Data Storage Corp: Form 10-Q for the period ended Jun 30, 2025

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto for the year ended December 31, 2024, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, filed on March 31, 2025 (the “2024 Annual Report”) with the U.S. Securities and Exchange Commission (the “SEC”). This Quarterly Report on Form 10-Q contains forward-looking statements, including, without limitation, statements related to our plans, strategies, objectives, expectations, intentions, and adequacy of resources. Investors are cautioned that such forward-looking statements involve risks and uncertainties including, without limitation, the following: (i) our plans, strategies, objectives, expectations, and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth; and (iii) other risks and uncertainties indicated from time to time in our filings with the SEC.

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

COMPANY OVERVIEW SUMMARY

Data Storage Corporation (“DSC,” the “Company,” “we,” “us” or “our”) is a leading provider of enterprise cloud and business continuity solutions, specializing in fully managed cloud hosting, disaster recovery, cybersecurity, and IT automation services. DSC leverages its expertise through its three subsidiaries: CloudFirst Technologies Corporation (“CloudFirst”), CloudFirst Europe Ltd. (“CloudFirst Europe”) and Nexxis Inc. (“Nexxis”). Through its CloudFirst platform – built on IBM Power Systems infrastructure – DSC delivers high-performance cloud solutions tailored for IBM i and AIX workloads This niche focus on IBM Power environments distinguishes CloudFirst in the market: none of the major public cloud providers (AWS, Microsoft Azure, or Google Cloud) natively support IBM i/AIX workload, giving DSC a distinct competitive edge in serving clients with these mission-critical systems. The Company leverages long-term subscription contracts for its cloud and disaster-recovery services, yielding a highly recurring revenue base and strong customer retention (historically over 90% annual subscription renewal rates) DSC’s client base exceeds 425 organizations across diverse sectors – including government, healthcare, education, manufacturing, and Fortune 500 enterprises – reflecting broad market demand for its multi-cloud hosting and business continuity solutions. In recent years, DSC has undertaken strategic expansions (organically and via acquisitions) to reinforce its position as an emerging growth leader in the multi-billion-dollar cloud hosting and business continuity market. Notably, the integration of Flagship Solutions, LLC (“Flagship”) (our wholly-owned subsidiary that was originally acquired in 2021) into CloudFirst was completed in January 2024, unlocking operational synergies and enabling cross-selling of the full CloudFirst suite to Flagship’s established customer base. This integration, combined with enhanced distribution and marketing capabilities post-2021 Nasdaq uplisting, has bolstered DSC’s growth trajectory and technical expertise.

DSC, through its subsidiary CloudFirst, expanded into the UK and European markets in October 2024 as part of DSC’s international growth strategy. This investment included consulting, accounting, and legal expenses to establish operations, as well as the strategic hiring of a regional director and sales personnel. Additionally, the Company initiated partner recruitment and invested in partner enablement through targeted training and sales support programs, laying the foundation for sustainable growth and expanded market presence in the region.

Recent Developments

On July 11, 2025, the Company entered into a unit purchase agreement (the “Purchase Agreement”) pursuant to which it agreed to sell its cloud solutions business (the “Business”), which consists of the operations of its CloudFirst Technologies Corporation and CloudFirst Europe Ltd. subsidiaries (the “Divestiture”). The Divestiture represents a strategic shift in the Company’s operations, assuming the Company’s shareholders approve the Divestiture at the Company’s annual meeting of shareholders currently scheduled for September 10, 2025 (the “2025 Annual Meeting”), and thereafter that the Divestiture is consummated.

Pursuant to the Purchase Agreement, the assets of the Business will be contributed to a new wholly-owned subsidiary, DTST Sub, LLC (“NewCo”), and the purchaser will acquire all of the outstanding units of NewCo for a purchase price of approximately $40 million in cash, subject to certain adjustments. The closing of the Divestiture is subject to customary closing conditions, including that the Company’s shareholders approve the Divestiture at the 2025 Annual Meeting (the “Shareholder Approval”).

As of June 30, 2025, the Divestiture did not meet all the criteria for held-for-sale classification under ASC 360, primarily because the required Shareholder Approval had not yet been obtained. Accordingly, the assets and liabilities of the Business remain classified as held and used within their respective line items on the Condensed Consolidated Financial Statements for all periods presented.

In light of a negotiated non-compete provision in the Purchase Agreement, if the transactions contemplated by the Purchase Agreement are consummated, DSC will not pursue opportunities that overlap with the cloud infrastructure or managed services sectors involving the Business. Following the planned sale of our cloud solutions business, assuming Shareholder Approval is obtained and the Divestiture is consummated, our continuing operations will consist of our Nexxis subsidiary, which provides VoIP, telecommunications and data access. The Business to be divested has historically constituted the significant majority of the Company’s consolidated operations. For the six months ended June 30, 2025, the Business represented approximately 95% of the Company’s total revenue and was the primary driver of its gross profit and operating cash flow. Following consummation of the Divestiture, the Company’s continuing operations will be substantially smaller. As a result, management will be required to evaluate and implement a revised strategic plan and potentially rationalize ongoing corporate costs to align its expense structure with the size and scope of the remaining business. Following the Divestiture, DSC intends to pursue acquisitions of companies in complementary and high-growth technology sectors, in addition to the growth of Nexxis.

RESULTS OF OPERATIONS

Three months ended June 30, 2025, as compared to June 30, 2024

Sales and Gross Profit

Total Sales. For the three months ended June 30, 2025, total sales increased by $236,430, or 4.8%, compared to the three months ended June 30, 2024. The increase was primarily driven by continued growth in our subscription-based services. Cloud Infrastructure & disaster recovery revenue increased by $193,225 or 6.1%, due to the addition of new subscription clients and expanded services for existing clients. Nexxis VoIP services also contributed significantly, with an increase of $47,790 or 17.3%, reflecting successful sales initiatives. This growth was partially offset by a decrease in equipment and software sales of $94,982, or 12.1%, which is primarily attributable to, non-recurring equipment sales in the prior year period and a strategic shift towards subscription services.

Cost of Sales and Gross Profit. Cost of sales for the three months ended June 30, 2025, increased by $107,569, or 4.3%, from the prior year period. This increase was consistent with the overall growth in sales and also reflects our investment in the newly established U.K. entity, which is contributing to higher cost of sales as operations ramp up. Gross profit margin remained stable at 49.3% for the three months ended June 30, 2025, compared to 49.0% in the prior year period. The slight margin improvement was due to a favorable revenue mix, with a higher proportion of sales coming from higher-margin cloud infrastructure services.

Selling, general and administrative expenses

Selling, general and administrative expenses. For the three months ended June 30, 2025, selling, general and administrative expenses increased $535,742, or 19.2%, as compared to the three months ended June 30, 2024. The increase was primarily driven by a $257,065, or 23.1%, increase in salaries and director fees and a $204,733, or 98.5%, increase in non-cash stock-based compensation. The increase in salaries is attributable to an increase in headcount to support our growth initiatives in the UK and in the US, and annual merit-based salary adjustments. The increase in stock-based compensation reflects new equity awards granted to the Board and to key employees and directors in the current period. Also contributing was an increase in commissions associated with increased revenues. These increases were partially offset by lower professional fees and occupancy costs compared to the prior period when we were in the process of transitioning our principal office location.

Loss from operations. Loss from operations was $795,667 for the three months ended June 30, 2025, compared to a loss of $388,786 in the prior year period. The increased loss was primarily due to the growth in selling, general and administrative expenses, including costs related to our investment in the newly established U.K. entity, which is incurring expenses as operations ramp up..

Other Income (Expense) and Net Loss. Total other income was $63,704 for the three months ended June 30, 2025, compared to $142,181 in the prior year period. The decrease was primarily due to lower interest income, which resulted from lower average balances of marketable securities during the period. As a result of the increased loss from operations and lower other income, net loss attributable to common stockholders was $733,049 for the three months ended June 30, 2025, compared to a net loss of $244,240 for the same period in 2024.

Six months ended June 30, 2025, as compared to June 30, 2024

Sales and Gross Profit

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Total Sales. For the six months ended June 30, 2025, total sales increased $84,439, or 0.6%, compared to the six months ended June 30, 2024. The relative stability in total sales was the result of a significant shift in our revenue mix. Growth was primarily driven by a $599,408, or 9.8%, increase in our core cloud infrastructure and disaster recovery services and $79,139, or 14.3%, increase in Nexxis VoIP services. This growth was largely offset by a $614,710, or 12.6%, decrease in equipment and software sales, which is primarily attributable to large, non-recurring equipment sales in the prior year period.

Cost of Sales and Gross Profit. Cost of sales for the six months ended June 30, 2025, increased by $62,154, or 0.8%, from the prior year period. Gross profit margin remained consistent at 40.8% for both periods. The favorable impact from a revenue mix shift towards our higher margin cloud and VoIP services was offset by lower gross margins on equipment and software sales during the current period compared to the prior year.

Selling, general and administrative expenses

Selling, general and administrative expenses. For the six months ended June 30, 2025, selling, general and administrative expenses increased $735,470, or 13.3%, as compared to the six months ended June 30, 2024. The increase was primarily driven by a $519,934, or 22.6%, increase in salaries and director fees and a $259,672, or 68.5%, increase in non-cash stock-based compensation. The rise in salaries is attributable to an increase in headcount to support our growth initiatives in the UK and in the US, and annual merit-based salary adjustments. The increase in stock-based compensation reflects new equity awards granted in 2025, many of which have shorter vesting periods than prior year grants, resulting in accelerated expense recognition. and the full period effect of awards granted in 2024. These increases were partially offset by a $75,684, or 52.4%, decrease in rent and occupancy expense compared to the prior period when we were in the process of transitioning our principal office location.

Loss from operations. Loss from operations was $888,176 for the six months ended June 30, 2025, compared to a loss of $174,991 in the prior year period. The increased loss was primarily due to the increase in selling, general and administrative expenses, including costs related to our investment in the newly established U.K. entity, which is incurring expenses as operations ramp up.

Other Income (Expense) and Net Loss. Total other income was $182,601 for the six months ended June 30, 2025, compared to $274,290 in the prior year period. The decrease was primarily due to lower interest income, which resulted from lower average balances of marketable securities during the current period. As a result of the significant increase in loss from operations, net loss attributable to common stockholders was $708,971 for the six months ended June 30, 2025, compared to net income of $112,862 for the same period in 2024.

LIQUIDITY AND CAPITAL RESOURCES

Sale of CloudFirst Businesses

Subsequent to the end of the quarter ended June 30, 2025, on July 11, 2025, the Company entered into a definitive agreement to sell its cloud solutions business (the “Divestiture”), which consists of its CloudFirst and CloudFirst UK segments, for a purchase price of $40 million. The closing of the Divestiture is subject to Shareholder Approval, for which a vote is expected to be held in the third quarter of 2025 at the 2025 Annual Meeting, as well as other customary conditions.

If the Shareholder Approval is obtained and the Divestiture is consummated, the Company expects to receive net cash proceeds of approximately $24 million, which includes transaction costs, and estimated taxes, but will be adjusted pursuant to closing adjustments, including working capital adjustment. This significant influx of cash would fundamentally alter the Company’s liquidity and capital resources. Management intends to use a substantial portion of the net proceeds to return capital to shareholders, with the remainder available for strategic investments in our continuing operations and other corporate purposes. We believe that our current cash and marketable securities, combined with the anticipated proceeds from the sale, will be more than sufficient to fund our operations and strategic initiatives for the foreseeable future.

Overview of Liquidity and Cash Flows

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

To the extent the Company is successful in growing its business, identifying potential acquisition targets, and negotiating the terms of such acquisitions, and where the purchase price may include a cash component, the Company expects to use its working capital and the proceeds of any financing to finance such acquisition costs.

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

The Company has long-term contracts to supply its subscription-based solutions that are invoiced to clients monthly. The Company believes its total contract value of its subscription contracts with clients based on the actual contracts that it has to date exceeds $10 million. Further, the Company continues to see an uptick in client interest in distribution channel expansion and in sales proposals. In 2025, the Company intends to continue to work to increase its presence in the IBM “Power I” infrastructure cloud and business continuity marketplace in the niche of IBM “Power” and in the disaster recovery global marketplace utilizing its technical expertise, data centers utilization, assets deployed in the data centers, 24 x 365 monitoring and software.

On July 18, 2024, the Company entered into the Agreement with Maxim, discussed in Note 8 to the condensed consolidated financial statements, pursuant to which the Company may offer and sell, from time to time, through Maxim, as sales agent or principal, shares of its common stock. There can be no guarantee that the Company will be able to raise capital from sales under the Agreement. To date, the Company has not made any sales under the Agreement.

The Company’s working capital was $11,240,402 on June 30, 2025, decreasing by $629,512 from $11,869,914 at December 31, 2024. The decrease is primarily attributable to a decrease in the Company’s cash, marketable securities and accounts receivable, which was offset, in part, by an increase in prepaid expenses and other current assets and lower accounts payable and accrued expenses.

Cash Flows for the six months ended June 30, 2025, as compared to June 30, 2024

The following table summarizes the Company’s cash flows:

Operating activities

The change in cash used in operating activities for the six months ended June 30, 2025, compared to the same period in 2024 was primarily driven by the net loss for the 2025 period of $705,575, compared to net income of $99,299 in the prior year period. Although the net loss was offset by $1.4 million of non-cash items, such as depreciation and amortization ($0.7) million and stock-based compensation ($0.6) million, an increase in working capital negatively impacted the company’s cash flows from operations. The increase in working capital was primarily related to expenses totaling $838,252 for deferred transaction fees related to the Divestiture.

Investing activities

The change in cash flows from investing activities was primarily due to net sales of marketable securities of $750,827 during the current period to fund operations, compared to net purchases in the prior year. This was partially offset by capital expenditures of $478,811 in the six months ended June 30, 2025, compared to $902,574 for the six-month ended June 30, 2024. The decrease in year over year capital spending reflects a higher pace of building-out cloud infrastructure in the prior year.

Financing activities

Cash used in financing activities for the six months ended June 30, 2025, represents $51,000 of payments made under finance lease agreements, primarily for leased capital equipment. For the six months ended June 30, 2025, finance lease payments were offset by $38,249 of proceeds from stock option exercises. Cash used in financing activities was lower than the same period in the prior year due to lower repayments of finance lease obligations, as all finance leases were paid in full during the first quarter of 2025.

Critical Accounting Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results may differ from the original estimates, requiring adjustments to these balances in future periods. There are accounting policies, each of which requires significant judgments and estimates on the part of management, that we believe are significant to the presentation of our condensed consolidated financial statements. The critical accounting estimates that affect the condensed consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of the 2024 Annual Report.

Off-Balance Sheet Arrangements

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

Non-GAAP Financial Measures

Adjusted EBITDA

To supplement the Company’s condensed consolidated financial statements presented in accordance with GAAP and to provide investors with additional information regarding the Company’s financial results, the Company considers and is including herein Adjusted EBITDA, a Non-GAAP financial measure. The Company views Adjusted EBITDA as an operating performance measure and, as such, the Company believes that the GAAP financial measure most directly comparable to it is net income (loss). The Company defines Adjusted EBITDA as net income adjusted for interest, depreciation, amortization, and stock-based compensation. The Company believes that Adjusted EBITDA provides an important measure of operating performance because it allows management, investors, debt holders and others to evaluate and compare ongoing operating results from period to period by removing the impact of the Company’s asset base, any asset disposals or impairments, stock-based compensation and other non-cash income and expense items associated with its reliance on issuing equity-linked debt securities to fund its working capital.

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

The following tables show our reconciliation of income (loss) before income taxes to adjusted EBITDA for the three and six months ended June 30, 2025, and 2024:

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Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including 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 (the “Exchange Act”). Rule 13a-15(e) under the Exchange Act defines “disclosure controls and procedures” as controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to a company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level at June 30, 2025.

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

Changes in Internal Control Over Financial Reporting.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2025, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Investing in our securities involves a high degree of risk. You should carefully consider the following risks and the risk factors set forth in our 2024 Annual Report, together with all the other information in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and notes thereto. If any of the following risks actually materialize, our operating results, financial condition and liquidity could be materially adversely affected. The following information updates, and should be read in conjunction with, the information disclosed in Part I, Item 1A, “Risk Factors,” contained in our 2024 Annual Report. Except as disclosed below, there have been no material changes from the risk factors disclosed in our 2024 Annual Report.

The Company has not generated a significant amount of net income and it may not be able to sustain profitability in the future.

As reflected in the condensed consolidated financial statements, the Company recorded a net loss attributable to common shareholders of $708,971 for the six months ended June 30, 2025, and net income attributable to common shareholders of $523,214 for the year ended December 31, 2024. As of June 30, 2025, the Company had cash of $611,323, marketable securities of $10,510,179, and working capital of $12,078,754. There can be no assurance that the Company will continue to generate income in the future.

The Company may incur costs in connection with strategic transactions that do not ultimately close.

The Company may pursue capital structure simplification, including warrant repurchases, in anticipation of strategic transactions. If such transactions do not proceed to definitive agreement or closing, these efforts may still result in non-recurring legal, advisory, and administrative costs, which could impact near-term financial results.

We cannot be assured that we will be able to maintain our listing on the Nasdaq Capital Market.

Our securities are listed on The Nasdaq Capital Market, a national securities exchange. We cannot be assured that we will continue to comply with the rules, regulations or requirements governing the listing of our common stock on The Nasdaq Capital Market or that our securities will continue to be listed on Nasdaq Capital Market in the future. If Nasdaq should determine at any time that we fail to meet Nasdaq requirements, we may be subject to a delisting action by Nasdaq.

On January 18, 2024, Nasdaq notified the Company that due to the passing of Mr. Hoffman, a member of our Board of Directors and member of our Audit Committee, the Company was no longer compliant with Nasdaq’s audit committee requirements as set forth in Rule 5605(c)(2)(A) of the Nasdaq listing standards. Nasdaq further notified the Company that, consistent with Rule 5605(c)(4) of the Nasdaq listing standards, Nasdaq provided the Company a cure period in order to regain compliance until the earlier of the Company’s next annual meeting of shareholders or December 30, 2024 or, if the next annual meeting of shareholders is held before June 27, 2024, then the Company must provide evidence of compliance no later than June 27, 2024.

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

If Nasdaq delists our securities from trading on its exchange at some future date, we could face significant material adverse consequences, including:

• a limited availability of market quotations for our securities;
• reduced liquidity with respect to our securities;
• a determination that our common stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock;
• a limited amount of news and analyst coverage for our company; and
• a decreased ability to issue additional securities or obtain additional financing in the future.

Upon exercise of the Company’s outstanding options or warrants, the Company will be obligated to issue a substantial number of additional shares of common stock which will dilute its present shareholders.

The Company is obligated to issue additional shares of its common stock in connection with any exercise or conversion, as applicable, of its outstanding options, warrants, and shares of its convertible preferred stock. The exercise of warrants or options will cause the Company to issue additional shares of its common stock and will dilute the percentage ownership of its shareholders. In addition, the Company has in the past, and may in the future, exchange outstanding securities for other securities on terms that are dilutive to the securities held by other shareholders not participating in such an exchange.

The pendency of the Divestiture may adversely affect DSC’s business, financial condition and results of operations.

Uncertainty about the effect of the Divestiture on employees, customers and other parties, may have an adverse effect on DSC’s business, financial condition and results of operations, regardless of whether the Divestiture is completed, and may have an adverse effect on DSC’s business, financial condition and results of operations if the Divestiture is completed. These risks include the following, all of which could be exacerbated by a delay in the completion of the Divestiture:

• the impairment of our ability to attract, retain and motivate current and prospective employees, including key personnel;
• the diversion of significant time and resources of DSC’s management;
• difficulties maintaining relationships with DSC’s customers and other business partners;
• delays or deferments of certain business decisions by DSC’s customers and other business partners;
• DSC’s inability to pursue alternative business opportunities or make appropriate changes to the Business because of requirements in the Purchase Agreement that it conduct the Business in all material respects in the ordinary course of business consistent with past practice and not engage in certain activities prior to the completion of the Divestiture;
• any litigation concerning the Divestiture and related costs; and
• the incurrence of significant costs, expenses and fees for professional services and other transaction costs in connection with the Divestiture.

Failure to consummate the Divestiture within the expected timeframe or at all could have a material adverse impact on DSC’s business, financial condition and results of operations.

There can be no assurance that the Divestiture will occur within the expected timeframe or at all. Consummation of the Divestiture is subject to specified conditions, including:

• the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under the Purchase Agreement, in each case subject to certain materiality qualifiers;
• DSC’s receipt of shareholder approval;
• the absence of any law or order in effect that prevents, makes unlawful or prohibits the consummation of the Divestiture;
• the absence of any material adverse effect on CloudFirst Delaware and DSC, taken as a whole, or the Business, in each case subject to certain exceptions; and
• the acceptance of employment from the Purchaser or its affiliates by 85% of the employees of the Business, including the Key Employees.

DSC cannot provide any assurances that these conditions will be satisfied in a timely manner or at all or that the Divestiture will occur. For additional information regarding the specified conditions to the closing of the Divestiture, see the section of the definitive proxy statement on Schedule 14A filed by the Company with the SEC on August 7, 2025 (the “2025 Proxy Statement”) entitled “The Divestiture—General Description of the Divestiture and the Purchase Agreement—Conditions to the Closing of the Divestiture.” In addition, the Purchase Agreement contains certain termination rights and, in certain circumstances, termination fees. For additional information regarding these termination rights and fees, see the sections of the 2025 Proxy Statement entitled “The Divestiture—General Description of the Divestiture and the Purchase Agreement—Termination Rights; and “—Termination Fees.” The occurrence of any event that could give rise to termination of the Purchase Agreement could delay or prevent the Divestiture from occurring at all.

The Purchase Agreement limits DSC’s ability to pursue alternatives to the Divestiture.

The Purchase Agreement contains provisions that make it more difficult for DSC to sell its assets or engage in another type of acquisition transaction with a party other than the Purchaser. These provisions include a non-solicitation provision, which generally prohibits DSC’s solicitation of third-party proposals relating to an acquisition (an “Acquisition Proposal”) and restricts its ability to furnish non-public information to, or participate in any discussions or negotiations with, any third party with respect to any Acquisition Proposal, subject to certain limited exceptions. In addition, the Purchaser has an opportunity to modify the terms of the Divestiture in response to any competing acquisition proposals before the Board may withdraw or change its recommendation with respect to the Divestiture. Upon the termination of the Purchase Agreement to pursue an alternate transaction, including in connection with a “superior proposal,” DSC will be required to pay $1,200,000 as a termination fee. These provisions could discourage a potential third-party acquirer from considering or proposing an acquisition transaction, even if such potential third party acquirer would be prepared to pay a higher price than what would be received in the Divestiture, or propose to acquire DSC’s entire company. These provisions might also result in a potential third-party acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable. If the Purchase Agreement is terminated and DSC determines to seek another purchaser, it may not be able to negotiate a transaction with another party on terms at least comparable to the terms of the Divestiture.

DSC may be the target of securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the Divestiture from being completed.

Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into agreements similar to the Divestiture involving a sale of a line of business or other business combinations. In addition, DSC may be subject to private actions, collective actions, investigations, and various other legal proceedings by shareholders, customers, employees, competitors, government agencies, or others. Even if the lawsuits are without merit, defending against these claims can result in substantial costs, damage to DSC’s reputation, and divert significant amounts of management time and resources. If any of these legal proceedings were to be determined adversely to DSC, or DSC were to enter into a settlement arrangement, it could be exposed to monetary damages or limits on its ability to operate its business, which could have an adverse effect on DSC’s business, liquidity financial condition, and operating results. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting the closing of the Divestiture, then that injunction may delay or prevent the Divestiture from being consummated, which may adversely affect DSC’s business, financial position and results of operation. As of the date of the 2025 Proxy Statement, DSC was not aware of any securities class action lawsuits or derivative lawsuits having been filed in connection with the Divestiture.

DSC’s executive officers and non-employee directors may have interests in the Divestiture that may differ from, or are in addition to, the interests of DSC’s shareholders.

DSC’s executive officers and non-employee directors may have interests in the Divestiture that may be different from, in addition to, or in conflict with, the interests of its shareholders. These interests and arrangements may create potential conflicts of interest. For example, as a condition to the closing of the Divestiture, Harold Schwartz, DSC’s President, must accept an offer of employment with NewCo or its affiliates. For more information, see the section of the 2025 Proxy Statement titled “The Divestiture — Interests of Certain Persons in the Divestiture.” The Board was aware of and considered these interests, among other matters, in reaching the determination to approve the terms of the Purchase Agreement and in recommending that DSC’s shareholders vote to approve the Divestiture Proposal.

DSC has incurred and will continue to incur significant expenses in connection with the Divestiture, regardless of whether the Divestiture is completed.

DSC has incurred and will continue to incur significant expenses related to the Divestiture. These expenses include, but are not limited to, financial advisory and opinion fees and expenses, legal fees, accounting fees and expenses, certain employee expenses, consulting fees, filing fees, printing expenses and other related fees and expenses. Many of these expenses will be payable by DSC regardless of whether the Divestiture is completed.

Failure to complete the Divestiture could cause DSC’s stock price to decline.

The failure to complete the Divestiture may create doubt as to the value of the Business and about DSC’s ability to effectively implement its current business strategies and/or a strategic transaction, which may result in a decline in DSC’s stock price.

The Divestiture may be a Fundamental Transaction under certain outstanding warrants which may trigger a payment requirement by us.

As of June 30, 2025, DSC has issued 2,415,860 warrants to purchase shares of Common Stock. The holders of warrants to purchase 1,031,250 shares of Common Stock issued in a private placement offering consummated in July 2021 (the “July 2021 Warrants”), will be entitled at their option, within 30 days after the closing of the Divestiture, assuming the Divestiture is considered a Fundamental Transaction pursuant to the terms of the July 2021 Warrants, to require DSC to purchase such warrants from the holder thereof by paying to such holder an amount of cash equal to the Black Scholes Value, as such term is defined in the July 2021 Warrants, of the remaining unexercised portion of its July 2021 Warrant on the date of the closing of the Divestiture.