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EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT OF 2002 - Data Storage Corpf10k2010ex31i_datastorcorp.htm
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT OF 2002 - Data Storage Corpf10k2010ex32i_datastorcorp.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K

(Mark One)
x    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
 
o   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
 
Commission File No. 333-148167
 
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.)
 
401 Franklin Avenue
   
Garden City, N.Y
 
11530
(Address of principal executive offices)
 
 
(Zip Code)
Registrant’s telephone number, including area code:  (212) 564-4922

Securities registered under Section 12(b) of the Exchange Act:
None
 
Securities registered under Section 12(g) of the Exchange Act:
Title of each class registered:
Name of each exchange on which registered:
Common Stock, par value $.001
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act. Yeso  Nox
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o   No x

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 x   Noo
 
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yeso   Nox
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of S-K (§229.405)  is contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
 
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).Yeso Noo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer                                                   o                          Accelerated filer                                                      o
Non-accelerated filer                                                     o                          Smaller reporting company                                    x
(Do not check if a smaller reporting company)
 
Revenues for year ended December 31, 2010: $2,514,340
 
Aggregate market value of the voting common stock held by non-affiliates of the registrant as of December 31, 2010, was $3,083,421
 
Number of shares of the registrant’s common stock outstanding as of April 13, 2010 was:

 
Number of Shares
Common Stock
21,674,033
Preferred Stock
1,401,786
 
Transitional Small Business Disclosure Format: Yes o  No o
 

 
 

 
 
Data Storage Corporation
Table of Contents

 
PART I
2
ITEM 1.       DESCRIPTION OF BUSINESS
2
Corporate History
2
Overview of Data Storage Corporation & Industry
2
Description of Data Storage Corporation’s Business
3
Data Storage Corporation’s Services and Solutions
4
Professional Services
7
Competition
8
Principal Competitors by Service Sector
8
ITEM 1A.     RISK FACTORS
8
ITEM 1B.     UNRESOLVED STAFF COMMENTS
8
ITEM 2.       DESCRIPTION OF PROPERTY
9
ITEM 3.       LEGAL PROCEEDINGS
9
ITEM 4.       (REMOVED AND RESERVED)
9
   
PART II
9
ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
9
No Public Market for Common Stock
9
Holders of Our Common Stock
9
Stock Option Grants
9
Registration Rights
9
ITEM 6.       SELECTED FINANCIAL DATA
9
ITEM 7.       MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
9
Company Overview
9
Results of Operation
10
Critical Accounting Policies
11
Off Balance Sheet Transactions
11
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
11
ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
11-30
ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
31
ITEM 9A.   CONTROLS AND PROCEDURES
31
   
PART III
30
ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
32
ITEM 11.    EXECUTIVE COMPENSATION
38
Summary Compensation Table
38
ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
39
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTION, AND DIRECTOR INDEPENDENCE
39
ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES
39
   
PART IV
38
ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
41
SIGNATURES
42

 
1

 
 
PART I
 
ITEM 1.       DESCRIPTION OF BUSINESS
 
Overview
 
CORPORATE HISTORY

Data Storage Corporation, a leader in Hybrid Cloud solutions and services is the result of several transactions: a share exchange with Euro Trend Inc. Incorporated on March 27, 2007 under the laws of the State of Nevada; Ownership of DSC incorporated in 2001; and an Asset Acquisition of SafeData in 2010. On October 20, 2008 we completed a Share Exchange Agreement whereby we acquired all of the outstanding capital stock and ownership interests of Data Storage Corporation. In exchange we issued 13,357,143 shares of our common stock to the Data Storage Corporation’s Shareholders, a Cloud Storage and SaaS organization, providing services for Disaster Recovery. This transaction was accounted for as a reverse merger for accounting purposes. Accordingly, Data Storage Corporation, the accounting acquirer, is regarded as the predecessor entity.On June 17, 2010 we entered into an Asset Purchase Agreement with SafeData, a provider of Cloud Storage and Cloud Computing mostly to IBM’s Mid-Range Equipment users, namely, AS400 and iSeries users under which we acquired all right, title and interest in the end user customer base of SafeData and all related current and fixed assets and contracts including the transfer of all of SafeData’s current liabilities arising out of the business or the assets acquired. Pursuant to the Agreement, wepaid an aggregate purchase price equal to $3,000,000. Giving effect to certain holdback and contingency clauses as defined in the agreement, we paid $1,229,952 in cash and $850,000 in shares of our common stock as well as assumption of SafeData Accounts Payable and Receivables.

The result of which positions Data Storage Corporation as a leader in Cloud Storage and Computing specializing in this underserved nichéwith over a 330% increase in revenue and a 38% increase in Gross Profit from 2009 to 2010.
 
OVERVIEW OF DATA STORAGE CORPORATION & INDUSTRY:  The Hybrid Cloud

Data Storage Corporation (DSC) is a provider of Hybrid Cloud solutions on a subscription basis in the USA and Canada focusing on data protection and business continuity that assist organizations in protecting their data, minimize downtime, ensure regulatory compliance and recover and restore data within their objectives.  Through our four data centers and by leveraging leading technologies, DSC delivers and supports a broad range of premium solutions for both Windows and IBM environments that assist clients in saving time and money, gain more control of and better access to data and enable the highest level of security for that data.  The company’s solutions include: offsite data protection and recovery services, High Availability (HA) replication services, email compliance solutions for e-discovery, continuous data protection, data de-duplication, virtualized system recovery and telecom recovery services.  Headquartered in Garden City, N.Y., we offer solutions and services to healthcare, banking and finance, distribution services, manufacturing, construction, education, and government industries by leveraging leading technologies, such as virtualization, cloud computing and cloud storage.
 


 
2

 

Our Continuing Strategy set forth in 2009:
 


Data Storage Corporation derives revenues from Professional Services and Subscription Services that provide businesses, education, government and healthcare protection of critical electronic data. In 2009 revenues consisted primarily of offsite data backup, de-duplication, continuous data protection, Cloud Disaster Recovery solutions and Electronic Medical Records, protecting information for our clients. In 2010 we expanded our solutions based on the asset acquisition of SafeData. We have expanded our solutions based on the expertise of the SafeData acquisition which is a leader in supporting disaster recovery and business continuity solutions to the IBM mid-range user group. We provide excellent value to this underserved market assisting clients in meeting their expectations.  We have equipment for cloud storage and cloud computing in our centers in MA, RI, NY, and FL. We deliver our services over highly reliable, redundant and secure fiber optic networks with separate and diverse routes to the Internet. The network and geographical diversity is important to clients seeking storage hosting and Disaster Recovery solutions, ensuring protection of data and continuity of business in the case of a network interruption.   

Data Storage Corporation is in the position today to leverage our infrastructure, data center and equipment capacity and leadership team to grow revenue to significant levels by acquisitions of synergetic data protection and cloud storage businesses that provide data vaulting and cloud recovery services, disaster recovery and business continuity solutions, store data for future access for e-discoveryand infrastructure as a service (IaaS). DSC believes opportunities exist to acquire synergistic service providers to enhance our products and services portfolio, expand our management and increase our cash flow.
 
Our objective is to reduce costs through economies of scale while increasing market share and consolidating efforts. We believe that through a strategy of increasing our direct sales force and partnership program a significant opportunity exists to acquire synergistic services providers.  In some form or another over 4,000 service providers exist today, providing DSC with ample acquisition targets. Initial acquisitions will be derived from companies that offer similar services to Data Storage as greater economies of scale can be realized using this strategy thereby improving net income
 

 
3

 

Our Acquisition Strategy:
 
 
 
We believe that the opportunity exists today to acquire and roll-up customer bases of cloud storage companies in this fractionized industry. This strategy will enable Data Storage Corporation to create a national presence as the premiere brand. The roll up of these technical consulting companies and system integrators will also form a powerful distribution channel for both our current and future service offerings.

The marketplace exists today for companies that provide professional services that specializing in Disaster Recovery and Business Continuity.  These companies are segmented into systems integrators that have added data protection services as an additional product line adding to their bundle of services and products, focused on smaller clients, less than 1,500 employees which are 85% of all businesses in the USA. A few very large professional services providers such as IBM and SunGard focus on the enterprise level organizations greater than 1,500 employees, therefore leaving small and medium size organizations under-served for top level professional services for Disaster Recovery solutions under DSC’s professional services umbrella utilizing a Cloud strategy.

DESCRIPTION OF SERVICES AND SOLUTIONS:
 
Data Storage Corporation (DSC) delivers and supports a broad range of premium cloud-based solutions focusing on data protection and recovery services utilizing High Availability with Hosted Replication, Data Storage, Data Backup and Data Recovery.

 
 
4

 
 
OVERVIEW:

Data Storage Corporation (DSC) is a provider of Hybrid Cloud solutions on a subscription basis and professional services in the USA and Canada focusing on data protection and business continuity that assist organizations in protecting their data, minimize downtime, ensure regulatory compliance and, recover and restore data within their recovery objectives. Through our four data centers and by leveraging leading technologies, DSC delivers and supports a broad range of premium solutions for both Windows and IBM environments that assist clients save time and money, gain more control of and better access to data and enable the highest level of security for that data.  The company’s solutions include: offsite data protection and recovery services, High Availability (HA) replication services, email compliance solutions for e-discovery, continuous data protection, data de-duplication, virtualized system recovery and telecom recovery services. We offer solutions and services to healthcare, banking and finance, distribution services, manufacturing, construction, education and government by leveraging leading technologies, such as systems virtualization, cloud computing and cloud storage, professional and managed services.

SERVICES AND SOLUTIONS:

Data Storage Corporation has become a leader in High Availability and Virtual Disaster Recovery of the IBM Mid RangePower Systems (AS400 / iSeries).  Our overall core competencies within the cloud are the following: Data Vaulting, Virtual Disaster Recovery and High Availability using Cloud Storage, Recovery and Computing Subscription Solutions.

Hosted Replication Delivers Access to Data Within Minutes

When businesses think about protecting mission-critical systems, they may think they cannot afford to implement a high availability solution.  However, when they consider the importance of keeping their data available, the question becomes, Can they afford not to?

With our cloud-based high availability services (SafeData HA), businesses finally have cost-effective access to best-in-class replication technologies for organizations of all sizes, operating in IBM iSeries/AS400, MS Windows, UNIX, Linux and AIX environments.

For a monthly subscription fee and long term contract, Data Storage creates and maintains a mirror of client’s mission-critical systems and data.  We assist to ensure that a business is “switch ready.” So whether they experience a power outage, face a natural disaster, or simply fall victim to human error, the business will not miss a beat.

SafeData High Availability (SafeData HA)

For those companies that have recovery time objectives of 15 minutes or less, DSC’s SafeData HA meets the high availability demands of their businesses.  Combining best-of-breed technologies from the industry’s leading developers, SafeData HA is the company’s subscription-based high availability offering.  For a monthly subscription fee, DSC creates and maintains a mirror of its clients’ mission-critical systems and data at a secure off-site data center ensuring their business is “switch ready”.  During either planned or unplanned downtime, SafeData HA provides a switchable “mirror” of a company’s data and applications guaranteeing availability in 15 minutes or less.

 
5

 

SafeData HA is available for the IBM System i, UNIX, AIX and Windows operating systems.  Products on each platform share the same architecture, but use a different middleware product designed and priced for the platform’s specific operating system.  SafeData HA provides real-time system replication using standard Internet protocol.  It is replicated to a server in DSC’s data centers.

In the event of an outage, the DSC system becomes the production system.  When the client’s production system is again operational, the DSC server updates the client’s system with any new data.  When downtime is planned, the customer can switch to the DSC server and run its production applications.

Benefits of DSC’s SafeData HA include:
· Data and application availability in 15 minutes or less
· Cost-effective
· Easy to implement and manage
· Reliable backup and recovery

SafeData Recovery (SafeData DR)

Organizations may not require real-time recovery.  For those with recovery time objectives of 10 hours or less running in an IBM System i environment, DSC’s SafeData DR subscription-based service is a viable option requiring no initial capital expenditure. Leveraging electronic vaulting technology, SafeData DR is an online backup and recovery service that gives organizations remote access to mirrored data and a full functioning recovery system within hours of a disruption.
SafeData DR instantly transfers data off-site to one of DSC’s secure data centers.  All data is encrypted prior to transmission and remains encrypted “in-flight” and “at rest” to ensure protection and to meet today’s compliance standards.

Benefits of DSC’s SafeData DR for IBM System I (iSeries, AS400):
 Fast recovery times (in hours, not days)
 No tapes to get lost or damaged
 Virtual recovery that fully protects your iSeries investment
 Eliminate data recovery burden on IT resources

SafeData Virtual Recovery for Windows (SafeData VDR)

Data Storage Corporation’s SafeData VDR solution provides the same recovery benefits as SafeData DR for the IBM System i platform, but for MS Windows environments.

In the event of a disruption or disaster, clients have remote connectivity to a fully functioning Windows system (virtual machine) complete with their backed up data and applications.

Benefits of DSC’s SafeData VDR for Windows Recovery:
 Fast recovery times (in hours, not days)
 No tapes to get lost or damaged
 Virtual recovery that fully protects your Windows investment
 Eliminate data recovery burden on IT resources

SafeData Vault for Backup, Recovery & Archiving (offsite, remote, and local-only)

Data Storage Corporation offers a fully automated service designed to reduce the overall costs associated with backup and recovery of application and file servers that enables organizations to centralize and streamline their data protection process. Business-critical data can be backed up any time, while servers are up and running.

The essence of data backup is simply the scheduled movement of “point-in-time” snapshots of data across a network to a remote location.  DSC’s disk-to-disk backup and recovery solution is reliable and easy-to-use.  As part of this service, DSC offers Continuous Data Protection (CDP), delta block processing, data de-duplication and large volume protection.

DSC’s SafeData Vault has significant advantages over traditional backup software:
· Immediate off-site backup
· Reduced backup windows
· Elimination of tape management issues
· Minimized costs associated with distributed backups
· Elimination of human intervention
· Encryption of all backed up data
· Optimized bandwidth
 
 
6

 

Features and Benefits:
· Simple to grow – Simple to manage
· Reduces operational overhead while freeing up staff to focus on higher priority tasks.
·  Agent-less – No agents to install on any machine (Some limitations apply to MS Exchange, GroupWise, Lotus Notes and MS SharePoint).
· De-duplication and compression technology provides cost reduction for stored data.
· Backed up data can be archived for long term storage.
· Local Restore option from an on premise server (restore at LAN speeds), while backing up online
· Always secure with 256-bit AES encryption.
· Centralized management interface, email or SNMP alerts, extensive logging and reporting for audits and verification.
· Tape-less – Disk to Disk – No more manual handling of tapes.
· Minimize backup windows leveraging “incremental forever” technology
· Continuous Data Protection for email and data files.
· Customizable retention policies and software parameters.

Benefits and Features of DSC solutions:
 
Data Archiving – Lifecycle Management
Backup data must be managed throughout its life cycle to provide the best data protection, meet compliance regulations and to improve recovery time objectives (RTO). The Archive offers policy-based file archiving and manages archiving and restoration of data from backup sessions, reducing the cost of inactive files on-line. It creates restorable point-in-time copies of backup sets for historical reference to meet compliance objectives and creates Certificates of Destruction.  All of an enterprise's data can be placed into one of two categories. Critical information is that which is needed for day-to-day operations and resides in the system's primary storage for fast access. Important information is the historical, legal and regulatory information that can safely be archived to secondary storage, lower cost disk or tapes stored offsite

Continuous Data Protection (CDP)
What if a database is corrupted in the middle of the workday?  As data continually mounts in today’s fast paced business environment, organizations need to protect their systems on an ongoing basis, or risk losing mission-critical data, information, and transactions, as well as associated business revenue. CDP solutions employ sophisticated I/O, CPU, and network throttling to achieve efficiency and reliability. Moreover, to protect against connectivity failures and interruptions, CDP features an auto resume mechanism that sustains replication and adapts according to the environment to achieve optimal and predictable performance.

Our technology will identify and propagate only that sector of data to the DR site, effectively reducing bandwidth and storage consumption.  CDP also employs data compression and encryption to maximize network bandwidth utilization and ensure end-to-end security between the primary and DR site.

Microsoft Exchange
Ensure business-critical e-mail data is protected against application or hardware-based corruption or loss, user error, or a natural disaster with our solution.  Designed with ease of use in mind, our solution provides Exchange Server 2000/2003/2007 complete protection down to the individual mailbox or even an individual mail message

Off-Site Backup Services
We provide online backup services that transfer your information over the Internet or on a dedicated private circuit to our secure company owned off-site storage location. Our online backup service provides the most advanced data protection solution for small and medium businesses. Our service turns an ordinary server into a powerful and fully automated network backup device.

PROFESSIONAL SERVICES
 
OVERVIEW:
Data Storage Corporation's Professional Service offers a proven, comprehensive selection of professional services designed to assist in fully leveraging the value of the client investment in Information Systems Performance Management.
 
OUR STRATEGY:
Professional Services include the three most critical areas of service -deployment, performance and best practices. Specific services are available for end to end IT and infrastructure assessments to design build engagements. Our services, can be easily customized to fit IT and business requirements. Our consultants are experts in many technology disciplines and will provide a wealth of knowledge, tools, skills and expertise.
 
SERVICES:
Data Storage Corporation’s Professional Services for planning, design, deployment, performance and best practices can help speed time to value and increase ROJ for the DSC investment:

 
7

 

Staffing

Gap Analysis

Systems Integration and Design

Technology Assessments

Managed Services

Technology Deployment

Network, Systems and broadband engineering consulting

Server farm virtualization analysis, design and implementation
 
BENEFITS TO OUR CLIENTS:

Develop a robust road map via DSC’s audit services to increase efficiencies and develop pragmatic action plans to meet any business goal.

Accelerate deployment through proven procedures and deep technology expertise.

Maximize performance with proactive audit and analysis, backed by fast problem response.

Leverage best practices that include DSC’s proprietary processes and intellectual capital gathered from numerous successful engagements.

Speed time to value with DSC’s tools, procedures and assistance.

Minimize risk by adopting a proactive service management approach.
  
COMPETITION

High Availability and Virtual Disaster Recovery Services:

The following vendors are competition to DSC within this service offering: HP Services, IBM Business Continuity and Recovery Services, and SunGard.  Recently these companies have expanded into data vaulting to target the smaller client base opportunity.

Data Vaulting:

a)  
Information Management and Protection Vendors: Vendors include EMC, i365, Symantec and CommVault.
b)  
Specialized Vendors: Venyu, which focuses on SMBs in the US.
c)  
Technology Providers / Service providersOEM-focused vendors may or may not be service providers, but they have access to a large business based on licensing their technology to other vendors.  This includes vendors such as CommVault and i365.  Symantec acquired online backup provider SwapDrive. i365, A Seagate Company, acquired EVault in January 2007, renaming it i365.  Connected Backup has an established enterprise customer base.  IBM Global Technology Services acquired Arsenal Digital Solutions in 2007, adding a range of Online backup services to its portfolio and rebranding it IBM Information Protection Services to Managed Data Vault.   Venyu offers two online backup and recovery services: AmeriVault-AV and AmeriVault-EV.  Its services protect PCs and servers, and while it focuses mostly on SMBs, it can also support Enterprises.
 
ITEM 1A.     RISK FACTORS
 
Not Applicable
 
ITEM 1B.     UNRESOLVED STAFF COMMENTS
 
Not Applicable.

 
8

 

ITEM 2.       DESCRIPTION OF PROPERTY
 
Our principal office is located at 401 Franklin Avenue, Garden City, NY 11530.  Our telephone number is (212) 564-4922.
 
ITEM 3.       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 our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
 
ITEM 4.       (REMOVED AND RESERVED)
 
PART II
  
ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
 LIMITED PUBLIC MARKET FOR COMMON STOCK
 A symbol was assigned for our securities so that our securities may be quoted for trading on the OTCBB under symbol DTST.  Minimal trading occurred through the date of this Report. There can be no assurance that a liquid market for our securities will ever develop. Transfer of our common stock may also be restricted under the securities or blue sky laws of various states and foreign jurisdictions. Consequently, investors may not be able to liquidate their investments and should be prepared to hold the common stock for an indefinite period of time. The company has conducted private stockholder sales to qualified investors for $2.2 million dollars over the last two years.
 
             
Year ended
 
Low Price
   
High Price
 
             
December 31, 2010
 
$
0.01
   
$
0.25
 
 
HOLDERS OF OUR COMMON STOCK
As March 17, 2011, we had 35 record holders of our Common Stock.
 
STOCK OPTION GRANTS
During the year ended December 31, 2010 the company issued 1,013,668 Common Stock Options and 3,014,438 in Common Stock Warrants with the Convertible Debt.
 
REGISTRATION RIGHTS
We have not granted registration rights to the selling shareholders or to any other persons.
 
ITEM 6.       SELECTED FINANCIAL DATA
Not applicable.

ITEM 7.       MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
 
COMPANY OVERVIEW
Data Storage Corpoation (DSC) is a provider of Hybrid Cloud solutions on a subscription basis in the USA and Canada and Professional Services focusing on data protection and business continuity that assist organizations in protecting their data, minimize downtime, ensure regulatory compliance and recover and restore data within their objectives.  Through our four data centers and by leveraging leading technologies, DSC delivers and supports a broad range of premium solutions for both Windows and IBM environments that assist clients save time and money, gain more control of and better access to data and enable the highest level of security for that data.

Headquartered in Garden City, N.Y., we offer solutions and services to healthcare, banking and finance, distribution services, manufacturing, construction, education, and government industries by leveraging leading technologies, such as virtualization, cloud computing and cloud storage.

Data Storage Corporation derives its revenues from the sale and subscription of services and solutions that provide businesses protection of critical electronic data. The company’s solutions include: offsite data protection and recovery services, High Availability (HA) replication services, email compliance solutions for e-discovery, continuous data protection, data de-duplication, virtualized system recovery and telecom recovery services. The Company has equipment in four Technical Centers: Westbury, New York; Fort Lauderdale, Florida; Boston, MA and Warwick, RI.

 
9

 

We service customers from our New York and Rhode Island premises which consist of modern offices and a technology suite adapted to meet the needs of a technology based business. Our mission is to provide a high level of service to organizations that need to ensure their data is intact and available upon demand.

Data Storage varies its use of resource, technology and work processes to meet the changing opportunities and challenges presented by the market and the internal customer requirements.   

RESULTS OF OPERATION
Year ended December 31, 2010 as compared to December 31, 2009
 
Net Sales.  Net sales for the year ended December 31, 2010 were $2,514,340, an increase of $1,929,055, or 329.6%, compared to $585,285 for the year ended December 31, 2009. The increase in sales is primarily attributable to our increased capacity in data backup and managed services with the acquisition of SafeData.
 
Cost of Sales. For the year ended December 31, 2010, cost of sales was $1,583,459, an increase of $1,123,656 from $459,803 for the year ended December 31, 2009.  The increase in cost of sales is directly attributable to the increase in sales and related costs over the prior period. The Company's gross margin increased to 37.0 % for the year ended December 31, 2010 as compared to 21.4% for the year ended December 31, 2009.  In connection with the acquisition, the Company was able to offer a broader spectrum of data backup and managed services at higher margins which increased overall margins over last year.
 
Operating Expenses.  For the year ended December 31, 2010 operating expenses were $2,295,753, an increase of $1,124,850 as compared to $1,170,903 for the year ended December 31, 2009. The majority of the increase in operating expenses for the year ended December 31, 2010 is a result of increased professional fees, amortization and commission expense in connection with the acquisition of SafeData.Professional fees increased $311,144 to $527,294 as compared to $216,150 for the year ended December 31, 2009. Amortization expense increased $116,646 to $125,911 as compared to $11,088 for the year ended December 31, 2009. Commission expense increased $78,675 to $120,161 as compared to $41,486 for the year ended December 31, 2009.
 
Interest Expense.  Interest expense for the year ended December 31, 2010 increased $302,995 to $307,981 from $4,986 for the year ended December 31, 2009. For the year ended December 31, 2010, interest expense was primarily related to the issuance of convertible debt and the related interest and amortization of debt discount. For the year ended December 31, 2009, interest expense was related to a $100,000 line of credit which was opened January 31, 2008.
 
Impairment of intangible asset.  For the year ended December 31, 2010, the company determined that the intangible asset related to the NovaStor customer list was permanently impaired and wrote off the unamortized balance of $126,130.

Net Loss.  Net loss for the year ended December 31, 2010 was ($1,798,981) an increase of $748,766 as compared to net loss of ($1,050,215) for the year ended December 31, 2009.
 
Liquidity and Capital Resources
The financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business.  The Company has been funded by the CEO and largest shareholder combined with private placements of the company stock. The Company has been successful in raising money as needed.  Further it is the intention of management to continue to raise money through stock issuances and to fund the Company on an as needed basis.  In 2011 we intend to continue to work to increase our presence in the IBM marketplace utilizing our increased technical expertise, capacity for data storage and managed services with our asset acquisition of SafeData.
 
To the extent we are successful in growing our business, identifying potential acquisition targets and negotiating the terms of such acquisition, and the purchase price includes a cash component, we plan to use our working capital and the proceeds of any financing to finance such acquisition costs. 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.
 
During the year ended December 31, 2010 the company’s cash increased $22,235 to $50,395 from $28,160 at December 31, 2009. Net cash of $22,548 was used in the Company’s operating activities and cash of $1,266,200 was used in investing activities, primarily for the acquisition of the net assets of SafeData, LLC. Net cash of $1,310,983 was provided by the company’s financing activities, $1,300,000 of the financing was from the issuance of convertible debt and stock, offset by $224,260 in payment of capital lease obligations.
 
The Company's working capital was ($2,543,851) at December 31, 2010, decreasing $2,374,130 from ($169,721) at December 31, 2009. The decrease is primarily due to accounts payable, leases payable, loan payable and deferred revenue recorded in connection with the acquisition of the net assets of SafeData.

 
10

 

CRITICAL ACCOUNTING POLICIES
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue, and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
 
Our significant accounting policies are summarized in Note 1 of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.

Recently Issued and Newly Adopted Accounting Pronouncements
 
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605,  Revenue Recognition  ) (“ASU 2009-13”) and ASU 2009-14,  Certain Arrangements That Include Software Elements  , (amendments to FASB ASC Topic 985,  Software  ) (“ASU 2009-14”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company does not expect adoption of ASU 2009-13 or ASU 2009-14 to have a material impact on the Company’s results of operations or financial condition. 
 
OFF BALANCE SHEET TRANSACTIONS
We have no off-balance sheet arrangements.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
We do not hold any derivative instruments and do not engage in any hedging activities.
 
ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 
 
Index to the Financial Statements
 
Page
       
 
Report of Independent Registered Public Accounting Firm
 
12
       
 
Consolidated Balance Sheets
 
13
       
 
Consolidated Statements of Operations
 
14
       
 
Consolidated Statements of Cash Flows
 
15
       
 
Consolidated Statements of Stockholders' Equity
 
16
       
 
Notes to Consolidated Financial Statements
 
17-29

 
11

 

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and
Stockholders of Data Storage Corporation
 
We have audited the accompanying balance sheets of Data Storage Corporation as of December 31, 2010 and 2009, and the related statements of income, stockholders’ equity and cash flows for each of the years then ended. Data Storage Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Data Storage Corporation as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in then ended in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Rosenberg Rich Baker Berman & Company
 
Somerset, New Jersey
April 15, 2011
 

 
12

 

DATA STORAGE CORPORATION AND SUBSIDIARY
BALANCE SHEETS
 
December 31,
   
   
2010
   
2009
   
ASSETS
             
Current Assets:
             
Cash and cash equivalents
 
$
50,395
   
$
              28,160
 
Accounts receivable (less allowance for doubtful
               
accounts of $17,000 in 2010 and $26,472 in 2009)
   
387,697
     
              30,378
 
Deferred compensation
   
          17,562
     
            101,160
 
Prepaid expense
   
              63,215
     
              21,103
 
Total Current Assets
   
            518,869
     
            180,801
 
                 
Property and Equipment:
               
Property and equipment
   
         2,031,771
     
         1,221,706
 
Less—Accumulated depreciation
   
        (1,200,448
   
          (913,383
)
Net Property and Equipment
   
           831,323
     
            308,323
 
                 
Other Assets:
               
Goodwill
   
2,201,828
     
-
 
Deferred compensation
   
              44,176
     
              28,628
 
Other assets
   
              18,652
     
              11,760
 
Intangible Assets, net
   
1,169,404
     
            135,931
 
Employee loan
   
              23,000
     
              23,000
 
 Total Other Assets
   
3,457,060
     
            199,319
 
                 
Total Assets
   
4,807,252
     
            688,443
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
               
Current Liabilities:
               
Accounts payable and accrued expenses
   
1,070,036
     
              82,698
 
Credit line payable
   
              99,970
     
              99,970
 
Due to related party
   
52,718
     
              34,718
 
Dividend payable
   
             125,000
     
              75,000
 
Deferred revenue
   
             461,724
     
              36,869
 
Leases payable
   
325,934
     
-
 
Loans payable
   
122,251
     
-
 
Contingent consideration in SafeData acquisition
   
805,087
     
-
 
Total Current Liabilities
   
3,062,720
     
            350,522
 
                 
Deferred rental obligation
   
26,064
     
              28,642
 
Due to officer
   
            614,628
     
            379,025
 
Loan payable long term
   
151,491
     
-
 
Leases payable long term
   
115,533
     
-
 
Convertible debt
   
18,928
     
-
 
Convertible debt – related parties
   
227,138
     
-
 
Total Long Term Liabilities
   
         1,153,782
     
            407,667
 
  Total Liabilities
   
4,216,502
     
            758,189
 
                 
Commitments and contingencies
   
 -
     
 -
 
                 
Stockholders’ Equity (Deficit):
               
Preferred Stock, $.001 par value; 10,000,000 shares authorized;
   
                1,402
     
                1,402
 
1,401,786 issued and outstanding in each period
               
Common stock, par value $0.001; 250,000,000 shares authorized;
   
17,861
     
              13,670
 
17,127,541 and 13,670,399  shares issued and outstanding, respectively
               
Additional paid in capital
   
         7,313,844
     
         4,808,558
 
Accumulated deficit
   
       (6,742,357
   
       (4,893,376
)
Total Stockholders' Equity (Deficit)
   
590,750
     
            (69,746
)
                 
Total Liabilities and Stockholders' Equity (Deficit)
 
$
4,807,252
   
$
            688,443
 
The accompanying notes are an integral part of these consolidated financial statements
   

 
13

 

DATA STORAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
             
             
   
Year Ended December 31,
 
   
2010
   
2009
 
             
Sales
 
$
2,514,340
   
$
585,285
 
                 
Cost of sales
   
1,583,459
     
459,803
 
                 
Gross Profit
   
930,881
     
125,482
 
                 
Selling, general and administrative
   
2,295,753
     
1,170,903
 
                 
Loss from Operations
   
(1,364,872
)
   
(1,045,421
)
                 
Other Income (Expense)
               
Impairment of intangible asset
   
(126,130
)
   
-
 
  Interest income
   
2
     
192
 
  Interest expense
   
(307,981
)
   
(4,986
)
  Total Other (Expense)
   
(434,109
)
   
(4,794
)
                 
Loss before provision for income taxes
   
(1,798,981
)
   
(1,050,215
)
                 
Provision for income taxes
   
-
     
-
 
                 
Net Loss
   
(1,798,981
)
   
(1,050,215
)
                 
Preferred Stock Dividend
   
(50,000
)
   
(50,000
)
                 
Net Loss Available to Common Stockholders
 
$
(1,848,981
)
 
$
(1,100,215
)
                 
Loss per Share – Basic and Diluted
 
$
(0.12
)
 
$
(0.08
)
                 
Weighted Average Number of Shares - Basic and Diluted
   
15,538,129
     
12,944,647
 
                 
 
The accompanying notes are an integral part of these consolidated financial statements

 
14

 

DATA STORAGE CORPORATION AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
             
   
Year Ended December 31,
 
   
2010
   
2009
 
Cash Flows from Operating Activities:
           
Net loss
 
$
(1,798,981
)
 
$
(1,050,215
)
Adjustments to reconcile net loss to net cash used in operating activities:
         
Depreciation and amortization
   
412,976
     
131,361
 
Allowance for doubtful accounts
   
(9,742
)
   
(18,058
)
Stock based compensation
   
439,420
     
51,902
 
Amortization of debt discount
   
166,121
     
-
 
Deferred compensation
   
68,050
     
-
 
Impairment of intangible asset
   
126,130
     
-
 
Changes in Assets and Liabilities:
               
Accounts receivable
   
(91,101
   
41,047
 
Prepaid expenses
   
(6,229
)
   
(21,103
)
Other assets
   
3,608
     
1,708
 
Accounts payable& accrued expenses
   
768,825
     
21,865
 
Deferred revenue
   
(117,048
   
24,079
 
Deferred rent
   
(2,577
   
28,642
 
Due to related party
   
18,000
     
16,718
 
Net Cash Used in Operating Activities
   
(22,548
)
   
(772,054
)
                 
Cash Flows from Investing Activities:
               
Cash paid for equipment
   
(36,246
)
   
(105,722
)
Cash paid for customer list
   
-
     
(30,000
)
Cash paid for acquisition of SafeData, LLC net assets
   
(1,229,954
)
   
-
 
Net Cash Used in Investing Activities
   
(1,266,200
)
   
(135,722
)
                 
Cash Flows from Financing Activities:
               
Issuance of convertible debt
   
1,000,000
     
-
 
Advances from officer
   
235,603
     
371,775
 
Repayments of capital lease obligations
   
(224,620
   
-
 
Options exercised
   
-
     
100
 
Proceeds from the issuance of common stock
   
300,000
     
275,000
 
Net Cash Provided by Financing Activities
   
1,310,983
     
646,875
 
                 
Increase in Cash and Cash Equivalents
   
22,235
     
(260,901
)
                 
Cash and Cash Equivalents, Beginning of Year
   
28,160
     
289,061
 
                 
Cash and Cash Equivalents, End of Year
 
$
50,395
   
$
28,160
 
                 
                 
Supplemental Disclosure of Cash Flow Information:
               
                 
Cash paid for interest
 
$
24,906
   
$
4,986
 
                 
Cash paid for income taxes
 
$
-
   
$
-
 
                 
                 
Noncash Investing and Financing Activities:
               
                 
Accrual of Preferred Stock Dividend
 
$
50,000
   
$
50,000
 
                 
Issuance of capital stock in connection with acquisition of SafeData, LLC
 
$
850,000
   
$
-
 
Warrants issued with convertible debt
 
$
920,056
   
$
-
 
 
The accompanying notes are an integral part of these consolidated financial statements

 
15

 

DATA STORAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


   
Preferred Stock
   
Common Stock
   
Additional Paid in
   
Accumulated
       
Description
 
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
                                           
Balance
December 1, 2008
    1,401,786     $ 1,402       12,473,214     $ 12,73     $ 4,352,966     $ (3,796,161 )   $ 573,680  
                                                         
Common Stock issued in private placement
    -       -       82,185       842       274,158       -       275,000  
                                                         
Stock based compensation
    -       -       350,000       350       181,339       -       181,689  
                                                         
Stock options exercised
    -       -       5,000       5       95       -       100  
                                                         
Net loss
    -       -       -       -       -       (1,050,215 )     (1,050,215 )
                                                         
Preferred stock dividend
    -       -       -       -       -       (50,000 )     (50,000 )
                                                         
Balance
December 31, 2009
    1,401,786       1,402       13,670,399       13,670       4,808,558       (4,893,376 )     (69,746 )
                                                         
Common stock issued in private placement
    -       -       600,000       600       299,400       -       300,000  
                                                         
Common stock issued in SafeData acquisition
    -       -       2,428,572       2,429       847,571       -       850,000  
                                                         
Stock Compensation
    -       -       1,062,857       1,063       370,937       -       372,000  
                                                         
Stock based compensation
    -       -       -       -       67,421       -       67,421  
                                                         
Warrants issued with convertible debt
    -       -       -       -       920,056       -       920,056  
                                                         
                                                         
Stock Options exercised
    -       -       98,505       99       (99 )     -       -  
                                                         
Net loss
                                            (1,798,981 )     (1,798,981 )
                                                         
Preferred stock dividend
    -       -       -       -       -       (50,000 )     (50,000 )
                                                         
Balance
December 31, 2010
    1,401,786     $ 1,402       17,860,331     $ 17,861       7,313,844       (6,742,357 )     590,750  

The accompanying notes are an integral part of these consolidated financial statements

 
16

 

DATA STORAGE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
  
Note 1 – Description of business, organization and other matters

Description of Business                                                       

Data Storage Corporation, (the “Company”) who provides Hybrid Cloud solutions and services is the result of several transactions: a share exchange with Euro Trend Inc. Incorporated on March 27, 2007 under the laws of the State of Nevada; Ownership of DSC incorporated in 2001; and an Asset Acquisition of SafeData in 2010. On October 20, 2008 we completed a Share Exchange Agreement whereby we acquired all of the outstanding capital stock and ownership interests of Data Storage Corporation. In exchange we issued 13,357,143 shares of our common stock to the Data Storage Corporation’s Shareholders, a Cloud Storage and SaaS organization, providing services for Disaster Recovery. This transaction was accounted for as a reverse merger for accounting purposes. Accordingly, Data Storage Corporation, the accounting acquirer, is regarded as the predecessor entity.On June 17, 2010 we entered into an Asset Purchase Agreement with SafeData, a provider of Cloud Storage and Cloud Computing mostly to IBM’s Mid-Range Equipment users, namely, AS400 and iSeries users under which we acquired all right, title and interest in the end user customer base of SafeData and all related current and fixed assets and contracts including the transfer of all of SafeData’s current liabilities arising out of the business or the assets acquired. Pursuant to the Agreement, wepaid an aggregate purchase price equal to $3,000,000. Giving effect to certain holdback and contingency clauses as defined in the agreement, we paid $1,229,952 in cash and $850,000 in shares of our common stock as well as assumption of SafeData Accounts Payable and Receivables.See also Note 11.

Data Storage Corporation was incorporated in Delaware on August 29, 2001. Data Storage Corporation is a provider of data backup services.  The Company specializes in secure disk-to-disk data backup and restoration solutions for disaster recovery, business continuity, and regulatory compliance.
 
Data Storage Corporation (DSC) is a provider of Hybrid Cloud solutions on a subscription basis in the USA and Canada and Professional Services focusing on data protection and business continuity that assist organizations in protecting their data, minimize downtime, ensure regulatory compliance and recover and restore data within their objectives.  Through our four data centers and by leveraging leading technologies, DSC delivers and supports a broad range of premium solutions for both Windows and IBM environments that assist clients save time and money, gain more control of and better access to data and enable the highest level of security for that data.

Data Storage Corporation derives its revenues from the sale and subscription of services and solutions that provide businesses protection of critical electronic data. The company’s solutions include: offsite data protection and recovery services, High Availability (HA) replication services, email compliance solutions for e-discovery, continuous data protection, data de-duplication, virtualized system recovery and telecom recovery services. The Company has equipment in four Technical Centers: Westbury, New York; Fort Lauderdale, Florida; Boston, MA and Warwick, RI.

Liquidity
 
The financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern, which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. For the year ended December 31, 2010, the Company has generated revenues of $2,514,340 but has incurred a net loss of $1,798,981. Its ability to continue as a going concern is dependent upon achieving sales growth, reduction of operation expenses and ability of the Company to obtain the necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due, and upon profitable operations.  The Company has been funded by the CEO and largest shareholder since inception as well as several Directors.  It is the intention of Charles Piluso to continue to fund the Company on an as needed basis.
 
Stock Based Compensation
 
The Company follows the requirements of FASB ASC 718-10-10, Share Based Payments with regard to stock-based compensation issued to employees.  The Company has various employment agreements and consulting 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 that was determined by using the most recent private placement price on the day the stock was awarded multiplied by the number of shares awarded.

Recently Issued and Newly Adopted Accounting Pronouncements
 
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605,  Revenue Recognition  ) (“ASU 2009-13”) and ASU 2009-14,  Certain Arrangements That Include Software Elements, (amendments to FASB ASC Topic 985,  Software  ) (“ASU 2009-14”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company does not expect adoption of ASU 2009-13 or ASU 2009-14 to have a material impact on the Company’s results of operations or financial condition. 

 
17

 
 
Note 2 - Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiary, Data Storage Corporation, a Delaware Corporation.  All significant inter-company transactions and balances have been eliminated in consolidation.
 
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 year ended December 31, 2010, the company had one customer that represented approximately 11% of sales; for the year end December 31, 2009 the company had two customers that represented 21% of sales.
 
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 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 5 to 7 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 December 31, 2010, the Company had a full valuation allowance against its deferred tax assets.
 
Estimated Fair Value of Financial Instruments
 
The Company's financial instruments include cash, accounts receivable and accounts payable, line of credit and due to related parties. Management believes the estimated fair value of these accounts at December 31, 2010 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.

 
18

 

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.
 
Revenue Recognition
 
The Company’s revenues consist principally of cloud storage and cloud computing revenues, SaaS and IaaS. Storage revenues consist of monthly charges related to the storage of materials or data (generally on a per unit basis).  Sales are generally recorded in the month the service is provided.  For customers who are billed on an annual basis, deferred revenue is recorded and amortized over the life of the contract. Set up fees charged in connection with storage contracts are deferred and recognized on a straight line basis over the life of the contract.

 Advertising Costs
 
The Company expenses the costs associated with advertising as they are incurred.  The Company incurred $70,211 and $30,399 for advertising costs for the years ended December 31, 2010 and 2009, respectively.

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 inclusion of the potential common shares to be issued have an anti-dilutive effect on diluted loss per share and therefore they are not included in the calculation. Potentially dilutive securities at December 31, 2010 include 3,225,865 warrants and 3,670,169 options.

Note 3 - Property and Equipment
 
Property and equipment, at cost, consist of the following:
 
  
December 31,
 
 
2010
   
2009
 
Storage equipment
  $ 1,613,259     $ 838,912  
Website and software
    169,833       166,933  
Furniture and fixtures
    22,837       22,837  
Computer hardware and software
    84,592       81,794  
Data Center
    141,250       111,230  
      2,031,771       1,221,706  
Less: Accumulated depreciation
    1,200,448       913,383  
Net property and equipment
  $ 831,323     $ 308,323  
 
Depreciation expense for the years ended December 31, 2010 and 2009 was $287,065 and $131,361, respectively.

 
19

 

Note 4- Goodwill and Intangible Assets
 
Goodwill and Intangible assets consisted of the following:
 
   
Estimated life in years
   
December 31, 2010
 
         
Gross
amount
   
Accumulated
Amortization
 
                   
Goodwill
 
Indefinite
    $ 2,201,828       -  
                       
Intangible assets not subject to amortization
                     
Trademarks
 
Indefinite
      279,268       -  
Intangible assets subject to amortization
                     
Customer list
   5 - 15       854,178       190,690  
Non-compete agreements
   4       262,147       35,499  
                         
Total Intangible Assets
            1,395,593       226,189  
                         
Total Goodwill and Intangible Assets
          $ 3,897,421     $ 226,189  
 
Scheduled amortization over the next five years as follows:

Twelve months ending December 31,
       
2011
    $ 214,357  
2012
      214,356  
2013
      214,356  
2014
      178,858  
2015
      68,209  
 
Total
  $ 890,136  

Amortization expense for the year ended December 31, 2010 and 2009 were $125,911 and $14,186 respectively
 
Note 5 – Capital lease obligations
 
The Company acquired capital leases in the acquisition of SafeData. The economic substance of the leases is that the Company is financing the acquisitions through the leases and accordingly, they are recorded in the Company’s assets and liabilities. The leases are payable to Systems Trading, Inc. and IBM with combined monthly installments of $41,590 through various dates in2011 and 2012. The leases are secured with the computer equipment.  Interest rates on capitalized leases vary from 6%-8% and are imputed based on the lower of the Company’s incremental borrowing rate at the inception of each lease or the lessor’s implicit rate of return.
 
Future minimum lease payments under the capital leases are as follows:

As of December 31, 2010
  $ 512,564  
Less amount representing interest
    (71,097 )
Total obligations under capital leases
    441,467  
Less current portion of obligations under capital leases
    (325,934 )
Long-term obligations under capital leases
  $ 115,533  
 
Long-term obligations under capital leases at December 31, 2010 mature as follows:
 
For the year ending December 31, 2011
  $ 325,934  
2012
    84,804  
2013
    30,729  
         
    $ 441,467  

 
20

 
 
The assets held under the capital leases are included in property and equipment as follows:
 
Equipment
  $ 773,819  
Less: accumulated depreciation
    163,734  
         
    $ 610,085  

Note 6 - Commitments and Contingencies
 
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 .5%, 3.75% at December 31, 2010, and is secured by all assets of the Company and personally guaranteed by the Company’s principal shareholder. As of December 31, 2010, the Company owed $99,970 under this agreement.

Loan Payable

On August 04, 2010, the Company entered into a note payable with Systems Trading, LLC in settlement of past due balances owed by SafeData related to certain capital leases. The note bears interest at 4%, and is due in 24 equal installments of $11,927 commencing February 4, 2011 through January 04, 2013. The note payable balance as of December 31, 2010 is $273,743.
 
Total maturities of the long term debt are as follows:

For the twelve months ended December 31,
     
2011
  $ 122,251  
2012
    139,604  
2013
    11,887  
         
    $ 273,742  

Operating Leases

The Company currently leases office space in Garden City, NY and Warwick, RI.


The lease for office space in Warwick, RI calls for monthly payments of $4,800 plus a portion of the operating expenses through February 2012.

The lease for office space in Garden City, NY calls for escalating monthly payments ranging from $6,056 to $6,617 plus a portion of the operating expenses through June 2014.

Minimum obligations under these lease agreements are as follows:

Twelve Months Ending December 31,
     
2011
  $ 131,367  
2012
    85,580  
2013
    78,259  
2014
    39,708  
         
    $ 334,914  
 
Rent expense for the years ended December 31, 2010 and December 31, 2009 was $116,203 and $56,301 respectively.
 
 
21

 

 Note 7 – Convertible debt

Related parties

On May 21, 2010 the Company entered into a security purchase agreements with its Chief Executive Officer for $538,463 of convertible notes payable along with 1,623,159 warrants to purchase common stock of the company at $.01. Each note is convertible into common stock at an exercise price of $.39.

Unrelated parties

On May 21, 2010 the Company entered into two security purchase agreements with independent investors for $461,537 of convertible notes payable along with 1,391,278 warrants to purchase common stock of the company at $.01. Each note is convertible into common stock at an exercise price of $.39.

At their commitment date, each convertible promissory note was tested for a beneficial conversion feature by comparing the effective conversion price to the fair value of the Company’s stock. The Company recognized a beneficial conversion feature of $410,256 which was recorded as a discount to the convertible promissory notes with an offset to additional paid-in capital. Additionally, the relative fair value of the warrants of $509,800 was calculated and recorded as a further reduction to the carrying amount of the convertible debt and as an addition to paid-in capital. The Company is amortizing the debt discount over the term of the debt. Amortization of debt discount for the year ended December 31, 2010 was $166,121.

Note 8 - Stockholders’ Equity
 
On May 21, 2010 the company entered into three security purchase agreements totaling $1,300,000. The agreements were with the chairman of the company for $700,000 and two unrelated individuals for $500,000 and $100,000. The security purchase agreements consisted of the issuance of common stock, convertible debentures and warrants as follows:

Common Stock
600,000 shares @ $0.50
Convertible Debentures
 $1,000,000
Warrants
3,014,437 shares @ $0.01

See Note 7 regarding the Convertible debt and warrants

Capital Stock
 
The Company has 260,000,000 shares of capital stock authorized, consisting of 250,000,000 shares of Common Stock, par value $0.001, 10,000,000 shares of Series A Preferred Stock, par value $0.001 per share.
 
Common Stock Options
 
During the year ended December 31, 2010 the Company issued 1,013,668 common stock options. 
 
A summary of the Company's option activity and related information follows:
 
   
Number of Shares Under Options
   
Range of
Option PricePer Share
   
Weighted Average Exercise Price
 
Options Outstanding at January 1, 2010
   
2,929,434
   
$
.02 - .36
   
$
0.093
 
   Options Granted
   
1,013,668
     
0.31 – 0.36
     
0.35
 
   Options Exercised
   
(103,505
   
0.02
     
.02
 
   Options Cancelled
   
(169,428
)
   
0.32
     
0.32
 
Options Outstanding at December 31, 2010
   
3,670,169
     
.02 - .36
     
0.137
 
                         
 Options Exercisable at December 31, 2010
   
2,558,269 
     
.02 - .36 
     
0.137
 

 
22

 

Share-based compensation expense for options totaling $67,420 was recognized in our results for the year ended December 31, 2010 is based on awards vested. The options were valued at the grant date at $366,014.

The valuation methodology used to determine the fair value of the options issued during the year was the Black-Scholes option-pricing model, an acceptable model in accordance with FASB ASC 718-10-10 Share Based Payments.  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 warrants.

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 Warrants and is calculated by using the average daily historical stock prices through the day preceding the grant date
 
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 estimated volatility is an average of the historical volatility of peer entities whose stock prices were publicly available.  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.
 
The weighted average fair value of options granted and the assumptions used in the Black-Scholes model during the year ended December 31, 2010 and 2009 are set forth in the table below.

   
2010
   
2009
 
Weighted average fair value of options granted
 
$
0.35
   
$
0.29
 
Risk-free interest rate
   
2.54 – 3.57
%
   
3.07 - 3.85
%
Volatility
   
77.45 – 117.62
%
   
78.36 - 85
%
Expected life (years)
   
10
     
10
 
Dividend yield
   
0.00
%
   
0.00
%
 
As of December 31, 2010, there was approximately $272,282 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 4.0 years.

Common Stock Warrants
 
During the year ended December 31, 2010 the Company issued 3,014,438 common stock warrants with the convertible debt. 
 
A summary of the Company's warrant activity and related information follows:
 
   
Number of Shares Under Warrants
   
Range of
Warrants PricePer Share
   
Weighted Average Exercise Price
 
Warrants Outstanding at January 1, 2010
   
211,427
   
$
.02
   
$
.02
 
   Warrants Granted
   
3,014,438
     
.01
     
.01
 
   Warrants Exercised
   
-0-
     
-0-
     
-0-
 
   Warrants Cancelled
   
-0-
     
-0-
     
-0-
 
Warrants Outstanding at December 31, 2010
   
3,225,865
     
0.01 – 0.02
     
.01
 
                         
Warrants exercisable at December 31, 2010
   
3,225,865
     
0.01 – 0.02
     
.01
 
 
The valuation methodology used to determine the fair value of the warrants issued during the year was the Black-Scholes option-pricing model, an acceptable model in accordance with FASB ASC 718-10-10 Share Based Payments.  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 warrants.

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 Warrants and is calculated by using the average daily historical stock prices through the day preceding the grant date

 
23

 
 
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 estimated volatility is an average of the historical volatility of peer entities whose stock prices were publicly available.  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.

The weighted average fair value of options granted and the assumptions used in the Black-Scholes model during the year ended December 31, 2010 is set forth in the table below.

   
2010
 
Weighted average fair value of options granted
 
$
.01
 
Risk-free interest rate
   
3.32
%
Volatility
   
85
%
Expected life (years)
   
10
 
Dividend yield
   
0.00
%

Preferred Stock
 
Liquidation preference
 
Upon any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any Common Stock, the holders of Series A Preferred Stock shall be entitled to be paid out of the assets of the Corporation legally available for distribution to stockholders, for each share of Series A Preferred Stock held by such holder, an amount per share of Series A Preferred Stock equal to the Original Issue Price for such share of Series A Preferred Stock plus all accrued and unpaid dividends on such share of Series A Preferred Stock as of the date of the Liquidation Event.

Conversion
 
The number of shares of Common Stock to which a share of Series A Preferred Stock may be converted shall be the product obtained by dividing the Original Issue Price of such share of Series A Preferred Stock by the then-effective Conversion Price (as defined below) for such share of Series A Preferred Stock. The conversion price for the Series A Preferred Stock shall initially be equal to $.39 and shall be adjusted from time to time.
 
Voting
 
Each holder of shares of Series A Preferred Stock shall be entitled to the number of votes, upon any meeting of the stockholders of the Corporation (or action taken by written consent in lieu of any such meeting) equal to the number of shares of Class B Common Stock into which such shares of Series A Preferred Stock could be converted
 
Dividends
 
Each share of Series A Preferred Stock, in preference to the holders of all Common Stock (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.
 
Note 9 - Related Party Transactions
 
Due to related party represents rent accrued to a partnership controlled by the Chief Executive Officer of the company for the New York Data Center.  The rent expense for the data center is $1,500 per month.
 
During the year ended December 31, 2010 the Chief Executive Officer advanced the Company $235,603. As of December 31, 2010 the Company owed the Chief Executive Officer $614,628. Since March 2010 no loans have been extended by the CEO. These advances bear no interest and have no stated terms of repayment.

 
24

 

Note 10 - Income Taxes
 
The components of the provision (benefit) for income taxes are as follows:
 
  
 
Years Ended December 31,
 
   
2010
   
2009
 
CURRENT
           
Federal
 
$
-0-
   
$
-0-
 
State
   
-0-
     
-0-
 
Total current tax provision
   
-0-
     
-0-
 
                 
DEFERRED
               
Federal
   
-0-
     
-0-
 
State
   
-0-
     
-0-
 
Total deferred tax benefit
   
-0-
     
-0-
 
Total tax provision (benefit)
 
$
-0-
   
$
-0-
 
                 
Temporary differences:
               
                 
Deferred Tax Assets:
               
                 
Net operating loss carry-forward
 
$
(1,273,478
)
 
$
(554,286
)
Less: valuation allowance
   
1,273,478
     
554,286
 
Deferred tax assets
   
-0-
     
-0-
 
Deferred tax liabilities
   
-0-
     
-0-
 
                 
Net deferred tax asset
 
$
-0-
   
$
-0-
 
 
The Company had federal and state net operating tax loss carry-forwards of approximately $3,183,696 and $2,165,106, respectively as of December 31, 2010.  The tax loss carry-forwards are available to offset future taxable income with the federal and state carry-forwards beginning to expire in 2028.
 
In 2010, net deferred tax assets did not change due to the full allowance.  The gross amount of the asset is entirely due to the Net operating loss carry forward.  The realization of the tax benefits is subject to the sufficiency of taxable income in future years.  The combined deferred tax assets represent the amounts expected to be realized before expiration.
 
The Company periodically assesses the likelihood that it will be able to recover its deferred tax assets.  The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits.  As a result of this analysis of all available evidence, both positive and negative, the Company concluded that it is more likely than not that its net deferred tax assets will ultimately not be recovered and, accordingly, a valuation allowance was recorded as of December 31, 2010.

The difference between the expected income tax expense (benefit) and the actual tax expense (benefit) computed by using the Federal statutory rate of 34% is as follows:

   
Year Ended December 31,
 
   
2010
   
2009
 
             
Expected income tax benefit (loss) at statutory rate of 34%
 
$
611,654
   
$
346,661
 
State and local tax benefit, net of federal
   
107,538
     
61,175
 
Change in valuation account
   
(719,192
)
   
(407,836
)
                 
Income tax expense (benefit)
 
$
-0-
   
$
-0-
 
 
 
25

 

Note 11 - Acquisition
 
On June 17, 2010, our wholly owned subsidiary Data Storage Corporation, a Delaware corporation (“Data Storage DE”) and SafeData, LLC, a Delaware Limited Liability Company (“SafeData”) entered into an Asset Purchase Agreement (the “Agreement”); setting forth the acquisition of SafeData’s assets. Data Storage DE and its parent Data Storage Corporation is hereinafter referred to as the “Company” or “Data Storage.”

As described above, on June 17, 2010, SafeData agreed to sell, transfer, assign, and deliver to the Company all right, title and interest in the end user customer base of SafeData (the “Business”) and all related current and fixed assets and contracts related to the Business. These assets include, but not limited to, all of SafeData’s accounts receivable and intellectual property. Additionally, SafeData transferred to the Company all of their current liabilities to the extent arising out of the business or the assets.

Pursuant to the Agreement, the Company paid an aggregate purchase price for the Assets equal to $3,000,000 (the “Purchase Price”) with $2,000,000 paid in cash and $1,000,000 in shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) valued at $0.35 per share or 2,857,142 shares of Common Stock. Upon Closing (as defined in the Agreement), a certain portion of the Purchase Price was deferred subject to certain holdback and contingency clauses contained in the Agreement.  Total price paid for SafeData Assets in the Acquisition was $3 million dollars.

The following sets forth the components of the purchase price:

Purchase price:
     
Cash paid to seller, less credit threshold adjustment of $70,047
 
$
1,229,952
 
Stock issued to seller
   
850,000
 
Holdback price adjustments
   
779,437
 
Total purchase price
   
2,859,389
 
         
Assets acquired:
       
Accounts Receivable
   
259,476
 
Prepaid Expenses
   
35,883
 
Fixed Assets
   
773,819
 
Security Deposits
   
10,500
 
Total assets acquired
   
1,079,678
 
         
Liabilities assumed:
       
Accounts payable
   
499,641
 
Capital Lease Obligation
   
666,087
 
Deferred Revenue
   
537,016
 
Total liabilities assumed
   
1,702,744
 
         
Net assets acquired
   
(623,066
)
         
Excess purchase price
 
$
3,482,455
 
  
Based on an independent appraisal, the Company allocated $1,280,627 of the excess purchase price to intangible assets with the balance of $2,201,828 assigned to Goodwill. The consolidated financial statements presented include the results of operations for SafeData for the period from June 17, 2010 to December 31, 2010.

The intangible assets subject to amortization have been assigned useful lives as follows:

Customer list
5 years
Non-compete agreements
4 years

The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company and SafeData, LLC as though the acquisition had occurred as of January 1, 2009. The pro forma amounts give effect to appropriate adjustments of amortization of intangible assets and interest expense associated with the financing of the purchase. The pro forma amounts presented are not necessarily indicative of either the actual consolidated operation results had the acquisition transaction occurred as of January 1, 2009.

 
26

 

   
Year ended
 
   
December 31,
 
   
2010
   
2009
 
             
Revenues
 
$
3,768,030
   
$
1,594,651
 
                 
Net loss
   
(1,861,031
)
   
(1,076,069
)
                 
Loss per share of common stock
   
(0.11
)
   
(0.06
)
                 
Basic and Diluted
   
17,127,541
     
18,128,809
 
 
Note 12 – Subsequent Events

On March 1, 2011, the company completed an equity raise of $1.5 million dollars with an independent investor.
 
Note 13 – Restatement of Previously Issued Financial Statements

On March 28, 2011, Management of Data Storage Corporation (the “Company”), after consulting with its independent registered public accounting firm, concluded that the Company’s previously issued financial statements included in its quarterly interim period report previously reported on Form 10-Q for the period ended September 30, 2010, should no longer be relied upon due to the discovery of the issuance of a stock grant that was omitted from the financial results for the third quarter in error.

The tables below summarize the impact of the restatements described above on financial information previously reported on the Company’s Forms 10-Q for the period ended September 30, 2010.

   
Restated
9-30-10
   
Adjustments
   
As Reported
9-30-10
 
BALANCE SHEET DATA
                 
Equity
                 
Common Stock
    17,284       157       17,127  
Additional Paid in Capital
    6,940,447       54,843       6,885,604  
Accumulated deficit
    (5,725,274 )     (55,000 )     (5,670,274 )
STATEMENT OF OPERATIONS
                       
Operating expense
                       
Selling, general and administrative
    1,364,579       55,000       1,309,579  
Net loss
    (794,397 )     55,000       (739,397 )
CASH FLOW DATA
                       
Net loss
    (794,397 )     (55,000 )     (739,397 )
Stock compensation
    55,000       55,000       -  
Net cash used in operating activities
    (128,458 )     -       (128,428 )
 
 
27

 

Balance Sheet (unaudited)9-30-10
 
   
Restated
9/30/09
 
Adjustments
 
Reported
9/30/09
 
Assets:
             
Current Assets:
             
Cash and cash equivalents
  $ 29,370       $ 29,370  
Accounts receivable, net
    341,777         341,777  
Deferred Compensation
    9,285         9,285  
Prepaid Expenses
    58,302         58,302  
Total Current Assets
    438,734         438,734  
Property and Equipment, net
    942,546         942,546  
Other Assets, net
    3,614,446         3,614,446  
Total Assets
    4,995,726         4,995,726  
Liabilities and stockholders’ equity (deficit)
                 
Current Liabilities
                 
Accounts payable and accrued expenses
    648,263         648,263  
Credit line payable
    92,470         92,470  
Due to related party
    48,218         48,218  
Dividend payable
    112,500         112,500  
Deferred revenue
    464,117         464,117  
Leases payable
    353,537         353,537  
Loans payable
    62,989         62,989  
Contingent consideration in SafeData acquisition
    763,807         763,807  
Total Current Liabilities
    2,545,901         2,545,901  
Deferred rental obligation
    26,974         26,974  
Due to officer
    614,628         614,628  
Loan payable long term
    208,034         208,034  
Leases payable long term
    181,306         181,306  
Contingent consideration in SafeData acquisition, long term
    15,630         15,630  
Convertible debt
    169,394         169,394  
Total liabilities
    3,716,867         3,716,867  
Stockholder’s equity:
                 
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 1,401,786 shares issued and outstanding
    1,402         1,402  
Common stock, par value $0.001; 250,000,000 shares authorized; 17,127,541 shares issued and outstanding
    17,284  
157
    17,127  
Additional paid in capital
    6,940,447  
54,843
    6,885,604  
Accumulated deficit
    (5,670,274 )
(55,000)
    (5,670,274 )
Total stockholders’ equity
    1,223,859         1,223,859  
Total liabilities and stockholders’ deficit
  $ 4,995,726       $ 4,995,726  
 
 
28

 

Statement of Operations – three and nine months ended 9-30-10 (unaudited)

   
Three Months ended
   
Nine Months ended
 
   
Restated
9/30/09
   
Adjustments
   
Reported
9/30/09
   
Restated
9/30/09
   
Adjustments
   
Reported
9/30/09
 
                                     
Sales
  $ 886,372           $ 886,372     $ 1,643,597           $ 1,643,597  
Cost of sales
    446,991             446,991       956,070             956,070  
Gross profit
    439,381             439,381       687,527             687,527  
Selling, general and administrative
    671,305       55,000       616,305       1,364,579       55,000       1,309,579  
Loss from operations
    (231,924 )             (176,924 )     (677,052 )             (622,052 )
Interest expense
    (97,634 )             (97,634 )     (117,345 )             (117,345 )
Loss before provision for income taxes
    (329,558 )             (274,558 )     (794,397 )             (739,397 )
Provision for income taxes
    -               -       -               -  
Net Loss
    (329,558 )             (274,558 )     (794,397 )             (739,397 )
Preferred stock dividend
    (12,500 )             (12,500 )     (37,500 )