Data Storage Corp 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, this item is not required. 32 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to the Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB Firm ID 00 89 ) F-2 Consolidated Balance Sheets as of December 31, 2022, and 2021 F-4 Consolidated Statements of Operations for the Years Ended December 31, 2022, and 2021 F-5 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022 , and 2021 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, and 2021 F-7 Notes to Consolidated Financial Statements F-8 F- 1 Report of Independent Registered Public Accounting Firm 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, 2022 and 2021, and the related statements of operations, stockholders’ equity (deficit), 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, 2022 and 2021 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. F- 2 To the Board of Directors and Stockholders of Data Storage Corporation and Subsidiaries The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company uses the discounted cash flow model to estimate the fair value of each reporting unit, which requires management to make subjective estimates and assumptions related to forecasts of cash flows such as revenue growth rates and estimates of the weighted average cost of capital rate. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. Management determined that the carrying value of its Flagship reporting unit exceeded the fair value as of the measurement date and as a result, an impairment of $2.3 million was recognized in the fourth quarter. Given the significant judgments made by management to estimate the fair value of the Flagship reporting unit, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasts of cash flows, such as revenue growth rates, and estimates of the weighted average cost of capital rate, required a high degree of auditor judgment. How the Critical Matter Was Addressed in the Audit The primary procedures we performed to address this critical audit matter included: ● Obtaining valuation reports prepared by valuation specialists engaged by management to assist in the determination of fair value of goodwill. ● Examining the completeness and accuracy of the underlying data supporting the significant assumptions and estimates used in the valuation reports, including historical and projected financial information. ● Utilizing personnel with specialized skills and knowledge in valuation to assist in: (i) evaluating the appropriateness of the valuation models, and (ii) assessing the reasonableness of the assumptions used in the determination of fair values. /s/ Rosenberg Rich Baker Berman, P.A. We have served as the Company’s auditor since 2008. Somerset, New Jersey March 31, 2023 F- 3 DATA STORAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2022 December 31, 2021 ASSETS Current Assets: Cash and cash equivalents $ 2,286,722 $ 12,135,803 Accounts receivable (less allowance for credit losses of $ 27,250 and $ 30,000 in 2022 and 2021, respectively) 3,502,836 2,384,367 Marketable securities 9,010,968 - Prepaid expenses and other current assets 584,666 536,401 Total Current Assets 15,385,192 15,056,571 Property and Equipment: Property and equipment 7,168,488 6,595,236 Less—Accumulated depreciation ( 4,956,698 ) ( 4,657,765 ) Net Property and Equipment 2,211,790 1,937,471 Other Assets: Goodwill 4,238,671 6,560,671 Operating lease right-of-use assets 226,501 422,318 Other assets 48,437 103,226 Intangible assets, net 1,975,644 2,254,566 Total Other Assets 6,489,253 9,340,781 Total Assets $ 24,086,235 $ 26,334,823 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current Liabilities: Accounts payable and accrued expenses $ 3,207,577 $ 1,343,391 Deferred revenue 281,060 366,859 Finance leases payable 359,868 216,299 Finance leases payable related party 520,623 839,793 Operating lease liabilities short term 160,657 205,414 Total Current Liabilities 4,529,785 2,971,756 Operating lease liabilities 71,772 226,344 Finance leases payable 281,242 157,424 Finance leases payable related party 256,241 364,654 Total Long-Term Liabilities 609,255 748,422 Total Liabilities 5,139,040 3,720,178 Commitments and contingencies (Note 7) — — Stockholders’ Equity: Preferred stock, Series A par value $ .001 ; 10,000,000 shares authorized; 0 and 0 shares issued and outstanding in 2022 and 2021, respectively — — Common stock, par value $ .001 ; 250,000,000 shares authorized; 6,822,127 and 6,693,793 shares issued and outstanding in 2022 and 2021, respectively 6,822 6,694 Additional paid in capital 38,982,440 38,241,155 Accumulated deficit ( 19,887,378 ) ( 15,530,576 ) Total Data Storage Corp Stockholders’ Equity 19,101,884 22,717,273 Non-controlling interest in consolidated subsidiary ( 154,689 ) ( 102,628 ) Total Stockholder’s Equity 18,947,195 22,614,645 Total Liabilities and Stockholders’ Equity $ 24,086,235 $ 26,334,823 The accompanying notes are an integral part of these consolidated Financial Statements. F- 4 DATA STORAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2022 2021 Sales $ 23,870,837 $ 14,876,227 Cost of sales 15,787,544 8,459,117 Gross Profit 8,083,293 6,417,110 Impairment of goodwill 2,322,000 — Selling, general and administrative 9,837,308 7,184,182 Loss from Operations ( 4,076,015 ) ( 767,072 ) Other Income (Expense) Interest expense, net ( 130,087 ) ( 126,746 ) Impairment of deferred offering costs and financing costs associated with canceled financing efforts ( 127,343 ) — Other Expense ( 75,418 ) — Loss on disposal of equipment — ( 44,732 ) Gain on forgiveness of debt — 798,840 Total Other Income (Expense) ( 332,848 ) 627,362 Income (Loss) before provision for income taxes ( 4,408,863 ) ( 139,710 ) Benefit from income taxes — 399,631 Net Income (Loss) ( 4,408,863 ) 259,921 Non-controlling interest in consolidated subsidiary 52,061 7,923 Net Income (Loss) attributable to Data Storage Corp ( 4,356,802 ) 267,844 Preferred Stock Dividends — ( 63,683 ) Net Income (Loss) Attributable to Common Stockholders $ ( 4,356,802 ) $ 204,161 Earnings per Share – Basic $ ( 0.64 ) $ 0.04 Earning pers Share – Diluted $ ( 0.64 ) $ 0.03 Weighted Average Number of Shares – Basic 6,775,140 5,075,716 Weighted Average Number of Shares – Diluted 6,775,140 6,340,125 The accompanying notes are an integral part of these consolidated Financial Statements. F- 5 DATA STORAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Non-Controlling Interest Total Stockholders’ Equity Shares Amount Shares Amount Balance January 1, 2021 1,401,786 $ 1,402 3,214,537 $ 3,215 $ 17,745,783 $ ( 15,734,737 ) $ ( 94,705 ) $ 1,920,958 Conversion of preferred series to stock ( 1,401,786 ) ( 1,402 ) 43,806 44 1,358 — — — Proceeds from issuance of common stock and warrants — — 2,975,000 2,975 16,941,405 — — 16,944,380 Stock Options Exercise — — 5,060 5 ( 5 ) — — — Stock warrants exercise — — 455,390 455 3,380,816 — — 3,381,271 Stock-based compensation — — — — 171,798 — — 171,798 Net Income (Loss) — — — — — 267,844 ( 7,923 ) 259,921 Preferred stock dividends — — — — — ( 63,683 ) — ( 63,683 ) Balance, December 31, 2021 — $ — 6,693,793 $ 6,694 $ 38,241,155 $ ( 15,530,576 ) $ ( 102,628 ) $ 22,614,645 Stock options exercise — — 3,334 3 6,931 — — 6,934 Stock-based compensation — — 125,000 125 734,354 — — 734,479 Net (Loss) — — — — — ( 4,356,802 ) ( 52,061 ) ( 4,408,863 ) Balance, December 31, 2022 — $ — 6,822,127 $ 6,822 $ 38,982,440 $ ( 19,887,378 ) $ ( 154,689 ) $ 18,947,195 The accompanying notes are an integral part of these consolidated Financial Statements. F- 6 DATA STORAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2022 2021 Cash Flows from Operating Activities: Net (loss) income $ ( 4,408,863 ) $ 259,921 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,225,911 1,284,345 Stock based compensation 734,479 171,798 Gain on forgiveness of debt — ( 798,840 ) Impairment of deferred offering costs and financing costs associated with canceled financing efforts 127,343 — Impairment of goodwill 2,322,000 — Loss on disposal of equipment — 44,732 Deferred income taxes, release of valuation allowance — ( 399,631 ) Changes in Assets and Liabilities: Accounts receivable ( 1,118,469 ) ( 440,517 ) Other assets 54,788 ( 6,417 ) Prepaid expenses and other current assets ( 48,265 ) ( 169,355 ) Right of use asset 195,817 ( 180,407 ) Accounts payable and accrued expenses 1,864,188 ( 142,233 ) Deferred revenue ( 85,799 ) ( 163,770 ) Operating lease liability ( 199,329 ) 179,684 Net Cash Provided by (Used in) Operating Activities 663,801 ( 360,690 ) Cash Flows from Investing Activities: Investor deposit — ( 25,000 ) Capital expenditures ( 127,257 ) ( 455,835 ) Purchase of marketable securities ( 9,010,968 ) - Cash acquired in business acquisition — 212,068 Cash consideration for business acquisition — ( 6,149,343 ) Net Cash Used in Investing Activities ( 9,138,225 ) ( 6,418,110 ) Cash Flows from Financing Activities: Proceeds from line of credit — 50,000 Repayments of finance lease obligations related party ( 867,741 ) ( 968,420 ) Repayments of finance lease obligations ( 386,509 ) ( 156,845 ) Payments for deferred offering costs ( 127,343 ) — Proceeds from issuance of common stock and warrants — 16,944,380 Cash received for the exercise of Warrants — 3,381,271 Cash received for the exercise of options 6,934 — Repayments of Dividend payable — ( 1,179,357 ) Repayment of line of credit — ( 50,024 ) Net Cash (Used in) Provided by Financing Activities ( 1,374,657 ) 18,021,005 Increase (decrease) in Cash and Cash Equivalents ( 9,849,081 ) 11,242,205 Cash and Cash Equivalents, Beginning of Period 12,135,803 893,598 Cash and Cash Equivalents, End of Period $ 2,286,722 $ 12,135,803 Supplemental Disclosures: Cash paid for interest $ 127,871 $ 116,682 Cash paid for income taxes $ — $ — Non-cash investing and financing activities: Accrual of preferred stock dividend $ — $ 63,683 Assets acquired by finance lease $ 1,094,051 $ 164,754 The accompanying notes are an integral part of these consolidated Financial Statements. F- 7 DATA STORAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2022 Note 1 – Basis of Presentation, Organization and Other Matters Data Storage Corporation (“DSC” or the “Company”) provides subscription based, long term agreements for disaster recovery solutions, cloud infrastructure, Cyber Security and Voice and Data solutions. Headquartered in Melville, NY, DSC offers solutions and services to businesses within the healthcare, banking and finance, distribution services, manufacturing, construction, education, and government industries. DSC derives its revenues from subscription services and solutions, managed services, software and maintenance, equipment and onboarding provisioning. DSC maintains infrastructure and storage equipment in seven technical centers in New York, Massachusetts, Texas, Florida, North Carolina and Canada. On May 31, 2021, the Company completed a merger of Flagship Solutions, LLC (“Flagship”) (a Florida limited liability company) and the Company’s wholly-owned subsidiary, Data Storage FL, LLC. Flagship is a provider of Hybrid Cloud solutions, managed services and cloud solutions. On January 27, 2022, we formed Information Technology Acquisition Corporation a special purpose acquisition company for the purpose of entering into a merger, capital stock exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination with one or more businesses or entities. Note 2 – Summary of Significant Accounting Policies Principles of Consolidation The Consolidated Financial statements include the accounts of the Company and its wholly-owned subsidiaries, (i) CloudFirst Technologies Corporation, a Delaware corporation, (ii) Data Storage FL, LLC, a Florida limited liability company, (iii) Flagship Solutions, LLC, a Florida limited liability company, (iv) Information Technology Acquisition Corporation, a Delaware Corporation, and (v) its majority-owned subsidiary, Nexxis Inc, a Nevada corporation. All 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. F- 8 Reclassifications Certain prior period amounts in the consolidated financial statements thereto have been reclassified where necessary to conform to the current year’s presentation. These reclassifications did not affect the prior period’s total assets, total liabilities, stockholders’ deficit, net loss or net cash used in operating activities. During the year ended December 31, 2022, we adopted a change in presentation on our consolidated statements of operations in order to present technician salaries in cost of sales, the presentation of which is consistent with our peers. Prior periods have been revised to reflect this change in presentation. Recently Issued and Newly Adopted Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU-2016-13”). ASU 2016-13 affects loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. ASU 2016-13 is effective for the fiscal year beginning after December 15, 2022, including interim periods within that fiscal year. The Company expects that there would be no material impact on the Company’s consolidated financial statements upon the adoption of this ASU. In November 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, issued by the Financial Accounting Standards Board. This ASU requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The update will generally result in the recognition of contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. The adoption of ASU 2021-08 did not have a material impact on the consolidated financial statements. Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Estimated Fair Value of Financial Instruments The Company’s financial instruments include cash, accounts receivable, accounts payable and lease commitments. Management believes the estimated fair value of these accounts on December 31 ,2022, approximate their carrying value as reflected in the balance sheet due to the short-term nature. The carrying values of certain of the Company’s notes payable and capital lease obligations approximate their fair values based upon a comparison of the interest rate and terms of such debt given the level of risk to the rates and terms of similar debt currently available to the Company in the marketplace. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Certain assets and liabilities are measured at fair value on a nonrecurring basis. Assets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property, plant and equipment, operating lease right-of-use assets, goodwill and other intangible assets. These assets are measured using Level 3 inputs, if determined to be impaired. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity or remaining maturity at the time of purchase, of three months or less to be cash equivalents. Investments Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. The following table sets forth a summary of the changes in equity investments, at cost that are measured at fair value on a non-recurring basis: Schedule of changes in equity investments measured at fair value For the year ended December 31, 2022 Total As of January 1, 2022 $ — Purchase of equity investments 9,010,968 Unrealized gains — As of December 31, 2022 $ 9,010,968 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. F- 9 As of December 30, 2022, DSC had two customers with an accounts receivable balance representing 23 % and 14 % of total accounts receivable. As of December 31, 2021, the Company had one customer with an accounts receivable balance representing 16 % of total accounts receivable. For the year ended December 31, 2022, the Company had two customers that accounted for 18 % and 11 % of revenue. For the year ended December 31, 2021, the Company had one customer that accounted for 14 % of revenue. Accounts Receivable/Allowance for Credit Losses The Company sells its services to customers on an open credit basis. Accounts receivables are uncollateralized, non-interest-bearing customer obligations. Accounts receivables are typically due within 30 days. The allowance for credit losses reflects the estimated accounts receivable that will not be collected due to credit losses. Provisions for estimated uncollectible accounts receivable are made for individual accounts based upon specific facts and circumstances including criteria such as their age, amount, and customer standing. Provisions are also made for other accounts receivable not specifically reviewed based upon historical experience. Clients are invoiced in advance for services as reflected in deferred revenue on the Company’s balance sheet. Property and Equipment Property and equipment are recorded at cost and depreciated over their estimated useful lives or the term of the lease using the straight-line method for financial statement purposes. Estimated useful lives in years for depreciation are five to seven years for property and equipment. Additions, betterments and replacements are capitalized, while expenditures for repairs and maintenance are charged to operations when incurred. As units of property are sold or retired, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income. Deferred Offering Costs The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financing as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ deficit as a reduction of additional paid-in capital generated as a result of the offering. Should the planned equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to other income and expenses in the consolidated statement of operations. In accordance with this policy, for the years ended December 31, 2022, and 2021, the Company expensed financing costs of $ 127,343 and $ 0 , respectively. 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, 2022, and December 31, 2021, 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, 2022, and 2021, the Company has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. The Company’s 2022, 2021, 2020, and 2019 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. F- 10 Goodwill and Other Intangibles The Company tests goodwill and other intangible assets for impairment on at least an annual basis. Impairment exists if the carrying value of a reporting unit exceeds its estimated fair value. To determine the fair value of goodwill and intangible assets, the Company uses many assumptions and estimates using a market participant approach that directly impact the results of the testing. In making these assumptions and estimates, the Company uses industry accepted valuation models and set criteria that are reviewed and approved by various levels of management. The Company tests goodwill for impairment on an annual basis on December 31, or more frequently if events occur or circumstances change indicating that the fair value of the goodwill may be below its carrying amount. The Company has four reporting units. The Company uses an income-based approach to determine the fair value of the reporting units. This approach uses a discounted cash flow methodology and the ability of our reporting units to generate cash flows as measures of fair value of our reporting units. During the year ended December 31, 2022, and 2021, the Company completed its annual impairment tests of goodwill. The Company performed the qualitative assessment as permitted by ASC 350-20 and determined for three of its reporting units that the fair value of those reporting units was more likely than not greater than their carrying value, including Goodwill. However, based on this qualitative assessment, the Company determined that the carrying value of the Flagship reporting units was more likely than not greater than its carrying value, including Goodwill. Based on the completion of the annual impairment test, the Company recorded an impairment charge of $ 2,322,000 and $0 for goodwill for the years ended December 31, 2022, and 2021, respectively. Revenue Recognition Nature of goods and services The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each: 1) Cloud Infrastructure and Disaster Recovery Revenue Cloud Infrastructure provides clients the ability to migrate their on-premises computing and digital storage to DSC’s enterprise-level technical compute and digital storage assets located in Tier 3 data centers. Data Storage Corporation owns the assets and provides a turnkey solution whereby achieving reliable and cost-effective, multi-tenant IBM Power compute, x86/intel, flash digital storage, while providing disaster recovery and cyber security while eliminating client capital expenditures. The client pays a monthly fee and can increase capacity as required. Clients can subscribe to an array of disaster recovery solutions without subscribing to cloud infrastructure. Product offerings provided directly from DSC are High Availability, Data Vaulting and retention solutions, including standby servers which allows clients to centralize and streamline their mission-critical digital information and technical environment while ensuring business continuity if they experience a cyber-attack or natural disaster Client’s data is vaulted, at two data centers with the maintenance of retention schedules for corporate governances and regulations all to meet their back to work objective in a disaster. 2) Managed Services These services are performed at the inception of a contract. The Company provides professional assistance to its clients during the implementation processes. On-boarding and set-up services ensure that the solution or software is installed properly and function as designed to provide clients with the best solutions. In addition, clients that are managed service clients have a requirement for DSC to offer time and material billing supplementing the client’s staff. F- 11 The Company also derives both one-time and subscription-based revenue, from providing support, management and renewal of software, hardware, third party maintenance contracts and third-party cloud services to clients. The managed services include help desk, remote access, operating system and software patch management, annual recovery tests and manufacturer support for equipment and on-gong monitoring of client system performance. 3) Equipment and Software The Company provides equipment and software and actively participate in collaboration with IBM to provide innovative business solutions to clients. The Company is a partner of IBM and the various software, infrastructure and hybrid cloud solutions provided to clients. 4) Nexxis Voice over Internet and Direct Internet Access The Company provides VoIP, Internet access and data transport services to ensure businesses are fully connected to the internet from any location, remote and on premise. The company provides Hosted VoIP solutions with equipment options for IP phones and internet speeds of up to 10Gb delivered over fiber optics. Disaggregation of revenue In the following table, revenue is disaggregated by major product line, geography, and timing of revenue recognition. Schedule of revenue is disaggregated by major product For the Years Ended December 31, 2022 United States International Total Infrastructure & Disaster Recovery/Cloud Service $ 8,116,523 $ 183,855 $ 8,300,378 Equipment and Software 6,194,634 — 6,194,634 Managed Services 8,323,329 122,126 8,445,455 Nexxis VoIP Services 799,675 — 799,675 Other 130,695 — 130,695 Total Revenue $ 23,564,856 $ 305,981 $ 23,870,837 For the Year Ended December 31, 2021 United States International Total Cloud Infrastructure & Disaster Recovery $ 7,105,892 $ 97,354 $ 7,203,246 Equipment and Software 2,080,463 — 2,080,463 Managed Services 4,661,777 — 4,661,777 Nexxis Services 772,344 — 772,344 Other 158,397 — 158,397 Total Revenue $ 14,778,873 $ 97,354 $ 14,876,227 For the Years Ended December 31, Timing of revenue recognition 2022 2021 Products transferred at a point in time $ 6,325,328 $ 2,694,923 Products and services transferred over time 17,545,509 12,181,304 Total Revenue $ 23,870,837 $ 14,876,227 Contract receivables are recorded at the invoiced amount and are uncollateralized, non-interest-bearing client obligations. Provisions for estimated uncollectible accounts receivable are made for individual accounts based upon specific facts and circumstances including criteria such as their age, amount, and client standing. Sales are generally recorded in the month the service is provided. For clients who are billed on an annual basis, deferred revenue is recorded and amortized over the life of the contract. Transaction price allocated to the remaining performance obligations F- 12 The Company has the following performance obligations: 1) Data Vaulting : Subscription-based cloud service that encrypts and transfers data to a secure Tier 3 data center and further replicates the data to a second Tier 3 DSC technical center where it remains encrypted. Ensuring client retention schedules for corporate compliance and disaster recovery. Provides for twenty-four (24) hour or less recovery time and utilizes advanced data reduction, reduplication technology to shorten back-up and restore time. 2) High Availability : A managed cloud subscription-based service that provides cost-effective mirroring software replication technology and provides one (1) hour or less recovery time for a client to be back in business. 3) Cloud Infrastructure : subscription-based cloud service provides for “capacity on-demand” for IBM Power and X86 Intel server systems. 4) Internet : Subscription-based service, offering continuous internet connection combined with FailSAFE which provides disaster recovery for both a clients’ voice and data environments. 5) Support and Maintenance : Subscription based service offers support for clients on their servers, firewalls, desktops or software. Services are provided 24x7x365 to our clients. 6) Implementation / Set-Up Fees : Onboarding and set-up for cloud infrastructure and disaster recovery as well as Cyber Security. 7) Equipment sales : Sale of servers and data storage equipment to the client. 9) License : Granting SSL certificates and licenses. Disaster Recovery and Business Continuity Solutions Subscription services allow clients to access data or receive services for a predetermined period of time. As the client obtains access at a point in time and continues to have access for the remainder of the subscription period, the client is considered to simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs. Accordingly, the related performance obligation is considered to be satisfied ratably over the contract term. As the performance obligation is satisfied evenly across the term of the contract, revenue is recognized on a straight-line basis over the contract term. Initial Set-Up Fees The Company accounts for set-up fees as a separate performance obligation. Set-up services are performed one-time and accordingly the revenue is recognized at the point in time, and is non-refundable, and the Company is entitled to the payment. Equipment Sales The obligation for the equipment sales is such the control of the product transfer is at a point in time (i.e., when the goods have been shipped or delivered to the client’s location, depending on shipping terms). Noting that the satisfaction of the performance obligation, in this sense, does not occur over time, the performance obligation is considered to be satisfied at a point in time when the obligation to the client has been fulfilled (i.e., when the goods have left the shipping facility or delivered to the client, depending on shipping terms). F- 13 License - granting SSL certificates and other licenses Performance obligations as it relates to licensing is that the control of the product transfers, either at a point in time or over time, depending on the nature of the license. The revenue standard identifies two types of licenses of IP: (i) a right to access IP; and, (ii) a right to use IP. To assist in determining whether a license provides a right to use or a right to access IP, ASC 606 defines two categories of IP: Functional and Symbolic. The Company’s license arrangements typically do not require the Company to make its proprietary content available to the client either through a download or through a direct connection. Throughout the life of the contract the Company does not continue to provide updates or upgrades to the license granted. Based on the guidance, the Company considers its license offerings to be akin to functional IP and recognizes revenue at the point in time the license is granted and/or renewed for a new period. Payment Terms The typical terms of subscription contracts range from 12 to 36 months, with auto-renew options extending the contract for an additional term. The Company invoices clients one month in advance for its services, in addition to any contractual data overages or for additional services. Warranties The Company offers guaranteed service levels and service guarantees on some of its contracts. These warranties are not sold separately and are accounted as “assurance warranties”. Significant Judgement In the instance where contracts have multiple performance obligations the Company uses judgment to establish a stand-alone price for each performance obligation. The price for each performance obligation is determined by reviewing market data for similar services as well as the Company’s historical pricing of each individual service. The sum of each performance obligation is calculated to determine the aggregate price for the individual services. The proportion of each individual service to the aggregate price is determined. The ratio is applied to the total contract price in order to allocate the transaction price to each performance obligation. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss, measured as the amount by which the carrying value exceeds the fair value is recognized if the carrying amount exceeds estimated un-discounted future cash flows. Advertising Costs The Company expenses the costs associated with advertising as they are incurred. The Company incurred $ 966,268 and $ 396,303 for advertising costs for the year ended December 31, 2022, and 2021, respectively. Stock-Based Compensation The Company follows the requirements of FASB ASC 718-10-10, Share-Based Payments with regards to stock-based compensation issued to employees and non-employees. The Company has agreements and arrangements that call for stock to be awarded to the employees and consultants at various times as compensation and periodic bonuses. The expense for this stock-based compensation is equal to the fair value of the stock price on the day the stock was awarded multiplied by the number of shares awarded. The Company has a relatively low forfeiture rate of stock-based compensation and forfeitures are recognized as they occur. The valuation methodology used to determine the fair value of the options issued during the period is the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including the volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the options. Risk-free interest rates are calculated based on continuously compounded risk-free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its Common Stock and does not intend to pay dividends on its Common Stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best assessment. F- 14 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. The Company’s calculation of estimated volatility is based on historical stock prices over a period equal to the expected life of the awards. Net Income (Loss) Per Common Share 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, 2022, and 2021: Schedule of Earning per share basic and diluted Year Ended December 31, 2022 2021 Net Income (Loss) Available to Common Shareholders $ ( 4,356,802 ) $ 204,161 Weighted average number of common shares - basic 6,775,140 5,075,716 Dilutive securities Options — 229,826 Warrants — 1,034,583 Weighted average number of common shares - diluted 6,775,140 6,340,125 Earnings (Loss) per share, basic $ ( 0.64 ) $ 0.04 Earnings (Loss) per share, diluted $ ( 0.64 ) $ 0.03 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: Schedule of anti-dilutive income (loss) per share Year ended December 31, 2022 2021 Options 301,391 37,641 Warrants 2,419,193 1,384,610 2,720,584 1,422,251 F- 15 Note 3 - Prepaids and other current assets Prepaids and other current assets consist of the following: Schedule of Prepaids and other current assets December 31, December 31, 2022 2021 Prepaid Marketing & Promotion $ 4,465 $ — Prepaid Subscriptions and license 439,088 409,985 Prepaid Maintenance 45,216 80,227 Prepaid Insurance 54,564 — Other 41,333 46,189 Total prepaids and other current assets $ 584,666 $ 536,401 Note 4- Property and Equipment Property and equipment, at cost, consist of the following: Property and equipment December 31, December 31, 2022 2021 Storage equipment $ 60,288 $ 476,887 Furniture and fixtures 20,860 19,491 Leasehold improvements 20,983 20,983 Computer hardware and software 93,062 317,729 Data center equipment 6,973,295 5,760,146 Gross Property and equipment 7,168,488 6,595,236 Less: Accumulated depreciation ( 4,956,698 ) ( 4,657,765 ) Net property and equipment $ 2,211,790 $ 1,937,471 Depreciation expense for the year ended December 31, 2022, and 2021 was $ 946,989 and $ 959,974 , respectively. Note 5 - Goodwill and Intangible Assets Goodwill and intangible assets consisted of the following: Schedule of intangible assets and goodwill Estimated life in years Gross amount December 31, 2022, Accumulated Amortization Net Intangible assets not subject to amortization Goodwill Indefinite $ 4,238,671 $ — $ 4,238,671 Trademarks Indefinite 514,268 — 514,268 Total intangible assets not subject to amortization 4,752,939 — 4,752,939 Intangible assets subject to amortization Customer lists 7 2,614,099 1,167,075 1,447,024 ABC acquired contracts 5 310,000 310,000 — SIAS acquired contracts 5 660,000 660,000 — Non-compete agreements 4 272,147 272,147 — Website and Digital Assets 3 33,002 18,650 14,352 Total intangible assets subject to amortization 3,889,248 2,427,872 1,461,376 Total Goodwill and Intangible Assets $ 8,642,187 $ 2,427,872 $ 6,214,315 F- 16 Scheduled amortization over the next five years are as follows: Schedule of amortization over the next two years Twelve months ending December 31, 2023 $ 277,560 2024 271,078 2025 267,143 2026 267,143 2027 267,143 Thereafter 111,309 Total $ 1,461,376 Amortization expense for the year ended December 31, 2022, and 2021 was $ 278,922 and $ 324,371 respectively. Note 6- Leases Operating Leases The Company currently maintains two leases for office space located in Melville, NY. The first lease for office space in Melville, NY commenced on September 1, 2019. The term of this lease is for three years and eleven months and runs co-terminus with our existing lease in the same building. The base annual rent is $ 11,856 payable in equal monthly installments of $ 988 . 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 and expires on July 31, 2023 . On July 31, 2021, the Company signed a three-year lease for approximately 2,880 square feet of office space at 980 North Federal Highway, Boca Raton, FL. The commencement date of the lease was August 2, 2021 . The monthly rent is approximately $ 4,820 . The Company leases cages and racks for technical space in Tier 3 data centers in New York, Massachusetts, North Carolina and Florida. These leases are month to month. The monthly rent is approximately $ 39,000 . The Company also leases technical space in Dallas, TX. The lease term is thirteen months and monthly payments are $ 1,403 . The lease term expires on July 31, 2023. On January 1, 2022, the Company entered into a lease agreement for office space with WeWork in Austin, TX. The lease term is six months and requires monthly payments of $ 1,470 and expires on June 30, 2022 . Subsequent to June 30, 2022, the company is on a $ 3,073 month-to-month lease with WeWork in Austin, TX. F- 17 Finance Lease Obligations On June 1, 2020, the Company entered into a lease agreement with a finance company to lease technical equipment. The lease obligation is payable in monthly installments of $ 5,008 . The lease carries an interest rate of 7 % and is a three-year lease. The term of the lease ends June 1, 2023 . On June 29, 2020, the Company entered into a lease agreement for technical equipment with a finance company. The lease obligation is payable in monthly installments of $ 5,050 . The lease carries an interest rate of 7 % and is a three-year lease. The term of the lease ends June 29, 2023 . On July 31, 2020, the Company entered into a lease agreement for technical equipment with a finance company. The lease obligation is payable in monthly installments of $ 4,524 . The lease carries an interest rate of 7 % and is a three-year lease. The term of the lease ends July 31, 2023 . On November 1, 2021, the Company entered into a lease agreement with a finance company for technical equipment. The lease obligation is payable in monthly installments of $ 3,152 . The lease carries an interest rate of 6 % and is a three-year lease. The term of the lease ends September 21, 2024 . On January 1, 2022, the Company entered into a lease agreement with a finance company for technical equipment. The lease obligation is payable in monthly installments of $ 17,718 . The lease carries an interest rate of 5 % and is a three-year lease. The term of the lease ends January 1, 2025 . On January 1, 2022, the Company entered into a technical equipment lease with a finance company. The lease obligation is payable in monthly installments of $ 2,037 . The lease carries an interest rate of 6 % and is a three-year lease. The term of the lease ends January 1, 2025 . Finance Lease Obligations – Related Party On April 1, 2018, the Company entered into a lease agreement with Systems Trading Inc. (“Systems Trading”) to refinance all equipment leases into one lease. This lease obligation is payable to Systems Trading with bi-monthly installments of $ 23,475 . The lease carries an interest rate of 5 % and is a four-year lease. The term of the lease ends April 16, 2022 . Systems Trading is owned and operated by Harold Schwartz the president of CloudFirst. 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 data center equipment. The first lease calls for monthly installments of $ 1,328 and expires on March 1, 2022 . It carries an interest rate of 7 %. The second lease calls for monthly installments 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 lease agreement with Systems Trading to lease equipment. The lease obligation is payable to Systems Trading with monthly installments of $ 10,534 . The lease carries an interest rate of 6 % and is a three-year lease. The term of the lease ends January 1, 2023 . On March 4, 2021, the Company entered into a 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 January 1, 2022, the Company entered into a lease agreement with Systems Trading effective January 1, 2022. This lease obligation is payable to Systems Trading with monthly installments of $ 7,145 and expires on April 1, 2025 . The lease carries an interest rate of 8 %. On April 1, 2022, the Company entered into a lease agreement with Systems Trading effective May 1, 2022. This lease obligation is payable to Systems Trading with monthly installments of $ 6,667 and expires on February 1, 2025 . The lease carries an interest rate of 8 %. F- 18 The Company determines if an arrangement contains a lease at inception. Right of Use “ROU” assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company’s lease term includes options to extend the lease when it is reasonably certain that it will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet, per the election of the practical expedient. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company recognizes variable lease payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are recognized in the period incurred. A discount rate of 5 % was used in preparation of the ROU asset and operating liabilities. The components of lease expense were as follows: Schedule of components of lease expense Year Ended December 31, 2022 Finance leases: Amortization of assets, included in depreciation and amortization expense $ 672,511 Interest on lease liabilities, included in interest expense 127,871 Operating lease: Amortization of assets, included in total operating expense 200,417 Interest on lease liabilities, included in total operating expense 16,643 Total net lease cost $ 1,017,442 Supplemental balance sheet information related to leases was as follows: Operating Leases: Operating lease right-of-use asset $ 226,501 Current operating lease liabilities $ 160,657 Noncurrent operating lease liabilities 71,772 Total operating lease liabilities $ 232,429 December 31, 2022 Finance leases: Property and equipment, at cost $ 5,521,716 Accumulated amortization ( 3,431,562 ) Property and equipment, net $ 2,090,154 Current obligations of finance leases $ 880,491 Finance leases, net of current obligations 537,483 Total finance lease liabilities $ 1,417,974 Supplemental cash flow and other information related to leases were as follows: Schedule of supplemental cash flow and other information related to leases Year Ended December 31, 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows related to operating leases $ 199,329 Financing cash flows related to finance leases $ 1,254,249 Weighted average remaining lease term (in years): Operating leases 1.28 Finance leases 1.30 Weighted average discount rate: Operating leases 5 % Finance leases 7 % F- 19 Long-term obligations under the operating and finance leases at December 31, 2022, mature as follows: Schedule of long-term obligations under the operating and finance leases For the Twelve Months Ended December 31, Operating Leases Finance Leases 2023 $ 175,296 $ 946,217 2024 63,983 504,942 2025 — 52,009 Total lease payments 239,279 1,503,168 Less: Amounts representing interest ( 6,850 ) ( 85,194 ) Total lease obligations 232,429 1,417,974 Less: long-term obligations ( 71,772 ) ( 537,483 ) Total current $ 160,657 $ 880,491 As of December 31, 2022, the Company had no additional significant operating or finance leases that had not yet commenced. Rent expense under all operating leases for the year ended December 31, 2022, and 2021 was $ 212,948 and $ 184,131 , respectively. Note 7 - Commitments and Contingencies As part of the Flagship acquisition the Company acquired a licensing agreement for marketing related materials with a National Football League team. The Company has approximately $ 1.3 million in payments over the next 5 years. F- 20 Note 8 – Note Payable 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. During the year ended December 31, 2021, the Company recorded interest of $6,140. During the year ended December 31, 2021, the PPP loan and accrued interest were forgiven and the Company recorded a gain on forgiveness of debt on the Consolidated Statements of Operations. On June 1, 2021, the Company assumed the PPP loan of Flagship Solutions, LLC in the amount of $307,300. During the year ended December 31, 2021, the Company recorded interest of $3,423. During the year ended December 31, 2021, the PPP loan and accrued interest were forgiven and the Company recorded a gain on forgiveness of debt on the Consolidated Statements of Operations. Note 9 - 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. On May 13, 2021, the Company entered into an underwritten public offering of an aggregate of 1,600,000 units, each consisting of one share of the Company’s Common Stock, par value $0 .001 per share, together with one warrant to purchase one share of Common Stock at an exercise price equal to $ 7.425 per share of Common Stock. The public offering price was $ 6.75 per Unit and the underwriters agreed to purchase 1,600,000 Units at a 7.5 % discount to the public offering price. The Company granted the representative a 45-day option to purchase an additional 240,000 shares of Common Stock and/or an additional 240,000 Warrants, in any combination thereof, to cover over-allotments. On May 15, 2021, the representative exercised the over-allotment option to purchase an additional 240,000 Warrants to purchase 240,000 shares of Common Stock. The net proceeds from the offering were $ 9.5 million. F- 21 On May 14, 2021, the Company effected a 1-for-40 reverse stock split. As a result, all share information in the accompanying financial statements has been adjusted as if the reverse stock split happened on the earliest date presented. On July 21, 2021, the Company entered into a securities purchase agreement with certain accredited institutional investors resulting in the raise of $ 8,305,000 in gross proceeds to the Company. Pursuant to the terms of the purchase agreement, the Company agreed to sell, (i) an aggregate of 1,375,000 shares of the Company’s Common Stock, par value $0 .001 per share and (ii) Warrants to purchase an aggregate of 1,031,250 shares of the Company’s Common Stock at an exercise price of $ 6.15 per share, subject to adjustment. The placement agent was entitled to a cash fee of 6.5 % of the gross proceeds of the Offering and the reimbursement for certain out-of-pocket expenses up to $ 50,000 . The net proceeds from the offering were $7.5 million. During the year ended December 31, 2021, employees exercised 6,592 options via cashless exercise, into 5,060 shares of common stock. During the year ended December 31, 2021, warrant holders exercised 455,390 Warrants into Common Stock . The Company received $ 3,381,271 for these Warrants . On May 1, 2022, the Company issued 125,000 shares of its Restricted Common Stock to employees in exchange for services at a fair value of $ 400,000 . During the year ended December 31, 2022, employees exercised 3,334 options into shares of Common Stock . The Company received $ 6,934 for these options. Common Stock Options A summary of the Company’s options activity and related information follows: Schedule of option activity and related information Number of Weighted Weighted Shares Range of Average Average Under Option Price Exercise Contractual Options Per Share Price Life Options Outstanding at January 1, 2020 207,748 $ 2.00 - 15.76 $ 5.20 6.6 Options Granted 82,157 3.03 - 5.80 4.50 10 Exercised ( 6,592 ) 2.00 2.00 — Expired/Cancelled ( 15,846 ) 3.00 - 14.00 5.89 — Options Outstanding at December 31, 2021 267,467 $ 2.00 - 16.00 $ 5.19 6.94 Options Granted 117,343 1.48 - 5.87 2.72 10 Exercised ( 3,334 ) 2.00 - 2.16 2.08 — Expired/Cancelled ( 80,085 ) 2.00 - 16.00 7.49 — Options Outstanding at December 31, 2022 301,391 $ 2.00 - 15.76 $ 3.46 7.45 Options Exercisable at December 31, 2022 166,945 $ 2.00 - 15.76 $ 3.71 5.98 Share-based compensation expense for options totaling $ 282,193 and $ 171,798 was recognized in our results for the years ended December 31, 2022, and 2021, respectively. F- 22 The valuation methodology used to determine the fair value of the options issued during the year was the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including the volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the options. The risk-free interest rate assumption is based upon observed interest rates on zero-coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the options. Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of the award. The Company’s calculation of estimated volatility is based on historical stock prices of the Company over a period equal to the expected life of the awards. As of December 31, 2022, there was $ 335,272 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 2.03 years. The weighted average fair value of options granted, and the assumptions used in the Black-Scholes model during the years ended December 31, 2022, and 2021, are set forth in the table below. Schedule of weighted average fair value of options granted 2021 2020 Weighted average fair value of options granted $ 2.72 $ 5.35 Risk-free interest rate 1.63 % – 3.83 % 1.31 % – 1.62 % Volatility 199 % – 214 % 217 % – 219 % Expected life (years) 10 years 10 years Dividend yield $ — % $ — % Share-based awards, restricted stock award (“RSAs”) On March 31, 2022, the Board resolved that, the Company shall pay each member of the Board, compensation as a group amount to $ 40,375 . The shares vest one year after issuance. On June 30, 2022, the Board resolved that, the Company shall pay each member of the Board, compensation as a group amount to $ 30,625 . The shares vest one year after issuance. On September 30, 2022, the Board resolved that, the Company shall pay each member of the Board, compensation as a group amount to $ 25,000 . The shares vest one year after issuance. On December 31, 2022, the Board resolved that, the Company shall pay each member of the Board, compensation as a group amount to $ 18,500 . The shares vest one year after issuance. A summary of the activity related to RSUs for the year ended December 31, 2022, is presented below: Schedule of non-vested Restricted stock units Total Grant Date Restricted Stock Units (RSUs) Shares Fair Value RSUs non-vested at January 1, 2022 — $ — RSUs granted 50,000 $ 1.48 - 3.23 RSUs vested — $ — RSUs forfeited — $ — RSUs non-vested December 31, 2022 50,000 $ 1.48 - 3.23 Stock-based compensation for RSU’s has been recorded in the consolidated statements of operations and totaled $52,285 for the year ended December 31, 2022. F- 23 Common Stock Warrant A summary of the Company’s warrant activity and related information follows: Schedule of warrant activity and related information Weighted Number of Range of Weighted Average Shares Option Price Average Contractual Under Options Per Share Exercise Price Life Warrant Outstanding at January 1, 2021 3,333 $ 0.40 $ 0.40 3.50 Warrant Granted 2,871,250 7.43 - 6.67 6.97 — Exercised ( 455,390 ) 7.43 7.43 — Expired/Cancelled — — — — Warrant Outstanding at December 31, 2021 2,419,193 $ 7.43 - 0.40 $ 6.87 4.67 Warrant Granted — — — — Warrant Outstanding at December 31, 2022 2,419,193 $ 7.43 - 0.40 $ 6.87 3.67 Warrant Exercisable at December 31, 2022 2,419,193 $ 7.43 - 0.40 $ 6.87 3.67 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. No Preferred shares are issued as of December 31, 2021. 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, 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 Company. On May 18, 2021, the Company converted 1,401,786 shares of Series A Preferred Stock into 43,806 shares of common stock. As part of this transaction, the Company also paid $ 1,179,357 the accrued and unpaid dividends. Accrued dividends at December 31, 2021, were $ 0 . F- 24 Note 10 - Income Taxes The components of deferred taxes are as follows: Year Ended December 31, 2022 2021 Deferred tax assets: Net operating loss carry forwards 2,368,000 1,752,000 Other 163,000 316,000 Total deferred tax assets 2,531,000 2,068,000 Deferred tax liabilities: Property and equipment ( 211,000 ) — Intangibles ( 1,180,000 ) ( 91,000 ) Other ( 63,000 ) ( 308,000 ) Total deferred tax liabilities ( 1,454,000 ) ( 399,000 ) Valuation Allowance ( 1,077,000 ) ( 1,669,000 ) Net deferred tax liabilities — — The Company had federal and state net operating tax loss carry-forwards of $ 7,841,000 and $ 7,511,000 , respectively as of December 31, 2022. 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 2022 and 2021, net deferred tax assets did not change due to the full allowance. The gross amount of the asset is predominantly 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, 2022, and 2021. A reconciliation of the Company’s effective income tax rate to the expected income tax rate, computed by applying the federal statutory income tax rate of 21.0% for each of the years ended December 31, 2022, and 2021 to the Company’s loss before provision (benefit) for income taxes, is as follows: Schedule of expected income tax expense (benefit) 2022 2021 U.S. Federal Statutory Rate 21.0 % 21.0 % State Taxes 7.1 % 7.1 % Valuation allowance ( 28.1 )% ( 12.2 )% Income tax provision — % ( 12.9 ) % Note 11 – Litigation We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting DSC, its common stock, any of its subsidiaries or of DSC’s or DSC’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect. F- 25 Note 12 – Related Party Transactions Finance Lease Obligations – Related Party During the year ended December 31, 2022, the Company entered into two related party finance lease obligations. See Note 6 for details. Nexxis Capital LLC Charles M. Piluso (Chairman and CEO) and Harold Schwartz (President) collectively own 100% of Nexxis Capital LLC (“Nexxis Capital”). Nexxis Capital was formed to purchase equipment and provide leases to Nexxis Inc.’s customers. The Company received funds of $ 39,172 and $ 14,209 during the year ended December 31, 2022, and 2021 respectively. Note 13 – Merger Flagship Solutions, LLC On February 4, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Data Storage FL, LLC, a Florida limited liability company and the Company’s wholly-owned subsidiary (the “Merger Sub”), Flagship Solutions, LLC (“Flagship”), a Florida limited liability company, and the owners (collectively, the “Equity holders”) of all of the issued and outstanding limited liability company membership interests in Flagship (collectively, the “Equity Interests”). The Company acquired Flagship on May 31, 2021, and became its wholly-owned subsidiary. The purchase price was $5.5 million. In addition, the cash merger consideration paid by the Company to the Equity holders at Closing shall be adjusted, on a dollar-for-dollar basis, by the amount by which Flagship’s net working capital at Closing is more or is less than the target working capital amount specified in the Merger Agreement. Concurrently with the Closing, Flagship and Mark Wyllie, Flagship’s Chief Executive Officer, entered into an Employment Agreement, which was effective upon consummation of the Closing, pursuant to which Mr. Wyllie will continue to serve as Chief Executive Officer of Flagship following the Closing on the terms and conditions set forth therein. Flagship’s obligations under the Wyllie Employment Agreement will also be guaranteed by the Company. The Wyllie Employment Agreement provides for: (i) an annual base salary of $170,000, (ii) management bonuses comprised of twenty-five percent (25%) of Flagship’s net income available in free cash flow as determined in accordance with GAAP for each calendar quarter during the term, (iii) an agreement to issue him stock options of the Company, subject to approval by the Board, commensurate with his position and performance and reflective of the executive compensation plans that the Company has in place with its other subsidiaries of similar size to Flagship, (iv) life insurance benefits in the amount of $400,000, and (v) four weeks paid vacation. In the event Mr. Wyllie’s employment is terminated by him for good reason (as defined in the Wyllie Employment Agreement) or by Flagship without cause, he will be entitled to receive his annual base salary through the expiration of the initial three-year employment term and an amount equal to his last annual bonus paid, payable quarterly. Pursuant to the Wyllie Employment Agreement, we agreed to elect Mr. Wyllie to the Board and the board of directors of Flagship to serve so long as he continues to be employed by the Company. The employment agreement contains customary non-competition provisions that apply during its term and for a period of two years after the term expires. In addition, pursuant to the Wyllie Employment Agreement, Mr. Wyllie was appointed to serve as a member of the Company’s Board of Directors and the board of directors of Flagship to serve so long as he continues to be employed by us. On October 28, 2022, Mark Wyllie resigned from his position as Chief Executive Officer of Flagship. Additionally, in connection with the res ignation, Mr. Wyllie will no longer serve as the Executive Vice President of the Company or a member of the Company’s Board of Directors. Following the closing of the transaction, Flagship’s financial statements as of the Closing were consolidated with the Consolidated Financial Statements of the Company. F- 26 The following sets forth the components of the purchase price: Schedule of purchase price Purchase price: Cash paid to the seller $ 6,149,343 Total purchase price 6,149,343 Tangible Assets Acquired: Cash 212,068 Accounts Receivable 1,389,263 Prepaid Expenses 127,574 Fixed Assets 4,986 Website and Digital Assets 33,002 Security Deposits 22,500 Total Tangible Assets Acquired 1,789,393 Tangible Liabilities Assumed: Accounts Payable and Accrued Expenses 514,354 Deferred Revenue 68,736 Deferred Tax Liability 399,631 PPP Loan Payable 307,300 Total Tangible Liabilities Assumed 1,290,021 Net Tangible Assets Acquired 499,372 Excess Purchase Price $ 5,649,971 The following table shows the allocation of the excess purchase price. Summary of the allocation of the excess purchase price Customer Relationships $ 1,870,000 Trade Names 235,000 Assembled Workforce 287,000 Goodwill 3,257,971 Excess Purchase Price $ 5,649,971 The intangible assets acquired include the trade names, customer relationships, assembled workforce, and goodwill. The deferred tax liability represents the tax affected timing differences relating to the acquired intangible assets to the extent they are not offset by acquired deferred tax assets. The goodwill represents the assembled workforce, acquired capabilities, and future economic benefits resulting from the acquisition. No portion of the goodwill is deductible for tax purposes. The following presents the unaudited pro-forma combined results of operations of the Company with Flagship Solutions as if the entities were combined on January 1, 2021. Schedule of unaudited pro-forma December 31, 2021 Revenues $ 23,051,759 Net income attributable to common shareholders $ 1,526,938 Net income per share $ 0.30 Weighted average number of shares outstanding 5,075,716 F- 27 Note 14 – Segment Information We operate in three reportable segments: Nexxis, Flagship Solutions Group, and CloudFirst. Our segments were determined based on our internal organizational structure, the manner in which our operations are managed, and the criteria used by our Chief Operating Decision Maker (CODM) to evaluate performance, which is generally the segment’s operating income or losses. Schedule of segment reporting income or losses Operations of: Products and services provided: Nexxis Inc NEXXIS is a single-source solution provider that delivers fully-managed cloud-based voice services, data transport, internet access, and SD-WAN solutions focused on business continuity for today’s modern business environment. Flagship Solutions, LLC Flagship Solutions Group (FSG) is a managed service provider. FSG invoices clients primarily for services that assist the clients’ technical teams. FSG has few technical assets and utilizes the assets or software of other cloud providers, whereby managing 3rd party infrastructure. FSG periodically sells equipment and software. CloudFirst Technologies Corporation CloudFirst, provides services from CloudFirst technological assets deployed in six Tier 3 data centers throughout the USA and Canada. This technology has been developed by CloudFirst. Clients are invoiced for cloud infrastructure and disaster recovery on the CloudFirst platform. Services provided to clients are provided on a subscription basis on long term contracts. The following tables present certain financial information related to our reportable segments and Corporate: Schedule of financial information related to reportable segments As of December 31, 2022 Nexxis Inc. Flagship Solutions LLC CloudFirst Technologies Corporate Total Accounts receivable $ 34,903 $ 1,924,184 $ 1,543,749 $ — $ 3,502,836 Prepaid expenses and other current assets 16,799 213,826 285,306 68,735 584,666 Net Property and Equipment — 19,705 2,192,085 — 2,211,790 Intangible assets, net — 1,696,376 279,268 — 1,975,644 Goodwill — 1,222,971 3,015,700 — 4,238,671 Operating lease right-of-use assets — 167,761 58,740 — 226,501 All other assets — — — 11,346,127 11,346,127 Total Assets $ 51,702 $ 5,244,823 $ 7,374,848 $ 11,414,862 $ 24,086,235 Accounts payable and accrued expenses $ 40,091 $ 1,563,408 $ 1,069,278 $ 534,800 $ 3,207,577 Deferred revenue — 165,725 115,335 — 281,060 Total Finance leases payable — — 641,110 — 641,110 Total Finance leases payable related party — — 776,864 — 776,864 Total Operating lease liabilities — 169,469 62,960 — 232,429 Total Liabilities $ 40,091 $ 1,898,602 $ 2,665,547 $ 534,800 $ 5,139,040 F- 28 As of December 31, 2021 Nexxis Inc. Flagship Solutions LLC CloudFirst Technologies Corporate Total Accounts receivable $ 19,094 $ 1,437,840 $ 927,433 $ — $ 2,384,367 Prepaid expenses and other current assets 6,117 330,777 198,860 647 536,401 Net Property and Equipment — 6,036 1,931,435 — 1,937,471 Intangible assets, net — 1,975,298 279,268 — 2,254,566 Goodwill — 3,544,971 3,015,700 — 6,560,671 Operating lease right-of-use assets — 268,698 153,620 — 422,318 All other assets — — — 12,239,029 12,239,029 Total Assets $ 25,211 $ 7,563,620 $ 6,506,316 $ 12,239,676 $ 26,334,823 Accounts payable and accrued expenses $ 49,291 $ 274,387 $ 812,192 $ 207,521 $ 1,343,391 Deferred revenue — — 366,859 — 366,859 Total Finance leases payable — — 373,723 — 373,723 Total Finance leases payable related party — — 1,204,447 — 1,204,447 Total Operating lease liabilities — 269,407 162,351 — 431,758 Total Liabilities $ 49,291 $ 543,794 $ 2,919,572 $ 207,521 $ 3,720,178 For the year ended December 31, 2022 Nexxis Inc. Flagship Solutions LLC CloudFirst Technologies Corporate Total Sales $ 931,341 $ 11,395,770 $ 11,543,726 $ — $ 23,870,837 Cost of sales 600,410 9,041,684 6,145,450 — 15,787,544 Gross Profit 330,931 2,354,086 5,398,276 — 8,083,293 Selling, general and administrative 403,370 3,599,572 2,391,613 2,216,842 8,611,397 Impairment of goodwill 2,322,000 — — 2,322,000 Depreciation and amortization — 282,684 943,227 — 1,225,911 Total operating expenses 403,370 6,204,256 3,334,840 2,216,842 12,159,308 Loss from Operations ( 72,439 ) ( 3,850,170 ) 2,063,436 ( 2,216,842 ) ( 4,076,015 ) Interest expense, net — ( 319 ) ( 138,365 ) 8,597 ( 130,087 ) Other expense — ( 75,418 ) — — ( 75,418 ) Impairment of deferred offering costs — — — ( 127,343 ) ( 127,343 ) Total Other Income (Expense) — ( 75,737 ) ( 138,365 ) ( 118,746 ) ( 332,848 ) Income (Loss) before provision for income taxes $ ( 72,439 ) $ ( 3,925,907 ) $ 1,925,071 $ ( 2,335,588 ) $ ( 4,408,863 ) F- 29 For the year ended December 31, 2021 Nexxis Inc. Flagship Solutions LLC CloudFirst Technologies Corporate Total Sales $ 817,175 $ 3,853,473 $ 10,205,579 $ — $ 14,876,227 Cost of sales 527,159 2,334,331 5,597,627 — 8,459,117 Gross Profit 290,016 1,519,142 4,607,952 — 6,417,110 Selling, general and administrative 329,628 1,965,727 2,763,880 840,602 5,899,837 Depreciation and amortization — 168,011.00 1,116,334.00 — 1,284,345 Total operating expenses 329,628 2,133,738 3,880,214 840,602 7,184,182 Loss from Operations ( 39,612 ) ( 614,596 ) 727,738 ( 840,602 ) ( 767,072 ) Interest expense, net — ( 3,423 ) ( 123,323 ) — ( 126,746 ) All other expenses — 310,723 443,385 — 754,108 Total Other Income (Expense) — 307,300 320,062 — 627,362 Income (Loss) before provision for income taxes $ ( 39,612 ) $ ( 307,296 ) $ 1,047,800 $ ( 840,602 ) $ ( 139,710 ) Note 15 - Subsequent Events Subsequent to December 31, 2022, the Company issued 132,354 options to employees through the 2021 Stock Incentive Plan. These options vest over three years and have exercise prices ranging from $ 1.61 – $ 1.96 . Subsequent to December 31, 2022, the Company issued 132,354 restricted stock units to employees through the 2021 Stock Incentive Plan. These RSUs vest over three years and do not have an expiration date. F- 30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.