(14) Income Taxes

We adopted ASU 2023-09 “Income Taxes (Topic 740): “Improvements to Income Tax Disclosures” on a prospective basis beginning with the fiscal year 2026. The following table presents the required disclosures pursuant to ASU 2023-09 and reconciles the U.S. federal statutory amounts and rate to our actual effective amount and rate on income from continuing operations for fiscal year 2026.

Reconciling items with an absolute value equal to or greater than 5% of the amount computed by applying the U.S. federal statutory income tax rate to pretax income from continuing operations are separately presented above; remaining items are aggregated based on management’s assessment of materiality.

Internal Revenue Code ("IRC") Section 162(m) limits the amount of deductible compensation for tax purposes paid to certain covered employees. During fiscal 2026, this limitation resulted in additional current tax expense and an increase in the valuation allowance associated with deferred tax assets related to restricted stock compensation.

Income taxes paid (net of refunds received) are disaggregated by federal, state, and foreign jurisdictions. Amounts paid to individual jurisdictions that are equal to or greater than 5% of total income taxes paid (net of refunds received) for the period are separately disclosed. The amounts of cash income taxes paid by the Company were as follows:

State income taxes paid are primarily attributable to the following jurisdictions: Illinois (16%), California (14%), Oregon (10%), Virginia (10%), Kansas (9%), and Wisconsin (8%). No other individual state represented more than 5% of total state income taxes paid.

Deferred taxes are recorded to give recognition to temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The tax effects of these temporary differences are recorded as deferred tax assets and deferred tax liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years. Deferred tax liabilities generally represent items that have been deducted for tax

purposes but have not yet been recorded in the consolidated statements of operations. To the extent there are deferred tax assets that are more likely than not to be realized, a valuation allowance would be recorded. Management does not expect to be able to utilize the foreign tax credit before it expires in 2026. Therefore, a full valuation allowance was established in fiscal year 2020. IRC Section 162(m) limits the amount of deductible compensation for tax purposes paid to certain covered employees. The components of deferred income tax assets and liabilities are summarized as follows (in thousands) for fiscal years ended:

At fiscal year ended 2025, the Company had federal net operating loss (“NOL”) carry forwards of approximately $1.9 million. This NOL is related to the acquisitions of Flesh and Impressions Direct. The NOL is subject to a Section 382 limitation of $0.2 million per year and expiring in 2040. Based on historical earnings and expected sufficient future taxable income, management believes it will be able to fully utilize the NOL.

Accounting standards require a two-step approach to determine how to recognize tax benefits in the financial statements where recognition and measurement of a tax benefit must be evaluated separately. A tax benefit will be recognized only if it meets a “more-likely-than-not” recognition threshold. For tax positions that meet this threshold, the tax benefit recognized is based on the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.

At fiscal years ended 2026 and 2025, unrecognized tax benefits related to uncertain tax positions, including accrued interest and penalties of $0.5 million and $0.2 million, respectively, are included in other liabilities on the consolidated balance sheets and would impact the effective rate if recognized. The interest expense associated with the unrecognized tax benefit is not material. A reconciliation of the change in the unrecognized tax benefits for fiscal years ended 2026 and 2025 is as follows (in thousands):

The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company has concluded all U.S. federal income tax matters for years through 2022. All material state and local income tax matters have been concluded for years through 2021.

The Company recognizes interest expense on underpayments of income taxes and accrued penalties related to unrecognized non-current tax benefits as part of the income tax provision. Other than amounts included in the unrecognized tax benefits, the Company did not recognize any interest or penalties for the fiscal years ended 2026, 2025 and 2024.