DATA STORAGE CORP MANAGEMENT REPORT OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
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, 2021, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021filed on March 31, 2022(the "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 Securities and Exchange Commission. 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. 21 The Industry Overview Hybrid and Multi-Cloud have become mainstream technological offerings of the Cloud Managed Services industry as companies have moved away from legacy, on-premise technology solutions. This approach is growing more complex, as companies utilize disparate technical environments, including on-premises equipment and software, multi-clouds interfacing with Software as a Service providers, Cloud Managed Service Providers assist businesses in achieving their desired security levels, technical cloud infrastructure and financial objectives while optimizing the value of these technologies and cloud resources through multi-cloud management, ensuring business continuity, governance, and operational efficiencies. This is a $500 billion-industry. One subset, of this $500 billion, is IBM Powercloud infrastructure and disaster recovery. Globally estimated at over one million virtual IBM Powerservers. According to the most recent information received from IBM typical industries utilizing IBM Powerservers are finance, retail, healthcare, government, and distribution organizations. According to Fortune Business Insights, the Cloud Managed Services industry in North Americawas $16.3 billionin 2019 and has been growing at a rate of 13.8% CAGR bringing us to $24 billionby the end of 2022. Disaster Recovery is projected to be a $3.6 billionin the US by the end of 2022 which is 35% of the $10.3 billionglobally based on Grandview Research Disaster Recovery Solutions Market Size report. Cyber Security, specifically the MDR segment, is an established market recognized by buyers. Gartner observed a 35% growth in end users' inquiries on the topic in the last year. Gartner estimates that by 2025, the MDR market will reach $2.15 billionin revenue, up from $1.03 billionin 2021, for a compound annual growth rate (CAGR) of 20.2%. The Company's VOIP solutions fit well into this steadily growing segment which is expected to reach $90 billionworldwide in 2022 with a CAGR of 3.1% with $17 billionin the US according to Globe Newswire Market Analysis and Insights: Global VoIP Market. Data and Analytics is another market that is growing rapidly and the Company is breaking into, according to Globe Newswire this market was valued at $198 billionin 2020 and with a projected 13.5% CAGR we see this hitting $263 billionby the end of 2022 and based on the Big Data Business Analytics market share report posted on statista.com the US has 51% of that growth. 22 Company Overview Data Storage Corporation, headquartered in Melville, New York, with three subsidiaries, DSC (CloudFirst), Flagship Solutions LLCand Nexxis, Inc., provides solutions and services to a broad range of clients in several industries, including healthcare, banking and finance, distribution services, manufacturing, construction, education, and government. The subsidiaries maintain business development teams, as well as independent distribution companies. As an example, the Company's distribution channel of companies provides long-term subscription-based disaster recovery and cloud infrastructure without investing in the infrastructure, data centers, telecommunications or specialized technical staff. During 2021, based on the May capital raise and the up list to Nasdaq, the Company accelerated organic growth strategies by added distribution, business development representatives, marketing, and technical personnel. Management continues to be focused on building the Company's sales and marketing strategy and expanding its technology assets throughout its data center network.
DSC is a leader in providing
The opportunity for the Company, in the
The Company believes businesses are increasingly under pressure to improve the proficiency of their information and storage systems accelerating the migration from self-managed technical equipment and solutions to fully managed multi-cloud technologies to reduce cost and compete effectively. These trends create an opportunity for cloud technology service providers.
The DSC market opportunity stems from the demand for fully managed cloud and cybersecurity services across all major operating systems.
The Company’s addressable market is estimated at
The company has designed and built its solutions and services to support the demanding IBM Power System workload, manage hybrid cloud deployments, and continue to deliver solutions that protect data and workloads from disasters and disasters. security attacks.
The Company's business offices are located in
New Yorkand Florida. The offices include a technology center and lab, adapted to meet the technical requirements of the Company's clients. The Company maintains its own infrastructure, storage, and networking equipment required to provide subscription solutions in seven geographically diverse data centers located in New York, Massachusetts, Texas, Floridaand North Carolina, and in Canada, Toronto, and Barrie, serving clients in the United Statesand Canada. The Company's disaster recovery and business continuity solutions allow clients to quickly recover from system outages, human and natural disasters, and cyber security attacks, such as Ransomware. The Company's managed cloud services begin with migration to the cloud and provide ongoing system support and management that enables its clients to run their software applications and technical workloads in a multi-cloud environment. The Company's cyber security offerings include comprehensive consultation and a suite of data security, disaster recovery, and remote monitoring services and technologies that is incorporated into the Company's cloud solutions or be delivered as a standalone managed security offering covering the client site endpoint devices, users, servers, and equipment.
Solution architects and the Company's business development teams work with organizations identifying and solving critical business problems. The Company carefully plans and manages the migration and configuration process, continuing the relationship and advising its clients long after the services have been implemented. Reflecting on client satisfaction, the Company's renewal rate on client subscription solutions is approximately 94% after their initial contract term expired. The Company provides its clients subscription-based, long-term agreements for cloud disaster recovery, cloud infrastructure, data analytics, cyber security,telecommunications solutions, and high processing on-site computing power and software solutions. While a significant portion of the Company's revenue has been subscription-based, it also generates revenue from the sale of equipment and software for cybersecurity, data storage,
IBM Powersystems equipment and managed service solutions.
The company entered 2022 with a benchmark annual recurring revenue of more than
Company Core Services: The Company provides a range of multi-cloud information technology solutions in highly secure enterprise-level cloud services for businesses using
23 Cyber Security Solutions:
? ezSecurity™ offers a suite of comprehensive cybersecurity solutions that
can be utilized on systems at the client's location or on systems hosted in the Company. These solutions include fully managed endpoint (PCs and other user devices) security with active threat mitigation, system
safety assessments, risk analysis and applications to ensure a
Security. ezSecurity™ contains a specialized offer for the protection and
IBM systems audit, including a package designed to protect IBM systems
against Ransomware attacks.
Data protection and recovery solutions:
? The ezVault™ solution is at the heart of the company’s data protection services
and allows its customers to have their data protected and stored offsite
with unlimited retention of data in a secure location that uses encryption,
enterprise-grade storage which allows for remote recovery from system outages, human and natural disasters, and cyber security attacks like Ransomware and viruses allowing restoration of data from a known good point in time prior to an attack. ? ezRecovery™ provides standby systems, networking, and storage in the Company's cloud infrastructure that allows for faster recovery from client
backups stored using ezVault™ in the same cloud-hosted location.
? The ezAvailability™ solution provides reliable real-time data replication for
critical applications with a recovery time objective of less than fifteen
minutes and near-zero recovery point objective, with optional, fully
managed replication services. The company’s ezAvailability™ service
consists of a full-time enterprise system, storage and network resources,
allowing production workloads to be moved quickly and easily to the enterprise
cloud when needed. The Company’s ezAvailability™ services are backed by a
Service Level Agreement (“SLA”) to help ensure performance, availability,
? The ezMirror™ solution provides replication services that mirror customers
storage-level data and enables similar near-zero
Goal like ezAvailability with less application management and recovery
Time Objective under 1 hour.
Cloud Hosted Production Systems: ezHost™ solution provides managed cloud services that removes the burden off system management from its clients and ensures that their software applications and IT workloads are running smoothly. ezHost™ provides full-time, scalable compute, storage, and network infrastructure resources to run clients' workloads on the Company's enterprise-class infrastructure. ezHost™ replaces the cost of support, maintenance, system administration, space, electrical power, and cooling of the typical hardware on-premises systems with a predictable monthly expense. The Company's ezHost services are backed by an SLA governing performance, availability, and access.
Voice & Data Solutions: Nexxis, our voice and data division, specializes in fully-managed VoIP, Internet Access, and Data Transportsolutions that satisfy the requirements of corporate and remote workforce. Services are delivered over fiber optic, coaxial, and wireless networks to assist businesses fully connected from any location. Nexxis provides dedicated internet access with speeds of up to 10 Gbps, FailSAFE, a cloud-first SD-WAN solution, that delivers industry-leading connectivity to cloud services, cloud-based Hosted VoIP and Unified Communicationsthat provide business continuity and integration with Microsoft Teams. Data Analytics: The Company's trademarked Infralytics™ offering was developed to empower IT organizations to respond quickly and intelligently to business-impact issues as they arise. With Infralytics custom dashboards, a client can monitor physical servers, virtual machines, network devices, applications, and services across multiple platforms - whether on-premises, virtual, or in the Cloud. It also allows the Company's clients to gain enhanced visibility and control over their physical, virtual, and cloud IT infrastructure via customized, interactive dashboards. In addition, utilizing IBM's Watsonthe Company is taking disparate data sources and developing algorithms to provide greater insight into the aggregation of that data. All of this is provided as a service with the primary deliverable a real-time dashboard. RESULTS OF OPERATIONS
Three months completed
Total Revenue. For the three months ended
March 31, 2022, total revenue was $8,657,199an increase of $6,082,508or 236% compared to $2,574,691for the three months ended March 31, 2021. The increase is primarily attributed to the additional sales from the Flagship merger and an increase in monthly subscription revenue. Revenue For the Three Months Ended March 31, 2022 2021 $ Change % Change Infrastructure & Disaster Recovery/Cloud Service $ 1,925,850 $ 1,660,348 $ 265,50216 % Equipment and Software 5,319,459 464,883 4,854,576 1,044 % Managed Services 1,182,810 226,767 956,043 422 % Nexxis VoIP Services 194,934 195,326 (392 ) - % Other 34,146 27,367 6,779 25 % Total Revenue $ 8,657,199 $ 2,574,691 $ 6,082,508236 % 24
Cost of Sales. For the three months ended
March 31, 2022, cost of sales was $6,011,289, an increase of $4,590,390or 323% compared to $1,420,899for the three months ended March 31, 2021. The increase of $4,590,390was mostly related to the Flagship merger and the variable nature of costs incurred to produce and sell our products or services. Selling, general and administrative expenses.For the three months ended March 31, 2022, selling, general and administrative expenses were $2,459,866, an increase of $1,341,459, or 120%, as compared to $1,118,407for the three months ended March 31, 2021. The net increase is reflected in the chart below. Selling, general and administrative expenses For the Three Months Ended March 31, 2022 2021 $ Change % Change Increase in Salaries $ 1,471,735 $ 503,672 $ 968,063192 %
Increase in Professional Fees 188,627 135,278 53,349 39 % Increase in Software as a Service Expense 70,058 52,143 17,915 34 % Increase in Advertising Expenses 90,873 95,776 (4,903 ) (5 )%
Increase in commission expenses 345 264 213 254 132 010
62 % Increase in all other Expenses 293,309 118,284 175,025 148 % Total Expenses
$ 2,459,866 $ 1,118,407 $ 1,341,459120 %
Wages. Salaries have increased due to the increase in staff due to the Flagship merger and the hiring of our Chief Financial Officer.
Professional fees. Professional fees increased primarily due to new investor relations ventures and an increase in fees associated with NASDAQ listing.
Software-as-a-service (SaaS) spending. SaaS increased due to additional costs paid to existing vendors to improve our customer relationship management software and sales quote process.
Commission fees. Commission expenses increased due to the Flagship merger and sales associated with Flagship.
All other expenses. Other expenses increased mainly due to the Flagship merger.
Other Expense. Other expenses for the three months ended
March 31, 2022increased $7,615to $42,660from $35,045for the three months ended March 31, 2021. The increase in other income is primarily attributable to the increase interest expense for the three months ended March 31, 2022. Net Income before provision for income taxes.Net income before provision for income taxes for the three months ended March 31, 2022was $156,010, as compared to a net income of $340for the three months ended March 31, 2021.
CASH AND CAPITAL RESOURCES
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles.
To the extent we are successful in growing our business, identifying potential acquisition targets and negotiating the terms of such acquisition, and the purchase price includes a cash component, we plan to use our working capital and the proceeds of any financing to finance such acquisition costs. 25 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 require a renegotiation of related party capital equipment leases, a reduction in advertising and marketing programs, renegotiation of our arrangement with Nexxis 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 believe the total contract value of our subscription contracts with clients based on the actual contracts that we have to date, exceeds
$10 million. Further, we continue to see an uptick in client interest distribution channel expansion and in sales proposals. In 2021, we 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 our technical expertise, data centers utilization, assets deployed in the data centers, 24 x 365 monitoring and software. During the three months ended March 31, 2022, DSC's cash increased by $1,284,904to $13,420,707from $12,135,803on December 31, 2021. Net cash of $1,643,823was provided by DSC's operating activities resulting primarily from the changes in assets and liabilities. Net cash of $25,946was used in investing activities from the purchase of equipment. Net cash of $332,973was used by financing activities resulting primarily from payments on capital lease obligations. This was offset by the cash received for the exercised options. DSC's working capital was $12,240,508on March 31, 2022, increasing by $155,693from $12,084,815at December 31, 2021. The increase is primarily attributable to an increase in cash, accounts receivable, prepaids, other current assets, and a decrease in deferred revenue. This was offset by an increase in accounts payable and leases payable.
Off-balance sheet arrangements
DSC has no arrangements, financings or other off-balance sheet 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. 26
The following table presents our reconciliation of net earnings and adjusted EBITDA for the three months ended
For the Three Months Ended March 31, March 31, 2022 2021 Net income
$ 143,384340 Non-GAAP adjustments: Depreciation and amortization 351,338 267,189 Flagship acquisition costs 605 - Interest income and expense 62,882 35,045 Stock based compensation 66,505 42,171 Adjusted EBITDA $ 604,492344,745
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