Data Storage Corporation (DTST) Earnings

Management highlights

• Core Strategic Positioning - DTST completed its post-CloudFirst-sale transformation, operating with a focused mandate to deploy capital with discipline, build sustainable recurring revenue, explore value-accretive acquisitions, and deliver long-term shareholder value. - The company currently has 1 core operating asset, Nexxis, which provides fully managed enterprise voice, internet, data transport, and SD-WAN connectivity solutions built on a recurring revenue model. • Operational and Financial Foundation - Nexxis delivered 9.3% year-over-year revenue growth for Q2 2026, providing DTST with a stable, growing recurring revenue base, established enterprise customer relationships, and operating experience to support broader strategic growth. - DTST ended Q2 2026 with approximately $9.3 million in cash and marketable securities, no long-term debt, and a streamlined corporate structure, giving the company full financial flexibility to pursue strategic opportunities. • Acquisition Strategy - Management is actively evaluating acquisition and investment opportunities across high-growth synergistic technology segments including AI infrastructure, sovereign AI niche plays, GPU infrastructure, cybersecurity software, and complementary telecommunications. The core criteria for targets are: recurring revenue, predictable cash flow, strong customer relationships, capable existing management teams, clear path to growth, and attractive long-term economics. - Management prioritizes distressed or undervalued targets with existing valuable IP, that need capital and scale support to grow. The company is not seeking unrelated acquisitions, and aims to build a synergistic portfolio of technology businesses that can scale within DTST's public Nasdaq platform. - Management maintains strict valuation discipline: it will not deploy capital just to complete a transaction, and prefers to preserve flexibility rather than pursue opportunities that do not meet strategic and financial criteria. Structuring options include full acquisitions, minority strategic investments, and internal development initiatives.

Guidance

There is no formal full-year financial guidance provided in this call. Management's forward-looking strategic guidance includes: - Management targets signing a non-binding letter of intent (LOI) for an acquisition within 40-60 days of the call, with a goal to close a transaction by the end of 2026 Q4 or no later than 2027 Q1. - Management will continue growing Nexxis to strengthen DTST's stable operating and revenue foundation while pursuing acquisitions, with the long-term goal of expanding company scale and earnings power to increase shareholder value. - Management confirms that its existing debt-free balance sheet provides sufficient runway to pursue its M&A pipeline and support growth of target assets.

Segment performance

Following the September 2025 sale of the CloudFirst business, Data Storage Corporation (DTST) only reports continuing operations for its single remaining product segment, Nexxis. For Q2 2026 (three months ended June 30, 2026): - Nexxis revenue was $359,000, a 9.3% year-over-year increase from $328,000 in Q2 2025. Growth was driven by new customer additions and higher spending from existing customers. - Nexxis gross profit was $168,000, a 21.9% year-over-year increase from $138,000 in the prior year period. - Gross profit margin improved to 47% in Q2 2026 from 42.1% in Q2 2025, driven by favorable sales mix and operating leverage. Nexxis represents 100% of DTST's continuing revenue contribution.

Risks & headwinds

• Many potential acquisition targets, particularly reverse merger candidates and early-stage technology firms, have unreasonable valuation expectations that are disconnected from actual revenue and earnings performance, creating a barrier to completing attractive deals. - DTST is cash-limited, which constrains the size and structure of potential acquisition transactions. - DTST's common stock currently trades below the company's liquidation value, which impacts acquisition structuring and requires the use of earn-out structures tied to performance to align seller and shareholder interests. - Early-stage target companies often provide overly aggressive growth forecasts that do not align with DTST's conservative financial criteria.

Analyst Q&A

• Q: What is the current state of DTST's M&A environment, and what is the biggest hurdle to completing a deal today? /

  A: Management has actively evaluated over 124 potential opportunities, but most unsolicited reverse merger proposals are pre-revenue companies with inflated valuations that do not meet DTST's criteria. The biggest hurdle is widespread unrealistic valuation expectations for targets, even for businesses with only $5 million to $6 million in annual revenue that seek $500 million valuations. DTST is most interested in distressed companies with solid existing IP/ assets (such as cybersecurity software or niche sovereign AI and GPU infrastructure plays) that have hit temporary financial headwinds, as these can be scaled with DTST's capital and platform. The company is in active due diligence on a small number of candidates but has not committed to any transaction.

• Q: Do you expect currently overvalued attractive opportunities to come back with more reasonable pricing over the next 6 to 12 months, and is patience part of your strategy? /

  A: Yes, management confirms that it is seeing previously unattainable opportunities return with more reasonable valuation requests as small-to-mid-sized technology companies struggle to access independent capital. DTST uses a network of specialized independent technical advisors to vet product viability and management quality for returning opportunities, and maintains a patient, disciplined approach that does not force a transaction just to deploy capital. One company DTST evaluated almost two years ago has recently returned for renewed discussions.

• Q: DTST trades below its liquidation value today. How does this impact your M&A outlook and deal structuring? /

  A: Management confirms DTST currently trades below its cash value, so deals for smaller targets will generally use a mix of partial cash and stock with an earn-out structure tied to the target meeting performance benchmarks. DTST will acquire a majority stake, place the target in a new subsidiary, and inject fresh capital for growth, requiring sellers to earn full consideration by meeting realistic growth targets. This structure aligns with DTST's limited cash position and avoids overpaying for unrealistic growth forecasts.

• Q: What timeline should investors expect for completing an acquisition? /

  A: Management's stated objective is to sign a non-binding LOI within 40 to 60 days of the call, and close an acquisition by the end of 2026 Q4. While management is impatient to complete a quality deal, it remains committed to patience and discipline, and will only close a deal that meets all of DTST's strategic and financial criteria.