Crexendo (CXDO) Risk Analysis

For a summary of recent accounting pronouncements and the anticipated effects on our consolidated financial statements, see Note 1 to the consolidated financial statements, which is incorporated by reference herein.

CREXENDO, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE  PAGE Report of Independent Registered Public Accounting (Firm Auditor ID 1013) 51     Consolidated Balance Sheets as of December 31, 2025 and 2024 53     Consolidated Statements of Operations for the years ended December 31, 2025 and 2024 54     Consolidated Statements of Comprehensive Income/(Loss) for the years ended December 31, 2025 and 2024 55     Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2025 and 2024 56     Consolidated Statements of Cash Flows for the years ended December 31, 2025 and 2024 57     Notes to Consolidated Financial Statements 58     Schedule II – Valuation and Qualifying Accounts 111  50Report of Independent Registered Public Accounting FirmStockholders and Board of DirectorsCrexendo, Inc. and SubsidiariesTempe, AZOpinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of Crexendo, Inc. and subsidiaries (the “Company”) as of December 31, 2025 and 2024, the related consolidated statements of operations, comprehensive income/(loss), stockholders’ equity, and cash flows for the years then ended, and the related notes and financial statement schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2025 and 2024, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.Critical Audit MatterThe critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.Revenue Recognition — Refer to Note 2 to the Consolidated Financial StatementsCritical Audit Matter DescriptionThe Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of products and services.Significant judgment is exercised by the Company in determining revenue recognition for certain customer agreements, and includes the following: ·Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as hard goods and related services that are sold with contracts. ·Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. ·The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.Recent Accounting PronouncementsFor a summary of recent accounting pronouncements and the anticipated effects on our consolidated financial statements, see Note 1 to the consolidated financial statements, which is incorporated by reference herein.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKSForeign Currency RiskFor all periods presented, our sales and operating expenses were predominately denominated in U.S. dollars. We therefore have not had material foreign currency risk associated with sales and cost-based activities. The functional currency of our material operating entities is the U.S. dollar.For the periods presented, we believe the exposure to foreign currency fluctuation from operating expenses is immaterial as the related costs do not constitute a significant portion of our total expenses. As we grow operations, our exposure to foreign currency risk may become more significant.Inflation RiskWe do not believe that inflation has had a material effect on our business, financial condition, or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. 49ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Cash provided by or used in operating activities is driven by our net income/(loss), adjustments to reconcile to net cash provided by or used in operating activities, the timing of customer collections, as well as the amount and timing of disbursements to our vendors, the amount of cash we invest in personnel, marketing, and infrastructure costs to support the anticipated growth of our business. The following table reflects our net cash provided by/(used in) operating activities for the year ended December 31, 2025, compared to the year ended December 31, 2024:  Year Ended December 31,   2025  2024  Dollar Change  Percent Change Net cash provided by/(used in) operating activities $9,297  $6,284  $3,013   48% 47The net cash provided by operations for the year ended December 31, 2025 was primarily driven by our net income of $5,071, non-cash expenses for depreciation and amortization of $3,295, share-based compensation of $2,932, an increase in accounts payable and accrued expenses of $1,045 and an increase in contract liabilities of $164, offset by an increase in equipment financing receivables of $1,124, an increase in contract costs of $827, and an increase in trade receivables of $539.The net cash provided by operations for the year ended December 31, 2024 was primarily driven by non-cash expenses for depreciation and amortization of $3,331, share-based compensation of $3,028, our net income of $1,677, an increase in accounts payable and accrued expenses of $1,275, and an increase in contract liabilities of $784, offset by an increase in contract costs of $1,192, an increase in trade receivables of $876, an increase in equipment financing receivables of $822, an increase in prepaid expenses of $368, and an increase in other assets of $346 primarily related to the capitalization of professional service fees for our new accounting system of $234.

Other income/(expense) primarily relates to net foreign exchange gains or losses and other income and expenses. The following table reflects our other income/(expense) for the year ended December 31, 2025, compared to the year ended December 31, 2024:  2025  2024  Dollar Change  Percent Change Other income/(expense), net $65  $(94) $159   169%The change in other income/(expense) is primarily related to an increase in foreign exchange gains/(losses) of $111, an increase in other income of $37, and an increase in interest income of $11.

Software solutions revenue consists primarily of software license fees, subscription maintenance and support, professional services, and annual user group meeting fees. Software licenses are billed by the number of concurrent sessions a customer has purchased or subscribes to. Subscription maintenance and support is ongoing and provides for software updates and improvements, support for add-on modules, bug fixes, and other general maintenance items. Professional services and other revenues consist of professional services such as the installation of software and integration of other modules, training and implementation as well as custom mobile branding. The following table reflects our service revenue for the year ended December 31, 2025, compared to the year ended December 31, 2024:  Year Ended December 31,   2025  2024  Dollar Change  Percent Change Software solutions revenue $29,664  $23,374  $6,290   27% 45The increase in software solutions revenue is primarily related to an increase in recurring software license and maintenance and support subscriptions of $3,553, an increase in perpetual software license revenue of $2,667, and an increase in professional services and other revenue of $70.

For the three months ended   March 31,  June 30,  September 30,  December 31,  Software Solutions 2025  2025  2025  2025 Software solutions revenue $6,868  $6,975  $7,521  $8,300 Operating expenses:                Cost of software solutions revenue  1,490   1,813   1,924   3,048 Selling and marketing  1,437   1,290   1,307   1,289 General and administrative   1,581   1,627   1,852   1,847 Research and development  1,391   1,322   1,292   1,234 Total operating expenses  5,899   6,052   6,375   7,418 Income/(loss) from operations  969   923   1,146   882 Other income/(expense), net  (16)  54   (6)  33 Income/(loss) before income tax  $953  $977  $1,140  $915   For the three months ended   March 31,  June 30,  September 30,  December 31,  Software Solutions 2024  2024  2024  2024 Software solutions revenue $5,146  $5,325  $5,860  $7,043 Operating expenses:                Cost of software solutions revenue  1,392   1,445   1,686   2,270 Selling and marketing  1,231   1,150   1,245   1,348 General and administrative   1,138   1,200   1,417   1,518 Research and development  980   1,070   1,339   1,375 Total operating expenses  4,741   4,865   5,687   6,511 Income/(loss) from operations  405   460   173   532 Other income/(expense), net  (17)  (10)   (5)   (62)Income/(loss) before income tax  $388  $450  $168  $470