Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and all other non-historical statements in this discussion are forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly in "Risk Factors" or in other sections of this report.

In this discussion, we use certain non-GAAP financial measures. Explanation of these non-GAAP financial measures and reconciliation to the most directly comparable GAAP financial measures are included in this Management's Discussion and Analysis of Financial Condition and Results of Operations. Investors should not consider non-GAAP financial measures in isolation or as substitutes for financial information presented in compliance with GAAP.

Overview

We are a leading provider of augmented and virtual reality educational technology products, focusing primarily on United States K-12 schools, the Career and Technical Education sector, and select international markets. Our proprietary hardware and software platform delivers interactive, stereoscopic three-dimensional (3D) learning experiences without the need for VR goggles or specialty glasses. We generate revenue through the sale of our hardware (such as our Inspire and Imagine laptops and tracked styluses), and software licenses for STEM and CTE applications, and implementation and professional development services.

Our Business Model

We generate revenue by selling our hardware products, software and professional development services to our customers.

Hardware Product Revenue

Our laptops are designed to work with a wide range of learning applications, for both K-12 education and CTE, that come to life by having 3D models projected out of the screen. Our flagship product is the Inspire, our latest laptop product built in partnership with a major PC OEM. Hardware Product revenue accounted for 53% and 57% of our total revenue for the six months ended June 30, 2026 and 2025, respectively.

Software Applications Revenue

We derive software applications revenue from the sale of licenses and subscription plans to the software applications available on our platform.

Our software applications are priced based on the number of devices or users and length of the contract. We offer discount programs based on increases in volume of devices or users and the length of the contract. We believe the wide variety and flexibility of our software applications help us retain existing customers and acquire additional customers. Software applications revenue accounted for 39% and 31% of our total revenue for the six months ended June 30, 2026 and 2025, respectively. We expect that going forward our software applications revenue will grow faster in absolute dollars and as a percentage of our total revenue than our product or service revenues.

We typically invoice our customers annually in advance of providing software and services. Software sales consist of licenses of our functional intellectual property that are materially satisfied at a point in time when key codes are provided to allow customers to access the software. In transactions where a third-party is involved in providing software licenses to a customer, we recognize the revenue from the third-party ratably over-time on a straight-line basis.

Services Revenue

We derive services revenue from installation and/or training services for products, both of which are separate performance obligations and typically are satisfied within a short period of time, often less than one month delivered remotely or on-site at the customer's location. Additionally, we offer one- and two-year extended warranty contracts that customers can purchase at their option, which are also separate performance obligations. Services revenue accounted for 8% and 12% of our total revenue for the six months ended June 30, 2026 and 2025, respectively.

Key Metrics

We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions. The calculation of the key metrics discussed below may differ significantly from other similarly titled metrics used by other companies, analysts, investors and other industry participants.

Bookings Growth

We track the bookings growth in our business very closely and we believe this is a key indicator of our business. Bookings represent customer orders that have hardware, software and service components. Bookings indicate future revenue, which lags based on product shipping date, monthly recognition of certain subscription revenue and service delivery completion. Our bookings growth is represented below for each of the periods presented:

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United States CTE & K-12 Bookings

We believe our ability to retain and grow our product and software revenue will be dependent on our ability to grow in both our United States CTE and K-12 market segments. We track our performance in this area by measuring our bookings from customers in each of these markets. We calculate this metric on a quarterly basis by comparing the aggregate number of bookings in each market for the most recent quarter divided by the number of bookings attributable to the same market for the same quarter in the previous fiscal year. CTE bookings accounted for approximately 53% and 35% for the three months ended June 30, 2026 and 2025, respectively, while K-12 bookings accounted for approximately 47% and 65%, for the three months ended June 30, 2026 and 2025, respectively. CTE bookings accounted for approximately 48% and 32% for the six months ended June 30, 2026 and 2025, respectively, while K-12 bookings accounted for approximately 52% and 68%, for the six months ended June 30, 2026 and 2025, respectively.

Subsequent to June 30, 2025, we experienced significant cancellations ("debooks") of previously reported customer commitments that affect full year bookings performance. These debooks totaled $1.9 million for the six months ended June 30, 2025. The primary factors contributing to these debooks were customer financial constraints.

Management believes the disclosure of these material debooks provides investors with important context for evaluating business performance. While we do not routinely adjust previously reported bookings figures for normal course cancellations, the magnitude of these debooks was deemed material enough to warrant specific disclosure in this Quarterly Report on Form 10-Q.

International Bookings

We track our performance in international sales by measuring bookings from our international reseller partners relative to total bookings. We calculate this metric on a quarterly basis by comparing the aggregate amount of bookings attributable to international partners for the most recent quarter compared to the number of bookings attributable to international partners for the same quarter in the previous fiscal year and the prior quarter. International bookings accounted for approximately 15% and 2% for the three months ended June 30, 2026 and 2025, respectively. International bookings accounted for approximately 12% and 13% for the six months ended June 30, 2026 and 2025, respectively.

Software Subscription Renewable Revenue Growth

We believe that our ability to renew and increase the software revenues on our platform from existing customers is an indicator of market penetration, adoption, the growth of our business and future revenue trends. Software sales of our solutions are purchased on an annual or multi-year basis, as well as one-time licenses to allow (i) an unlimited number of users on a particular device or (ii) a particular number of users to access our applications. We include subscriptions for both device and user-based applications and services in our measure of renewing revenue. Our customers typically enter into annual licenses or subscriptions with us, although some enter into multi-year agreements. Customers have no contractual obligation to renew their licenses or subscriptions with us after the completion of their initial term.

We believe the level of renewing revenue is an important indicator of future business success, as it is an indicator of sales growth of customer expansion accounts, utilization of our platform and future margin improvement. Our renewing revenue includes:

The above aspects of software revenue are captured in the annualized contract value ("ACV") and net dollar revenue retention rate ("NDRR") metrics described below under "Retention and Expansion of Customers." We believe that these annualized measures provide important context to understanding the strength and growth of our software license revenue. We expect to accelerate the transition of our revenue mix to software from hardware through continued improvement in renewing revenue from the retention and expansion of our customers.

Retention and Expansion of Customers

Our ability to increase revenue depends in part on retaining our existing customers and expanding their use of our platform. We offer an integrated, comprehensive set of solutions that cover K-12/STEM and CTE. We have a variety of software bundles targeted at different areas of learning and grade levels. Retaining and expanding our existing customer base is critical to our success.

To monitor our ability to retain and grow our customer base for our software we monitor the annualized contract value of active software licenses, with particular attention to customers with at least $50,000 in ACV. Our ACV for the six months ended June 30, 2026 and 2025 was approximately $9.4 million and $10.9 million, respectively. We calculate our

Dollar-Based Retention Rate as of a given period end by starting with the ACV from all customers as of 12 months prior to such period end ("Prior Period ACV") and calculating the ACV from these same customers as of the current period end ("Current Period ACV"). Current Period ACV includes any upsells and is net of contraction or attrition over the trailing 12 months but excludes revenue from new customers in the current period. We then divide the total Current Period ACV by the total Prior Period ACV to arrive at our Dollar- Based Retention Rate. For the trailing twelve-month period ended June 30, 2026 and 2025, our NDRR on customers with at least $50,000 of ACV was 66% and 97%, respectively.

Average Term Length

We measure the ACV dollar-weighted term length of our renewable software license agreements. We believe an increase in term length is a signal that customers are adopting our products for long-term use, which decreases the risk that a customer will choose not to renew their software licenses. CTE agreements are typically longer-term than K-12 agreements, and as a result, the dollar-weighted term length measure can reflect a mix shift of license agreements between these product lines.

Non-GAAP Financial Measures

We use non-GAAP financial measures in addition to our results of operations reported in accordance with GAAP. Non-GAAP financial measures have limitations as analytical tools when assessing our operating performance and should not be considered in isolation or as a substitute for GAAP measures, including gross profit and net income (loss). We may calculate or present our non-GAAP financial measures differently than other companies who report measures with similar titles and, as a result, the non-GAAP financial measures we report may not be comparable with those of companies in our industry or in other industries.

Adjusted EBITDA

We calculate Adjusted EBITDA as GAAP net income (loss) adjusted for interest expense, depreciation and amortization expense, income tax expense, offering costs related to financing activities, stock-based compensation, gain on extinguishment of debt, change in fair value of convertible debt and the change in fair value of Series P and P 2 Preferred Stock liability. We believe this measure provides our management and investors with consistency and comparability with our past financial performance and is an important indicator of the performance and profitability of our business.

The following table presents our Adjusted EBITDA from operations for each of the periods presented:

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Components of Results of Operations

Revenue

Our revenue consists of hardware revenue, software applications revenue and services revenue. We recognize revenue at the amount to which we expect to be entitled when control of the products, software or services is transferred to its customers as described below. We have elected to record revenue net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded within other current liabilities until remitted to the relevant government authority.

Hardware Revenue - Hardware revenue is generated from the sale of our learning stations bundled with pre-loaded perpetual license software, accessories necessary for full use of our products, including stylus, eyewear (if needed) and power adapters, and a standard assurance type warranty. Hardware accessories are also sold on a stand-alone basis. Customers place orders for the hardware and we fulfill the order and ship the hardware directly to the customer or authorized resellers. Generally, we receive payment from customers or authorized resellers at the time of hardware delivery; however, in certain circumstances our United States customers may remit payment at a later date pursuant to the terms of their agreement with us. We recognize hardware revenue associated with a sale in full at the time of shipment. Customers purchasing hardware from us also typically purchase our enabled software applications for use on their devices.

Software Applications Revenue - Software applications revenue is generated from the sale of internally developed and third-party applications enabled for use on our products licensed over specified contractual terms. Most software applications reside on our products and require license keys to activate, although certain applications are web-based and require user log-ins. Customers who license our software use it on our products under different subscription terms based on the number of devices or users and length of the contract. We do not require customers to license software applications when purchasing our products.

We typically invoice our customers annually in advance based on their subscription. Software sales that consist of licenses of functional intellectual property are satisfied at a point in time when key codes are provided to allow customers to access the software. In transactions where we provide user-based software licenses to a customer, we recognize software revenue ratably on a straight-line basis. For the sale of third-party applications where we obtain control of the application before transferring it to the customer, we recognize revenue based on the gross amount billed to customers.

Services Revenue - We derive services revenue from implementation, professional development and technical services delivered remotely or on-site at the customer's location and extended service type warranties. Services are either delivered by our personnel or our qualified third-party representatives. Under the third-party arrangements, we will pay the third-party for their delivery services and bill the customer directly. We will also repair our products for a fee if the nature of the repair is outside the scope of the applicable warranty, but this is not a significant source of revenue. Each

service type does not significantly impact the functionality of the others, or the hardware/software being provided. Services are typically invoiced in advance and revenue is recognized based on the passage of time during the contract period. We believe that the passage of time corresponds directly to the satisfaction of the performance obligations.

Cost of Goods Sold

Cost of goods sold consists of cost of hardware sold, cost of software sold and cost of services sold. Overall cost of revenue is largely dependent on a combination of revenue types, hardware component supply and pricing and cost of third-party software applications.

Cost of Hardware Sold - Cost of hardware sold consists primarily of costs associated with the manufacture of our products and personnel-related expenses associated with manufacturing employees, including salaries, benefits, bonuses, overhead and stock-based compensation.

All of our products are manufactured by manufacturers located primarily in China. We have entered into agreements for the supply of many components; however, there can be no guarantee that we will be able to extend or renew these agreements on similar terms, or at all. Although most components in the products essential to our business are generally available from multiple sources, certain custom and new technology components are currently obtained from single or limited sources. We compete for various components with other participants in the markets for personal computers, tablets and accessories. Therefore, many components, including those that are available from multiple sources, are at times subject to industry-wide shortage and significant commodity pricing fluctuations.

Cost of hardware sold also includes costs of acquiring third-party devices and components, and costs associated with shipping devices to customers. We have outsourced much of our transportation and logistics management for the distribution of products. While these arrangements can lower operating costs, they also reduce our direct control over distribution. During the COVID-19 pandemic, certain of our logistical service providers experienced disruptions. Refer to "Supply Chain Challenges" for more information.

Cost of goods sold related to delivered hardware and bundled software, including estimated standard warranty costs, are recognized at the time of sale.

Cost of Software Sold - Cost of software sold consists primarily of fees paid to third parties for software licenses, costs associated with the technical support of software applications and the cost of our customer success operations. Costs incurred to provide product-related bundled services and unspecified software upgrade rights are recognized as cost of sales as incurred.

Cost of Services Sold - Cost of services sold consists primarily of personnel costs associated with the development and delivery of the services. Some of these costs are internal resources while others are associated with third parties engaged to develop or deliver the services. Other costs include travel and technology used in the development or delivery of the services. Cost of services revenue, including those for extended service type warranty and repair expenses relating to our products, are recognized as cost of sales as incurred or upon completion of the service obligation.

Operating Expenses

Our operating expenses consist primarily of selling, general and administrative expenses and product engineering and R&D expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and sales commissions. Operating expenses also include overhead costs, including rent, utilities, insurance, legal and office supplies.

Selling and marketing - Selling and marketing expenses consist of labor and other costs directly related to the promotion of our products, including compensation for our marketing team and travel expense incurred in connection with promotional efforts.

General and administrative expenses - General, and administrative expenses consist primarily of personnel-related expenses associated with our finance, legal, information technology, human resources, facilities and administrative employees, including salaries, benefits, bonuses, sales commissions and stock-based compensation. Commissions paid on the sale of hardware and short-term software licenses are recognized upon delivery. Commissions paid on the sale in which at least a portion of the goods and services will be satisfied over a period of time (services primarily consisting of extended warranties) are not material and are expensed when incurred. General and administrative expenses also include external legal, accounting and other professional services fees, operational software and subscription services and other corporate expenses.

Research and development expenses - Research and development expenses consist primarily of product engineering and personnel-related expenses associated with our hardware and software engineering employees, including salaries, benefits, bonuses and stock-based compensation. R&D expenses also include third-party contractor or professional services fees, and software and subscription services dedicated for use by our engineering organization. We expect that our R&D expenses will increase in absolute dollars as our business grows, particularly as we incur additional costs related to continued investments in our platform and products. In addition, R&D expenses that qualify as internal-use software development costs are capitalized, the amount of which may fluctuate significantly from period-to-period.

Gain from settlement of vendor claims - Gain from settlement of vendor claims consists of litigation matters relating to former vendors, for which the vendor customer relationship has previously ceased.

Interest Expense

Interest expense consists primarily of changes in accrued interest expense, interest payments and amortization of debt issuance costs for our debt facilities. See "Liquidity and Capital Resources - Debt and Financing Arrangements."

Income Tax Expense (Benefit)

Income tax expense (benefit) consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business.

Results of Operations

The following table sets forth our results of operations for the three and six months ended June 30, 2026 and 2025:

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Comparison of financial results for the three months ended June 30, 2026 and 2025

Revenue

Total revenue decreased by $2.1 million, or 28%, for the three months ended June 30, 2026 to $5.4 million as compared to the three months ended June 30, 2025. This decrease in revenue is primarily attributable to lower hardware, software and service revenues attributable to uncertainty in our K-12 end-user markets where funding sources have been disrupted, causing longer than usual sales cycles, and in some cases prompting customers to delay receipt of confirmed order bookings. Potential tariff volatility surcharges have also contributed to potentially elongated sales cycles as we communicate these pricing impacts to customers in revised quotes.

Hardware revenue decreased by $1.5 million or 34%, to $2.9 million for the three months ended June 30, 2026, from $4.3 million for the three months ended June 30, 2025. The decrease in hardware revenue was primarily attributable to a decrease in units shipped. For the three months ended June 30, 2026 and 2025, hardware revenue as a percentage of total revenue was 53% and 58%, respectively.

Software revenue decreased by $0.2 million or 10%, to $2.2 million for the three months ended June 30, 2026, from $2.4 million for the three months ended June 30, 2025. For the three months ended June 30, 2026 and 2025, software revenue as a percentage of total revenue was 40% and 32%, respectively.

Our key software retention metrics are as follows: (1) ACV as of June 30, 2026 decreased to $9.4 million as compared to June 30, 2025 of $10.9 million and (2) NDRR for the trailing twelve-month period ended June 30, 2026 was 66%, as compared to 64% for the trailing twelve-month period ended June 30, 2025.

Service revenue decreased by $0.4 million or 49%, to $0.4 million for the three months ended June 30, 2026, from $0.8 million for the three months ended June 30, 2025. The decrease in revenue was primarily attributable to decreased sales of extended warranty and technology support services and reflects the revenue recognition of expiring contracts in Q2 FY 25. For the three months ended June 30, 2026 and 2025, services revenue as a percentage of total revenue was 7% and 10%, respectively.

Cost of Goods Sold

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For the three months ended June 30, 2026, total cost of goods sold decreased by $1.9 million, or 45%, to $2.4 million compared to $4.3 million for the three months ended June 30, 2025. This decrease was primarily attributable to reduced hardware costs of $1.4 million due to fewer units sold. For the three months ended June 30, 2026 and 2025, gross margin was 56% and 43%, respectively.

Cost of hardware sold decreased by $1.4 million, or 49%, to $1.5 million for the three months ended June 30, 2026, from $2.9 million for the three months ended June 30, 2025. The decrease in cost of hardware sold was primarily attributable to a decrease in the volumes shipped of Inspire laptops.

For the three months ended June 30, 2026 and 2025, hardware gross margin was 47% and 32%, respectively.

Cost of software sold decreased by $0.2 million or 27%, to $0.6 million for the three months ended June 30, 2026, from $0.8 million for the three months ended June 30, 2025. The decrease in cost of software sold corresponded to decreased sales of third-party point-in-time software and overall software application sales. For the three months ended June 30, 2026 and 2025, software gross margin was 72% and 68%, respectively.

Cost of services sold decreased by $0.1 million or 33%, to $0.3 million for the three months ended June 30, 2026, from $0.4 million for the three months ended June 30, 2025. For the three months ended June 30, 2026 and 2025, services gross margin was 29% and 46%, respectively.

Excess and obsolete expense decreased $0.2 million or 91%, to $17,000 for the three months ended June 30, 2026, from $0.2 million in the three months ended June 30, 2025. The decrease was attributable to the write-off of third-party software licenses in the three months ending June 30, 2025.

Operating Expenses

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For the three months ended June 30, 2026, operating expenses decreased by $2.7 million, or 29%, to $6.8 million from $9.5 million for the three months ended June 30, 2025. The decrease in expenses was primarily due to decreased costs in personnel expenses, marketing, travel related expenses and consulting expenses and fees incurred through the three months ended June 30, 2026.

Research and development expenses decreased by $0.5 million or 36%, to $0.8 million for the three months ended June 30, 2026, from $1.3 million for the three months ended June 30, 2025. The decrease in expenses was primarily attributable to a decrease in compensation costs resulting from lower headcount.

Selling and marketing expenses decreased by $1.8 million or 45%, to $2.2 million for the three months ended June 30, 2026, from $3.9 million for the three months ended June 30, 2025. The decrease in expenses was mainly due to lower compensation and commission expenses associated with the reduced sales team and fewer sales, and less travel related expenses, reflecting decreased staff size and fewer performance-based incentives being reached.

General and administrative expenses decreased by $0.5 million or 11%, to $3.8 million for the three months ended June 30, 2026, from $4.3 million for the three months ended June 30, 2025. The decrease in expenses was primarily

attributable to lower compensation expenses and lower consulting related expenses primarily related to lower audit costs and the fees incurred for the issuance of convertible debt in June 2025.

Gain from settlement of vendor claims reflects a one-time settlement of litigation matters relating to former vendors, for which the vendor customer relationship has previously ceased.

Interest Expense

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For the three months ended June 30, 2026, interest expense decreased by $0.1 million, or 20%, to $0.2 million, from $0.3 million for the three months ended June 30, 2025. The decrease in interest expense was primarily attributable to lower debt outstanding in the three months ended June 30, 2026 compared to the three months ended June 30, 2025.

Gain on Extinguishment of Convertible and Other Debt

Gain on extinguishment of convertible and other debt was approximately $4.1 million in the three months ended June 30, 2026, with no amount in the prior period.

(Loss) Gain on Change in Fair Value of Convertible Debt

(Loss) Gain on Change in Fair Value of Convertible Debt was a loss of approximately $1.0 million and a gain of approximately $0.5 million in the three months ended June 30, 2026 and 2025, respectively. This is a result of the changing inputs into the fair value model for the convertible debt for which the Company has elected the fair value option.

Income Tax Expense

Income tax expense for each of the three months ended June 30, 2026 and 2025 was immaterial. We estimate an annual effective tax rate for the year ending December 31, 2026 of (0.08)% as we incurred losses for the six months ended June 30, 2026 and expect to continue to incur losses through the remainder of our fiscal year, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2026. The United States federal statutory rate is 21% while our effective tax rate for the years ended December 31, 2025 and 2024 was 0.1% and 0.1%, respectively. No federal or state income taxes are expected outside of immaterial state tax payments.

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Comparison of financial results for the six months ended June 30, 2026 and 2025

Revenue

Total revenue decreased by $3.6 million, or 25%, for the six months ended June 30, 2026 to $10.6 million as compared to the six months ended June 30, 2025. This decrease in revenue is primarily attributable to lower hardware and software revenues attributable to uncertainty in our K-12 end-user markets where funding sources have been disrupted, causing longer than usual sales cycles, and in some cases prompting customers to delay receipt of confirmed order bookings. Potential tariff volatility surcharges have also contributed to potentially elongated sales cycles as we communicate these pricing impacts to customers in revised quotes.

Hardware revenue decreased by $2.5 million or 31%, to $5.7 million for the six months ended June 30, 2026, from $8.1 million for the six months ended June 30, 2025. The decrease in hardware revenue was primarily attributable to a decrease in units shipped. For the six months ended June 30, 2026 and 2025, hardware revenue as a percentage of total revenue was 53% and 57%, respectively.

Software revenue decreased $0.2 million or 5%, to $4.1 million for the six months ended June 30, 2026, from $4.3 million for the six months ended June 30, 2025. For the six months ended June 30, 2026 and 2025, software revenue as a percentage of total revenue was 39% and 31%, respectively.

Our key software retention metrics are as follows: (1) ACV as of June 30, 2026 decreased to $9.4 million as compared to June 30, 2025 of $10.9 million and (2) NDRR for the trailing twelve-month period ended June 30, 2026 was 66%, as compared to 64% for the trailing twelve-month period ended June 30, 2025.

Service revenue decreased by $0.8 million or 49%, to $0.9 million for the six months ended June 30, 2026, from $1.7 million for the six months ended June 30, 2025. The decrease in revenue was primarily attributable to decreased sales of extended warranty and technology support services and reflects the revenue recognition of expiring contracts in the first half of FY 25. For the six months ended June 30, 2026 and 2025, services revenue as a percentage of total revenue was 8% and 12%, respectively.

Cost of Goods Sold

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For the six months ended June 30, 2026, total cost of goods sold decreased by $3.0 million, or 39%, to $4.8 million compared to $7.8 million for the six months ended June 30, 2025. This decrease was primarily attributable to reduced hardware costs of $2.2 million due to fewer units sold partially, as well as reduced costs of software, services and excess and obsolete expenses during the six months ended June 30, 2026. For the six months ended June 30, 2026 and 2025, gross margin was 55% and 45%, respectively.

Cost of hardware sold decreased by $2.2 million, or 42%, to $3.1 million for the six months ended June 30, 2026, from $5.3 million for the six months ended June 30, 2025. The decrease in cost of hardware sold was primarily attributable to a decrease in the volumes shipped of Inspire laptops.

For the six months ended June 30, 2026 and 2025, hardware gross margin was 45% and 34%, respectively.

Cost of software sold decreased by $0.3 million or 20%, to $1.1 million for the six months ended June 30, 2026, from $1.4 million for the six months ended June 30, 2025. The decrease in cost of software sold corresponded to decreased sales of third-party point-in-time software and overall software application sales. For the six months ended June 30, 2026 and 2025, software gross margin was 74% and 67%, respectively.

Cost of services sold decreased by $0.3 million or 37%, to $0.5 million for the six months ended June 30, 2026, from $0.9 million for the six months ended June 30, 2025. For the six months ended June 30, 2026 and 2025, services gross margin was 38% and 49%, respectively.

Excess and obsolete expense decreased $0.2 million or 91%, to $17,000 for the six months ended June 30, 2026, from $0.2 million in the six months ended June 30, 2025. The decrease was attributable to the write-off of third-party software licenses in the three months ending June 30, 2025.

Operating Expenses

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For the six months ended June 30, 2026, operating expenses decreased by $4.6 million, or 25%, to $13.5 million from $18.1 million for the six months ended June 30, 2025. The decrease in expenses was primarily due to decreased costs in personnel expenses, travel related expenses and consulting expenses and fees incurred through the six months ended June 30, 2026.

Research and development expenses decreased by $0.6 million or 24%, to $1.8 million for the six months ended June 30, 2026, from $2.4 million for the six months ended June 30, 2025. The decrease in expenses was primarily attributable to a decrease in compensation costs resulting from lower headcount.

Selling and marketing expenses decreased by $3.4 million or 42%, to $4.6 million for the six months ended June 30, 2026, from $8.0 million for the six months ended June 30, 2025. The decrease in expenses was mainly due to lower compensation and commission expenses associated with the reduced sales team and fewer sales, and less travel related expenses, reflecting decreased staff size and fewer performance-based incentives being reached.

General and administrative expenses decreased by $0.7 million or 8%, to $7.1 million for the six months ended June 30, 2026, from $7.8 million for the six months ended June 30, 2025. The decrease in expenses was primarily attributable to lower consulting related expenses primarily related to lower audit costs and the fees incurred for the issuance of convertible debt in March 2025.

Gain from settlement of vendor claims reflects a one-time settlement of litigation matters relating to former vendors, for which the vendor customer relationship has previously ceased.

Interest Expense

For the six months ended June 30, 2026, interest expense decreased by $0.2 million, or 27%, to $0.6 million, from $0.8 million for the six months ended June 30, 2025. The decrease in interest expense was primarily attributable to lower debt outstanding in the three months ended June 30, 2026 compared to the three months ended June 30, 2025.

Gain on Extinguishment of Convertible and Other Debt

Gain on extinguishment of convertible and other debt was approximately $4.1 million in the six months ended June 30, 2026, with no amount in the prior period.

(Loss) Gain on Change in Fair Value of Convertible Debt

(Loss) Gain on Change in Fair Value of Convertible Debt was a loss of approximately $3.6 million and a gain of approximately $0.5 million in the six months ended June 30, 2026 and 2025, respectively. This is a result of the changing inputs into the fair value model for the convertible debt for which the Company has elected the fair value option.

Income Tax Expense

Income tax expense for each of the six months ended June 30, 2026 and 2025 was immaterial. We estimate an annual effective tax rate for the year ending December 31, 2026 of (0.08)% as we incurred losses for the six months ended June 30, 2026 and expect to continue to incur losses through the remainder of our fiscal year, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2026. The United States federal statutory rate is 21% while our effective tax rate for the years ended December 31, 2025 and 2024 was 0.1% and 0.1%, respectively. No federal or state income taxes are expected outside of immaterial state tax payments.

Cash Flows

The following table summarizes our cash flows for the periods presented:

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Operating Activities

For the six months ended June 30, 2026, our operating activities used cash of $5.0 million, primarily due to our net loss of $6.3 million, the gain on extinguishment of debt of $4.1 million, the gain from settlements of vendor claims of $1.2 million, the change in fair value of the Series P Preferred Stock liability of $0.2 million and the changes in our operating assets and liabilities of $0.2 million, partially offset by adjustments for non-cash charges, including stock-based compensation expense of $3.1 million, the change in fair value of convertible debt of $3.6 million, non-cash amortization of debt discount of $0.1 million, and bad debt expense of $47,000. The change in our operating assets and liabilities was primarily the result of an increase in accounts receivable of $1.2 million and an increase in prepaid expenses and other assets of $0.2 million and a decrease in accounts payable of $0.1 million and accrued expenses of $0.1 million, partially offset by a decrease in inventory of $0.4 million and other assets of $2,000, and an increase in deferred revenue of $0.9 million and accrued interest of $0.2 million.

For the six months ended June 30, 2025, our operating activities used cash of $11.6 million, primarily due to our net loss of $11.9 million, the change in fair value of convertible debt of $0.5 million and changes in our operating assets and liabilities of $2.2 million, partially offset by adjustments for non-cash charges, including stock-based compensation expense of $2.8 million, provision for excess and obsolete inventory of $0.2 million, and non-cash amortization of other debt discount of $0.1 million. The change in our operating assets and liabilities was primarily the result of an increase in accounts receivable of $1.5 million and prepaid and other assets of $1.2 million and a decrease in accounts payable of $0.4 million, partially offset by a decrease in inventory of $0.5 million and an increase in deferred revenue of $0.1 million and accrued interest of $0.4 million.

Investing Activities

For the six months ended June 30, 2026 and 2025, net cash used in investing activities was immaterial due to our low capital equipment requirements.

Financing Activities

For the six months ended June 30, 2026, net cash provided by financing activities was $4.9 million primarily due to proceeds from convertible debt of $4.0 million, proceeds from other debt issuances of $1.3 million, proceeds from issuance of common stock from equity line-of-credit of $0.1 million, and proceeds from issuance of Preferred Stock Series P of $3.0 million partially offset by repayment of convertible debt of $1.8 million and other debt issuances of $1.7 million.

For the six months ended June 30, 2025, net cash provided by financing activities was $8.3 million primarily due to proceeds from convertible debt of $13.0 million, other debt issuances of $2.0 million, and proceeds from exercise of stock options of $0.1 million partially offset by repayment of other debt issuances of $6.8 million, and fees paid for debt issuance of $30,000.

Liquidity and Capital Resources

As of June 30, 2026 and December 31, 2025, we had an accumulated deficit of $322.1 million and $315.8 million, respectively. Our net losses were $6.3 million and $11.9 million for the six months ended June 30, 2026 and 2025, respectively.

As of June 30, 2026 and December 31, 2025, we had cash and cash equivalents of $0.5 million and $1.0 million, respectively. In April 2025, we raised $14.0 million in a Senior Secured Convertible Note Financing. See Note 5 - Debt and Related Party Debt to our condensed consolidated financial statements for the three months ended June 30, 2026 elsewhere in this report for additional information. In the three months ended June 30, 2026 and the year ended December 31, 2025, we raised $7.0 million and $18.5 million, respectively, for an aggregate total all-time of $50.5 million through debt and financing arrangements, including $13.0 million of convertible debt, $7.5 million of net proceeds from the IPO, $9.3 million under loan and security agreements with Fiza, $5.0 million in convertible notes and $5.6 million in other debt issuances. Our financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern. The recurring losses and negative cash flows from operations, working capital deficiency, the need for additional financing, and uncertainties frequently encountered by companies in the technology industry are factors that raise substantial doubt about our ability to continue as a going concern for the twelve-month period from the date the financial statements included herein were issued. See Note 1 to our condensed consolidated financial statements for the three months ended June 30, 2026 included elsewhere in this report for additional information on our assessment.

During the six months ended June 30, 2026, we incurred a net loss of $6.3 million, had Adjusted EBITDA of ($3.0) million and had negative cash flows from operations of $5.0 million. For the years ended December 31, 2025, we incurred a net loss of $25.4 million, and incurred negative cash flows from operations of $18.0 million. We had combined cash and cash equivalents of $0.9 million and $1.0 million as of June 30, 2026 and December 31, 2025, respectively. We have incurred operating losses and negative cash flows from operations since inception. Our prospects are subject to risks, expenses and uncertainties frequently encountered by companies in the technology industry. These risks include, but are not limited to, the uncertainty of successfully developing our products, availability of additional financing, gaining customer acceptance and uncertainty of achieving future profitability among other factors discussed under "Cautionary Note Regarding Forward - Looking Statements". Our success depends on the outcome of our research and development activities, scale-up and successful partnering and commercialization of our products and product candidates. In February 2025, we entered into two Loan and Security agreements that provided us with $2.0 million in financing. In April 2025, we entered into a convertible debt agreement that may provide us with up to $20.0 million in financing. In July 2025, we entered into an equity line-of-credit agreement that may provide us with up to $30.0 million in equity. In August 2025, we entered into new debt loans that provided us with $2.0 million in financing.

Management has projected cash on hand may not be sufficient to allow us to continue operations and there is substantial doubt about our ability to continue as a going concern within 12 months from the date of issuance of the financial statements if we are unable to raise additional funding for operations. We expect our working capital needs to increase in the future as we continue to expand and enhance our operations. Our ability to raise additional funds for working capital through equity or debt financings or other sources may depend on the financial success of our business and successful implementation of our key strategic initiatives, financial, economic and market conditions and other factors, some of which are beyond our control. Further financings may have a dilutive effect on stockholders and any debt financing, if available, may require restrictions to be placed on our future financing and operating activities. If we require additional capital and are unsuccessful in raising that capital at a reasonable cost and at the required times, or at all, we may not be able to continue our business operations or we may be unable to advance our growth initiatives, either of which could adversely impact our business, financial condition and results of operations.

Sources of Liquidity

We have historically funded our operations through the issuance of common stock and preferred stock to private investors, our IPO in December 2024, and debt financing. Our accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liabilities in the normal course of business. The recurring losses and negative cash flows from operations, working capital deficiency, the need for additional financing, and uncertainties frequently encountered by companies in the technology industry are factors that raise substantial doubt about our ability to continue as a going concern for the twelve-month period from the date the financial statements included herein were issued. The conditions identified above raise substantial doubt about our ability to continue as a going concern. Our condensed consolidated financial statements do not contain any adjustments that might result if we are unable to continue as a going concern.

Debt and Financing Arrangements

Fiza Term Debt.

The Company had three outstanding loans through May 28, 2026 with Fiza Investments Limited, ("Fiza") with a total outstanding principal balance of $7.2 million. On May 28, 2026, the Company converted an aggregate amount of $10,003,916, consisting of $7,201,695 in principal (the "Principal") and $2,802,221 in accrued interest (the "Interest") as follows (i) the Principal into shares of Common Stock at a fixed conversion price equal to $0.2385 per share, 150% of the closing price of the Common Stock on the OTC Markets on the trading day immediately preceding the Closing Date; and (ii) the Interest into shares of the newly created Series P-2 Preferred at a fixed conversion price of $1.00 per share, resulting in the issuance of 2,802,221 shares of Series P-2 Preferred to Fiza. No cash was paid in connection with the conversion. As of June 30, 2026, no amounts remain outstanding under the Fiza loans, and the Company recognized a gain on extinguishment of $3.1 million during the three and six months ended June 30, 2026.

Other Term Loans.

On August 20, 2025, the Company entered into two Loan and Security Agreements with Itria Ventures LLC ("Itria") in the principal amounts of $1,000,000 each ("Term Loans 10 and 11") for an aggregate total of $2,000,000 at a rate of 18.00% to 18.99% per year. On March 19, 2026, the Company, entered into a new Loan and Security Agreement the ("New Loan Agreement") with Itria in connection with the refinancing of all of its outstanding debt with Itria. Pursuant to the New Loan Agreement, the Lender agreed to provide the Company with a term loan in the principal amount of $1,344,500 (the "New Loan") at an interest rate of 18.99% per year. The New Loan is payable on a monthly basis in 24 equal installments, maturing on the 24-month anniversary of the funding date. The proceeds of the New Loan were used to refinance and pay off in full Term Loans 10 and 11. See Note 5 - Debt and Related Party Debt for more information.

The outstanding balance of all Itria loans as of June 30, 2026 and December 31, 2025 is $1.3 million and $1.6 million, respectively.

Senior Secured Convertible Note Financing.

On April 10, 2025, the Company entered into a securities purchase agreement (the "Note SPA") with an investor, (the "Senior Lender"), pursuant to which the Company sold, and the Senior Lender purchased, a senior secured convertible note issued by the Company (the "Initial Senior Secured Convertible Note," and such financing, the "Senior Secured Convertible Note Financing") in the original principal amount of $13,978,495, which is convertible into shares of the Company's common stock. The Senior Secured Convertible Note Financing initially closed on April 11, 2025. The gross proceeds to the Company from the Initial Senior Secured Convertible Note Financing, prior to the payment of legal fees and transaction expenses, was $13,000,000. All obligations under the Initial Senior Secured Convertible Note were satisfied and discharged on May 28, 2026, as described below.

In addition, the Company and Senior Lender agreed in the Amendment to conduct a second closing pursuant to the Note SPA, which occurred on March 16, 2026 (the "Second Closing"). On the Second Closing, the Company issued an additional senior secured convertible promissory note in the original principal amount of $4,301,075 (the "Additional Senior Secured Convertible Note," and together with the Initial Senior Secured Convertible Note, the "Senior Secured Convertible Note"). The Company used the net proceeds from the issuance of the Additional Senior Secured Convertible Note to repay approximately $2,000,000 of existing debt owed to the Senior Lender, and for working capital and general corporate purposes.

Subject to the satisfaction of certain conditions contained in the Note SPA (including mutual agreement by the Company and the Senior Lender), the Company may issue an additional senior secured convertible note to the lender in the principal amount of $3,225,807 (for additional gross proceeds of $3,000,000).

May 28, 2026 Restructuring

On May 28, 2026, the Company and the Senior Lender entered into a Debt Restructuring Agreement pursuant to which the Senior Lender converted $2,000,000 of outstanding principal and other amounts owed into shares of common stock at a fixed conversion price of $0.2385 per share. The converted amount consisted of $789,110 under the Initial Senior Secured Convertible Note, which fully satisfied and discharged that note, with the balance drawn from interest and Make-Whole Amounts under the Additional Senior Secured Convertible Note. The Company recognized a gain on extinguishment of $1.0 million during the three and six months ended June 30, 2026. The Additional Senior Secured Convertible Note, as reduced, was amended and restated (the "Amended Note").

Terms of the Amended Note

As of June 30, 2026, $2,000,000 of principal remained outstanding. The Senior Lender is subject to a nine-month conversion moratorium expiring February 28, 2027, after which the Amended Note is repayable in nine equal monthly installments of combined principal, interest and Make-Whole Amounts, with the final installment due November 28, 2027. The note matures March 15, 2028, was issued with a 7.0% original issue discount, accrues interest at 6.0% per annum guaranteed through maturity, and is secured by a first priority lien on substantially all of the Company's assets, including intellectual property. It is convertible at $7.00 per share, subject to a $1.25 floor price and to beneficial ownership limitations of 4.99% (9.99% on or after June 20, 2026). Installments paid in shares are priced at the lesser of the conversion price or 95% of the lowest VWAP over the preceding ten trading days.

Upon an event of default, the Senior Lender may require redemption at a 10% premium, interest accrues at 11.0% per annum, and the Senior Lender may convert at a discount to prevailing VWAP. In connection with a change of control, the Senior Lender may require redemption in cash at 110% of principal, accrued interest and make-whole amounts. The Company has elected the fair value option for the Amended Note, and changes in fair value are recognized in earnings. See Note 5 - Debt and Related Party Debt.

Contractual Obligations

Our principal commitments consist of obligations for office space under a non-cancelable operating lease that expires in October 2027, as well as repayment of borrowings under other financing arrangements as described above under "- Liquidity and Capital Resources - Debt and Financing Arrangements." In addition, we have agreements with certain hardware suppliers to purchase inventory; as of June 30, 2026, we had approximately $16.5 million in purchase obligations outstanding under such agreements, all of which are scheduled to come due on or before December 31, 2026.

Critical Accounting Estimates

As discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025 filed with the SEC on March 30, 2026, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America ("US GAAP"). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those consolidated financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies and estimates relate to revenue recognition, including Standalone Selling Price ("SSP") and the allocation of the transaction price; leases; impairment of intangible assets; impairment of long-lived assets; valuation of accounts receivable; valuation of inventory; valuation of debt and embedded features; stock compensation; and income taxes (including uncertain tax positions). There have been no significant changes to the Company's accounting policies subsequent to December 31, 2025.

Revenue Recognition

We recognize revenue from signed contracts with customers, change orders (approved and unapproved) and claims on those contracts that we conclude to be enforceable under the terms of the signed contracts. Some of our contracts have one clearly identifiable performance obligation. However, many contracts provide the customer several promises that

include hardware, software and professional services. The determination of the number of performance obligations in a contract requires significant judgment and could change the timing of the amount of revenue recorded for a given period.

For contracts with multiple performance obligations, the transaction price is allocated based on SSP, with list prices typically used for most items. For post-contract support services ("PCS") significant judgement is involved based on factors such as specific services offered, business models and operational efficiency. The Company regularly reassesses this estimate as changes could materially impact revenue recognition timing and amounts.

Discounts in certain contracts with customers are deemed variable consideration but are known at the time of revenue recognition.

Inventory

Our inventory, which includes raw materials and finished goods is valued using the weighted average cost method for hardware inventory while software inventory is recorded at actual cost. We periodically review the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold.

Convertible Debt

We have issued convertible promissory notes and evaluate embedded features for potential bifurcation as derivatives.

For the recent convertible note described in Note 5 - Debt and Related Party Debt, we elected the fair value option under ASC 825, measuring the entire instrument at fair value with changes recognized in earnings. This election is irrevocable and applied to the whole instrument, consistent with ASC 825-10 guidance. Key estimates include the valuation of original issue discount, accrued interest, and make-whole provisions, which require assumptions about discount rates, credit risk, and market conditions. The fair value option under ASC 825 simplifies the accounting by eliminating the need to bifurcate embedded derivatives under ASC 815 and aligns with the principles outlined in ASC 470 for debt instruments. This approach requires ongoing reassessment of fair value inputs and assumptions, which can significantly affect reported earnings and liabilities. All fees related to the convertible note were expensed as incurred and not recorded as debt issuance costs.

Series P and P 2 Preferred Stock

We have issued convertible Series P Preferred Stock and determined that the Series P and Series P 2 Preferred Stocks should be classified as a liability and recorded at fair value as a non-current liability as of June 30, 2026 on the condensed consolidated balance sheet. This classification reflects the embedded obligation to issue a variable number of common shares upon automatic conversion, based predominantly on a measure other than the fair value of the Company's equity shares (the lower of the Conversion Price or 80% of the 90-Day VWAP of the Company's common stock).

The Series P and Series P 2 Preferred Stocks are measured at fair value at each reporting date, with changes in fair value recognized in earnings. The fair value measurement incorporates the present value of all contractual cash flows, including accrued PIK dividends at the 18% stated rate through the Required Conversion date. No separate dividend accrual is recognized.

In accordance with ASC 480-10-25-14, the Company determined that the changes in fair value of the Series P and Series P 2 Preferred Stocks liability during the periods presented were primarily attributable to changes in the price of the Company's common stock and the discount rate used in the valuation model, rather than changes in the Company's own credit risk. Accordingly, the change in fair value was recognized in consolidated net loss rather than other comprehensive income (loss). The net impact for the three months ended June 30, 2026 and 2025, was a loss of approximately $34,000 and $0, respectively. The net impact for the six months ended June 30, 2026 and 2025, was a gain of approximately $0.2 million and $0, respectively.

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Income Taxes

We use the asset and liability method under FASB ASC Topic 740, Income Taxes, when accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax asset and liability.

We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing tax planning strategies in assessing the need for a valuation allowance.

We recognize tax benefits from uncertain tax positions only if we believe that 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. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we will make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

JOBS Act

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies until such time that we either (i) irrevocably elect to "opt out" of such extended transition period or (ii) no longer qualify as an emerging growth company. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

We are also a smaller reporting company meaning that the market value of our stock held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. To the extent we continue to qualify as a smaller reporting company after we cease to qualify as an emerging growth company, we will continue to be permitted to make certain reduced disclosures in our periodic reports and other documents that we file with the SEC. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.