Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
Investing in the Company’s common stock involves
a high degree of risk. You should carefully consider the following risks together with the other information in this Annual Report.
Risks Related to Data
Storage’s Business
The Company has not
generated a significant amount of net income and it may not be able to sustain profitability in the future.
As reflected in the
consolidated financial statements, the Company had net income attributable to common shareholders of $381,575 for the year ended
December 31, 2023 and a net loss attributable to common shareholders of $4,356,802 for the year ended December 31, 2022. As of
December 31, 2023, the Company had cash of $1,428,730, marketable securities of $11,318,196, and working capital of $11,011,407.
There can be no assurance that the Company will continue to generate income in the future.
If the Company
is unable to attract new customers to its infrastructure and disaster recovery/cloud subscription services on a cost-effective
basis, its revenue and operating results would be adversely affected.
The Company generates the
majority of its revenue from the sale of subscriptions to its infrastructure and disaster recovery/cloud solutions as well as contracted
managed services and software and hardware renewals. In order to grow, the Company must continue to reach the many businesses in need
of our unique services, many of whom may have not previously used infrastructure as a service and cloud disaster recovery backup solutions.
The Company uses and periodically adjusts a diverse mix of advertising and marketing programs to promote its solutions. Significant increases
in the pricing of one or more of the Company’s advertising channels would increase its advertising costs or cause it to choose less
expensive and perhaps fewer effective channels. As the Company adds to or changes the mix of its advertising and marketing strategies,
it may expand into channels with significantly higher costs than its current programs, which could adversely affect its operating results.
The Company may incur advertising and marketing expenses significantly in advance of the time it anticipates recognizing any revenue generated
by such expenses, and it may only at a later date, or never, experience an increase in revenue or brand awareness as a result of such
expenditures. Additionally, because the Company recognizes revenue from customers over the terms of their subscriptions, a large portion
of its revenue for each quarter reflects deferred revenue from subscriptions entered into during previous quarters, and downturns or upturns
in subscription sales or renewals may not be reflected in the Company’s operating results until later periods. It has made in the
past, and may make in the future, significant investments to test new advertising, and there can be no assurance that any such investments
will lead to the cost-effective acquisition of additional customers. If the Company is unable to maintain effective advertising programs,
its ability to attract new customers could be adversely affected, its advertising and marketing expenses could increase substantially,
and its operating results may suffer.
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A portion of the Company’s
potential customers locate its website through search engines, such as Google, Bing, and Yahoo!. The Company’s ability to maintain
the number of visitors directed to its website is not entirely within its control. If search engine companies modify their search algorithms
in a manner that reduces the prominence of the Company’s listing, or if its competitors’ search engine optimization efforts
are more successful than the Company’s, fewer potential customers may click through to its website. In addition, the cost of purchased
listings has increased in the past and may increase in the future. A decrease in website traffic or an increase in search costs could
adversely affect the Company’s customer acquisition efforts and its operating results.
The Company expects
to continue to acquire or invest in other companies, which may divert its management’s attention, result in additional dilution
to its stockholders, and consume resources that are necessary to sustain its business.
Having completed the
merger with Flagship, the Company expects to continue to acquire complementary solutions, services, technologies, or businesses
in the future. The Company may also enter into relationships with other businesses to expand its portfolio of solutions or its
ability to provide its solutions in foreign jurisdictions, which could involve preferred or exclusive licenses, additional channels
of distribution, discount pricing, or investments in other companies. Negotiating these transactions can be time-consuming, difficult,
and expensive, and its ability to complete these transactions may often be subject to conditions or approvals that are beyond its
control. Consequently, these transactions, even if a definitive purchase agreement is executed and announced, may not close.
Acquisitions may also disrupt
the Company’s business, divert its resources, and require significant management attention that would otherwise be available for
the development of its business. Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be
realized on a timely basis or at all or the Company may be exposed to known or unknown liabilities, including litigation against the companies
that it may acquire. In connection with any such transaction, the Company may:
●
issue additional equity securities that would dilute its stockholders;
●
use cash that the Company may need in the future to operate its business;
●
incur debt on terms unfavorable to the Company, that it may be unable to repay,
or that may place burdensome restrictions on its operations;
●
incur large charges or substantial liabilities; or
●
become subject to adverse tax consequences or substantial depreciation, deferred compensation, or other acquisition-related accounting charges.
Any of these risks could
harm the Company’s business and operating results.
Integration of an acquired
company’s operations may present challenges.
The integration of an acquired
company requires, among other things, coordination of administrative, sales and marketing, accounting and finance functions, and expansion
of information and management systems. Integration may prove to be difficult due to the necessity of coordinating geographically separate
organizations and integrating personnel with disparate business backgrounds and accustomed to different corporate cultures. The Company
may not be able to retain key employees of an acquired company. Additionally, the process of integrating a new solution or service may
require a disproportionate amount of time and attention of the Company’s management and financial and other resources. Any difficulties
or problems encountered in the integration of a new solution or service could have a material adverse effect on the Company’s business.
The Company intends to continue
to acquire businesses that it believes will help achieve its business objectives. As a result, the Company’s operating costs will
likely continue to grow. The integration of an acquired company may cost more than the Company anticipates, and it is possible that the
Company will incur significant additional unforeseen costs in connection with such integration, which may negatively impact its earnings.
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In addition, the Company
may only be able to conduct limited due diligence on an acquired company’s operations. Following an acquisition, the Company may
be subject to liabilities arising from an acquired company’s past or present operations, including liabilities related to data security,
encryption and privacy of customer data, and these liabilities may be greater than the warranty and indemnity limitations that the Company
negotiates. Any liability that is greater than these warranty and indemnity limitations could have a negative impact on the Company’s
financial condition.
Even if successfully integrated,
there can be no assurance that the Company’s operating performance after an acquisition will be successful or will fulfill management’s
objectives.
We may not realize the anticipated
benefits of the merger with Flagship or successfully integrate our businesses
On May 31, 2021, the Company completed the Merger. The Company expects that
Flagship’s business will be synergistic with its existing IBM business and anticipates meaningful operation efficiency and that
the Merger will provide a comprehensive one-stop provider to cross-sell solutions across each organization’s respective enterprise,
as well as middle-market customers. Key offerings for the combined companies are expected to include a wide array of multi-cloud information
technology solutions in highly secure, reliable enterprise level cloud services for companies using IBM Power systems, Microsoft Windows,
and Linux, including Infrastructure as a Service (IaaS), Disaster Recovery of digital information as a Service (DRaaS), and Cyber Security
as a Service (CSaaS).
Since having completed the
merger, however, the Company still faces risks and unknowns associated with the Merger. Ultimately, the Company may not realize the anticipated
benefits of the merger with Flagship and integrating and operating Data Storage’s and Flagship’s business may be more difficult,
time-consuming, or costly than expected. Additionally, integrating and operating the Flagship business could result in higher capital
expenditures than anticipated, which could result in the Company’s need to raise additional capital for its operations.
The Company
may fail to maintain an effective system of internal controls, which may result in material misstatements of its consolidated financial
statements or cause it to fail to meet its periodic reporting obligations.
As a public company,
we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls.
Section 404 requires an annual management assessment of the effectiveness of our internal control over financial reporting. The
rules governing the standards that must be met for management to assess our internal control over financial reporting are complex
and require significant documentation, testing, and possible remediation.
The
Company previously identified material weaknesses in its internal control over financial reporting, concluding that its disclosure
controls were not effective, based on material weaknesses which ultimately contributed to the Company not designing and maintaining
formal controls to analyze, account for, and disclose complex transactions, including the accounting for certain consideration
received from a vendor. These material weaknesses resulted in the restatement of the Company’s previously filed quarterly
condensed consolidated financial information for the period ended June 30, 2022, related to accrued expenses, cost of goods sold,
gross profit, loss from operations, net loss, earnings per share and the related disclosures. As of March 31, 2023, the material
weaknesses has been remediated.
In response to such material
weaknesses, management has expended and will continue to expand a substantial amount of effort and resources for the remediation of material
weaknesses in internal control over financial reporting. In November of 2022, management and its advisors began evaluating and documenting
the design and operating effectiveness of our internal control over financial reporting, and their work is ongoing.
The Company can give no assurance
that additional material weaknesses will not be identified in the future. The Company’s failure to implement and maintain effective
internal control over financial reporting could result in errors in its consolidated financial statements that could result in a restatement
of its financial statements and could cause it to fail to meet its reporting obligations, any of which could diminish investor confidence
in the Company and cause a decline in the price of its common stock.
The Company is controlled
by three principal stockholders who serve as its executive officers and directors.
As of March 27, 2024, through their aggregate voting power, Messrs. Piluso,
Schwartz and Kempster control approximately 37% of the Company’s outstanding common stock, giving them the ability to control a
significant portion of the votes for the Company’s directors and all other matters requiring the approval of its stockholders, including
the election of all its directors and the approval of a reverse stock split.
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Risks Related
to the Company’s Industry
The market for cloud
solutions is highly competitive, and if the Company does not compete effectively, its operating results will be harmed.
The market for the Company’s
services is highly competitive, quickly evolving and subject to rapid changes in technology. The Company expects to continue to face intense
competition from its existing competitors as well as additional competition from new market entrants in the future as the market for its
services continues to grow.
The Company competes with
cloud backup and infrastructure providers and providers of traditional hardware-based systems and IBM Power Systems. Its current and potential
competitors vary by size, service offerings, and geographic region. These competitors may elect to partner with each other or with focused
companies to grow their businesses. They include:
●
in-house IT departments of its customers and potential customers;
●
traditional global infrastructure providers, including, but not limited to, large multi-national providers, such as IBM, Microsoft, Google, and Amazon Web Services (AWS);
●
cloud and software service providers and digital systems integrators;
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regional managed services providers; and
●
colocation solutions providers, such as Equinix, Rackspace and TierPoint.
Many of these competitors benefit from significant competitive advantages over
the Company, given their desire to enter this niche marketplace, such as greater name recognition, longer operating histories, more varied
services, and larger marketing budgets, as well as greater financial, technical, and other resources. In addition, many of these competitors
have established marketing relationships and major distribution agreements with computer manufacturers, internet service providers, and
resellers, giving them access to larger customer bases. Some of these competitors may make acquisitions or enter strategic relationships
to offer a more comprehensive service than the Company does. As a result, some of these competitors may be able to:
●
develop superior products or services, gain greater market acceptance, and expand their service offerings more efficiently or more rapidly;
●
adapt to new or emerging technologies and changes in customer requirements more quickly;
●
bundle their offerings, including hosting services with other services they provide at reduced prices;
●
streamline their operational structure, obtain better pricing, or secure more favorable contractual terms, allowing them to deliver services and products at a lower cost;
●
take advantage of acquisition, joint ventures, and other opportunities more readily;
●
adopt more aggressive pricing policies and devote greater resources to the promotion, marketing, and sales of their services, which could cause us to have to lower prices for certain services to remain competitive in the market; and
●
devote greater resources to the research and development of their products and services.
In addition, demand for the
Company’s cloud solutions is sensitive to price. Many factors, including the Company’s customer acquisition, advertising and
technology costs, and its current and future competitors’ pricing and marketing strategies, can significantly affect its pricing
strategies. Certain of the Company’s competitors offer, or may in the future offer, lower-priced or free solutions that compete
with its solutions.
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Additionally, consolidation
activity through strategic mergers, acquisitions and joint ventures may result in new competitors that can offer a broader range
of products and services, may have a greater scale or a lower cost structure. To the extent such consolidation results in the ability
of vertically integrated companies to offer more integrated services to customers than the Company can, customers may prefer the
single-source approach and direct more business to such competitors, thereby impairing the Company’s competitive position.
Furthermore, new entrants not currently considered to be competitors may enter the market through acquisitions, partnerships, or
strategic relationships. As the Company looks to market and sell its services to potential customers, the Company must convince
its internal stakeholders that the Company’s services are superior to their current solutions. If the Company is unable to
anticipate or react to these competitive challenges, its competitive position would weaken, which could adversely affect its business,
financial condition, and results of operations. These combinations may make it more difficult for the Company to compete effectively
and its inability to compete effectively would negatively impact its operating results. In addition, there can be no assurance
that the Company will not be forced to engage in price-cutting initiatives, or to increase its advertising and other expenses to
attract and retain customers in response to competitive pressures, either of which could have a material adverse effect on the
Company’s revenue and operating results.
If a cyberattack was able to breach the Company’s security protocols
and disrupt its data protection platform and solutions, any such disruption could increase its expenses, damage its reputation, harm its
business and adversely affect its stock price.
The Company has implemented
various protocols and regularly monitors its systems via security software to reduce any security vulnerabilities. The Company
also relies on third-party providers for several critical aspects of its infrastructure cloud and disaster recovery business continuity
services, and consequently, it does not maintain direct control over the security or stability of those associated systems. Furthermore,
the firmware, software, and/or open-source software that its data protection solutions may utilize could be susceptible to hacking
or misuse. In the event of the discovery of a significant security vulnerability, the Company would incur additional substantial
expenses and its business would be harmed.
The process of developing
new technologies is complex and uncertain, and if the Company fails to accurately predict customers’ changing needs and emerging
technological trends or if the Company fails to achieve the benefits expected from its investments, its business could be harmed. The
Company believes that it must continue to dedicate a significant amount of resources to its research and development efforts to maintain
its competitive position and it must commit significant resources to develop new solutions before knowing whether its investments will
result in solutions the market will accept. The Company’s new solutions or solution enhancements could fail to attain sufficient
market acceptance or harm its business for many reasons, including:
●
delays in releasing its new solutions or enhancements to the market;
●
failure to accurately predict market demand or customer demands;
●
inability to protect against new types of attacks or techniques used by hackers;
●
difficulties with software development, design, or marketing that could delay or prevent its development, introduction, or implementation of new solutions and enhancements;
●
defects, errors or failures in its design or performance;
●
negative publicity about its performance or effectiveness;
●
introduction or anticipated introduction of competing solutions by its competitors;
●
poor business conditions for its customers, causing them to delay information technology purchases;
●
the perceived value of its solutions or enhancements relative to their cost; and
●
easing of regulatory requirements around security or storage.
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In addition, new technologies
have the risk of defects that may not be discovered until after the product launches, resulting in adverse publicity, loss of revenue
or harm to the Company’s business and reputation.
Any significant disruption in service in the Company’s computer systems,
or caused by its third-party storage and system providers, could damage its reputation and result in a loss of customers, which would
harm its business, financial condition, and operating results.
The Company’s reputation,
and ability to attract, retain and serve its customers is dependent upon the reliable performance of its network infrastructure and payment
systems, and its customers’ ability to readily access their stored files. The Company has experienced interruptions in these systems
in the past, including server failures that temporarily slowed down its customers’ ability to access their stored files, or made
the Company’s infrastructure inaccessible, and it may experience interruptions or outages in the future.
In addition, while the Company both operates and maintains elements of network
infrastructure, some elements of this complex system are operated by third parties that the Company does not control and that would require
significant time to replace. The Company expects this dependence on third parties to increase. In particular, the Company utilizes IBM
and Intel to provide equipment and support. All of these third-party systems are located in data center facilities operated by third parties.
While these data centers are of the highest level, Tier 3, there can be no assurance that they will not experience disruptions that will
adversely impact the Company’s ability to service its customers. The Company’s data center leases expire at various times
between 2023 and 2024 with rights of extension. If the Company were unable to renew these agreements on commercially reasonable terms,
it may be required to transfer that portion of its computing and storage capacity to new data center facilities, and it may incur significant
costs and possible service interruption in connection with doing so.
The Company also relies upon
third-party colocation providers to host its main servers. If these providers are unable to handle current or higher volumes of use, experience
any interruption in operations or cease operations for any reason or if the Company is unable to agree on satisfactory terms for continued
hosting relationships, the Company would be forced to enter into a relationship with other service providers or assume hosting responsibilities
itself. If the Company is forced to switch data center facilities, which in itself is a competitive industry, it may not be successful
in finding an alternative service provider on acceptable terms or in hosting the computer servers itself. The Company may also be limited
in its remedies against these providers in the event of a failure of service.
Interruptions, outages and/or
failures in the Company’s own systems, the third-party systems and facilities on which we rely, or the use of its data center facilities,
whether due to system failures, computer viruses, cybersecurity attacks, physical or electronic break-ins, damage or interruption from
human error, power losses, natural disasters or terrorist attacks, hardware failures, systems failures, telecommunications failures or
other factors, could affect the security or availability of infrastructure, prevent the Company from being able to continuously back up
its customers’ data or its customers from accessing their stored data, and may damage or delete its customers’ stored files.
If this were to occur, the Company’s reputation could be compromised, and it could be subject to liability to the customers that
were affected.
Any financial difficulties,
such as bankruptcy, faced by the Company’s third-party data center operators, its third-party colocation providers, or any of the
service providers with whom the Company or they contract, may have negative effects on its business, the nature and extent of which are
difficult to predict. Moreover, if its third-party data center providers or its third-party colocation providers are unable to keep up
with the Company’s growing needs for capacity, this could have an adverse effect on the Company’s business. Interruptions
in the Company’s services might reduce its revenue, cause it to issue credits or refunds to customers, subject it to potential liability,
or harm its renewal rates. In addition, prolonged delays or unforeseen difficulties in connection with adding storage capacity or upgrading
its network architecture when required may cause the Company’s service quality to suffer. Problems with the reliability or security
of the Company’s systems could harm its reputation, and the cost of remedying these problems could negatively affect the Company’s
business, financial condition, and operating results.
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Security vulnerabilities,
data protection breaches and cyberattacks could disrupt the Company’s data protection platform and solutions, and any such disruption
could increase its expenses, damage its reputation, harm its business, and adversely affect its stock price.
The Company relies
on third-party providers for several critical aspects of its infrastructure cloud and disaster recovery business continuity services,
and consequently, it does not maintain direct control over the security or stability of the associated systems. Furthermore, the
firmware, software and/or open-source software that its data protection solutions may utilize could be susceptible to hacking or
misuse. In the event of the discovery of a significant security vulnerability, the Company would incur additional substantial expenses
and its business would be harmed.
The Company’s customers
rely on its solutions for production, replication, and storage of digital copies of their files, including financial records, business
information, photos, and other personally meaningful content. The Company also stores credit card information and other personal information
about its customers. An actual or perceived breach of the Company’s network security and systems or other cybersecurity related
events that cause the loss or public disclosure of, or access by third parties to, its customers’ stored files could have serious
negative consequences for its business, including possible fines, penalties and damages, reduced demand for its solutions, an unwillingness
of customers to provide the Company with their credit card or payment information, an unwillingness of its customers to use its solutions,
harm to its reputation and brand, loss of its ability to accept and process customer credit card orders, and time-consuming and expensive
litigation. If this occurs, the Company’s business and operating results could be adversely affected. Third parties may be able
to circumvent the Company’s security by deploying viruses, worms, and other malicious software programs that are designed to attack
or attempt to infiltrate its systems and networks and it may not immediately discover these attacks or attempted infiltrations. Further,
outside parties may attempt to fraudulently induce the Company’s employees, consultants, or affiliates to disclose sensitive information
in order to gain access to its information or its customers’ information. The techniques used to obtain unauthorized access, disable
or degrade service, or sabotage systems change frequently, often are not recognized until launched against a target, and may originate
from less regulated or remote areas around the world. As a result, the Company may be unable to proactively address these techniques or
to implement adequate preventative or reactionary measures. In addition, employee or consultant error, malfeasance, or other errors in
the storage, use, or transmission of personal information could result in a breach of customer or employee privacy. The Company maintains
insurance coverage to mitigate the potential financial impact of these risks; however, its insurance may not cover all such events or
may be insufficient to compensate it for the potentially significant losses, including the potential damage to the future growth of its
business, that may result from the breach of customer or employee privacy. If the Company or its third-party providers are unable to successfully
prevent breaches of security relating to its solutions or customer private information, it could result in litigation and potential liability
for the Company, cause damage to its brand and reputation, or otherwise harm its business and its stock price.
Many states have enacted
laws requiring companies to notify consumers of data security breaches involving their personal data. In addition, the SEC now also requires
disclosure of material data security breaches. These mandatory disclosures regarding a security breach often lead to widespread negative
publicity, which may cause the Company’s customers to lose confidence in the effectiveness of its data security measures. Any security
breach, whether successful or not, would harm the Company’s reputation and could cause the loss of customers. Similarly, if a publicized
breach of data security at any other cloud backup service provider or other major consumer website were to occur, there could be a general
public loss of confidence in the use of the internet for cloud backup services or commercial transactions generally. Any of these events
could have material adverse effects on the Company’s business, financial condition, and operating results.
The Company’s
ability to provide services to its customers depends on its customers’ continued high-speed access to the internet and the continued
reliability of the internet infrastructure.
The Company’s business
depends on its customers’ continued high-speed access to the internet, as well as the continued maintenance and development of the
internet infrastructure. While the Company also provides broadband internet services, many of its clients depend on third-party internet
service providers to expand high-speed internet access, to maintain a reliable network with the necessary speed, data capacity, and security,
and to develop complementary solutions and services, including high-speed solutions, for providing reliable and timely internet access
and services. All of these factors are out of the Company’s control. To the extent that the internet continues to experience an
increased number of users, frequency of use, or bandwidth requirements, the internet may become congested and be unable to support the
demands placed on it, and its performance or reliability may decline. Any internet outages or delays could adversely affect the Company’s
ability to provide services to its customers.
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Currently, internet access
is provided by telecommunications companies and internet access service providers that have significant and increasing market power in
the broadband and internet access marketplace. In the absence of government regulation, these providers could take measures that affect
their customers’ ability to use the Company’s products and services, such as attempting to charge their customers more for
using the Company’s products and services. To the extent that internet service providers implement usage-based pricing, including
meaningful bandwidth caps, or otherwise try to monetize access to their networks, the Company could incur greater operating expenses and
customer acquisition and retention could be negatively impacted. Furthermore, to the extent network operators were to create tiers of
internet access service and either charge the Company for or prohibit the Company’s services from being available to its customers
through these tiers, its business could be negatively impacted. Some of these providers also offer products and services that directly
compete with the Company’s own offerings, which could potentially give them a competitive advantage.
If the Company
is unable to retain its existing customers, its business, financial condition, and operating results would be adversely affected.
If the Company’s
efforts to satisfy its existing customers are not successful, it may not be able to retain them, and as a result, its revenue and
ability to grow would be adversely affected. The Company may not be able to accurately predict future trends in customer renewals.
Customers choose not to renew their subscriptions for many reasons, including if customer service issues are not satisfactorily
resolved, a desire to reduce discretionary spending, or a perception that they do not use the service sufficiently, that the solution
is a poor value, or that competitive services provide a better value or experience. If the Company’s approximate 94% retention
rate significantly decreases, it may need to increase the rate at which it adds new customers in order to maintain and grow its
revenue, which may require it to incur significantly higher advertising and marketing expenses than it currently anticipates, or
its revenue may decline. A significant decrease in the Company’s retention rate would therefore have an adverse effect on
its business, financial condition, and operating results. The Company’s estimates of the number of employees it retains,
and advertising costs are based to a large extent upon its subscription contracts, which may be terminated by customers typically
upon 90 days’ notice prior to the ending term of their contract for services.
A decline in
demand for the Company’s cyber security, disaster recovery, and/or infrastructure solutions, in general, would cause its
revenue to decline.
The Company derives, and
expects to continue to derive, a significant portion of its revenue from subscription services for business continuity, such as data protection
solutions including its disaster recovery backup, replication, archive, and infrastructure as a service offering. Some of the potential
factors that could affect interest in and demand for cloud solutions include:
●
awareness of the Company’s brand and the cloud solutions category generally;
●
the appeal and reliability of the Company’s solutions;
●
the price, performance, features, and availability of competing solutions and services;
●
public concern regarding privacy and data security;
●
the Company’s ability to maintain high levels of customer satisfaction; and
●
the rate of growth in cloud solutions generally.
In addition, substantially
all of the Company’s revenue is currently derived from customers in the U.S. Consequently, a decrease of interest in and demand
for the Company’s solutions in the U.S. could have a disproportionately greater impact on it than if its geographic mix of revenue
was less concentrated.
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The Company primarily
depends upon third-party distribution companies to generate new customers. The Company’s relationships with its partners and distributors
may be terminated or may not continue to be beneficial in generating new customers, which could adversely affect its ability to increase
its customer base.
The Company maintains a network
of distributors, which refer customers to it through links on their websites or promotion to their customers. The number of customers
that the Company can add through these relationships is dependent on the marketing efforts of distributors, over which it has little control.
If the Company is unable to maintain its relationships, or renew contracts on favorable terms, with existing partners and distributors
or establish new contractual relationships with potential partners and distributors, it may experience delays and increased costs in adding
customers, which could have a material adverse effect on the Company. The Company’s distributors also provide services to other
third parties and therefore may not devote their full time and attention to promoting the Company’s products and services.
If the Company is unable
to expand its base of business customers, its future growth and operating results could be adversely affected.
The Company has committed
and continues to commit substantial resources to the expansion and increased marketing of its business solutions. If the Company is unable
to market and sell its solutions to businesses with competitive pricing and in a cost-effective manner its ability to grow its revenue
and achieve profitability may be harmed.
If the Company is unable
to sustain market recognition of and loyalty to its brand, or if its reputation were to be harmed, it could lose customers or fail to
increase the number of its customers, which could harm its business, financial condition, and operating results.
Given the Company’s market focus, maintaining and enhancing its brand is
critical to its success. The Company believes that the importance of brand recognition and loyalty will increase in light of the increasing
competition in its markets. The Company plans to continue investing substantial resources to promote its brand, both domestically and
internationally, but there is no guarantee that its brand development strategies will enhance the recognition of its brand. Some of the
Company’s existing and potential competitors have well-established brands with greater recognition than it has. If the Company’s
efforts to promote and maintain the Company’s brand are not successful, the Company’s operating results and its ability to
attract and retain customers may be adversely affected. In addition, even if the Company’s brand recognition and loyalty increase,
it may not result in increased use of its solutions or higher revenue.
The Company’s solutions,
as well as those of its competitors, are regularly reviewed in computer and business publications. Negative reviews, or reviews in which
the Company’s competitors’ solutions and services are rated more highly than its solutions, could negatively affect its brand
and reputation. From time to time, the Company’s customers express dissatisfaction with its solutions, including, among other things,
dissatisfaction with its customer support, its billing policies, and the way its solutions operate. If the Company does not handle customer
complaints effectively, its brand and reputation may suffer, it may lose its customers’ confidence, and they may choose not to renew
their subscriptions. In addition, many of the Company’s customers participate in online blogs about computers and internet services,
including the Company’s solutions, and its success depends in part on its ability to generate positive customer feedback through
such online channels where consumers seek and share information. If actions that the Company takes or changes that it makes to its solutions
upset these customers, their blogging could negatively affect its brand and reputation. Complaints or negative publicity about the Company’s
solutions or billing practices could adversely impact its ability to attract and retain customers and its business, financial condition,
and operating results.
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The Company is subject
to governmental regulation and other legal obligations related to privacy, and any actual or perceived failure to comply with such obligations
would harm its business.
The Company receives, stores,
and processes personal information and other customer data and maintains specific protocols and procedures to help safeguard the privacy
of that personal information and customer data. Personal privacy has become a significant issue in the United States and in many other
countries where the Company may offer 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. However, it is possible that these obligations may be interpreted
and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or the Company’s
practices. 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 the Company, which
could have an adverse effect on the Company’s reputation and business.
The Company’s customers
may also accidentally disclose their passwords or store them on a mobile device that is lost or stolen, creating the perception that its
systems are not secure against third-party access. Additionally, if third parties that the Company works with, such as vendors or developers,
violate applicable laws or its policies, such violations may also put its customers’ information at risk and could in turn have
an adverse effect on its business. Any significant change to applicable laws, regulations, or industry practices regarding the use or
disclosure of the Company’s customers’ 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 it 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.
The Company’s
solutions are used by customers in the health care industry, and it must comply with numerous federal and state laws related to patient
privacy in connection with providing its solutions to these customers.
The Company’s solutions
are used by customers in the health care industry, and it 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 us known as business associate agreements
that require the Company 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;
20
●
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 we are safeguarding individually identifiable health information.
The Company may not be able
to adequately address the business risks created by HIPAA or HITECH implementation or comply with its obligations under its business associate
agreements. Furthermore, the Company is unable to predict what changes to HIPAA, HITECH or other laws or regulations might be made in
the future or how those changes could affect its business or the costs of compliance. Failure by the Company to comply with any of the
federal and state standards regarding patient privacy may subject the Company to penalties, including civil monetary penalties and, in
some circumstances, criminal penalties, which could have an adverse effect on its business, financial condition, and operating results.
Errors, failures, bugs
in or unavailability of the Company’s solutions released by it could result in negative publicity, damage to its brand, returns,
loss of or delay in market acceptance of its solutions, loss of competitive position, or claims by customers or others.
The Company offers solutions
that operate in a wide variety of environments, systems, applications, and configurations, that are often installed and used in large-scale
computing environments with different operating systems, system management software, and equipment and networking configurations. The
Company’s customers’ computing environments are often characterized by a wide variety of standard and non-standard configurations
that can make pre-release testing for programming or compatibility errors very difficult and time-consuming. In addition, despite testing
by the Company and others, errors, failures, or bugs may not be found in new solutions or releases until after distribution. In the past,
when the Company has discovered any software errors, failures or bugs in certain of its solution offerings after their introduction or
when new versions are released, it, in some cases, has experienced delayed or lost revenues as a result of these errors. In addition,
the Company relies on hardware purchased or leased and software licensed from third parties to offer its solutions, and any defects in,
or unavailability of, its third-party software or hardware could cause interruptions to the availability of its solutions.
Errors, failures, bugs in
or unavailability of the Company’s solutions released by it could result in negative publicity, damage to its brand, returns, loss
of or delay in market acceptance of its solutions, loss of competitive position, or claims by customers or others. Many of the Company’s
end-user customers use its solutions in applications that are critical to their business and may have a greater sensitivity to defects
in its solutions than to defects in other, less critical, software solutions. In addition, if an actual or perceived breach of information
integrity or availability occurs in one of its end-user customer’s systems, regardless of whether the breach is attributable to
its solutions, the market perception of the effectiveness of its solutions could be harmed. Alleviating any of these problems could require
significant expenditures of the Company’s capital and other resources and could cause interruptions, delays, or cessation of its
solution licensing, which could cause it to lose existing or potential customers and could adversely affect its operating results.
The Company faces many
risks associated with its growth and plans to expand, which could harm its business, financial condition, and operating results.
The Company continues to
experience sales growth in its business. This growth has placed, and may continue to place, significant demands on its management and
its operational and financial infrastructure. As the Company’s operations grow in size, scope, and complexity, it will need to improve
and upgrade its systems and infrastructure to attract, service, and retain an increasing number of customers. The expansion of its systems
and infrastructure will require the Company to commit substantial financial, operational, and technical resources in advance of an increase
in the volume of business, with no assurance that the volume of business will increase. Any such additional capital investments will increase
the Company’s cost base. Continued growth could also strain the Company’s ability to maintain reliable service levels for
its customers, develop and improve its operational, financial, and management controls, enhance its reporting systems and procedures,
and recruit, train, and retain highly skilled personnel. If the Company fails to achieve the necessary level of efficiency in its organization
as it grows, its business, financial condition, and operating results could be harmed.
21
The Company has office
locations in New York, Florida, and Texas, and data centers in New York, Massachusetts, North Carolina, Texas, and Canada. If the
Company is unable to effectively manage a large and geographically dispersed group of employees and contractors or to anticipate
its future growth and personnel needs, its business may be adversely affected. As the Company expands its business, it adds complexity
to its organization and must expand and adapt its operational infrastructure and effectively coordinate throughout its organization.
As a result, the Company has incurred and expects to continue to incur additional expenses related to its continued growth.
The Company also anticipates
that its efforts to expand internationally will entail the marketing and advertising of its services and brand and the development of
localized websites. The Company does not have substantial experience in selling its solutions in international markets or in conforming
to the local cultures, standards, or policies necessary to successfully compete in those markets, and it must invest significant resources
in order to do so. The Company may not succeed in these efforts or achieve its customer acquisition or other goals. For some international
markets, customer preferences and buying behaviors may be different, and the Company may use business or pricing models that are different
from its traditional subscription model to provide cloud backup and related services to customers. The Company’s revenue from new
foreign markets may not exceed the costs of establishing, marketing, and maintaining its international solutions, and therefore may not
be profitable on a sustained basis, if at all.
The Company’s
intended international expansion will subject it to risks typically encountered when operating internationally .
The Company intends to expand
internationally which subjects it to new risks that it has not generally faced in the United States. These risks in clude:
●
localization
of the Company’s solutions, including translation into foreign languages and adaptation for local practices and regulatory
requirements;
●
lack
of experience in other geographic markets;
●
strong
local competitors;
●
cost
and burden of complying with, lack of familiarity with, and unexpected changes in foreign legal and regulatory requirements, including
consumer and data privacy laws;
●
difficulties
in managing and staffing international operations;
●
potentially
adverse tax consequences, including the complexities of transfer pricing, foreign value added or other tax systems, double taxation,
and restrictions, and/or taxes on the repatriation of earnings;
●
dependence
on third parties, including channel partners with whom we do not have extensive experience;
●
compliance
with the Foreign Corrupt Practices Act, economic sanction laws and regulations, export controls, and other U.S. laws and regulations
regarding international business operations;
●
increased
financial accounting and reporting burdens and complexities;
●
political,
social, and economic instability abroad, terrorist attacks, and security concerns in general; and
●
reduced
or varied protection for intellectual property rights in some countries.
22
Operating in international
markets also requires significant management attention and financial resources. The investment and additional resources required to establish
operations and manage growth in other countries may not produce desired levels of revenue or profitability.
The Company’s software
contains encryption technologies, certain types of which are subject to U.S. and foreign export control regulations and, in some foreign
countries, restrictions on importation and/or use. Any failure on the Company’s part to comply with encryption or other applicable
export control requirements could result in financial penalties or other sanctions under the U.S. export regulations, including restrictions
on future export activities, which could harm its business and operating results. Regulatory restrictions could impair the Company’s
access to technologies that it seeks for improving its solutions and may also limit or reduce the demand for its solutions outside of
the U.S.
The loss of the Company’s
key personnel, or its failure to attract, integrate, and retain other highly qualified personnel, could harm its business and growth prospects.
The Company depends on the
continued service and performance of its key personnel. In addition, many of the Company’s key technologies and systems are custom-made
for its business by its personnel. The loss of key personnel, including key members of the Company’s management team, as well as
certain of its key marketing, sales, product development, or technology personnel, could disrupt its operations and have an adverse effect
on its ability to grow its business. In addition, several of the Company’s key personnel have only recently been employed by it,
and the Company is still in the process of integrating these personnel into its operations. The Company’s failure to successfully
integrate these key employees into its business could adversely affect its business.
To execute the Company’s growth plan, it must attract and retain highly
qualified personnel. Competition for these employees is intense, and the Company may not be successful in attracting and retaining qualified
personnel. The Company, from time to time in the past, experienced, and it expects to continue to experience, difficulty in hiring and
retaining highly-skilled employees with appropriate qualifications. New hires require significant training and, in most cases, take significant
time before they achieve full productivity. The Company’s recent hires and planned hires may not become as productive as it expects,
and it may be unable to hire or retain sufficient numbers of qualified individuals. Many of the companies with which it competes for experienced
personnel have greater resources than it has. In addition, in making employment decisions, particularly in the internet and high-technology
industries, job candidates often consider the value of the equity that they are to receive in connection with their employment. In addition,
employees may be more likely to voluntarily exit the Company if the shares underlying their vested and unvested options, as well as unvested
restricted stock units, have significantly depreciated in value resulting in the options they are holding potentially being significantly
above the market price of the Company’s common stock and the value of the restricted stock units decreasing. If the Company fails
to attract new personnel, or fails to retain and motivate its current personnel, its business and growth prospects could be severely harmed.
Risks Related to Intellectual
Property
Assertions by a third
party that the Company’s solutions infringe its intellectual property, whether correct, could subject the Company to costly and
time-consuming litigation or expensive licenses.
There is frequent litigation
in the software and technology industries based on allegations of infringement or other violations of intellectual property rights. Any
such claims or litigation may be time-consuming and costly, divert management resources, require the Company to change its services, require
it to credit or refund subscription fees, or have other adverse effects on its business. Many companies are devoting significant resources
to obtaining patents that could affect many aspects of the Company’s business. Third parties may claim that the Company’s
technologies or solutions infringe or otherwise violate their patents or other intellectual property rights.
If the Company is forced
to defend itself against intellectual property infringement claims, whether they have merit or are determined in its favor, it may face
costly litigation, diversion of technical and management personnel, limitations on its ability to use its current websites and technologies,
and an inability to market or provide its solutions. As a result of any such claim, the Company may have to develop or acquire non-infringing
technologies, pay damages, enter into royalty or licensing agreements, cease providing certain services, adjust its marketing and advertising
activities, or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable
to the Company, or at all.
23
Furthermore, the Company
has licensed proprietary technologies from third parties that it uses in its technologies and business, and it cannot be certain that
the owners’ rights in their technologies will not be challenged, invalidated, or circumvented. In addition to the general risks
described above associated with intellectual property and other proprietary rights, the Company is subject to the additional risk that
the seller of such technologies may not have appropriately created, maintained, or enforced their rights in such technology.
The Company relies
on third-party software to develop and provide its solutions, including server software and licenses from third parties to use patented
intellectual property.
The Company relies on software
licensed from third parties to develop and offer its solutions. In addition, the Company may need to obtain future licenses from third
parties to use intellectual property associated with the development of its solutions, which might not be available to the Company on
acceptable terms, or at all. Any loss of the right to use any software required for the development and maintenance of the Company’s solutions
could result in delays in the provision of its solutions until equivalent technology is either developed by the Company, or, if available
from others, is identified, obtained, and integrated, which delay could harm its business. Any errors or defects in third-party software
could result in errors or a failure of its solutions, which could harm its business.
If the Company is unable
to protect its domain names, its reputation, brand, customer base, and revenue, as well as its business and operating results, could be
adversely affected.
The Company has registered domain names for websites (“URLs”) that
it uses in its business, such as www.datastoragecorp.com. If the Company is unable to maintain its rights in these domain names, its competitors
or other third parties could capitalize on the Company’s brand recognition by using these domain names for their own benefit. In
addition, although the Company owns the Company’s domain name under various global top-level domains such as .com and .net, as well
as under various country-specific domains, it might not be able to, or may choose not to, acquire or maintain other country-specific versions
of the Company’s domain name or other potentially similar URLs. Domain names similar to the Company have already been registered
in the U.S. and elsewhere, and its competitors or other third parties could capitalize on its brand recognition by using domain names
similar to the Company’s. The regulation of domain names in the U.S. and elsewhere is generally conducted by internet regulatory
bodies and is subject to change. If the Company loses the ability to use a domain name in a particular country, it may be forced to either
incur significant additional expenses to market its solutions within that country, including the development of a new brand and the creation
of new promotional materials, or elect not to sell its solutions in that country. Either result could substantially harm its business
and operating results. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars, or modify
the requirements for holding domain names. As a result, the Company may not be able to acquire or maintain the domain names that utilize
the Company’s name in all of the countries in which it currently conducts or intends to conduct business. Further, the relationship
between regulations governing domain names and laws protecting trademarks and similar proprietary rights varies among jurisdictions and
is unclear in some jurisdictions. The Company may be unable to prevent third parties from acquiring and using domain names that infringe,
are similar to, or otherwise decrease the value of, its brand or its trademarks. Protecting and enforcing the Company’s rights in
its domain names and determining the rights of others may require litigation, which could result in substantial costs, divert management
attention, and not be decided favorably to the Company.
Risks
Related to the Company’s Common Stock and Securities
The Company’s
stock price has fluctuated in the past and may be volatile in the future, and as a result, investors in its common stock could incur
substantial losses.
The Company’s
stock price has fluctuated in the past, has recently been volatile, and may be volatile in the future. By way of example, on
September 1, 2023, the reported low sale price of the Company’s common stock was $3.21, and the reported high sales price was
$3.75. For comparison purposes, on January 12, 2023, the price of the Company’s common stock closed at $1.61 per share, on
October 17, 2023, its stock price closed at $3.49 per share, and on August 11, 2023, its stock price closed at $2.59 per share with
no discernable announcements or developments by the Company or third parties (other than the filing of the Quarterly Report on Form
10-Q). The
Company may incur rapid and substantial decreases in its stock price in the foreseeable future that are unrelated to its operating
performance or prospects. The stock market has experienced extreme volatility that has often been unrelated to the operating
performance of particular companies. As a result of this volatility, investors may experience losses on their investment in the
Company’s common stock. The market price for the Company’s common stock may be influenced by many factors, including the
following:
24
●
investor
reaction to the Company’s business strategy;
●
the success
of competitive products or technologies;
●
regulatory
or legal developments in the United States and other countries, especially changes in laws or regulations applicable to the Company’s
products;
●
variations
in the Company’s financial results or those of companies that are perceived to be similar to the Company;
●
the Company’s
ability or inability to raise additional capital and the terms on which it raises it;
●
declines
in the market prices of stocks generally;
●
the
Company’s public disclosure of the terms of any financing which it consummates in the future;
●
an
announcement that the Company has effected a reverse split of the Company’s common stock and treasury stock;
●
the
Company’s failure to be profitable;
●
the
Company’s failure to raise working capital;
●
any
acquisitions we may consummate, including, but not limited to, the Merger;
●
announcements
by the Company or its competitors of significant contracts, new services, acquisitions, commercial relationships, joint ventures
or capital commitments;
●
cancellation
of key contracts;
●
the
Company’s failure to meet financial forecasts it publicly discloses;
●
trading volume
of the Company’s common stock;
●
sales of the
Company’s common stock by it or its stockholders;
●
general economic,
industry and market conditions; and
●
other
events or factors, including those resulting from such events, or the prospect
of such events, including war, terrorism and other international conflicts, public health issues including health epidemics or pandemics,
such as the COVID-19 pandemic, and natural disasters such as hurricanes, floods, fires, earthquakes, tornadoes or other adverse weather
and climate conditions, whether occurring in the United States or elsewhere, could disrupt the Company’s operations, disrupt the
operations of its suppliers or result in political or economic instability.
These broad market
and industry factors may seriously harm the market price of the Company’s common stock, regardless of its operating performance.
Since the stock price of its common stock has fluctuated in the past, has been volatile recently and may be volatile in the future,
investors in its common stock could incur substantial losses. In the past, following periods of volatility in the market, securities
class-action litigation has often been instituted against companies. Such litigation, if instituted against the Company, could
result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect
its business, financial condition, results of operations and growth prospects. There can be no guarantee that the Company’s
stock price will remain at current prices or that future sales of its common stock will not be at prices lower than those sold
to investors.
25
Additionally, recently, securities
of certain companies have experienced significant and extreme volatility in stock price due to short sellers of shares of common stock,
known as a “short squeeze.” These short squeezes have caused extreme volatility in those companies and in the market and have
led to the price per share of those companies to trade at a significantly inflated rate that is disconnected from the underlying value
of the company. Many investors who have purchased shares in those companies at an inflated rate face the risk of losing a significant
portion of their original investment as the price per share has declined steadily as interest in those stocks has abated. While the Company
has no reason to believe its shares would be the target of a short squeeze, there can be no assurance that it won’t be in the future,
and you may lose a significant portion or all of your investment if you purchase the Company’s shares at a rate that is significantly
disconnected from its underlying value.
We cannot be
assured that we will be able to maintain our listing on the Nasdaq Capital Market.
Our securities are
listed on The Nasdaq Capital Market, a national securities exchange. We cannot be assured that we will continue to comply with
the rules, regulations or requirements governing the listing of our common stock on Nasdaq Capital Market or that our securities
will continue to be listed on Nasdaq Capital Market in the future. If Nasdaq should determine at any time that we fail to meet
Nasdaq requirements, we may be subject to a delisting action by Nasdaq.
On January 18, 2024,
Nasdaq notified the Company that due to the passing of Mr. Hoffman, the Company no longer complies with Nasdaq’s audit committee
requirements as set forth in Rule 5605(c)(2)(A) of the Nasdaq listing standards. Nasdaq further notified the Company that, consistent
with Rule 5605(c)(4) of the Nasdaq listing standards, Nasdaq provided the Company a cure period in order to regain compliance until
the earlier of the Company’s next annual meeting of shareholders or December 30, 2024 or, if the next annual meeting of shareholders
is held before June 27, 2024, then the Company must provide evidence of compliance no later than June 27, 2024. As of March 8,
2024, the Company believes that it has regained compliance with Rule 5605(c)(2)(A) of the Nasdaq listing standards although as
of the date of this Annual Report we did not receive notification from Nasdaq that we regained compliance.
If Nasdaq delists
our securities from trading on its exchange at some future date, we could face significant material adverse consequences, including:
●
a
limited availability of market quotations for our securities;
●
reduced
liquidity with respect to our securities;
●
a
determination that our common stock is a “penny stock” which will require brokers trading in our common stock
to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market
for our common stock;
●
a
limited amount of news and analyst coverage for our company; and
●
a
decreased ability to issue additional securities or obtain additional financing in the future.
Upon exercise of the
Company’s outstanding options or warrants, it will be obligated to issue a substantial number of additional shares of common stock
which will dilute its present shareholders .
The Company is obligated to issue additional shares of its common stock in
connection with any exercise or conversion, as applicable, of its outstanding options, warrants, and shares of its convertible preferred
stock. As of December 31, 2023, there were options and warrants outstanding convertible into an aggregate of 3,011,207 shares of common
stock. The exercise of warrants or options will cause the Company to issue additional shares of its common stock and will dilute the percentage
ownership of its shareholders. In addition, the Company has in the past, and may in the future, exchange outstanding securities for other
securities on terms that are dilutive to the securities held by other shareholders not participating in such an exchange.
Offers or availability
for sale of a substantial number of shares of the Company’s common stock may cause the price of its common stock to decline .
Sales of large blocks of the Company’s common stock could depress the price
of its common stock. The existence of these shares and shares of common stock that may be issuable upon conversion or exercise, as applicable,
of outstanding shares of convertible preferred stock, warrants and options create a circumstance commonly referred to as an “overhang”
which can act as a depressant to the Company’s common stock price. The existence of an overhang, whether or not sales have occurred
or are occurring, also could make the Company’s ability to raise additional financing through the sale of equity or equity-linked
securities more difficult in the future at a time and price that the Company deems reasonable or appropriate. If the Company’s existing
shareholders and investors seek to convert or exercise such securities or sell a substantial number of shares of its common stock, such
selling efforts may cause significant declines in the market price of its common stock. In addition, the shares of the Company’s
common stock included in the Units and underlying warrants sold in the offering will be freely tradable without restriction or further
registration under the Securities Act. As a result, a substantial number of shares of the Company’s common stock may be sold in
the public market following this offering. If there are significantly more shares of common stock offered for sale than buyers are willing
to purchase, then the market price of the Company’s common stock may decline to a market price at which buyers are willing to purchase
the offered common stock and sellers remain willing to sell its common stock.
The Company does not
expect to declare any common stock cash dividends in the foreseeable future.
The Company does not anticipate
declaring any cash dividends to holders of Data Storage common stock in the foreseeable future. Consequently, common stockholders may
need to rely on sales of their shares after price appreciation, which may never occur, as the only way to realize any future gains on
their investment.
26
Because the Company
may issue preferred stock without the approval of its shareholders and have other anti-takeover defenses, it may be more difficult for
a third party to acquire the Company and could depress its stock price.
In general, the Company’s
Board may issue, without a vote of its shareholders, one or more additional series of preferred stock that has more than one vote per
share. Without these restrictions, the Company’s Board could issue preferred stock to investors who support it and its management
and give effective control of its business to its management. Additionally, the issuance of preferred stock could block an acquisition
resulting in both a drop in the Company’s stock price and a decline in interest of its common stock. This could make it more difficult
for shareholders to sell their common stock. This could also cause the market price of the Company’s common stock shares to drop
significantly, even if its business is performing well.
Provisions of Nevada
law could delay or prevent an acquisition of Data Storage, even if the acquisition would be beneficial to its stockholders and could make
it more difficult for stockholders to change Data Storage’s management.
Data
Storage Corporation is subject to anti-takeover provisions under Nevada law, which could delay or prevent a change of control. Together,
these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment
of a premium over prevailing market prices for the Company’s securities. These provisions include: limitations on the ability to
engage in any “combination” with an “interested stockholder” (each, as defined in the Nevada Revised Statutes
(“NRS”)) for two years from the date the person first becomes an “interested stockholder”; being subject to Sections
78.378 to 78.3793 of the NRS and allowing an “acquiring person” to obtain voting rights in “control shares” without
shareholder approval; the ability of the Board to issue shares of currently undesignated and unissued preferred stock without prior stockholder
approval; limitations on the ability of stockholders to call special meetings; and the ability of the Board to amend its amended Bylaws
without stockholder approval.