Data Storage Corp

(Unaudited)

Note 1 –Basis of Presentation, Organization and Other Matters

Headquartered in New York, NY Data Storage Corporation (“DSC” or the “Company”) is focused on strategic investments and supporting businesses in high-growth technology sectors, including, but not limited to, GPU Infrastructure-as-a-Service (IaaS), AI-driven software applications, cybersecurity and telecommunications.

On July 11, 2025, the Company entered into a definitive agreement to sell its cloud solutions business, comprised of its CloudFirst Technologies Corporation and CloudFirst Europe Ltd. subsidiaries (the “Could Solutions Business”). The sale was approved by shareholders on September 10, 2025, and the transaction officially closed on September 11, 2025.

As described in Note 3, the Cloud Solutions Business has been classified as a discontinued operation. The Company’s continuing operations consist of the operations of Nexxis Inc. (“Nexxis”) subsidiary, which provides voice and data telecommunications solutions. Unless otherwise noted, the following footnotes pertain to the Company’s continuing operations.

These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods presented. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2024, filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2025.

Note 2 –Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, consisting of (i) Information Technology Acquisition Corporation, a Delaware corporation; and (ii) its majority-owned subsidiary, Nexxis Inc., a Nevada corporation. All intercompany transactions and balances have been eliminated in consolidation.

The Company’s former business segments, CloudFirst Technologies Corporation and CloudFirst Europe Ltd., were sold on September 11, 2025, and are classified as discontinued operations.

The Company’s continuing operations consist of a single reportable segment focused on voice and data solutions. The Chief Executive Officer reviews consolidated financial information to assess performance and allocate resources.

Recently Issued and Newly Adopted Accounting Standards

In November 2024, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2024-03,Income Statement (Topic 220): Reporting Comprehensive Income - Expense Disaggregation Disclosures, Disaggregation of Income Statement Expenses, which requires public companies to disclose, in interim and annual reporting periods, additional information about certain expenses in the financial statements. Subsequently, in January 2025, the FASB issued ASU 2025-01, which clarified the effective date of ASU 2024-03. The amendments in this pronouncement will be effective for annual periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted and is effective on either a prospective basis or retrospective basis. The Company is currently assessing the potential impacts of adoption on its financial statements.

In May 2025, the FASB issued ASU 2025-03,Business Combinations (Topic 805) and Consolidation (Topic 810): Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity. This ASU provides guidance for determining the accounting acquirer in a business combination involving a variable interest entity. The amendments are effective for fiscal years beginning after December 15, 2026, including interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements but does not expect it to have a material impact upon adoption.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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.

Fair Value Measurement

The Company’s financial instruments include cash, accounts receivable, accounts payable and operating lease commitments. Management believes that the estimated fair values of cash, accounts receivable, and accounts payable as of September 30, 2025, approximate their carrying values due to the short-term nature of these instruments.

The fair value measurement disclosures are grouped into three levels based on valuation factors:

The Company’s Level 1 assets and liabilities include cash, accounts receivable, marketable securities, accounts payable, prepaid expenses, and other current assets. Management believes the estimated fair value of these accounts at September 30, 2025, approximates their carrying value as reflected in the balance sheets due to the short-term nature of these instruments.

The Company’s Level 2 assets and liabilities include the Company’s finance and operating lease assets and liabilities. The carrying amounts of these leases approximate their fair values, based on a comparison of the lease terms and the Company’s incremental borrowing rates with those of similar leases available in the market.

Level 3 fair value measurements are derived from valuation techniques that include significant inputs that are not based on observable market data. When required, the Company uses discounted and undiscounted cash flow models to determine the fair value of certain assets and liabilities. These models rely on unobservable inputs, which reflect management’s own assumptions about the factors that market participants would use in pricing the asset or liability, and are significant to the overall fair value measurement.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis. Assets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property and equipment, goodwill, and other intangible assets.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity, or remaining maturity at the time of purchase, of three months or less, to be cash equivalents.

Investments

Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments and assets subjecting the Company to concentration of credit risk consist primarily of cash and cash equivalents, short-term investments, and trade accounts receivable. The Company’s cash and cash equivalents are maintained at major U.S. financial institutions. Deposits in these institutions may exceed the amount of insurance provided on such deposits.

The Company’s customers are primarily concentrated in the United States.

As of September 30, 2025, the Company’s Nexxis subsidiary had four customers that individually accounted for approximately 28%,14%,11%, and 10% of the Company's total accounts receivable, respectively. For each of the three and nine months ended September 30, 2025, one customer accounted for more than 10% of sales in the Company’s Nexxis subsidiary.

Accounts Receivable

Accounts receivable are stated at their net realizable value. The Company maintains an allowance for credit losses for estimated losses resulting from the inability of its customers to make required payments. Due to the monthly subscription nature of the services and positive collection history, this allowance has not been material.

Property and Equipment

Property and equipment, which consists primarily of office and computer equipment, are recorded at cost and depreciated over their estimated useful lives using the straight-line method. The estimated useful lives for this equipment are generally five to seven years.

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 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.

Advertising Costs

The Company expenses the costs associated with advertising as they are incurred. The Company incurred $5,613 and $9,087 for advertising costs for the three months ended September 30, 2025, and 2024, respectively. The Company incurred $12,131 and $29,658 for advertising costs for the nine months ended September 30, 2025, and 2024, respectively.

Stock-Based Compensation

The Company follows the requirements of FASB ASC 718-10-10,Share-Based Payments with regards to stock-based compensation issued to employees and non-employees. The Company has agreements and arrangements that call for stock to be awarded to 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. Risk-free interest rates are calculated based on continuously compounded risk-free rates for the appropriate 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. The expected forfeiture rate is estimated based on management’s best assessment.

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.

Net Income Per Common Share

Basic income per share is computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per share is computed by dividing net income adjusted for income or loss that would result from the assumed conversion of potential shares of Common Stock from contracts that may be settled in stock or cash by the weighted average number of shares of Common Stock, common stock equivalents and potentially dilutive securities outstanding during each period.

The following table sets forth the information needed to compute basic and diluted earnings per share for the three and nine months ended September 30, 2025, and 2024:

The following table sets forth the number of potential shares of common stock that have been excluded from diluted net income per share because their effect was anti-dilutive:

**Note 3 –Discontinued Operations **

On September 11, 2025, the Company completed the sale of its Cloud Solutions Business for a base purchase price of $40,000,000. At closing, the proceeds were contractually adjusted for a $1,500,000 escrow deposit and $431,537 in net adjustments for estimated closing date debt and working capital.

This resulted in total cash received at closing of $38,068,463. The transaction remains subject to final post-closing adjustments, which may be settled from the escrowed funds.

The operating results of these divested subsidiaries have been reclassified and are presented as “Income (loss) from discontinued operations, net of tax” on the Condensed Consolidated Statements of Operations for all periods presented. The gain on the sale is presented separately in the Condensed Consolidated Statements of Operations, as follows:

(1) Represents the carrying value (book value) of the assets and liabilities of the Business on the date of sale.

(2) Represents cash selling expenses, including legal and advisory fees, as shown on the Condensed Consolidated Statement of Cash Flows.

(3) Represents the fair value of the warrant liability reclassified from equity as cost of the transaction (see Note 5).

(4) Represents the estimated provision for federal and state income taxes on the gain from the sale. This tax expense was determined based on management's preliminary analysis, which included estimates for the taxable gain on the sale, the utilization of the Company's net operating loss carryforwards based on a preliminary analysis and an estimate for state income taxes. The final tax expense is subject to change pending the completion of formal tax studies and final calculations and may be adjusted.

Summary of Significant Accounting Policies of Discontinued Operations

The Cloud Solutions Business derived revenue from subscription services for cloud infrastructure and disaster recovery, managed services, and the sale of equipment and software. Subscription revenue was recognized ratably over the contract term. Revenue from equipment and software sales was recognized at a point in time when control transferred to the customer. Goodwill and other intangible assets of the Cloud Solutions Business were tested for impairment annually. Property and equipment, primarily data center assets, were depreciated on a straight-line basis over their estimated useful lives.

Themajor classes of assets and liabilities of the Cloud Solutions Business classified as discontinued operations were as follows:

Operating results for the discontinued operations were as follows:

Note 4 -Prepaids and other current assets

Prepaids and other current assets consist of the following:

Note 5** -Warrant Liability**

Description of Warrants and Fundamental Transaction

On July 21, 2021, the Company issued 1,031,250 Common Stock Purchase Warrants (the “July 2021 Warrants”) to institutional investors. The July 2021 Warrants have an exercise price of $6.15 per share.

The July 2021 Warrant agreements contained a “Fundamental Transaction” provision stating that upon a merger, change in control, or sale of all or substantially all of the Company’s assets, holders could elect to receive a cash payment equal to the Black-Scholes value of their July 2021 Warrants.

On September 11, 2025, the Company completed the sale of its CloudFirst division (see Note 3, “Discontinued Operations”). This transaction constituted a Fundamental Transaction, which triggered the cash-settlement provision for all outstanding July 2021 Warrants.

Accounting Policy

Prior to September 11, 2025, the July 2021 Warrants were classified as equity, as the cash-settlement provision was contingent and not probable of being triggered.

The triggering of the cash-settlement provision on September 11, 2025, required the July 2021 Warrants to be reclassified from equity to a liability at their fair value. The Company recognized an initial warrant liability of $2,461,663, which was recorded as a component of the gain on sale of discontinued operations.

The warrant liability is subject to remeasurement at fair value at each subsequent reporting period. For the period from the September 11, 2025 reclassification date through September 30, 2025, the change in the liability's fair value was determined by management to be immaterial.

Fair Value Measurement

The fair value of the warrant liability is measured using the Black-Scholes-Merton option-pricing model, which requires the use of subjective assumptions. These inputs are considered Level 3 inputs within the fair value hierarchy.

The key assumptions used in the Black-Scholes-Merton model to value the outstanding warrant liability as of September 30, 2025, were as follows:

Warrant Liability Roll-Forward

The following table provides a roll-forward of the warrant liability, which is measured at fair value on a recurring basis:

During the three and nine months ended September 30, 2025, holders of 517,500 July 2021 Warrants elected to receive cash settlements totaling $1,236,825.

Note 6 -Stockholders’ Equity

Capital Stock

The Company has 260,000,000 authorized shares of capital stock, consisting of 250,000,000 shares of Common Stock, par value $0.001, and 10,000,000 shares of Preferred Stock, par value $0.001 per share. No shares of Preferred Stock are currently outstanding.

At the Market**Equity Distribution Agreement

On July 18, 2024, the Company entered into an Equity Distribution Agreement (the “Agreement”), pursuant to which it may offer and sell, from time to time, shares of its Common Stock. Sales of shares of Common Stock under the Agreement will be made pursuant to the Company’s registration statement on Form S-3 (File No. 333-280881) (the “Registration Statement”) and a related prospectus supplement (the “ATM Prospectus”). The ATM Prospectus relates to the offering of up to $10,600,000 of shares of the Company’s Common Stock. The issuance and sale, if any, of common stock under the Agreement is subject to the Company maintaining an effective registration statement. The Registration Statement was declared effective on July 26, 2024. To date, the Company has not made any sales under the Agreement.

Common Stock Options

A summary of the Company’s options activity and related information follows:

Share-based compensation expense for options totaling $383,734 and $50,451 was recognized in the Company’s results for the three months ended September 30, 2025, and 2024, respectively. Share-based compensation expense for options totaling $507,018 and $140,566 was recognized in the Company’s results for the nine months ended September 30, 2025, and 2024, respectively.

The intrinsic value of outstanding options as of September 30, 2025, was $779,471.

The valuation methodology used to determine the fair value of the options issued during the year was 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 assumption is based upon observed interest rates on zero-coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the options.

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 of the Company over a period equal to the expected life of the awards.

As of September 30, 2025, there wasno unrecognized compensation expense related to unvested employee options granted under the Company’s share-based compensation plans.

The weighted average fair value of options granted, and the assumptions used in the Black-Scholes model during the nine months ended September 30, 2025, and 2024, are set forth in the table below.

Warrants

A summary of activity related to Common Stock Warrants and related information follows for the nine months ended September 30, 2025 is presented below:

Share-based awards, Restricted Stock Units (‘RSUs’)

A summary of the activity related to RSUs for the nine months ended September 30, 2025, is presented below:

Stock-based compensation for RSUs has been recorded in the consolidated statements of operations and totaled $154,084 and $57,844 for the three months ended September 30, 2025, and 2024, respectively. Stock-based compensation for RSUs has been recorded in the consolidated statements of operations and totaled $498,812 and $202,492 for the nine months ended September 30, 2025, and 2024, respectively.

As of September 30, 2025, there wasno unrecognized compensation expense related to unvested RSUs granted under the Company’s share-based compensation plans.

Preferred Stock

Key provisions of the Company’s authorized and designated Series A Preferred Stock are set forth below. There are no shares of Series A Preferred Stock issued or outstanding as of September 30, 2025:

Liquidation preference

Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any Common Stock, the holders of Series A Preferred Stock shall be entitled to be paid out of the assets of the Company legally available for distribution to stockholders, for each share of Series A Preferred Stock held by such holder, an amount per share of Series A Preferred Stock equal to the Original Issue Price for such share of Series A Preferred Stock plus all accrued and unpaid dividends on such share of Series A Preferred Stock as of the date of the Liquidation Event.

Conversion

The number of shares of Common Stock to which a share of Series A Preferred Stock may be converted shall be the product obtained by dividing the Original Issue Price of such share of Series A Preferred Stock by the then-effective Conversion Price (as defined herein) for such share of Series A Preferred Stock. The Conversion Price for the Series A Preferred Stock shall initially be equal to $0.02 and shall be adjusted from time to time.

Voting

Each holder of shares of Series A Preferred Stock shall be entitled to the number of votes, upon any meeting of the stockholders of the Company (or action taken by written consent in lieu of any such meeting) equal to the number of shares of Common Stock into which such shares of Series A Preferred Stock could be converted.

Dividends

Each share of Series A Preferred Stock, in preference to the holders of all common stock, shall entitle its holder to receive, but only out of funds that are legally available therefore, cash dividends at the rate of ten percent (10%) per annum from the Original Issue Date on the Original Issue Price for such share of Series A Preferred Stock, compounding annually unless paid by the Company. There areno shares of Series A Preferred Stock outstanding as of September 30, 2025.

Note 7 – Commitments and Contingencies

The Company is currently not involved in any litigation that it believes could have a materially adverse effect on its financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of its subsidiaries, threatened against or affecting the Company, its Common Stock, any of its subsidiaries or of the Company’s or its subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Note 8 –Income Taxes

The Company's provision for income taxes is determined using an estimated annual effective tax rate, adjusted for discrete items that arise during the period.

Continuing Operations: For the nine months ended September 30, 2025, the Company recorded an income tax benefit of $1,034,683 on its pre-tax loss from continuing operations of $2,347,855. This benefit resulted from a partial release of the Company's valuation allowance against its net deferred tax assets. The taxable gain generated from the sale of the discontinued operation (discussed below) provided a source of income, allowing for the realization of these deferred tax assets which previously did not meet the "more likely than not" criteria. For the comparable 2024 period, the Company maintained a full valuation allowance.

Discontinued Operations: For the nine months ended September 30, 2025, the Company recorded a pre-tax loss from discontinued operations of $116,975 and a related tax benefit of $31,624.

Separately, the Company completed the sale of its discontinued operation, resulting in a pre-tax gain of $24,802,105 for the nine months ended September 30, 2025. The Company recorded a provision for federal and state income taxes on this gain of $7,330,816. This gain is treated as a significant, discrete item for tax purposes. The final tax expense is subject to change pending the completion of formal tax studies.

The final tax expense is subject to change pending the completion of formal tax studies and final calculations, and may be adjusted in the future. The $4,362,885 tax expense is recorded as a component of the "Net gain on sale of discontinued operation" in the Condensed Consolidated Statements of Operations and as "Income taxes payable" on the Condensed Consolidated Balance Sheet.

Note 9 –Related Party Transactions

Nexxis Capital LLC

Charles M. Piluso (Chairman and CEO) and Harold Schwartz (President) collectively own 100% of Nexxis Capital LLC (“Nexxis Capital”). Nexxis Capital was formed to purchase equipment and provide leases to Nexxis Inc.’s customers. The Company received from Nexxis Capital $0 and $0 for the three and nine months ended September 30, 2025, and $3,257 and $7,348 for the three and nine months ended September 30, 2024, respectively.

Eisner & Maglione CPA’s LLC

Lawrence Maglione, a member of the Board of Directors, is a partner of Eisner & Maglione CPA’s LLC. The Company paid Mr. Maglione’s firm $7,878 and $5,075 for accounting and consulting services for the three months ended September 30, 2025, and 2024, respectively. The Company paid Mr. Maglione’s firm $35,616 and $13,908 for accounting and consulting services during the nine months ended September 30, 2025, and 2024, respectively.

Note 10 –Equity Investment

On May 21, 2025, the Company invested $100,000 in TG-17, Inc.(“TG-17”), a privately held Delaware corporation, in exchange for shares of TG-17 Series CF Preferred Stock. The investment represents less than 20% of the outstanding equity of TG-17, Inc. and does not convey board representation, control rights, or any significant influence over the investee’s operating or financial policies.

The investment does not have a readily determinable fair value, and accordingly, the Company accounts for the investment using the measurement alternative. Under this method, the investment is recorded at its original cost and is adjusted for any impairment or for observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

As of September 30, 2025, the Company has not identified any events or changes in circumstances that would indicate impairment of the investment, nor has it observed any transactions requiring a remeasurement of its carrying value. The investment is classified as a non-current asset on the balance sheet.

Note 11 -Subsequent Events

The Company has evaluated events that occurred through November 18, 2025, the date that the financial statements were issued, and determined that there have been no events that have occurred that would require adjustments to the Company’s disclosures in the financial statements other than as follows:

Final Settlement of Warrant Liability

In October 2025, subsequent to the period ended September 30, 2025, the Company completed the final settlement of its outstanding warrant liability, which was recorded at**$1,224,838** on the Condensed Consolidated Balance Sheet.

The full liability was extinguished through two actions:

As of the date of this filing, the Company has no remaining liability associated with these warrants.