Data Storage Corp 10-K

ITEM 1. BUSINESS The Industry and Opportunity Data Storage Corporation provides Cloud Managed Services and technologies across multiple platforms. The Company’s technical assets are located in geographically diverse Tier 3 compliant data centers throughout the USA and Canada. Hybrid and Multi-Cloud have become mainstream technological offerings of the Cloud Managed Services industry as companies have moved away from legacy, on-premise technology solutions. This approach is growing more complex, as companies utilize disparate technical environments, including on-premises equipment and software, multi-clouds interfacing with Software as a Service providers, Amazon AWS and others while focusing on the remote employee or contractor for higher levels of security is driving growth in managed cloud services. Cloud Managed Service Providers assist businesses in achieving their desired security levels, technical cloud infrastructure and financial objectives while optimizing the value of these technologies and cloud resources through multi-cloud management, ensuring business continuity, governance, and operational efficiencies. This is a five hundred-billion-dollar industry. One subset, a highly-focused segment of the Company, is IBM Power cloud infrastructure and disaster recovery. Globally estimated at over one million virtual IBM Power servers. According to the most recent information received from IBM typical industries utilizing IBM Power servers are finance, retail, healthcare, government, and distribution organizations. The Company is a leader in providing IBM Power cloud infrastructure, disaster recovery and the creation of unique offerings for over 15 years. The opportunity, for the Company, in the IBM Power server portfolio segment is to capture a share of this annual recurring revenue marketplace that is currently under migration to cloud infrastructure. The Company believes businesses are increasingly under pressure to improve the proficiency of their information and storage systems accelerating the migration from self-managed technical equipment and solutions to fully managed multi-cloud technologies to reduce cost and compete effectively. These trends create an opportunity for cloud technology service providers. The Company’s market opportunity is derived from the demand for fully managed cloud and cybersecurity services across all major operating systems. The Company’s target is the $46.7 billion marketplace in the United States and Canada of this overall, projected $1 trillion global marketplace. According to Fortune Business Insights, the Cloud Managed Services industry in North America was $16.3 billion in 2019 and has been growing at a rate of 13.8% CAGR bringing us to $24 billion by the end of 2022. Disaster Recovery is projected to be a $3.6 billion in the US by the end of 2022 which is 35% of the $10.3 billion globally based on Grandview Research Disaster Recovery Solutions Market Size report. Cyber Security, specifically the MDR segment, is an established market recognized by buyers . Gartner observed a 35% growth in end users’ inquiries on the topic in the last year. Gartner estimates that by 2025, the MDR market will reach $2.15 billion in revenue, up from $1.03 billion in 2021, for a compound annual growth rate (CAGR) of 20.2%. The Company’s VOIP solutions fit well into this steadily growing segment which is expected to reach $90 billion worldwide in 2022 with a CAGR of 3.1% with $17 billion in the US according to Globe Newswire Market Analysis and Insights: Global VoIP Market. Data and Analytics is another market that is growing rapidly and the Company is breaking into, according to Globe Newswire this market was valued at $198 billion in 2020 and with a projected 13.5% CAGR we see this hitting $263 billion by the end of 2022 and based on the Big Data Business Analytics market share report posted on statista.com the US has 51% of that growth. The Company is positioned to support this growth, in the IBM Power multi-cloud marketplace as businesses continue to migrate towards this strategy. The Company has designed and built its solutions and services to support the demanding IBM Power System workload, manage hybrid cloud deployments and continue to provide solutions that keep data and workloads protected from disasters and security attacks. 2 Company Overview Data Storage Corporation, headquartered in Melville, New York, with its three subsidiaries, DSC, Flagship Solutions LLC and Nexxis, Inc., provides solutions and services to a broad range of clients in several industries, including healthcare, banking and finance, distribution services, manufacturing, construction, education, and government. The subsidiaries maintain business development teams, as well as independent distribution companies. As an example, the Company’s distribution channel of companies provides long-term subscription-based disaster recovery and cloud infrastructure without investing in the infrastructure, data centers, telecommunications or specialized technical staff, which substantially lowers their barrier of entry in providing these solutions to their client base. The distribution company has typically provided equipment and software. However, a client’s awareness in 2021 of the ability to migrate to an IBM Power cloud infrastructure and disaster recovery affords the distributor the ability to maintain the client and create an annuity year after year. To further support that awareness, over 55,000 visitors arrived at the Company’s website in 2021. During 2021, based on the May capital raise and the up list to Nasdaq, the Company added distribution, business development representatives, marketing, and technical personnel. Management continues to be focused on building the Company’s sales and marketing strategy and expanding its technology assets throughout its data center network. The Company’s business offices are located in New York and Florida. The offices include a technology center and lab, adapted to meet the technical requirements of the Company’s clients. The Company maintains its own infrastructure, storage, and networking equipment required to provide subscription solutions in seven geographically diverse data centers located in New York, Massachusetts, Texas, Florida and North Carolina, and in Canada, Toronto, and Barrie, serving clients in the United States and Canada. The Company’s business continuity solutions allow clients to quickly recover from system outages, human and natural disasters, and cyber security attacks, such as Ransomware. The Company’s managed cloud services begin with migration to the cloud and provide ongoing system support and management that enables its clients to run their software applications and technical workloads in a multi-cloud environment. The Company’s cyber security offerings include comprehensive consultation and a suite of data security, disaster recovery, and remote monitoring services and technologies that can be incorporated into the Company’s cloud solutions or be delivered as a standalone managed security offering covering the client site endpoint devices, users, servers, and equipment. Solution architects and the Company’s business development teams work with organizations identifying and solving critical business problems. The Company carefully plans and manages the migration and configuration process, continuing the relationship and advising its clients long after the services have been implemented. As of this filing, the Company has proposals outstanding of approximately $20 million in total contract value; and, total proposals outstanding for subscriptions solutions of approximately $14 million in total contract value. Reflecting on client satisfaction, the Company’s renewal rate on client subscription solutions is approximately 94% after their initial contract term expired. The Company provides its clients subscription-based, long-term agreements for cloud disaster recovery, cloud infrastructure, telecommunications solutions, and high processing on-site computing power and software solutions. While a significant portion of the Company’s revenue has been subscription-based, it also generates revenue from the sale of equipment and software for cybersecurity, data storage, IBM Power systems equipment and managed service solutions. As of this filing the Company has a backlog of over $500,000 in Annual Recurring Revenue (ARR) and equipment and software backlog of approximately $2 million. 3 Growth Strategies The Company will continue to drive revenues by expanding distribution channels. The Company will continue to build upon its social and digital lead generation programs. Further, the Company will continue to seek synergetic acquisitions that expand distribution, leading a technology trend, add to its existing technical staff and create economies of scale improving gross profit margins. The Company increases revenue and drives growth by developing and managing collaborative solutions as well as joint marketing initiatives. The Company has a diverse community of distribution partners, ranging from IBM Business Partners, Software Vendors, application support providers, consultants, and other cloud infrastructure providers. The Company believes there is a significant need for its solutions on a global basis and, accordingly, the opportunity for it to grow its business through international expansion as these markets increase their use of multi-cloud solutions. The Company’s Core Services : The Company provides an array of multi-cloud information technology solutions in highly secure, enterprise-level cloud services for companies using IBM Power Systems, Microsoft Windows, and Linux. Specifically, the Company’s support services cover: ● Cloud Infrastructure ● Disaster Recovery as a Service ● Cyber Security as a Service ● Data Analytics as a Service Solutions and Services Cyber Security Solutions: The Company’s ezSecurity™ solution offers a suite of comprehensive cyber security products that can be utilized on systems at the client’s location or on systems hosted in the Company’s cloud. These offerings include fully managed endpoint (PCs and other user devices) security with active threat mitigation, system security assessments, risk analysis, and applications to ensure continuous security. ezSecurity™ contains a specialized offering for protecting and auditing IBM systems including a package designed to protect IBM systems against Ransomware attacks. Data Protection and Recovery Solutions: The Company offers a variety of data protection and disaster recovery solutions services designed to meet its clients’ requirements and budgets. ● ezVault™ solution is at the core of the Company’s data protection services and allows its clients to have their data protected offsite with unlimited data retention in a secure location that uses encrypted, enterprise-grade storage which allows for remote recovery from system outages, human and natural disasters, and cyber security attacks like Ransomware and virus allowing restoration of data from a known good point in time prior to an attack. ● ezRecovery™ provides standby systems, networking, and storage in the Company’s cloud infrastructure that allows for faster recovery from client backups stored using ezVault™ at the same hosted location. ● ezAvailability™ solution offers reliable real-time data replication for mission-critical applications with Recovery Time Objective under fifteen minutes and near-zero Recovery Point Objective, with optional, fully managed replication services. The Company’s ezAvailability™ service consists of a full-time enterprise system, storage, and network resources, allowing quick and easily switched production workloads to the Company’s cloud when needed. The Company’s ezAvailability™ services are backed by a Service-Level Agreement (“SLA”) to help assure performance, availability, and access. ● ezMirror™ solution provides replication services that mirror the clients’ data at the storage level and allows for similar near-zero Recovery Point Objective as ezAvailability with less application management and Recovery Time Objective under 1 hour. 4 Cloud Hosted Production Systems: The Company’s ezHost™ solution offers managed cloud services that removes the burden off system management from its clients and ensures that their software applications and IT workloads are running smoothly. ezHost™ provides full-time, scalable compute, storage, and network infrastructure resources to run clients’ workloads on the Company’s enterprise-class infrastructure. ezHost™ replaces the cost of support, maintenance, system administration, space, electrical power, and cooling of the typical hardware on-premises systems with a predictable monthly expense. The Company’s ezHost services are backed by an SLA governing performance, availability, and access. Voice & Data Solutions: Nexxis, our voice and data division, specializes in fully-managed VoIP, Internet Access, and Data Transport solutions that satisfy the requirements of corporate and remote workforce. Services are delivered over fiber optic, coaxial, and wireless networks to assist businesses fully connected from any location. Nexxis provides dedicated internet access with speeds of up to 10 Gbps, FailSAFE, a Cloud-first SD-WAN solution, that delivers industry-leading connectivity to cloud services, cloud-based Hosted VoIP and Unified Communications that provide business continuity and integration with Microsoft Teams. Data Analytics: The Company’s trademarked Infralytics™ offering was developed to empower IT organizations to respond quickly and intelligently to business-impact issues as they arise. With Infralytics custom dashboards, a client can monitor physical servers, virtual machines, network devices, applications, and services across multiple platforms – whether on-premises, virtual, or in the Cloud. It also allows the Company’s clients to gain enhanced visibility and control over their physical, virtual, and cloud IT infrastructure via customized, interactive dashboards. In addition, utilizing IBM’s Watson the Company is taking disparate data sources and developing algorithms to provide greater insight into the aggregation of that data. All of this is provided as a service with the primary deliverable a real-time dashboard. Corporate History On October 20, 2008, the Company consummated a share exchange transaction with Euro Trend Inc. The Company subsequently changed its name from Euro Trend Inc. to Data Storage Corporation. Data Storage Corporation acquired the assets of SafeData, LLC in June 2010, and the assets of Message Logic LLC, (“Message Logic”) in October 2012. In November 2012, the Company entered into an agreement with an IBM partner, ABC Services, Inc. to provide an IBM Power cloud infrastructure offering, marketed under the name Secure Infrastructure & Services LLC (“SIAS”), a New York limited liability company. In October 2016, the Company purchased the assets of ABC Services, Inc., which included the remaining 50% of the SIAS company. On June 1, 2021, the Company merged its Florida company with Flagship Solutions, LLC. This transaction with an IBM Gold Business Partner was synergetic to the Company’s services and added new solutions such as IP with their Renewalytics managed maintenance/software and data analytics practice. The result of these acquisitions, combined with the Company’s legacy business continuity disaster recovery and IBM Power cloud infrastructure solutions, positions Data Storage Corporation as a leader. Competitive Landscape The markets for the Company’s products and services are competitive. However, competition is limited in the Company’s $46.7 billion marketplace, compared to the limitless competitors, competing against Amazon Web Services (AWS), Google, and Microsoft today which hold an estimated 51% of the marketplace for X86 cloud infrastructure and X86 disaster recovery platforms. Today, the IBM Power community, based on a recent IBM user survey, only 15% of the IBM Power server community utilizes the cloud. Other Company services and solutions, outside of the IBM Power user community face many competitors for cyber security and data analytics, however, these solutions and services are typically provided by the Company to their existing clients and distribution companies. These markets are characterized by frequent product introductions and rapid technological advances. The Company’s financial condition and operating results can be adversely affected by these and other industry-wide downward pressures on gross margins. Principal competitive factors important to the Company include price, product features, relative price and performance, product quality and reliability, strong third-party software, marketing and distribution capability, service and support and corporate reputation. The Company is focused on expanding its market opportunities globally related to disaster recovery and cloud infrastructure, primarily focused on the IBM community. These markets are highly competitive and include several large, well-funded and experienced participants. The Company’s future financial condition and operating results depend on the Company’s ability to continue to provide a high-quality solution as well as increase distribution of the solutions in each of the markets in which it competes. 5 Flagship Solutions, LLC. On February 4, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Data Storage FL, LLC, a Florida limited liability company and our 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), we acquired 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, our wholly-owned subsidiary. The closing of the Merger (the “Closing”) Flagship was completed on June 1, 2021. Flagship is a provider of IBM equipment and solutions, managed services and cloud solutions that include cloud-based server monitoring and management, 24×7 help desk support, and data center infrastructure management. Concurrently with the Closing, Flagship and Mark Wyllie, Flagship’s Chief Executive Officer, entered into an Employment Agreement (the “Wyllie Employment Agreement”), which became effective upon consummation of the Closing, pursuant to which Mr. Wyllie will continue to serve as Chief Executive Officer of Flagship following the Closing on the terms and conditions set forth therein. Flagship’s obligations under the Wyllie Employment Agreement will also be guaranteed by the Company. The Wyllie Employment Agreement contains customary salary, bonus, employee benefits, severance and restrictive covenant provisions. In addition, pursuant to the Wyllie Employment Agreement, Mr. Wyllie was appointed to serve as a member of the Board during the term of his employment thereunder. Mr. Wyllie, as of November 11, 2021, became an Officer of the Company. The foregoing information has been filed as an exhibit to the 2021 Annual Report. Readers should review those agreements for a complete understanding of the terms and conditions associated with this transaction. COVID-19 In December 2019, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China. The World Health Organization determined that the outbreak constituted a “Public Health Emergency of International Concern” and declared a pandemic. The COVID-19 pandemic is disrupting businesses and affecting production and sales across a range of industries, as well as causing volatility in the financial markets. The extent of the impact of the COVID-19 pandemic on the Company’s customer demand, sales and financial performance will depend on certain developments, including, among other things, the duration and spread of the outbreak and the impact on its customers and employees, all of which are uncertain and cannot be predicted. See “Risk Factors” for information regarding certain risks associated with the pandemic. The COVID-19 pandemic has accelerated cloud transformation efforts for new and existing customers and underscored the importance and mission-critical nature of multi-cloud strategies. Over the last year, customers have increasingly turned to cloud solutions to pivot to new business models, improved their disaster recovery of mission-critical data, migrated to cloud-based solutions and reduced their capital expenditure requirements. Since September 2021 the Company has adopted a hybrid model that allows for its employees to either work remotely utilizing solutions the Company provides to their clients and distribution channels, or work in its offices. Additionally, the Company’s remote, technology-enabled model has enabled minimal disruption to its go-to-market efforts and service delivery organizations. Currently, the COVID-19 pandemic has not had a significant impact on the Company’s operations or financial performance; however, the ultimate extent of the impact of the COVID-19 pandemic on its operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and its impact on the Company’s customers, vendors and employees and its impact on its sales cycles as well as industry events, all of which are uncertain and cannot be predicted. The extent of the impact, if any, will depend on future developments, including actions taken to contain COVID-19. See also “Risk Factors” for more information. 6 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 to Signature Bank, as the lender, 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 received forgiveness for the full amount during the year ended December 31, 2021. The extent of the impact, if any, will depend on future developments, including actions taken to contain COVID-19. See also “Risk Factors” for more information. Reverse Stock Split On March 8, 2021, the Company’s Board of Directors and its stockholders that have in excess of 50% of its voting power approved an amendment to its articles of incorporation to effect a reverse stock split with a ratio of between 1:2 to 1:60, to be effected in the discretion of its Board of Directors. Based on the Nasdaq up listing on May 17, 2021, the Company had a reverse split of 40:1. Government Regulation The Company is subject to various federal, state, local and international laws with respect to its receipt, storage and processing of personal information and other customer data. The Company receives, stores, and processes personal information and other customer data. Personal privacy has become a significant issue in the United States and in many other countries where the Company may provide its offering of solutions. The regulatory framework for privacy issues worldwide is currently complex and evolving, and it is likely to remain uncertain for the foreseeable future. There are numerous federal, state, local, and foreign laws regarding privacy and the storing, sharing, use, processing, disclosure, and protection of personal information and other customer data, the scope of which are changing, subject to differing interpretations, and may be inconsistent among countries or conflict with other rules. The Company generally seeks to comply with industry standards and is subject to the terms of its privacy policies and privacy-related obligations to third parties. The Company strives to comply with all applicable laws, policies, legal obligations, and industry codes of conduct relating to privacy and data protection to the extent possible. Any failure or perceived failure by the Company to comply with its privacy policies, its privacy-related obligations to customers or other third parties, its privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other customer data, may result in governmental enforcement actions, litigation, or public statements against the Company by consumer advocacy groups or others and could cause its customers to lose trust in it, which could have an adverse effect on its reputation and business. Any significant change to applicable laws, regulations, or industry practices regarding the use or disclosure of the Company’s customer’s data, or regarding the manner in which the express or implied consent of customers for the use and disclosure of such data is obtained, could require the Company to modify its solutions and features, possibly in a material manner, and may limit its ability to develop new services and features that make use of the data that its customers voluntarily share with the Company. 7 The Company’s solutions are used by customers in the health care industry, and the Company must comply with numerous federal and state laws related to patient privacy in connection with providing its solutions to these customers. In particular, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), and the Health Information Technology for Economic and Clinical Health Act (“HITECH”) include privacy standards that protect individual privacy by limiting the uses and disclosures of individually identifiable health information and implementing data security standards. Because the Company’s solutions may backup individually identifiable health information for its customers, its customers are mandated by HIPAA to enter into written agreements with the Company known as business associate agreements that require it to safeguard individually identifiable health information. Business associate agreements typically include: ● a description of the Company’s permitted uses of individually identifiable health information; ● a covenant not to disclose that information except as permitted under the agreement and to make the Company’s subcontractors, if any, subject to the same restrictions; ● assurances that appropriate administrative, physical, and technical safeguards are in place to prevent misuse of that information; ● an obligation to report to the Company’s customers any use or disclosure of that information other than as provided for in the agreement; ● a prohibition against the Company’s use or disclosure of that information if a similar use or disclosure by its customers would violate the HIPAA standards; ● the ability of the Company’s customers to terminate their subscription to its solution if the Company breaches a material term of the business associate agreement and are unable to cure the breach; ● the requirement to return or destroy all individually identifiable health information at the end of the customer’s subscription; and ● access by the Department of Health and Human Services to the Company’s internal practices, books, and records to validate that the Company is safeguarding individually identifiable health information. 8 Human Capital Resources The Company believes that its success depends upon its ability to attract, develop and retain key personnel. As of March 31, 2022, the Company employed 60 full-time employees and 2 part-time employees, of which eight are executive management, thirteen are administration and finance, twelve are sales staff and twenty-nine were part of its technical team. None of the Company’s employees are covered by collective bargaining agreements, and management considers relations with the Company’s employees to be in good standing. Although the Company continually seeks to add additional talent to its workforce, management believes that it has sufficient human capital to operate its business successfully. The Company’s compensation programs are designed to align the compensation of its employees with its performance and to provide the proper incentives to attract, retain and motivate employees to achieve superior results. The structure of the Company’s compensation programs balances incentive earnings for both short-term and long-term performance. The he alth and safety of the Company’s employees is its highest priority, and this is consistent with its operating philosophy. Corporate Information The primary mailing address for the Company is 48 South Service Road, Suite 203, Melville, NY 11747. Available Information The Company’s corporate website address is www.datastoragecorp.com . All filings the Company makes with the Securities and Exchange Commission (“SEC”), including its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, its Current Reports on Form 8-K, its proxy statements and any amendments thereto filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available for free in the Investor Relations section of the Company’s website as soon as reasonably practicable after they are filed with or furnished to the SEC. The reference to the Company’s website address does not constitute inclusion or incorporation by reference of the information contained on the Company’s website in this Form 10-K or other filings with the SEC, and the information contained on the Company’s website is not part of this document. 9