Note 14. Income Taxes

The Company’s income tax expense (benefit) for the three months ended March 31, 2026 is as follows ($ in thousands):

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. For interim periods, the Company applies the estimated annual effective tax rate (“AETR”) method in accordance with ASC 740-270. Under this method, income tax expense for interim periods is computed by applying the estimated annual effective tax rate to year-to-date ordinary pretax income (loss) and adjusting for the tax effects of discrete items recognized in the period.

For the three months ended March 31, 2026, the Company recorded income tax expense despite reporting a pretax loss. This result is primarily attributable to a significant permanent difference related to the limitation on the deductibility of certain executive compensation under Internal Revenue Code Section 162(m). The Company currently expects that a substantial portion of executive compensation will not be deductible for income tax purposes for the full fiscal year. As a result, the Company’s estimated annual taxable income is forecasted to be positive, despite an expected pretax book loss. Accordingly, the Company’s estimated annual effective tax rate is negative, as the projected annual income tax expense is divided by an expected pretax book loss. The application of this negative AETR to year-to-date ordinary pretax loss results in the recognition of income tax expense in the interim period, rather than a tax benefit that would otherwise be expected based on the pretax loss.

In addition, the Company recognized the tax effect of a discrete item during the three months ended March 31, 2026, which further impacted income tax expense in the period. Discrete items are excluded from the determination of the AETR and are recorded in the period in which they occur. During the period, the Company recognized a book loss of approximately $6.9 million related to the sale of the Company’s marketable securities in American Bitcoin Corp (“ABTC”) stock. For income tax purposes, the majority of the approximate $32.5 million of proceeds from the sale of the Company’s ABTC stock resulted in a $32.5 million were taxable ordinary income which is treated as a discrete item in the interim period. The income tax effect of this transaction increased current income tax expense by approximately $9.5 million.

The Company’s effective tax rate for the three months ended March 31, 2026, was (9.0%). The primary drivers of the variance from the statutory rate were state taxes, Sec. 162m disallowed compensation, and valuation allowance. The Company will continue to assess its estimated annual effective tax rate each reporting period. Changes in forecasted pretax income, the amount of non-deductible compensation under Section 162(m), or other factors could result in significant adjustments to the Company’s interim income tax provision in future periods.

During the three months ended March 31, 2025, the Company did not record any income tax expense or benefit.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the Company’s history of cumulative net losses, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company has determined that, based on objective positive and negative evidence currently available, it is more likely than not that the Company will not realize the benefits of all deferred tax assets. Accordingly, the Company has provided a full valuation allowance for the deferred tax assets of approximately $49.4 million as of March 31, 2026 and $38.3 million as of December 31, 2025. For the three-month period ended March 31, 2026, the change in valuation allowance is approximately $11.1 million.

As of March 31, 2026, the Company has federal, state post-apportioned, and foreign net operating loss (“NOL”) carryforwards of approximately $76.7 million, $74.5 million, and $0, respectively. Of the federal amount, $29.8 million have a limited carryforward period and will begin to expire in 2026, and $47.0 million will have an indefinite carryforward period. Of the state post-apportioned amount, $74.5 million have a limited carryforward period and will begin to expire in 2038.

Utilization of the U.S. NOL carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period.

The Company completed a Section 382 study through December 31, 2025, and concluded that it underwent ownership changes as defined by the Code on September 10, 2013, March 31, 2014, May 24, 2016, December 5, 2019, March 31, 2020, March 31, 2021, and February 10, 2025. The Company had a net unrealized built-in loss (“NUBIL”) position at each ownership change date. As a result, the Company’s utilization of certain tax attributes, including amortization of acquired intangible assets, is subject to the Section 382 limitation. The Company has approximately $76 million of acquired intangible assets capitalized between 2013 and 2023 that are subject to this limitation.

Any future ownership changes that may occur after December 31, 2025, may limit the Company’s ability to utilize remaining tax attributes. Due to the existence of the valuation allowance, limitations created by the 2013 ownership change and any potential future ownership changes will not impact the Company’s effective tax rate.