Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

12. Income Taxes

For the years ended December 31, 2022 and 2021, the Company’s provision for income tax consisted of (in thousands):

	Year Ended December 31,
	2022		2021
Current:
Federal	$	—	$	—
State		14		4
Foreign		—		—
Total Current	$	14	$	4
Deferred:
Federal	$	—	$	—
State		—		—
Foreign		—		—
Total Deferred	$	—	$	—
Provision for income taxes	$	14	$	4

The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:

	Year Ended December 31,
	2022		2021
Tax at statutory federal rate	21.0	%	21.0	%
State taxes, net of federal benefit	1.9		1.8
Stock-based compensation	4.2		4.7
IRC section 162(m) limitation	1.1		—
Change in valuation allowance	(28.0)		(27.5)
Other	—		0.1
Provision for income taxes	0.2	%	0.1	%

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

	December 31,
	2022		2021
Deferred tax assets:
Net operating loss carryforwards	$	27,110	$	30,658
Inventory		273		278
Accruals		737		801
Depreciation and amortization		27		240
Research and experimental expenditures		2,229		—
Stock-based compensation		270		177
Right of use liability		1,477		206
Gross deferred tax assets		32,123		32,360
Valuation allowance		(30,328)		(32,047)
Deferred tax assets		1,795		313
Deferred tax liabilities:
Right of use asset		(1,463)		(209)
Other		(332)		(104)
Deferred tax liabilities		(1,795)		(313)
Net deferred tax assets	$	—	$	—

The Company is required to reduce its deferred tax assets by a valuation allowance if it is more likely than not that some or all of its deferred tax assets will not be realized. Management must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of the valuation allowance, if any, the Company assesses the likelihood that it will be able to recover its deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical cumulative losses, the Company determined that, based on all available evidence, there was substantial uncertainty as to whether it will recover recorded net deferred taxes in future periods. Accordingly, the Company recorded a valuation allowance against all of its net deferred tax assets as of December 31, 2022 and 2021. The net valuation allowance decreased by $1.7 million in 2022.

As of December 31, 2022, the Company has federal net operating loss carryforwards of approximately $119.9 million, of which $79.1 million will expire in 2028 through 2037 if not utilized, and $40.8 million that will carryover indefinitely. In addition, the Company has state net operating loss carryforwards of approximately $50.3 million, of which $47.5 million will expire in 2028 through 2041 if not utilized, and $2.8 million that will carryover indefinitely.

The Tax Reform Act of 1986 (the Act) provides for a limitation on the annual use of net operating loss carryforwards following certain ownership changes (as defined by the Act and codified under Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the Code)) that could limit the Company’s ability to utilize these carryforwards. Further, a portion of the carryforwards may expire before utilized to reduce future income tax liabilities as a result of the annual limitation. The Company experienced an ownership change in October 2016 and as a result, $43.8 million ($9.2 million tax effected) of the federal NOLs are expected to expire unutilized due to limitation under

Section 382 of the Code. The NOLs expected to expire unutilized are included in the NOL carryforward amounts disclosed, subject to a valuation allowance.

The Company files income tax returns in the U.S. federal and various state jurisdictions. The Company is generally subject to U.S. federal and state income tax examination for all tax years beginning in 2008, due to the net operating losses that are carried forward.

A summary of changes in the Company’s gross unrecognized tax benefits for the years ended December 31, 2022 and 2021 was as follows (in thousands):

	Year Ended December 31,
	2022		2021
Unrecognized tax expense, beginning of the year	$	105	$	104
Decrease related to prior year tax positions		(16)		(12)
Increase related to current year tax positions		16		13
Unrecognized tax expense, end of year	$	105	$	105

The total balance of unrecognized tax benefits as of December 31, 2022 would impact the effective tax rate, if recognized.

The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefit as a component of income tax expense. The Company has accrued penalties and interest of $155,000, as of both December 31, 2022 and 2021.