UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒

~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~September 30, 2020

☐

~~TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File No. 001-35384

DATA STORAGE CORPORATION

(Exact name of registrant as specified in its charter)

NEVADA		98-0530147
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

48 South Service Road

Melville, NY

11747

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (212) 564-4922

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes☒ No☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes☒ No☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer☐	Accelerated Filer☐
Non-Accelerated Filer ☐	Smaller Reporting Company☒
	Emerging Growth Company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes☐ No☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
None		N/A		N/A

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of ~~May 19,~~November 16, 2020, was 128,539,418

DATA STORAGE CORPORATION

FORM 10-Q

INDEX

			Page
PART I— FINANCIAL INFORMATION

	Item 1	Financial Statements	3

		Condensed Consolidated Balance Sheets as of ~~March 31,~~September 30, 2020 (unaudited) and December 31, 2019	31

		Condensed Consolidated Statements of Operations for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019 (unaudited)	42

		Condensed Consolidated Statements of Stockholders’ Equity for three and nine months ~~ended March 31,~~September 30, 2020 and 2019 (unaudited)	53-4

		Condensed Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019 (unaudited)	65

		Notes to Condensed Consolidated Financial Statements	~~7-15~~6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~16-18~~16

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	1918

	Item 4.	Control and Procedures	19

PART II— OTHER INFORMATION

	Item 1.	Legal Proceedings	2019

	Item 1A.	Risk Factors	2019

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2019

	Item 3.	Defaults Upon Senior Securities	2019

	Item 4.	Mine Safety Disclosures	2019

	Item 5.	Other Information	2019

	Item 6.	Exhibits	2120

DATA STORAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2020			December 31, 2019			September 30, 2020			December 31, 2019
		(Unaudited)					(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	328,182		$	326,561		$	604,763		$	326,561
Accounts receivable (less allowance for doubtful accounts of $30,000 in 2020 and 2019)		836,957			691,436			933,111			691,436
Prepaid expenses and other current assets		110,385			80,728			206,214			80,728
Total Current Assets		1,275,524			1,098,725			1,744,088			1,098,725

Property and Equipment:
Property and equipment		7,287,064			6,894,087			7,829,148			6,894,087
Less—Accumulated depreciation		(4,898,414	)		(4,705,256	)		(5,313,999	)		(4,705,256	)
Net Property and Equipment		2,388,650			2,188,831			2,515,149			2,188,831

Other Assets:
Goodwill		3,015,700			3,015,700			3,015,700			3,015,700
Operating lease right-of-use assets		304,200			324,267			263,034			324,267
Other assets		65,433			65,433			49,308			65,433
Intangible assets, net		601,435			649,934			504,435			649,934
Total Other Assets		3,986,768			4,055,334			3,832,477			4,055,334

Total Assets	$	7,650,942		$	7,342,890		$	8,091,714		$	7,342,890

LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable and accrued expenses	$	1,030,607		$	906,716		$	1,187,649		$	906,716
Dividend payable		1,005,183			970,997			1,076,874			970,997
Deferred revenue		546,843			432,942			494,629			432,942
Line of credit		24			75,000			24			75,000
Finance leases payable								161,144			—
Finance leases payable related party		1,004,149			833,148			978,683			833,148
Operating lease liabilities short term		102,251			101,505			103,780			101,505
Note payable		350,000			350,000			294,541			350,000
Total Current Liabilities		4,039,057			3,670,308			4,297,324			3,670,308

Note payable long term								187,436			—
Operating lease liabilities long term		211,373			231,312			168,390			231,312
Finance leases payable, long term								286,633			—
Finance leases payable related party, long term		1,708,575			1,713,122			1,222,982			1,713,122
Total Long Term Liabilities		1,919,948			1,944,434			1,865,441			1,944,434

Total Liabilities		5,959,005			5,614,742			6,162,765			5,614,742

Stockholders’ Equity:
Preferred stock, Series A par value $.001; 10,000,000 shares authorized; 1,401,786 shares issued and outstanding in each year		1,402			1,402			1,402			1,402
Common stock, par value $.001; 250,000,000 shares authorized; 128,539,418 and 128,439,418 shares issued and outstanding in 2020 and 2019, respectively		128,539			128,439			128,539			128,439
Additional paid in capital		17,494,779			17,456,431			17,578,288			17,456,431
Accumulated deficit		(15,858,672	)		(15,790,076	)		(15,693,399	)		(15,790,076	)
Total Data Storage Corp Stockholders' Equity		1,766,048			1,796,196
Total Data Storage Corp Stockholders’ Equity								2,014,830			1,796,196
Non-controlling interest in consolidated subsidiary		(74,111	)		(68,048	)		(85,881	)		(68,048	)
Total Stockholder’s Equity		1,691,937			1,728,148			1,928,949			1,728,148
Total Liabilities and Stockholders' Equity	$	7,650,942		$	7,342,890
Total Liabilities and Stockholders’ Equity							$	8,091,714		$	7,342,890

The accompanying notes are an integral part of these condensed consolidated Financial Statements.

DATA STORAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended March 31,
2020 2019

Sales $ 2,098,710 $ 2,001,281

Cost of sales 1,216,117 1,076,543

Gross Profit 882,593 924,738

Selling, general and administrative 876,626 822,868

Income from Operations 5,967 101,870

Other Income (Expense)
Interest income 20 87
Interest expense (46,460 ) (49,419 )
Total Other Income (Expense) (46,440 ) (49,332 )

Income (Loss) before provision for income taxes (40,473 ) 52,538

Provision for income taxes — —

Net Income (Loss) (40,473 ) 52,538

Non-controlling interest in consolidated subsidiary 6,063 10,323

Net Income (Loss) attributable to Data Storage Corp (34,410 ) 62,861

Preferred Stock Dividends (34,186 ) (31,078 )

Net Income (Loss) Attributable to Common Stockholders $ (68,596 ) $ 31,783

Earning (Loss) per Share – Basic $ 0.00 $ 0.00
Earning (Loss) per Share – Diluted $ 0.00 $ 0.00
Weighted Average Number of Shares - Basic 128,486,085 128,139,418
Weighted Average Number of Shares - Diluted 128,486,085 131,939,979

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019

Sales	$	2,723,532		$	2,013,662		$	6,827,867		$	6,046,531

Cost of sales		1,621,008			1,232,633			3,977,546			3,410,835

Gross Profit		1,102,524			781,029			2,850,321			2,635,696

Selling, general and administrative		1,017,863			884,650			2,882,755			2,565,252

Income (loss) from Operations		84,661			(103,621	)		(32,434	)		70,444

Other Income (Expense)
Interest income		1			—			21			220
Interest expense		(42,727	)		(41,120	)		(132,866	)		(137,425	)
Gain on contingent liability		—			—			350,000			—
Other income		—			11,453			—			23,054
Total Other Income (Expense)		(42,726	)		(29,667	)		217,155			(114,151	)

Income (loss) before provision for income taxes		41,935			(133,288	)		184,721			(43,707	)

Provision for income taxes		—			—			—			—

Net Income		41,935			(133,288	)		184,721			(43,707	)

Non-controlling interest in consolidated subsidiary		4,283			11,693			17,833			33,282

Net Income attributable to Data Storage Corp		46,218			(121,595	)		202,554			(10,425	)

Preferred Stock Dividends		(36,650	)		(31,078	)		(105,877	)		(93,234	)

Net Income (Loss) Attributable to Common Stockholders	$	9,568		$	(152,683	)	$	96,677		$	(103,659	)

Earning (Loss) per Share – Basic	$	0.00		$	0.00		$	0.00		$	0.00
Earning (Loss) per Share – Diluted	$	0.00		$	0.00		$	0.00		$	0.00
Weighted Average Number of Shares - Basic		128,539,418			128,139,418			128,512,836			128,139,418
Weighted Average Number of Shares - Diluted		135,339,979			128,139,418			134,635,987			128,139,418

The accompanying notes are an integral part of these condensed consolidated Financial Statements.

DATA STORAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020

(Unaudited)

	Preferred Stock				Common Stock				Additional Paid-in		Accumulated			Non-Controlling			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Interest			Equity
Balance July 1, 2019		1,401,786	$	1,402		128,139,418	$	128,139	$	17,414,339	$	(15,686,608	)	$	(49,100	)	$	1,808,172
Stock-based compensation		—		—		—		—		2,175		—			—			2,175
Net Income (Loss)		—		—		—		—		—		(121,597	)		(11,693	)		(133,290	)
Preferred Stock		—		—		—		—		—		(31,078	)		—			(31,078	)
Balance, September 30, 2019		1,401,786	$	1,402		128,139,418	$	128,139	$	17,416,514	$	(15,839,283	)	$	(60,793	)	$	1,645,979

Balance July 1, 2020		1,401,786	$	1,402		128,539,418	$	128,539	$	17,536,117	$	(15,702,967	)	$	(81,598	)	$	1,881,493
Stock-based compensation		—		—		—		—		42,171		—			—			42,171
Net Income (Loss)		—		—		—		—		—		46,218			(4,283	)		41,935
Preferred Stock		—		—		—		—		—		(36,650	)		—			(36,650	)
Balance, September 30, 2020		1,401,786	$	1,402		128,539,418	$	128,539	$	17,578,288	$	(15,693,399	)	$	(85,881	)	$	1,928,949

The accompanying notes are an integral part of these condensed consolidated Financial Statements

DATA STORAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR SIX MONTHS ENDED SEPTEMBER 30, 2019 AND 2020

(Unaudited)

	Preferred Stock				Common Stock				Additional Paid-in		Accumulated			Non-Controlling			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Interest			Equity

Balance January 1, 2019		1,401,786	$	1,402		128,139,418	$	128,139	$	17,409,989	$	(15,735,624	)	$	(27,511	)	$	1,776,395
Stock-based compensation		—		—		—		—		6,525		—			—			6,525
Net Income (Loss)		—		—		—		—		—		(10,425	)		(33,282	)		(43,707	)
Preferred Stock		—		—		—		—		—		(93,234	)		—			(93,324	)
Balance, September 30, 2019		1,401,786	$	1,402		128,139,418	$	128,139	$	17,416,514	$	(15,839,283	)	$	(60,793	)	$	1,645,979

Balance January 1, 2020		1,401,786	$	1,402		128,439,418	$	128,439	$	17,456,431	$	(15,790,076	)	$	(68,048	)	$	1,728,148
Stock-based compensation		—		—		—		—		116,557		—			—			116,557
Stock Options Exercise		—		—		100,000		100		5,300		—			—			5,400
Net Income (Loss)		—		—		—		—		—		202,554			(17,833	)		184,721
Preferred Stock		—		—		—		—		—		(105,877	)		—			(105,877	)
Balance, September 30, 2020		1,401,786	$	1,402		128,539,418	$	128,539	$	17,578,288	$	(15,693,399	)	$	(85,881	)	$	1,928,949

The accompanying notes are an integral part of these condensed consolidated Financial Statements

DATA STORAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS’ EQUITY~~CASH FLOWS

~~FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND FOR THE THREE MONTHS ENDED MARCH 31, 2020~~

(Unaudited)

Preferred Stock Common Stock Additional Paid-in Accumulated Non-Controlling Total Stockholders’
Shares Amount Shares Amount Capital Deficit Interest Equity

Balance, January 1, 2019 1,401,786 $ 1,402 128,139,418 $ 128,139 $ 17,409,989 $ (15,735,624 ) $ (27,511 ) $ 1,776,395

Stock-based compensation —   —   —   —   2,175 —   —   2,175

Net Income —   —   —   —   —   62,861 (10,323 ) 52,538

Preferred Stock —   —   —   —   —   (31,078 ) —   (31,078 )

Balance March 31, 2019 1,401,786 $ 1,401,786 128,139,418 $ 128,139 $ 17,412,164 $ (15,703,841 ) $ (37,834 ) 1,800,030

Balance January 1, 2020 1,401,786 1,402 128,439,418 128,439 17,456,431 (15,790,076 ) (68,048 ) 1,728,148

Stock Options Issued as Compensation —   —   —   —   33,048 —   —   33,048

Stock Options Exercise —   —   100,000 100 5,300 —   —   5,400

Net Loss —   —   —   —   —   (34,410 ) (6,063 ) (40,473 )

Preferred Stock —   —   —   —   —   (34,186 ) —   (34,186 )

Balance, March 31, 2020 1,401,786 $ 1,402 128,539,418 $ 128,539 $ 17,494,779 $ (15,858,672 ) $ (74,111 ) $ 1,691,937

	Nine Months Ended September 30,
	2020			2019
Cash Flows from Operating Activities:
Net Income	$	184,721		$	(43,707	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		754,243			678,927
Stock-based compensation		116,557			6,525
Gain on contingent liability		(350,000	)		—
Changes in Assets and Liabilities:
Accounts receivable		(241,675	)		2,248
Other assets		16,125			—
Prepaid expenses and other current assets		(98,874	)		76,116
Right of use asset		61,233			(344,716	)
Accounts payable and accrued expenses		252,717			(137,683	)
Deferred revenue		61,687			63,260
Deferred rent		—			(18,890	)
Operating lease liability		(60,647	)		352,348
Net Cash Provided by Operating Activities		696,087			634,428
Cash Flows from Investing Activities:
Capital expenditures		(164,796	)		(33,354	)
Net Cash Used in Investing Activities		(164,796	)		(33,354	)
Cash Flows from Financing Activities:
Proceeds from issuance of note payable		481,977			—
Repayments of finance lease obligations related party		(641,170	)		(546,182	)
Repayments of finance lease obligations		(24,320	)		—
Cash received for the exercised of options		5,400			—
Repayment of line of credit		(74,976	)		—
Net Cash Used in Financing Activities		(253,089	)		(546,182	)

Increase in Cash and Cash Equivalents		278,202			54,892

Cash and Cash Equivalents, Beginning of Period		326,561			228,790

Cash and Cash Equivalents, End of Period	$	604,763		$	283,682
Supplemental Disclosures:
Cash paid for interest	$	124,297		$	137,425
Cash paid for income taxes	$	—		$	—
Non-cash investing and financing activities:
Accrual of preferred stock dividend	$	105,877		$	93,234
Assets acquired by finance lease	$	808,261		$	1,560,021

The accompanying notes are an integral part of these condensed consolidated Financial Statements.

~~DATA STORAGE CORPORATION AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(Unaudited)~~

Three Months Ended March 31,
2020 2019
Cash Flows from Operating Activities:
Net Income (Loss) $ (40,473 ) $ 52,538
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 241,658 224,806
Stock based compensation 33,048 2,175
Changes in Assets and Liabilities:
Accounts receivable (145,521 ) 49,257
Prepaid expenses and other current assets (29,657 ) 87,626
Right of use asset 20,067 (340,522 )
Accounts payable and accrued expenses 123,890 (172,651 )
Deferred revenue 113,901 (3,016 )
Operating lease liability (19,193 ) 327,552
Net Cash Provided by Operating Activities 297,720 227,765

Cash Flows from Investing Activities:
Capital expenditures (56,812 ) (17,570 )
Net Cash Used in Investing Activities (56,812 ) (17,570 )

Cash Flows from Financing Activities:
Repayments of capital lease obligations (169,711 ) (183,590 )
Cash received for the exercised of options 5,400 — 
Repayment of line of credit (74,976 ) —
Net Cash Used in Financing Activities (239,287 ) (183,590 )

Increase in Cash and Cash Equivalents 1,621 26,605

Cash and Cash Equivalents, Beginning of Period 326,561 228,790

Cash and Cash Equivalents, End of Period $ 328,182 $ 255,395

Supplemental Disclosures:
Cash paid for interest $ 177,451 $ 50,621
Cash paid for income taxes $ — $ —

Non-cash investing and financing activities:
Accrual of preferred stock dividend $ 34,186 $ 31,078
Assets acquired by finance lease $ 336,165 $ 1,502,844

~~The accompanying notes are an integral part of these condensed consolidated Financial Statements.~~

DATA STORAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2020

Note 1 - Basis of Presentation, Organization and Other Matters

Data Storage Corporation ~~("DSC"~~(“DSC” or the ~~"Company"~~“Company”) provides subscription based, long term agreements for disaster recovery solutions, Infrastructure as a Service (IaaS) and VoIP type solutions.

Headquartered in Melville, NY, with additional offices in Warwick, RI, DSC offers solutions and services to businesses within the healthcare, banking and finance, distribution services, manufacturing, construction, education, and government industries.

DSC derives its revenues from subscription services and solutions, managed services, software and maintenance, equipment and onboarding provisioning. DSC maintains infrastructure and storage equipment in several technical centers in New York, New Jersey, Massachusetts, Texas and North Carolina.

Going Concern Analysis

Under ASU 2014-15 Presentation of Financial Statements-Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40.

As reflected in the Condensed Consolidated Financial statements, the Company had a net income ~~(loss)~~ available to shareholders of ~~$(68,596)~~$96,677 and ~~$31,783~~($103,659) for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, respectively. As of ~~March 31,~~September 30, 2020, DSC had cash of ~~$328,182~~$604,763 and a working capital deficiency of ~~$2,763,533.~~$2,553,236. As a result, these conditions raised substantial doubt regarding our ability to continue as a going concern.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, the Company provided cash from operations of ~~$297,720~~$696,087 with continued revenue growth of subscription solutions. Further, the Company has no capital expenditure commitments and the ~~company’s~~Company’s offices have been consolidated and fully staffed and with sufficient room for growth.

If necessary, management also determined that it is probable that related party sources of debt financing and capitalized leases can be renegotiated based on management’s history of being able to raise and refinance debt through related parties.

As a result of the current favorable trends of improving cash flow, the Company concluded that the initial conditions which raised substantial doubt regarding the ability to continue as a going concern has been mitigated.

Note 2 - Summary of Significant Accounting Policies

Principles of Consolidation

The Condensed Consolidated Financial statements include the accounts of (i) the Company, (ii) its wholly-owned subsidiary, Data Storage Corporation, a Delaware corporation, and (iii) its majority-owned subsidiary, Nexxis Inc, a Nevada corporation. All significant inter-company transactions and balances have been eliminated in consolidation.

Business combinations.

We account for business combinations under the acquisition method of accounting, which requires us to recognize separately from goodwill, the assets acquired, and the liabilities assumed at their acquisition date fair values. While we use our best estimates and assumptions to accurately value assets, acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of operations.

Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include future expected cash flows from product sales, customer contracts and acquired technologies, and estimated cash flows from the projects when completed and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

Reclassifications

Certain prior year amounts in the consolidated financial statements and the notes thereto have been reclassified where necessary to conform to the current year presentation. These reclassifications did not affect the prior period total assets, total liabilities, stockholders’ deficit, net ~~loss~~income or net cash used in operating activities.

Recently Issued and Newly Adopted Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04 Intangibles-Goodwill and Other (“ASC 350”): Simplifying the Accounting for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019 and an entity should apply the amendments of ASU 2017-04 on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 did not have a material impact on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements for fair value measurements. We do not believe the updated guidance, which is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. The adoption of ASU 2018-13 did not have a material impact on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This guidance requires companies to apply the internal-use software guidance in Accounting Standards Codification (“ASC”) 350-40 to implementation costs incurred in a hosting arrangement that is a service contract to determine whether to capitalize certain implementation costs or expense them as incurred. ~~We do not believe the~~The new guidance, ~~which~~ is effective for fiscal years beginning after December 15, 2019. The adoption of ASU ~~2018-153~~2018-15 did not have a material impact on its condensed consolidated financial statements.

In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods. The Company is currently evaluating the potential impact of this guidance on its Condensed Consolidated Financial statements.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

Estimated Fair Value of Financial Instruments

The Company’s financial instruments include cash, accounts receivable, accounts payable, line of credit and due to related parties. Management believes the estimated fair value of these accounts at ~~March 31,~~September 30, 2020 approximate their carrying value as reflected in the balance sheets due to the short-term nature of these instruments or the use of market interest rates for debt instruments. The carrying values of certain of the Company’s notes payable and capital lease obligations approximate their fair values based upon a comparison of the interest rate and terms of such debt given the level of risk to the rates and terms of similar debt currently available to the Company in the marketplace.

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments with an original maturity or remaining maturity at the time of purchase, of three months or less to be cash equivalents.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments and assets subjecting the Company to concentration of credit risk consist primarily of cash and cash equivalents, short-term investments and trade accounts receivable. The Company’s cash and cash equivalents are maintained at major U.S. financial institutions. Deposits in these institutions may exceed the amount of insurance provided on such deposits.

The Company’s customers are primarily concentrated in the United States.

The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts on factors surrounding the credit risk of specific customers, historical trends, and other information.

~~For the three months ended March 31,~~As of September 30, 2020, DSC had ~~two~~four customers with an accounts receivable balance representing ~~30%~~65% of total accounts receivable. ~~For~~One of the ~~three months ended March~~clients is a Valued Added Reseller (VAR) with multiple clients under the DSC VAR partnership. As of December 31, 2019, DSC had ~~two~~three customers with an accounts receivable balance representing 38% of total accounts receivable.

~~For~~During the ~~three~~nine months ended ~~March 31,~~September 30, 2020 ~~the company had one client that accounted for 14% of revenue. For the three months ended March 31, 2019~~ the Company had ~~two~~the above-mentioned Value-Added Reseller with multiple clients accounting for 10% of revenue. During the nine months ended September 30, 2019 that specific VAR had accounted for ~~21%~~31% of revenue.

Accounts Receivable/Allowance for Doubtful Accounts

The Company sells its services to customers on an open credit basis. Accounts receivable are uncollateralized, non-interest-bearing customer obligations. Accounts receivables are typically due within 30 days. The allowance for doubtful accounts reflects the estimated accounts receivable that will not be collected due to credit losses and allowances. Provisions for estimated uncollectible accounts receivable are made for individual accounts based upon specific facts and circumstances including criteria such as their age, amount, and customer standing. Provisions are also made for other accounts receivable not specifically reviewed based upon historical experience. Clients are invoiced in advance for services as reflected in deferred revenue on the Company’s balance sheet.

Property and Equipment

Property and equipment is recorded at cost and depreciated over their estimated useful lives or the term of the lease using the straight-line method for financial statement purposes. Estimated useful lives in years for depreciation are 5five to 7seven years for property and equipment. Additions, betterments and replacements are capitalized, while expenditures for repairs and maintenance are charged to operations when incurred. As units of property are sold or retired, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. At ~~March 31,~~September 30, 2020 and December 31, 2019, the Company had a full valuation allowance against its deferred tax assets.

Per FASB ASC 740-10, disclosure is not required of an uncertain tax position unless it is considered probable that a claim will be asserted and there is a more-likely-than-not possibility that the outcome will be unfavorable. Using this guidance, as of December 31, 2019 and 2018, the Company has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. The Company’s 2018, 2017 and 2016 Federal and State tax returns remain subject to examination by their respective taxing authorities. Neither of the Company’s Federal or State tax returns are currently under examination.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“(”2017 Tax Act”). Corporate taxpayers may carryback net operating losses (NOLs) originating between 2018 and 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material adjustments to our income tax provision.

Goodwill and Other Intangibles

In accordance with GAAP, the Company tests goodwill and other intangible assets for impairment on at least an annual basis. Goodwill impairment exists if the net book value of a reporting unit exceeds its estimated fair value. The impairment testing is performed in two steps: (i) the Company determines impairment by comparing the fair value of a reporting unit with its carrying value, and (ii) if there is impairment, the Company measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. To determine the fair value of these intangible assets, the Company uses many assumptions and estimates using a market participant approach that directly impact the results of the testing. In making these assumptions and estimates, the Company uses industry accepted valuation models and set criteria that are reviewed and approved by various levels of management.

Revenue Recognition

Nature of goods and services

The following is a description of the products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each:

Infrastructure as a Service (IaaS) and Disaster Recovery Revenue

Subscription services such as Infrastructure as a Service, Platform as a Service and Disaster Recovery, High Availability, Data Vault Services and DRaaS type solutions (cloud) allows clients to centralize and streamline their technical and mission critical digital information and technical environment. Client’s data can be backed up, replicated, archived and restored to meet their back to work objective in a disaster. Infrastructure as a Service (IaaS) assist clients to achieve reliable and cost-effective computing and high availability solutions while eliminating or supplementing Capex.

Managed Services

These services are performed at the inception of a contract. The Company offers professional assistance to its clients during the installation processes. On-boarding and set-up services ensure that the solution or software is installed properly and function as designed to provide clients with the best solutions. In addition, clients that are managed service clients have a requirement for DSC to offer time and material billing.

The Company also derives revenues in the area from providing support and management of its software to clients. The managed services include help desk, remote access, annual recovery tests and manufacturer support for equipment and on-gong monitoring of client system performance.

Equipment and Software Revenue

The Company provides equipment and software and actively participate in collaboration with IBM to provide innovative business solutions to clients. The ~~company~~Company is a partner of IBM and the various software solutions provided to clients.

Disaggregation of revenue

In the following table, revenue is disaggregated by major product line, geography, and timing of revenue ~~recognition (in thousands of USD).~~recognition.

For the Three Months	For the Three Months							For the Three Months
Ended March 31, 2020
Ended September 30, 2020								Ended September 30, 2020
		United States		International		Total			United States		International		Total
Infrastructure & Disaster Recovery/Cloud Service		$	1,359,921	$	33,799	$	1,393,720		$	1,416,847	$	20,551	$	1,437,398
Equipment and Software			328,733		—		328,733			936,344		—		936,344
Managed Services			220,475		—		220,475			169,565		—		169,565
Nexxis VoIP Services			153,197		—		153,197			180,225		—		180,225
Other			2,585		—		2,585
Total Revenue		$	2,064,911	$	33,799	$	2,098,710		$	2,702,981	$	20,551	$	2,723,532

For the Three Months	For the Three Months							For the Three Months
Ended March 31, 2019
Ended September 30, 2019								Ended September 30, 2019
		United States		International		Total			United States		International		Total
Infrastructure & Disaster Recovery/Cloud Service		$	1,236,447	$	30,600	$	1,267,047		$	1,273,147	$	63,201	$	1,336,348
Equipment and Software			428,511		—		428,511			350,339		—		350,339
Managed Services			213,925		—		213,925			195,847		—		195,847
Nexxis VoIP Services			90,703		—		90,703			131,128		—		131,129
Other			1,095		—		1,095
Total Revenue		$	1,970,681	$	30,600	$	2,001,281		$	1,950,461	$	63,201	$	2,013,662

For the Three Months	For the Three Months					For the Three Months
Ended March 31,
Ended September 30,						Ended September 30,
Timing of revenue recognition		2020		2019			2020		2019
Products transferred at a point in time		$	328,733	$	428,511		$	936,344	$	410,238
Products and services transferred over time			1,769,977		1,572,770			1,787,188		1,603,424
Total Revenue		$	2,098,710	$	2,001,281		$	2,723,532	$	2,013,662

For the Nine Months
Ended September 30, 2020
	United States		International		Total
Infrastructure & Disaster Recovery/Cloud Service	$	4,133,213	$	107,583	$	4,240,796
Equipment and Software		1,544,786		—		1,544,786
Managed Services		557,515		—		557,515
Nexxis VoIP Services		484,770		—		484,770
Total Revenue	$	6,720,284	$	107,583	$	6,827,867

For the Nine Months
Ended September 30, 2019
	United States		International		Total
Infrastructure & Disaster Recovery/Cloud Service	$	3,849,252	$	111,214	$	3,960,466
Equipment and Software		1,285,297		—		1,285,297
Managed Services		322,133		—		322,133
Nexxis VoIP Services		478,635		—		478,635
Total Revenue	$	5,935,317	$	111,214	$	6,046,531

For the Nine Months
Ended September 30,
Timing of revenue recognition	2020		2019
Products transferred at a point in time	$	1,544,786	$	1,285,297
Products and services transferred over time		5,283,081		4,761,234
Total Revenue	$	6,827,867	$	6,046,531

Contract receivables are recorded at the invoiced amount and are uncollateralized, non-interest-bearing client obligations. Provisions for estimated uncollectible accounts receivable are made for individual accounts based upon specific facts and circumstances including criteria such as their age, amount, and client standing.

Sales are generally recorded in the month the service is provided. For clients who are billed on an annual basis, deferred revenue is recorded and amortized over the life of the contract.

Transaction price allocated to the remaining performance obligations

The Company has the following performance obligations:

Disaster Recovery (“DR”): subscription-based service that instantly encrypted and transfers data to secure location further replicates the data to a second DSC data center where it remains encrypted. Provides 10 hour or less recovery time

Data Vaulting: subscription-based cloud backup solution that uses advanced data reduction technology to shorten restore time

High Availability (“HA”): subscription-based service which offers cost-effective mirroring replication technology and provides one (1) hour or less recovery time

Infrastructure as a Service (“IaaS”): subscription-based service offers “capacity on-demand” for IBM Power and Intel server systems

Message Logic: subscription-based service offers cost effective email archiving, data analytics, compliance monitoring and retrieval of email messages which cannot be deleted

Internet: subscription-based service offers continuous internet connection in the event of outages

Support and Maintenance: subscription-based service offers support for servers, firewalls, desktops or software and ad hoc support and help desk

Initial Set-Up Fees: on boarding and set-up services

Equipment sales: sale of servers to the end user

10)

License: granting SSL certificates and other licenses

Disaster Recovery with Stand-By Servers, High Availability, Data Vaulting, IaaS, Message Logic, Support and Maintenance, and Internet

Subscription services such as the above allows clients to access a set of data or receive services for a predetermined period of time. As the client obtains access at a point in time but continues to have access for the remainder of the subscription period, the client is considered to simultaneously receive and consume the benefits provided by the entity’s performance as the entity performs. Accordingly, the related performance obligation is considered to be satisfied ratably over the contract term. As the performance obligation is satisfied evenly across the term of the contract, revenue should be recognized on a straight-line basis over the contract term.

Initial Set-Up Fees

The Company accounts for set-up fees as separate performance obligation. Set-up services are performed one time and accordingly the revenue should be recognized at the point in time that the service is performed, and the Company is entitled to the payment.

Equipment sales

For the Equipment sales performance obligation, the control of the product transfers at a point in time (i.e., when the goods have been shipped or delivered to the client’s location, depending on shipping terms). Noting that the satisfaction of the performance obligation, in this sense, does not occur over time as defined within ASC 606-10-25-27 through 29, the performance obligation is considered to be satisfied at a point in time (ASC 606-10-25-30) when the obligation to the client has been fulfilled (i.e., when the goods have left the shipping facility or delivered to the client, depending on shipping terms).

License – granting SSL certificates and other licenses

In the case of Licensing performance obligation, the control of the product transfers either at point in time or over time depending on the nature of the license. The revenue standard identifies two types of licenses of IP: a right to access IP and a right to use IP. To assist in determining whether a license provides a right to use or a right to access IP, ASC 606 defines two categories of IP: Functional and Symbolic. The Company’s license arrangements typically do not require the Company to make its proprietary content available to the client either through a download or through a direct connection. Throughout the life of the contract the Company does not continue to provide updates or upgrades to the license granted. Based on the guidance, the Company considers its license offerings to be akin to functional IP and will recognize revenue at the point in time the license is granted and/or renewed for a new period.

Payment terms

The terms of the contracts typical range from 12 to 36 months with auto-renew options. The Company invoices clients one month in advance for its services plus any overages or additional services provided.

Warranties

The Company offers guaranteed service levels and performance and service guarantees on some of its contracts. These warrantees are not sold separately and according to ASC 606-10-50-12(a) are accounted as “assurance warranties”.

Significant judgement

In the instances that contract have multiple performance obligation, the Company uses judgment to establish stand-alone price for each performance obligation separately. The price for each performance obligation is determined by reviewing market data for similar services as well as the Company’s historical pricing of each individual service. The sum of each performance obligation was calculated to determine the aggregate price for the individual services. Next the proportion of each individual service to the aggregate price was determined. That ratio was applied to the total contract price in order to allocate the transaction price to each performance obligation.

Impairment of Long-Lived Assets

In accordance with FASB ASC 360-10-35, we review our long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss, measured as the amount by which the carrying value exceeds the fair value, is recognized if the carrying amount exceeds estimated undiscounted future cash flows.

Advertising Costs

The Company expenses the costs associated with advertising as they are incurred. The Company incurred a net impact of ~~$65,380~~$234,565 and ~~$33,963~~$188,249 for advertising costs for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, respectively.

~~Stock Based~~Stock-Based Compensation

DSC follows the requirements of FASB ASC 718-10-10,Share Based Paymentswith regards to stock-based compensation issued to employees. DSC has agreements and arrangements that call for stock to be awarded to the employees and consultants at various times as compensation and periodic bonuses. The expense for this stock-based compensation is equal to the fair value of the stock price on the day the stock was awarded multiplied by the number of shares awarded.

The valuation methodology used to determine the fair value of the options issued during the year was the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk- free interest rate, and the weighted average expected life of the options. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its Common stock and does not intend to pay dividends on its Common stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best estimate.

Estimated volatility is a measure of the amount by which DSC’s stock price is expected to fluctuate each year during the expected life of the award. DSC’s calculation of estimated volatility is based on historical stock prices of these entities over a period equal to the expected life of the awards. DSC uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price.

Net Income (Loss) Per Common Share

In accordance with FASB ASC 260-10-5 Earnings Per Share, basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) adjusted for income or loss that would result from the assumed conversion of potential common shares from contracts that may be settled in stock or cash by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.

The following table sets forth the information needed to compute basic and diluted earnings per share for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019:

						For the Three Months Ended					For the Nine Months Ended
	March 31,					September 30,					September 30,
	2020			2019		2020		2019			2020		2019

Net Income (Loss) Available to Common Shareholders	$	(68,596	)	$	31,783	$	9,568		(152,673	)	$	96,677	$	(103,659	)

Weighted average number of common shares - basic		128,486,085			128,139,418		128,539,418		128,139,418			128,521,836		128,139,418
Dilutive securities
Options		-			3,667,227		6,667,227		—			5,980,817		—
Warrants		-			133,334		133,334		—			133,334		—
Weighted average number of common shares - diluted		128,486,085			131,939,979		135,339,979		128,139,418			134,635,987		128,139,418

Earnings (Loss) per share, basic	$	0.00		$	0.00	$	0.00	$	0.00		$	0.00	$	0.00
Earnings (Loss) per share, diluted	$	0.00		$	0.00	$	0.00	$	0.00		$	0.00	$	0.00

The following table sets forth the number of potential shares of common stock that have been excluded from diluted net income (loss) per share net income (loss) per share because their effect was anti-dilutive:

	March 31,				Three Months ended September 30,				Nine Months ended September 30,
	2020		2019		2020		2019		2020		2019
Options		8,325,824		2,098,292		1,758,597		6,015,518		2,445,007		6,015,518
Warrants		133,334		-		—		133,334		—		133,334
		8,459,158		2,098,292		1,758,597		6,148,852		2,445,007		6,148,852

Note 3 - Property and Equipment

Property and equipment, at cost, consist of the following:

	March 31,			December 31,			September 30,			December 31,
	2020			2019			2020			2019
Storage equipment	$	756,236		$	756,236		$	756,236		$	756,236
Website and software		533,417			533,417			533,417			533,417
Furniture and fixtures		27,131			27,131			27,131			27,131
Leasehold improvements		16,846			16,846			20,983			16,846
Computer hardware and software		1,218,464			1,218,464			1,224,591			1,218,464
Data center equipment		4,734,970			4,341,993			5,266,790			4,341,993
		7,287,064			6,894,087			7,829,148			6,894,087
Less: Accumulated depreciation		(4,898,414	)		(4,705,256	)		(5,313,999	)		(4,705,256	)
Net property and equipment	$	2,388,650		$	2,188,831		$	2,515,149		$	2,188,831

Depreciation expense for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019 was ~~$193,158~~$608,743 and ~~$175,472,~~$530,927, respectively.

Note 4 - Goodwill and Intangible Assets

Goodwill and intangible assets consisted of the following:

			March 31, 2020
	Estimated life		Gross amount		Accumulated		Net		Estimated	September 30, 2020
	in years		Gross amount		Amortization		Net		life in years	Gross amount		Accumulated Amortization		Net
Intangible assets not subject to amortization
Goodwill		Indefinite	$	3,015,700	$	—	$	3,015,700	Indefinite	$	3,015,700	$	—	$	3,015,700
Trademarks		Indefinite		294,268		—		294,268	Indefinite		294,268		—		294,268
Total intangible assets not subject to amortization				3,309,968		—		3,309,968			3,309,968		—		3,309,968
Intangible assets subject to amortization
Customer lists		5-15		897,274		897,274		-	5-15		897,274		897,274		—
ABC acquired contracts		5		310,000		211,833		98,167	5		310,000		242,833		67,167
SIAS acquired contracts		5		660,000		451,000		209,000	5		660,000		517,000		143,000
Non-compete agreements		4		272,147		272,147		-	4		272,147		272,147		—
Total intangible assets subject to amortization				2,139,421		1,832,254		307,167			2,139,421		1,929,254		210,167
Total Goodwill and Intangible Assets			$	5,449,389	$	1,832,254	$	3,617,135		$	5,449,389	$	1,929,254	$	3,520,135

Scheduled amortization over the next two years as follows:

Twelve months ending March 31,
2020	$	194,000
Twelve months ending September 30,
2021		113,167	$	194,000
2022				16,167
Total	$	307,167	$	210,167

Amortization expense for the ~~years~~nine months ended ~~March 31,~~September 30, 2020 and 2019 were ~~$48,500~~$145,500 and ~~$49,334~~$148,000 respectively.

Note 5 –Leases

Operating Leases

The Company currently has three leases for office space, with two offices located in Melville, NY, and one office in Warwick, RI.

A lease for office space in Melville, NY, was entered into on November 20, 2017, which commenced on April 2, 2018. The term of this lease is five years and three months at $86,268 per year with an escalation of 3% per year with an ending date of July 31, 2023.

The Company entered into a lease agreement for a technology lab in Melville, NY, that commenced on September 1, 2019. The term of this lease is for three years and 11 months and runs co-terminus with our existing lease in the same building. The base annual rent is $10,764 payable in equal monthly installments of $897.

The lease for office space in Warwick, RI, ~~calls for monthly payments of $2,324 which commenced February 1, 2015 which escalated to $2,460 on February 1, 2017. This lease expired on January 31, 2019. The Company~~was extended ~~this lease~~ until January 31, 2021. The annual base rent shall be $31,176 payable in equal monthly installments of $2,598.

The Company leases rack space in New York, New Jersey, Massachusetts, Texas and North Carolina. These leases are month to month and the monthly rent is approximately $25,000.

Finance Lease Obligations

On June 1, 2020, the Company entered into a lease agreement with Arrow Capital Solutions, Inc. to lease equipment. The lease obligation is payable to Arrow Capital Solutions with monthly installments of $5,008. The lease carries an interest rate of 7% and is a three-year lease. The term of the lease ends June 1, 2023.

On June 29, 2020, the Company entered into a lease agreement with Arrow Capital Solutions, Inc. to lease equipment. The lease obligation is payable to Arrow Capital Solutions with monthly installments of $5,050. The lease carries an interest rate of 7% and is a three-year lease. The term of the lease ends June 29, 2023.

On July 31, 2020, the Company entered into a lease agreement with Arrow Capital Solutions, Inc. to lease equipment under a finance lease. The lease obligation is payable to Arrow Capital Solutions with monthly installments of $4,524. The lease carries an interest rate of 7% and is a three-year lease.

Finance Lease Obligations – Related Party

On April 1, 2018, the Company entered into a lease agreement with Systems Trading Inc. (“Systems Trading”) to refinance all leases into one lease. This lease obligation is payable to Systems Trading with bi-monthly installments of $23,475. The lease carries an interest rate of 5% and is a four -year lease. The term of the lease ends April 16, 2022. Systems Trading is owned and operated by the Company’s President, Hal Schwartz.

On January 1, 2019, the Company entered into a lease agreement with Systems Trading. This lease obligation is payable to Systems Trading with monthly installments of $29,592. The lease carries an interest rate of 6.75% and is a five-year lease. The term of the lease ends December 31, 2023.

On April 1, 2019, the Company entered into two lease agreements with Systems Trading to add new data center equipment. The first lease calls for monthly payments of $1,328 and expires on March 1, 2022. It carries an interest rate of 7%. The second lease calls for monthly payments of $461 and expires on March 1, 2022. It carries an interest rate of 6.7%.

On January 1, 2020, the Company entered into a new lease agreement with Systems Trading Inc. to lease equipment. The lease obligation is payable to Systems Trading with monthly installments of $10,534. The lease carries an interest rate of 6% and is a three-year lease. The term of the lease ends January 1, 2023.

We determine if an arrangement contains a lease at inception. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet, per the election of the practical expedient noted above. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We recognize lease expense for these leases on a straight-line basis over the lease term. We recognize variable lease payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are recognized in the period incurred. A discount rate of 7% was used in preparation of the ROU asset and operating liabilities.

The components of lease expense were as follows:

	Three Months Ended March 31, 2020		Nine Months Ended September 30, 2020
Finance lease:
Amortization of assets, included in depreciation and amortization expense	$	24,905	$	608,743
Interest on lease liabilities, included in interest expense		5,713		124,300
Operating lease:
Amortization of assets, included in total operating expense		223,845		57,709
Interest on lease liabilities, included in total operating expense		42,381		16,106
Total net lease cost	$	296,844	$	806,858

Supplemental balance sheet information related to leases was as follows

Operating Leases

Operating lease ROU asset	$	304,200	$	263,034

Current operating lease liabilities		102,251		103,780
Noncurrent operating lease liabilities		211,373		168,390
Total operating lease liabilities	$	313,624	$	272,170

	March 31, 2020			September 30, 2020
Finance leases:
Property and equipment, at cost	$	3,596,400		$	4,366,665
Accumulated amortization		(1,549,457	)		(3,172,342	)
Property and equipment, net		2,046,943			1,194,323

Current obligations of finance leases	$	1,004,149		$	1,139,828
Finance leases, net of current obligations,		1,708,575			1,509,614
Total finance lease liabilities	$	2,712,724		$	2,649,441

Supplemental cash flow and other information related to leases was as follows:

	Three Months Ended March 31, 2020			Nine Months Ended September 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows related to operating leases	$	19,193		$	75,852
Financing cash flows related to finance leases	$	169,711		$	829,391

Weighted average remaining lease term (in years):
Operating leases		2.22			1.72
Finance leases		2.17			2.33

Weighted average discount rate:
Operating leases		7	%		7	%
Finance leases		6	%		6	%

Long-term obligations under the operating and finance leases at ~~March 31,~~September 30, 2020 mature as follows:

For the Twelve Months Ended March 31,	Operating Leases			Finance Leases
For the Twelve Months Ended September 30,							Operating Leases			Finance Leases
2021	$	102,251			888,652		$	103,780			348,440
2022		105,319			1,066,382			106,901			1,241,361
2023		108,535			674,434			90,696			849,426
2024		37,046			355,104			-			441,725
2025		-			-
Total lease payments		353,151			2,984,572			301,377			2,880,952
Less: Amounts representing interest		(39,527	)		(271,848	)		(29,207	)		(231,509	)
Total lease obligations		313,624			2,712,724			272,170			2,649,443
Less: Current		(102,251	)		(1,004,149	)		(103,780	)		(1,139,828	)
	$	211,373			1,708,575		$	168,390			1,509,615

As of ~~March 31,~~September 30, 2020, we had no additional significant operating or finance leases that had not yet commenced. Rent expense under all operating leases for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019 was ~~$24,905~~$127,268 and ~~$42,337,~~$191,377, respectively.

Note 6 - Commitments and Contingencies

COVID 19 Disclosure

Business interruptions, including any interruptions resulting from COVID-19, could significantly disrupt our operations and could have a material adverse impact on DSC if the situation continues. Under NYS Executive Order 202.6, “Essential Business,” DSC is an “Essential Business” based on the following in the Executive order number 2: Essential infrastructure including telecommunications and data centers; and, number 12: Vendors that provide essential services or products, including logistics and technology support.

Further, all employees, including our specialized technical staff, are working from home or in a virtual environment. DSC always maintains the ability for team members to work virtual and we will continue to stay virtual, until the State and or the Federal government indicate the environment is safe to return to work.

The ongoing coronavirus outbreak which began in China at the beginning of 2020 has impacted various businesses throughout the world, including travel restrictions and the extended shutdown of certain businesses in impacted geographic regions. If the coronavirus outbreak situation should worsen, we may experience disruptions to our business including, but not limited to equipment, to our workforce, or to our business relationships with other third parties.

The extent to which the coronavirus impacts our operations or those of our third-party partners will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. Any such disruptions or losses we incur could have a material adverse effect on our financial results and our ability to conduct business as expected.

Revolving Credit Facility

On January 31, 2008, the Company entered into a revolving credit line with a bank. The credit facility provides for $100,000 at prime plus 0.5% and is secured by all assets of the Company and personally guaranteed by the Company’s CEO. As of ~~March 31,~~September 30, 2020 and December 31, 2019 the balance was $24 and $75,000 respectively.

Note 7 – Long Term Debt

Note Payable

In connection with the Company’s October 2012 acquisition of certain assets (the “ML Assets”) of Message Logic, ~~LLC,~~Inc. (“Message Logic”), the Company ~~acquired software~~maintains ownership of the ML Assets subject to a ~~UCC filing~~security interest in the ML Assets held by a third party banking institution (the “Bank”) in connection with a secured loan made by the Bank to Message Logic in June 2012 in the amount of $350,000 ~~plus accrued interest.~~(the “ML Loan”). The Bank filed a UCC-1 Financing Statement with the Secretary of State of Delaware perfecting its interest in the ML Assets (the “UCC-1 Filing”). On September 5, 2014, the Company entered into an agreement ~~whereby~~with Message Logic and the Bank pursuant to which the Company paid ~~all arrears~~to the Bank the outstanding interest amount due on the ML Loan over 7seven months at $3,910 per month. In addition, the Company agreed to continue to make monthly ~~interest~~interest-only payments to the Bank at $1,553 per ~~month with~~month. The Company assumed these liabilities as part of its option to pay off the ~~principal balance~~ML Loan, terminate the UCC-1 Filing and own the ML Assets free of ~~$350,000 payable on April 30, 2016.~~all liens and encumbrances. The Company stopped making ~~interest only~~interest-only payments on October 25, 2018. ~~There has been no default notice~~During the nine months ended September 30, 2020, the Company made a strategic decision to cease utilizing the ML Assets in its operations and advised the Bank of such information. In connection with this and as a result, the Company recorded a gain on contingent liability in the amount of $350,000 on the condensed consolidated statements of operations.

On April 30, 2020, the Company was granted a loan from a banking institution, in the principal amount of $481,977 (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The Loan, which was in the form of a Note dated April 30, 2020, matures on April 30, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing on November 5, 2020. Funds from the ~~bank. The Company is~~loan may only be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments. Management intends to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the ~~process of negotiating a final settlement.~~CARES Act.

As of September 30, 2020, remaining scheduled principal payments due on notes payable are as follows:

Twelve months ended September 30,
2021	$	294,541
2022		187,436
	$	481,977

Note 8 - Stockholders’ (Deficit)

Capital Stock

The Company has 260,000,000 authorized shares of capital stock, consisting of 250,000,000 shares of common stock, par value $0.001, and 10,000,000 shares of Preferred Stock, par value $0.001 per share.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, the Company received cash of $5,400 from the exercise of 100,000 options.

Common Stock Options

A summary of the Company’s option activity and related information follows:

	Number of Shares Under Options			Range of Option Price Per Share		Weighted Average Exercise Price		Number of Shares Under Options			Range of Option Price Per Share		Weighted Average Exercise Price
Options Outstanding at December 31, 2019		8,425,824		$	0.05 – 0.65	$	0.17		8,425,824		$	0.05 – 0.65	$	0.17
Options Granted		250,000			0.13		0.13		350,000			0.13		0.13
Exercised		(100,000	)		0.54		0.54		(100,000	)		0.05		0.05
Expire/Cancelled		(250,000	)		0.36		0.36		(250,000	)		0.36		0.36
Options Outstanding at March 31, 2020		8,325,824		$	0.05 – 0.65	$	0.20
Options Outstanding at September 30, 2020									8,425,824		$	0.05 – 0.65	$	0.13

Options Exercisable at March 31, 2020		4,441,433		$	0.05 – 0.65	$	0.20
Options Exercisable at September 30, 2020									4,869,403		$	0.05 – 0.65	$	0.19

Share-based compensation expense for options totaling ~~$33,048~~$116,559 was recognized in our results for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 based on awards vested.

The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the options.

Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of the award. The Company’s calculation of estimated volatility is based on historical stock prices of these peer entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price.

As of ~~March 31,~~September 30, 2020, there was ~~$377,797~~$306,282 of total unrecognized compensation expense related to unvested employee options granted under the Company’s share-based compensation plans that is expected to be recognized over a weighted average period of approximately 32.25 year.

The weighted average fair value of options granted, and the assumptions used in the Black-Scholes model during the ~~three~~nine months ended ~~March 31,~~September 30, 2020 are set forth in the table below.

2020
Weighted average fair value of options granted $ 0.13
Risk-free interest rate 0.83 %
Volatility 223 %
Expected life (years) 10
Dividend yield 0.00 %

		2020
Weighted average fair value of options granted		$0.13
Risk-free interest rate		0.66% - 0.83%
Volatility		221% - 223%
Expected life (years)		10
Dividend yield		0.00%

Dividends

Each share of Series A Preferred Stock, in preference to the holders of all Common Stock (as defined below), shall entitle its holder to receive, but only out of funds that are legally available therefore, cash dividends at the rate of ten percent (10%) per annum from the Original Issue Date on the Original Issue Price for such share of Series A Preferred Stock, compounding annually unless paid by the Corporation. Accrued dividends at ~~March~~September 30, 2020 and December 31, ~~2020~~2019 were ~~$1,005,183.~~ $1,076,874 and $970,997 respectively.

Note 9 - Litigation

We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting DSC, its common stock, any of its subsidiaries or of DSC’s or DSC’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Note 10 – Related Party Transactions

Finance Lease Obligations – Related Party

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, the Company entered into one related party finance lease obligations. See Note 5 for details.

Nexxis Capital LLC

Charles Piluso and Harold Schwartz collectively own 100% of Nexxis Capital LLC (“Nexxis Capital”). Nexxis Capital was formed to purchase equipment and provide leases to Nexxis Inc.’s customers.

The Company did not receive any funds from Nexxis Capital during the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019.

~~Note 11 - Subsequent Events~~

On April 2, 2020 the Company entered into a new lease agreement with Arrow Capital Solutions, Inc. to lease equipment. The lease obligation is payable to Arrow Capital Solutions with monthly installments of $5,008. The lease carries an interest rate of 6% and is a three-year lease.

On May 14, 2020, the Company was granted a loan from Signature bank, in the principal amount of $481,977 (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The Loan, which was in the form of a Note dated April 30, 2020, matures on April 30, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing on November 5, 2020. Funds from the loan may only be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments. Management intends to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

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,~~’ ‘will’, ‘should’, ‘could’, ‘expects’, ‘plans’, ‘intends’, ‘anticipates’, ‘believes’, ‘estimates’, ‘predicts’, ‘potential’, or ’~~continue~~’ ‘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 (“DSC” or the “Company”) provides subscription based, long term agreements for disaster recovery solutions, Infrastructure as a Service ~~(IaaS)~~(Cloud - IaaS), telecommunications solutions; and, ~~VoIP~~providing high processing on site computing power and ~~carrier type solutions.~~software equipment to our clients. Approximately ~~16%~~22 percent of our revenue is derived from equipment sales for cyber security, storage, IBM Power i systems and managed service solutions.

In the first nine months of 2020 the Company added new distributors, additional management focused on building sales and marketing distribution, and expanded our technology in Dallas. As we move into the fourth quarter of 2020 the Company has pending installations of over $58,000 in new monthly recurring billing. Additionally, in the fourth quarter we have received sales orders pending delivery of equipment for $420,000. During the first nine months of 2020 we have added thirty new distributors, bringing the total active distribution to fifty-one. Although the Company has experienced higher equipment and software sales in 2020, several of our large long-term clients have submitted only a portion of a planned expansion and upgrades on their on-premise requirements. We have also seen an increase in revenue from our IBM Power Infrastructure as a Service (IaaS - cloud) and Disaster Recovery solution proposals. We believe the increase in sales is due to the awareness and demand of DSC's IaaS and DR that provide high processing compute power systems in the cloud, both of which are highly specialized storage solutions. We have also expanded our services into the cyber security space with our ezSecurity solution. We believe of the estimated 80,000 USA IBM Power servers in finance, retail, healthcare, government and distribution will continue to move forward toward migration to the cloud for these special systems. We believe the Company has carved a niche as one of the few leaders providing this service.

~~Our~~As always and for the past two decades, our mission is to protect our client’s data, ensuring business continuity, assisting in their compliance requirements and providing better control over their digital information. The Company’s October 2016 acquisition of the assets of ABC Services, Inc. and ABC Services II, Inc. (collectively, “ABC”), and its acquisition of the remaining 50% of the assets of Secure Infrastructure and Services LLC, supports the Company’s acquisition strategy. These acquisitions accelerated our strategy into cloud based managed services, expanded cyber security solutions and our hybrid cloud solutions with the ability to provide equipment and expanded technical support.

The Company provides its solutions through its business development team and contracted distribution channels. DSC’s contracted, approved distributors, have the ability to provide Recovery and Hybrid Cloud solutions, IBM and Intel IaaS cloud-based solutions without the distributor investing in infrastructure, data centers and telecommunications services as well as specialized technical staff whereby lowering their barrier of entry ~~for them~~ to provide these solutions to their client base.

DSC is a ~~19-year~~20-year veteran in cloud storage and cloud computing providing disaster recovery, business continuity and compliance solutions that assist organizations in protecting their data, minimizing downtime while ensuring regulatory compliance. Serving the business continuity market, DSC’s clients save time and money, gain more control and better access to data and enable a high level of security for their data. Solutions include: Infrastructure as a Service specializing in IBM Power; data backup recovery and restore, high availability data replication; email archival and compliance; ~~and eDiscovery;~~ continuous data protection; data de- duplication; and, virtualized system recovery. DSC has forged significant relationships with leading organizations creating valuable partnerships.

Our IBM Power and Intel IaaS Cloud ensures enterprise level equipment and support, focusing on iSeries, AIX, Power, AS400 and our high-processing power for Intel. Our Disaster Recovery services for both Intel and IBM has a guaranteed back-to-work window. DSC is a one-stop source for managed services from VoIP to providing the client with equipment and software, monitoring, help desk and a full array of business continuity solutions.

The Company provides its solutions through its business development team and contracted distribution channels. DSC’s contracted approved distributors have the ability to provide our Recovery and IaaS solutions without capital investment thereby lowering their barrier of entry in providing these cloud solutions to their client base.

Headquartered in Melville, NY, ~~with additional offices in Warwick, RI, DSC~~ offers solutions and services to businesses within the healthcare, banking and finance, distribution services, manufacturing, construction, education, and government industries.

~~DSC~~The Company services clients from its staffed technical offices in New York and Rhode Island, which consist of modern offices and a technology suite adapted to meet the needs of a technology-based business. In addition to office staffing, the Company has a remote employee workforce

DSC varies its use of resources, technology and work processes to meet the changing opportunities and challenges presented by the market and the internal customer requirements. The Company supports clients twenty-four hours a day, 365 days a year.

RESULTS OF OPERATIONS

Three months ended ~~March 31,~~September 30, 2020 as compared to ~~March 31,~~September 30, 2019

Total Revenue~~For~~for the three months ended ~~March 31,~~September 30, 2020, ~~increase~~increased by ~~$97,429.~~$709,870. The increase is primarily attributed to ~~three existing customers which~~ increased ~~their services for Infrastructure & Disaster Recovery/Cloud Service. Additionally,~~equipment sales in 2020. During the ~~Nexxis division~~third quarter of 2020, the Company recorded increased ~~its customer base which generated additional revenue. This was offset by a decrease in~~ equipment ~~and software for the quarter.~~sales that were delayed due to Covid 19.

Revenue For the Three Months
Ended March 31,
2020 2019 $ Change % Change
Infrastructure & Disaster Recovery/Cloud Service $ 1,393,720 $ 1,267,047 $ 126,673 10 %
Equipment and Software 328,733 428,511 (99,778 ) (23 )%
Managed Services 220,475 213,925 6,550 3 %
Nexxis VoIP Services 153,197 90,703 62,494 69 %
Other 2,585 1,095 1,490 136 %
Total Revenue $ 2,098,710 $ 2,001,281 $ 97,429 5 %

Revenue	For the Three Months
	Ended September 30,
	2020		2019		$ Change			% Change
Infrastructure & Disaster Recovery/Cloud Service	$	1,437,398	$	1,336,348	$	101,050			7	%
Equipment and Software		936,344		350,339		586,005			167	%
Managed and Other Professional Services		169,565		195,847		(26,282	)		(13	)%
Nexxis VoIP Services - Telecom		180,225		131,128		49,097			37	%
Total Revenue	$	2,723,532	$	2,013,662	$	709,870			35	%

Cost of Sales.For the three months ended ~~March 31,~~September 30, 2020, cost of sales was ~~$1,216,117,~~$1,621,008, an increase of ~~$139,574~~$388,375 or ~~13%~~32% compared to ~~$1,076,543~~$1,232,633 for the three months ended ~~March 31,~~September 30, 2019. The increase is primarily attributable to additional expenses for equipment purchased for sale for our new and existing customers as well as additional costs for hardware maintenance, manufacturer support, and salaries. Additional Data and VoIP services are related to the Nexxis division, which increased due to additional sales in the quarter.

Operating Expenses. For the three months ended September 30, 2020, operating expenses were $1,017,863, an increase of $133,213, or 15%, as compared to $884,650 for the three months ended September 30, 2019. The net increase is reflected in the chart below.

Operating Expenses	For the Three Months
	Ended September 30,
	2020		2019		$ Change			% Change
Increase in Salaries	$	293,240	$	181,587	$	111,653			61	%
Increase in Officer Salaries		203,075		139,408		63,667			46	%
Decrease in Professional Fees		31,749		74,231		(42,482	)		(57	)%
Increase in Advertising Expenses		96,634		69,642		26,992			39	%
Increase in Commissions Expense		258,022		224,329		33,693			15	%
Decrease in all other Expenses		135,143		195,453		(60,310	)		(31	)%
Total Expenses	$	1,017,863	$	884,650	$	133,213			15	%

Salaries increased due to new hires during 2020, employee raises, and increased stock-based compensation from options issued to employees under the Company’s stock incentive program.

Officer salaries increased due to raises granted to senior management.

Professional fees decreased primarily due to a reduction of services needed from an investment banking firm.

Advertising Expenses increased primarily due to changes in vendors and new marketing programs.

Commission expense vary due to different contractual agreements with both the contracted distributors and employees.

All Other Expenses decreased primarily due to the reduction of travel and costs associated with the employees working from home due to the pandemic. In addition, the expenses related to our office space in Melville, New York and insurance were reduced compared to the prior period.

Other Income (Expense) for the three months ended September 30, 2020, increased $13,059 to $42,726 from $29,667 for the three months ended September 30, 2019. The increase is primarily attributed to the decrease in other income compared to the prior period.

Net Income (Loss). Net income for the three months ended September 30, 2020, was $41,935, as compared to a net loss of $133,288 for the three months ended September 30, 2019.

Nine months ended September 30, 2020 as compared to September 30, 2019

Total Revenue for the nine months ended September 30, 2020, increase by $781,336. The increase is primarily attributable to the increased equipment sales as well as additional Data and VoIP services that are related to the Nexxis division.

Revenue	For the Nine Months
	Ended September 30,
	2020		2019		$ Change		% Change
Infrastructure & Disaster Recovery/Cloud Service	$	4,240,796	$	3,960,466	$	280,330		7	%
Equipment and Software		1,544,786		1,285,297		259,489		20	%
Managed and Other Professional Services		557,515		465,231		92,284		20	%
Nexxis VoIP Services		484,770		335,537		149,233		44	%
Total Revenue	$	6,827,867	$	6,046,531	$	781,336		13	%

Cost of Sales. For the nine months ended September 30, 2020, cost of sales was $3,977,546, an increase of $566,711 or 17% compared to $3,410,835 for the nine months ended September 30, 2019. The increase is primarily attributable to expenses associated with the data centers for infrastructure and disaster recovery cloud ~~services.~~services as well as additional costs related to the Nexxis division, and equipment purchases for sale.

Operating Expenses.For the ~~three~~nine months ended ~~March 31,~~September 30, 2020, operating expenses were ~~$876,626,~~$2,882,755, an increase of ~~$53,758,~~$317,503, or 7%12%, as compared to ~~$822,868~~$2,565,252 for the ~~three~~nine months ended ~~March 31,~~September 30, 2019. The net increase is reflected in the chart below.

Operating Expenses	For the Nine Months
	Ended September 30,
	2020		2019		$ Change			% Change
Increase in Salaries	$	863,576	$	534,090	$	329,486			62	%
Increase in Officer Salaries		619,124		468,250		150,874			32	%
Decrease in Professional Fees		115,984		206,673		(90,689	)		(44	)%
Increase in Advertising Expenses		234,564		188,249		46,315			25	%
Increase in Commissions Expense		686,970		630,822		56,148			9	%
Decrease in all other Expenses		362,537		537,168		(174,631	)		(33	)%
Total Expenses	$	2,882,755	$	2,565,252	$	317,503			12	%

Operating Expenses For the Three Months
Ended March 31,
2020 2019 $ Change % Change
Increase in Salaries $ 442,732 $ 366,071 $ 76,661 21 %
Decrease in Professional Fees 46,342 76,117 (29,775 ) (39 )%
Increase in Software as a Service Expense 34,768 1,995 32,773 1,643 %
Increase in Advertising Expenses 65,380 33,963 31,417 93 %
Decrease in Commissions Expense 185,868 186,971 (1,103 ) (1 )%
Decrease in T&E 9,784 24,265 (14,481 ) (60 )%
Decrease in all other Expenses 91,752 133,486
(41,74
) (31 )%
Total Expenses $ 876,626 $ 822,868 $ 53,758 7 %

Salaries increased ~~by $76,661~~ due to ~~increases in administrative~~new hires during 2020, raises granted to employees increased stock-based compensation from options issued to employees under the Company’s stock incentive program.

Officer salaries due to raises granted to senior management.

Professional fees decreased primarily due to reduced services from investment banking and ~~finance salaries with an addition of two full-time employees. The company also awarded a stock based compensation of options valued at $33,050 to a current employee~~ investor relations firms.

S~~oftware as a Service Expense (SaaS)increased by~~$~~32,773. This is attributed to the expanding data gathering so management can make more informed decisions.~~

Advertising Expensesincreased primarily due to additional marketing campaigns for ~~both~~ Data Storage Corporation, ~~and their subsidiary~~which was offset by a decrease in marketing campaigns for Nexxis.

~~Professional fees~~Commission expense ~~decreased primarily~~vary due to different contractual agreements with both the ~~company hiring a consultant as an employee~~contracted distributors and ~~relying less on consultants for accounting services.~~employees.

All Other Expenses decreased primarily due to the reduction of ~~training expenses in~~travel and costs associated with the ~~amount of approximately $12,700, rent expense in the amount of approximately $7,400~~employees working from home due to the ~~company downsizing in~~pandemic. In addition, the expenses related to our office space ~~bad debt recovery of about approximately $10,000~~in Melville, New York and ~~office supplies in~~insurance were reduced compared to the ~~amount of approximately $4,700.~~prior period.

Other Income (Expense).~~Interest income (expense)~~ for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 increased ~~$2,892~~$331,306 to ~~$46,440~~$217,155 from ~~$49,332~~$(114,151) for the ~~three~~nine months ended ~~March 31,~~September 30, 2019. The increase is attributed to the gain on contingent liability in the amount of $350,000 during the nine months ended September 30, 2020.

Net Income (Loss).Net ~~loss~~income for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 was ~~$40,473,~~$184,721, as compared to a net ~~income~~loss of ~~$52,538~~$43,707 for the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

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 DSC will realize its assets and discharge its liabilities in the ordinary course of business. In 2020, we intend to continue to work to increase our presence in the ~~cloud~~IaaS / DR and business continuity marketplace continuing in specializing in IBM Power i and disaster recovery / business continuity marketplace utilizing our technical expertise, software and our capacity in our data centers.

To the extent we are successful in growing our business ~~identifying potential~~both organically and through acquisition, ~~targets and negotiating the terms of such acquisition, and the purchase price includes a cash component,~~ we ~~plan~~continue to ~~use~~plan our working capital and the proceeds of any financing to finance such acquisition 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 require a renegotiation of related party capital equipment leases and / or major shareholders, such as senior management, entering into financing or stock purchase arrangements. The company has long term contracts to supply IaaS and DR solutions invoiced to clients monthly. We believe our total contract value of our sales contracts with clients exceeds 10 million dollars. Further, the company continues to see an uptick in client interest, distribution channel expansion and in sales proposals.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, DSC’s cash increased ~~$1,621~~$278,202 to ~~$328,182~~$604,763 from $326,561 ~~March~~December 31, 2019. Net cash of ~~$ 297,720~~$696,087 was provided by DSC’s operating activities resulting primarily from net income from operations and the ~~changes in assets~~following adjustments for non-cash items $754,243 for depreciation and ~~liabilities.~~amortization, $116,557 for stock based compensation, and $(350,000) gain on contingent liability. Net cash of ~~$56,812~~$164,796 was used in investing activities resulting from payments on capital expenditures. Net cash of ~~$239,287~~$253,089 was used in financing activities resulting primarily from ~~payments on~~the repayment of capital lease ~~obligations.~~obligations and the line of credit, which was offset by the proceeds from the issuance of note payable.

DSC’s working capital deficit was ~~$2,763,533~~$2,553,236 at ~~March 31,~~September 30, 2020, ~~increasing~~decreasing by ~~$191,950~~$18,347 from $2,571,583 at December 31, 2019. The ~~increase~~decrease is primarily attributable to an increase in cash, accounts receivable, and prepaid expense along with a decrease of ~~accounts payable, dividend~~notes payable and ~~related party financing notes in~~a decrease of the ~~amount~~line of ~~$329,078. The increase in short term liabilities~~credit. This was offset by an increase in accounts ~~receivable~~payable and ~~prepaid expenses of $175,178.~~dividend payable, deferred revenue, and finance lease obligations.

Off-Balance Sheet Arrangements

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

Interest due on the Company’s loans is based upon the applicable stated fixed contractual rate with the lender. Interest earned on DSC bank accounts is linked to the applicable base interest rate. For the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and 2019, the Company had interest expense of ~~$46,460~~$132,866 and ~~$49,419~~$137,425 respectively. The Company believes that its results of operations are not materially affected by changes in interest rates.

DSC’s exposure to market risk is confined to its cash and cash equivalents, all of which have maturities of less than three months and bear and pay interest in U.S. dollars. Since the Company invests in highly liquid, relatively low yield investments, we do not believe interest rate changes would have a material impact on us.

DSC does not hold any derivative instruments and does not engage in any hedging activities.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this Report, under the supervision and with the participation of DSC’s management, including its principal executive officer and principal financial officer, DSC conducted an evaluation of its 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”). Based on this evaluation, DSC’s principal executive officer and principal financial officers have concluded that DSC’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by DSC in the reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules based on the material weakness described below.

The material weaknesses identified during management’s assessment were (i) a lack of sufficient internal accounting expertise to provide reasonable assurance that our financial statements and notes thereto are prepared in accordance with GAAP and (ii) a lack of segregation of duties to ensure adequate review of financial statement preparation. In light of these material weaknesses, management has concluded that, as of ~~March 31,~~September 30, 2020, DSC did not maintain effective internal control over financial reporting. As defined by the Public Company Accounting Oversight Board Auditing Standard No. 5, a material weakness is a deficiency or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. In order to ensure the effectiveness of DSC’s disclosure controls in the future DSC intends on adding financial staff resources to our internal accounting and finance department.

Because of 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.

Changes in Internal Control Over Financial Reporting.

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

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting DSC, its common stock, any of its subsidiaries, ~~or of DSC’s or DSC’s subsidiaries’~~ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Item 1A.

Risk Factors.

As a smaller reporting company, we are not required to provide disclosure pursuant to this item.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

There were no defaults upon senior securities during the period ended ~~March 31,~~September 30, 2020.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information.

None

Item 6.

Exhibits

Exhibit No.		Description

3.1		Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form SB-2 filed on December 17, 2007 (the “SB-2”)).

3.2		Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Form 8-K filed on October 24, 2008).

3.3		Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1.1 on Form 8-K filed on January 6, 2009).

3.4		Bylaws (incorporated by reference to Exhibit 3.2 to the SB-2).

3.5		Amended Bylaws (incorporated by reference to Exhibit 3.2 to Form 8-K filed on October 24, 2008).

4.1		Share Exchange Agreement, dated October 20, 2008, by and among Euro Trend Inc., Data Storage Corporation and the shareholders of Data Storage Corporation named on the signature page thereto (incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 24, 2008).

4.2		Share Exchange Agreement, dated October 20, 2008, by and among, Euro Trend Inc., Data Storage Corporation and the shareholders of Data Storage Corporation named on the signature page thereto (incorporated by reference to Exhibit 10.1 to Form 8-K/A filed on June 29, 2009).

4.3		Registration Rights Agreement, dated November 29, 2011, by and between Data Storage Corporation and Southridge Partners II, LP (incorporated herein by reference to Exhibit 10.2 to Form 8-K filed on December 2, 2011).

4.4		Equity Purchase Agreement, dated November 29, 2011, by and between Data Storage Corporation and Southridge Partners II, LP (incorporated herein by reference to Exhibit 10.2 to Form 8-K filed on December 2, 2011).

4.5		Convertible Promissory Note, dated February 28, 2013, by and between the Company and John F. Coghlan. (incorporated herein by reference to Exhibit 4.1 to Form 10-Q filed on May 20, 2013)

4.6		Warrant to Purchase Common Stock, dated February 28, 2013, by and between the Company and John F. Coghlan (incorporated herein by reference to Exhibit 4.2 to Form 10-Q filed on May 20, 2013)

4.7		Securities Purchase Agreement, dated February 28, 2013, by and between the Company and John F. Coghlan. (incorporated herein by reference to Exhibit 10.1 to Form 10-Q filed on May 20, 2013)

4.8		Securities Purchase Agreement between Charles M. Piluso and the Company dated as of August 9, 2013 (incorporated by reference to Exhibit 2.3 of Schedule 13D/A No. 1 filed by Charles M. Piluso on August 14, 2013 (File No. 005- 84248)).

4.9		10% Convertible Promissory Note due April 30, 2016 (incorporated by reference to Exhibit 2.4 of Schedule 13D/A No. 1 filed by Charles M. Piluso on August 14, 2013 (File No. 005-84248)).

4.10		Warrant to Purchase Common Stock dated as of August 9, 2013, (incorporated by reference to Exhibit 2.5 of Schedule 13D/A No. 1 filed by Charles M. Piluso on August 14, 2013 (File No. 005-84248)).

10.1		Asset Purchase Agreement dated November 10, 2008, by and between Novastor Corporation as Seller and Data Storage Corporation as Purchaser (incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 12, 2008).

10.2		Joint Venture – Strategic Alliance Agreement, dated March 2, 2010, by and between Data Storage Corporation and United Telecomp, LLC (incorporated by reference to Exhibit 10.1 to Form 8-K filed on March 3, 2010).

10.3		Term Sheet for Acquisition by Data Storage Corporation of 80% of the Equity of e-ternity Business Continuity Consultants, Inc., dated May 16, 2012 (incorporated by reference to Exhibit 99.1 to Form 8-K, filed on May 30, 2012).

10.4		Term Sheet for Acquisition by Data Storage Corporation of Message Logic, Inc., dated August 31, 2012 (incorporated by reference to Exhibit 99.1 to Form 8-K filed on September 4, 2012).

10.5		Asset Purchase Agreement, dated June 17, 2010, between SafeData, LLC and Data Storage Corporation (incorporated by reference to Exhibit 10.1 to Form 8-K filed on June 23, 2010).

10.6		Asset Purchase Agreement, dated October 31, 2012, by and between Data Storage Corporation and Message Logic, Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K filed on January 30, 2013).

10.7		Stock Purchase Agreement, dated October 31, 2012, by and between Data Storage Corporation and Zojax Group, LLC (incorporated by reference to Exhibit 10. 1 to Form 8-K filed on November 7, 2012).

10.8		Form of Employment Agreement between Peter Briggs and Data Storage Corporation (incorporated by reference to Exhibit 10.2 to Form 8-K filed on June 23, 2010).

10.9		Data Storage Corporation 2010 Incentive Award Plan (incorporated by reference to Exhibit 10.1 on Form S-8/A filed on October 25, 2010).

10.10		Amended and Restated Data Storage Corporation 2010 Incentive Award Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed on April 26, 2012).

10.11		Stock Purchase Agreement, dated as of March 1, 2011, by and between Data Storage Corporation and John F. Coghlan (incorporated by reference to Exhibit 10.1 to Form 8-K filed on March 7, 2011).

10.12		Stock Purchase Agreement, dated September 7, 2012, by and between Data Storage Corporation and John F. Coghlan (incorporated by reference to Exhibit 2.1 to Form 8-K filed on September 13, 2012).

10.13		Stock Purchase Agreement, dated September 7, 2012, by and between Data Storage Corporation and Clifford Stein (incorporated by reference to Exhibit 2.2 to Form 8-K filed on September 13, 2012).

10.14		Stock Purchase Agreement, dated September 18, 2012, by and between Data Storage Corporation and Jan Burman (incorporated by reference to Exhibit 2.1 to Form 8-K filed on September 21, 2012).

10.15		Stock Purchase Agreement, dated September 18, 2012, by and between Data Storage Corporation and Charles M. Piluso (incorporated by reference to Exhibit 2.2 to Form 8-K filed on September 21, 2012).

10.16		Stock Purchase Agreement, dated September 18, 2012, by and between Data Storage Corporation and Piluso Family Associates (incorporated by reference to Exhibit 2.3 to Form 8-K filed on September 21, 2012).

10.17		Asset Purchase Agreement by and between ABC Services Inc., and Data Storage Corporation as of October 25, 2016 (incorporated by reference to Exhibit 10.1 to Form 8K filed on October 31, 2016) Asset Purchase Agreement by and between ABC Services II Inc., and Data Storage Corporation as of October 25, 2016 (incorporated by reference to Exhibit 10.2 to Form 8K filed on October 31, 2016) Conversion Agreement by and between Data Storage Corporation and Charles M. Piluso dated October 25, 2016

10.18		(incorporated by reference to Exhibit 10.3 to Form 8K filed on October 31, 2016) Conversion Agreement by and between Data Storage Corporation and John F. Coghlan dated October 25, 2016

10.19		(incorporated by reference to Exhibit 10.4 to Form 8K filed on October 31, 2016)

10.20		Conversion Agreement by and between Data Storage Corporation and Clifford Stein dated October 25, 2016(incorporated by reference to Exhibit 10.5 to Form 8K filed on October 31, 2016).

10.21		Conversion Agreement by and between Data Storage Corporation and Clifford Stein dated October 25, 2016 (incorporated by reference to Exhibit 10.5 to Form 8K filed on October 31, 2016).

10.22		Form of Stockholders Agreement by and between Data Storage Corporation, Nexxis Inc., and John Camello dated November 13, 2017.

10.23		Form of Employment Agreement between Data Storage Corporation, Nexxis Inc., and John Camello dated November 13, 2017.

14		Code of Ethics (incorporated by reference to Exhibit 14.1 to Form 10-K filed on September 30, 2009).

21		List of Subsidiaries of Data Storage Corporation (incorporated by reference to Exhibit 21 to the Registration Statement on Form S-1 filed on February 6, 2012).

31.1		Certification of President, Chief Executive Officer, Chief Financial Officer, Chairman of the Board of Directors Pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Exchange Act.

32.1		Certification of President, Chief Executive Officer, Chief Financial Officer, Chairman of the Board of Directors Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1		Press Release dated November 1, 2017 (incorporated by reference to Exhibit 99.1 to Form 8K filed on November 9, 2017)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	DATA STORAGE CORPORATION
Date: ~~May 20,~~November 17, 2020
	By:	/s/Charles M. Piluso
		Charles M. Piluso
		Chief Executive Officer
		Chief Financial Officer
		(Principal Executive, Financial and Accounting Officer)

	Three Months Ended March 31,
	2020			2019

Sales	$	2,098,710		$	2,001,281

Cost of sales		1,216,117			1,076,543

Gross Profit		882,593			924,738

Selling, general and administrative		876,626			822,868

Income from Operations		5,967			101,870

Other Income (Expense)
Interest income		20			87
Interest expense		(46,460	)		(49,419	)
Total Other Income (Expense)		(46,440	)		(49,332	)

Income (Loss) before provision for income taxes		(40,473	)		52,538

Provision for income taxes		—			—

Net Income (Loss)		(40,473	)		52,538

Non-controlling interest in consolidated subsidiary		6,063			10,323

Net Income (Loss) attributable to Data Storage Corp		(34,410	)		62,861

Preferred Stock Dividends		(34,186	)		(31,078	)

Net Income (Loss) Attributable to Common Stockholders	$	(68,596	)	$	31,783

Earning (Loss) per Share – Basic	$	0.00		$	0.00
Earning (Loss) per Share – Diluted	$	0.00		$	0.00
Weighted Average Number of Shares - Basic		128,486,085			128,139,418
Weighted Average Number of Shares - Diluted		128,486,085			131,939,979