What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-07 compared with 2026-05-01 · 180 added, 61 removed, 309 unchanged (44% of the section changed)

4 unchanged sentences

We envision a world in which every digital interaction is amazing.

By combining our leading communications capabilities with rich contextual data and AI, we provide the infrastructure for businesses of all sizes to revolutionize how they engage with their customers by delivering seamless, trusted, and personalized customer experiences at scale.

The Twilio platform combines our communications channels and software solutions with contextual data and AI-powered orchestration, enabling businesses to deliver amazing customer engagement across the entire customer journey.

Our platform provides a trusted, simple, and smart infrastructure foundation that customers can build on.

We offer highly customizable communications APIs that enable developers to embed numerous forms of messaging, voice, email, and video interactions into their customer-facing applications, as well as software products that target specific engagement needs, including our digital engagement centers, marketing campaigns, and user authentication and identity solutions.

22 unchanged sentences

The increased fees do not impact our gross profit, but they create a headwind to our gross margins.

In March 2026, we paid $141.0 million under our 2025 company-wide bonus program to eligible employees for amounts previously accrued.

As previously disclosed, these payments impacted our cash flows in the first quarter of 2026.

Given our recent history of generating net income in the U.S., we believe that there is a reasonable possibility that during 2026 sufficient positive evidence may become available to allow us to determine that a significant portion of the valuation allowance recorded against our U.S.

deferred tax assets should be released.

This would result in a significant income tax benefit for the period when we release the valuation allowance in the U.S.

However, the exact timing and amount of the valuation allowance release are subject to change based on our actual operating results.

In the second quarter of 2026, we determined that we would be unable to consume certain network services that we prepaid in previous periods due to operational and financial challenges experienced by two network service providers.

This determination resulted in a $32.8 million impairment loss on prepaid assets that impacted our operating expenses and income from operations for the three and six months ended June 30, 2026.

This impairment loss has no impact on our free cash flow and will not impact our results of operations in future periods.

We regularly assess the need for a valuation allowance on our deferred tax assets.

As of June 30, 2026, based on our analysis of both positive and negative evidence, including the amount of pre-tax book income in the U.S.

in recent periods and our expectation of future profits in the U.S., we concluded that it is more likely than not that the majority of our U.S.

deferred tax assets are realizable.

As a result, we released a significant portion of our valuation allowance on the net deferred tax assets in the U.S., resulting in the recognition of deferred tax assets and income tax benefit of $944.1 million during the three and six months ended June 30, 2026.

For further detail refer to Note 14 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Our results of operations have in the past been, and could in the future be, impacted by adverse macroeconomic conditions.

3 unchanged sentences

We review a number of operational and financial metrics, including Dollar-Based Net Expansion Rate (“DBNE”), to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions.

The following table summarizes our year-over-year revenue growth and DBNE for the three months ended March 31, 2026 and 2025.

The following table summarizes our year-over-year revenue growth and DBNE for the three months ended June 30, 2026 and 2025.

Three Months Ended

2 unchanged sentences

Dollar-Based Net Expansion Rate 116 % 108 %

Beginning in the first quarter of 2026, we have discontinued disclosure of Active Customer Accounts as a key metric.

As a result, we are revising the definition of DBNE to remove references to Active Customer Accounts and Zipwhip accounts and instead refer to “customer accounts.” The methodology for identifying these customer accounts is unchanged from the methodology most recently used to identify Active Customer Accounts and this definitional update has no impact on our methodology for calculating DBNE or our historical or future DBNE.

Dollar‑Based Net Expansion Rate

28 unchanged sentences

Usage-based customers subject to such contracts are typically invoiced monthly in arrears for products used.

In the three months ended March 31, 2026 and 2025, we generated 75% and 73% of our revenue, respectively, from usage-based fees.

In the three months ended June 30, 2026 and 2025, we generated 75% and 74% of our revenue, respectively, from usage-based fees.

Subscription-based fees are earned in accordance with subscription pricing terms.

1 unchanged sentence

Subscription customers are generally invoiced in advance at the start of the contract term.

In the three months ended March 31, 2026 and 2025, we generated 25% and 27% of our revenue, respectively, from non-usage‑based fees.

In the three months ended June 30, 2026 and 2025, we generated 25% and 26% of our revenue, respectively, from non-usage‑based fees.

Amounts that have been charged via credit card or invoiced are recorded in revenue, deferred revenue or customer deposits, depending on whether the revenue recognition criteria have been met.

18 unchanged sentences

We are focusing our research and development investment in the highest impact product areas for our future.

We are investing strategically in alignment with our focus on bringing communications, data and AI together into a single platform that enables fast, relevant and personalized interactions.

We are investing strategically in alignment with our focus on combining communications, memory, and AI orchestration with identity, governance and observability to enable businesses to deliver continuous, personal and secure conversations.

Sales and Marketing.

5 unchanged sentences

General and administrative expenses also include costs related to business acquisitions and dispositions, legal and other professional services fees, certain taxes, depreciation and amortization, charitable contributions and an allocation of our general overhead expenses.

Impairment Loss on Prepaid Assets.

Impairment loss on prepaid assets consists of certain losses related to network services we prepaid in prior periods that we will be unable to consume due to operational and financial challenges experienced by two network service providers.

Other (Expenses) Income, Net

Our other (expenses) income, net, consist primarily of our share of losses from our equity method investment, impairment charges and gains and losses related to our strategic investments, realized gains and losses from marketable securities, interest income and expense and debt-related costs.

Provision for Income Taxes

Our provision for income taxes consists primarily of federal, state and foreign income taxes and withholding taxes in foreign jurisdictions in which the Company conducts business.

Benefit from (Provision for) Income Taxes

Our benefit from (provision for) income taxes consists primarily of the tax benefit from the release of a significant portion of our U.S.

valuation allowance;

and also, federal, state and foreign income taxes and withholding taxes in foreign jurisdictions in which the Company conducts business.

From time to time, we may recognize tax benefits arising from various matters, including newly enacted legislations.

Benefits from income taxes may fully or partially offset the provision for income taxes within a reporting period.

The primary difference between our effective tax rate and the federal statutory rate relates to the valuation allowance the Company established on the federal, state and certain foreign net operating losses and credits.

In 2026, the primary difference between our effective tax rate and federal statutory rate relates to the tax benefit recognized from the U.S.

valuation allowance released during the second quarter of 2026.

In prior periods, the primary difference between our effective tax rate and the federal statutory rate related to the valuation allowance we established on the federal, state and certain foreign deferred tax assets.

Results of Operations

1 unchanged sentence

The period-to-period comparison of our historical results are not indicative of the results that may be expected in the future.

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2026 2025 2026 2025

Condensed Consolidated Statements of Operations Data:

11 unchanged sentences

118,430 101,532 220,976 193,609

Impairment loss on prepaid assets 32,771 — 32,771 —

Total operating expenses 641,320 565,751 1,217,898 1,124,236

6 unchanged sentences

(9,020) (3,397) (14,454) 105

Income before provision for income taxes

102,232 26,584

Provision for income taxes

(12,093) (6,567)

Income before benefit from (provision for) income taxes 75,526 33,592 177,758 60,176

Benefit from (provision for) income taxes 991,683 (11,169) 979,590 (17,736)

Net income attributable to common stockholders

8 unchanged sentences

(1) Includes stock-based compensation expense as follows:

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2026 2025 2026 2025

(In thousands)

6 unchanged sentences

(2) Includes amortization of acquired intangibles as follows:

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2026 2025 2026 2025

(In thousands)

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The following table sets forth our results of operations for each of the periods presented as a percentage of our total revenue:

Three Months Ended

Condensed Consolidated Statements of Operations, as a percentage of revenue:

Three Months Ended Six Months Ended

June 30, June 30,

2026 2025 2026 2025

Condensed Consolidated Statements of Operations, as a

percentage of revenue:

Revenue 100 % 100 % 100 % 100 %

5 unchanged sentences

General and administrative 8 8 8 8

Impairment loss on prepaid assets 2 — 1 —

Total operating expenses 43 46 42 47

4 unchanged sentences

Total other (expenses) income, net (1) * * *

Income before provision for income taxes

Provision for income taxes

Income before benefit from (provision for) income taxes 5 3 6 3

Benefit from (provision for) income taxes 66 (1) 34 (1)

Net income attributable to common stockholders

71 % 2 % 40 % 2 %

____________________________________

* Less than 0.5% of revenue.

** Columns may not sum due to rounding.

Comparison of the Three Months Ended March 31, 2026 and 2025

Comparison of the Three Months Ended June 30, 2026 and 2025

Three Months Ended

2 unchanged sentences

$ 1,499,089 $ 1,228,425 $ 270,664 22 %

In the three months ended March 31, 2026, revenue increased by $234.4 million, or 20%, compared to the same period last year.

In the three months ended June 30, 2026, revenue increased by $270.7 million, or 22%, compared to the same period last year.

This increase was primarily attributable to the increased usage of our products by our existing customers, as reflected in our DBNE of 116%, as well as an increase of $75.7 million in revenue derived from customer accounts not captured in our DBNE calculation, which are primarily new customer accounts.

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$ 725,866 $ 602,740 $ 123,126 20 %

In the three months ended March 31, 2026, cost of revenue increased by $131.8 million, or 22%, compared to the same period last year.

In the three months ended June 30, 2026, cost of revenue increased by $147.5 million, or 24%, compared to the same period last year.

The increase was primarily attributable to a $138.8 million increase in network service provider costs, net of the impact of hedging instruments, which includes a $71.1 million increase due to the incremental A2P fees recently introduced by major U.S.

In the three months ended March 31, 2026, gross profit increased by $102.7 million, or 18%, compared to the same period last year.

In the three months ended June 30, 2026, gross profit increased by $123.1 million, or 20%, compared to the same period last year.

This increase was attributable to the factors impacting our revenue and cost of revenue, as described above.

6 unchanged sentences

General and administrative 118,430 101,532 16,898 17 %

Impairment loss on prepaid assets 32,771 — 32,771 NM

Total operating expenses $ 641,320 $ 565,751 $ 75,569 13 %

In the three months ended March 31, 2026, research and development expenses increased by $7.9 million, or 3%, compared to the same period last year.

Fluctuations in the various research and development expense categories were not significant either individually or in the aggregate.

In the three months ended March 31, 2026, sales and marketing expenses decreased by $0.2 million, or nearly flat, compared to the same period last year.

_____________________________

NM - Percentage not meaningful

In the three months ended June 30, 2026, research and development expenses increased by $29.8 million, or 12%, compared to the same period last year.

The increase was primarily attributable to a $13.8 million increase in hosting fees to support development and staging of our products and a $10.3 million increase in total personnel costs.

In the three months ended June 30, 2026, sales and marketing expenses decreased by $3.9 million, or 2%, compared to the same period last year.

Fluctuations in the various sales and marketing expense categories were not significant either individually or in the aggregate.

In the three months ended March 31, 2026, general and administrative expenses increased by $10.5 million, or 11%, compared to the same period last year.

Fluctuations in the various general and administrative expense categories were not significant either individually or in the aggregate.

Other (Expenses) Income, net

In the three months ended June 30, 2026, general and administrative expenses increased by $16.9 million, or 17%, compared to the same period last year.

The increase was primarily attributable to an $8.0 million increase in the provision for doubtful accounts, a $4.0 million increase in personnel costs, and a $2.1 million increase in professional services fees.

In the three months ended June 30, 2026, impairment loss on prepaid assets increased by $32.8 million compared to the same period last year.

The impairment relates to certain prepaid network services that we determined we would be unable to consume due to operational and financial challenges experienced by two network service providers.

No such impairment occurred in the prior year period.

Other Expenses, net

Three Months Ended

4 unchanged sentences

15,326 21,825 (6,499) (30) %

Total other (expenses) income, net

Total other expenses, net $ (9,020) $ (3,397) $ (5,623) 166 %

In the three months ended June 30, 2026, other expenses, net, increased by $5.6 million, or 166%, compared to the same period last year.

Fluctuations in the various other expense, net, categories were not significant either individually or in the aggregate.

Benefit from (Provision for) Income Taxes

Three Months Ended

2026 2025 Change

(Dollars in thousands)

Benefit from (provision for) income taxes $ 991,683 $ (11,169) $ 1,002,852 NM

_____________________________

In the three months ended March 31, 2026, other (expenses) income, net, decreased by $8.9 million, or 255%, compared to the same period last year.

The decrease was primarily attributable to a $7.8 million increase in our share of losses from our equity method investment.

NM - Percentage not meaningful

In the three months ended June 30, 2026, benefit from (provision for) income taxes increased by $1.0 billion compared to the same period last year.

The increase was primarily attributable to the release of our valuation allowance on certain of our U.S.

federal and state deferred tax assets in the three months ended June 30, 2026, which generated a $944.1 million income tax benefit.

For further detail refer to Note 14 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Comparison of the Six Months Ended June 30, 2026 and 2025

Six Months Ended

2026 2025 Change

(Dollars in thousands)

$ 2,905,996 $ 2,400,888 $ 505,108 21 %

In the six months ended June 30, 2026, revenue increased by $505.1 million, or 21%, compared to the same period last year.

This increase was primarily attributable to the increased usage of our products by our existing customers, as reflected in our DBNE of 115%, as well as an increase of $146.6 million in revenue derived from customer accounts not captured in our DBNE calculation, which are primarily new customer accounts.

The increase also reflects $117.1 million in revenue related to the incremental A2P fees recently introduced by major U.S.

Cost of Revenue and Gross Profit

Six Months Ended

2026 2025 Change

(Dollars in thousands)

Cost of revenue $ 1,495,886 $ 1,216,581 $ 279,305 23 %

$ 1,410,110 $ 1,184,307 $ 225,803 19 %

In the six months ended June 30, 2026, cost of revenue increased by $279.3 million, or 23%, compared to the same period last year.

This increase was primarily attributable to a $257.0 million increase in network service providers’ costs, net of the impact of hedging instruments, which includes a $117.1 million increase due to the incremental A2P fees recently introduced by major U.S.

In the six months ended June 30, 2026, gross profit increased by $225.8 million, or 19%, compared to the same period last year.

The increase was attributable to the factors impacting our revenue and cost of revenue, as described above.

Operating Expenses

Six Months Ended

2026 2025 Change

(Dollars in thousands)

Research and development $ 535,483 $ 497,790 $ 37,693 8 %

Sales and marketing 428,668 432,837 (4,169) (1) %

General and administrative 220,976 193,609 27,367 14 %

Impairment loss on prepaid assets 32,771 — 32,771 NM

Total operating expenses $ 1,217,898 $ 1,124,236 $ 93,662 8 %

_____________________________

NM - Percentage not meaningful

In the six months ended June 30, 2026, research and development expenses increased by $37.7 million, or 8%, compared to the same period last year.

The increase was primarily attributable to a $22.6 million increase in hosting fees to support development and staging of our products and a $12.5 million increase in total personnel costs.

In the six months ended June 30, 2026, sales and marketing expenses decreased by $4.2 million, or 1%, compared to the same period last year.

Fluctuations in the various sales and marketing expense categories were not significant either individually or in the aggregate.

In the six months ended June 30, 2026, general and administrative expenses increased by $27.4 million, or 14%, compared to the same period last year.

The increase was primarily attributable to an $11.1 million increase in total personnel costs, a $7.1 million increase in the provision for doubtful accounts and a $4.6 million increase in professional services fees.

In the six months ended June 30, 2026, impairment loss on prepaid assets increased by $32.8 million compared to the same period last year.

The impairment relates to certain prepaid network services that we determined we would be unable to consume due to operational and financial challenges experienced by two network service providers.

No such impairment occurred in the prior year period.

Other (Expenses) Income, net

Six Months Ended

2026 2025 Change

(Dollars in thousands)

Share of losses from equity method investment $ (51,569) $ (44,693) $ (6,876) 15 %

Other income, net

37,115 44,798 (7,683) (17) %

Total other (expenses) income, net $ (14,454) $ 105 $ (14,559) NM

_____________________________

NM - Percentage not meaningful

In the six months ended June 30, 2026, other (expenses) income, net, decreased by $14.6 million compared to the same period last year.

The decrease is primarily attributable to a $7.7 million decrease in other income, net, primarily driven by unrealized losses from fluctuations in foreign currency exchange rates and a $6.9 million increase in our share of losses from our equity method investment.

Benefit from (Provision for) Income Taxes

Six Months Ended

2026 2025 Change

(Dollars in thousands)

Benefit from (provision for) income taxes

$ 979,590 $ (17,736) $ 997,326 NM

_____________________________

NM - Percentage not meaningful

In the six months ended June 30, 2026, benefit from (provision for) income taxes increased by $1.0 billion compared to the same period last year.

The increase was primarily attributable to the release of our valuation allowance on certain of our U.S.

federal and state deferred tax assets in the six months ended June 30, 2026, which generated a $944.1 million income tax benefit.

For further detail refer to Note 14 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Non-GAAP Financial Measures

31 unchanged sentences

Restructuring costs 108 (140)

Loss on lease termination (500) —

Impairment loss on prepaid assets (32,771) —

Non-GAAP operating expenses $ 451,077 $ 402,359

14 unchanged sentences

Restructuring costs (108) 140

Loss on lease termination 500 —

Impairment loss on prepaid assets 32,771 —

Non-GAAP income from operations

13 unchanged sentences

Free cash flow margin 24 % 21 %

Net cash used in investing activities

$ (41,190) $ (19,140)

Net cash (used in) provided by investing activities $ (53,246) $ 402,019

Net cash used in financing activities $ (37,854) $ (175,914)

Liquidity and Capital Resources

As of March 31, 2026, we had cash and cash equivalents of $542.0 million and short-term marketable securities of $1.8 billion.

As of June 30, 2026, we had cash and cash equivalents of $823.3 million and short-term marketable securities of $1.8 billion.

Cash equivalents consist of money market funds, commercial paper and U.S.

22 unchanged sentences

The program expires on December 31, 2027.

In the three months ended March 31, 2026, we repurchased $253.4 million in aggregate value, or 2.1 million shares of our Class A common stock.

As of March 31, 2026, approximately $892.0 million of the amount authorized in January 2025 for share repurchases remained available for future repurchases.

In the three and six months ended June 30, 2026, we repurchased $66.0 million in aggregate value, or 0.5 million shares, and $319.4 million in aggregate value, or 2.6 million shares, respectively, of our Class A common stock.

As of June 30, 2026, approximately $826.0 million of the amount authorized in January 2025 for share repurchases remained available for future repurchases.

2029 Notes and 2031 Notes

2 unchanged sentences

The following table summarizes our cash flows:

Three Months Ended

Six Months Ended

(In thousands)

1 unchanged sentence

$ 525,591 $ 468,126

Cash used in investing activities

(41,190) (19,140)

Cash (used in) provided by investing activities (94,436) 382,879

Cash used in financing activities

(290,428) (301,708)

Net (decrease) increase in cash, cash equivalents and restricted cash

$ (140,558) $ 46,108

Net increase in cash, cash equivalents and restricted cash $ 140,727 $ 549,297

Cash Flows from Operating Activities

In the three months ended March 31, 2026, cash provided by operating activities consisted primarily of our net income of $90.1 million adjusted for non-cash items, including $136.5 million of stock-based compensation expense, $34.2 million of depreciation and amortization expense, $27.2 million of our share of losses from an equity method investment, $17.1 million of amortization of deferred commissions, $4.7 million of non-cash reduction in our operating right-of-use asset, and $160.2 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts payable and other current liabilities decreased $149.3 million primarily driven by the payment of the 2025 company-wide bonus in the three months ended March 31, 2026.

In the six months ended June 30, 2026, cash provided by operating activities consisted primarily of our net income of $1.2 billion adjusted for non-cash items, including $944.1 million of tax benefit related to release of our U.S.

valuation allowance, $278.4 million of stock-based compensation expense, $63.7 million of depreciation and amortization expense, $51.6 million of our share of losses from an equity method investment, $33.6 million of amortization of deferred commissions, $9.5 million of non-cash reduction in our operating right-of-use asset, and $175.0 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts payable and other current liabilities decreased $67.3 million primarily driven by the payment of the 2025 company-wide bonus in the six months ended June 30, 2026.

Operating lease liabilities decreased $17.8 million due to payments made against our operating lease obligations.

In the three months ended March 31, 2025, cash provided by operating activities consisted primarily of our net income of $20.0 million adjusted for non-cash items, including $139.3 million of stock-based compensation expense, $49.6 million of depreciation and amortization expense, $19.5 million of our share of losses from an equity method investment, $19.3 million of amortization of deferred commissions, $5.2 million of non-cash reduction in our operating right-of-use asset, and $65.7 million of cumulative changes in operating assets and liabilities.

In the six months ended June 30, 2025, cash provided by operating activities consisted primarily of our net income of $42.4 million adjusted for non-cash items, including $288.5 million of stock-based compensation expense, $99.4 million of depreciation and amortization expense, $44.7 million of our share of losses from an equity method investment, $38.4 million of amortization of deferred commissions, $10.5 million of non-cash reduction in our operating right-of-use asset, and $59.8 million of cumulative changes in operating assets and liabilities.

With respect to changes in operating assets and liabilities, accounts receivable and prepaid expenses decreased $81.6 million primarily due to timing of cash receipts and prepayments of certain operating expenses.

Accounts payable and other current liabilities decreased $86.4 million primarily driven by the payment of the 2024 company-wide bonus in the three months ended March 31, 2025.

Accounts payable and other current liabilities decreased $64.4 million primarily driven by the payment of the 2024 company-wide bonus in the six months ended June 30, 2025.

Other long-term assets increased $51.4 million primarily due to an increase in long-term prepayments to support our business.

Operating lease liabilities decreased $18.7 million due to payments made against our operating lease obligations.

Cash Flows from Investing Activities

In the three months ended March 31, 2026, cash used in investing activities was $41.2 million, primarily consisting of $19.6 million of purchases of marketable securities and other investments, net of proceeds from sales and maturities of marketable securities and other investments, $16.7 million related to capitalized software development costs, and $4.2 million related to purchases of long-lived assets.

In the three months ended March 31, 2025, cash used in investing activities was $19.1 million consisting of $11.6 million related to capitalized software development costs, $6.4 million of purchases of marketable securities and other investments, net of proceeds from sales and maturities of marketable securities, and $1.2 million related to purchases of long-lived assets.

In the six months ended June 30, 2026, cash used in investing activities was $94.4 million, primarily consisting of $53.2 million of purchases of marketable securities and other investments, net of proceeds from sales and maturities of marketable securities and other investments, $33.4 million related to capitalized software development costs, and $7.2 million related to purchases of long-lived assets.

In the six months ended June 30, 2025, cash provided by investing activities was $382.9 million, primarily consisting of $409.2 million of maturities and sales of marketable securities, net of purchases, partially offset by $24.2 million related to capitalized software development costs, and $2.2 million related to purchases of long-lived assets.

Cash Flows from Financing Activities

In the three months ended March 31, 2026, cash used in financing activities was $252.6 million primarily consisting of $253.0 million of cash paid to repurchase 2.1 million shares of our Class A common stock, including related costs.

In the three months ended March 31, 2025, cash used in financing activities was $125.8 million primarily consisting of $126.3 million of cash paid to repurchase 1.2 million shares of our Class A common stock, including related costs.

In the six months ended June 30, 2026, cash used in financing activities was $290.4 million primarily consisting of $323.0 million of cash paid to repurchase 0.5 million shares of our Class A common stock, including related costs, partially offset by $32.8 million in proceeds from exercises of stock options and shares of Class A common stock issued under the Company’s ESPP.

In the six months ended June 30, 2025, cash used in financing activities was $301.7 million primarily consisting of $323.2 million of cash paid to repurchase 3.0 million shares of our Class A common stock, including related costs, partially offset by $25.9 million in proceeds from exercises of stock options and shares of Class A common stock issued under the Company’s ESPP.

Critical Accounting Policies and Estimates

4 unchanged sentences

Our actual results could differ from these estimates.

There have been no changes to our critical accounting policies as described in our Annual Report on Form 10-K filed with the SEC on February 24, 2026.

We account for income taxes using the asset and liability approach.

Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating losses and tax credit carry-forwards.

Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized.

We recognize the effect of uncertain income tax positions only if those positions are more likely than not of being sustained.

Recognized income tax positions are measured at the largest amount that is more than 50% likely to be realized.

Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

We regularly assess the need for a valuation allowance on our deferred tax assets.

In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of all available evidence, whether it is more-likely-than-not that some or all of our deferred tax assets will be realized.

The determination of the realizability of deferred tax assets requires significant judgment and relies on management's estimates of future taxable income.

As of June 30, 2026, we demonstrated sustained profitability in the U.S.

over a cumulative period of three years based on the U.S.

pre-tax book income adjusted for permanent book-tax differences, and we expect to continue to sustain this profitability position in the U.S.

for the annual period ended December 31, 2026.

This evidence is objective and verifiable and represents strong positive evidence that carries significant weight.

Based on our analysis of all available positive and negative evidence, including the objective and verifiable positive evidence as described above, and anticipated future earnings, we concluded that it is more likely than not that the majority of our U.S.

deferred tax assets are realizable.

As a result of this change in estimate, we released a significant portion of the valuation allowance on our U.S.

deferred tax assets in the current quarter.

For further detail refer to Note 14 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Our judgment regarding the need for a valuation allowance may reasonably change in future reporting periods due to many factors, including changes in expectations of future profitability in the U.S.

and changes in tax laws or regulations.

We will continue to maintain a valuation allowance against deferred tax assets where we believe that it is more likely than not that they will not be realized.

There have been no other changes to our critical accounting policies and estimates as described in our Annual Report on Form 10-K filed with the SEC on February 24, 2026.

Recent Accounting Pronouncements Not Yet Adopted

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis