Data Storage (NASDAQ:DTST) said its first quarter of 2026 reflected the company’s continued transition following the 2025 sale of its CloudFirst business, with management outlining plans to pursue a new artificial intelligence infrastructure opportunity while reporting growth in its remaining Nexxis operations.
Chairman and Chief Executive Officer Chuck Piluso said the company is operating with “financial strength, strategic flexibility, and operational focus” after selling CloudFirst for $40 million in September 2025. He said the transaction allowed Data Storage to complete a tender offer that reduced its outstanding share count by approximately 72% while maintaining a debt-free balance sheet and liquidity.
Company Plans Sovereign AI Subsidiary
Piluso said Data Storage plans to establish Sovereign AI Solutions, a wholly owned subsidiary focused on developing what he described as an “AI continuity control plane” for regulated enterprises. The platform is intended to support resiliency, recovery, validation and compliance for private AI infrastructure environments.
He said organizations in industries such as healthcare, financial services and insurance are beginning to deploy AI systems on-site to run proprietary models using sensitive data. Unlike public cloud AI tools, Piluso said these systems may become embedded in core workflows, compliance functions, decision-making and customer-facing processes.
Management said traditional data storage and disaster recovery systems are primarily designed to restore infrastructure uptime, while AI deployments introduce different requirements. Piluso said enterprises will need to validate that models continue behaving correctly during and after disruptions, that outputs remain compliant, that inference consistency is maintained and that recovery procedures satisfy regulatory standards.
“We believe this creates a significantly new category of infrastructure need,” Piluso said.
Data Storage said its planned platform would be designed to detect behavioral anomalies, execute validated recovery sequences and generate audit-ready documentation. Piluso said the company is not currently aware of another purpose-built platform targeting compliance-driven AI recovery for regulated enterprises in the manner it is pursuing.
Nexxis Provides Continuing Revenue Base
Chief Financial Officer Chris Panagiotakos said the company’s ongoing financial reporting now reflects only continuing operations, specifically its Nexxis subsidiary, after the sale of CloudFirst.
Sales from continuing operations were $347,000 for the three months ended March 31, 2026, up $34,000, or 10.9%, from $313,000 in the prior-year period. Panagiotakos said the increase was primarily attributable to growth in Nexxis voice and data solutions, including new customers and higher spending from existing customers.
Gross profit was $186,000, an increase of $45,000, or 32.1%, from $141,000 a year earlier. Piluso said Nexxis gross margins expanded to 53.7%, compared with 45% in the prior-year period, reflecting demand for connectivity services and operating discipline.
Nexxis provides VoIP, dedicated internet access, SD-WAN and data transport services. Piluso said the business remains a stable recurring revenue operation and supports the company’s broader strategic initiatives.
Expenses Rise on Stock Compensation and Professional Fees
Panagiotakos said selling, general and administrative expenses increased $615,000, or 71.8%, to $1.5 million for the quarter, compared with $857,000 in the prior-year period. The increase was primarily driven by a $425,000 rise in non-cash stock-based compensation tied to grants made to certain employees during the quarter.
Professional fees increased by $135,000, or 73.6%, due to higher legal and consulting costs. Net loss attributable to common shareholders was $631,000 for the quarter, compared with net income of $24,000 for the same period in 2025.
The company ended the quarter with approximately $9.7 million in cash equivalents and marketable securities. Panagiotakos said Data Storage used $29.5 million from the sale of marketable securities to repurchase common stock through the tender offer, which closed Jan. 15, 2026.
Management Outlines Development Timeline
During the question-and-answer session, Piluso said the company is working with a recruiter to identify leadership for Sovereign AI Solutions and is evaluating potential chief technology officer candidates who may initially work on a consulting basis. He also said Data Storage is speaking with several companies about possible subcontracting, installation partnerships and software development support.
Piluso said the company hopes to begin developing a statement of work within about 30 days and may involve three separate companies with different technical disciplines. He said the first stage would resemble the CloudFirst model but focused on GPU-based infrastructure and storage, while a second stage would involve software designed to enable failover and behavioral consistency.
Asked about spending, Piluso said the company may spend approximately $250,000 to $300,000 to reach the statement-of-work stage before a larger commitment. He said subsequent spending would likely include capital expenditures, with much of the hardware depreciated over five years, though software development costs remain less certain.
Piluso said management believes the company has enough capital to implement the initiative while maintaining a two-year runway if revenue is not generated. He said Data Storage hopes to begin taking agreements in the first quarter of 2027, possibly earlier, describing the initial arrangements as “reservations” rather than subscriptions, while still recurring in nature.
Partnerships and Nexxis Growth Remain in Focus
Piluso said Data Storage is evaluating partnerships and possible joint ventures with companies already installing sovereign AI systems. He said the company is not currently focused on making investments, adding that management believes it can pursue the initiative with existing cash.
On Nexxis, Piluso said the subsidiary has strong gross margins and a small staff led by President John Canelo, who owns 20% of the business. He said Nexxis is trying to recruit business development personnel and may benefit from using a digital agency to generate inbound leads. Piluso also said Data Storage has looked at one or two acquisition opportunities that could be rolled into Nexxis and continues to evaluate that possibility.
In closing, Piluso said Data Storage aims to position itself “at the intersection of enterprise AI, resiliency, and regulated infrastructure,” while maintaining disciplined execution and strategic flexibility.
About Data Storage (NASDAQ:DTST)
Data Storage Corporation provides data management and cloud solutions in the United States and internationally. It offers a suite of multi-cloud IT solutions, including cyber security solutions, which comprise ezSecurity, a security solution for endpoint security, system assessments, and risk analysis, as well as IBM system protection, including Ransomware defense. The company also provides data protection and recovery solutions, such as ezVault for offsite data protection; ezRecovery for fast data recovery; ezAvailability for real-time data replication with minimal recovery objectives; and ezMirror for data mirroring at the storage level.
