NOTE 12. INCOME TAXES

Prior to December 31, 2022, the Operating Company was treated as a partnership for U.S. federal and most applicable state and local income tax purposes, and its taxable income or loss was generally passed through to its members. Effective December 31, 2022, the Operating Company became wholly owned by the Company and is treated as a disregarded entity for U.S. tax purposes. Beginning in 2023, 100% of the Operating Company’s U.S. income and expenses have been included in the Company’s U.S. federal and state income tax returns. The Company also files in various state jurisdictions and certain foreign jurisdictions, including Canada and the Netherlands.

For the year ended December 31, 2025, the Company recorded a current state income tax provision of approximately $7 thousand. No federal, foreign or additional state current income tax provision was recorded for 2025. The Company recorded no net deferred tax provision for 2025 because changes in gross deferred tax assets and liabilities were substantially offset by corresponding changes in the valuation allowance.

Beginning with annual reporting for 2025, the Company adopted ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740), prospectively. For the year ended December 31, 2025, the Company’s effective tax rate primarily reflects state income taxes, permanent differences, and changes in valuation allowance. Because the Company continues to maintain a full valuation allowance against its deferred tax assets, no material net deferred tax expense or benefit was recognized for 2025.

The Company’s United States and foreign operations components of income (loss) from continuing operations before income taxes are as follows:

 SCHEDULE OF INCOME BEFORE INCOME TAX, DOMESTIC AND FOREIGN

Income Tax Expense

The income tax (benefit) expense for the years ended December 31, 2025 and 2024 consisted of the following:

 SCHEDULE OF COMPONENTS OF INCOME TAX EXPENSE (BENEFIT)

The difference between the income tax provision at the U.S. federal statutory rate and the recorded provision is primarily due to the valuation allowance recorded on all deferred tax assets. A reconciliation of the provision for income taxes to the amount computed by applying the 21% statutory U.S. federal income tax rate to income before income taxes after the adoption of ASU 2023-09 is as follows:

 SCHEDULE OF RECONCILIATION OF THE PROVISION FOR INCOME TAXES

A reconciliation of the income tax (benefit) expense computed at the U.S. federal statutory income tax rate to the income tax expense recognized is as follows:

 SCHEDULE OF EFFECTIVE INCOME TAX RATE RECONCILIATION

Due to cumulative losses and the full valuation allowance recorded against deferred tax assets, the Company did not recognize a material tax benefit on its 2025 pretax loss.

Deferred Tax Assets and Liabilities

The components of deferred tax assets and liabilities were as follows:

 SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES

Deferred tax assets and liabilities are presented on a net basis by jurisdiction. As of December 31, 2025, deferred tax assets were fully offset by valuation allowances and deferred tax liabilities, resulting in a net deferred tax liabilities, resulting in a net deferred tax position of $0.

Certain deferred tax asset balances, including those related to goodwill and other intangible assets and equity-based compensation, reflect historical tax positions and methodologies that continue to be evaluated by management. The Company will refine such balances, if necessary, as additional analysis is completed.

As of December 31, 2025, the Company had approximately $270.3 million of federal net operating loss carryforwards, of which approximately $9.8 million expire beginning in 2038 and the remainder do not expire. Utilization of the federal net operating losses generated after 2017 is generally limited to 80% of future taxable income. The Company also had approximately $239.0 million of state net operating loss carryforwards that begin expiring in 2038, approximately $14.9 million of Dutch net operating loss carryforwards that begin expiring in 2029, and approximately $0.2 million of Canadian net operating loss carryforwards that begin expiring in 2026.

The Company has not yet completed a formal analysis of potential limitations on utilization under Section 382 of the Internal Revenue Code and similar state provisions. While management does not currently expect such limitations to materially impact the net deferred tax asset balance due to the full valuation allowance, this assessment remains subject to further analysis.

In addition, the deduction for business interest expense is limited to 30% of taxable income under Section 163(j). Disallowed interest is carried forward to future periods and remains subject to the Section 163(j) limitation in those periods. As of December 31, 2025, the Company had approximately $26.3 million of business interest carryforwards, including approximately $17.6 million related to the KushCo merger.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences become deductible and carryforwards are available. Management considered all available positive and negative evidence, including cumulative losses in recent years, the Company’s historical operating results, projected future taxable income, the scheduled reversal of deferred tax liabilities, and available tax planning strategies. Based on this evaluation, management concluded that a full valuation allowance was required as of December 31, 2025 and 2024.

The utilization of the Company’s net operating loss carryforwards and tax credit carryovers may be subject to annual limitations under Sections 382 and 383 of the Internal Revenue Code and similar state provisions if an ownership change has occurred or occurs in the future. The Company has not completed a formal Section 382 study. Accordingly, the disclosed carryforward balances do not reflect any reduction that may result from such a study.

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted in the U.S. The OBBBA includes significant provisions, such as the permanent extension of certain expiring provision of the Tax Cuts and Jobs Act, modification to the international tax framework and the restoration of favorable tax treatment for certain business provisions. The legislation has multiple effective dates, with certain provisions effective in 2025 and other implemented through 2027. The bill does not materially impact the Company’s 2025 income tax provision.

The Company does not record U.S. income taxes on the undistributed earnings of its foreign subsidiaries, other than the Canadian subsidiary, because such earnings are intended to be permanently reinvested in those jurisdictions. If funds are repatriated in the future, such repatriation may be subject to local laws and applicable tax consequences.

Uncertain Tax Positions

The Company evaluates uncertain tax positions in accordance with ASC 740. As of December 31, 2025, 2024 and 2023, the Company had no unrecognized tax benefits. The Company does not expect material interest or penalties related to uncertain tax positions due to its historical losses, significant net operating loss carryforwards and full valuation allowance position.

Tax Receivable Agreement (TRA)

The Company is party to a tax receivable agreement (“TRA”) that provides for the payment to certain former holders of interests in the Operating Company of 85% of certain tax benefits, if any, that the Company actually realizes, or in some circumstances is deemed to realize, as a result of increases in tax basis and certain other tax benefits.

As of December 31, 2025 and 2024, the Company had recorded no liability under the TRA because, based on its valuation allowance assessment, the related tax benefits were not considered realizable and the amount and timing of any future payments were not probable or reasonably estimable.

If realization of the deferred tax assets subject to the TRA becomes more likely than not in a future period, the Company may record a liability related to the TRA, which would be recognized as expense in the consolidated statements of operations and comprehensive loss.

No payments were made under the TRA during the years ended December 31, 2025 and 2024.