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Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes

14.

Income Taxes

 

In October 2023, the Company completed its acquisition of the controlling interest in BC. As a result of the Contributions, the Company directly or indirectly owned multiple controlled foreign corporations (“CFCs”) for US tax purposes.

 

The components of the Company’s provision for income taxes for the years ended December 31, 2023 and 2022 consist of the following (in thousands):

 

Year Ended December 31,

 

 

2023

 

 

2022

 

Current income tax provision:

 

 

 

 

 

Federal

$

—

 

 

$

—

 

State

 

6

 

 

 

1

 

Foreign - PRC

 

9,343

 

 

 

5,987

 

Total current income tax provision

$

9,349

 

 

$

5,988

 

 

 

 

 

 

 

Deferred income tax provision:

 

 

 

 

 

Federal

$

—

 

 

$

(91

)

State

 

—

 

 

 

—

 

Foreign - PRC

 

(834

)

 

 

(799

)

Total deferred income tax provision

$

(834

)

 

$

(890

)

Total income tax provision

$

8,515

 

 

$

5,098

 

 

The reconciliation of the federal statutory income tax rate to the Company’s effective tax rate for the years ended December 31, 2023 and 2022 are as follows:

 

 

Year Ended December 31,

 

2023

 

2022

Tax computed at federal statutory rate

21.00%

 

21.00%

Rate difference due to different jurisdiction

-2.43%

 

4.31%

Preferential income tax rate for HNTE

3.19%

 

-10.37%

Non-deductible expense – Operating

-6.28%

 

33.06%

Non-deductible expense – One-time expense related to the Contributions

-22.16%

 

0.00%

R&D Super-deduction

1.45%

 

-12.42%

Valuation allowance change

-4.37%

 

0.00%

ESOP

-0.55%

 

21.81%

Other

-0.76%

 

-2.52%

Effective tax rate

-10.91%

 

54.87%

 

Significant components of the Company’s deferred tax assets as of December 31, 2023 and 2022 consist of the following (in thousands):

 

 

Year Ended December 31,

 

 

2023

 

 

2022

 

Deferred tax assets:

 

 

 

 

 

Accruals and reserves

$

2,811

 

 

$

183

 

Deferred revenue

 

39

 

 

 

—

 

Net operating loss carry forwards

 

40,669

 

 

 

—

 

Other equity investments

 

—

 

 

 

150

 

Tax credit carry forwards

 

4,463

 

 

 

—

 

Fixed and intangible assets

 

15,332

 

 

 

3,428

 

Impact from foreign corporations

 

4,590

 

 

 

—

 

Capitalized transaction costs

 

658

 

 

 

414

 

Lease liabilities

 

98

 

 

 

—

 

Deferred income tax assets before valuation allowance

 

68,660

 

 

 

4,175

 

Deferred tax liability – ROU assets

 

(108

)

 

 

—

 

Deferred tax liability – Fixed assets

 

(84

)

 

 

(94

)

Less: valuation allowance

 

(63,773

)

 

 

—

 

Deferred tax assets, net

$

4,695

 

 

$

4,081

 

 

The movements of the valuation allowance are as follows (in thousands):

 

 

2023

 

 

2022

 

Balance at the beginning of the year

$

—

 

 

$

—

 

Changes of valuation allowances

 

(63,773

)

 

 

—

 

Balance at the end of the year

$

(63,773

)

 

$

—

 

 

Based on the available objective evidence on December 31, 2023, the Company does not believe it is more likely than not that its net deferred tax assets will be realizable for US tax purposes. Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets on December 31, 2023 for US tax purposes.

 

As of December 31, 2023, after consideration of certain limitations (see below), the Company had approximately $193.5 million federal and $10.5 million state net operating loss carryforwards (“NOL”) available to reduce future taxable income which, if unused, will begin to expire in 2037 for federal and 2034 for state tax purposes. The federal net operating loss carryforward includes $191.9 million that have an indefinite life.

 

As of December 31, 2023, the Company also had tax credit carry forwards available to offset future tax liabilities of approximately $8,000 for federal and $7.5 million for state. If unused, the federal credit will begin to expire in 2042 and the state tax credit does not expire.

 

If the Company experiences a greater than 50 percentage point aggregate change in ownership over a three-year period (a Section 382 ownership change), utilization of its pre-change NOL carryforwards are subject to annual limitation under Section 382 of the Internal Revenue Code (California has similar provisions). The annual limitation is determined by multiplying the value of the Company’s stock immediately before such ownership change by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization. The Company determined that ownership changes under Section 382 occurred on December 31, 2007, August 20, 2015, April 13, 2017, February 15, 2018, February 18, 2020, and December 26, 2022. Approximately $156.5 million and $75.2 million of the NOLs will expire unutilized for federal and California state income tax purposes, respectively. The Company has derecognized NOL related deferred tax assets in the tax affected amounts of $32.9 million and $0 for federal and California state income tax purposes, respectively, through the year ended December 31, 2023.

 

All of the federal R&D credits could expire unutilized, whereas none of the California R&D credits are subject to expiration. Approximately $6.0 million of gross federal R&D credit-related deferred tax assets were derecognized due to the Section 383 limitation. The ability of the Company to use its remaining NOL and credit carryforwards may be further limited if the Company experiences a Section 382 ownership change as a result of future changes in its stock ownership.

 

On June 29, 2020, the California Governor signed Assembly Bill 85 (“A.B. 85”), which now becomes California law. A.B. 85, which includes several tax measures, provides for a three-year suspension of the use of net operating losses for medium and large businesses and a three-year cap on the use of business incentive tax credits to offset no more than $5 million of tax per year. Generally, A.B. 85 suspends the use of California NOLs for taxable years 2021, 2022, and 2023 for taxpayers with taxable income of $1 million or more. Since the Company is not expected to generate California source taxable income of more than $1 million, no material impact is anticipated at this time.

 

Accounting for Uncertainty in Income Taxes

 

The Company only recognizes tax benefits if it is more likely than not that they will be sustained upon audit by the relevant tax authority based upon their technical merits. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained.

 

The Company had approximately $1.8 million of unrecognized tax benefits as of December 31, 2023. As the Company has a full valuation allowance on its deferred tax assets, the unrecognized tax benefits have reduced the deferred tax assets and the valuation allowance in the same amount. The Company does not expect the amount of unrecognized tax benefits to materially change in the next twelve months.

 

A reconciliation of the beginning and ending balance of the unrecognized tax benefits is as follows (in thousands):

 

Beginning Balance on January 1, 2022

$

—

 

Increase/(Decrease) of unrecognized tax benefits taken in prior years

 

—

 

Increase/(Decrease) of unrecognized tax benefits related to current year

 

—

 

Ending Balance on December 31, 2022

 

—

 

Increase as a result of the GNI USA Contributions on October 30, 2023

 

1,833

 

Increase/(Decrease) of unrecognized tax benefits taken in prior years

 

—

 

Increase/(Decrease) of unrecognized tax benefits related to current year

 

—

 

Ending Balance on December 31, 2023

$

1,833

 

 

Interest and penalties related to unrecognized tax benefits would be included as income tax expense in the Company’s consolidated statements of operations. As of December 31, 2023 and 2022, the Company had not recognized any tax-related penalties or interest in its consolidated financial statements.

 

The Company files income tax returns in the United States federal, California, and Florida for tax year 2023. The Company filed an initial return in 2022 in Florida and final returns in 2021 in Kansas, Missouri and New Jersey state jurisdictions. The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions. As of December 31, 2023 and 2022, the Company had no uncertain tax positions which affected its financial position as its results of operations or its cash flow, and will continue to evaluate for uncertain tax positions in the future. The Company is subject to United States federal and state income tax examinations by authorities for all tax years due to accumulated net operating losses that are being carried forward for tax purposes.

 

APB 23

 

Generally, a taxable outside basis difference associated with a foreign subsidiary may not be recognized if the indefinite reversal criterion of ASC paragraph 740-30-25-17 (APB Opinion No. 23, Accounting for Income Taxes – Special Areas (“APB 23”)) is met. A deferred tax liability is recognized when an entity no longer meets the indefinite reversal criterion. ASC paragraph 740-30-25-17 provides a presumption that all undistributed earnings will be transferred to the parent entity may be overcome, and no income taxes shall be accrued by the parent entity, if sufficient evidence shows that the subsidiary has invested or will invest the undistributed earnings indefinitely or that the earnings will be remitted in a tax-free liquidation.

 

The Company does not have a plan of repatriation of earnings from non-US subsidiaries to the Company. However, to the extent the Company will not permanently reinvest in its PRC business, a DTL of approximately $2.5 million as of December 31, 2023 related to PRC withholding taxes on repatriation of BC’s earnings (i.e., the Company’s primary operating subsidiary in the PRC) would need to be recorded.