Data Storage Corp: Form 10-Q for the period ended Sep 30, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto for the year ended December 31, 2023, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed on March 28, 2024 (the “2023 Annual Report”) with the U.S. Securities and Exchange Commission (the “SEC”). This Quarterly Report on Form 10-Q contains forward-looking statements, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions, and adequacy of resources. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) our plans, strategies, objectives, expectations, and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth; and (iii) other risks and uncertainties indicated from time to time in our filings with the SEC.

In some cases, you can identify forward-looking statements by terminology such as ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘expects,’ ‘plans,’ ‘intends,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘predicts,’ ‘potential,’ or ‘continue’ or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We are under no duty to update any of the forward-looking statements after the date of this report.

Company Overview

Data Storage Corporation (“Data Storage,” “we,” “us,” “our” and the “Company”) is headquartered in Melville, New York. Our common stock trades on the Nasdaq Capital Market (“Nasdaq”) under the ticker symbol DTST. We operate through two subsidiaries; CloudFirst Technologies Corporation (“CloudFirst Technologies”), a Delaware corporation, and Nexxis Inc. These subsidiaries provide solutions and services to a broad range of clients in several industries including healthcare, banking and finance, distribution services, manufacturing, construction, education, and government. The subsidiaries maintain business development teams, as well as independent distribution channels.

Strategic Growth and Infrastructure: In response to a capital raise and Nasdaq uplisting in 2021, we expanded our distribution networks and bolstered our team, focusing on enhancing our sales, marketing, and technological capabilities. Data Storage operates seven geographically diverse data centers across the U.S. and Canada, supporting its commitment to providing secure and reliable subscription-based services.

Core Services:

• Business Continuity Solutions: Offers rapid recovery from system outages and disasters, ensuring minimal operational disruption.
• Managed Cloud Infrastructure Services: Facilitates cloud migration and provides ongoing support for software applications and technical workloads in a multi-cloud environment.
• Cyber Security: Delivers comprehensive security consultation, data protection, disaster recovery, and remote monitoring services, either integrated into cloud solutions or as standalone offerings.

Client Engagement and Revenue Generation: We engage with clients through direct business development efforts and a broad distribution network, offering solutions that lower barriers to entry for disaster recovery and cloud infrastructure services. While subscription-based services constitute a significant portion of our revenue, we also generate income from the sale of equipment and software, emphasizing cybersecurity, data storage, and IBM Power systems solutions.

This overview highlights Data Storage Corporation’s strategic approach to leveraging technology and expertise to meet the complex needs of its diverse client base, ensuring business continuity and security in an increasingly digital world.

2024 Business Update Summary

In the first half of 2024, we laid a strong foundation for sustained growth. Strategic capital allocation toward professional services, business development, and account management has been pivotal. The January 1st merger of CloudFirst Technologies and Flagship Solutions LLC into a single subsidiary of Data Storage Corporation has positioned us to advance key strategic initiatives effectively.

Our expansion into Europe, with a primary focus on the United Kingdom (UK), is underway. Equipment procurement for our three data center locations has commenced, and we project the platform will be operational and ready for client onboarding by January 2025. Management estimates that the UK and European Union (EU) markets includes more than 50,000 businesses with established trade and operations spanning the USA, UK, and EU, a prospect that bolsters our marketing strategy. The close economic and commercial ties between these countries are expected to enhance our efforts to penetrate the UK and EU markets. CloudFirst Technologies’ wholly owned subsidiary, UK Cloud Host Technologies Ltd., has established an executive presence in London and appointed Colin Freeman as Managing Director to lead the European expansion. Banking facilities are established, and we are actively progressing in our execution phase.

Our initial expansion outside the USA began with establishing a presence in Canada, where CloudFirst Technologies operates two IBM Power platforms. The trading relationship between the UK, Canada, and the USA presents substantial growth potential. We believe these interconnected markets offer a significant addressable opportunity. Our portfolio of cloud infrastructure services, including cloud hosting, disaster recovery, and cybersecurity, positions Data Storage as a comprehensive, multi-country service provider—one of the few offering such breadth and capability.

Our CXO (Client Experience Officer) program, announced earlier this year, is driving tangible outcomes by deepening client engagement, enhancing cross-selling opportunities, and exceeding service expectations.

We maintain our focus and operational stability. While market conditions remain unpredictable, our cash position is solid, and we forecast continued positive EBITDA from our subsidiary operations.

Operational Footprint:

Data Storage Corporation operates from offices in New York and Texas, equipped with data centers designed to meet client requirements effectively. We also employ remote staff to complement our office teams and manages a robust infrastructure across seven geographically diverse data centers in the United States and Canada, supporting our comprehensive subscription-based solutions.

Recent Developments

On May 3, 2024, the Board signed a resolution to amend our Bylaws to provide that at each meeting of stockholders, except where otherwise provided by law, the presence in person or by proxy of the holders of thirty-three and one-third percent of the outstanding shares of our voting stock shall constitute a quorum.

On June 20, 2024, we held our 2024 Annual Meeting of Stockholders (the “2024 Annual Meeting”). At the 2024 Annual Meeting, our stockholders approved an amendment to our 2021 Stock Incentive Plan, as amended and restated (the “Incentive Plan”) to increase the number of shares of common stock that we will have authority to grant under the Incentive Plan by an additional 1,000,000 shares of common stock to 2,075,000.

On July 18, 2024, we entered into an Equity Distribution Agreement (the “Agreement”), with Maxim Group LLC (“Maxim”), pursuant to which we may offer and sell, from time to time, through Maxim, as sales agent or principal, shares of our common stock. Subject to the terms and conditions of the Agreement, Maxim will use commercially reasonable efforts consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations and the rules of the Nasdaq Capital Market to sell shares from time to time based upon our instructions, including any price, time or size limits specified by us. Under the Agreement, Maxim may sell shares by any method deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended, or any other method permitted by law, including in privately negotiated transactions. Maxim’s obligations to sell shares under the Agreement are subject to satisfaction of certain conditions, including customary closing conditions for transactions of this nature. We will pay Maxim a commission of 2.5% of the aggregate gross proceeds from each sale of shares and have agreed to provide Maxim with customary indemnification and contribution rights. We also agreed to reimburse Maxim for certain specified expenses of up to $50,000. Sales of shares of common stock under the Agreement will be made pursuant to our registration statement on Form S-3 (File No. 333-280881) (the “Registration Statement”) and a related prospectus supplement (the “ATM Prospectus”), both of which were filed with the SEC on July 18, 2024. The ATM Prospectus relates to the offering of up to $10,600,000 shares of our common stock. The issuance and sale, if any, of common stock under the Agreement is subject to us maintaining an effective registration statement. The Registration Statement was declared effective on July 26, 2024.

RESULTS OF OPERATIONS

Three months ended September 30, 2024 as compared to September 30, 2023

Total Sales. For the three months ended September 30, 2024, total sales were $5,808,834, a decrease of $177,791 or 3%, compared to $5,986,625 for the three months ended September 30, 2023. The decrease is primarily attributed to lower one-time Equipment and Software sales during the current period and a decrease in Managed Services, primarily offset by an increase in Infrastructure & Disaster Recovery/Cloud Services.. Typically, we generate a higher margin on Infrastructure & Disaster Recovery/Cloud Services than we do on one-time Equipment Sales.

27

Cost of Sales. For the three months ended September 30, 2024, cost of sales was $3,297,164, a decrease of $359,107 or 10% compared to $3,656,271 for the three months ended September 30, 2023. The decrease was mostly related to the decrease in one-time equipment and managed services related cost of sales.

Selling, general and administrative expenses. For the three months ended September 30, 2024, selling, general and administrative expenses were $2,537,501, an increase of $221,288 or 10%, as compared to $2,316,213 for the three months ended September 30, 2023. The net increase is reflected in the chart below.

Salaries. Salaries increased as a result of an increase in stock-based compensation in addition to an increase in salaries due to annual employee performance reviews.

Professional Fees. Professional fees increased primarily due to business development consulting fees and an increase in legal and accounting fees related to the filing of certain registration statements.

Software as a Service Expense (SaaS). SaaS decreased due to a decrease in outside professional services.

Advertising Expenses. Advertising Expenses decreased due to offsets in expense of our stadium lease.

Commissions Expense. Commissions expense decreased due to the decrease in one-time equipment sales.

Travel and Entertainment. Travel and Entertainment expenses increased due to international expansion efforts in addition to travel related to domestic customer expansion efforts.

Other Income (Expense). Other income for the three months ended September 30, 2024, increased $5,759 to $149,356 from $143,597 for the three months ended September 30, 2023. The increase in other income is primarily attributable to the increase in interest income from investment in marketable securities.

Income (loss) before provision for income taxes. Income before provision for income taxes for the three months ended September 30, 2024, was $123,526, as compared to income of $157,738 for the three months ended September 30, 2023.

Nine months ended September 30, 2024 as compared to September 30, 2023

Total Sales. For the nine months ended September 30, 2024, total sales were $18,955,074, an increase of $184,335 or 1%, compared to $18,770,739 for the nine months ended September 30, 2023. The increase is primarily attributed to the increase of $2,146,623 or 29% in Infrastructure & Disaster Recovery/Cloud Services offset partially by a decrease in one-time equipment sales and managed services during the current period. Typically, we generate a higher margin on Infrastructure & Disaster Recovery/Cloud Services than we do on one-time Equipment Sales.

Cost of Sales. For the nine months ended September 30, 2024, cost of sales was $11,069,038, a decrease of $702,848 or 6% compared to $11,771,886 for the nine months ended September 30, 2023. The decrease of 6% was mostly related to a decrease in one-time equipment sales.

Selling, general and administrative expenses. For the nine months ended September 30, 2024, selling, general and administrative expenses were $8,086,857, an increase of $1,167,875 or 17%, as compared to $6,918,982 for the nine months ended September 30, 2023. The net increase is reflected in the chart below.

Salaries. Salaries increased as a result of an increase in stock-based compensation in addition to an increase in salaries due to annual employee performance reviews.

Professional fees. Professional fees increased primarily due to business development consulting fees and an increase in legal and accounting fees related to the filing of certain registration statements.

Software as a Service Expense (SaaS). SaaS increased due to a new customer relationship management platform at one of the company’s divisions.

Advertising Expenses. Advertising Expenses increased due to an increase in new marketing campaigns and in person events.

Travel and Entertainment. Travel and Entertainment expenses increased due to international expansion in efforts in addition to travel related to domestic customer expansion efforts.

All Other Expenses. Other expenses increased primarily due to an increase in sales and use tax expense.

Other Income (Expense). Other income for the nine months ended September 30, 2024, increased $104,678 to $423,646 from $318,968 for the nine months ended September 30, 2023. The increase in other income is primarily attributable to the increase in interest income from investment in marketable securities.

Income before provision for income taxes. Income before provision for income taxes for the nine months ended September 30, 2024, was $222,825, as compared to $398,839 for the nine months ended September 30, 2023, a decrease of $176,014.

LIQUIDITY AND CAPITAL RESOURCES

The consolidated financial statements have been prepared using generally accepted accounting principles in the United States of America (“GAAP”) applicable for a going concern, which assumes that we will realize our assets and discharge our liabilities in the ordinary course of business.

To the extent we are successful in growing our business, identifying potential acquisition targets, and negotiating the terms of such acquisition, and in the event the purchase price includes a cash component, we plan to use our working capital and the proceeds of any financing to finance such acquisition and related costs.

Our opinion concerning our liquidity is based on current information. If this information proves to be inaccurate, or if circumstances change, we may not be able to meet our liquidity needs, which will likely require a renegotiation of related party capital equipment leases, a reduction in advertising and marketing programs, and/or a reduction in salaries for officers that are major shareholders.

We have long-term contracts to supply our subscription-based solutions that are invoiced to clients monthly. We continue to see an uptick in client interest distribution channel expansion and in sales proposals. In 2024, we have and intend to continue to work to increase our presence in the IBM “Power I” infrastructure cloud and business continuity marketplace in the niche of IBM “Power” and in the disaster recovery global marketplace utilizing its technical expertise, data centers utilization, assets deployed in the data centers, 24 x 365 monitoring and software.

On July 18, 2024, we entered into the Agreement with Maxim pursuant to which we may offer and sell, from time to time, through Maxim, as sales agent or principal, shares of our common stock. There can be no guarantee that we will be able to raise capital from sales under the Agreement. To date, we have not made any sales under the Agreement,

Cash Flows for nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023

The following table summarizes our cash flows:

Operating activities

During the nine months ended September 30, 2024, cash provided by operating activities was $552,590, compared to $2,161,424 during the nine months ended September 30, 2023. The decrease of $1,608,834 is primarily due to the decrease in accounts receivable of $1,897,218, partially offset by the $317,388 increase in adjustments for non-cash items, including depreciation and amortization and stock-based compensation.

Investing activities

During the nine months ended September 30, 2024, net cash used in investing activities totaled $1,172,581, compared to $2,767,949 during the nine months ended September 30, 2023. The decrease of $1,595,368 was primarily due to a net decrease in the purchases of marketable securities.

Financing activities

During the nine months ended September 30, 2024, net cash used in financing activities totaled $295,021, compared to $686,809 during the nine months ended September 30, 2023. The decrease of $391,788 was primarily due to lower repayments of finance lease obligations to a related party.

Nine months ended September 30, 2024 as compared to Fiscal Year ended December 31, 2023

During the nine months ended September 30, 2024, our cash decreased by $915,012 to $513,718 from $1,428,730 on December 31, 2023. Net cash of $552,590 was provided by our operating activities resulting primarily from the changes in assets and liabilities. Net cash of $1,172,581 was used in investing activities principally related to the purchase of equipment. Net cash of $295,021 was used in financing activities primarily related to repayments of finance lease obligations, partially offset by proceeds received from the exercise of stock options.

The Company’s working capital was $11,583,279 on September 30, 2024, increasing by $571,872 from $11,011,407 at December 31, 2023. The increase is primarily attributable to an increase in accounts receivable and other current assets and a decrease in deferred revenue and finance leases. This was offset by a decrease in cash and an increase in accounts payable.

Critical Accounting 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. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results may differ from the original estimates, requiring adjustments to these balances in future periods. There are accounting policies, each of which requires significant judgments and estimates on the part of management, that we believe are significant to the presentation of our consolidated financial statements. The critical accounting estimates that affect the consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of the 2023 Annual Report.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities”.

Non-GAAP Financial Measures

Adjusted EBITDA

To supplement our consolidated financial statements presented in accordance with GAAP and to provide investors with additional information regarding our financial results, we consider and are including herein Adjusted EBITDA, a Non-GAAP financial measure. We view Adjusted EBITDA as an operating performance measure and, as such, we believe that the GAAP financial measure most directly comparable to it is net income (loss). We define Adjusted EBITDA as net income adjusted for interest and financing fees, depreciation, amortization, stock-based compensation, and other non-cash income and expenses. We believe that Adjusted EBITDA provides us an important measure of operating performance because it allows management, investors, debtholders and others to evaluate and compare ongoing operating results from period to period by removing the impact of our asset base, any asset disposals or impairments, stock-based compensation and other non-cash income and expense items associated with our reliance on issuing equity-linked debt securities to fund our working capital.

Our use of Adjusted EBITDA has limitations as an analytical tool, and this measure should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP, as the excluded items may have significant effects on our operating results and financial condition. Additionally, our measure of Adjusted EBITDA may differ from other companies’ measure of Adjusted EBITDA. When evaluating our performance, Adjusted EBITDA should be considered with other financial performance measures, including various cash flow metrics, net income and other GAAP results. In the future, we may disclose different non-GAAP financial measures in order to help our investors and others more meaningfully evaluate and compare our future results of operations to our previously reported results of operations.

The following table shows our reconciliation of net income to adjusted EBITDA for the three months ended September 30, 2024, and 2023, respectively:

For the Three Months Ended September 30, 2024

For the Three Months Ended September 30, 2023

32

The following table shows our reconciliation of net income to adjusted EBITDA for the nine months ended September 30, 2024, and 2023, respectively:

For the Nine Months Ended September 30, 2024

For the Nine Months Ended September 30, 2023

Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including its principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Rule 13a-15(e) under the Exchange Act defines “disclosure controls and procedures” as controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to a company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level at September 30, 2024.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. As set forth above, our Chief Executive Officer and Chief Financial Officer have concluded, based on the evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.

Changes in Internal Control Over Financial Reporting.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2024, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Investing in our securities involves a high degree of risk. You should carefully consider the following risks and the risk factors set forth in our 2023 Annual Report, together with all the other information in this Quarterly Report on Form 10-Q, including our condensed financial statements and notes thereto. If any of the following risks actually materialize, our operating results, financial condition and liquidity could be materially adversely affected. The following information updates, and should be read in conjunction with, the information disclosed in Part I, Item 1A, “Risk Factors,” contained in our 2023 Annual Report. Except as disclosed below, there have been no material changes from the risk factors disclosed in our 2023 Annual Report.

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 $235,259 for the nine months ended September 30, 2024, and $381,575 for the year ended December 31, 2023. As of September 30, 2024, the Company had cash of $513,718, marketable securities of $11,374,769, and working capital of $11,583,279. There can be no assurance that the Company will continue to generate income in the future.

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 The 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, a member of our Board of Directors and member of our Audit Committee, the Company was no longer compliant 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.

On April 2, 2024, the Company received a letter (the “Notification Letter”) from Nasdaq stating that, based on the information regarding the appointment of Nancy M. Stallone, CPA to the Company’s Board of Directors and Audit Committee, Nasdaq has determined that the Company complies with the Audit Committee requirement for continued listing on The Nasdaq Capital Market set forth in Listing Rules 5605(c)(2), which requires that the Company maintain an audit committee of at least three members, each of whom must meet specified criteria, including certain independence criteria. Accordingly, the Nasdaq staff has determined that the Company has regained compliance with Nasdaq Listing Rule 5605(c)(2) and has indicated that the matter is now closed.

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 September 30, 2024, there were options and warrants outstanding convertible into an aggregate of 3,145,014 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.