Data Storage Corp: Form 10-Q for the period ended Sep 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, as amended on April 30, 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

Data Storage Corporation (“Data Storage,” “we,” “us,” “our” and the “Company”) has been a leading provider of multi-cloud hosting, fully managed cloud services, disaster recovery, cybersecurity, IT automation, and voice & data solutions for more than twenty years. However, following the sale of our cloud solutions business on September 11, 2025, which consisted of the operations of our subsidiaries, CloudFirst Technologies Corporation and CloudFirst Europe Ltd., there has been a strategic shift in our operations. We continue to operate our subsidiary, Nexxis Inc. (“Nexxis”), a telecommunications and data solutions access company. We are focused on managing, building, expanding or acquiring synergetic technology companies that provide leading edge solutions that assist businesses and institutions improve our business processes. We intend to pursue acquisitions of companies in complementary and high-growth technology sectors.

At the closing of the sale of the CloudFirst business on September 11, 2025, we received $38,068,463 in cash. This amount was based on a contractual base purchase price of $40,000,000, adjusted at closing for a $1,500,000 escrow deposit and $431,537 in net adjustments for estimated closing date debt and working capital.

From this amount, we paid $2,434,172 for selling expenses and other transaction costs. As a result, our Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2025, reflects net cash proceeds of $35,634,291 from the sale, net of cash selling expenses.

The net proceeds, after accounting for all transaction costs and estimated taxes, are reflected in the Gain on sale of discontinued operation on the Condensed Consolidated Statements of Operations.

Our Board of Directors (the “Board”) has determined that we will engage in a tender offer to repurchase from our shareholders up to 85% of our outstanding shares of Common Stock at the time the tender offer is made, which our Board currently expects will be commenced in the fourth quarter of 2025. We intend to use 85% of our cash on hand on the date the tender offer is made, inclusive of the net sale proceeds received in connection with the sale of the CloudFirst business, net of certain expenses and taxes, to offer to repurchase up to 85% of our outstanding shares of Common Stock in compliance with all relevant statutory requirements.

Our Board is actively evaluating multiple strategic alternatives for the use of the remaining sale proceeds, with the goal of maximizing long-term shareholder value. Some of the uses for such remaining cash include, without limitation:

• Targeted Acquisitions in High-Growth Sectors – We intend to leverage our management’s expertise in technology and pursue acquisitions of companies in complementary and high-growth technology sectors which may include the following:
• Artificial Intelligence (AI) Enabled Vertical SaaS (software-as-a-service) GPU infrastructure type services, IaaS
• Cybersecurity solutions and related applications and services, such as SOC.
• Investments in companies in various sectors
• Sale or Merger of the Company – Our Board may evaluate potential strategic interest in the public company itself, including a full sale, reverse merger, or other business combination with a third party that may benefit from our public listing, cash position, 250 million shares authorized and clean capital structure; and/or
• A Hybrid of the Above Strategies – We may pursue a combination of the above strategies for the remaining sale proceeds beyond those intended to be used for the tender offer.

The Board has not made a final determination regarding the use of proceeds received from consummation of the sale of the CloudFirst business in excess of those intended to be used for the tender offer, the terms of which have not been finalized. Any such actions will be subject to further review, market conditions, and, where required, shareholder approval. We are committed to maximizing shareholder value while maintaining flexibility to pursue the most advantageous path forward.

RESULTS OF OPERATIONS

Following the sale of our cloud solutions business on September 11, 2025, our continuing operations consist solely of our Nexxis subsidiary. The historical operations of the divested business have been reclassified and are presented as “Income (loss) from discontinued operations, net of tax” in our Condensed Consolidated Statements of Operations.

Accordingly, the following discussion and analysis of our results of operations focuses on our continuing operations (Nexxis) for the periods presented.

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

Sales and Gross Profit

Sales from our continuing operations, which consist of our Nexxis subsidiary, were $416,956 for the three months ended September 30, 2025, an increase of $91,657, or 28.2%, from $325,299 in the same period last year due to an expanding customer base. The increase was primarily driven by the continued expansion of our voice and data telecommunications solutions to new and existing customers.

Gross profit for the third quarter of 2025 was $198,499, an increase of $54,032, or 37.4%, compared to $144,467 in the third quarter of 2024. Our gross profit margin improved to 47.6% from 44.4% in the prior-year period. The increase in gross margin was primarily due to successful cost management and scaling efficiencies as our subscription revenue base grows.

Selling, general and administrative expenses

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Selling, general and administrative expenses. For the three months ended September 30, 2025, selling, general and administrative expenses increased $312,875, or 31.8%, to $1,296,974 from $984,099 for the three months ended September 30, 2024. The increase was primarily driven by a $429,483, or 396.4%, increase in non-cash stock-based compensation primarily related to the accelerated vesting of equity awards in connection with the Divestiture, which triggered a fundamental transaction clause in equity award agreements with employees. Salaries and director fees also increased by $40,202, or 10.7%, due to annual merit-based adjustments. These increases were partially offset by a $119,243, or 30.1%, decrease in professional fees as certain legal and consulting projects from the prior year were completed.

Income from continuing operations, net of tax. income from continuing operations was $129,555 for the three months ended September 30, 2025, compared to a loss of $678,862 in the prior year period. The change compared to the prior period was primarily due to an income tax benefit recorded in the 2025 period, offset by an increase in non-cash stock-based compensation.

Interest Income. Interest income for the three months ended September 30, 2025, was $193,347, compared to $160,770 for the three months ended September 30, 2024. The 20.3% increase in other income was primarily due to higher interest income earned on our portfolio of marketable securities, which was significantly expanded using the net proceeds from the sale of our cloud solutions business (the “Divestiture”).

Nine months ended September 30, 2025, as compared to September 30, 2024

Sales and Gross Profit

Sales from our continuing operations were $1,057,651 for the nine months ended September 30, 2025, an increase of $158,516, or 17.6%, from $899,135 in the same period last year. The increase was primarily driven by an expanding customer base in our Nexxis voice and data solutions business.

Gross profit for the nine months ended September 30, 2025 was $477,458, an increase of $83,007, or 21.0%, compared to $394,451 in the prior-year period. Our gross profit margin improved to 45.1% from 43.9% in the prior-year period, driven by favorable sales mix and operating leverage.

Selling, general and administrative expenses

Selling, general and administrative expenses. For the nine months ended September 30, 2025, selling, general and administrative expenses increased $375,693, or 13.1%, to $3,242,833 from $2,867,140 for the nine months ended September 30, 2024. The increase was primarily driven by a $662,772, or 193.2%, increase in non-cash stock-based compensation primarily related to the accelerated vesting of equity awards in connection with the Divestiture, which triggered a fundamental transaction clause in equity award agreements with employees. Salaries and director fees increased $176,663, or 15.0%, attributable to annual merit-based salary adjustments. These increases were significantly offset by a $404,000, or 37.2%, decrease in professional fees, primarily related to lower legal and consulting expenses in the current year.

Loss from continuing operations, net of tax. Loss from continuing operations, net of tax was $1,313,172 for the nine months ended September 30, 2025, compared to a loss of $2,016,109 in the prior year period. The decreased loss was primarily due to a tax benefit recorded in the 2025 period, partially offset by an increase in non-cash stock-based compensation expense.

Interest Income. Interest income for the nine months ended September 30, 2025, was $417,520, compared to $456,580 for the nine months ended September 30, 2024. The 8.6% decrease was primarily due to lower average balances of marketable securities held during the first eight months of 2025 as compared to the prior year. This was partially offset by an increase in interest income generated in the last 19 days of the third quarter from the investment of the net proceeds from the Divestiture.

Income from discontinued operations, net of tax. For the nine months ended September 30, 2025, we recognized a gain on the sale of discontinued operations of $17,846,470. This gain is net of transaction costs and the reclassification of the warrant liability. This gain was partially offset by a loss from the operations of the CloudFirst business of $116,975 for the period of January 1, 2025, through the sale date of September 11, 2025.

LIQUIDITY AND CAPITAL RESOURCES

Sale of CloudFirst Businesses

On September 11, 2025, we completed the Divestiture, which consisted of our CloudFirst and CloudFirst UK segments, for gross proceeds of $40.0 million. The sale was approved by shareholders on September 10, 2025.

We received net cash proceeds of approximately $38.1 million, which is net of $1.5 million placed in escrow and a working capital adjustment. As of September 30, 2025, we paid transaction costs of $3.7 million (including $1.2 million of contractual warrant repurchases and $2.4 million of direct transaction costs). Additionally, we have accrued $4.4 million in estimated income taxes payable related to the Divestiture and in October 2025, paid $0.8 million of contractual warrant repurchases. Furthermore, these proceeds are subject to final post-closing adjustments for net working capital and closing date debt, which are expected to be paid by amounts held in escrow.

This significant influx of cash has fundamentally altered our liquidity and capital resources. Management’s new strategy is to use the proceeds remaining after the tender offer for strategic investments and acquisitions in high-growth technology sectors, including GPU Infrastructure-as-a-Service (IaaS), AI-driven software, and cybersecurity. We also intend to use a substantial portion of the net proceeds to return capital to shareholders. We believe that our current cash and marketable securities resulting from the sale are sufficient to fund our continuing operations and new strategic initiatives at least the next twelve months from the date of the filing of this Quarterly Report on Form 10-Q 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 we are successful in identifying potential acquisition targets and negotiating the terms of such acquisitions, and where the purchase price may include a cash component, we expect to use our working capital and the proceeds of any financing it may engage in to finance such acquisition costs.

Our conclusion concerning our liquidity is based on current information. If this information proves to be inaccurate, or if circumstances change, we may not be able to meet our liquidity needs, which may require a reduction in selling general and administrative expenses, including salaries for officers that are major shareholders.

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

The Company’s working capital in the company’s continuing operations was $46,749,512 on September 30, 2025, increasing by $34,829,443 from $11,920,069 at, December 31, 2024. The increase is primarily attributable to the disposition of the CloudFirst business. The working capital at, December 31, 2024, included the assets and liabilities of the business that was subsequently sold, while the working capital at, September 30, 2025, reflects only our continuing operations (Nexxis Inc.) and the net proceeds from the Divestiture.

Cash Flows for nine months ended September 30, 2025, as compared to the nine months ended September 30, 2024

The following table summarizes our cash flows:

Operating Activities: Cash used in operating activities of continuing operations was $1.1 million for the nine months ended September 30, 2025, compared to $1.6 million used in the prior-year period. The cash used in 2025 was primarily driven by the loss from continuing operations of $2.3 million, which was largely offset by non-cash stock-based compensation of $1.0 million and other non-cash charges.

Investing Activities: Cash provided by investing activities of continuing operations was $1.4 million for the nine months ended September 30, 2025, compared to cash used of $58,722 in the same period of the prior year. The cash provided in 2025 was primarily driven by the $35,634,291 in net cash received from the sale of the CloudFirst business. These proceeds were almost entirely deployed into marketable securities, as reflected in the $38.5 million in purchases and $4.3 million in sales of marketable securities during the period.

Financing Activities: Cash used in financing activities of continuing operations was $824,051 for the nine months ended September 30, 2025, compared to cash provided of $88,732 in the same period of the prior year. The significant cash use in 2025 was the $1,236,825 cash settlement of warrants issued in a private placement offering consummated in July 2021 (the “July 2021 Warrants”) following the trigger of the Fundamental Transaction provision in the July 2021 Warrants. This was partially offset by $412,774 in proceeds from stock option exercises.

Cash Flows from Discontinued Operations: Cash used in discontinued operations was $248,633 for the nine months ended September 30, 2025, compared to cash provided of $692,356 in the prior-year period. This represents the net cash flows from the CloudFirst business for the period of January 1, 2025, through the sale date of September 11, 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 consolidated financial statements. The critical accounting estimates that affect the 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”.

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 our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, and as a result of the material weakness described below, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 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 not effective to provide reasonable assurance that the objectives of our disclosure control system were met.

Changes in Internal Control Over Financial Reporting.

During the course of the review for this Quarterly Report on Form 10-Q, management identified a material weakness in our internal controls over financial reporting. This material weakness relates specifically to the design and execution of controls over the accounting and disclosure of significant and unusual transactions, specifically the controls related to the analysis used in the financial reporting process and the related income tax implications of the divestiture of a material portion of our business, which occurred late in the quarter.

The material weakness resulted from deficiencies in the controls over the analysis used in the financial reporting process, particularly in evaluating the accounting and tax consequences of this complex transaction. As a result, our existing controls did not operate effectively to ensure that such transaction was appropriately assessed and disclosed.

In order to remediate this material weakness, management plans to implement the following steps to strengthen our internal control environment:

• Enhancing internal review procedures to ensure that significant and unusual transactions are identified, analyzed, and reviewed with appropriate rigor each quarter.
• Engaging appropriate internal and external resources to support the evaluation of complex transactions, including the related income tax implications, where specialized expertise is required.
• Providing additional training to relevant personnel on the accounting and disclosure requirements for significant and unusual transactions.

Management will continue to monitor the effectiveness of these remediation efforts and will make further adjustments to the plan as necessary to ensure the material weakness is fully addressed.

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 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 unaudited consolidated financial statements, the Company had a loss from continuing operations of $1.1 million and $2.8 million, respectively, for the three and nine months ended September 30, 2025, net income attributable to common shareholders of $16.1 million and $15.4 million for the three and nine months ended September 30, 2025. As of September 30, 2025, the Company had cash of $0.3 million, marketable securities of $45.4 million, and working capital in its continuing operations of $46.7 million. There can be no assurance that the Company will continue to generate income in the future or be profitable.

We may need to raise additional capital to acquire companies in complementary and high-growth technology sectors and there can be no assurance that we will be successful in doing so.

We expect our expenses to increase in connection with our anticipated acquisition activities. For the foreseeable future we will have to fund all of our operations and capital expenditures from revenue generated from operations and equity and debt offerings and cash on hand.

We may need to raise additional capital to fund our acquisitions, and we cannot be certain that funding will be available on acceptable terms on a timely basis, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that may impact our ability to conduct our business and also have a dilutive effect on our stockholders. We currently do not have any commitment for funding. Our ability to raise capital through the sale of securities may be limited by the rules of the SEC and Nasdaq that place limits on the number and dollar amount of securities that may be sold. There can be no assurances that we will be able to raise the funds needed, especially in light of the fact that our ability to sell securities registered on our registration statement on Form S-3 will be limited until such time the market value of our voting securities held by non-affiliates is $75 million or more.

We have identified a material weakness in our internal control over financial reporting, which could adversely affect our ability to report our financial results accurately and in a timely manner.

In connection with the preparation of this Quarterly Report on Form 10-Q, we identified a material weakness in our internal control over financial reporting. The material weakness relates to the design and execution of controls over the accounting and disclosure of significant and unusual transactions, including the related income tax implications. This weakness was identified in connection with the divestiture of a material portion of our business that occurred late in the quarter.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis. Although we are actively implementing a remediation plan, including enhancing internal review procedures and engaging appropriate internal and external resources, the material weakness has not yet been fully remediated.

If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a- 15(f) under the Exchange Act. During the third quarter of 2025, we identified a material weakness in our internal controls over financial reporting related to the accounting for significant and unusual transactions. Specifically, the controls related to the analysis utilized in the financial reporting process and the related income tax implication of the significant and unusual transactions. Management plans to fully remediate the identified material weakness in internal controls, however, there can be no assurance that the internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future. In addition, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are designed and operating effectively.

A shutdown of the U.S. federal government may adversely affect our business.

A recurring shutdown of the U.S. federal government may adversely affect our business operations and regulatory compliance. During such shutdowns, while the SEC’s EDGAR system remains operational, the unavailability of SEC staff to review filings, issue comments, or declare registration statements effective may delay our ability to complete public offerings, respond to comment letters, or obtain timely regulatory approvals. These delays could impact our access to capital markets, hinder strategic transactions, and create uncertainty around our disclosure obligations. Additionally, the lack of interpretive guidance or exemptive relief during a shutdown may increase legal and compliance risks. There can be no assurance that future shutdowns will not materially affect our operations or financial condition.

Our growth may be impacted by acquisitions. We may not be able to identify suitable acquisition candidates, complete acquisitions or integrate acquisitions successfully.

Our future growth may depend in part on our ability to acquire and successfully integrate new businesses. Our Board is actively evaluating multiple strategic alternatives for the use of the remaining sale proceeds, which as stated above, include targeted acquisitions in high growth sectors, a reverse merger or a hybrid of the foregoing. We may not be able to identify suitable acquisition candidates, complete acquisitions, or integrate acquisitions successfully. Once acquired, operations may not achieve anticipated levels of revenues or profitability. Acquisitions involve risks, including difficulties in the integration of the operations, technologies, services, and products of the acquired companies and the diversion of management's attention from other business concerns. Although our management will endeavor to evaluate the risks inherent in any particular transaction, there are no assurances that we will properly ascertain all such risks. Difficulties encountered with acquisitions could have a material adverse effect on our business, financial condition, and results of operations.

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 Company may be the target of securities class action and derivative lawsuits which could result in substantial costs.

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, the Company 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 the Company’s reputation, and divert significant amounts of management time and resources. If any of these legal proceedings were to be determined adversely to the Company, or the Company 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 the Company’s business, liquidity financial condition, and operating results. As of the date of this Quarterly Report on Form 10-Q, the Company was not aware of any securities class action lawsuits or derivative lawsuits having been filed in connection with the Divestiture.