RYTHM, Inc. Income Taxes Disclosure

Note 19 — Income Taxes

 

For financial reporting purposes, the net pre-tax book income and/or loss for the U.S. and foreign entities, in the aggregate, was:

 

(In thousands)		December 31, 2025				December 31, 2024
United States			(33,257	)			(41,746	)
Foreign			—				—
Total			(33,257	)			(41,746	)

 

Income tax expense consisted of the following for the years ended December 31, 2025 and December 31, 2024:

 

(In thousands)		December 31, 2025				December 31, 2024
Current:
Federal		$	—			$	—
State			—				(2	)
Foreign			—				—
Subtotal			—				(2	)
Deferred:
Federal		$	—				—
State			—				—
Foreign			—				—
Subtotal			—				—
Total		$	—			$	(2	)

The reconciliation between the Company’s effective tax rate on income from continuing operations and the statutory tax rate for the years ended December 31, 2025 and December 31, 2024 is as follows:

 

		December 31, 2025								December 31, 2024
(In thousands)		$				%				$				%
Current tax at U.S. statutory rate			(6,986	)			21.01	%			(8,767	)			21.00	%
Non-deductible loss on fair value of warrants			—				0.00	%			3,759				-9.00	%
Other nondeductible/nontaxable items			(54	)			0.16	%			(423	)			1.01	%
Illinois taxes			(997	)			3.00	%			—				0.00	%
Other state taxes			(749	)			2.25	%			(872	)			2.09	%
Rate change			(597	)			1.80	%			(717	)			1.72	%
True-up and other (federal)			39,104				-117.58	%			1,383				-3.31	%
True-up and other (state)			5,666				-17.04	%			—				0.00	%
Valuation allowance (federal)			(31,209	)			93.84	%			2,067
Valuation allowance (state)			(4,178	)			12.56	%			3,568
Income tax (expense) benefit		$	—							$	(2	)

 

Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of net deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain.

 

The following items comprise the Company’s net deferred tax assets and liabilities as of December 31, 2025 and December 31, 2024:

 

(In thousands)		December 31, 2025				December 31, 2024
Deferred tax assets:
Net operating loss carryforward		$	12,659			$	48,662
Accruals, reserves, and other			2,725				4,422
Stock-based compensation			1,265				442
Lease liability			10				126
Fixed assets			—				116
Intangible assets			5,589				3,475
Capitalized sec. 174 R&E			1,221				1,731
Credits			1,100				1,221
Uncertain tax positions			(1,100	)			(1,221	)
Total Deferred Tax Asset			23,469				58,974
Valuation allowance			(23,465	)			(58,852	)
Deferred income tax assets, net of Valuation Allowance			4				122
Deferred tax liabilities:
Right-of-Use Asset			(4	)			(122	)
Amortization
Total Deferred Tax Liability			(4	)			(122	)
Net Deferred Tax Asset/(Liability)		$	—			$	—

 

The Company continually evaluates the likelihood of the realization of deferred tax assets and adjusts the carrying amount of the deferred tax assets by the valuation allowance to the extent the future realization of the deferred tax assets is more likely than not. The Company considers many factors when assessing the likelihood of future realization of its deferred tax assets, including its recent cumulative pre-tax income or loss in recent history, expectation of future taxable income or loss, the carryforward periods available to the Company for tax reporting purposes, and other relevant factors. Therefore, a full valuation allowance has been applied to deferred tax assets.

The utilization of the Company’s net operating losses may be subject to a U.S. federal limitation due to the “change in ownership provisions” under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC” or the “Code”) and other similar limitations in various state jurisdictions. Such limitations may result in a reduction of the amount of net operating loss carryforwards in future years and possibly the expiration of certain net operating loss carryforwards before their utilization. During the quarter ended June 30, 2025, the Company completed an analysis of Ownership Changes, which had not previously been performed. The analysis identified multiple historical ownership changes that significantly limit the utilization of federal NOLs through the date of the most recent change on November 5, 2024, subjecting them to a minimal annual limitation.

 

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted, introducing significant and wide-ranging changes to the U.S. federal tax system. These changes are impactful to many areas of the tax law including but not limited to timing of the deductibility of interest expense, recovery of capital expenditures, ability to expense research and experimental expenditures, limitations on deductions for charitable contributions and a host of changes to the U.S. taxation of companies with international operations. The Company has evaluated the impacts and determined that there is no material impact on its consolidated financial statements due to its cumulative loss position and the existence of a full valuation allowance.

 

As of the year ended December 31, 2025, the Company has federal, and state net operating loss carryforwards of approximately $45.5 million, and $47.9 million respectively. Federal net operating loss carryforwards in the amount of $48.5 million have an indefinite life. Federal NOL carryforwards generated after tax year 2021 are subject to an 80% limitation on taxable income, do not expire and will carryforward indefinitely. State net operating loss carryforwards in the amount of $44.8 million begin expiring in 2039 and approximately $3.1 million have an indefinite life.

 

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examinations by federal, foreign, and state and local jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from 2022 to the present in the U.S. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state and local tax authorities to the extent utilized in a future period.

 

The Company is also subject to certain non-income taxes such as value added taxes, sales taxes, and property taxes. The Company has taken certain positions that management feels, although not free from doubt, should not result in a successful challenge by certain tax authorities.

 

As required by the uncertain tax position guidance in ASC 740, Income Tax the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applied the uncertain tax position guidance in ASC 740, Accounting for Income to all tax positions for which the statute of limitations remained open. Any estimates of tax contingencies contain assumptions and judgments about potential actions by taxing jurisdictions. Any interest and penalties related to uncertain tax positions would be included as part of the income tax provision.

 

Our unrecognized tax benefits at December 31, 2025 relate entirely to research and development tax credits. The total amount of unrecognized tax benefits at December 31, 2025 is $1,100. If recognized, none of the unrecognized tax benefits would impact our effective tax rate. The following table summarizes the activity related to our unrecognized tax benefits (in thousands):

 

		Year ended December 31, 2025
Unrecognized benefit – beginning of period		$	1,191
Prior period tax position increases (decreases)		$	-
Current period tax position increases (decreases)		$	(91	)
Unrecognized benefit – end of period		$	1,100

 

Our policy is to recognize interest and penalties related to income taxes as components of interest expense and other expense, respectively. We incurred no interest or penalties related to unrecognized tax benefits for the years ended December 31, 2025 or 2024. We do not anticipate any significant changes in our uncertain tax positions within twelve months of this reporting date.