CXDO 10-K & 10-Q changes, risk factors and insider trading

We are subject to risks related to public health crises, such as the COVID-19 pandemic, or other pandemics which may occur.occur Thepresently COVID-19 pandemic had an adverse effect on our operating resultsor in 2022.the future. Our business is based on our ability to provide products and services to customers throughout the United States and around the world and the ability of those customers to use and pay for those products and services for their businesses and in their daily lives. As a result, our business, financial condition and results of operations could be materially adversely affected by a public health crisis that significantly impacts the way customers use and are able to pay for our products and services, the way our employees are able to provide services to our customers, and the ways that our partners and suppliers are able to provide products and services to us. For example, public and private sector policies and initiatives to reduce the transmission of COVID-19contagious diseases and initiatives the Company took in response to the health crisis to promote the health and safety of our employees and provide critical infrastructure and connectivity to our customers, along with the related global slowdown in economic activity, resulted in slower revenue growth, increased costs and lower earnings per share and a sustained decrease in our stock price, which resulted in an impairment of goodwill of $32.1 million in 2022. In addition, such a crisis could significantly increase the probability or consequences of the risks our business faces in ordinary circumstances, such as risks associated with our supplier and vendor relationships, risks of an economic slowdown, regulatory risks, and the costs and availability of financing.

Any one of the factors above, or the cumulative effect of some or all of the factors referred to above, may result in significant fluctuations in our quarterly and annual results of operations. This variability and unpredictability could result in our failure to meet the expectations of research analysts or investors for any period, which could cause our stock price to decline. We sustained operating losses in 2023 and may experience losses in the future. In addition, a significant percentage of our operating expenses is fixed in nature and is based on forecasted revenues trends. Accordingly, in the event of revenue shortfalls, we may not be able to mitigate the negative impact on net income/(loss) and margins in the short term. If we fail to meet or exceed the expectations of research analysts or investors, the market price of our shares could fall substantially, and we could face costly lawsuits, including securities class-action suits. This may also impair our ability to raise capital, should we seek to do so.

The United States mayhas very likely imposeimposed trade restrictions and tariffs on equipment we use, particularly from China and Canada. An increase in costs or limitation on our ability to source equipment including telephones and ancillary equipment may affect our results from operations as well as results and our stock price.

The Software Solutions Division previously sold licenses primarily as a “perpetual” license. We are now selling more subscriptions basedsubscription-based licenses on a monthly recurring revenue model, how the sale is structured may affect results on a quarter-to-quarter basis.

Increasing Complexity in Managed Service OfferingsOfferings.

Migration to Oracle Cloud InfrastructureInfrastructure.

Risks Associated with Relying on Oracle CloudCloud.

Operational Risks During MigrationMigration.

Long-Term Dependence on Oracle's Business StrategyStrategy.

Our Cloud Telecommunications service revenue increased 7%6% or $2,181$1,933 to $33,782 for the year ended December 31, 2025 as compared to $31,849 for the year ended December 31, 20242024. asOur comparedCloud Telecommunications product revenue decreased 16% or $894 to $29,668$4,721 for the year ended December 31, 2023.2025 Ouras Cloud Telecommunications product revenue increased 2% or $131compared to $5,615 for the year ended December 31, 2024 as compared to $5,484 for the year ended December 31, 2023.2024.

The increase in total revenue is due to an increase in software solutions revenue of $5,327,$6,290 and an increase in service revenue of $2,181,$1,933, andoffset anby increasea decrease in product revenue of $131.$894.

The increase in income/(loss) before income tax is primarily related to an increase in revenue of $7,639,$7,329 and an increase in other income/(expense) of $616, offset by an increase in operating expenses of $4,126 and a decrease in other income/(expense) of $1,360.$4,463. The increase in revenue is primarily related to organic growth from new and existing customers. The increase in operating expenses is primarily related to an increase in salaries, benefits, bonuses and share-based compensation of $1,267, an increase in commission expense of $1,621,$986, an increase in contract labor and outsourced engineering services of $549,$699, an increase in third-party telecommunication charges of $590, an increase in software costs of $415, an increase in hosting serviceservices fees of $399,$295, an increase in marketingannual costsuser group meeting expenses of $307,$169, and an increase in salaries,other benefits, bonuses and share-based compensationexpenses of $220.$42. The decreaseincrease in other income/(expense) is primarily related to the gain on the sale of our corporate office recognized during the year ended December 31, 2023 of $1,459 offset by an increase in interest income of $189$446, an increase in other income of $147, and a decrease in interest expense of $73.$23.

To evaluate our business, we consider and use non-generally accepted accounting principles (“Non-GAAP”) net income and Adjusted EBITDA as a supplemental measure of operating performance. These measures include the same adjustments that management takes into account when it reviews and assesses operating performance on a period-to-period basis. We consider Non-GAAP net income to be an important indicator of overall business performance because it allows us to evaluate results without the effects of share-based compensation,compensation and related taxes, acquisition related expenses, changes in fair value of contingent consideration, amortization of intangibles, and goodwill and long-lived asset impairment. We define EBITDA as U.S. GAAP net income/(loss) before interest expense, interest income and other expense/(income), the gain/(loss) on the sale of property and equipment, goodwill and long-lived asset impairments, provisionbenefit/(benefitprovision) for income taxes,tax, and depreciation and amortization. We believe EBITDA provides a useful metric to investors to compare us with other companies within our industry and across industries. We define Adjusted EBITDA as EBITDA adjusted for acquisition related expenses, changes in fair value of contingent consideration and share-based compensation.compensation and related taxes. We use Adjusted EBITDA as a supplemental measure to review and assess operating performance. We also believe use of Adjusted EBITDA facilitates investors’ use of operating performance comparisons from period to period, as well as across companies.

The Company reviews the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Once an indicator of potential impairment has occurred, the impairment test is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, the impairment test first requires a comparison of projected undiscounted future cash flows against the carrying amount of the asset group. If the carrying value of the asset group exceeds the estimated undiscounted future cash flows, the asset group would be deemed to be potentially impaired. The impairment, if any, would be measured based on the amount by which the carrying amount exceeds the fair value. Fair value is determined primarily using the projected future undiscounted cash flows. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose. We recognized impairment losses of $0 in the Consolidated Statements of Operations for the years ended December 31, 20242025 and 2023, respectively.2024.

We currently have net deferred tax assets consisting of net operating loss carryforwards, tax credit carryforwards and deductible temporary differences. Management periodically weighs the positive and negative evidence to determine if it is more likely than not that some or all of the deferred tax assets will be realized. As of December 31, 2024,2025, excluding the gain on the sale of property and equipment,equipment in 2023, we no longer have three years of cumulative pretax losseslosses, andhowever the weight of all other positive and negative evidence, such as amortization expenses for future acquisitions and forecasts and projections of future pretax income are inherently subjective and require management to make assumption or complex judgments about matters that are inherently uncertain and therefore are not sufficient to overcome the significant negative evidence of a three year lookback cumulative loss position.uncertain. Therefore, management determined that it is not more likely than not that we will be able to realize our deferred tax assets, and we have recorded a valuation allowance of $5,417$7,687 at December 31, 2024.2025.

We account for our share-based compensation awards using the fair-value method. The grant date fair value was determined using the Black-Scholes-Merton pricing model. The Black-Scholes-Merton valuation calculation requires us to make key assumptions such as future stock price volatility, expected terms, risk-free rates, and dividend yield. Our expected volatility is derived from our volatility rate as a publicly traded company. The expected term is based on our historical experience. The risk-free interest factor is based on the United States Treasury yield curve in effect at the time of the grant for zero coupon United States Treasury notes with maturities of approximately equal to each grant’s expected term. For the year ended December 31, 2023,2025, oneno quarterly dividenddividends of $0.005 waswere declared and paid, howevertherefore we have assumed a 0% dividend yield for the year ended December 31, 2024.2025.

The increase in cost of service revenue was primarily related to an increase in third-party telecommunication charges of $590, an increase in contract labor costs to assist with the migration of our customers to our new VIP platform of $201,$354, an increase in salaries,data benefits,center bonuses,hosting and share-based compensationcosts of $94,$114, an increase in third-partysoftware telecommunications chargescosts of $71,$73, an increase in credit card processing fees of $68,$39, and an increase in other cost of service revenue expense of $47.$57, offset by a decrease in salaries, benefits, bonuses, and share-based compensation of $161.

The decrease in cost of product revenue is primarily related to athe higherdecrease marginin product mixrevenue by eliminatingfor the saleyear ofended lowDecember margin31, products.2025.

The increase in selling and marketing expense is primarily related to an increase in commission expense of $1,185$592 directly related to the increase in revenue, an increase in salaries, benefits, bonuses, share-based compensation, and headcount of $355, an increase in marketing costs of $92,$134, and an increase in other salesselling and marketing expenseexpenses of $36.$44, offset by a decrease in bad debt related to a decrease in our credit loss reserve of $110 and a decrease in the amortization of customer relationship intangible assets of $131.

The decrease in general and administrative expenses is primarily related to a decrease in executive and administrative salaries, benefits, bonuses, share-based compensation, and share-based compensationheadcount of $1,010 primarily due to$508, a decrease in share-basedtelecommunication compensationannual taxes and fees of $733$138, anda andecrease allocationin rent expense of costs to the Software Solutions segment of $203,$74, and a decrease in other general and administrative expenses of $32, offset by an increase of rent expense of $242 due to the leaseback of our previously sold corporate headquarters land and building and rent on our new corporate office of $80, and an increase in accounting software costs of $81 associated with service contract fees for our new accounting system.$20.

The decrease in research and development expenses is primarily related to the allocation of engineering resources to our Software Solutions segment of $380$316, asoffset weby finalizean theincrease migration of our customers to our VIP platform, and a decreasein other research and development expenses of $4.$9.

The change in other income/(expense) is primarily from the gain on sale of our corporate office building reported during the year ended December 31, 2023 of $1,459 and a decrease in other income of $3, offset by an increase in interest income of $189$435 and a decrease in interest expense of $73.$23, offset by a decrease in other income of $1.

Remaining Performance Obligations (RPOs) represents the total contract value of all contracts signed, less revenue recognized from those contracts as of December 31, 20242025 and 2023.2024. RPOs increaseddecreased 58%,6%, or $11,140$1,890 to $28,372 as of December 31, 2025 as compared to $30,262 as of December 31, 2024 as compared to $19,122 as of December 31, 2023.2024. Below is a table which displays the Software solutions segment remaining performance obligations as of December 31, 20242025 and 2023,2024, which we expect to recognize as revenue within the next thirty-six months (in thousands):

The increase in cost of software solutions revenue is primarily related to an increase in third-party hosting service costs of $399, an increase in salaries, benefits, bonuses, share-based compensation, and share-based compensationheadcount of $322,$631, an increase in software costs of $293,$310, an increase in third-party hosting service costs of $181, an increase in annual user group meeting expenses of $142,$169, an increase in outsourced services of $169, and an increase in other cost of software solutions revenue of $10.$22.

The increase in selling and marketing expense is primarily related to an increase in commission expense of $436$394 directly related to the increase in revenue, an increase in marketing materials and trade shows of $215, an increase in sales support software of $90, and an increase in other selling and marketing costs of $16,$137, offset by a decrease in salaries, benefits, bonuses, and share-based compensation of $203$91 due to the allocation of marketing resources to the Cloud Telecommunications Services segment.segment, a decrease in bad debt related to a decrease in our credit loss reserve of $50, and a decrease in other selling and marketing costs of $41.

General and administrative expenses consist of salaries, benefits, bonuses and share-based compensation for executives and administrative personnel, amortization of trademarktrademark, trade name, and tradecapitalized namesoftware development costs intangible assets, legal, rent, equipment, accounting and other professional services, consulting fees and other administrative corporate expenses. The following table reflects our general and administrative expenses for the year ended December 31, 2024,2025, compared to the year ended December 31, 20232024:

The increase in general and administrative expenses is primarily related to an increase in salaries, benefits, bonuses, share-based compensation, and share-based compensationheadcount of $615,$1,013, an increase in legal expenses of $266, an increase in the amortization of intangible assets of $119, an increase in professional service costs of $60, an increase in bank and merchant fees of $49, an increase in consulting fees of $42, an increase in accounting software costs of $81$32 associated with service contract fees for our new accounting system, an increase in consulting fees of $42, and an increase in other general and administrative expenses of $17.$53.

The increase in research and development expenses is primarily related to an increase in salaries, benefits, bonuses, share-based compensation, and share-based compensationheadcount of $782$344 due to the allocation of resources from the Cloud Telecommunications Services segment as we finalize the migration of our customers to the VIP platform, and an increase in outsourced engineering services expenses of $306,$134, offset by a decrease in other research and development expenses of $12.$3.

The change in other income/(expense) is primarily related to aan decrease in other income of $96 and a decreaseincrease in foreign exchange gains/(losses) of $64.$111, an increase in other income of $37, and an increase in interest income of $11.

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) offering, including voice, video, contact center, premise systems, and managed IT services tailored to businesses of all sizes. Our cloud communications software solutions currently support over sevensix million end users globally, through an extensive network of over 240245 cloud communication platform software subscribers and our direct retail offering. Our products and services can be categorized in the following offerings:

We believe that our Annualized Exit Monthly Recurring Subscriptions (“AERR”) is a leading indicator of our anticipated subscriptions revenues. We believe that trends in revenue are important to understanding the overall health of our business, and we use these trends to formulate financial projections and make strategic business decisions. Our AERR equals our Monthly Recurring Subscriptions multiplied by 12. Our Monthly Recurring Subscriptions equals the monthly value of all customer recurring charges at the end of a given month. For example, our Monthly Recurring Subscriptions at MarchJune 31,30, 2026 were $4,854.$6,763. As such, our AERR at MarchJune 31,30, 2026 was $58,249$81,153 compared to $57,529$53,874 at DecemberJune 31,30, 2025.

Our key business metrics for the three monthsperiods ended MarchJune 31,30, 2026 and MarchJune 31,30, 2025, were as follows (in thousands, except for percentages):

Three months ended MarchJune 31,30, 2026 compared to three months ended MarchJune 31,30, 2025

Total revenue consists of service revenue, software solutions revenue and product revenue. The following table reflects our total revenue for the three months ended MarchJune 31,30, 2026, compared to the three months ended MarchJune 31,30, 2025:

The increase in total revenue is due to acquired revenue contributed by our acquisition of ESI on March 1, 2026 of $2,099,$6,963, an increase in productorganic service revenue of $1,117,$579, an increase in software solutions revenue of $855,$352, and an increase in serviceorganic product revenue of $582.$200.

The following table reflects our income/(loss) before income tax for the three months ended MarchJune 31,30, 2026, compared to the three months ended MarchJune 31,30, 2025:

The decrease in income/(loss) before income taxestax is primarily related to an increase in operating expenseexpenses of $5,363$8,142 and a decrease in other income/(expense) of $156, offset by an increase in revenue of $4,653 and an increase in other income of $102.$8,094. The increase in revenue is related to organic growth from existing customers and new customers, and acquiredadditional revenue of $6,963 contributed by our March 1, 2026 acquisition of ESI onand Marchan 1,increase 2026.of $1,131 from organic growth from new and existing customers. The increase in operating expenses is primarily related to additional expenses of $2,130$7,380 contributed by our March 1, 2026 acquisition of ESI, an increase in cost of product revenue of $1,074,$224 related to an increase in acquisitionproduct related expenses of $839,revenue, an increase in third-party hosting services of $601,$293, an increase in commission expenses of $204,$262, anoffset increaseby ina salaries, benefits, bonuses, and share-based compensation of $150, and an increasedecrease in other operating expenses of $365.$17. The increasedecrease in other income is primarily related to ana increasedecrease in interest income of $75,$57, an increase in interest expense of $56, and a decrease in other income of $23, and a decrease in interest expense of $9.$43.

The following table reflects our income tax benefit/(provision) for the three months ended MarchJune 31,30, 2026, compared to the three months ended MarchJune 31,30, 2025:

The increasedecrease in income tax provision is due to minimum state tax increases as a resultdecrease ofin increasedtaxable revenue.for the three months ended June 30, 2026.

In our MayAugust 5,4, 2026 earnings press release, as furnished on Form 8-K, we included Non-GAAP net income, EBITDA and Adjusted EBITDA. The terms Non-GAAP net income, EBITDA, and Adjusted EBITDA are not defined under U.S. GAAP, and are not measures of operating income, operating performance or liquidity presented in analytical tools, and when assessing our operating performance, Non-GAAP net income, EBITDA, and Adjusted EBITDA should not be considered in isolation, or as a substitute for net income/(loss) or other consolidated income statement data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not limited to:

______________ (1) For the three months ended MarchJune 31,30, 2026 and 2025, employer payroll tax expense related to share-based compensation was $6$79 and $72,$63, respectively. For the six months ended June 30, 2026 and 2025, employer payroll tax expense related to share-based compensation was $85 and $135, respectively.

Three months ended MarchJune 31,30, 2026 compared to three months ended MarchJune 31,30, 2025

Cloud telecommunications service revenue consists primarily of fees collected for cloud telecommunications services, professional services, interest from sales-type leases, reselling broadband Internet services, managed IT service, and administrative fees. The following table reflects our service revenue for the three months ended MarchJune 31,30, 2026, compared to the three months ended MarchJune 31,30, 2025:

The increase in service revenue is dueprimarily related to additional service revenue of $5,915 contributed by our March 1, 2026 acquisition of ESI, an increase in telecommunications services fees of $479,$503, an increase in fees, commissions, and other, recognized over time of $188,$156, and an increase in sales-type lease interest of $32,$23, offset by a decrease in one-time fees, commissioncommissions and other of $117. Additional service revenue of $1,797 contributed by our acquisition of ESI on March 1, 2026.$103. A substantial portion of cloudCloud telecommunicationsTelecommunications service revenue is generated through thirty-six to sixty month service contracts.

Product revenue consists primarily of fees collected from the sale of desktop phone devices, third-party equipment, and device as a service. The following table reflects our product revenue for the three months ended MarchJune 31,30, 2026, compared to the three months ended MarchJune 31,30, 2025:

Product revenue fluctuates from one period to the next based on sales bookings, the allocation of discounts or sales promotions across the performance obligations, and the timing of installations. Our typical customer installation is complete within 30-60 days. However, larger enterprise customers can take multiple months, depending on size and the number of locations. ProductThe increase in product revenue is recognizedprimarily whenrelated productsto have been installed and services commence. Additionally,additional product revenue can fluctuate due to the allocation of discounts$1,048 orcontributed salesby promotions across the performance obligations. Ourour March 1, 2026 acquisition of ESIESI, contributedan $302increase in managed IT services and infrastructure as a service product revenue of additional$234, offset by a decrease in product revenue.revenue related to our cloud telecommunications services of $34.

Remaining Performance Obligations (RPOs) represents the total contract value of all contracts signed, less revenue recognized from those contracts as of MarchJune 31,30, 2026 and 2025. RPO’s increased 98%,97%, or $53,442$54,588 to $108,125$110,980 as of MarchJune 31,30, 2026 as compared to $54,683$56,392 as of MarchJune 31,30, 2025. Our March 1, 2026 acquisition of ESI contributed $49,598$49,762 of the increase in RPO’s as of March 31, 2026. Below is a table which displays the Cloud Telecommunications segment revenue remaining performance obligations as of JanuaryApril 1, 2026 and 2025, and MarchJune 31,30, 2026 and 2025, which we expect to recognize as revenue within the next thirty-six to sixty months (in thousands):

Cost of service revenue consists primarily of fees we pay to third-party telecommunications carriers, broadband Internet providers, software providers, costs related to installations, contract labor costs, credit card processing fees, customer support salaries, benefits, bonuses, and share-based compensation. The following table reflects our cost of service revenue for the three months ended MarchJune 31,30, 2026, compared to the three months ended MarchJune 31,30, 2025:

The increase in cost of service revenue was primarily related to additional cost of service revenue of $492$1,467 contributed by our March 1, 2026 acquisition of ESI, an increase in third-party telecommunications charges of $58, an increase in data center hosting costs of $20,$21, and an increase in other cost of service revenue of $7$11, offset by a decrease in salaries, benefits, bonuses, and share-based compensation of $157$158 and a decrease in contractthird-party labortelecommunication costscharges of $23.$28.

Cost of product revenue consists of the costs associated with desktop phone devices and third-party equipment. The following table reflects our cost of product revenue for the three months ended MarchJune 31,30, 2026, compared to the three months ended MarchJune 31,30, 2025:

The increase is directly related to an increase in product revenue for the quarter,quarter and additional cost of product revenue of $154$450 contributed by our March 1, 2026 acquisition of ESI.

Selling and marketing expenses consist primarily of direct and channel sales representative salaries, benefits, bonuses, and share-based compensation, partner channel commissions, amortization of costs to acquire contracts, travel expenses, lead generation services, trade shows, internal and third-party marketing costs, amortization of customer relationship intangible assets, the production of marketing materials, bad debt expense, and sales support software. The following table reflects our selling and marketing expenses for the three months ended MarchJune 31,30, 2026, compared to the three months ended MarchJune 31,30, 2025:

The increase in selling and marketing expense is primarily related to additional selling and marketing expense of $1,024$3,395 contributed by our March 1, 2026 acquisition of ESI,ESI and an increase in commission expense of $204$221 directly related to the increase in revenue, an increase in bad debt of $178 related to a large decrease in our provision for the three months ended March 31, 2025, an increase in marketing costs of $40, offset by a decrease in the amortization of customer relationship intangible assets of $34, a decrease in bad debt expense of $21, and a decrease in other salesselling and marketing expenseexpenses of $14.$4.

General and administrative expenses consist of salaries, benefits, bonuses and share-based compensation for executives, administrative personnel, legal, rent, equipment, accounting and other professional services, investor relations, rent expense, consulting fees, depreciation, amortization of intangible assets, and other administrative corporate expenses. The following table reflects our general and administrative expenses for the three months ended MarchJune 31,30, 2026, compared to the three months ended MarchJune 31,30, 2025:

The increase in general and administrative expenses is primarily related to additional general and administrative expense of $1,316 contributed by our March 1, 2026 acquisition of ESI, an increase in executive and administrative salaries, benefits, bonuses, and share-based compensation, of $584,$296, an increase in legal expenses of $338 related to the acquisition of ESI, and additional general and administrative expense of $393 contributed by our March 1, 2026 acquisition of ESI,$44, offset by a decrease in the amortization of capitalized software development costs of $58 and a decrease in other general and administrative expenses of $8.$12.

Research and development expenses primarily consist of salaries, benefits, bonuses, and share-based compensation, and outsourced engineering services related to the development of new cloud telecommunications features and products. The following table reflects our research and development expenses for the three months ended MarchJune 31,30, 2026, compared to the three months ended MarchJune 31,30, 2025:

The increase in research and development expenses is primarily related to additional research and development expense of $90$283 contributed by our March 1, 2026 acquisition of ESI and an increase in other research and development expenses of $9, offset by a decrease in salaries, benefits, bonuses, share-based compensation of $20.ESI.

Other income/(expense) primarily relates to interest income, interest expense, net foreign exchange gains or losses, gain on the sale of property and equipment, and credit card cash back rewards. The following table reflects our other income/(expense) for the three months ended MarchJune 31,30, 2026, compared to the three months ended MarchJune 31,30, 2025:

The change in other income/(expense) is primarily fromrelated to a decrease in interest income of $67 and an increase in interest income of $64 and a decrease in interest expense of $9$56, andoffset by an increase in additional other income/(expense) of $1 contributed by our March 1, 2026 acquisition of ESI, offset by a decrease in other income of $6$20.

ThreeSix months ended MarchJune 31,30, 2026 compared to threesix months ended MarchJune 31,30, 2025