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

 

11.INCOME TAXES

 

We account for income taxes in accordance with ASC 740 Income Taxes. ASC 740 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected tax consequences or events that have been recognized in our consolidated financial statements or tax returns. ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in the consolidated financial statements. The interpretation prescribes a recognition threshold and measurement attribute for the consolidated financial statements recognition and measurement of a tax position taken, or expected to be taken, in a tax return.

 

The Company files income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. The Company generally is no longer subject to U.S. or state examinations by tax authorities for taxable years prior to 2019. However, net operating losses utilized from prior years in subsequent years’ tax returns are subject to examination until three years after the filing of subsequent years’ tax returns. The statute of limitations expiration in foreign jurisdictions for corporate tax returns generally ranges between two and five years depending on the jurisdiction.

 

The (benefit) for income taxes consists of the following:

 

Year ended December 31,  2023   2022 
Current:          
State  $14,248   $21,332 
Deferred:          
    Federal   (12,608,425)   (6,428,448)
State   (755,237)   (146,015)
Total  $(13,349,414)  $(6,553,131)

 

The difference between the income tax provision computed at the federal statutory rate and the actual tax benefit is accounted for as follows:

 

December 31,  2023   2022 
Taxes computed at the federal statutory rate  $808,876   $550,850 
State income tax, net   (585,381)   (98,499)
Research and development tax credit   (133,089)   (190,656)
Change in valuation allowance   (13,531,626)   (6,616,952)
Other   88,308    51,696 
Accrued loss reserve adjustment   —    (253,738)
Permanent differences   3,498    4,168 
Benefit for income taxes  $(13,349,414)  $(6,553,131)

 

The components of deferred income tax assets and liabilities are as follows at December 31:

 

Deferred Tax Assets:  2023   2022
(As Restated)		 
Allowance for credit losses  $20,632   $60,100 
Capitalized R&D   1,420,263    864,969 
Credit carryforwards   2,278,642    2,193,146 
Inventory reserve   350,073    722,991 
Accrued payroll   151,986    267,819 
Loss contracts reserve   75,402    46,205 
Restricted stock   94,809    92,677 
Acquisition costs   74,136    77,762 
Lease liability   1,139,836    1,469,551 
Accrued legal   —    159,849 
Disallowed interest expense   1,067,063    943,089 
Net operating loss carryforward   16,356,545    17,513,901 
Other   45,057    20,659 
Deferred tax assets   23,074,444    24,432,718 
           
Valuation allowance   (569,143)   (14,740,034)
           
Deferred Tax Liabilities:          
Prepaid expenses   143,126    207,980 
Revenue recognition    1,224,106    1,341,105 
Property and equipment   140,449    178,107 
ROU asset   1,059,496    1,391,029 
Deferred tax liabilities  $2,567,177   $3,118,221 
Net deferred tax assets  $19,938,124   $6,574,463 

 

During our review of the Company’s deferred income tax positions as of December 31, 2023, we determined that the following adjustments are needed to our previously reported December 31, 2022 deferred tax assets and liabilities balances, with no impact to our net deferred tax assets, due to the inadequate review, assessment of and reporting of the Company’s temporary differences between book and taxable income. More specifically, the adjustments are required due to computational errors and incomplete analyses. Accordingly, we have restated the balances as previously reported, where needed, as follows:

 

Deferred Tax Assets:  2022 (as Previously Reported)   Restatement Adjustments   2022 (As Restated) 
Allowance for credit losses  $60,100   $—   $60,100 
Capitalized R&D   864,969    —    864,969 
Credit carryforwards   2,193,146    —    2,193,146 
Inventory reserve   1,130,788    (407,797)   722,991 
Accrued payroll   267,819    —    267,819 
Loss contracts reserve   46,205    —    46,205 
Restricted stock   160,989    (68,312)   92,677 
Acquisition costs   77,762    —    77,762 
Lease liability   1,469,551    —    1,469,551 
Accrued legal   159,849    —    159,849 
Disallowed interest expense   1,268,226    (325,137)   943,089 
Net operating loss carryforward   19,493,530    (1,979,629)   17,513,901 
Other   20,659    —    20,659 
Deferred tax assets   27,213,593    (2,780,875)   24,432,718 
                
Valuation allowance   (14,916,923)   176,889    (14,740,034)
                
Deferred Tax Liabilities:               
Prepaid expenses   207,980    —    207,980 
Revenue recognition   3,966,404    (2,625,299)   1,341,105 
Property and equipment   156,794    21,313    178,107 
ROU asset   1,391,029    —    1,391,029 
Deferred tax liabilities  $5,722,207   $(2,603,986)  $3,118,221 
Net deferred tax assets  $6,574,463   $—   $6,574,463 

 

As of December 31, 2023, the Company had approximately $74.7 million of gross net operating loss carryforwards (“NOLs”) for federal tax purposes and approximately $17.3 million of post apportionment NOLs for state tax purposes. The Federal NOLs begin to expire in 2034. Losses generated in 2018 and forward of $14.4 million have an indefinite life and can offset up to 80% of taxable income in the future. Federal NOLs generated prior to 2018 can offset 100% of future taxable income. The state NOLs begin to expire in 2034.

 

As a result of the Tax Cuts and Jobs Act of 2017 and the Coronavirus Aid, Relief, and Economic Security Act of 2020, federal NOLs arising before January 1, 2018, and NOLs arising after January 1, 2018, are subject to different rules. Our pre-2018 NOLs totaled approximately $60.3 million; these NOLs will expire in varying amounts from 2034 through 2039, if not utilized, and can offset 100% of future taxable income for regular tax purposes. Our NOLs arising in 2018, 2019 and 2020 can generally be carried back five years, carried forward indefinitely and can offset 100% of taxable income for tax years before January 1, 2021 and up to 80% of taxable income for tax years after December 31, 2020. Any NOLs arising on or after January 1, 2021, cannot be carried back, can generally be carried forward indefinitely and can offset up to 80% of future taxable income. The state NOLs begin to expire in 2034.

 

Our ability to fully recognize the benefits from our NOLs is dependent upon our ability to generate sufficient income prior to their expiration. In addition, our NOL carryforwards may be limited if we experience an ownership change as defined by Section 382 of the Internal Revenue Code (“Section 382”). In general, an ownership change under Section 382 occurs if 5% shareholders increase their collective ownership of the aggregate amount of our outstanding shares by more than 50 percentage points over a relevant lookback period. The Company has completed a Section 382 analysis for the year ended December 31, 2022, and believes that no ownership change occurred during the relevant lookback period that would limit our ability to use our NOLs. The sale of additional equity securities in the future may trigger an ownership change under IRC Section 382, which could significantly limit our ability to utilize our tax benefits.

 

The Company will recognize a tax benefit in the consolidated financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (i.e., a likelihood greater than 50%) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes.

 

Assessing the realizability of deferred tax assets requires the determination of whether it is more likely than not that some portion or all the deferred tax assets will not be realized. In assessing the need for a valuation allowance, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, loss carryback and tax-planning strategies. Generally, more weight is given to objectively verifiable evidence, such as a cumulative loss in recent years, as a significant piece of negative evidence to overcome. As of December 31, 2023, the Company achieved three years of consecutive book and taxable income, along with projections of profitability, for which management determined that there is sufficient positive evidence to conclude that it is more likely than not that a portion of the deferred tax assets will be realized. As such, $14,170,891 of the valuation allowance was released during the fourth quarter of fiscal 2023, leaving a balance in the valuation allowance of $569,143 as of December 31, 2023.

 

The income tax (benefit) for the year ended December 31, 2023 was $(13,349,414), an effective tax (benefit) rate of (346.6%). The tax (benefit) was mostly the result of the aforementioned reduction in the valuation allowance on deferred tax assets. Management makes these estimates quarterly in order to determine the appropriate level of valuation allowance to include in the Company’s financial statements at the balance sheet date.