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EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - Data Storage Corpf10k2011ex31i_datastorage.htm
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EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT - Data Storage Corpf10k2011ex32i_datastorage.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, 2011
 
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 per share
OTC.BB
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act. Yeso  No x
 
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   No x
 
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).Yes x 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, 2011: $3,940,323
 
Aggregate market value of the voting common stock held by non-affiliates of the registrant as of December 31, 2011, was $2,951,227
 
Number of shares of the registrant’s common stock outstanding as of April 12, 2012 was 28,912,712
 
Transitional Small Business Disclosure Format: Yes   No 
 
 
 

 
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 Corporations Business
3
Data Storage Corporations Services and Solutions
5
Competition
8
Principal Competitors by Service Sector
8
   
ITEM 1A.     RISK FACTORS
9
   
ITEM 1B.      UNRESOLVED STAFF COMMENTS
9
   
ITEM 2.        DESCRIPTION OF PROPERTY
9
   
ITEM 3.        LEGAL PROCEEDINGS
9
   
ITEM 4.        MINE SAFETY DISCLOSURES
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.        MANAGEMENTS 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
   
ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
34
   
ITEM 9A.     CONTROLS AND PROCEDURES
34
   
PART III
35
   
ITEM 10.      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
35
   
ITEM 11.      EXECUTIVE COMPENSATION
42
Summary Compensation Table
42
   
ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
46
   
ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTION, AND DIRECTOR INDEPENDENCE
47
   
ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES
47
   
PART IV
48
   
ITEM 15.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
48
   
SIGNATURES
49
 
 
1

 
 
PART I
 
ITEM 1.       DESCRIPTION OF BUSINESS
 
Overview
 
CORPORATE HISTORY

Data Storage Corporation (DSC), a cloud storage and cloud computing organization focused on disaster recovery and business continuity 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 Data Storage Corporation 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 DSC. In exchange we issued 13,357,143 shares of our common stock to the Data Storage Corporation’s Shareholders.  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, 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 Safe Data’s current liabilities arising out of the business or the assets acquired. Pursuant to the Agreement, we paid 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.  In June of 2011 we made a final payment net of holdback of $482,308 and we issued the remaining balance of $150,000 in Common Stock.  The final settlement resulted in a gain of $176,497

The result of which positions Data Storage Corporation as a leader in Cloud Storage and Cloud Computing specializing in disaster recovery and business continuity with a market opportunity of over 39 Billion dollars over the next several years, this underserved niche of companies with 50 to 1500 employees will continue to remain a key target.
 
OVERVIEW OF DATA STORAGE CORPORATION & INDUSTRY:  The Hybrid Cloud

Data Storage Corporation provides Cloud solutions focused on disaster recovery and business continuity on a subscription basis in the USA and Canada.  The solutions assist organizations in protecting their data, minimize downtime, ensure regulatory compliance and recover and restore data within their recovery objectives.  Through DSC’s three 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 their 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., DSC provides solutions and services to healthcare, banking and finance, distribution services, manufacturing, construction, education, and government industries

 
2

 
 
 
Our Continuing Strategy set forth in 2011:

 
Data Storage Corporation derives revenues from long term Subscription Services and Professional Services related to implementation of subscription services that provide businesses, education, government and healthcare protection of critical computerized 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 provide excellent value to this underserved market assisting clients in meeting their recovery expectations.  In 2011 we continued to assimilate organizations, expanded our technology as well as technical group and positioned the new organization for accelerated growth.  DSC has equipment for cloud storage and cloud computing in our centers in MA, RI, and NY. We deliver our solutions 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.   

 
3

 

Data Storage Corporation is in the position today to leverage our infrastructure, data center, equipment capacity and leadership team to grow revenue to significant levels. Positioned for organic growth, although a strategy will be to grow through acquisition of similar solutions such as data vaulting, cloud recovery services, disaster recovery and business continuity solutions, e-discovery and infrastructure-as-a-service (IaaS) companies. DSC believes opportunities exist to acquire synergistic service providers to enhance our products and services portfolio, increase our distribution channels, 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 as well as acquisition of synergistic services providers we can create significant value. 
 
Our Acquisition Strategy:



 
 
4

 
 
We believe that the opportunity exists today to acquire and roll-up customer bases of cloud computing and storage companies in this fragmented industry. This strategy will enable Data Storage Corporation to create a national presence, and a recognizable 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 technical companies that provide professional services 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 to their bundle of services and products. These companies focus on smaller clients, less than 1,500 employees.  This segment of business amounts to 85% of all businesses in the USA and Canada. 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 and positioned for DSC’s solutions.

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.


 
 
 
5

 
 
OVERVIEW:

Data Storage Corporation provides Cloud solutions focused on disaster recovery and business continuity on a subscription basis in the USA and Canada.  The solutions assist organizations in protecting their data, minimize downtime, ensure regulatory compliance and recover and restore data within their recovery objectives.  Through our three 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 their 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 provide solutions and services to healthcare, banking and finance, distribution services, manufacturing, construction, education, and government industries.

SERVICES AND SOLUTIONS:

Data Storage Corporation has become one of the leading companies in High Availability and Virtual Disaster Recovery of the IBM Mid Range Power Systems.   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 continue to operate, whereby providing infrastructure-as-a-service to the client.

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.

SafeData HA is available for the IBM System iSeries, 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

 
6

 

SafeData Recovery (SafeData DR)

Organizations may not require real-time recovery.  For those with recovery time objectives of 10 hours or less, DSC’s SafeData DR subscription-based service is a viable option requiring little or no initial capital expenditure.

SafeData DR is available for the IBM System iSeries, UNIX, AIX and Windows operating systems. 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 include:

· Fast recovery times (in hours, not days)
· No tapes to get lost or damaged
· Virtual recovery that fully protects your server 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
 
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.

 
7

 
 
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.
 
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:
 
Information Management and Protection Vendors: Vendors include EMC, i365, Symantec and CommVault.
   
Specialized Vendors: Venyu, which focuses on SMBs in the US.
   
Technology Providers / Service providers.  OEM-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.
 
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.       MINE SAFETY DISCLOSURES
 
Not applicable.
 
 
8

 
 
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 $3.2 million dollars over the last three years.
 
Quarterly ended
 
Low Price
   
High Price
 
March 31, 2010
 
$
0.25
   
$
0.50
 
June 30, 2010
 
$
0.03
   
$
0.59
 
September 30, 2010
 
$
0.01
   
$
0.15
 
December 31, 2010
 
$
0.01
   
$
0.05
 
March 31, 2011
 
$
0.04
   
$
0.06
 
June 30, 2011
 
$
0.06
   
$
0.15
 
September 30, 2011
 
$
0.05
   
$
0.74
 
December 31, 2011
 
$
0.40
   
$
1.50
 
 
HOLDERS OF OUR COMMON STOCK

As March 17, 2012, we had 41 shareholders of our Common Stock.  

STOCK OPTION GRANTS

During the year ended December 31, 2011 the company issued 522,215 Common Stock Options, no Common Stock Warrants and 11,052,379 shares of Common Stock.
 
REGISTRATION RIGHTS

We have agreed to issue and sell to Southridge Partners II, LP shares (Put Shares) of our common stock, par value $0.001 per share (the Common Stock) from time to time for an aggregate investment price of up to Twenty Million Dollars ($20,000,000) (the Registrable Securities) and to provide certain registration rights under the Securities Act of 1933. 

ITEM 6.       SELECTED FINANCIAL DATA

Not applicable.

ITEM 7.       MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
 
 
9

 
 
COMPANY OVERVIEW

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 three 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 three Technical Centers: Westbury, New York; Boston, MA and Warwick, RI.
 
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, 2011 as compared to December 31, 2010
 
Net Sales.  Net sales for the year ended December 31, 2011 were $3,940,323, an increase of $1,425,983, or 56.7%, compared to $2,514,340 for the year ended December 31, 2010. The increase in sales is primarily attributable to increased sales personnel and a full year of revenue from the Safedata acquisition.
 
Cost of Sales. For the year ended December 31, 2011, cost of sales was $2,509,921, an increase of $926,461 from $1,583,459 for the year ended December 31, 2010.  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 is 36.3 % for the year ended December 31, 2011 as compared to 37.0 % for the year ended December 31, 2010.
 
Operating Expenses.  For the year ended December 31, 2011, operating expenses were $3,257,091, an increase of $961,338, as compared to $2,295,753 for the year ended December 31, 2010. The majority of the increase in operating expenses for the year ended December 31, 2011 is a result of increased officer’s salaries, sales salaries and sales commissions in connection with the acquisition of SafeData and the hiring of a sales team and a Chief Operating Officer. Sales salaries increased $211,143 to $487,238, as compared to $276,095 for the year ended December 31, 2010. Executive salaries expense increased $447,427 to $461,006, as compared to $13,579 for the year ended December 31, 2010. Sales commission expense increased $192,253 to $308,899, as compared to $116,646 for the year ended December 31, 2010.
 
Other Expenses.  Gain on settlement of contingent consideration expense for the year ended December 31, 2011 increased $176,497 to $176,497 from $0 for the year ended December 31, 2010. Impairment of intangible assets for the year ended December 31, 2011 increased $126,130 to $0 from ($126,130) for the year ended December 31, 2010. Interest income for the year ended December 31, 2011 increased $2,222 to $2,244 from 2 for the year ended December 31, 2010. Amortization of debt discount for the year ended December 31, 2011 increased $587,814 to $753,935 from $166,121 for the year ended December 31, 2010. Amortization of deferred financing fees for the year ended December 31, 2011 increased $4,368 to $4,368 from $0 for the year ended December 31, 2010.  Loss on extinguishment of debt for the year ended December 31, 2011 increased $142,925 to $142,925 from $0 for the year ended December 31, 2010.  Loss on settlement of liabilities for the year ended December 31, 2011 increased $8,975 to $8,975 from $0 for the year ended December 31, 2010.  Interest Expense for the year ended December 31, 2011 increased $103,636 to $245,496 from $141,860 for the year ended December 31, 2010.
 
Net Loss.  Net loss for the year ended December 31, 2011 was ($2,803,647) an increase of $1,004,665 as compared to net loss of ($1,798,982) for the year ended December 31, 2010.
 
 
10

 
 
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 2012 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, 2011 the company’s cash increased $118,095 to $168,490 from $50,395 at December 31, 2010. Net cash of $519,493 was used in the Company’s operating activities and cash of $96,575 was used in investing activities, primarily funding capital expenditures. Net cash of $734,163 was provided by the Company’s financing activities, $1,755,000 of the financing was from the issuance of common stock, offset by $462,143in payment of capital lease and loan obligations and the final payment of contingent consideration in the acquisition of SafeData of $546,516.
 
The Company's working capital was ($2,281,776) at December 31, 2011, decreasing $262,075 from ($2,543,851) at December 31, 2010. The decrease is primarily due accounts payable to leases payable, loan payable and deferred revenue recorded in connection with the acquisition of the net assets of SafeData.

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 December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 enhances current disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. Entities are required to provide both net and gross information for these assets and liabilities in order to facilitate comparability between financial statements prepared on the basis of U.S. GAAP and financial statements prepared on the basis of IFRS. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. ASU 2011-11 is not expected to have a material impact on the Company’s financial position or results of operations.
 
 
11

 
 
In September 2011, the FASB issued Accounting Standards Update No. 2011-08 (“ASU 2011-08”), which updates the guidance in ASC Topic 350, Intangibles – Goodwill & Other. The amendments in ASU 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than fifty percent. If, after assessing the totality of events or circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in ASU 2011-08 include examples of events and circumstances that an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. However, the examples are not intended to be all-inclusive and an entity may identify other relevant events and circumstances to consider in making the determination. The examples in this ASU 2011-08 supersede the previous examples under ASC Topic 350 of events and circumstances an entity should consider in determining whether it should test for impairment between annual tests, and also supersede the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to perform the second step of the impairment test. Under the amendments in ASU 2011-08, an entity is no longer permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as previously permitted under ASC Topic 350. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. ASU 2011-08 is not expected to have a material impact on the Company’s financial position or results of operations.
 
In May 2011, the FASB issued Accounting Standards Update 2011-04 (“ASU 2011-04”), which updated the guidance in ASC Topic 820, Fair Value Measurement. The amendments in ASU 2011-04 generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. ASU 2011-04 results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011, and early application is not permitted. ASU 2011-04 is not expected to have a material impact on the Company’s financial position or results of operations.
 
In December 2010, the FASB issued ASU 2010-29, “Business Combinations (ASC Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”). The amendments in ASU 2010-29 affect any public entity as defined by ASC Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments in ASU 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in ASU 2010-29 are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of ASU 2010-29 did not have a material impact on the Company’s results of operations or financial condition.
 
In December 2010, the FASB issued ASU 2010-28, “Intangibles — Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”). The amendments in ASU 2010-28 modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in ASU 2010-28 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of ASU 2010-28 did not have a material impact on the Company’s results of operations or financial condition.
 
In April 2010, the FASB issued ASU 2010-17, “Revenue Recognition — Milestone Method” (“ASU 2010-17”). ASU 2010-17 provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. The following criteria must be met for a milestone to be considered substantive: the consideration earned by achieving the milestone should (i) be commensurate with either the level of effort required to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone; (ii) be related solely to past performance; and (iii) be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. Accordingly, an arrangement may contain both substantive and non-substantive milestones. ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The adoption of ASU 2010-17 did not have a material effect on the Company’s results of operations or financial condition.
 
 
12

 
 
In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). 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 in ASU 2009-13 eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 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 adoption of ASU 2009-13 did not have a material impact on the Company’s results of operations or financial condition.
 
Management does not believe there would have been a material effect on the accompanying financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period.
 
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.
 
 
 
13

 
 
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

 
 
14

 
 
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, 2011 and 2010, 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, 2011 and 2010, 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 13, 2012
 
 
 
15

 
 
DATA STORAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 
   
December 31,
   
December 31,
 
ASSETS
 
2011
   
2010
 
Current Assets:
           
 Cash and cash equivalents
 
$
168,490
   
$
50,395
 
 Accounts receivable (less allowance for doubtful
               
     accounts of $48,000 in 2011 and $17,000 in 2010)
   
294,306
     
387,697
 
Deferred Compensation
   
37,041
     
17,562
 
Prepaid Expenses and other current assets
   
218,675
     
63,215
 
   Total Current Assets
   
718,512
     
518,869
 
                 
Property and Equipment:
               
 Property and equipment
   
3,024,302
     
2,031,771
 
 Less—Accumulated depreciation
   
(1,680,484
)
   
(1,200,448
)
  Net Property and Equipment
   
1,343,818
     
831,323
 
                 
Other Assets:
               
Goodwill
   
2,201,828
     
2,201,828
 
Deferred compensation
   
26,614
     
44,176
 
Other assets
   
61,923
     
18,652
 
Intangible Assets, net
   
955,048
     
1,169,404
 
Employee loan
   
-
     
23,000
 
   Total Other Assets
   
3,245,413
     
3,457,060
 
                 
   Total Assets
   
5,307,743
     
4,807,252
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities:
               
 Accounts payable and accrued expenses
   
1,343,855
     
1,070,036
 
Credit line payable
   
100,292
     
99,970
 
Due to related party
   
124,753
     
52,718
 
Dividend Payable
   
162,500
     
125,000
 
Deferred revenue
   
641,381
     
461,724
 
Leases payable
   
499,325
     
325,934
 
Loans payable
   
128,182
     
122,251
 
Contingent consideration in SafeData acquisition
   
-
     
805,087
 
 Total Current Liabilities
   
3,000,288
     
3,062,720
 
                 
Deferred rental obligation
   
21,341
     
26,064
 
Due to officer
   
624,818
     
614,628
 
Loan payable long term
   
11,887
     
151,491
 
Leases payable long term
   
509,628
     
115,533
 
Convertible debt
   
-
     
18,928
 
Convertible debt – related parties
   
-
     
227,138
 
Total Long Term Liabilities
   
1,167,674
     
1,153,782
 
                 
  Total Liabilities
   
4,167,962
     
4,216,502
 
                 
Commitments and contingencies
   
-
     
-
 
                 
Stockholders’ Equity:
               
Preferred Stock, $.001 par value; 10,000,000 shares authorized;
               
    1,401,786 shares issued and outstanding in each period
   
1,402
     
1,402
 
Common stock, par value $0.001; 250,000,000 shares authorized;
               
28,912,712 and 17,127,541 shares issued and outstanding, respectively
   
28,913
     
17,861
 
Additional paid in capital
   
10,705,470
     
7,313,844
 
Accumulated deficit
   
(9,596,004
)
   
(6,742,357
)
Total Stockholders' Equity
   
1,139,781
     
590,750
 
Total Liabilities and Stockholders' Equity
 
$
5,307,743
   
$
4,807,252
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
16

 
 
DATA STORAGE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS


   
Years Ended
 
   
December 31,
 
   
2011
   
2010
 
             
Sales
 
$
3,940,323
   
$
2,514,340
 
                 
Cost of sales
   
2,509,921
     
1,583,459
 
                 
Gross Profit
   
1,430,402
     
930,881
 
                 
Selling, general and administrative
   
3,257,091
     
2,295,753
 
                 
Loss from Operations
   
(1,826,689
)
   
(1,364,872
)
                 
Other Income (Expense)
               
    Gain on settlement of contingent consideration
   
176,497
     
-
 
    Impairment of intangible assets
    -      
(126,130
)
    Interest income
   
2,244
      2
 
    Amortization of debt discount
   
(753,935
)
   
(166,121
)
    Amortization of deferred financing fees
   
(4,368
)
   
-
 
    Loss on extinguishment of debt
   
(142,925
)
   
-
 
    Loss on settlement of liabilities
   
(8,975
)
   
-
 
    Interest expense
   
(245,496
)
   
(141,860
)
                  Total Other (Expense)
   
(976,958
)
   
(434,109
)
                 
Loss before provision for income taxes
   
(2,803,647
)
   
(1,798,981
)
                 
Provision for income taxes
   
-
     
-
 
                 
Net Loss
   
(2,803,647
)
   
(1,798,981
)
                 
Preferred Stock Dividend
   
(50,000
)
   
(50,000
)
                 
Net Loss Available to Common Shareholders
 
$
(2,853,647
)
 
$
(1,848,981
)
                 
Loss per Share – Basic and Diluted
 
$
(0.13
)
 
$
(0.12
)
Weighted Average Number of Shares - Basic and Diluted
   
21,690,051
     
15,538,129
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
17

 
 
DATA STORAGE CORPORATION AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
             
   
Years Ended
 
   
December 31,
 
   
2011
   
2010
 
             
Net loss
 
$
(2,803,647
)
 
$
(1,798,981
)
Adjustments to reconcile net loss  to net cash used in operating activities:
               
   Depreciation and amortization
   
       694,393
     
412,976
 
   Amortization of debt discount
   
753,934
     
166,121
 
   Non cash interest expense
   
167,925
     
-
 
   Loss on extinguishment of debt
   
142,926
         
   Loss on settlement of liabilities
   
8,975
         
   Deferred compensation
   
19,333
     
68,050
 
   Impairment of intangible asset
   
-
     
126,130
 
   Deferred financing fees
   
4,368
         
   Allowance for doubtful accounts
   
31,000
     
(9,742
)
   Stock based compensation
   
78,836
     
439,420
 
   Gain on settlement of contingent consideration
   
(176,496)
     
-
 
         Changes in Assets and Liabilities:
               
              Accounts receivable
   
62,391
     
(91,101
)
              Other assets
   
(5,138)
     
3,608
 
              Prepaid expenses and other current assets
   
(155,460)
     
(6,229
)
         Employee Loan
   
23,000
         
             Accounts payable and accrued expenses
   
459,233
     
768,825
 
             Deferred revenue
   
179,657
     
(117,048,
)
             Deferred rent
   
(4,723)
     
(2,577
)
             Due to related party
   
-
     
18,000
 
Net Cash Used in Operating Activities
   
(519,493)
     
(22,548
)
                 
Cash Flows from Investing Activities:
               
    Capital expenditures
   
(96,575
)
   
(36,246
)
    Acquisition of SafeData, LLC net assets
   
-
     
(1,229,954
)
Net Cash Used in Investing Activities
   
(96,575
)
   
(1,266,200
)
                 
Cash Flows from Financing Activities:
               
   Proceeds from the issuance of common stock
   
1,755,000
     
300,000
 
   Issuance of convertible debt
   
-
     
1,000,000
 
   Repayments of capital lease obligations
   
(328,470)
     
(224,620
)
   Repayments of loan obligations
   
(133,673)
     
-
 
   Advances from credit line
   
322
     
-
 
   Payment of preferred dividend
   
(12,500)
         
   Repayment of contingent consideration
   
(546,516)
         
   Advances from shareholder
   
-
     
235,603
 
Net Cash Provided by Financing Activities
   
734,163
     
1,310,983
 
                 
Increase in Cash and Cash Equivalents
   
118,095
     
22,235
 
                 
Cash and Cash Equivalents, Beginning of Year
   
50,395
     
28,160
 
                 
Cash and Cash Equivalents, End of Year
 
$
168,490
   
$
50,395
 
                 
Cash paid for interest
 
$
76,571
   
$
24,906
 
Cash paid for income taxes
 
$
-
   
$
-
 
                 
                 
Non cash investing and financing  activities:
               
 
               
   Accrual of preferred stock dividend
 
$
50,000
   
$
50,000
 
   Warrants issued with convertible debt
 
$
-
   
$
920,056
 
   Stock issued in connection with acquisition of SafeData, LLC
 
$
150,000
   
$
850,000
 
   Fixed assets acquired under capital leases
 
$
895,957
   
$
-
 
   Stock issued for settlement of payables
 
$
255,000
   
$
-
 
   Stock issued for financing fees
 
$
42,500
   
$
-
 
   Stock issued for deferred compensation
 
$
21,250
   
$
-
 
   Stock issued in settlement of convertible debt
 
$
1,000,000
   
$
-
 
   Stock issued for accrued interest
 
$
129,166
   
$
-
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
18

 
 
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 January 1, 2010
   
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 based 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
 
                                                         
Common stock issued in private placement
   
-
     
-
     
3,940,777
     
3,941
     
1,751,059
     
-
     
1,755,000
 
                                                         
Common stock issued in debt conversion
   
-
     
-
     
2,564,098
     
2,564
     
997,436
     
-
     
1,000,000
 
                                                         
Common stock issued in lieu of interest
   
     - 
       
   
400,002 
     
398 
     
271,695 
             
272,093 
 
                                                         
Warrants exercised
   
-
     
-
     
2,997,632
     
2,998
     
(2,998
)
   
-
     
-
 
                                                         
Stock issued in settlement of contingent liability
                   
428,571
     
429
     
149,571
             
150,000
 
                                                         
Common stock issued in equity financing
   
-
     
-
     
50,000
     
50
     
42,450
     
-
     
42,500
 
                                                         
Stock based compensation
   
-
     
-
     
-
     
-
     
78,837
     
-
     
78,837
 
                                                         
Stock issued for services provided
   
-
     
-
     
25,000
     
25
     
21,225
     
-
     
21,250
 
                                                         
Stock Options exercised
   
-
     
-
     
837,730
     
838
     
(838
)
   
-
     
-
 
                                                         
Stock issued in settlement of accounts payable
                   
300,000
     
300
     
254,700
             
255,000
 
                                                         
Stock issuance cancellations
                   
(491,429
)
   
(491
)
   
(171,509
)
           
(172,000
)
                                                         
Net loss
                                           
(2,803,647
)
   
(2,803,647
)
                                                         
Preferred stock dividend
   
-
     
-
     
-
     
-
     
-
     
(50,000
)
   
(50,000
)
                                                         
Balance December 31, 2011
   
1,401,786
   
$
1,402
     
28,912,712
   
$
28,913
     
10,705,470
     
(9,596,004
)
   
1,139,781
 

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

 
19

 


DATA STORAGE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
  
Note 1 Description of business, organization and other matters

Description of Business                                                       

Data Storage Corporation (DSC), a cloud storage and cloud computing organization focused on disaster recovery and business continuity 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 Data Storage Corporation 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 DSC. In exchange we issued 13,357,143 shares of our common stock to the Data Storage Corporations Shareholders.  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, 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 Safe Data’s current liabilities arising out of the business or the assets acquired. Pursuant to the Agreement, we paid 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.  In June of 2011 we made a final payment net of holdback of $482,308. and we issued the remaining balance of $150,000 in Common Stock.  See also Note 11.
 
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, 2011, the Company has generated revenues of $3,940,323 but has incurred a net loss of $2,803,647. 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.
 
Note 2 - Summary of Significant Accounting Policies
 
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.  The Company records its options at fair value using the Black-Scholes valuation model.

Recently Issued and Newly Adopted Accounting Pronouncements
 
In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). ASU 2011-11 enhances current disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. Entities are required to provide both net and gross information for these assets and liabilities in order to facilitate comparability between financial statements prepared on the basis of U.S. GAAP and financial statements prepared on the basis of IFRS. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. ASU 2011-11 is not expected to have a material impact on the Company’s financial position or results of operations.
 
 
20

 
 
In September 2011, the FASB issued Accounting Standards Update No. 2011-08 (“ASU 2011-08”), which updates the guidance in ASC Topic 350, Intangibles – Goodwill & Other. The amendments in ASU 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than fifty percent. If, after assessing the totality of events or circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in ASU 2011-08 include examples of events and circumstances that an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. However, the examples are not intended to be all-inclusive and an entity may identify other relevant events and circumstances to consider in making the determination. The examples in this ASU 2011-08 supersede the previous examples under ASC Topic 350 of events and circumstances an entity should consider in determining whether it should test for impairment between annual tests, and also supersede the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to perform the second step of the impairment test. Under the amendments in ASU 2011-08, an entity is no longer permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as previously permitted under ASC Topic 350. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. ASU 2011-08 is not expected to have a material impact on the Company’s financial position or results of operations.
 
In May 2011, the FASB issued Accounting Standards Update 2011-04 (“ASU 2011-04”), which updated the guidance in ASC Topic 820, Fair Value Measurement. The amendments in ASU 2011-04 generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. ASU 2011-04 results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011, and early application is not permitted. ASU 2011-04 is not expected to have a material impact on the Company’s financial position or results of operations.
 
In December 2010, the FASB issued ASU 2010-29, “Business Combinations (ASC Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”). The amendments in ASU 2010-29 affect any public entity as defined by ASC Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments in ASU 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in ASU 2010-29 are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of ASU 2010-29 did not have a material impact on the Company’s results of operations or financial condition.
 
In December 2010, the FASB issued ASU 2010-28, “Intangibles — Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”). The amendments in ASU 2010-28 modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in ASU 2010-28 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of ASU 2010-28 did not have a material impact on the Company’s results of operations or financial condition.
 
In April 2010, the FASB issued ASU 2010-17, “Revenue Recognition — Milestone Method” (“ASU 2010-17”). ASU 2010-17 provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. The following criteria must be met for a milestone to be considered substantive: the consideration earned by achieving the milestone should (i) be commensurate with either the level of effort required to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone; (ii) be related solely to past performance; and (iii) be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. Accordingly, an arrangement may contain both substantive and non-substantive milestones. ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The adoption of ASU 2010-17 did not have a material effect on the Company’s results of operations or financial condition.
 
 
21

 
 
In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). 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 in ASU 2009-13 eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 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 adoption of ASU 2009-13 did not have a material impact on the Company’s results of operations or financial condition.
 
Management does not believe there would have been a material effect on the accompanying financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period.
 
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 11% 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 companys balance sheet.
 
 
22

 
 
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, 2011, 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, 2011 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 the company’s long-term debt approximates their fair values based upon a comparison of the interest rate and terms of such debt to the rates and terms of debt currently available to the company.
 
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 $187,463 and $70,211 for advertising costs for the years ended December 31, 2011 and 2010, 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, 2011 include 2,563,115 options and 173,427 warrants.
 
 
23

 
 
Note 3 - Property and Equipment
 
Property and equipment, at cost, consist of the following:
 
  
 
December 31,
 
   
2011
   
2010
 
Storage equipment
$
2,149,294
   
$
1,613,359
 
Website and software
 
169,833
     
169,833
 
Furniture and fixtures
 
22,837
     
22,837
 
Computer hardware and software
91,687
     
84,592
 
Data Center
   
590,651
     
141,250
 
     
3,024,302
     
2,031,771
 
Less: Accumulated depreciation
 
1,680,484
     
1,200,448
 
Net property and equipment
$
1,343,818
   
$
831,323
 
 
Depreciation expense for the years ended December 31, 2011 and 2010 was $480,036 and $287,065, respectively.
 
Note 4 - Goodwill and Intangible Assets
 
 
Goodwill and Intangible assets consisted of the following:
   
Estimated life in years
   
December 31, 2011
 
         
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       339,514  
Non-compete agreements
    4       262,147       101,031  
                         
       Total Intangible Assets
            1,395,593       440,545  
                         
       Total Goodwill and Intangible Assets
          $ 3,597,421     $ 440,545  
 
 
 
24

 
 
Scheduled amortization over the next five years as follows:

  Twelve months ending December 31,
       
  2012
    $ 214,356  
  2013
      214,356  
  2014
      178,858  
  2015
      68,210  
 
Total
  $ 675,780  

Amortization expense for the year ended December 31, 2011 and 2010 were $214,357 and $125,911 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 Companys assets and liabilities. The leases are payable to Systems Trading, Inc. and IBM with combined monthly installments of $56,136 through various dates in 2011 and 2012. The leases are secured with the computer equipment.  Interest rates on capitalized leases vary from 6%-12% and are imputed based on the lower of the Companys incremental borrowing rate at the inception of each lease or the lessors implicit rate of return.

Future minimum lease payments under the capital leases are as follows:
 
       
    As of December 31, 2011
  $ 1,068,815  
    Less amount representing interest
    (59,862 )
    Total obligations under capital leases
    1,008,953  
    Less current portion of obligations under capital leases
    (499,325 )
    Long-term obligations under capital leases
  $ 509,628  
 
 
Long-term obligations under capital leases at December 31, 2011 mature as follows:
 
       
For the year ending December 31, 2012
  $ 500,020  
           2013
    301,656  
           2014
    175,642  
           2015
    31,635  
         
    $ 1,.008,953  
 
 
25

 
 
The assets held under the capital leases are included in property and equipment as follows:
 
       
Equipment
 
$
1,262,488
 
Less: accumulated depreciation
   
295,365
 
         
   
$
967,123
 
 
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, 2011, and is secured by all assets of the Company and personally guaranteed by the Companys principal shareholder. As of December 31, 2011, the Company owed $100,292 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, 2011 is $140,069.
 
Total maturities of the long term debt are as follows:

For the year ending December 31
     
2012
  $ 139,604  
2013
    11,887  
         
         
    $ 140,069  
 
Operating Leases

The Company currently leases office space in New York, NY; Garden City, NY and Warwick, RI.
 
The lease for office space in Warwick, RI calls for monthly payments of $5,400 plus a portion of the operating expenses beginning in April 2012 and ending in December 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.

The lease for office space in New York, NY was prepaid in August 2011 for the 9 ½ months period ending May 29, 2012.  The prepaid rent was $35,915 and the deposit was $1,500.
 
 
26

 
 
Minimum obligations under these lease agreements are as follows:

For the year Ending December 31,:
     
2012
 
$
85,580
 
2013
   
78,259
 
2014
   
39,709
 
         
   
$
334,915
 
 
Rent expense for the years ended December 31, 2011 and December 31, 2010 was $178,581 and $116,203 respectively.

 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.  In December 2011 the convertible notes were converted to 1,380,671 shares of common stock and the warrants were exercised as a cashless transaction that resulted in 1,593,647 of common stock.  The Company also issued 65,666 shares of its Common Stock to settle accrued interest As an inducement to convert the debt, the company issued 142,534 shares of its Common Stock.  The issuance and settlement resulted in a loss on extinguishment of $77,212.
 
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.  In December 2011 the convertible notes were converted to 1,183,427 shares of common stock and the warrants were exercised as a cashless transaction that resulted in 1,365,983 of common stock.  The Company also issued 79,738 shares to settle accrued interest.  As an inducement to convert the debt, the Company issued 110,859 shares of its Common Stock.  The issuance and settlement resulted in a loss on extinguishment of $65,713.
 
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, 2011 was $753,935.
 
Note 8 - Stockholders Equity
 
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.

 
27

 
 
Common Stock Options
 
During the year ended December 31, 2011 the Company issued 522,215 common stock options under the 2008 Stock Equity Plan which was discontinued on February 3rd, 2012. 
 
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
 
Options Outstanding at January 1, 2010
   
2,929,434
   
$
0.02 - 0.36
   
$
0.09
 
   Options Granted
   
1,013,668
     
0.31 - 0.36
     
0.35
 
   Options Exercised
   
(103,505
   
0.02
     
0.02
 
   Options Cancelled
   
(169,428
)
   
0.32
     
0.32
 
Options Outstanding at December 31, 2010
   
3,670,169
   
0.02 - 0.36
   
0.14
 
   Options Granted
   
522,215
     
0.41 - 0.85
     
0.44
 
   Options Exercised
   
(1,583,592
   
0.02
     
.02
 
   Options Expired
   
(45,677
)
   
0.32
     
0.32
 
Options Outstanding at December 31, 2011
   
2,563,115
   
0.02 - 0.85
   
0.28
 
                         
 Options Exercisable at December 31, 2011
   
1,180,988 
   
0.02 - 0.85 
   
0.37
 
 
Share-based compensation expense for options totaling $181,960 was recognized in our results for the year ended December 31, 2011 is based on awards vested. The options were valued at the grant date at $366,014.

During the year ended December 31, 2011, 1,583,592 Options were exercised in a cashless transaction resulting in the issuance of 837,730 shares of Common Stock.

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, 2011 and 2010 are set forth in the table below.
 
   
2011
   
2010
 
Weighted average fair value of options granted
 
$
0.37
   
$
0.35
 
Risk-free interest rate
   
2.20
%
   
2.54 - 3.57
%
Volatility
   
74.98
%
   
77.45 – 117.62
%
Expected life (years)
   
10
     
10
 
Dividend yield
   
0.00
%
   
0.00
%
 
 
 
28

 

As of December 31, 2011, there was approximately $248,882 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 2.5 years.
 
Common Stock Warrants
 
A summary of the Company's warrant activity and related information follows:
 
   
Number of Shares Under Warrants
   
Range of
Warrants Price Per Share
   
Weighted Average Exercise Price
 
Warrants Outstanding at January 1, 2010
   
211,427
   
$
0.02
   
$
0.02
 
   Warrants Granted
   
3,014,438
     
0.01
     
0.01
 
   Warrants Exercised
   
-0-
     
-0-
     
-0-
 
   Warrants Cancelled
   
-0-
     
-0-
     
-0-
 
Warrants Outstanding at December 31, 2010
   
3,225,865
   
$
0.02
   
$
0.02
 
   Warrants Granted
   
0
     
0.01
     
0.01
 
   Warrants Exercised
   
3,052,438
     
-0-
     
-0-
 
   Warrants Cancelled
   
-0-
     
-0-
     
-0-
 
Warrants Outstanding at December 31, 2011
   
173,427
   
0.02
   
0.02
 
                         
Warrants exercisable at December 31, 2011
   
173,427
   
0.02
   
0.02
 
 
During the year ended December 31, 2011, 3,052,438 warrants were exercised in a cashless transaction resulting in the issuance of 2,997,632 shares of Common Stock.

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
 
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
%
 
 
29

 

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.

Stock Issuances

During the year ended December 31, 2011 the company issued 3,940,777 shares of common stock for an aggregate $1.755 Million to unrelated independent investors

Convertible debt holders exercised their rights which included the conversion of stock and warrant exercise for a total of 5,523,728 shares of common stock.  In addition the holders received an inducement of 253,393 shares to convert and accept shares in lieu of past due interest payments.  Shares issued for past due interest payments totaled 145,404.  The transaction resulted in the recognition of a loss on extinguishment of debt of $142,925.
 
During the year the company issued 300,000 shares of common stock in settlement of accounts payable and 50,000 shares in connection with a financing.
 
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.
 
As of December 31, 2011 the Company owed the Chief Executive Officer $624,818. These advances bear no interest and has no stated terms of repayment. 

 
30

 

Note 10 - Income Taxes
 
The components of the provision (benefit) for income taxes are as follows:
 
  
 
Years Ended December 31,
 
   
2011
   
2010
 
CURRENT
           
Federal
 
$
-0-
   
$
-0-
 
State
   
-0-
     
-0-
 
Total current tax provision
   
-0-
     
-0-
 
                 
DEFERRED
               
Federal
   
-0-
     
-0-
 
State
   
-0-
     
-0-
 
Total deferred tax provision
   
-0-
     
-0-
 
Total tax provision (benefit)
 
$
-0-
   
$
-0-
 
 
The Components of deferred taxes consists of the following
 
Deferred Tax Assets:
               
                 
Net operating loss carry-forward
 
$
(1,300,983
)
 
$
(762,488
)
Less: valuation allowance
   
(1,300,983
)    
(762,488
)
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 $3,166,039 and $3,162,384, respectively as of December 31, 2011.  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, 2011 and 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,
 
   
2011
   
2010
 
             
Expected income tax benefit (loss) at statutory rate of 34%
 
$
473,295
   
$
163,917
 
State and local tax benefit, net of federal
   
98,835
     
34,230
 
Change in valuation account
   
(572,130
)
   
(198,147)
 
                 
Income tax expense (benefit)
 
$
-0-
   
$
-0-
 

 
 
31

 
 
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
 
  
The holdback consists of $150,000 issuable in Commons Stock, $700,000 note payable and $50,649 for pre-closing adjustments.  The Company discounted the contingent consideration based on an estimated rate of 16% and recognized the interest over the term of the agreement.  During 2011 the Company made cash payments totaling $546,516 plus Common Stock valued at $150,000 in full settlement under the holdback and contingency clauses.  After certain adjustments allowed for in the Contract the Company recognized a gain on settlement of contingent consideration of $176,497.  The final payment for the Holdback price adjustment was made based on an adjustment to the holdback amount because of a greater than 10% decrease in monthly recurring due to lost accounts and bad payers and a direct deduction for payables not disclosed in the closing documents. The formula is (Closing monthly revenue less monthly revenue for lost accounts and bad payers) divided by closing monthly recurring revenue less 50% divided by 40% times the holdback of $700,000.
 
 
32

 
 
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
 
Note 12 Subsequent Events

On January 31, 2012, the company completed a convertible debt offering of $500,000, with a member of the companys board of Directors, convertible into common stock at $0.85 per share

 
 
33

 
 
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
At no time have there been any disagreements with our accountants regarding any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
 
ITEM 9A. CONTROLS AND PROCEDURES
 
Evaluation of disclosure controls and procedures  

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of December 31, 2009. Based on this evaluation, our principal executive officer and principal financial officers have concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commissions rules based on the material weakness described below.

Management's report on internal control over financial reporting
 
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.  The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with United States’ generally accepted accounting principles (US GAAP), including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting.  Based on this evaluation, management has determined that as of December 31, 2011, there were material weaknesses in our internal control over financial reporting.  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 generally accepted accounting principles (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 December 31, 2011, we 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 our disclosure controls in the future we intend on adding financial staff resources to our 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.
 
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
 
 
 
34

 

PART III

 
 ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The following table sets forth the names, ages, and positions of our new executive officers and directors as of the December 31, 2011. Executive officers are elected annually by our Board of Directors. Each executive officer holds his office until he resigns, is removed by the Board, or his successor is elected and qualified. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal.
 
 
Name
Age
Position
Charles M. Piluso
58
President, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, Chairman of the Board
Richard Rebetti Jr.
46
Director, Joined as COO in February 2011 and Treasurer April 2012
Peter Briggs
53
Officer and VP
Matthew Grosso
48
Secretary and VP
John Argen
57
Director
Jan Burman
59
Director
Biagio Civale
76
Director
Joseph B. Hoffman
54
Director
Lawrence M. Maglione Jr.
50
Director
Cliff Stein
54
Director
John Coghlan
56
Director
 
Charles M. Piluso, President, Chief Executive Officer, Chairman of the Board

Profile

Prior to Data Storage Corporation, Mr. Piluso founded North American Telecommunication Corporation; facilities based Competitive Local Exchange Carrier licensed by the Public Service Commission in ten states, serving as the company's Chairman and President from 1997 to 2000.
 
 
35

 
 
Between 1990 and 1997, Mr. Piluso served as Chairman & Founder of International Telecommunications Corporation, a facilities-based international carrier licensed by the Federal Communications Commission. Mr. Piluso founded ITC in 1990 and grew it from two employees to 135 employees with $170 million in revenues in 1997. ITC participated in a roll up strategy that went public in 1997 for 800 million dollars. The company had operations and agreements in many countries including Russia, Israel, Ukraine, United Kingdom, Dominican Republic, Chile and Canada. During his tenure, Mr. Piluso grew the company to the fifth largest facilities based international carrier in the USA within five years. Mr. Piluso's career in the telecommunications industry began in 1978 when he joined ITT Corporation.  A Fortune 10 company.
 
Over the years, Mr. Piluso was promoted from sales to Sales Management, Marketing and Business Development in their Long Distance Division until 1984. He left ITT to become the General Manager of the New York region for United Technologies Communications Corporation. In that position, Mr. Piluso managed union technicians, sales, installation and customer service.

Mr. Piluso holds a Bachelor’s degree, a Master of Arts in Political Science and Public Administration, and a Masters of Business Administration, all from St. John’s University. He was also an Instructor Professor at St. John’s University, College of Business from 1986 through 1988. Currently, Mr. Piluso serves on the Board of Governors at Saint John’s University and the Board of Trustees of Molloy College and, the Board of Advisors for the Nassau County Police Department Foundation.
 
Richard Rebetti, Director, Chief Operating Officer, Treasurer
 
Profile
 
Mr. Rebetti is the Chief Operating Officer of Data storage Corporation where he is responsible for managing the companys day-to-day operations, as well as overseeing its marketing and information systems functions.
 
Mr. Rebetti has more than 20 years of operational management experience at technology and telecommunications organizations. Prior to joining DSC, Mr. Rebetti was the chief technology officer for STi Prepaid, LLC, an over $300 million division of Leucadia National Corp. and also held the position of COO for Telco Group Inc./STi Prepaid, Inc. During Mr. Rebettis nine years at STi he was part of a team that coordinated the integration of corporate acquisitions and was responsible for the launch of the companys prepaid wireless division.
 
From 1997 to 2001, Mr. Rebetti was a co-founder of North American Telecommunications Corporation along with Mr. Piluso, a competitive local exchange carrier offering local, long distance and data services to small and medium size businesses. In this role, Mr. Rebetti was responsible for Systems and Technology, which included information systems, Internet services, service delivery, and operational support systems.
 
Before co-founding North American Telecommunications, Mr. Rebetti worked for RSL COM, U.S.A., Inc., formally International Telecommunications Corporation (ITC), which he co-founded with Mr. Piluso in 1990. During his first five years at ITC, he was responsible for setting up and managing the accounting, billing and M.I.S. departments. During his last 18 months at RSL COM, U.S.A., Inc., he coordinated the implementation of corporate acquisitions held the position of president of RSL Com PrimeCall, Inc., which was the enhanced services division of RSL COM, U.S.A., Inc. During his tenure as president of PrimeCall, annual revenue increased from $4,000,000 to $40,000,000.
 
Mr. Rebetti has a Bachelor of Science degree in finance and an Advanced Professional Certificate in accounting from St. John's University in New York, as well as a Master of Business Administration in management from City University of New York, Baruch College.
 
 
36

 

Peter Briggs, Executive Vice President
 
Profile
 
Mr. Briggs founded SafeData in 2005 realizing the growing HA need for replication and data recovery solutions for mid-sized businesses and experienced continual growth in both revenues and its customer base during its first five years. Prior to SafeData, Mr. Briggs was president and CEO of ADS, a company he founded and managed. With more than 20 years experience in the IBM mid-market, he led ADS to become one of the largest distributors of AS/400 servers in the New England market. Prior to ADS, Mr. Briggs held various sales and sales management roles for several IBM business partners where he had significant revenue responsibility.

Mr. Briggs earned a B.S. degree in business administration from the C.W. Post Campus of Long Island University. He has been awarded the Top Contributor Partner award from IBM and Partner of the Year from Lakeview Technology. He is also a member of the New England Disaster Recovery Exchange and Greater Providence Chamber of Commerce.
 
Matthew P. Grosso, Executive Vice President, Corporate Secretary