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Income Taxes
 12 Months Ended
Dec. 31, 2024
Income Tax Disclosure [Abstract]  
Income Taxes

7. INCOME TAXES

We recorded a provision for income tax of $53 thousand and $59 thousand for the years ended December 31, 2024 and 2023, respectively. The components of the provision for income taxes are as follows (in thousands):

 

 

 

Year ended
December 31,

 

 

 

2024

 

 

2023

 

Current:

 

 

 

 

 

 

Federal

 

$

-

 

 

$

(11

)

State

 

 

31

 

 

 

70

 

Foreign

 

 

22

 

 

 

—

 

Provision for income taxes

 

$

53

 

 

$

59

 

 

The difference between the effective tax rate and the U.S federal statutory rate was driven primarily due to the changes in the valuation allowance of our deferred tax assets, state income taxes and impact of stock-based compensation to the deferred tax assets in both 2024 and 2023. A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows:

 

 

 

Year ended
December 31,

 

 

 

2024

 

 

2023

 

Federal statutory rate

 

 

21

%

 

 

21

%

State rate, net of federal benefit

 

 

2

 

 

 

7

 

Tax credits

 

 

2

 

 

 

(3

)

Permanent adjustments

 

 

—

 

 

 

—

 

Change in valuation allowance

 

 

(16

)

 

 

(19

)

Stock compensation

 

 

(13

)

 

 

(2

)

Tax law change

 

 

2

 

 

 

(5

)

Other

 

 

1

 

 

 

—

 

Effective tax rate

 

 

(1

)%

 

 

(1

)%

 

 

On October 4, 2023, Massachusetts enacted tax law changes which included the adoption of a single sales apportionment factor effective on January 1, 2025. As required under ASC 740, Income Taxes, we have accounted for the deferred tax impacts of this tax law change in the period the tax law was enacted, which has the impact of reducing our state deferred tax assets. The change in the deferred tax asset balance related to this was offset by a corresponding decrease in the valuation allowance.

 

Deferred income taxes - We had net deferred tax assets of $0 as of December 31, 2024 and 2023. The principal components of deferred tax assets, net, were as follows at December 31 (in thousands):

 

 

 

2024

 

 

2023

 

Stock-based compensation

 

$

215

 

 

$

663

 

Research and development credits

 

 

6,662

 

 

 

6,623

 

Capitalized research expense

 

 

3,846

 

 

 

3,094

 

Net operating loss

 

 

2,655

 

 

 

1,768

 

Loss on note receivable

 

 

—

 

 

 

644

 

Other

 

 

318

 

 

 

257

 

Total deferred tax assts

 

 

13,696

 

 

 

13,049

 

Valuation allowance

 

 

(13,222

)

 

 

(12,504

)

Deferred tax liabilities

 

 

 

 

 

 

Depreciation

 

 

(113

)

 

 

(138

)

Intangibles

 

 

(361

)

 

 

(407

)

Total deferred tax liabilities

 

 

(474

)

 

 

(545

)

Net deferred tax assets (liabilities)

 

$

-

 

 

$

-

 

 

As of December 31, 2024, $6.7 million of our deferred tax assets relate to research and development credit carryforwards. Further, a significant portion of our deferred tax assets relates to federal and state research and development credits. These credits may only offset 75% of the tax liability after net operating loss carryforwards are utilized and thus, we have the risk that the credits could expire before utilization if sufficient taxable income in the carryforward periods doesn’t exist.

As of December 31, 2024, we had a federal net operating loss carryforward of $7.4 million, which may be available to offset future income tax liabilities. $6.8 million of those NOLs can be carried forward indefinitely and the remaining $0.6 million expire in 2037. As of December 31, 2024, we had State NOL carryforwards of $26.5 million, which expire at various dates though 2044.

We evaluated and considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets was needed. The deferred tax assets are composed principally of net operating loss carryforwards, capitalized research costs and research and development credits. As part of this analysis, we gave more weight to recent, historical evidence than future projections as we consider the past more objective. Under the applicable accounting standards, we considered our history of losses and concluded that is more likely that we will not recognize the benefits of federal and state deferred tax assets. Therefore, we have recorded a full valuation allowance of $13.2 million and $12.5 million at December 31, 2024 and 2023, respectively. During the year ended December 31, 2024, we increased the valuation allowance by $0.7 million from the prior year end. We will continue to monitor the evidence and the realizability of our deferred tax assets in future periods. Should evidence regarding the realizability of our deferred tax assets change at a future point in time, we will adjust the valuation allowance as required.

 

Under Internal Revenue Code Section 382, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. In connection with our acquisition of FortressID during 2021, the historical NOL carryforwards of $3.5 million from FortressID are likely limited under Section 382 due to a change in ownership triggered by the acquisition, however, we do not expect the limitation to result in any of the NOL carryforwards to expire unused. We have not completed a study at the Aware, Inc. level to assess whether an “ownership change” has occurred or whether there have been multiple ownership changes since we became a “loss corporation” as defined in Section 382. Future changes in our stock ownership, which may be outside of our control, may trigger an “ownership change.” In addition, future equity offerings or acquisitions that have equity as a component of the purchase price could result in an “ownership change.” If an “ownership change” has occurred or does occur in the future, utilization of the NOL carryforwards or other tax attributes may be limited, which could potentially result in increased future tax liability to us.

Uncertain tax benefits - As of December 31, 2024 and 2023, we had $0.7 million of uncertain tax positions that were primarily related to our research and development tax credits. There were no changes to this amount during each of the years ended December 31, 2024 and 2023. The uncertain tax positions will impact our effective tax rate if realized.

Tax examinations – We file tax returns as prescribed by the tax laws of the jurisdictions in which we operate. In the normal course of business, we are subject to examination by federal and state jurisdictions, where applicable. The earliest tax years that remain subject to examination by jurisdiction is 2019 for both federal and Massachusetts. However, to the extent the Company utilizes net operating losses or credits from years prior to 2019, the statute remains open to the extent of the net operating losses or other credits are utilized.