Prepared remarks
Greetings, and welcome to the Data Storage Corporation Second Quarter 2026 Earnings Call. Operator instructions were provided. As a reminder, this conference is being recorded. It is now my pleasure to introduce Alexandra Schilt, Investor Relations. Thank you. You may begin.
Thank you. Good morning, everyone, and welcome to Data Storage Corporation's 2026 Second Quarter Business Update Conference Call. On the call with us this morning are Chuck Piluso, Chairman and Chief Executive Officer; and Chris Panagiotakos, Chief Financial Officer. The company issued a press release this morning containing its 2026 second quarter financial results, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at (212) 671-1020. Before we begin, please note that today's call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to various risks and uncertainties described in the company's filings with the SEC. Except as required by law, the company assumes no obligation to update or revise forward-looking statements. I'd now like to turn the call over to Chuck Piluso. Please go ahead, Chuck.
Thank you, Ali. Good morning, everyone. We appreciate everyone joining us today. The second quarter advanced transformation of Data Storage Corporation following the sale of CloudFirst. We are operating from a focused position with a clear mandate: deploy capital with discipline, explore acquisitions, build sustainable recurring revenue, and consider opportunities for emerging and meaningful value for shareholders. There are three points I want investors to take away from this call today. First, Nexxis is performing. The revenue from continuing operations increased 9.3% year-over-year, and the business delivered year-over-year growth in both revenue and gross profit. Nexxis gives us recurring revenue and an operating foundation in communications and connectivity while we execute our broader strategy. Second, our balance sheet gives us the ability to act — we ended the period with approximately $9.3 million in cash and marketable securities and no long-term debt as well as a streamlined corporate structure. That capital is something we intend to deploy. And we're not deploying capital just for the sake of doing transactions. We intend to be selective, valuation conscious and focused on opportunities where we believe we can build durable earning power. Third, our strategic pipeline is active. We are evaluating businesses and opportunities across AI infrastructure, cybersecurity, communications, software and other related technology markets. The common thread is straightforward: recurring revenue, predictable cash flow, strong customer relationships, capable management teams and a path to operational and financial growth. Our strategy is simple: partner with technology businesses that have compelling products but need resources and capital to scale. We are focused on areas including GPU infrastructure, AI-enabled software, cybersecurity and telecommunications. We believe the Nasdaq-listed platform, our operating experience and our capital position can be meaningful advantages when paired with the right business. We're not trying to assemble a collection of unrelated assets. We are working to build a portfolio of technology businesses that are synergistic and have the potential to scale. We also believe our current structure gives us several ways to create value. An acquisition adds recurring revenue and earnings, a strategic investment or partnership can provide exposure to attractive markets while allowing us to manage the risk, and internally developed initiatives can create additional opportunities when they're supported by customer demand. We are maintaining discipline around valuation and structure. Having capital available does not mean we need to deploy it immediately. We would rather preserve our flexibility and pursue a transaction that meets our strategic and financial criteria. When we commit shareholder capital, we want a clear rationale for why that business belongs within DTST and how that investment can create value over time. That framework also shapes how we evaluate acquisitions. We are looking beyond headline revenue growth. We want businesses where the quality of the revenue is attractive, where customers have a reason to stay and where the underlying economics can support sustainable earnings over time. We also want management teams that know their markets and can continue to operate as part of a larger platform. Let me spend a few moments on Nexxis. Nexxis provides fully managed business voice, Internet, data transport and SD-WAN solutions designed for the enterprise. It offers enterprise-grade reliability and simplified operation. Its model is built around recurring revenue, high-touch support and integrated connectivity. For customers, that can mean fewer vendors, better visibility, greater resiliency and a single point of accountability. For DTST, it provides a stable operating base as we pursue our next stage of growth. Our objective is to continue supporting Nexxis while remaining focused on the larger opportunity in front of us, using the platform and the capital we have today to expand the scale and earnings capacity of the company. We believe the combination of existing recurring revenue businesses and disciplined growth can create a stronger and more valuable enterprise over time. The 9.3% year-over-year increase in revenue from continuing operations is encouraging because it demonstrates that this operating foundation continues to move forward while we pursue a broader strategy. We view Nexxis not simply as a legacy business, but as an operating asset that gives DTST recurring customer relationships, market presence and practical experience supporting critical enterprise communications environments. We believe the work we are doing now can materially reshape DTST over time. The opportunity is to take a focused public company platform, a growing recurring revenue operating business and available capital and use those assets to build greater scale and stronger earning power. Today, DTST is defined by focus and optionality. We have an operating business that is growing, a debt-free capital structure, and a clear acquisition framework. We do not need to force a transaction. We can wait for the right opportunity. And when we find it, we believe we have the platform and resources. Our priority is not activity, it is value creation. Now I'd like to turn it over to Chris Panagiotakos, our CFO, for a review of the financial results. Chris?
Thank you, Chuck. Good morning, everyone. As previously discussed, on September 11, 2025, we closed the sale of our CloudFirst business for $40 million. As a result of the transaction and in accordance with auditing and reporting standards, our ongoing financial reporting now reflects only our continuing operations, specifically our Nexxis subsidiary. Sales from continuing operations were $359,000 for the three months ended June 30, 2026, an increase of $31,000 or 9.3% compared to $328,000 in the prior year period. 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. Gross profit for the three months ended June 30, 2026, was $168,000, an increase of $30,000 or 21.9% compared to $138,000 in the prior period. Our gross profit margin improved to 47% from 42.1% in the prior period, driven by favorable sales mix and operating leverage. Selling, general and administrative expenses for the three months ended June 30, 2026, increased $362,000 or 33.2% to $1.5 million from $1.1 million for the three months ended June 30, 2025. The increase was primarily driven by a $328,000 or 99.1% increase in noncash stock-based compensation as a result of grants to certain executives and employees and an increase in professional fees of $58,000 or 26.2% attributable to higher fees paid relating to legal and consulting services during the period. Net loss attributable to common shareholders for the three months ended June 30, 2026, was $1.2 million compared to a net loss of $732,000 for the three months ended June 30, 2025. We ended the quarter with cash and marketable securities of approximately $9.3 million at June 30, 2026. We used $29.5 million of the proceeds from the sale of marketable securities to repurchase common stock from our shareholders in connection with the tender offer, which closed on January 15, 2026. Thank you. I will now turn the call back to Chuck.
Thanks, Chris. Let's open up the call for some questions.
Questions and answers
Your first question comes from Matthew Galinko with Maxim Group.
Maybe if we could start with what you're seeing in the M&A environment? And what would you say the biggest hurdle is today? Is it businesses that you don't necessarily have line of sight to recurring or scalability and sustainability? Or are valuations sort of not in a place where you find realistic returns? I'm just curious what you're seeing and how that's changing over time.
Thanks, Matt. Thank you for that question. I will tell you, since we signed the deal in July with ProForma, which is owned by Renovus, the private equity firm that acquired CloudFirst, and then we had the shareholder vote in September of 2025, we've been actively working on M&A transactions. Since that July signing, we started looking at opportunities. We've had many approaches from different firms proposing reverse mergers into the company. As we evaluated those companies to see how they would improve shareholder value, we found a lot of pre-revenue biotech-type opportunities where everyone expects a $1 billion valuation in a short period of time. So that was disappointing. When we look at reverse mergers, if we actually saw something that was a real, solid company — and I'd say we've had over 15 approaches — it really wasn't a strategy of ours to pursue reverse mergers. But if something fantastic came up, you have to look at it. We just didn't see that. On the other side, you look at some of the valuations and what happens: some companies are at $5 million to $6 million in revenue and have a $500 million valuation because they raised money from friends and family. There are a lot of unrealistic valuations; no one is going to write a check for $500 million for them. So you're seeing a lot of unrealistic acquisitions. We have a few different paths. We're looking at distressed companies, for example, that have cybersecurity software but got caught up with bad debt or covenant issues — yet they own IP and have patents filed. When we see a solid management team that has gotten into trouble, we like that because it's something with legs. We can pick up the software, put some of our experience and capital behind it, and grow it, maybe building a SOC or just selling the software. So things like that interest us. We've looked at some telecom. With telecom, although it's a fantastic business, it's not on a steep growth climb. If you take Packet8 and round numbers, they might have $700 million to $800 million in revenue and a market cap around $200 million to $300 million; it's solid recurring revenue. A lot of folks today, Microsoft Teams has taken a lot of their voice business. But when you look at that, Nexxis actually integrates with Teams. So there's integration that goes on and you have a phone company that you can call. So we think that's good for growth, and John and his group do a fantastic job at Nexxis. But we're looking more at sovereign AI and niche plays. We believe that rather than trying to build a new cloud, we're looking at these niche plays that are not yet mainstream but will be ready. The business that we've been in for 25 years gives us experience that may allow us to build solutions that lead to compliance for regulated industries that cannot use public cloud — they need private builds. So we're looking seriously at companies that install sovereign AI and that have talent to be taken to another level. I have some plans for that, but we're not there yet. So I would say cyber, niche GPU infrastructure, and companies with assets or IP are of interest. We've looked at many companies. On our tracker it shows roughly 124 opportunities. We're finding a few. We have things lined up and are performing further due diligence, but we're not ready to pull the trigger on anyone. The biggest things we look at are the management team and whether they have a deliverable product and a real requirement in the market. So many folks have outrageous valuations. I don't know if that helps with the question, but it gives you a feel that we've been very active and continue to be so every week. We have several banks that are working with us and sending deals or approaching us.
That's super helpful. I appreciate the color. Maybe just as a follow-up to that process: for maybe the more attractive types of opportunities that have unrealistic valuations today but need capital and might not be able to reraise at the levels they want, do you expect any of those to potentially come back six months from now, a year from now with maybe a more reasonable ask? Or is that part of the strategy as you remain patient and have different assets and levels of engagement?
There's one exact company that we looked at a while ago — over a year ago, could be close to two years — and they did come back and we're having discussions and meeting with folks. We're just being careful. We have a group of technical advisers that can evaluate specific technologies. I'm not a software person, but we have talent that can look at GPU infrastructure and niche plays. These advisers include folks who were at Amazon, Google and other leading firms. Once we determine that a management team is good and we like them, and perhaps their forecasts are too optimistic, we try to make those forecasts more reasonable and then assess the product with our advisers involved. They have been engaged in a number of things we're looking at. It is difficult to raise money for companies at that stage and they need access to capital. We have a Nasdaq-listed company and the approximately $10 million gives us runway and some money to spend, but we're going to be careful with it. One company did come back, in answer to your question.
Your next question comes from Robert Jordan with TSA Capital.
Chuck, given where your stock is currently trading, how do you view your company's valuation? And does it factor into your M&A outlook?
Well, first of all, we're trading below our liquidation value right now. We have about $10 million in the bank; you can divide that out if you want to add any value to the public company. That said, we would use a portion of our cash in any transaction. For buying a smaller company, it would often be based on some combination of earnout, cash and stock. We would issue some cash, but we'd rather buy a company or a majority of a company, place it in a new subsidiary, and put fresh capital into that to drive growth. People have to prove that whatever we're buying has legs and can grow; we do benchmarking and then structure consideration accordingly. If they believe in the company, there's no reason they wouldn't agree to those terms. When we see unrealistic numbers, we scale them back; we talk to founders who say they'll be at $15 million, then $25 million, then $40 million in short order — it's unrealistic. I've been around long enough to know those stories. So we plan to structure deals with earnouts and limited upfront cash tied to revenue and profit targets. We are limited by cash — I'd love to have $20 million in the bank — but we're going to be careful with deployment.
No, that answers it. That's very helpful. Just one other question I have: how do you think about the timeline for your potential M&A activity? What should investors expect over the coming quarters?
I would love to get a nonbinding LOI signed within, let's call it, 40 to 60 days, and I'd love to close something toward the end of the year or definitely in the first quarter. Our objective is to get a deal done by the end of the fourth quarter. I'm impatient, but I've been patient with this process; deals keep coming in and we want to pick the right one. Every deal is a little different, but yes, I'd love to get a deal done in the fourth quarter.
Good luck with the acquisition strategy.
There are no further questions at this time. I'll hand the floor back over to Chuck Piluso for closing remarks.
Thank you. Thank you all for the questions; I appreciate it. It gives us an opportunity to go a little deeper on the direction we're pursuing. As we look forward, I believe the company is in a very strong position. We have a recurring revenue operating business in Nexxis. We have a solid capital position, and we have no long-term debt. We have a very streamlined corporate structure that gives us flexibility to pursue opportunities where we believe we can enhance value for the business and, in turn, shareholder value. Our priority now is execution. We are actively evaluating M&A opportunities across several areas of technology, but we're going to remain very disciplined. We are not going to pursue transactions simply for the sake of getting bigger. We're looking for quality businesses with quality leadership, recurring revenue and an established customer base, strong management teams that are willing to stay and grow the business, and the potential to generate sustainable earnings and cash flow. When we deploy capital, we want to do so in a way that we believe can create long-term value for our shareholders. At the same time, we intend to continue building on the momentum at Nexxis and strengthening the operating foundation of the company. Nexxis continues to provide us with a stable recurring revenue base, established customer relationships and exposure to ongoing demand for enterprise connectivity solutions. We believe that foundation gives us a solid platform as we evaluate opportunities to broaden our scale, improve our revenue base and improve the long-term earnings profile of the company. Ultimately, the next phase for DTST is about translating our financial flexibility, our operating platform and our experience into greater scale, stronger earnings power and increased shareholder value. Today, as I mentioned before, we trade below our cash and marketable securities. However, we recognize that results, not intentions, will determine our success, and our team is focused on delivering measurable progress. We appreciate the continued support from our shareholders, employees, customers and partners, and we look forward to updating you as we execute on these objectives. Thank you for joining us today.
Thank you. And that concludes today's call. All parties may disconnect. Have a good day.