DEF: Data Storage Corp Seeks Shareholder Approval for Cloud Business Divestiture

Data Storage Corporation (DSC) is seeking shareholder approval for the divestiture of its cloud solutions business for $40 million, aiming to unlock shareholder value and pursue new high-growth technology opportunities.

Summary

• Data Storage Corporation (DSC) proposes to sell its cloud solutions business, including CloudFirst Technologies Corporation and CloudFirst Europe Ltd., to Total Server Solutions Holdings, LLC for a Base Purchase Price of $40 million.
• This divestiture represents the sale of substantially all of DSC's assets, with DSC retaining its Nexxis Inc. telecommunications and data access business, which generated approximately $1.1 million in revenue for the year ended December 31, 2024.
• The Board of Directors has unanimously determined the Divestiture to be fair and advisable, recommending shareholders approve the Divestiture Proposal.
• Following the divestiture, DSC intends to make a tender offer to repurchase up to 85% of its outstanding common stock, utilizing 85% of its cash on hand, including estimated net sale proceeds of approximately $24 million after transaction costs and taxes.
• The remaining 15% of cash and sale proceeds will be used to pursue strategic acquisitions in high-growth technology sectors such as AI-enabled Vertical SaaS, cybersecurity solutions, Industrial IoT + Edge AI, and Healthcare Workflow Automation, or a potential sale/merger of DSC itself.
• The $40 million Base Purchase Price reflects a meaningful premium over DSC's pre-announcement market value of approximately $27.8 million as of June 30, 2025.
• The transaction is contingent on shareholder approval and other closing conditions, including 85% of the Business's employees, including certain Key Employees, accepting employment offers from the Purchaser.
• Cassel Salpeter & Co., LLC provided an oral and written fairness opinion to the Board on June 11, 2025, stating the Base Purchase Price was fair, from a financial point of view, to DSC.
• Executive officers and directors, collectively owning approximately 40% of DSC Common Stock, have entered into support agreements to vote in favor of the Divestiture Proposal.
• All outstanding unvested equity awards of employees, including executive officers and directors, will accelerate and fully vest upon the consummation of the Divestiture.

Sentiment

Score: 8

Explanation: The filing outlines a strategic divestiture at a premium valuation, followed by a significant share repurchase and a pivot to high-growth sectors. This indicates a proactive approach to unlock shareholder value and reposition the company for future opportunities, despite the sale of a core asset. The unanimous board approval and fairness opinion further support a positive outlook for the transaction.

Positives

• The divestiture monetizes DSC's core operating asset at a premium valuation, with a $40 million purchase price compared to DSC's pre-announcement market value of approximately $27.8 million.
• The company plans a significant return of capital to shareholders through a tender offer to repurchase up to 85% of outstanding common stock, potentially enhancing shareholder value and liquidity.
• The strategic pivot allows DSC to focus on high-growth technology sectors like AI, cybersecurity, and IoT through future acquisitions, leveraging its remaining cash and public listing.
• The Board of Directors unanimously approved the divestiture, deeming it fair and advisable, supported by a fairness opinion from a financial advisor.
• The CloudFirst business has a distinct competitive edge in its niche market (IBM Power Systems for IBM i and AIX workloads) due to lack of native support from major public cloud providers, contributing to a highly recurring revenue base and strong customer retention (over 90% annual subscription renewal rates).

Negatives

• The divestiture involves the sale of substantially all of DSC's assets, leaving the company primarily with cash and its smaller Nexxis Inc. telecommunications business.
• DSC will be subject to a five-year non-compete clause, preventing it from operating in the Disaster Recovery and IBM and x86 cloud infrastructure space.
• Executive officers and non-employee directors have interests in the divestiture, such as accelerated equity vesting and continued employment for a key executive, which may create potential conflicts of interest with general shareholders.
• Significant transaction-related expenses will be incurred regardless of whether the divestiture is completed.
• The financial advisor's fairness opinion will not be updated to reflect any changes in circumstances between the opinion date and the completion of the divestiture.
• Shareholders will not receive direct proceeds from the divestiture; their participation in value realization is contingent on the planned tender offer.
• Management will have broad discretion over the use of the remaining sale proceeds, and there is no guarantee that these funds will be invested successfully in new ventures.
• The divestiture may trigger a payment requirement for certain outstanding warrants (specifically, the July 2021 Warrants totaling 1,031,250 shares) based on their Black Scholes Value.

Risks

• The pendency of the Divestiture may adversely affect DSC's business, financial condition, and results of operations due to uncertainty among employees, customers, and other parties.
• There is a risk of impairment to DSC's ability to attract, retain, and motivate current and prospective employees, including key personnel.
• The divestiture process may divert significant time and resources of DSC's management.
• Difficulties may arise in maintaining relationships with DSC's customers and other business partners.
• The Purchase Agreement limits DSC's ability to pursue alternative business opportunities or make appropriate changes to the Business prior to completion.
• The company faces inherent litigation risk in transactions of this nature, including potential lawsuits against DSC or the Board, which could result in substantial costs and delays.
• Failure to consummate the Divestiture within the expected timeframe or at all could have a material adverse impact on DSC's business and financial condition.
• Consummation of the Divestiture is subject to several conditions, including shareholder approval, absence of governmental orders, absence of a Material Adverse Effect, and acceptance of employment offers by 85% of key employees.
• The Purchase Agreement includes exclusivity restrictions and a termination fee of $1,200,000, which could discourage competing acquisition proposals.
• Shareholders will not directly receive any proceeds from the Divestiture; their only opportunity to realize value from the sale is through participation in the planned tender offer.
• The unaudited pro forma financial information is for illustrative purposes only and may not accurately reflect DSC's actual financial condition or results of operations post-divestiture.
• Nevada law does not provide DSC's shareholders with appraisal or dissenters' rights in connection with the Divestiture.
• Failure to complete the Divestiture could cause DSC's stock price to decline.
• The Divestiture may be deemed a 'Fundamental Transaction' under certain outstanding warrants, potentially triggering a cash payment obligation by DSC to warrant holders.

Future Outlook

Following the divestiture, DSC plans to continue operating Nexxis Inc. and will focus on managing, building, expanding, or acquiring synergetic technology companies in high-growth sectors such as AI-enabled Vertical SaaS, cybersecurity solutions, Industrial IoT + Edge AI, and Healthcare Workflow Automation. The Board is also evaluating a potential full sale, reverse merger, or other business combination for DSC itself, or a hybrid of these strategies, to maximize shareholder value.

Management Comments

• The Board of Directors of DSC, after carefully considering the factors more fully described in the enclosed proxy statement, has unanimously determined the Divestiture to be fair to DSCs shareholders, and declared the Divestiture advisable.
• DSC is committed to maximizing shareholder value while maintaining flexibility to pursue the most advantageous path forward.
• DSCs Board and management team believe that DSCs market capitalization has been depressed for quite some time in addition to the fact that DSC Common Stock has suffered from a lack of trading volume, and the public market has failed to appropriately value the contributions of CloudFirst Delaware and, more recently, CloudFirst Europe.
• The depressed market capitalization and lack of trading volume of DSC Common Stock was impeding DSCs ability to attract investment and fund growth, which led DSCs management team to begin looking at strategic alternatives to increase shareholder value.

Industry Context

The divestiture of DSC's cloud solutions business, which specializes in IBM Power Systems infrastructure for IBM i and AIX workloads, highlights a strategic shift away from a niche market where major public cloud providers (AWS, Microsoft Azure, Google Cloud) do not natively support these workloads. DSC's pivot towards high-growth sectors like AI infrastructure, Vertical AI applications, and cybersecurity aligns with broader industry trends focusing on emerging technologies and digital transformation, moving away from legacy infrastructure services.

Comparison to Industry Standards

• Prior to announcing the Divestiture, DSC's Common Stock Enterprise Value/Sales ratio was approximately 1.38, significantly below the cloud sector median of 3.12, indicating a market undervaluation of its recurring revenue business.
• The $40 million Base Purchase Price for the CloudFirst business reflects a meaningful premium over DSC's pre-announcement trading value of approximately $27.8 million, suggesting the divestiture unlocks value not recognized by the public market.
• The CloudFirst platform's niche focus on IBM Power environments provides a distinct competitive edge, as major public cloud providers like AWS, Microsoft Azure, or Google Cloud do not natively support IBM i/AIX workloads.
• CloudFirst's business model leverages long-term subscription contracts for cloud and disaster-recovery services, yielding a highly recurring revenue base and strong customer retention (historically over 90% annual subscription renewal rates), which are favorable metrics compared to industry averages for subscription-based services.

Management Changes

Corporate Governance

Legal Proceedings

• No Proceeding pending, or to the Selling Entity's Knowledge threatened in writing or verbally, against or affecting the Selling Entity or any of its Subsidiaries or affecting any of their properties or assets or, as to matters related to the Selling Entity or its Subsidiaries, against any officer, director, manager, shareholder, member or employee of the Selling Entity or its Subsidiaries (including the Company Employees) in their respective capacities in such positions, except as set forth in Section 3.11 of the Company Disclosure Schedule (not provided in filing).
• No material deficiency or weakness in internal accounting controls, fraud, or wrongdoing involving management/employees in financial statement preparation or internal controls since January 1, 2023.
• No pending or past claims against the Selling Entity or its Subsidiaries initiated by any Person or entity, FTC, state attorney general, or other Governmental Body alleging violation of Privacy Laws, Privacy Agreements, or Privacy and Information Security Policies, or unfair/deceptive trade practices.
• No unauthorized access, use, loss, destruction, modification, or disclosure of Personal Data (Security Breach) in possession or control of Selling Entity or its Subsidiaries, and no legal requirement to provide notices for such breaches.
• No unauthorized intrusions or breaches of security into any Company IT Systems.
• No third-party processing Personal Data on behalf of Selling Entity or its Subsidiaries has experienced a Security Breach affecting Personal Data.
• No labor-related or employment-related complaints, allegations, or charges of employment discrimination, sexual harassment, or misconduct pending, threatened, or reasonably expected to arise against Parent or its Subsidiaries with relevant governmental bodies.
• No unfair labor practices, strikes, boycotts, sit-ins, picketing, slowdowns, stoppages of work, lockouts, or other concerted interference with normal operations existing, pending or threatened against or involving Parent or its Subsidiaries in connection with the Business.
• No plant closing, mass termination, or mass layoff of employees implemented by Parent or its Subsidiaries in connection with the Business, and no layoffs that could implicate WARN Act are currently contemplated.
• No audit of immigration, employment verification, or Form I-9 practices by any Governmental Body, nor any penalties assessed due to hire of unauthorized workers or failure to comply with document retention requirements in connection with the Business.
• No current or former independent contractor could be deemed a misclassified employee, and all non-exempt employees have been paid overtime as required.
• The filing notes the inherent risk of litigation in transactions of this nature, including potential lawsuits that could be brought against DSC or the Board in connection with the Divestiture.

Related Party Transactions

• Equipment lease agreement with Systems Trading Inc. (a company owned by Harold Schwartz, DSC's President and Director) with monthly installments of $1,566.82, which expired on March 31, 2024, at an 8% interest rate.
• Received funds of $31,352 in 2024 and $39,172 in 2023 from Nexxis Capital LLC, a company owned by Charles M. Piluso (CEO and Chairman) and Harold Schwartz.
• Lease agreement with Systems Trading effective January 1, 2022, with monthly installments of $7,145, expiring April 1, 2025, at an 8% interest rate.
• Lease agreement with Systems Trading effective May 1, 2022, with monthly installments of $6,667, expiring February 1, 2025, at an 8% interest rate.

Stakeholder Impact

• Shareholders: Potential for significant capital return through a tender offer (up to 85% of shares), potential for increased share price due to premium sale and strategic pivot, but also risk of stock price decline if divestiture fails or future strategy is unsuccessful. Shareholders will not receive direct proceeds from the sale, only via the tender offer. Nevada law does not provide dissenters' rights.
• Employees: 85% of the Business's employees, including Key Employees like Harold Schwartz, must accept employment offers from the Purchaser for the deal to close. Unvested equity awards for DSC employees (including executives) will accelerate and fully vest. There is a potential for business disruption and employee attrition during the pendency of the transaction.
• Customers: CloudFirst customers will transition to Total Server Solutions Holdings, LLC. There is a potential for disruption to customer relationships during the divestiture process.
• Management: Executive officers and directors have interests in the divestiture (e.g., accelerated equity vesting, continued employment for Harold Schwartz) that may differ from general shareholders, creating potential conflicts of interest.

Next Steps

• Hold the 2025 Annual Meeting of Shareholders on September 10, 2025, to vote on the Divestiture Proposal and other matters.
• Consummate the Divestiture in the third quarter of 2025, assuming shareholder approval and satisfaction of other conditions.
• Make a tender offer to repurchase up to 85% of outstanding DSC Common Stock shortly after the Divestiture's consummation (within three months of Closing Date).
• Evaluate strategic alternatives for the remaining 15% of cash, including targeted acquisitions in high-growth technology sectors (AI, cybersecurity, IoT) or a potential sale/merger of DSC.
• CloudFirst Delaware will change its name and cease using Business-related trademarks/trade names within five days post-closing.
• File final voting results in a Current Report on Form 8-K after the 2025 Annual Meeting.

Key Dates

Recommendation

The proposed divestiture of DSC's cloud solutions business at a significant premium to its current market valuation, coupled with the stated intention to return up to 85% of outstanding shares to shareholders via a tender offer, presents a compelling value proposition. The strategic pivot towards high-growth technology sectors like AI and cybersecurity, leveraging the remaining cash and public listing, indicates a forward-thinking management team focused on maximizing long-term shareholder value. While risks associated with execution and future acquisitions exist, the immediate value realization and clear capital allocation strategy make this a strong buy opportunity for investors.

Keywords

Divestiture, Cloud Solutions, Asset Sale, Shareholder Approval, Tender Offer, Strategic Acquisitions, AI Infrastructure, Cybersecurity, IBM Power Systems, Recurring Revenue, Corporate Governance, SEC Filing, Financial Reporting, Risk Management, Nasdaq