Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, some of which are not within our control. See "Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements."

Company Overview

CPI is a payments technology company providing a comprehensive range of physical and digital payment solutions for U.S. financial institutions, processors, fintechs, prepaid program managers, and more. We are a leader in several areas of the U.S. payment card solutions market, including debit and credit card production, personalization, and Software-as-a-Service-based ("SaaS-based") instant issuance services. We are also a market leader in the production of "Prepaid Debit Cards," defined as debit cards issued on the networks of the "Payment Card Brands" (Visa, Mastercard^®, American Express^® and Discover^®) but not linked to a traditional bank account, and related secure packaging solutions. We serve thousands of customers through direct and indirect sales channels and have maintained long-standing relationships with our top customers.

Our revenues are primarily generated from the production of and services related to secure debit and credit cards that are issued on the networks of the Payment Card Brands, including Prepaid Debit Cards.

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Segment Overview

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Our business consists of the following reportable segments: Debit and Credit, Prepaid Debit, and Other.

Debit and Credit Segment

Our Debit and Credit segment primarily produces secure debit and credit cards and provides card services for U.S. card-issuing financial institutions. Services include personalization; instant issuance, which provides customers the ability to issue an instant personalized debit or credit card on-demand within a customer location; and other payment solutions such as digital push provisioning for mobile wallets.

Prepaid Debit Segment

Our Prepaid Debit segment primarily provides secure packaging solutions, Prepaid Debit Cards, and other integrated prepaid card services to prepaid program managers in the U.S.

Other

Our Other segment includes corporate expenses.

Key Components of Results of Operations

Beginning in the fourth quarter of 2025, we revised our financial statement presentation to better reflect the integrated nature of the services and solutions provided in connection with our product offerings. Accordingly, we no longer present "Products" and "Services" separately within revenue and cost of goods sold, and prior period amounts have been revised to conform the prior period presentation to the current period presentation.

Set forth below is a brief description of key line items of our consolidated statements of operations and comprehensive income.

Revenue

Revenue is generated from the sale to our customers, including the design and production of contact and contactless payment cards, which includes our eco-focused cards. Contactlesscards have additional technology to process contactless transactions and generally have a higher selling price than contact-only cards. We also generate revenue from the sale of our Card@Once^® instant issuance system and consumables, private label credit cards and retail gift cards, the personalization and fulfillment of payment cards, tamper-evident secure packaging, fulfillment services, SaaS-based personalization of instant issuance payment cards and other digital offerings. See Part II, Item 8, Financial Statements and Supplementary Data, Note 2 "Summary of Significant Accounting Policies" and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Critical Accounting Policies and Estimates-Revenue Recognition" in this Annual Report on Form 10-K for further information and timing of revenue recognition for net sales. We include revenue from gross shipping and handling in revenue.

Cost of Goods Sold

Cost of goods sold includes the direct and indirect costs of the products we sell and the related services that we provide. Costs include the cost of raw materials, including microchips for all applicable cards and antennas for contactless cards, labor costs, equipment and facilities costs, operation overhead, depreciation and amortization, leases and transport costs. These costs also include Card@Once instant issuance hardware and consumable product costs. Additionally, costs include the cost of labor, raw materials in the case of tamper-evident secure packaging, equipment and facilities costs, operation overhead, depreciation and amortization, leases and transport costs. Cost of goods sold can be impacted by many factors, including volume, operational efficiencies, procurement costs, promotional activity, and employee relations. We include the costs of shipping and handling related to customer sales in cost of goods sold.

Gross Profit and Gross Margin

Gross profit consists of our revenue less our cost of goods sold. Gross margin is gross profit as a percentage of revenue.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") primarily consist of expenses for executive, finance, sales, marketing, legal and compliance, information technology, procurement, customer service, human resources, research and development and administrative personnel, including payroll, benefits and stock-based compensation expense, bad debt expense and outside legal and other advisory fees, including consulting, accounting, and software related fees. Selling, general and administrative expenses also includes depreciation and amortization expense and may include impairment charges on tangible and intangible assets, when necessary.

Income from Operations and Operating Margin

Income from operations consists of our gross profit less our net selling, general and administrative expenses. Operating margin is income from operations as a percentage of revenue.

Other Expense, net

Other expense, net consists primarily of interest expense and other non-operating items.

Income Tax Expense

Income tax expense consists of our federal and state income taxes at statutory rates, including the impact of other items such as valuation allowances, tax credits, permanent items, and foreign taxes.

Net Income

Net income consists of our income from operations, less other expense, net, and income taxes.

Results of Operations

Year Ended December 31, 2025 Compared with Year Ended December 31, 2024

The following table presents the components of our consolidated statements of operations and comprehensive income for each of the periods presented:

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* Calculation not meaningful.

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The following discussion of our consolidated results of operations and segment results refers to the year ended December 31, 2025 compared to the corresponding prior year period. The results of operations should be read in conjunction with the discussion of our segment results of operations, which provide more detailed discussions concerning certain components of the consolidated statements of operations and comprehensive income.

Revenue:

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Revenue increased $62.9 million for the year ended December 31, 2025, primarily due to contributions of $42.8 million, or 7.9% of revenue for the year ended December 31, 2025, from the acquisition of Arroweye as well as increased volumes of contactless cards, partially offset by decreased revenue in our Prepaid Debit segment.

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The decrease in revenue in the Prepaid Debit segment for the year ended December 31, 2025 was primarily attributable to a change in accounting in the second quarter of 2025 resulting in reduced revenue recognition related to work-in-process orders as discussed in Part II, Item 8, Financial Statements and Supplementary Data, Note 2, "Summary of Significant Accounting Policies." Excluding the change in accounting, the increase in consolidated revenue would have been $73.0 million, or 15.3%.

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Gross Profit and Gross Profit Margin:

Gross profit and gross profit margin decreased for the year ended December 31, 2025, primarily due to unfavorable sales mix and increased production costs, including increased depreciation and tariff expenses, partially offset by benefits of operating leverage from increased revenue.

Selling, General and Administrative Expenses:

Selling, general and administrative expenses increased for the year ended December 31, 2025, primarily due to increased professional service fees and other costs of $6.0 million associated with the acquisition and integration of Arroweye.

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Interest, net:

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Interest expense decreased for the year ended December 31, 2025, primarily due to payment in the prior year period of an early redemption premium of $5.8 million related to the redemption in full of the $267.9 million 8.625% Senior Secured Notes due 2026 (the "2026 Senior Notes"), as compared to payment in the current period of a $0.6 million premium related to the redemption of $20.0 million of our 10.000% Senior Secured Notes due 2029. The decrease was partially offset by impacts of higher average borrowings on the Senior Notes due 2029 and ABL Revolver (defined below) for the year ended December 31, 2025.

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Loss on Debt Extinguishment:

During the year ended December 31, 2024, we recorded a $3.0 million loss on debt extinguishment relating to the unamortized deferred financing costs in connection with the redemption of the 2026 Senior Notes and the refinancing of our ABL Revolver in July 2024.

Other Expense, net:

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Other expense, net was relatively consistent for the year ended December 31, 2025.

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Income Tax Expense:

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Our effective tax rates on pre-tax income were 30.6% and 22.0% for the years ended December 31, 2025 and 2024, respectively. The increase in the Company's effective tax rate for the year ended December 31, 2025 related to non-deductible acquisition-related costs and increased state tax expenses related to the acquisition of Arroweye. The effective tax rate for the year ended December 31, 2024 was impacted by the increased deductibility of stock-based compensation realized upon certain stock option exercises and restricted stock unit vesting.

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Segment Discussion

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Debit and Credit:

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Revenue:

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Revenue for Debit and Credit increased for the year ended December 31, 2025, primarily due to contributions from the Arroweye acquisition, higher volumes of contactless cards, including metal cards, and increased Card@Once instant issuance sales, partially offset by decreased sales of other cards and personalization services.

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Gross Profit and Gross Profit Margin:

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Gross profit increased for Debit and Credit for the year ended December 31, 2025, primarily due to the increase in revenue discussed above.

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Gross profit margin decreased for Debit and Credit for the year ended December 31, 2025, primarily due to unfavorable sales mix and increased production costs, including increased depreciation and tariff expenses, partially offset by benefits of operating leverage from increased revenue.

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Income from Operations:

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Income from operations for Debit and Credit decreased for the year ended December 31, 2025, primarily due to increased selling, general and administrative expenses driven by increased compensation-related expenses resulting from increased headcount due to the Arroweye acquisition, and increased technology costs; partially offset by increased gross profit.

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Prepaid Debit:

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Revenue:

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Revenue for Prepaid Debit decreased $12.9 million for the year ended December 31, 2025, primarily due to a change in accounting in the second quarter of 2025 resulting in reduced revenue recognition for work-in-process orders. Excluding the change in accounting, the decrease in revenue would have been $3.3 million, or 3.3%. The prior year period benefited from significant sales of higher-priced packaging solutions to existing customers.

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Gross Profit and Gross Profit Margin:

Gross profit and gross profit margin for Prepaid Debit decreased for the year ended December 31, 2025, primarily due to decreased revenue, including the impact of the change in accounting that was implemented in the second quarter resulting in reduced revenue recognition for work-in-process orders.

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Income from Operations:

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Income from operations for Prepaid Debit decreased for the year ended December 31, 2025, primarily due to the factors discussed in "Gross Profit and Gross Profit Margin" above.

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Other:

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As the Other segment is comprised entirely of corporate expenses, income from operations for Other consists of selling, general and administrative expenses shown below.

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Selling, general and administrative expenses:

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Other selling, general and administrative expenses decreased for the year ended December 31, 2025, primarily due to decreased compensation-related expenses, including employee performance-based incentive compensation and prior year costs associated with the prior-CEO retention agreement; partially offset by increased professional service fees related to acquisition and integration costs associated with the acquisition of Arroweye.

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2026 Changes in Reportable Segments

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In connection with our increased strategic focus on expanding and developing additional proprietary integrated technological solutions for our customer base, we will implement a new segment structure to assess performance and allocate resources, beginning in the first quarter of 2026. The changes in our segment structure primarily relate to the separation of our proprietary integrated technological related operations into a separate segment from the Debit and Credit segment. A summary of how the segments will be structured follows:

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Liquidity and Capital Resources

At December 31, 2025, we had $21.7 million of cash and cash equivalents. Our primary source of liquidity has been cash generated from our operating activities, which has been driven by net income and fluctuations in working capital. Our working capital fluctuates primarily due to timing and size of tax payments, collections from customers, inventory purchases, payments of employee incentive programs, and interest payments on our outstanding Senior Notes, with the interest payments being due in the first and third quarters of the year.

Our ability to make investments in and grow our business, service our debt, and improve our debt leverage ratios, while maintaining strong liquidity, depends on our ability to generate excess operating cash flows. Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels and our senior secured revolving credit facility (the "ABL Revolver") with available borrowing capacity of $74.7 million as of December 31, 2025, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital needs. Our future cash flows could be impacted by a variety of factors, some of which are beyond our control. Factors include, but are not limited to, demand from some of our customers for certain products and related services; changes in economic conditions, especially those impacting our customers; the pricing, terms and availability of goods and services that we purchase; and financings that we enter into.

Cash Flows from Operating Activities

Cash provided by operating activities for the year ended December 31, 2025 increased to $59.5 million from $43.3 million for the year ended December 31, 2024, primarily due to reduced working capital usage. Working capital benefited from increased collections on accounts receivable, lower inventory purchases and timing of payments, and lower payments related to the prior-CEO retention agreement, partially offset by incentive payments related to a customer contract originally entered into in the first quarter of 2024, higher employee performance-based incentive compensation payments in 2025, and higher cash paid for interest on our Senior Notes.

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Cash Flows from Investing Activities

Arroweye Acquisition

On May 6, 2025, we acquired Arroweye for a final purchase price of $45.8 million. The net cash consideration paid was $44.2 million, which reflects cash acquired of $1.6 million. The acquisition was funded through a combination of cash on hand and our available capacity under the ABL Revolver. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 4, "Acquisition" for information regarding the acquisition.

Capital Expenditures

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During the year ended December 31, 2025, capital expenditures, including investments to support the business, such as machinery and information technology equipment, totaled $18.2 million, primarily related to our new production facility in Indiana.

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Equity Method Investment

On October 7, 2025, we acquired a 20% equity interest in Gift Card Co Pty Ltd, doing business as "Karta," a digital card technology company and prepaid program manager based in Australia. Total consideration for the transaction was $10.0 million, with $2.5 million paid in cash upon closing and the remaining $7.5 million was recorded as a contingent consideration, which is included in "Other long-term liabilities" on our consolidated balance sheet. We also retain an option to purchase an additional 31% of Karta prior to early April 2027. Additionally, we incurred $0.3 million in related costs. As of December 31, 2025, the value of the investment was $10.2 million and is included in "Other assets" on our consolidated balance sheet.

Cash Flows from Financing Activities

As of December 31, 2025 and 2024, we had the following outstanding borrowings:

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Senior Notes

On July 11, 2024 (the "Closing Date"), we completed a private offering by our wholly-owned subsidiary, CPI CG Inc. (the "Issuer"), of $285.0 million aggregate principal amount of 10.000% Senior Notes due 2029 (the "Senior Notes") and related guarantees at an issue price of 100%. The Senior Notes mature on July 15, 2029 and interest is payable on January 15 and July 15 of each year. The notes and related guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended, to persons reasonably believed to be qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States to certain non-U.S. persons in compliance with Regulation S under the Securities Act.

Net proceeds from the Senior Notes, together with cash on hand, were used to redeem the entire principal balance of $267.9 million of the 8.625% Senior Secured Notes due 2026 (the "2026 Senior Notes") as of the Closing Date, and to pay related fees, an early redemption premium of 2.156%, and other expenses. The early redemption premium paid is recorded in "Interest, net" on the consolidated statement of operations and comprehensive income for the year ended December 31, 2024.

On July 15, 2025, the Company used available capacity under the ABL Revolver (defined below) to redeem $20.0 million of its outstanding $285.0 million aggregate principal amount Senior Notes. The redemption was made pursuant to the terms of the indenture governing the Senior Notes, at a redemption price of 103.000% of par plus accrued and unpaid interest to the date of redemption.

The Company has obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control and certain asset sales.

ABL Revolver

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On the Closing Date, the Company and CPI CG Inc. as borrower (the "Borrower"), entered into a credit agreement with JPMorgan Chase Bank, N.A., as lender, administrative agent and collateral agent ("JPMorgan"), providing for an asset-based, senior secured revolving credit facility (the "ABL Revolver") of up to $75.0 million. We primarily utilize our ABL Revolver to provide general liquidity and to support shorter term financing requirements.

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On July 2, 2025, the Company, the Borrower, and JPMorgan entered into Amendment No. 1 to Credit Agreement (the "Amendment"), which amends the ABL Revolver to, among other things, increase the available borrowing capacity from $75.0 million to $100.0 million. The Amendment did not modify the maturity date of the ABL Revolver nor the interest rate.

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ABL Revolver also includes an uncommitted accordion feature whereby the Borrower may increase the ABL Revolver commitment by an aggregate amount not to exceed $25.0 million, subject to certain conditions. The ABL Revolver matures on the earliest to occur of July 11, 2029 and the date that is 91 days prior to the maturity of the Senior Notes.

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Borrowings under the ABL Revolver bear interest at a rate per annum that ranges based on the applicable term secured overnight financing rate as administered by the Federal Reserve Bank of New York plus 1.50% to 1.75% (subject, in each case, to a credit spread adjustment of 0.10%), based on the average daily borrowing capacity under the ABL Revolver over the most recently completed month. The unused portion of the ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily excess availability under the ABL Revolver over the immediately preceding month.

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As of December 31, 2025, we had $25.0 million of outstanding borrowings on the ABL Revolver. Borrowings of $67.0 million in 2025 under the ABL Revolver were primarily utilized to fund the Arroweye acquisition and redeem a portion of the Senior Notes, partially offset by subsequent payments of $42.0 million made throughout the year.

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Amounts borrowed and outstanding under the ABL Revolver and Senior Notes are required to be repaid in full, together with any accrued and unpaid interest, no later than July 15, 2029 and may be subject to earlier mandatory prepayment upon certain events.

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Credit Ratings and Debt Covenants

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The credit ratings on our debt are an important consideration in our overall business, managing our financing costs and facilitating access to additional capital on favorable terms. Factors that we believe are important in assessing our credit ratings include earnings, cash flow generation, leverage, available liquidity and the overall health of the business.

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The Senior Notes and the ABL Revolver contain covenants limiting the ability of the Company, the Borrower and the Company's restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of the Borrower and its restricted subsidiaries to pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the indenture governing the Senior Notes and the ABL Credit Agreement.

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The ABL Revolver includes limitations on the Borrower's ability to borrow in certain situations, including limitations based on the calculation of borrowing capacity and further limitations that are triggered if the amount available to borrow under the ABL Revolver is less than the greater of $7.5 million and 10% of the Maximum Revolver Amount. The borrowing capacity represents the net availability under the ABL Revolver and is calculated as the lesser of a) the total of certain eligible assets, including cash, accounts receivable and inventories, further reduced by stated contribution percentages and adjustments (the "Borrowing Base") and b) the Maximum Revolver Amount. The Borrowing Base is further reduced by credit line reserves and letters of credit, as well as the loan ledger balance outstanding on the ABL Revolver. Additionally, commencing with the month immediately following a date on which borrowing capacity is below the greater of $7.5 million and 10% of the Maximum Revolver Amount and until such time that borrowing capacity equals or exceeds the greater of $7.5 million and 10% of the Maximum Revolver Amount for 30 consecutive days, the Company must maintain a fixed charge coverage ratio (as defined in the ABL Credit Agreement) of at least 1.00 to 1.00, calculated for the trailing 12 months, in order to borrow under the ABL Revolver.

Material Cash Requirements

Our material cash requirements include interest payments on our long-term debt, operating and finance lease payments, and purchase obligations to support our operations.

Debt Service Requirements

As of December 31, 2025, the total projected principal and interest payments on our borrowings are $392.7 million, primarily related to the Senior Notes, of which $28.5 million of interest is expected to be paid in the next 12 months.

The remaining interest payments are expected to be paid over the remaining term of the Senior Notes, which mature in 2029, and the principal is due upon maturity. We have estimated our future interest payments assuming no additional borrowings under the ABL Revolver, no early redemptions of principal on the Senior Notes, and no debt issuances or renewals upon the maturity dates of our notes. However, we may borrow additional amounts under the ABL Revolver, redeem principal on the Senior Notes early, or refinance all or a portion of our borrowings in future periods.

Leases

We lease equipment and real property for production and services. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 9, "Financing and Operating Leases," for details on our leasing arrangements, including future maturities of our operating lease liabilities, as of December 31, 2025.

Purchase Obligations

A purchase obligation is an agreement to purchase goods or services that is enforceable, legally binding, and specifies all significant terms. As of December 31, 2025, we had approximately $62.2 million of outstanding purchase obligations, nearly all of which is expected to be paid in the next 12 months.

Cyclical and Seasonal Nature of Business

Payment cards are generally influenced by broader cyclical changes in the economy, with economic downturns potentially resulting in decreases in the demand for our products and related services and economic upturns potentially resulting in increases in demand. In particular, prolonged economic downturns typically have resulted in significant reductions in the production demand for general purpose credit cards due to tightening credit conditions. Our revenue is also influenced by changes in customer behavior such as altering inventory management practices, payment card renewal cycles and demand for new products, such as contactless cards. Additionally, we historically have generated higher revenue in the third and fourth quarters of the year, as our sales of Prepaid Debit Card solutions are more heavily weighted toward the second half of the year when consumers tend to purchase more of these products and other integrated prepaid card services in anticipation of the holiday season in the United States and timing related to the production of health insurance and health savings account cards.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our reported revenue, results of operations and net income, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates.

Revenue Recognition

During the second quarter of 2025, the Company reassessed certain aspects of its revenue recognition practices under Financial Accounting Standards Board Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606"), and the legal enforceability of certain contract terms based on evolving business practices where the Company and a customer deviate from contract terms after an order is placed but before it is shipped. This assessment highlights the Company's approach relating to goods that are in production but have not yet shipped, reflecting its emphasis on maintaining long-term customer relationships.

Such deviations may impact the legal enforceability of payment terms for goods that are in the process of being produced but have not shipped. As a result, the Company concluded that certain contracts no longer meet the criteria for over-time revenue recognition under ASC 606. Effective prospectively beginning in the second quarter of 2025, the Company began recognizing revenue for these contracts at a point in time, typically upon shipment or customer acceptance. Additionally, in connection with the acquisition and integration of Arroweye during the second quarter of 2025, the Company assessed Arroweye's customer contracts and determined that Arroweye revenue should also be recognized at point-in-time.

Costs to Obtain a Contract with a Customer

Costs to obtain a contract ("contract costs") include only those costs incurred to obtain a contract that the Company would not have incurred if the contract had not been obtained. For contracts where the term is greater than one year, these costs are recorded as an asset and amortized consistent with the timing of the related revenue over the life of the contract. To do so, we estimate the amount of the contract costs over the term of the contract as well as the timing of future revenue over the term of the contract to determine the amortization of such costs. Contract costs incurred but unpaid are included in "Accrued expenses" on the Company's consolidated balance sheets. Contract costs are expensed as incurred when the amortization period is one year or less. Assets capitalized for contract costs are evaluated for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. No impairments were recorded for the years ended December 31, 2025 and 2024.

As of December 31, 2025 and 2024, the Company recorded $2.5 million and $2.1 million, respectively, in "Prepaid expenses and other current assets", and $8.1 million and $11.1 million, respectively, in "Other assets" related to capitalized contract costs. Amortization of these costs, recorded as a reduction of revenue, totaled $2.6 million and $1.8 million for the years ended December 31, 2025 and 2024, respectively.

Income Taxes

We are subject to income taxes in the United States and certain foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.

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The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets, including net operating loss carryforwards, will not be realized. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves consideration of estimates regarding the timing and amount of future taxable income by jurisdiction, the reversal of taxable temporary differences and the impact of tax planning strategies. Changes in the relevant facts can significantly impact the judgment or need for valuation allowances. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. The company is required to make estimates regarding future compensation for covered individuals to determine the value of its deferred tax assets related to the future deductibility of executive stock-based compensation and accrued incentive compensation, which also requires significant judgment. We also establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will be consistent with what is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the current provision for income taxes. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The Company's valuation allowance recorded as of December 31, 2025, primarily relates to certain federal and state net operating losses obtained through the Arroweye acquisition that the Company estimates may not be fully utilized. Additionally, other changes to the federal and state tax regulations can lead to variability in allowable deductions, which can impact the Company's valuation allowance.

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting, which requires that most assets (both tangible and intangible) and liabilities are recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of net assets is recognized as goodwill. Critical estimates used in valuing certain intangible assets include but are not limited to the amount and timing of future cash flows, future revenue growth, customer retention rates, expected use of acquired assets, and the determination of royalty and discount rates. A high degree of judgment is required to estimate the fair value of the long-lived assets. We may use quoted market prices, prices for similar assets, present value techniques and other valuation techniques to prepare these estimates. To assist us in making these fair value determinations, we may engage third-party valuation specialists. Due to the high degree of judgment involved in our estimation techniques, any value ultimately derived from our long-lived assets may differ from our estimate of fair value. Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain. Certain adjustments to the assessed fair values of the assets and liabilities made subsequent to the acquisition date, but within the measurement period, which is one year or less, are recorded as adjustments to goodwill.

Recent Accounting Pronouncements

Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 2, "Summary of Significant Accounting Policies" for a discussion of recent accounting pronouncements.