, 2020 and 2019, respectively. Stock Based Compensation DSC follows the requirements of FASB ASC 718-10-10, Share Based Payments with regards to stock-based compensation issued to employees. 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. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its Common stock and does not intend to pay dividends on its Common stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best estimate. Estimated volatility is a measure of the amount by which DSC’s stock price is expected to fluctuate each year during the expected life of the award. DSC’s calculation of estimated volatility is based on historical stock prices of these 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. 41 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 following table sets forth the information needed to compute basic and diluted earnings per share for the years ended December 31, 2020 and 2019: December 31, 2020 2019 Net Income (Loss) Available to Common Shareholders $ 55,339 $ (54,452 ) Weighted average number of common shares - basic 128,526,267 128,156,678 Dilutive securities Options 5,980,818 -- Warrants 133,334 -- Weighted average number of common shares - diluted 134,640,419 128,156,678 Earnings (Loss) per share, basic $ 0.00 $ 0.00 Earnings (Loss) per share, diluted $ 0.00 $ 0.00 The following table sets forth the number of potential shares of common stock that have been excluded from diluted net income (loss) per share net income (loss) per share because their effect was anti-dilutive: December 31, 2020 2019 Options 2,325,168 8,425,824 Warrants 133,334 133,334 2,458,502 8,425,824 Note 3 - Property and Equipment Property and equipment, at cost, consist of the following: December 31, 2020 2019 Storage equipment $ 756,236 $ 756,236 Website and software 533,417 533,417 Furniture and fixtures 17,441 27,131 Leasehold improvements 20,983 16,846 Computer hardware and software 1,236,329 1,218,464 Data center equipment 5,281,017 4,341,993 7,845,423 6,894,087 Less: Accumulated depreciation 5,543,822 4,705,256 Net property and equipment $ 2,301,601 $ 2,188,831 Depreciation expense for the years ended December 31, 2020 and 2019 was $838,566 and $699,918, respectively. Note 4 - Goodwill and Intangible Assets Goodwill and intangible assets consisted of the following: December 31, 2020 Estimated life in years Gross amount Accumulated Amortization Net Intangible assets not subject to amortization Goodwill Indefinite $ 3,015,700 $ — $ 3,015,700 Trademarks Indefinite 294,268 — 294,268 Total intangible assets not subject to amortization 3,309,968 — 3,309,968 Intangible assets subject to amortization Customer lists 5 - 15 897,274 897,274 — ABC acquired contracts 5 310,000 258,333 51,667 SIAS acquired contracts 5 660,000 550,000 110,000 Non-compete agreements 4 272,147 272,147 - Total intangible assets subject to amortization 2,139,421 1,977,754 161,667 Total Goodwill and Intangible Assets $ 5,449,389 $ 1,977,754 $ 3,471,635 42 The scheduled remaining amortization is as follows: Years ending December 31, 2021 $ 161,667 Total $ 161,667 Amortization expense for the years ended December 31, 2020 and 2019 were $194,000 and $196,779 respectively. Note 5 –Leases Operating Leases The Company currently has three leases for office space, with two offices located in Melville, NY, and one office in Warwick, RI. The first lease for office space in Melville, NY, was assumed as part of the Company’s acquisition of ABC in 2016 and called for monthly payments of $8,382 and expiring August 31, 2019. Upon termination of the lease in August 2019, the Company entered into a new lease for a technology lab in a smaller space commencing on September 1, 2019. The term of this lease is for three years and 11 months and runs co-terminus with our existing lease in the same building. The base annual rent is $10,764 payable in equal monthly installments of $897. A second lease for office space in Melville, NY, was entered into on November 20, 2017, which commenced on April 2, 2018. The term of this lease is five years and three months at $86,268 per year with an escalation of 3% per year with an ending date of July 31, 2023. 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 expired on January 31, 2019. The Company extended this lease until January 31, 2020. This lease was further extended until January 31, 2021. The annual base rent shall be $31,176 payable in equal monthly installments of $2,598. We have satisfied the terms of the lease and no longer occupy this premise. The Company leases rack space in New York, Massachusetts and North Carolina. These leases are month to month and the monthly rent is approximately $25,000. In 2020 the Company entered into a new rack space lease agreement in Dallas, TX. The lease term is 13 months and requires monthly payments of $1,905. Finance Lease Obligations On June 1, 2020, the Company entered into a lease agreement with Arrow Capital Solutions, Inc. to lease equipment. The lease obligation is payable to Arrow Capital Solutions with monthly installments of $5,008. The lease carries an interest rate of 7% and is a three-year lease. The term of the lease ends June 1, 2023. On June 29, 2020, the Company entered into a lease agreement with Arrow Capital Solutions, Inc. to lease equipment. The lease obligation is payable to Arrow Capital Solutions with monthly installments of $5,050. The lease carries an interest rate of 7% and is a three-year lease. The term of the lease ends June 29, 2023. On July 31, 2020, the Company entered into a lease agreement with Arrow Capital Solutions, Inc. to lease equipment under a finance lease. The lease obligation is payable to Arrow Capital Solutions with monthly installments of $4,524. The lease carries an interest rate of 7% and is a three-year lease. Finance Lease Obligations – Related Party On April 1, 2018, the Company entered into a lease agreement with Systems Trading Inc. (“Systems Trading”) to refinance all leases into one lease. This lease obligation is payable to Systems Trading with bi-monthly installments of $23,475. The lease carries an interest rate of 5% and is a four -year lease. The term of the lease ends April 16, 2022. Systems Trading is owned and operated by the Company’s President, Hal Schwartz. On January 1, 2019, the Company entered into a lease agreement with Systems Trading. This lease obligation is payable to Systems Trading with monthly installments of $29,592. The lease carries an interest rate of 6.75% and is a five-year lease. The term of the lease ends December 31, 2023. On April 1, 2019, the Company entered into two lease agreements with Systems Trading to add new data center equipment. The first lease calls for monthly payments of $1,328 and expires on March 1, 2022. It carries an interest rate of 7%. The second lease calls for monthly payments of $461 and expires on March 1, 2022. It carries an interest rate of 6.7%. On January 1, 2020, the Company entered into a new lease agreement with Systems Trading Inc. to lease equipment. The lease obligation is payable to Systems Trading with monthly installments of $10,534. The lease carries an interest rate of 6% and is a three-year lease. The term of the lease ends January 1, 2023. We determine if an arrangement contains a lease at inception. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet, per the election of the practical expedient noted above. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We recognize lease expense for these leases on a straight-line basis over the lease term. We recognize variable lease payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are recognized in the period incurred. A discount rate of 7% was used in preparation of the ROU asset and operating liabilities. 43 The components of lease expense were as follows: Year Ended December 31, 2020 Finance lease: Amortization of assets, included in depreciation and amortization expense $ 814,572 Interest on lease liabilities, included in interest expense 154,858 Operating lease: Amortization of assets, included in total operating expense 101,504 Interest on lease liabilities, included in total operating expense 20,763 Total net lease cost $ 1,091,697 Supplemental balance sheet information related to leases was as follows Operating Leases Operating lease ROU asset $ 241,911 Current operating lease liabilities 104,549 Noncurrent operating lease liabilities 147,525 Total operating lease liabilities $ 252,074 December 31, 2020 Finance leases: Property and equipment, at cost $ 4,366,665 Accumulated amortization (2,267,449 ) Property and equipment, net 2,099,216 Current obligations of finance leases $ 1,317,542 Finance leases, net of current obligations 1,222,420 Total finance lease liabilities $ 2,539,962 Supplemental cash flow and other information related to leases was as follows: Year Ended December 31, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows related to operating leases $ 80,743 Financing cash flows related to finance leases $ 774,971 Weighted average remaining lease term (in years): Operating leases 1.72 Finance leases 2.12 Weighted average discount rate: Operating leases 7 % Finance leases 6 % Long-term obligations under the operating and finance leases at December 31, 2020 mature as follows: For the Year ending December 31, Operating Leases Finance Leases 2021 $ 104,549 $ 1,462,239 2022 107,718 849,427 2023 64,357 441,724 2024 - - 2025 - - Total lease payments 276,625 2,753,390 Less: Amounts representing interest (24,551 ) (213,428 ) Total lease obligations 252,074 2,539,962 Less: Current (104,549 ) (1,317,542 ) $ 147,525 $ 1,222,420 As of December 31, 2020, we had no additional significant operating or finance leases that had not yet commenced. Rent expense under all operating leases for the years ended December 31, 2020 and 2019 were $169,716 and $251,814, respectively. 44 Note 6 - Commitments and Contingencies COVID 19 The COVID-19 pandemic has created significant worldwide uncertainty, volatility and economic disruption. The extent to which COVID-19 will adversely impact our business, financial condition and results of operations is dependent upon numerous factors, many of which are highly uncertain, rapidly changing and uncontrollable. These factors include, but are not limited to: (i) the duration and scope of the pandemic; (ii) governmental, business and individual actions that have been and continue to be taken in response to the pandemic, including travel restrictions, quarantines, social distancing, work-from-home and shelter-in-place orders and shut-downs; (iii) the impact on U.S. and global economies and the timing and rate of economic recovery; (iv) potential adverse effects on the financial markets and access to capital; (v) potential goodwill or other impairment charges; (vi) increased cybersecurity risks as a result of pervasive remote working conditions; and (vii) our ability to effectively carry out our operations due to any adverse impacts on the health and safety of our employees and their families. Under NYS Executive Order 202.6, “Essential Business,” DSC is an “Essential Business” based on the following in the Executive order number 2: Essential infrastructure including telecommunications and data centers; and, number 12: Vendors that provide essential services or products, including logistics and technology support. Further, as a result of the pandemic, all employees, including the Company’s specialized technical staff, are working remotely or in a virtual environment. DSC always maintains the ability for team members to work virtual and the Company will continue to stay virtual, until the State and or the Federal government indicate the environment is safe to return to work. The significant increase in remote working, particularly for an extended period of time, could exacerbate certain risks to the Company’s business, including an increased risk of cybersecurity events and improper dissemination of personal or confidential information, though the Company does not believe these circumstances have, or will, materially adversely impact its internal controls or financial reporting systems. If the COVID-19 pandemic should worsen, the Company may experience disruptions to our business including, but not limited to equipment, to its workforce, or to its business relationships with other third parties. The extent to which COVID-19 impacts the Company’s operations or those of its third-party partners will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. Any such disruptions or losses we incur could have a material adverse effect on the Company’s financial results and our ability to conduct business as expected. 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% and is secured by all assets of the Company and personally guaranteed by the Company’s principal shareholder. As of December 31, 2020, and 2019 the balance was $24 and $75,000, respectively. Note 7 – Long Term Debt In connection with the Company’s October 2012 acquisition of certain assets (the “ML Assets”) of Message Logic, Inc. (“Message Logic”), the Company maintained ownership of the ML Assets subject to a security interest in the ML Assets held by a third party banking institution (the “Bank”) in connection with a secured loan made by the Bank to Message Logic in June 2012 in the amount of $350,000 (the “ML Loan”). The Bank filed a UCC-1 Financing Statement with the Secretary of State of Delaware perfecting its interest in the ML Assets (the “UCC-1 Filing”). On September 5, 2014, the Company entered into an agreement with Message Logic and the Bank pursuant to which the Company paid to the Bank the outstanding interest amount due on the ML Loan over seven months at $3,910 per month. In addition, the Company agreed to continue to make monthly interest-only payments to the Bank at $1,553 per month. The Company recorded a contingent liability as part of its option to pay off the ML Loan, terminate the UCC-1 Filing and own the ML Assets free of all liens and encumbrances. The Company stopped making interest-only payments on October 25, 2018. During 2020, the Company made a strategic decision to cease utilizing the ML Assets in its operations and advised the Bank of such information. In connection with this and as a result, the Company recorded a gain on extinguishment of contingent liability in the amount of $350,000 on the consolidated statements of operations. On April 30, 2020, the Company was granted a loan from a banking institution, in the principal amount of $481,977 (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The Loan, which was in the form of a Note dated April 30, 2020, matures on April 30, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing on November 5, 2020. Funds from the loan may only be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments. Management used the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The company has not yet applied for the loan forgiveness. As of December 31, 2020, if not forgiven, remaining scheduled principal payments due on notes payable are as follows: Year ending December 31, 2021 $ 374,871 2022 107,106 $ 481,977 Note 8 - Stockholders’ (Deficit) Capital Stock The Company has 260,000,000 authorized shares of capital stock, consisting of 250,000,000 shares of common stock, par value $0.001, and 10,000,000 shares of Preferred Stock, par value $0.001 per share. Common Stock Options 2010 Incentive Award Plan On August 12, 2010, the Company adopted the Data Storage Corporation 2010 Incentive Award Plan (the “2010 Plan”) that provided for 2,000,000 shares of common stock reserved for issuance under the terms of the 2010 Plan; which was amended on September 25, 2013 to increase the number of shares of common stock reserved for issuance under the Plan to 5,000,000 shares of common stock; which was further amended on June 20, 2017 to increase the number of shares of common stock reserved for issuance under the Plan to 8,000,000 shares of common stock; and further amended on July 1, 2019 to increase the number of shares of common stock reserved for issuance under the Plan to 10,000,000 shares of common stock. On April 23, 2012, the Company amended and restated the 2010 Plan to change the name to the “Amended and Restated Data Storage Corporation Incentive Award Plan” (the “Plan”). The Plan was 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 Plan, the Company had the right to 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 were restricted shares of common stock (collectively referred to as “Incentive Awards”). Incentive Awards were granted pursuant to the Plan for 10 years from the Effective Date. There are 8,305,985 options outstanding under the Plan as of December 31, 2020. The 2010 Plan expired on October 21, 2020 and accordingly, there are no shares available for future grants. 45 If an incentive award granted under the Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered to us in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for future awards under the Plan. The number of shares subject to the Plan, and the number of shares and terms of any Incentive Award may be adjusted in the event of any change in our outstanding common stock by reason of any stock dividend, spin-off, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares, or similar transaction. 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 Weighted Average Contractual Life Options Outstanding at January 1, 2019 5,765,519 $ 0.02 – 0.65 $ 0.26 6.8 Options Granted 2,852,537 0.05 0.05 Exercised (100,000 ) 0.05 0.05 Expired/Cancelled (92,232 ) 0.05 0.05 Options Outstanding at December 31, 2019 8,425,824 $ 0.05 – 0.65 $ 0.17 7.5 Options Granted 350,000 0.12 – 0.13 0.13 Exercised (100,000 ) 0.05 0.05 Expire/Cancelled (369,838 ) 0.35 – 0.36 0.36 Options Outstanding at December 31, 2020 8,305,986 $ 0.05 – 0.39 $ 0.13 6.6 Options Exercisable at December 31, 2020 5,227,220 $ 0.05 – 0.39 $ 0.17 5.5 Share-based compensation expense for options totaling $158,728 and $15,342 was recognized in our results for the year ended December 31, 2020 and 2019, respectively 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. Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of the award. The Company’s calculation of estimated volatility is based on historical stock prices of 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, 2020, there was $264,111 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 3 year. The weighted average fair value of options granted, and the assumptions used in the Black-Scholes model during the year ended December 31, 2020 and 2019 are set forth in the table below. 2020 2019 Weighted average fair value of options granted $ 0.13 $ 0.05 Risk-free interest rate 0.66-0.83 % 1.79 % Volatility 221 – 223 % 225 % Expected life (years) 10 10 Dividend yield 0.00 % 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 Weighted Average Contractual Life Warrants Outstanding at January 1, 2019 133,334 $ 0.01 $ 0.01 5.5 Warrants Granted — — — Warrants Outstanding at December 31, 2019 133,334 $ 0.01 $ 0.01 4.5 Warrants Granted — — — Warrants Outstanding at December 31, 2020 133,334 $ 0.01 $ 0.01 3.5 Warrants Exercisable at December 31, 2020 133,334 $ 0.01 $ 0.01 3.5 46 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, 2020 and 2019 were $1,115,674 and $970,997, respectively. Note 9 - Income Taxes The components of deferred taxes are as follows: Deferred Tax Assets: 2020 2019 Net operating loss carry-forward $ 1,313,000 $ 1,419,000 Less: valuation allowance (1,313,000 ) (1,419,000 ) Net deferred tax asset $ — $ — The Company had federal and state net operating tax loss carry-forwards of $4,725,000 and $4,325,000, respectively as of December 31, 2020. 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 2020 and 2019, 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, 2020 and 2019. The difference between the expected income tax expense (benefit) and the actual tax expense (benefit) computed by using the Federal statutory rate of 21% is as follows: Year Ended December 31, 2020 2019 Expected income tax benefit (loss) at statutory rate of 21% $ 79,000 ) $ 22,000 State and local tax benefit (loss), net of federal 27,000 ) 7,500 Change in valuation account (4,000 ) (29,500 ) Income tax expense (benefit) $ — $ — 47 Note 10 - Litigation The Company currently is not involved in any litigation that it believes 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 11 – Related Party Transactions Finance Lease Obligations – Related Party During the years ended December 31, 2020 and 2019 the Company entered into three different related party finance lease obligations. See Note 5 for details. Nexxis Capital LLC Charles Piluso and Harold Schwartz collectively own 100% of Nexxis Capital LLC (“Nexxis Capital”). Nexxis Capital was formed to purchase equipment and provide leases to Nexxis Inc.’s customers. The Company received funds of $37,954 and $12,794 during the years ended December 31, 2020 and 2019, respectively. Note 12 - Subsequent Events On January 31, 2021, the term of the lease for the Company’s location in Rhode Island expired. Employees from that location are now working remotely from their residences. Flagship Solutions, LLC On February 4, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Data Storage FL, LLC, a Florida limited liability company and the Company’s wholly-owned subsidiary (the “Merger Sub”), Flagship Solutions, LLC (“Flagship”), a Florida limited liability company, and the owners (collectively, the “Equityholders”) of all of the issued and outstanding limited liability company membership interests in Flagship (collectively, the “Equity Interests”), pursuant to which, upon the Closing (as defined below), the Company will acquire Flagship through the merger of Merger Sub with and into Flagship (the “Merger”), with Flagship being the surviving company in the Merger and becoming as a result its wholly-owned subsidiary. The closing of the Merger (the “Closing”) is expected to take place on or before May 31, 2021 (the “Outside Closing Date”). Pursuant to the Merger, all of the Equity Interests that are issued and outstanding immediately prior to the effectiveness of the filing of the Articles of Merger by Flagship and Merger Sub with the Secretary of State of the State of Florida, will be converted into the right to receive an aggregate amount equal to up to $10,500,000, consisting of $5,550,000, payable in cash, subject to reduction by the amount of any excluded liabilities assumed by the Company at Closing and subject to adjustment as set forth below in connection with a net working capital adjustment, and up to $4,950,000, payable in shares of the Company’s common stock, subject to reduction by the amount by which the valuation of Flagship (the “Flagship Valuation”), as calculated based on Flagship’s unaudited pro forma 2018 financial statements and audited 2019 and 2020 financial statements (the “2020 Audit”), is less than $10,500,000. In the event that the Flagship Valuation, as calculated based on the 2020 Audit, is less than $10,500,000, then, within fifteen (15) days after completion of the audit of Flagship’s financial statements for its 2019, 2020 and 2021 fiscal years (the “2021 Audit”), the Company has agreed to pay the Equityholders, in shares of the Company’s common stock, the amount by which the Flagship Valuation, as calculated based on the 2021 Audit, exceeds the sum of $5,550,000 and the value of the shares merger consideration paid by us to the Equityholders at Closing. In addition, the cash merger consideration paid by the Company to the Equityholders at Closing shall be adjusted, on a dollar-for-dollar basis, by the amount by which Flagship’s estimated net working capital at Closing is more or is less than the target working capital amount specified in the Merger Agreement. The parties have agreed to indemnify each other for any losses that may be incurred by them as a result of their breach of any of their representations, warranties and covenants contained in the Merger Agreement. The Company’s indemnification obligations are capped at 20% of the aggregate merger consideration paid to the Equityholders for any breach of our representations and warranties contained in the Merger Agreement, other than the representations and warranties set forth under Section 4.1 (Existence; Good Standing; Authority; Enforceability), Section 4.2 (No Conflict) and Section 4.4 (Brokers) (herein, “Fundamental Representations”). The Company’s indemnification obligations in respect of any breach by the Company of the Fundamental Representations or in the event of our willful or intentional breach of the Merger Agreement (or acts of fraud), are not capped. Concurrently with the Closing, Flagship and Mark Wyllie, Flagship’s Chief Executive Officer, will enter into an Employment Agreement (the “Wyllie Employment Agreement”), which will become effective upon consummation of the Closing, pursuant to which Mr. Wyllie will continue to serve as Chief Executive Officer of Flagship following the Closing on the terms and conditions set forth therein. Flagship’s obligations under the Wyllie Employment Agreement will also be guaranteed by us. The Wyllie Employment Agreement will contain customary salary, bonus, employee benefits, severance and restrictive covenant provisions. In addition, pursuant to the Wyllie Employment Agreement, Mr. Wyllie will be appointed to serve as a member of the Board during the term of his employment thereunder. The Merger Agreement further provides that it may be terminated by Flagship and the Equityholders (a “Flagship Termination”) in the event we have not consummated an underwritten public offering of our securities or listed our shares of common stock on national securities exchange such as the Nasdaq, by the Outside Closing Date, as long as such failure was not due to the breach of, or non-compliance with, the Merger Agreement by the Company or any of the Equityholders. In the event of a Flagship Termination, the Company will be required to pay Flagship and the Equityholders an amount equal to two (2) times their reasonable, documented, out-of-pocket attorneys’ and accountants’ transaction fees and expenses incurred prior to such Flagship Termination in connection with the Merger, up to a maximum aggregate amount of $100,000. On March 4, 2021, the Company entered into a new lease agreement with Systems Trading effective April 1, 2021. This lease obligation is payable to Systems Trading with monthly installments of $1,567 and expires on March 31, 2024. The lease carries an interest rate of 8%. On March 8, 2021 , the Board approved and adopted the 2021 Stock Incentive Plan (the “2021 Plan”), and the Consenting Stockholders subsequently approved the 2021 Plan, by written consent dated March 8, 2021. An aggregate of 15,000,000 shares may be issued under this plan. On March 8, 2021 , the Board approved and stockholders owning in excess of 50% of the Company’s voting power approved an amendment to the Company’s articles of incorporation to effect a reverse stock split at a ratio of between 1:2 and 1:60, to be determined in the sole discretion of the Board at a future date. 48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.