Crexendo, Inc.

Crexendo, Inc. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited, in thousands, except par value and share data)

Condensed Consolidated Statements of Operations

(Unaudited, in thousands, except per share and share data)

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

Condensed Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2026 and 2025

(Unaudited, in thousands, except share data)

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

Notes to Condensed Consolidated Financial Statements

(unaudited, in thousands, except per share and share data)

1. Significant Accounting Policies

**Description of Business –**Crexendo, Inc. is incorporated in the state of Nevada. As used hereafter in the notes to condensed consolidated financial statements, we refer to Crexendo, Inc. and its wholly owned subsidiaries, as “we,” “us,” or “our Company.” Crexendo, Inc. is an award-winning software technology company that is a premier provider of cloud communication platform software and unified communications as a service (UCaaS) offerings, including voice, video, contact center, and managed IT services tailored to businesses of all sizes. Our cloud communications software solutions currently support over six million end users globally, through an extensive network of over 245 cloud communication platform software subscribers and our direct retail offering. The Company has two operating segments, which consist of Cloud Telecommunications and Software Solutions.

Basis of Presentation** ****–**The condensed consolidated financial statements include the accounts and operations of Crexendo, Inc. and its wholly owned subsidiaries, which include Allegiant Networks, LLC, Crexendo Business Solutions, Inc., Estech Systems, LLC (“ESI”), ESI Hosted Services, LLC, NetSapiens, LLC, Crexendo Business Solutions of Virginia, Inc., NSHC, Inc., NetSapiens Canada, Inc., NetSapiens International Limited and Crexendo International, Inc. All intercompany account balances and transactions have been eliminated in consolidation. The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”), consistent in all material respects with those applied in our financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025. Because these financial statements address interim periods, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. Such interim financial information is unaudited but reflects all adjustments that in the opinion of management are necessary for the fair presentation of the interim periods presented. The results of operations presented in this Quarterly Report on Form 10-Q are not necessarily indicative of the results that may be expected for the year ending December 31, 2026 or for any future periods. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025.

*Foreign Currency Translation -***The functional currency of our international subsidiaries is the local currency. We translate assets and liabilities of foreign subsidiaries, whose functional currency is their local currency, at exchange rates in effect at the balance sheet date. We translate revenue and expenses at the monthly average exchange rates. We include accumulated net translation adjustments in stockholders’ equity as a component of accumulated other comprehensive income (loss).

Due to changes in exchange rates between reporting periods and changes in certain account balances, the foreign currency translation adjustment will change from period to period. During the three months ended June 30, 2026 and 2025, the Company recorded foreign currency translation gains/(losses) of $3, and $33, respectively, and during the six months ended June 30, 2026 and 2025, the Company recorded foreign currency gains/(losses) of ($14) and $46, respectively, on our consolidated statements of comprehensive income (loss).

Cash and Cash Equivalents**–**We consider all highly liquid, short-term investments with maturities of three months or less at the time of purchase to be cash equivalents. As of June 30, 2026 and December 31, 2025, we had cash and cash equivalents in financial institutions in excess of federally insured limits in the amount of $17,634 and $30,715, respectively.

Trade Receivables and Allowance for Credit Losses**–**Trade receivables from our cloud telecommunications services and software solutions segments are recorded at invoiced amounts. Trade receivables are generally due within 30 days after the invoice date. We provide an allowance for credit losses based on historical loss experience, the age of the receivables, specific troubled accounts and other currently available information.

The allowance for credit losses is determined based on an assessment of historical collection experience using the aging schedule method as well as consideration of current and future economic conditions. Trade receivables are written off against the allowance after all collection efforts have been exhausted and management deems the account to be uncollectible. We believe that our trade receivable credit risk is low because of the geographic and industry diversification of our clients and small account balances for most of our clients. We continually evaluate the adequacy of the allowance for credit losses and adjust as necessary.

Equipment Financing Receivables and Allowance for Credit Losses**–**Equipment financing receivables are comprised of sales-type leases. Sales-type leases are from financing options provided to clients for cloud telecommunications equipment (IP or cloud telephone desktop devices) and are generally due in installments over periods ranging from three to five years.

We provide an allowance for credit losses based on historical loss experience, adverse situations that may affect a client’s ability to pay, current economic conditions and outlook based on reasonable and supportable forecasts. We continually evaluate the adequacy of the allowance for credit losses and adjust as necessary. Equipment financing receivables are written off against the allowance after all collection efforts have been exhausted and management deems the account to be uncollectible. We believe that our equipment financing receivable credit risk is low because of the geographic and industry diversification of our clients and small account balances for most of our clients.

Contract Assets and Allowance for Credit Losses**–**Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed as of the reporting date. The Company recognizes a contract asset when the Company transfers products or services to a customer and the right to consideration is conditional on something other than the passage of time. The contract assets are transferred to receivables when the rights become unconditional.

The allowance for credit losses is determined based on an assessment of historical collection experience using the loss-rate method as well as consideration of current and future economic conditions and changes in our loss-rate trends. We utilize a five-year lookback period to establish our estimate of expected credit losses, as our contractual terms range from three to five years. Contract assets are written off against the allowance after all collection efforts have been exhausted and management deems the account to be uncollectible. We believe that our contract assets credit risk is low because of the geographic and industry diversification of our clients and small account balances for most of our clients. We continually evaluate the adequacy of the allowance for credit losses and adjust as necessary.

Contract Costs**–**Contract costs primarily relate to incremental commission costs paid to sales representatives and sales leadership as a result of obtaining software solutions and telecommunication service contracts which are recoverable. The Company capitalized contract costs in the amount of $10,233 and $5,002 at June 30, 2026 and December 31, 2025, respectively. Capitalized commission costs are amortized based on the transfer of goods or services to which the assets relate, which typically range from thirty-six to sixty months, and are included in selling and marketing expenses. During the three months ended June 30, 2026 and 2025, the Company amortized $1,378 and $749, respectively, and during the six months ended June 30, 2026 and 2025, the Company amortized $2,432 and $1,572 respectively, and there was no impairment loss in relation to the costs capitalized.

Inventory**–**Finished goods telecommunications equipment inventory is stated at the lower of cost or net realizable value (first-in, first-out method). In accordance with applicable accounting guidance, we regularly evaluate whether inventory is stated at the lower of cost or net realizable value. If net realizable value is less than cost, the write-down is recognized as a loss in earnings in the period in which the excess occurs.

Property and Equipment**–**Depreciation and amortization expense is computed using the straight-line method in amounts sufficient to allocate the cost of depreciable assets over their estimated useful lives ranging from two to five years. The cost of leasehold improvements is amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the related lease. Depreciable lives by asset group are as follows:

Maintenance and repairs are expensed as incurred. The cost and accumulated depreciation of property and equipment sold or otherwise retired are removed from the accounts and any related gain or loss on disposition is reflected in the statement of operations.

Asset Acquisitions** ****–**Periodically we acquire customer relationships that we account for as an asset acquisition and record a corresponding intangible asset that is amortized over its estimated useful life. Any excess of the fair value of the purchase price over the fair value of the identifiable assets and liabilities is allocated on a relative fair value basis. No goodwill is recorded in an asset acquisition. If the fair value of the assets acquired exceeds the initial consideration paid as of the date of acquisition but includes a contingent consideration arrangement and ASC 450 and ASC 815 do not apply to contingent consideration, we analogize to the guidance in ASC 323 on recognizing contingent consideration in the acquisition of an equity method investment. The Company recognizes a liability equal to the lesser of, the maximum amount of contingent consideration or the excess of the fair value of the net assets acquired over the initial cost measurement. In accordance with the requirements of ASC 323 for equity method investments, the Company recognizes any excess of the contingent consideration issued or issuable, over the amount that was initially recognized as a liability, as an additional cost of the asset acquisition. If the amount initially recognized as a liability exceeds the contingent consideration issued or issuable, the entity recognizes that amount as a reduction of the cost of the asset acquisition.

**Business Acquisitions -**We account for business combinations using the acquisition method of accounting. The acquisition method of accounting requires that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. We include the results of all acquisitions in our consolidated financial statements from the date of acquisition. Acquisition related transaction costs, such as banking, legal, accounting and other costs incurred in connection with an acquisition, are expensed as incurred in general and administrative expenses.

Goodwill**–**We have recorded goodwill related to various business acquisitions. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. In each of our acquisitions, the objective of the acquisition was to expand our product offerings and customer base and to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill. We test goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired. Items that could reasonably be expected to negatively affect key assumptions used in estimating fair value include but are not limited to: sustained decline in our stock price due to a decline in our financial performance due to the loss of key customers, loss of key personnel, emergence of new technologies or new competitors; and decline in overall market or economic conditions leading to a decline in our stock price.

The process of estimating the fair value of goodwill is subjective and requires the Company to make estimates that may significantly impact the outcome of the analysis. A qualitative assessment considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, as well as company specifications. If after performing this assessment, the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company must perform the quantitative test. Under the quantitative test, a goodwill impairment is identified by comparing the fair value of the reporting unit to the carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and an impairment charge is recognized in an amount equal to the excess, not to exceed the carrying amount of goodwill.

Impairment assessment inherently involves management judgments regarding a number of assumptions. The reporting unit fair value also depends on the future strength of the U.S. economy. New and developing competition as well as technological change could also adversely affect future fair value estimates. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of the Company’s recorded goodwill, differences in assumptions could have a material effect on the estimated fair values. For further information, see Note 8 (Intangible Assets and Goodwill).

**Intangible Assets –**Our intangible assets consist of customer relationships, developed technologies, trademarks and trade name, and capitalized software development costs. The intangible assets are amortized following the patterns in which the economic benefits are consumed or straight-line over the estimated useful life. We periodically review the estimated useful lives of our intangible assets and review these assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The determination of impairment is based on estimates of future undiscounted cash flows. If an intangible asset is considered to be impaired, the amount of the impairment will be equal to the excess of the carrying value over the fair value of the asset.

Amortizable intangible assets are amortized over the estimated useful lives as follows:

Contract Liabilities**–**Our contract liabilities consist primarily of advance consideration received from customers for telecommunications contracts. The product and monthly service revenue is recognized on completion of the implementation and the remaining activation fees are reclassified as contract liabilities.

Use of Estimates**–**In preparing the consolidated financial statements, management makes assumptions, estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods. Specific estimates and judgments include valuation of goodwill and intangible assets in connection with business acquisitions and asset acquisitions, allowances for doubtful accounts, uncertainties related to certain income tax benefits, valuation of deferred income tax assets, valuations of share-based payments, annual incentive bonuses accrual, recoverability of long-lived assets and intangible assets, and product warranty liabilities. Management’s estimates are based on historical experience and on our expectations that are believed to be reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our current estimates and those differences may be material.

**Contingencies–**The Company accrues for claims and contingencies when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its matters and, where it is probable that a liability has been or will be incurred, it accrues for all probable and reasonably estimable losses. Where the Company can reasonably estimate a range of losses it may incur regarding such a matter, it records an accrual for the amount within the range that constitutes its best estimate. If the Company can reasonably estimate a range but no amount within the range appears to be a better estimate than any other, it uses the amount that is the low end of such range.

Service, Software Solutions and Product Revenue Recognition**–**Revenue is recognized upon transfer of control of promised services, software solutions or products to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services and excludes any amounts collected on behalf of third parties. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We recognize revenue for delivered elements only when we determine there are no uncertainties regarding customer acceptance. Changes in the allocation of the sales price between delivered and undelivered elements can impact the timing of revenue recognized but does not change the total revenue recognized on any agreement. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. For more detailed information about revenue, see Note 2.

Cost of Service Revenue**–**Cost of service revenue includes cloud telecommunications services. Cloud telecommunications cost of service revenue primarily consists of fees we pay to third-party telecommunications and broadband Internet providers, costs of other third-party services we resell, personnel and travel expenses related to system implementation, and customer service.

Cost of Software Solutions Revenue**–**Cost of software solutions revenue consists primarily of royalties and other fees paid to third parties whose technology or products are sold as part of the Company’s products, direct costs to manufacture and distribute products, direct costs to provide product support and professional support services, direct costs associated with delivery of the Company’s software offerings, and amortization expense related to developed technology intangible assets.

Cost of Product Revenue**–**Cost of product revenue primarily consists of the costs associated with the purchase of desktop devices and other third-party equipment we purchase for resale.

**Product Warranty –**We provide for the estimated cost of product warranties at the time we recognize revenue. We evaluate our warranty obligations on a product group basis. Our standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. We base our estimated warranty obligation upon warranty terms, ongoing product failure rates, and current period product shipments. If actual product failure rates, repair rates or any other post-sales support costs were to differ from our estimates, we would be required to make revisions to the estimated warranty liability. Warranty terms generally last for the duration that the customer has service.

Contingent Consideration**–**Contingent consideration represents deferred business acquisition and asset acquisition consideration to be paid out at some point in the future, typically over a one-year period or less from the acquisition date. Contingent consideration is recorded at the asset acquisition date fair value. Contingent consideration recorded in connection with a business acquisition is reported at fair value each reporting period until the contingency is resolved. Any changes in fair value are recognized in earnings. Contingent consideration recorded in connection with an asset acquisition is not derecognized until the related contingency is resolved and the consideration is paid or becomes payable. If the amount initially recorded as contingent consideration exceeds the amount paid or payable, the Company recognizes that excess amount as a reduction in the cost of the related intangible assets.

**Research and Development –**Research and development expenses consist primarily of personnel and related expenses for the Company’s research and development staff, including salaries, benefits, bonuses and share-based compensation and the cost of certain third-party contractors. Research and development costs are expensed as incurred. Costs related to internally developed software are expensed as research and development expense until technological feasibility has been achieved, after which the costs are capitalized.

Fair Value Measurements**–**The fair value of our financial assets and liabilities was determined based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

Lease Obligations** ****–**We determine if an agreement is a lease at inception. We evaluate the lease terms to determine whether the lease will be accounted for as an operating or finance lease. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities, current portion, and operating lease liabilities, net of current portion in our consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

A lease that transfers substantially all of the benefits and risks incidental to ownership of property are accounted for as finance leases. At the inception of a finance lease, an asset and finance lease obligation is recorded at an amount equal to the lesser of the present value of the minimum lease payments and the property’s fair market value. Finance lease obligations are classified as either current or long-term based on the due dates of future minimum lease payments, net of interest.

Notes Payable** ****–**We record notes payable net of any discounts or premiums. Discounts and premiums are amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period.

Income Taxes**–**We recognize a liability or asset for the deferred tax consequences of all temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. Accruals for uncertain tax positions are provided for in accordance with accounting guidance. Accordingly, we may recognize the tax benefits from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting guidance is also provided on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in the financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations, and cash flows. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. At December 31, 2025, we determined that it is more likely-than-not that we will not be able to realize our deferred income tax assets in the future. A valuation allowance of $7,687 and $7,687 was recorded against our gross deferred tax asset balance as of June 30, 2026 and December 31, 2025, respectively.

Interest and penalties associated with income taxes are classified as income tax expense in the condensed consolidated statements of operations.

Share-Based Compensation** ****–**For equity-classified awards, compensation expense is recognized over the requisite service period based on the computed fair value on the grant date of the award. Equity classified awards include the issuance of stock options and restricted stock units (“RSUs”).

Operating Segments** ****–**Accounting guidance establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in financial reports issued to stockholders. The Company has reorganized into two operating segments, which consist of cloud telecommunications services and software solutions. The software solutions segment includes the results of operation of NetSapiens, LLC, NSHC, Inc., NetSapiens Canada, Inc., and NetSapiens International Limited. The cloud telecommunications segment includes the results of operations of Allegiant Networks, LLC, Crexendo Business Solutions, Inc., Crexendo International, Inc., Crexendo Business Solutions of Virginia, Inc., Estech Systems, LLC (“ESI”), and ESI Hosted Services, LLC. We generate 96% of our total revenue from customers within the United States and 4% of our total revenues from customers in other parts of the world.

Significant Customers** ****–**No customer accounted for 10% or more of our total revenue for the three and six months ended June 30, 2026 and 2025. No customer accounted for 10% or more of our total trade receivables as of June 30, 2026 and December 31, 2025.

Recently Adopted Accounting Pronouncements** -**In December 2023, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) 2023-09,Income Taxes (Topic 740): Improvements to Income Tax Disclosures, to enhance the transparency and decision-usefulness of income tax disclosures, particularly in the rate reconciliation table and disclosures about income taxes paid. The ASU’s amendments are effective for annual periods beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. The Company adopted ASU 2023-09 (Topic 740) as of January 1, 2025, the adoption of this ASU did not have a material impact on our quarterly income tax disclosures in our condensed consolidated financial statements and related disclosures. However, the adoption of the ASU did have an impact on our annual income tax disclosures in our consolidated financial statements. We added disclosures for income/(loss) before tax by jurisdiction. We expanded our rate reconciliation disclosures to included disaggregated reconciling items by nature utilizing the 5% threshold and added applicable percentages for each item disclosed. Additionally, we added expanded disclosures for income taxes paid, disaggregated between federal, state and foreign jurisdictions utilizing a quantitative threshold of 5% of total income taxes paid and further disclosed the individual state and local jurisdictions that contribute to the majority (greater than 50%) of the income taxes paid within the jurisdiction. The new standard allows for prospective or retrospective adoption of these disclosure items. Management determined the retrospective disclosures would be more useful to our stockholders.

In July 2025, the FASB issued ASU 2025-05,Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets. This ASU provides entities with a practical expedient to simplify the estimation of expected credit losses on current accounts receivable and current contract assets that arise from transactions accounted for under ASC 606 by allowing the assumption that current conditions as of the balance sheet date will not change during the remaining life of the asset. The amendments in ASU 2025-05 are effective for annual reporting periods beginning after December 15, 2025, and interim reporting periods within those annual reporting periods, with early prospective adoption permitted. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements** **– In December 2025, the FASB issued ASU 2025-12,Codification Improvements. The ASU represents changes to the Codification that clarify, correct errors, or make minor improvements. The amendments make the Codification easier to understand and apply. The amendments in ASU 2025-12 are effective for fiscal years beginning after December 15, 2026, including interim periods within those fiscal years, with early adoption permitted. Except for the amendments to Topic 260, Earnings Per Share this ASU can be applied either prospectively or retrospectively with transition method elected on an issue-by-issue basis. The Company is currently evaluating ASU 2025-12 to determine the impact it may have on our consolidated financial statements.

In December 2025, the FASB issued ASU 2025-11,Interim Reporting (Topic 270): Narrow-Scope Improvements. This ASU clarifies that the interim reporting requirements in Topic 270 apply to all entities that issue interim financial statements prepared in accordance with U.S. GAAP and consolidates such requirements within Topic 270. The amendments provide a comprehensive list within Topic 270 of required interim disclosures, establish a principle requiring disclosure of events or changes occurring after the end of the most recent annual reporting period that have a material impact on interim results and clarifies the form and content requirements applicable to interim financial statements. The amendments in ASU 2025-11 are effective for the interim reporting periods within annual reporting periods beginning after December 15, 2027, with early adoption permitted. This ASU can be applied either prospectively or retrospectively to any or all prior periods presented in the financial statements. The Company is currently evaluating ASU 2025-11 to determine the impact it may have on our consolidated financial statements.

In November 2025, the FASB issued ASU 2025-08,Financial Instruments — Credit Losses (Topic 326): Purchased Loans. This ASU requires that loans acquired without credit deterioration and deemed “seasoned” will be considered purchased seasoned loans and accounted for using the gross-up approach at acquisition (i.e., record the loan at its purchase price and separately record an allowance for expected credit losses). Seasoned loans include all loans acquired in a business combination, that do not have “more-than-insignificant” deterioration of credit quality since origination, as well as loans purchased at least 90 days after origination, where the purchaser was not involved in the origination of the loans. The amendments in ASU 2025-08 are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods, with early adoption permitted. This ASU should be applied prospectively to loans that are acquired on or after the initial application date. The adoption is not expected to have an impact on our consolidated financial statements.

In September 2025, the FASB issued ASU 2025-06,Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Softwarewhich amends the guidance in ASC 350-40*, Intangibles — Goodwill and Other — Internal-Use Software*. This ASU modernizes the recognition and disclosure framework for internal-use software costs, removing the previous “development stage” model and introducing a more judgment-based approach. The amendments in ASU 2025-06 are effective for fiscal years beginning after December 15, 2027, and for interim periods within those annual reporting periods, with early adoption permitted. This ASU is permitted to be applied prospectively, retrospectively or through a modified transition approach. The adoption is not expected to have an impact on our consolidated financial statements.

In November 2024, the FASB issued ASU No. 2024-03,Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. ASU 2024-03 requires a public business entity (“PBE”) to disclose information in the notes to financial statements about purchases of inventory, employee compensation, depreciation, intangible asset amortization, and depletion for each income statement line item that contains those expenses. Entities would also have to disclose other specific expenses, gains, or losses that are already required to be disclosed under GAAP in this same disclosure, a qualitative description of the amounts remaining that are not separately disaggregated quantitatively, and the total amount of selling expenses, as well as the PBE’s definition of selling expenses. In January 2025, the FASB Issued ASU No. 2025-01,Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40), which clarified that ASU 2024-03 is effective public business entities for annual reporting periods beginning after December 15, 2026 and interim reporting periods within annual reporting periods beginning after December 15, 2027. Implementation of ASU 2024-03 may be applied prospectively or retrospectively. The application of this new guidance is not expected to have a material impact on the Company’s financial statements, as the guidance pertains only to disclosures.

**2.**Revenue

Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product, service, or software solution to a customer. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. The following is a description of principal activities – separated by reportable segments – from which the Company generates its revenue. For more detailed information about reportable segments, see Note 17.

Cloud Telecommunications Services Segment

Products and services may be sold separately or in bundled packages. The typical length of a contract for service is thirty-nine to ninety months. Customers are billed for these services on a monthly basis. For bundled packages, the Company accounts for individual products and services separately if they are distinct – i.e. if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services in a bundle based on their relative stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the desktop devices and telecommunication services. For items that are not sold separately (e.g. additional features) the Company estimates stand-alone selling prices using the adjusted market assessment approach. When we provide a free trial period, we do not begin to recognize recurring revenue until the trial period has ended and the customer has been billed for the services.

Desktop Devices** –**Revenue generated from the sale of telecommunications equipment (desktop devices) is recognized when the customer takes possession of the devices and the cloud telecommunications services begin. The Company typically bills and collects the fees for the equipment upon entering into a contract with a customer. Cash receipts are recorded as a contract liability until implementation is complete and the services begin.

Equipment Financing Revenue** –**Fees generated from renting our cloud telecommunication equipment (IP or cloud telephone desktop devices) through leasing contracts are recognized as revenue based on whether the lease qualifies as an operating lease or sales-type lease. The two primary accounting provisions which we use to classify transactions as sales-type or operating leases are: 1) lease term to determine if it is equal to or greater than 75% of the economic life of the equipment and 2) the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the equipment at the inception of the lease. The economic life of most of our products is estimated to be three years, since this represents the most frequent contractual lease term for our products, and there is no residual value for used equipment. Residual values, if any, are established at the lease inception using estimates of fair value at the end of the lease term. The vast majority of our leases that qualify as sales-type leases are non-cancelable and include cancellation penalties approximately equal to the full value of the lease receivables. Leases that do not meet the criteria for sales-type lease accounting are accounted for as operating leases. Revenue from sales-type leases is recognized upon installation and the interest portion is deferred and recognized as earned. Revenue from operating leases in recognized ratably over the applicable service period.

Cloud Telecommunications Services** –**Cloud telecommunication services include voice, data, collaboration software, broadband Internet access, managed IT services, cloud server rental and support, managed security, cabling, software license sales, interest generated from equipment financing revenue, and support for premise-based PBX phone systems. The Company recognizes revenue as services are provided in service revenue. Fees generated from reselling broadband Internet access are recognized as revenue net of the costs charged by the third-party service providers. Cloud telecommunications services are billed and paid on a monthly basis. Our telecommunications services contracts typically have a term of thirty-nine to ninety months.

Fees, Commissions, and Other, Recognized over Time** –**Includes contracted and non-contracted items such as:

One-Time Fees, Commissions, and Other** –**Includes contracted and non-contracted items such as:

Software Solutions Segment

The Software Solutions segment derives revenues from three primary sources: software licenses, software maintenance support and professional services. Software and services may be sold separately or in bundled packages. Generally, contracts with customers contain multiple performance obligations, consisting of software and services. For bundled packages, the Company accounts for individual products and services separately if they are distinct – i.e. if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services in a bundle based on their relative stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the software licenses and professional services. For items that are not sold separately (e.g. additional features) the Company estimates stand-alone selling prices using the adjusted market assessment approach. When we provide a free trial period, we do not begin to recognize recurring revenue until the trial period has ended and the customer has been billed for the services.

Software Licenses** -**The Company’s software licenses typically provide a perpetual right to use the Company’s software. The Company also sells term-based software licenses that expire and Software-as-a-Service (“SaaS”) based software which are referred to as subscription arrangements. The Company does not customize its software nor are installation services required, as the customer has a right to utilize internal resources or a third-party service company. The software is delivered before related services are provided and are functional without professional services or customer support. The Company has concluded that its software licenses are functional intellectual property that are distinct, as the user can benefit from the software on its own. The software license revenue could be recognized upon transfer of control or when the software is made available for download, as this is the point that the user of the software can direct the use of, and obtain substantially all of the remaining benefits from, the functional intellectual property. However, historical experience shows that customers regularly renegotiate the number of licenses during the installation process. Therefore, the Company recognizes revenue from software licenses when the setup is complete. The Company does not recognize software revenue related to the renewal of subscription software licenses earlier than the beginning of the subscription period.

Subscription Maintenance and Support -** **Subscription maintenance and support revenue includes revenue from maintenance service contracts, customer support, and other supportive services. The Company offers warranties on its products. The warranty period for the Company’s licensed software is generally 90 days. Certain of the Company’s warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations. The Company also sells separately-priced maintenance service contracts, which qualify as service-type warranties and represent separate performance obligations. The Company does not typically allow and has no history of accepting material product returns. Customer support includes software updates on a when-and-if-available basis, telephone support, integrated web-based support and bug fixes or patches. Subscription and maintenance support revenue is recognized ratably over the term of the customer support agreement, which is typically one year.

*Professional Services and Other -*The Company’s professional services include consulting, technical support, resident engineer services, design services and installation services. Revenue from professional services and other is recognized when the performance obligation is complete and the customer has accepted the performance obligation.

Disaggregation of Revenue

In the following table, revenue is disaggregated by primary major product line, and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the reportable segments.

Contract balances

The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers:

Significant changes in the contract assets and the contract liabilities balances during the period are as follows:

Contract assets and allowance for credit losses

Our contract assets balance consists of the Company’s rights to consideration for work completed but not billed as of the reporting date. The contract assets are transferred to receivables when the rights become unconditional. Contract assets were as follows (in thousands):

The allowance for credit losses is determined based on an assessment of historical collection experience using the loss-rate method as well as consideration of current and future economic conditions and changes in our loss-rate trends. We utilize a five-year lookback period to establish our estimate of expected credit losses, as our contractual terms range from three to five years. Based on that assessment, the allowance for credit losses as a percent of gross contract assets decreased to 12.7% at June 30, 2026 from 26.4% at December 31, 2025.

Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in thousands):

All consideration from contracts with customers is included in the amounts presented above

3. Earnings Per Common Share

Basic net income/(loss) per common share is computed by dividing the net income for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed giving effect to all dilutive common stock equivalents, consisting of common stock options. The following table sets forth the computation of basic and diluted net income per common share:

For the three and six months ended June 30, 2026 and 2025, the following potentially dilutive common stock, including awards granted under our equity incentive compensation plans, were excluded from the computation of diluted net income per share because including them would be anti-dilutive:

4. Acquisitions

ESI Business Acquisition

On March 1, 2026, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Estech Holdings, Inc., a Texas corporation (“Seller”), pursuant to which the Company agreed to purchase from Seller one hundred percent (100%) of the issued and outstanding membership interests (the “Purchased Interests”) of Estech Systems, LLC, a Delaware limited liability company, and its operating subsidiary, ESI Hosted Services, LLC (collectively, “ESI”), subject to the terms and conditions set forth in the Purchase Agreement. The aggregate purchase price for the Purchased Interests was $34,733, subject to customary post-closing purchase price adjustments based on working capital, indebtedness, and transaction expenses. The Purchase Price consists of $27,300 in cash and $7,433 in shares of the Company’s common stock, resulting in the issuance following closing of the Acquisition of 1,159,638 shares of the Company’s common stock, par value $0.001, calculated based on the Average Share Price as defined in the Purchase Agreement. The Shares were issued in a private transaction in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). The shares have not been registered under the Securities Act and may not be offered or sold absent registration or an applicable exemption. Pursuant to the lock-up agreement, after six months, 50% of the shares will be permitted to be sold, with an additional 50% permitted to be sold after twelve months. On March 1, 2026, the Company closed the transaction, and the Company issued the seller cash consideration of $27,300 and 1,159,638 shares of the Company’s common stock valued at $6.41 per share, for an aggregate purchase price of approximately $34.7 million.

The acquisition was accounted for under the acquisition method of accounting, and the operating results of ESI have been included in our condensed consolidated financial statements from the closing date of the acquisition. The historical results of operations of ESI were not significant to the Company’s condensed consolidated results of operations for the periods presented. Under the acquisition method of accounting, the aggregate amount of consideration paid by us was allocated to ESI’s net tangible assets and intangible assets based on their estimated fair values as of the acquisition closing date. The preliminary purchase price allocation, as set forth in the table below, reflects various preliminary fair value estimates and analysis prepared by the Company. We retained an independent third-party valuation firm to assist management in our valuation of the acquired assets and liabilities assumed and we expect this valuation to be completed during the third quarter of 2026. ESI required additional time to complete their historical audited financial statement for the year ended December 31, 2025, which was issued in May 2026. The preliminary purchase price allocation is subject to revision as a more detailed analysis is completed by a third-party valuation specialist and additional information on the fair values of ESI’s assets and liabilities becomes available. Any change in the fair value of the net assets of ESI will change the amount of the purchase price allocable to goodwill. Final purchase accounting adjustments may differ materially from preliminary purchase price allocation presented here. The preliminary areas of the purchase price allocation that are not yet finalized relate to the identification and valuation of intangible assets by an independent third-party valuation firm and the determination of fair values of certain assets and liabilities; trade receivable, right-of-use assets and associated liabilities, deferred tax assets, contract costs, and various accrued liabilities. We anticipate finalizing our purchase price allocation during 2026. The following table presents the preliminary allocation of the assets acquired and liabilities assumed as of March 1, 2026 (in thousands):

(a) During the second quarter of 2026, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustment was due to an adjustment to the payment of a pre-acquisition liability and a decrease to goodwill of $2.

(b) During the second quarter of 2026, we identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to revisions to our estimates for various assets acquired and liabilities assumed, resulting in a net decrease of $1 to assets acquired, a decrease of $44 to liabilities assumed, and a decrease to goodwill of $43.

The preliminary fair value of the customer relationships and trademarks and trade names of $23,400 was established based upon the income approach. The income approach relies on an estimation of the present value of the future monetary benefits expected to flow to the owner of an asset during its remaining economic life. This approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted to its present value using a rate of return, or discount rate that accounts for the time value of money and the degree of risk inherent in the asset. The income approach may take the form of a “relief from royalty” methodology, a cost savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration.

The customer relationships were valued using the multi-period excess earnings method. Inherent in the multi-period excess earnings method is the recognition that, in most cases, all of the assets of the business, both tangible and intangible, contribute to the generation of the cash flow of the business and the net cash flows attributable to the subject asset must recognize the support of the other assets which contribute to the realization of the cash flows. This future cash flow was then discounted using an estimated required rate of return for the asset to determine the present value of the future cash flows attributable to the asset. The key assumptions used in valuing the customer relationships acquired are as follows: weighted average cost of capital of 17%, tax rate of 25.0%, and estimated economic life of 14 years.

The preliminary estimate of the trademarks and trade name were valued using the relief from royalty methodology. The relief-from-royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be required to pay royalties or license fees on revenues earned through the use of the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the trademarks and trade name. The market-derived royalty rate is then applied to estimate the royalty savings. The key assumptions used in valuing the trademarks and trade name are as follows: royalty rate of 1.0%, discount rate of 18%, tax rate of 25% and estimated average economic life of 6 years.

The following unaudited pro forma information presents our consolidated results of operations as if ESI had been included in our consolidated results since January 1, 2025:

The unaudited pro forma financial information is presented for informational purposes only and may not necessarily reflect the Company’s future results of operations or what the results of operations would have been had the Company owned and operated ESI as of January 1, 2025.

Acquisition-related expenses incurred by us in connection with the ESI acquisition of $180 for the three months ended June 30, 2026 and $1,019 for the six months ended June 30, 2026, are recorded within general and administrative expenses in our condensed consolidated statements of operations.

5. Trade Receivables and Allowance for Credit Losses

Our trade receivables balance consists of traditional trade receivables. Trade receivables were as follows (in thousands):

The allowance for credit losses is determined based on an assessment of historical collection experience using the aging schedule method as well as consideration of current and future economic conditions. Based on that assessment, the allowance for credit losses as a percent of gross trade receivables decreased to 1.2% at June 30, 2026 from 2.5% at December 31, 2025.

6. Equipment Financing Receivables and Allowance for Credit Losses

Our equipment financing receivables balance consists of sales-type leases arising from lease financing of cloud telecommunication equipment (IP or cloud telephone desktop devices) bundled and sold with our cloud telecommunications services. The majority of our leases that qualify as sales-type leases are non-cancelable and include cancellation penalties approximately equal to the full value of the lease receivables. Revenue from sales-type leases is recognized upon installation and the interest portion is deferred and recognized as earned. These receivables are typically collateralized by a security interest in the underlying equipment. Equipment financing receivables were as follows (in thousands):

A summary of our gross equipment financing receivables’ future contractual maturities, is as follows (in thousands):

Allowance for Credit Losses

Aging of Receivables

The aging of gross equipment financing receivables was as follows (in thousands):

Our equipment financing receivable portfolio is primarily in the United States. The allowance for credit losses is determined principally based on an assessment of origination year and past collection experience as well as consideration of current and future economic conditions and changes in our customer collection trends. Based on that assessment, the allowance for credit losses as a percent of gross equipment financing receivables (net of unearned income) decreased to 2.7% at June 30, 2026 from 3.3% at December 31, 2025.

The allowance for credit losses represents an estimate of the losses expected to be incurred from the Company’s equipment financing receivable portfolio. The projected loss rates are primarily based upon historical loss experience adjusted for judgments about the probable effects of relevant observable data including current and future economic conditions as well as delinquency trends, resolution rates, and the aging of receivables. The allowance for credit losses for equipment finance receivables is inherently more difficult to estimate than the allowance for trade receivables because the underlying lease portfolio has an average maturity, at any time, of approximately three to five years and contains unbilled amounts. We consider all available information in our quarterly assessments of the adequacy of the allowance for credit losses. We believe our estimates, including any qualitative adjustments, are reasonable and have considered all reasonably available information about past events, current conditions, and reasonable and supportable forecasts of future events and economic conditions. The identification of account-specific exposure is not a significant factor in establishing the allowance for credit losses for equipment finance receivables. We continue to monitor developments in future economic conditions and trends, and as a result, our reserve may need to be updated in future periods.

The table below shows gross equipment financing receivables and current period gross write offs by year of origination (in thousands):

6. Prepaid Expenses

** **Prepaid expenses consisted of the following (in thousands):

7. Property and Equipment

** **Property and equipment consisted of the following (in thousands):

Depreciation expense is included in general and administrative expenses and totaled $63 and $55 for the three months ended June 30, 2026 and 2025, respectively, and $108 and $120 for the six months ended June 30, 2026 and 2025, respectively.

8. Intangible Assets and Goodwill

Acquired intangible assets subject to amortization consisted of the following (in thousands):

As of June 30, 2026, the weighted average remaining useful life for customer relationships was 12.5 years, Trademarks was 5.5 years, and developed technologies was 0.9 years.

Amortization expense for customer relationships intangible assets is included in selling and marketing expenses, amortization expense for developed technologies intangible assets is included in cost of software solutions revenue, and amortization expense for trademark and trade name intangible assets is included in general and administrative expenses. The following table summarizes the amortization expense by financial statement line item (in thousands):

As of June 30, 2026, annual amortization of definite lived intangible assets, based on existing intangible assets and current useful lives, is estimated to be the following (in thousands):

The following table provides a summary of changes in the carrying amounts of goodwill (in thousands):

9. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

The changes in aggregate product warranty liabilities for the year ended December 31, 2025 and the six months ended June 30, 2026 were as follows (in thousands):

Product warranty expense is included in cost of product revenue expense and totaled $7 and $6 for the three months ended June 30, 2026 and 2025, respectively, and $11 and $12 for the six months ended June 30, 2026 and 2025, respectively.

**10.**Notes Payable

Notes payable consists of short and long-term financing arrangements:

In May 2026, the Company entered into a credit agreement with Wells Fargo Bank, National Association, (“Credit Agreement”), providing for a $5,000 Term Loan. Borrowings under the Term Loan will bear interest, at a rate per annum equal to the Applicable Margin of 2.25% plus the Term Secured Overnight Financing Rate (“SOFR”) in effect on the first day of the applicable interest period. The interest period is a period commencing on a Federal Reserve Business Day and continuing for 1 month, 3 months, or 6 months as designated by the borrower from time to time, during which the future outstanding principal balance bears interest. The applicable margin is determined based on the Company’s total net leverage ratio (as defined in the agreement) and varies between tranches from 2.25% at a less than or equal to 2.00 to 1.00 net leverage ratio and up to 2.75% at a greater than 2.50 to 1.00 net leverage ratio. Interest is payable quarterly in arrears on the last day of each fiscal quarter, with respect to borrowings bearing interest. The Term Loan is subject to compliance with the restrictive covenants as defined in the agreement. The credit facility is guaranteed by certain material domestic subsidiaries of the Company and secured by substantially all of the personal property of the Company and such subsidiary guarantors. In connection with the Credit Agreement, the Company incurred $147 of total debt issuance costs. As of June 30, 2026, $139 of unamortized debt issuance costs remained.

On February 27, 2023, we entered into a promissory note with CrossFirst Bank in the amount of $278. The promissory note had a term of three (3) years with monthly payments of Eight Thousand Five Hundred Forty-Three ($8,543), including interest of 6.58%, beginning on March 27, 2023. Additionally, the promissory note is subject to certain financial covenants.

On November 1, 2022, as part of the acquisition of Allegiant Networks, we entered into a promissory note with the seller in the amount of $1.1 million. The loan agreement had a term of three (3) years with quarterly payments of Ninety-Eight Thousand Three Hundred Eighty-One ($98,381), including interest at 4.00%, beginning on April 1, 2023. As of June 30, 2026 and December 31, 2025, the outstanding balance of the related party note payable was $0 and $98, respectively. During the three months ended June 30, 2026 and 2025, the Company paid principal of $0 and $94, respectively, and interest of $0 and $4, respectively. During the six months ended June 30, 2026 and 2025, the Company paid principal of $98 and $188, respectively, and interest of $0 and $8, respectively.

As of June 30, 2026, future principal payments are scheduled as follows (in thousands):

11. Line of Credit

In May 2026, the Company entered into a credit agreement with Wells Fargo Bank, National Association, (“Credit Agreement”), providing for a $5,000 Revolving Credit Facility. The $5,000 Revolving Credit Facility commitments remain available for draw until May 2029, at which time it will terminate, and all outstanding revolving loans under the facility will be due and payable. Borrowings under the Revolving Credit Facility shall bear interest either (i) at a fluctuating rate per annum equal to the Applicable Margin plus Daily Simple SOFR in effect from time to time, or (ii) at a rate per annum equal to the Applicable Margin plus Term SOFR in effect on the first day of the applicable Interest Period, as selected by the Company. The Company selected an interest period of quarterly. The applicable margin is determined based on the Company’s total net leverage ratio (as defined in the agreement) and varies between tranches from 2.25% at a less than or equal to 2.00 to 1.00 net leverage ratio and up to 2.75% at a greater than 2.50 to 1.00 net leverage ratio. Interest is payable quarterly in arrears on the last day of each fiscal quarter, with respect to borrowings bearing interest. Any drawdown under the Credit Agreement would be subject to compliance with the restrictive covenants as defined in the agreement. The Company also pays a quarterly fee of up to 0.35% per annum on the daily unused amount of the Revolving Credit Facility commitments. The credit facility is guaranteed by certain material domestic subsidiaries of the Company and secured by substantially all of the personal property of the Company and such subsidiary guarantors. As of June 30, 2026, there was an outstanding balance of $0, and $5,000 remained available for borrowing.

The Company maintained a line of credit with a maximum principal amount of $700, payable upon demand. The line of credit bore interest at 0.50% over the Wall Street Journal Prime Rate. As of June 30, 2026, there was an outstanding balance of $0 and $0 remained available for borrowing. The line of credit was collateralized by all company assets and subject to certain financial covenants. On February 18, 2026, the Company terminated the line of credit.

12. Fair Value Measurements

We have financial instruments as of June 30, 2026 and December 31, 2025 for which the fair value is summarized below (in thousands):

We have no liabilities for which fair value is recognized in the balance sheet on a recurring basis as of June 30, 2026 and December 31, 2025.

13. Income Taxes

Our effective tax rate for the three months ended June 30, 2026 and 2025 was 2.3% and 3.8%, respectively, which resulted in an income tax benefit/(provision) of $(25) and $(48), respectively. Our effective tax rate for the six months ended June 30, 2026 and 2025 was 3.2% and 3.7%, respectively, which resulted in an income tax benefit/(provision) of $(54) and $(92), respectively.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the evidence available, it is more-likely-than-not that such assets will not be realized. In making the assessment under the more-likely-than-not standard, appropriate consideration must be given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods by jurisdiction, unitary versus stand-alone state tax filings, our experience with loss carryforwards expiring unutilized, and all tax planning alternatives that may be available. As of December 31, 2025, management reviewed the weight of all the positive and negative evidence available. Management reviewed positive evidence such as three years of cumulative pretax income in the U.S. federal tax jurisdiction, and projections of future pretax income and the duration of statutory carry-forward periods and negative evidence such as the impact of future acquisitions on our cumulative pretax net income in the U.S. federal tax jurisdiction. As of December 31, 2025 the Company has a cumulative pretax income for the three-year lookback, excluding the gain on the sale of property and equipment, which is considered significant objectively verifiable negative evidence. Management also evaluated projections of future pretax income and the duration of statutory carry-forward periods to determine if the NOL carryforwards could be utilized in whole or in part before they expire unutilized. In our forecast and projections of future income, we also consider the impact of probable future acquisitions, and the impact additional intangible asset amortization expenses will have on our future pretax income. Forecasts and projections of future income are inherently subjective and therefore generally are given less weight, based on the extent to which the assumptions can be objectively verified based on historical experience. Although historical trends utilized in our projections are objectively verifiable, we assigned less weight to this positive evidence given the subjective nature of assumptions in projections and the unknown impact of the additional intangible asset amortization expense will have in future periods from the acquisition closed during the quarter ended March 31, 2026. Management reviewed negative evidence related to experience of credits and loss carryforwards expiring unutilized, and determined that although negative evidence exists, it was not significant evidence, as the current loss carryforwards do not begin to expire until 2034 and therefore risk is minimal. After reviewing the weight of the positive and negative evidence, management determined that the positive evidence was not sufficient enough to overcome the negative evidence of potentially returning to a cumulative pretax loss position for the three-year lookback in future periods as a result of additional intangible asset amortization expense from the business combination completed during the quarter ended March 31, 2026. Therefore, management determined that it is more likely than not that deferred tax assets of $7,687 are not realizable. Therefore, a valuation allowance of $7,687 was recorded against our gross deferred tax asset balance as of June 30, 2026 and December 31, 2025.

14. Share-Based Compensation

The following table summarizes the statement of operations effect of share-based compensation for the three and six months ended June 30, 2026 and 2025 (in thousands):

15. Leases

Lessee Accounting

We determine if an agreement is a lease at inception. We lease office space, data center colocation space, other assets, and office equipment under operating leases. We lease data center equipment, including maintenance contracts and vehicles under finance leases.

Operating leases are recorded as right-of-use (“ROU”) assets and lease liabilities on the balance sheet, excluding leases that are less than 12 months. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. The Company’s lease agreements do not contain any variable lease payments, material residual value guarantees or any restrictive covenants. Our lease terms may include options, at our sole discretion, to extend or terminate the lease.

We leased office space in Tempe, Arizona under a non-cancelable operating lease agreement that expired in January 2025. On August 9, 2023, in connection with the sale of our corporate office building and land, we entered into a lease agreement to leaseback the property. The operating lease agreement had an initial term of eighteen full calendar months, with an option to terminate the lease on the last day of the twelfth full calendar month with a sixty-day notice. The operating lease agreement included fixed fees for property tax, insurance, and common area maintenance (CAM). We accounted for the lease components and non-lease components such as fixed fee property tax and insurance charges as a single lease component. The CAM charges were considered a separate non-lease component of the lease agreement and were excluded from the measurement of the lease liability.* *We utilized our incremental borrowing rate of 6.58% to determine the present value of lease payments to determine our lease liability. Rental expense for the three months ended June 30, 2026 and 2025 was approximately $0 and $0, respectively, and for the six months ended June 30, 2026 and 2025 was $0 and $14, respectively. The Company terminated the lease agreement as of January 31, 2025.

We currently are in a non-cancelable commercial sublease operating agreement to sublease office space in Tempe Arizona, which is the headquarters for the Company. This sublease commenced on October 1, 2025, and will continue for thirty-seven (37) months through October 31, 2027. The base monthly rent is as follows: October 1, 2025 – September 30, 2026, $28; October 1, 2026 – September 30, 2026, $29, and October 1, 2026 – October 31, 2027, $30. The Company is entitled to three months of rent abatement, which will be January 2026, January 2026, and January 2027. If Operating Costs exceed $20 in a calendar year, then the Company shall be responsible for fifty (50%) percent of the amount exceeding $20. Rental expense for the three months ended June 30, 2026 and 2025 was approximately $82 and $81, respectively, and for the six months ended June 30, 2026 and 2025 was $163 and $161, respectively.

We currently lease office space in San Diego, California under a non-cancelable operating lease agreement that expires in 2026. Rental expense for the three months ended June 30, 2026 and 2025 was approximately $22 and $21, respectively, and for the six months ended June 30, 2026 and 2025 was $45 and $43, respectively.

We currently lease office space in Overland Park, Kansas under a non-cancelable operating lease agreement that expires in 2027. The operating lease contains customary escalation clauses. Rental expense for the three months ended June 30, 2026 and 2025 was approximately $44 and $41, respectively, and for the six months ended June 30, 2026 and 2025 was $88 and $82, respectively.

We currently lease office space in Plano, Texas under a non-cancelable operating lease agreement that expires in 2026. Rental expense for the three months ended June 30, 2026 and 2025 was approximately $8 and $0, respectively, and for the six months ended June 30, 2026 and 2025 was $11 and $0, respectively.

We currently lease other assets under multiple operating leases. The leases expire on various dates through 2027 and the interest rates range from 3% to 15.74%. The expense is included in cost of product expenses and totaled approximately $14 and $17 for the three months ended June 30, 2026 and 2025, respectively, and for the six months ended June 30, 2026 and 2025 was $29 and $35, respectively.

We currently lease data center colocation space in Grand Rapids, Michigan, Las Vegas, Nevada, Dallas, Texas, Lenexa, Kansas, Plano, Texas, Secaucus, New Jersey and Phoenix, Arizona under non-cancelable operating lease agreements that expire on various dates through 2029. Rental expense for the three months ended June 30, 2026 and 2025 was approximately $84 and $102, respectively, and for the six months ended June 30, 2026 and 2025 was $94 and $216, respectively.

We have lease agreements with lease and non-lease components, and we account for the lease and non-lease components as a single lease component. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company leases equipment and support under finance lease agreements which extend through 2026. The Company also leases one vehicle under a financing agreement. The outstanding balance for finance leases was $1 and $2 as of June 30, 2026 and December 31, 2025, respectively. The Company recorded assets classified as property and equipment under finance lease obligations of $486 and $486 as of June 30, 2026 and December 31, 2025, respectively. Related accumulated depreciation totaled $485 and $462 as of June 30, 2026 and December 31, 2025, respectively. The interest rate on the finance lease obligation is 15.74% and interest expense was $0 and $0 for the three months ended June 30, 2026 and 2025, respectively, and for the six months ended June 30, 2026 and 2025 was $0 and $0, respectively.

The maturity of operating leases and finance lease liabilities as of June 30, 2026 are as follows:

16. Commitments and Contingencies

Annual Employee Bonus Plan Accrual

We utilize incentive bonuses to reward performance achievements, which provides potential annual cash bonus awards to Company employees, including Named Executive Officers (“NEOs”). Under the Bonus Plan, the Compensation Committee of the Board of Directors of the Company (the “Board”) has established a bonus pool of $1,089, for our NEOs and executive management team for the year ending December 31, 2026. The Board established a bonus pool of $409 for our non-executive employees, for the year ending December 31, 2026. Participants are eligible to receive cash bonus awards based upon achieving annual performance targets established by the Board for the year ending December 31, 2026, relating to annual revenue and adjusted EBITDA performance targets. Awards will be paid on a tiered scale based upon actual performance as a percentage of the performance targets with a floor and cap. Payments for individual performance targets met or exceeded are payable, whether or not all performance targets are met, consistent with the weighted amounts for each performance target within the bonus pools. Bonus awards for NEOs and executive management will be weighted 50% on annual revenue and 50% on Adjusted EBITDA. No bonus will be awarded for any performance target for which actual performance is less than 90% of target. At 90% or greater actual performance relative to the target, 50% of the weighted bonus amount for the performance target is payable. From 90% to 100% actual performance relative to the target, the remaining 50% of the weighted bonus amount is awarded pro rata with the percentage of actual performance exceeding 90% of target (i.e., each 1% excess over 90% of performance target equals 5% of the weighted bonus amount payable). If actual performance reaches 105% of the revenue performance target or 110% of the adjusted EBITDA performance target or greater for any individual performance target, then an additional 10% of the amount apportioned to that performance target will be payable as an additional bonus. Historically, for the years ended December 31, 2025 and 2024, the employee bonus plan performance targets were achieved at 100% or greater. Based on our financial performance as of June 30, 2026 and forecasted annualized results for the year ended December 31, 2026, management determined that the achievement of 100% of the annual revenue and Adjusted EBITDA performance targets is probable. Based on management’s estimate, the Company recorded an accrual of $750 for the employee bonus plan, which is included in accrued expense in the accompanying condensed consolidated balance sheet at June 30, 2026.

Performance-Based Stock Price Appreciation Incentive Plan.

We utilize an equity-based compensation incentive plan for certain of our NEOs responsible for investor relations, designed to reward performance tied to the company’s stock price appreciation. The plan is structured to reward performance that directly benefits our shareholders by tying the equity-based compensation in the form of RSU grants to the appreciation of our stock price. This plan is intended to motivate and retain key executives while aligning their interests with the creation of stockholder value. The share price performance targets range from $8.00 to $20.50 in $0.50 increments and must be met or exceeded during the trading day for at least fifteen (15) trading days during a twenty (20) trading day period. If any of the performance targets are achieved, each eligible NEOs will be awarded an RSU grant equal to 10,000 RSUs, and the RSUs will vest quarterly over a one-year term. The performance-based stock price appreciation incentive plan is a three-year incentive plan and the Compensation Committee has the right to cancel the plan annually on the anniversary date of the plan. During the three-year term, the individual performance target may be achieved more than once provided certain conditions in the plan are met.

Purchase Obligations

In February 2024, the Company entered into a $5.4 million noncancellable five-year hosting service contract with Oracle, a third-party network service provider. The contract includes minimum quarterly commitments and the requirements to maintain the service level for the entire contract period. Under this agreement, $649 remains due during fiscal year 2026, $1.5 million will be due during fiscal 2027, $1.7 million will be due during fiscal 2028, and $456 will be due during fiscal 2029. During the three months ended June 30, 2026 and 2025, the Company has expensed $294 and $0, respectively and for the six months ended June 30, 2026 and 2025 was $874 and $22, respectively, of the purchase obligation and $162 and $141 is included in accrued expenses at June 30, 2026 and December 31, 2025, respectively.

Legal Proceedings

In the ordinary course of business, the Company may be involved in a variety of claims, lawsuits, investigations, and other proceedings, including patent infringement claims, employment litigation, regulatory compliance matters, and contractual disputes, that can arise in the normal course of the Company’s operations. The Company recognizes a provision when management believes information available prior to the issuance of the financial statements indicates it is probable a loss has been incurred as of the date of the financial statements and the amount of loss can be reasonably estimated. The Company adjusts the amount of the provision to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. As of June 30, 2026, the Company does not have a recorded liability for estimated losses. Legal costs are expensed as incurred.

On March 5, 2026, ReadyComm LLC (“ReadyComm”) filed a complaint against Crexendo, Inc. in the United States District Court for the District of Delaware, captionedReadyComm LLC v. Crexendo, Inc., Case No. 1:26-cv-00234-MN. The complaint alleges that certain of the Company’s products and services directly and indirectly infringe one or more claims of U.S. Patent No. 9,179,011, entitled “Telephone Communication System and Method of Using.” ReadyComm seeks monetary damages, interest, costs and expenses, attorneys’ fees under certain circumstances, and other relief the court may deem appropriate.

The Company denies ReadyComm’s allegations and does not believe that it has infringed any valid and enforceable claim of the patent. The Company has asserted counterclaims seeking declarations that it does not infringe the patent and that the patent is invalid, as well as dismissal of the complaint with prejudice and recovery of its costs and attorneys’ fees. ReadyComm has denied the substantive allegations of the Company’s counterclaims. The litigation remains at an early stage, and no trial date has been set.

The Company intends to vigorously defend against ReadyComm’s claims and pursue its counterclaims. Based on the information currently available, the Company does not believe that a loss is probable and, therefore, has not recorded a reserve relating to this matter. However, litigation is inherently uncertain, and the ultimate outcome cannot presently be predicted.

17. Segment Reporting

The Company has two reportable operating segments, which consist of cloud telecommunications services and software solutions and uses segment income/(loss) from operations to assess performance against forecasted results and allocate resources to its segments. Segment income/(loss) from operations is determined on the same basis as consolidated income/(loss) from operations presented in the Company’s consolidated statements of operations. The cloud telecommunications services segment generates revenue from selling cloud telecommunication services, products, and other internet services. The software solutions segment generates revenue from selling perpetual software licenses and software subscriptions, subscription maintenance and support, and professional services.

Our chief operating decision maker (CODM) is our Chief Executive Officer, Jeffrey G. Korn. The CODM uses segment income/(loss) from operations before income tax for purposes of allocating resources and evaluating financial performance predominantly in the annual budget and forecasting process. The CODM considers budget-to-actual variances on a quarterly basis using the segment income/(loss) before income tax measure when making decisions about allocating capital and personnel to the segments. The CODM does not review assets in evaluating the results of the operating segments, and therefore, such information is not presented. Segment revenue, significant segment expenses, income/(loss) from operations, other income/(expense) and income/(loss) before income tax for the three and six months ended June 30, 2026 and 2025 are as follows (in thousands):

The Company operates in two geographic areas, the United States and international. Revenue by geography is based on the location of the customer from which the revenue is earned. Revenue by geographic location is as follows (in thousands):