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

Note 11. Income Taxes

Income Taxes

The components of the pretax loss from operations for the years ended December 31 are as follows (in thousands):

 

 

 

For the Years Ended December 31,

 

 

 

2023

 

 

2022

 

U.S. Domestic

 

 

12,235

 

 

 

8,575

 

Foreign

 

 

65

 

 

 

—

 

Pretax loss from operations

 

 

12,300

 

 

 

8,575

 

 

The income tax expense (benefit) is as follows (in thousands):

 

 

 

For the Years Ended December 31,

 

 

 

2023

 

 

2022

 

Current:

 

 

 

 

 

 

U.S. federal

 

$

—

 

 

$

(13

)

State and local

 

 

16

 

 

 

24

 

Foreign

 

 

100

 

 

 

43

 

Total current income tax expense

 

 

116

 

 

 

54

 

Deferred:

 

 

 

 

 

 

U.S. federal

 

 

9

 

 

 

10

 

State and local

 

 

3

 

 

 

20

 

Total deferred income tax expense

 

 

12

 

 

 

30

 

Income tax expense

 

$

128

 

 

$

84

 

 

Tax Rate Reconciliation

Reconciliations of the total income tax provision tax rate to the statutory federal income tax rate of 21% for the years ended December 31, 2023 and 2022, respectively, are as follows (in thousands):

 

 

 

For the Years Ended December 31,

 

 

 

2023

 

 

2022

 

Income taxes at statutory rates

 

$

(2,583

)

 

$

(1,802

)

State income tax, net of federal benefit

 

 

23

 

 

 

44

 

Permanent items

 

 

40

 

 

 

52

 

Equity based compensation

 

 

386

 

 

 

298

 

Federal research credits

 

 

(122

)

 

 

(374

)

Federal return to provision

 

 

(10

)

 

 

(1

)

Foreign taxes

 

 

100

 

 

 

43

 

Other

 

 

17

 

 

 

77

 

Change in federal valuation allowance

 

 

2,277

 

 

 

1,747

 

Income tax expense

 

$

128

 

 

$

84

 

 

Significant Components of Current and Deferred Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):

 

 

 

As of December 31,

 

 

 

2023

 

 

2022

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryforwards

 

$

5,846

 

 

$

5,374

 

Research and AMT credits

 

 

3,937

 

 

 

3,742

 

Stock based compensation

 

 

1,831

 

 

 

1,891

 

Lease liability

 

 

383

 

 

 

611

 

Section 174 R&D Capitalization

 

 

4,159

 

 

 

2,319

 

Accrued and other

 

 

760

 

 

 

1,100

 

 

 

 

16,916

 

 

 

15,037

 

Less valuation allowance

 

 

(14,578

)

 

 

(11,884

)

Deferred tax assets, net of allowance

 

 

2,338

 

 

 

3,153

 

Deferred tax liabilities:

 

 

 

 

 

 

Fixed assets

 

 

(501

)

 

 

(520

)

Goodwill

 

 

(468

)

 

 

(418

)

Right-of-use asset

 

 

(340

)

 

 

(556

)

Intangible asset

 

 

(1,180

)

 

 

(1,798

)

Deferred tax liabilities

 

 

(2,489

)

 

 

(3,292

)

Total deferred tax liabilities

 

$

(151

)

 

$

(139

)

We have established a valuation allowance against our net deferred tax assets due to the uncertainty surrounding the realization of such assets. The Company periodically evaluates the recoverability of the deferred tax assets. At such time it is determined that it is more likely than not that deferred assets are realizable, the valuation allowance will be reduced. The Company has recorded a valuation allowance of $14.6 million as of December 31, 2023 as it does not believe it is more likely than not that certain deferred tax assets will be realized due to the recent history of both pre-tax book income and losses, the lack of taxable income available in carryback periods or feasible tax-planning strategies, the limited existing taxable temporary differences, and the subjective nature of forecasting future taxable income into the future. The Company increased its valuation allowance by approximately $2.7 million during the year ended December 31, 2023.

At December 31, 2023 the Company had federal and state tax loss carryforwards of approximately $23.2 million, and $11.5 million, respectively. The federal loss generated post 2018 of $11.9 million will carryforward indefinitely and be available to offset up to 80% of future taxable income each year. The remaining federal and state net operating loss carryforwards begin to expire in 2029 and 2026, respectively, if unused.

At December 31, 2023 the Company had federal and state tax credit carryforwards of approximately $2.1 million, and $1.8 million, respectively, after reduction for uncertain tax positions. The federal credits will begin to expire in 2026, if unused, and the California credits carryforwards indefinitely. The other states credits will begin to expire in 2032.

The Internal Revenue Code (IRC) Sections 382 and 383 limit annual use of NOL and research and development credit carryforwards in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has completed an ownership change analysis through December 31, 2022 and determined that there were no ownership changes in 2023. If a requisite ownership change occurs, the amount of remaining tax attribute carryforwards available to offset taxable income and income tax expense in future years may be restricted or eliminated. If eliminated, the related asset would be removed from deferred tax assets with a corresponding reduction in the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, will not impact the Company’s effective tax rate.

The following table summarizes the reconciliation of the unrecognized tax benefits activity during the years ended December 31 (in thousands):

 

 

 

2023

 

 

2022

 

Beginning unrecognized tax benefits

 

$

1,305

 

 

$

1,217

 

Gross increases - tax positions in prior period

 

 

(65

)

 

 

(50

)

Gross decreases – tax positions in prior period

 

 

-

 

 

 

(9

)

Gross increases - current year tax positions

 

 

114

 

 

 

147

 

Purchase accounting

 

 

—

 

 

 

—

 

Ending unrecognized tax benefits

 

$

1,354

 

 

$

1,305

 

The unrecognized tax benefit amounts are reflected in the determination of the Company’s deferred tax assets. If recognized, $120,000 of these amounts would impact the company’s effective tax rate. We do not foresee material changes to our uncertain tax benefits within the next twelve months.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company has an accrual for interest or penalties of $0.1 million on the Company’s balance sheets as of December 31, 2023 and 2022. The Company has recognized no interest and/or penalties in the Statement of Operations for each of the years ended December 31, 2023 and 2022.

The company is subject to taxation in the United States, various state jurisdictions, China and the United Kingdom. Due to the existence of federal, state and foreign net operating loss and credit carryovers, the Company's tax years that remain open and subject to examination by tax jurisdiction are years 2003 and forward for federal and years 2007 and forward for the state of California.