Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

5. INCOME TAXES

We recorded a benefit for income taxes of $0.3 million in the year ended December 31, 2021 related to a release of our valuation allowance as a result the deferred taxes recorded as part of the FortressID acquisition.  We recorded a benefit for income taxes of $1.6 million in the year ended December 31, 2020 that includes a $1.4 million tax benefit of the current year tax loss which can be carried back due to changes made by the CARES Act which was signed into law on March 27, 2020.  The CARES Act contained specific relief and stimulus measures including allowing net operating losses originating in 2018 through 2020 to be carried back five years to offset taxable income in the carryback period. The components of the benefit from income taxes are as follows (in thousands):

	Year ended December 31,
	2021			2020
Current:
Federal	$	-		$	(1,397	)
State		—			(237	)
		—			(1,634	)
Deferred:
Federal		(147	)		—
State		(122	)		—
		(269	)		—
Benefit from income taxes	$	(269	)	$	(1,634	)

The 2021 difference between the effective tax rate and the U.S federal statutory rates was driven primarily due to the change in valuation allowance of our deferred tax assets.  A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows:

	Year ended December 31,
	2021			2020
Federal statutory rate		21	%		21	%
State rate, net of federal benefit		6			6
Tax credits		2			3
Permanent adjustments		—			—
Change in valuation allowance		(24	)		(25	)
Expiration of statutes on uncertain tax positions		—			2
Net operating loss carryback rate benefit under    CARES Act		—			11
Other		(1	)		—
Effective tax rate		4	%		18	%

The 2020 difference between the effective tax rate and the U.S. feral statutory rates was driven primarily due to the change in valuation allowance of our deferred tax assets.  This was partially offset by an income tax rate benefit related to a carryback of the 2020 net operating losses under the CARES Act.

Deferred income taxes - We had deferred tax assets of $10.7 million and $8.7 million as of December 31, 2021 and 2020 respectively.  The principal components of deferred tax assets, net, were as follows at December 31 (in thousands):

	2021			2020
Depreciation	$	367		$	307
Stock-based compensation		405			121
Research and development credits		6,904			6,686
Net operating loss		3,380			1,352
Other		254			208
Total deferred tax assts		11,310			8,674
Valuation allowance		(10,730	)		(8,674	)
Deferred tax liabilities
Intangibles		(580	)		—
Total deferred tax liabilities		(580	)		—
Net deferred tax assets (liabilities)	$	-		$	-

As of December 31, 2021, $6.9 million of our deferred tax assets relate to research credit carryforwards.  We assessed the need for a valuation allowance on our deferred tax assets.  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. As part of this analysis, we gave more weight to recent, historical evidence than future projections as we consider the past more objective.  As of December 31, 2021, we had a cumulative pretax loss over the most recent three-year period including a pretax loss of $6.1 million in 2021. We considered the cumulative loss for the year ended December 31, 2021 to be significant negative evidence in the overall analysis.

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, 2021, we had a federal net operating loss carryforward of $7.3 million, which may be available to offset future income tax liabilities and can be carried forward indefinitely. As of December 31, 2021, we had State NOL carryforwards of $16.7 million, respectively, which expire at various dates though 2041.  

We evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets, which are composed principally of net operating loss carryforwards and research and development credits.  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 feral and state deferred tax assets.  Therefore, we have recorded a full valuation allowance of $10.7 million and $8.7 million at December 31, 2021 and 2020, respectively.  During the year ended December 31, 2021, we increased the valuation allowance by $2.0 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 - A roll forward of the uncertain tax position that was primarily related to our research and development tax credits is as follows (in thousands):

Uncertain tax positions at December 31, 2019	$	1,008
Increase due to positions taken in prior periods		(206	)
Uncertain tax positions at December 31, 2020		802
Decrease due to positions taken in prior periods		—
Uncertain tax positions at December 31, 2021	$	802

Uncertain tax positions of $0.8 million will impact our 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 2018 for both federal and Massachusetts.  However, to the extent the Company utilizes net operating losses or credits from years prior to 2018, the statute remains open to the extent of the net operating losses or other credits are utilized.