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Note 10 - Income Taxes
 12 Months Ended
Dec. 31, 2023
Notes to Financial Statements  
Income Tax Disclosure [Text Block]

NOTE 10 — INCOME TAXES

 

The components of loss before provision of income taxes and the components for the provision for income taxes are as follows (in thousands):

 

  

Fiscal Years

 
  

2023

  

2022

  

2021

 

Income (loss) before income taxes:

            

U.S.

 $(225) $(4,116) $(6,461)

Foreign

  (36)  (53)  (36)

Income (loss) before income taxes

 $(261) $(4,169) $(6,497)
             

Provision for income taxes:

            

Current:

            

State

 $9  $3  $3 

Foreign

  (6)  36   22 

Subtotal

  3   39   25 

Deferred:

            

Foreign

  (1)  59   94 

Subtotal

  (1)  59   94 

Provision for income taxes

 $2  $98  $119 

 

The difference between income taxes computed at the statutory federal income tax rate and the provision for income taxes is attributable to the following (in thousands):

 

  

Fiscal Years

 
  

2023

  

2022

  

2021

 

Income tax benefit at statutory rate

 $(55) $(876) $(1,364)

State taxes

  9   3   3 

Foreign taxes

  —   106   124 

Stock compensation and other permanent differences

  (740)  21   (155)

PPP loan forgiveness

  —   —   (250)

R&D tax credits

  (480)  (318)  (230)

Expired tax attributes

  1,290   3,563   3,303 

Future benefit of deferred tax assets not recognized

  (22)  (2,401)  (1,312)

Provision for income taxes

 $2  $98  $119 

 

Based on the available objective evidence, management believes it is more likely than not that the U.S. net deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its U.S. federal and state deferred tax assets at December 31, 2023. Any future release of the valuation allowance may be recorded as a tax benefit increasing net income. The Company believes it is more likely than not it will be able to realize its foreign deferred tax assets.

 

Significant components of the Company's deferred tax balances are as follows (in thousands):

 

  December 31, 2023  

January 1, 2023

 

Deferred tax assets:

        

Net operating losses

 $42,220  $43,110 

Accruals and reserves

  1,569   1,284 

Credits carryforward

  6,730   6,004 

Depreciation and amortization

  5,841   6,488 

Stock-based compensation

  447   1 

Operating lease liability

  216   327 

Gross deferred tax assets

  57,023   57,214 

Deferred tax liabilities:

        

Right-of-use asset

  (215)  (328)

Withholding tax on future distribution

  (125)  (125)

Gross deferred tax liabilities

  (340)  (453)

Net deferred tax assets

  56,683   56,761 

Valuation allowance

  (56,783)  (56,862)

Total deferred tax liability

 $(100) $(101)

 

Beginning January 1, 2022, the Tax Cuts and Jobs Act (the "Tax Act”) eliminated the option to deduct research and development expenditures in the current year and requires taxpayers to capitalize such expenses pursuant to Internal Revenue Code (“IRC”) Section 174. The capitalized expenses are amortized over a 5-year period for domestic expenses and a 15-year period for foreign expenses. As a result of this provision of the Tax Act, the Company capitalized $8.5 million of research expenses in fiscal year 2023.

 

As of December 31, 2023, the Company had federal and state income tax net operating loss ("NOL") carryforwards of approximately $169.5 million and $94.2 million, respectively. Approximately $106.3 million in federal NOLs generated before January 1, 2018 expire beginning in 2024 through 2037. Federal NOLs of $63.2 million generated in years after January l, 2018 can be carried forward indefinitely. State NOLs will expire beginning in fiscal year 2028 through 2043. The Company had research credit carryforwards of approximately $4.6 million for federal and $5.5 million for state income tax purposes as of December 31, 2023. If not utilized, the federal carryforwards will expire beginning in 2026 through 2043. The California research credit carryforward can be carried forward indefinitely.

 

Due to the Company's history of losses, it believes that it is more likely than not that the deferred tax assets and benefits from these federal and state NOL and credit carryforwards will not be realized as of December 31, 2023. Accordingly, the Company established a valuation allowance of $56.8 million, tax-effected, as of the Fiscal Year ended  December 31, 2023 due to uncertainties related to its ability to utilize its U.S. deferred tax assets before they expire.

 

Events which may restrict utilization of a company’s net operating loss and credit carryforwards include, but are not limited to, certain ownership change limitations as defined in Internal Revenue Code Section 382(a) ("Section 382") and similar state provisions. In the event the Company has had a change of ownership, utilization of carryforwards could be restricted to an annual limitation. The annual limitation may result in the expiration of net operating loss carryforwards and credit carryforwards before utilization.

 

The Company performed a Section 382 Study related to ownership changes in fiscal year 2023, covering the period starting January 1, 2005 through December 31, 2023. Per the Section 382 Study, there were no Section 382 ownership changes during this period. As a result, the future utilization of the Company's NOL and R&D credit carryovers generated since 2005 are not subject to any limitations, assuming the Company does not experience an ownership change in the future.

 

Foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for on the undistributed earnings of certain foreign subsidiaries as of the end of fiscal 2023. The Company intends to reinvest these earnings indefinitely in the Company’s foreign subsidiaries. The Company believes that future domestic cash generation will be sufficient to meet future domestic cash needs. In previous years, the Company recorded a deferred tax liability of approximately $0.1 million on the undistributed earnings of non-U.S. subsidiaries. During fiscal 2023, there were no changes to this balance, and at December 31, 2023, the balance for this deferred tax liability was approximately $0.1 million. The foreign withholding taxes are not expected to have a material impact on the Company’s financial position and results of operation.

 

Uncertain Tax Positions

 

Changes in gross unrecognized benefits are as follows (in thousands):

  

Fiscal Years

 
  

2023

  

2022

  

2021

 

Beginning balance of unrecognized tax benefits

 $2,249  $2,118  $2,175 

Additions (subtractions) for tax positions related to the prior year

  2   —   (7)

Additions for tax positions related to the current year

  262   185   128 

Lapse of statutes of limitations

  —   (54)  (178)

Ending balance of unrecognized tax benefits

 $2,513  $2,249  $2,118 

 

Out of $2.5 million of unrecognized tax benefits, there are no unrecognized tax benefits that would result in a change in the Company's effective tax rate if recognized in future years. The accrued interest and penalties related to uncertain tax positions was not significant as of December 31, 2023, January 1, 2023, and January 2, 2022.

 

The Company is not currently under tax examination in the U.S. and the Company’s historical net operating loss and credit carryforwards may be adjusted by the Internal Revenue Service and other tax authorities until the statute closes on the year in which such tax attributes are utilized. The Company estimates that its unrecognized tax benefits will not change significantly within the next twelve months.

 

The Company is subject to U.S. federal income tax as well as income taxes in many U.S. states and foreign jurisdictions in which the Company operates. The U.S. tax years from 2004 forward remain effectively open to examination due to the carryover of unused net operating losses and tax credits.