Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our plan of operation and results of operations should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements included elsewhere in this Annual Report. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include, among others, those listed under "Forward-Looking Statements" and "Risk Factors" and those included elsewhere in this Annual Report.

COMPANY OVERVIEW SUMMARY

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.

Sale of CloudFirst Business

On September 11, 2025, we closed the sale of the CloudFirst business, for which 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 $6,467,590 for selling expenses, estimated taxes on the sale, and other transaction costs. As a result, our Consolidated Statement of Cash Flows for the year ended December 31, 2025, reflects net cash proceeds of $31,600,873 from the sale. The net proceeds, after accounting for all transaction costs and estimated taxes, are reflected in the Gain on sale of discontinued operations on the Consolidated Statements of Operations.

Tender Offer

On December 8, 2025, we commenced the Tender Offer to purchase up to 6,192,990 shares of Common Stock, representing approximately 83% of our issued and outstanding shares as of December 1, 2025, at the maximum aggregate purchase price for shares purchased in the Tender Offer of $32,203,548. The Tender Offer expired on January 12, 2026.

In accordance with the terms and conditions of the Tender Offer, based on the final count, on January 15, 2026, we accepted for purchase 5,625,129 shares of Common Stock at a purchase price of $5.20 per share, for an aggregate cost of $29,250,971, excluding fees, any excise taxes, and expenses relating to the Tender Offer. The shares accepted for purchase represent approximately 72.0% of the total number of shares of Common Stock outstanding as of December 8, 2025. Following payment for the tendered shares, we had 2,167,138 shares of Common Stock outstanding. After completing the Tender Offer and related payments, we retained over $10.0 million in cash.

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:

o AI, Enabled Vertical SaaS, GPU IaaS

o Cybersecurity solutions and related applications and services, such as SOC.

o 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 used for the Tender Offer. 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

Year ended December 31, 2025, as compared to December 31, 2024

Sales and Gross Profit

Sales from continuing operations were $1,382,929 for the year ended December 31, 2025, an increase of $163,682, or 13.4%, compared to $1,219,247 in the prior year. The increase was primarily attributable to continued growth in our Nexxis voice and data solutions business, driven by the addition of new customers and increased spending from existing customers. Revenue growth during the period reflects continued demand for our voice and data connectivity solutions and expansion of services within our existing customer base.

In addition, revenue generated from existing customers increased year over year, reflecting higher utilization of our services and incremental service adoption. The Company also continued to diversify its customer base during the year. As a result, revenue concentration among our largest customers declined, with the top five customers representing approximately 35.7% of total revenue in 2025 compared to approximately 41.0% in 2024. No customer accounted for more than 10% of sales for the year ended December 31, 2025. One customer accounted for 16% of sales for the year ended December 31, 2024.

Gross profit for the year ended December 31, 2025 was $614,324, an increase of $87,075, or 16.5%, compared to $527,249 in the prior year. Our gross profit margin improved to 44.4% from 43.2% in the prior year, driven by favorable sales mix and operating leverage.

Selling, general and administrative expenses
		For the Year Ended December 31,
		2025				2024				$ Inc (Dec)				% Inc (Dec)
Salaries and director fees		$	1,861,649			$	1,695,706			$	165,943				9.8	%
Stock based compensation			1,005,830				499,000				506,830				101.6	%
Professional fees			1,021,496				1,322,428				(300,932	)			(22.8	)%
Software as a service			6,998				19,925				(12,927	)			(64.9	)%
Advertising			18,512				31,744				(13,232	)			(41.7	)%
Commissions			78,731				67,460				11,271				16.7	%
Depreciation and amortization			5,235				1,623				3,612				222.6	%
Travel and entertainment			42,852				109,012				(66,160	)			(60.7	)%
Rent and occupancy			23,742				10,554				13,188				125.0	%
Insurance			33,554				12,891				20,663				160.3	%
Other			89,427				70,025				19,402				27.7	%
Total Operating Expenses		$	4,188,026			$	3,840,368			$	347,658				9.1	%

For the year ended December 31, 2025, selling, general and administrative expenses increased $347,658, or 9.1%, to $4,188,026 from $3,840,368 for the year ended December 31, 2024. The increase was primarily driven by a $506,830, or 101.6%, increase in non-cash stock-based compensation primarily related to the accelerated vesting of equity awards in connection with the sale of the CloudFirst business, which triggered a Fundamental Transaction clause in equity award agreements with employees. Salaries and director fees increased $165,943, or 9.8%, attributable to annual merit-based salary adjustments and bonuses. These increases were significantly offset by a $300,932, or 22.8%, decrease in professional fees, primarily related to lower legal and consulting expenses in the current year. We expect expenses to decrease for the year ending December 31, 2026 as compared to the year ended December 31, 2025 because many employees who previously worked for us are now employed by the purchaser of the CloudFirst business and we also anticipate lower legal and accounting costs.

Loss from continuing operations, net of tax. Loss from continuing operations, net of tax was $866,195 for the year ended December 31, 2025, compared to a loss of $2,759,331 in the prior year. The reduced loss was primarily driven by a tax benefit recorded in 2025, partially offset by an increase in non-cash stock-based compensation expense.

Interest Income. Interest income for the year ended December 31, 2025, was $850,371, compared to $592,819 for the year ended December 31, 2024. The 43.4% increase was primarily due to an increase in interest income generated from the investment of the net proceeds from the sale of the CloudFirst business following the sale in September 2025, partially offset by lower average balances of marketable securities held during the first eight months of 2025 as compared to the prior year.

Income from discontinued operations, net of tax. For the year ended December 31, 2025, we recognized a net gain on the sale of discontinued operations of $20,118,681. This gain is net of tax, transaction costs, and the reclassification of the warrant liability to equity. This gain was partially offset by a pre-tax loss from the operations of the CloudFirst business of $69,412 for the period of January 1, 2025 through the sale date of September 11, 2025.

LIQUIDITY AND CAPITAL RESOURCES

The 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 we may undertake to fund the related 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 reductions in selling, general and administrative expenses, including salaries of officers who are major shareholders.

The Company's working capital related to continuing operations was $41,784,453 at December 31, 2025, increasing by $29,864,384 from $11,920,069 at December 31, 2024. The increase is primarily attributable to the disposition of the CloudFirst business. The prior year working capital included the assets and liabilities of the business that was subsequently sold, while the working capital at December 31, 2025 reflects only the continuing Nexxis operations and the net proceeds from the sale of the CloudFirst business.

Tender Offer and Resulting Cash Position

On December 8, 2025, we commenced a fixed price tender offer to purchase up to 6,192,990 shares of our Common Stock at a maximum aggregate purchase price of $32.2 million. The Tender Offer expired on January 12, 2026, and on January 15, 2026, we accepted for purchase 5,625,129 shares of Common Stock at $5.20 per share, for an aggregate purchase price of $29.3 million, excluding fees, excise taxes, and expenses. Following payment for the tendered shares, we had 2,167,138 shares outstanding and retained over $10.0 million of cash, which we believe provides sufficient liquidity for ongoing operations and strategic initiatives. As of April 14, 2026, our cash and cash equivalents were approximately $9.6 million.

Impact on Liquidity, Capital Allocation, and Future Obligations

The Tender Offer significantly reduced our outstanding share count and utilized a substantial portion of our cash resources. However:

●

We remained well capitalized following completion of the Tender Offer, with more than $10.0 million in cash and no material near-term debt maturities.

●

We did not incur additional indebtedness to fund the Tender Offer.

●

We continue to evaluate capital allocation alternatives, including preservation of liquidity for operations.

We believe our current cash position and expected cash flows from operations will be sufficient to fund working capital needs, capital expenditures, and operating commitments for at least the next 12 months.

Working Capital and Cash Flow Considerations

Our liquidity profile is primarily driven by cash on hand remaining after the Tender Offer, and careful management of operating and capital expenditures. We are actively managing expenses and have reduced corporate spending to align with our smaller portfolio and strategic transition.

Outlook

We expect that our current liquidity, together with anticipated cash flows, will support operational needs. We expect that we may also pursue additional sources of liquidity, including:

●

reductions in selling, general and administrative expenses, and

●

potential changes to our investment strategy.

We will continue to monitor macroeconomic conditions and capital market trends, including impacts on financing availability.

Cash Flows for the year ended December 31, 2025, as compared to December 31, 2024

The following table summarizes the Company's cash flows:

		Year Ended December 31,
		2025				2024
Cash (used in) provided by operating activities of continuing operations		$	(1,403,432	)		$	999,861
Cash provided by investing activities of continuing operations			7,707,318				55,041
Cash (used in) provided by financing activities of continuing operations			(1,296,998	)			133,005
Cash used in discontinued operations			(2,597,581	)			(1,543,949	)
Effect of exchange rate changes on cash			9,950				(2,591	)
Increase (decrease) in cash			2,419,257				(358,633	)
Cash, beginning of period			1,070,097				1,428,730
Cash, end of period		$	3,489,354			$	1,070,097

Operating activities

Cash used in operating activities of continuing operations was $1,403,432 for the year ended December 31, 2025, compared to cash provided of $999,861 for the prior year. The cash used in 2025 was primarily driven by the loss from continuing operations of $866,195, which was largely offset by non-cash stock-based compensation of $1,005,830 and other non-cash charges.

Investing activities

Cash provided by investing activities of continuing operations was $7,707,318 for the year ended December 31, 2025, compared to $55,041 for the prior year. The cash provided in 2025 was primarily driven by net proceeds from the sale of the CloudFirst business of $35,566,460, which were almost entirely deployed into marketable securities, as reflected in purchases of $38,918,636 and sales of $11,175,518 during the year.

Financing activities

Cash used in financing activities of continuing operations was $1,296,998 for the year ended December 31, 2025, compared to cash provided of $133,005 for the prior year. The significant cash use in 2025 reflects the aggregate cash payment of $2,049,388 to certain holders 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 and the request by such holders that the Company purchase their July 2021 Warrants at the Black Scholes Value (as such term is defined in the July 2021 Warrants), and $205,608 of costs paid in connection with the Tender Offer and other costs, partially offset by $957,997 in proceeds from stock option exercises.

Cash flows from discontinued operations

Cash used in discontinued operations was $2,597,581 for the year ended December 31, 2025, compared to $1,543,949 in the prior year. 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, and $3,965,587 of taxes paid in the fourth quarter of 2025 on the gain on the sale.

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 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 loss from continuing operations, net of tax. The Company defines Adjusted EBITDA as loss from continuing operations, net of tax adjusted for interest and financing fees, depreciation, amortization, stock-based compensation, and other non-cash income and expenses. 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 table shows the Company's reconciliation of loss from continuing operations, net of tax to Adjusted EBITDA for the years ended December 31, 2025, and 2024:

		For the year ended December 31,
		2025				2024
Loss from continuing operations, net of tax		$	(866,195	)		$	(2,759,331	)
Non-GAAP adjustments:
Depreciation and amortization			5,235				1,623
Interest income			(850,371	)			(592,819	)
(Benefit) provision for income taxes			(1,857,136	)			39,031
Stock-based compensation			1,005,830				499,000
Adjusted EBITDA		$	(2,562,637	)		$	(2,812,496	)

CRITICAL ACCOUNTING ESTIMATES

Use of 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. The Company believes 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 the Company believes are significant to the presentation of its consolidated financial statements. The most significant accounting estimates are set forth below.

Estimated Fair Value of Financial Instruments

The Company's financial instruments include cash, accounts receivable, marketable securities, and accounts payable. Management believes the estimated fair value of these accounts on December 31, 2025, approximate their carrying value as reflected in the balance sheet due to their short-term nature.

Property and Equipment

Property and equipment are 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 five to seven 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.

Revenue Recognition

The Company's continuing operations derive all revenue from its Nexxis subsidiary, which provides Voice over Internet Protocol ("VoIP"), Internet access, and data transport services. Revenue is recognized when control of the promised services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

The Company's contracts are typically monthly subscription agreements. For these contracts, the Company has a single performance obligation: to provide continuous access to its VoIP, Internet, and/or data transport services over the contract term. This performance obligation is satisfied over time because the customer simultaneously receives and consumes the benefits of the services as they are provided.

Revenue is recognized ratably over the applicable monthly service period. The Company's standard payment terms are monthly, and the transaction price is the fixed monthly subscription fee. Because the billing cycle corresponds directly to the service period, the Company does not have significant contract assets or contract liabilities (deferred revenue) at the end of a reporting period. All revenue from continuing operations is transacted in the United States in U.S. dollars.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss, measured as the amount by which the carrying value exceeds the fair value, is recognized if the carrying amount exceeds estimated un-discounted future cash flows.

Stock-Based Compensation

The Company follows the requirements of FASB ASC 718, Share-Based Payments with regard to stock-based compensation issued to employees and non-employees. The Company has agreements and arrangements that call for stock to be awarded to the employees and consultants at various times as compensation and periodic bonuses. The expense for this stock-based compensation is equal to the fair value of the stock price on the day the stock was awarded multiplied by the number of shares awarded. The Company has a relatively low forfeiture rate of stock-based compensation, and forfeitures are recognized as they occur.

The valuation methodology used to determine the fair value of the options issued during the period is the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including the volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of valuation for instruments with a similar expected term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its Common Stock and does not intend to pay dividends on its Common Stock in the foreseeable future.

Estimated volatility is a measure of the amount by which the Company's stock price is expected to fluctuate each year during the expected life of the award. The Company's calculation of estimated volatility is based on historical stock prices over a period equal to the expected life of the awards.

Impact of Recently Issued Accounting Standards

In the normal course of business, we evaluate all new accounting standards issued by the FASB, SEC, or other authoritative accounting bodies to determine the potential impact they may have on the Company's Consolidated Financial Statements. See Note 2 "Summary of Significant Accounting Policies" of the notes to the Company's consolidated financial statements in Item 8 of this Form 10-K for additional information about these recently issued accounting standards and their potential impact on the Company's financial condition or results of operations.