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

NOTE 13. INCOME TAXES

 

The components of income tax provision (benefit) for the years ended December 31, 2024 and 2023 are as follows:

 

   2024    2023 
Current taxes:          
Federal  $—   $— 
State   —    — 
           
Total current taxes   —    — 
Deferred tax provision (benefit)   —    — 
           
Income tax provision (benefit)  $—   $— 

 

A reconciliation of the income tax (provision) benefit at the statutory rate of 21% for the years ended December 31, 2024, and 2023 to the Company’s effective tax rate is as follows:

 

   2024   2023 
U.S. Statutory tax rate   21.0%   21.0%
State taxes, net of Federal benefit   6.0%   6.0%
Stock based compensation   —%   4.3%
Change in valuation reserve on deferred tax assets   (21.6)%   (28.8)%
Contingent consideration for acquisition   —%   (3.0)%
Extinguishment of convertible debt   —%   3.2%
Other, net   (5.4)%   (2.7)%
           
Income tax (provision) benefit   —%   —%

 

The effective tax rate for the years ended December 31, 2024, and 2023 varied from the expected statutory rate due to the Company continuing to provide a 100% valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of December 31, 2024, primarily because of the current year operating losses.

 

 

Significant components of the Company’s deferred tax assets (liabilities) as of December 31, 2024 and 2023 are as follows:

 

   2024   2023 
Deferred tax assets:          
Stock-based compensation  $540,000   $305,000 
Start-up costs   110,000    110,000 
Inventory reserves   535,000    1,120,000 
Warrant derivative liabilities   —    — 
Investment in subsidiaries   185,000    — 
Research & development expenses   1,030,000    — 
Allowance for doubtful accounts receivable   60,000    50,000 
Property, plant and equipment depreciation   90,000    230,000 
Deferred revenue   2,340,000    2,535,000 
Accrued litigation reserve   985,000    500,000 
Accrued expenses   60,000    35,000 
Net operating loss carryforward   39,275,000    35,365,000 
Research and development tax credit carryforward   1,740,000    1,795,000 
State jobs credit carryforward   230,000    230,000 
Charitable contributions carryforward   115,000    95,000 
Uniform capitalization of inventory costs   15,000    115,000 
           
Total deferred tax assets   47,310,000    42,485,000 
           
Valuation reserve   (46,290,000)   (41,610,000)
           
Total deferred tax assets   1,020,000    875,000 
Deferred tax liabilities:          
Warrant derivative liabilities   (650,000)   (455,000) 
Intangible assets   (230,000)   (265,000)
Domestic international sales company   (140,000)   (155,000)
           
Total deferred tax liabilities   (1,020,000)   (875,000)
           
Net deferred tax assets (liability)  $—   $— 

 

The valuation allowance on deferred tax assets totaled $46,290,000 and $41,610,000 as of December 31, 2024, and 2023, respectively. The Company records the benefit it will derive in future accounting periods from tax losses and credits and deductible temporary differences as “deferred tax assets.” In accordance with ASC 740, “Income Taxes,” the Company records a valuation allowance to reduce the carrying value of our deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

The Company incurred operating losses in 2024 and 2023 and it continues to be in a three-year cumulative loss position at December 31, 2024 and 2023. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore, it determined to increase our valuation allowance by $4,680,000 but continue to fully reserve its deferred tax assets at December 31, 2024. The Company expects to continue to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity.

 

As of December 31, 2024, the Company had the following Federal net operating loss carry-forwards available to offset future taxable income:

 SCHEDULE OF FEDERAL NET OPERATING LOSS CARRY FORWARDS

   Amount 
Tax years generated:     
2017 and before  $49,459,000 
2018 and after   109,821,000 
      
Federal net operating loss carry-forwards available  $159,280,000 

 

Such tax net operating loss carry-forwards expire between 2025 and 2043 relative to Federal net operating loss carry-forwards generated in tax years 2017 and prior. Federal net operating loss carry-forwards generated in tax years 2018 and after cannot be carried back to prior years and have an indefinite life since the enactment of the Tax Cuts and Jobs Act of 2017. The Tax Cuts and Jobs Act of 2017 further provides for an annual limitation on usage equivalent to 80% of taxable income. In addition, the Company had research and development tax credit carry-forwards totaling $1,742,000 available as of December 31, 2024, which expire between 2025 and 2040.

 

 

The Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss carry-forwards in the event that it has experienced a more than 50% change in ownership over a three-year period. Current estimates prepared by the Company indicate that there may have been ownership changes in the past that could limit our ability to utilize a portion of our net operating loss carryforwards and our research and development tax credit carry-forwards.

 

As discussed in Note 1, “Summary of Significant Accounting Policies,” tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Management has identified no tax positions taken that would meet or exceed these thresholds and therefore there are no gross interest, penalties and unrecognized tax expense/benefits that are not expected to ultimately result in payment or receipt of cash in the consolidated financial statements.

 

The effective tax rate for the years ended December 31, 2024, and 2023 varied from the expected statutory rate due to the Company continuing to provide a 100% valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of December 31, 2024, primarily because of the current year operating losses.

 

The Company’s 2022 federal tax return was recently examined by the Internal Revenue Service resulting in no proposed adjustments.