Income Taxes

12 Months Ended

Dec. 31, 2023

Income Taxes

Income Taxes

12. Income Taxes

For the years ended December 31, 2023 and 2022, the Company’s provision for income tax consisted of (in thousands):

	Year Ended December 31,
	2023		2022
Current:
Federal	$	—	$	—
State		134		14
Foreign		—		—
Total Current	$	134	$	14
Deferred:
Federal	$	40	$	—
State		(190)		—
Foreign		—		—
Total Deferred	$	(150)	$	—
Provision for income taxes	$	(16)	$	14

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

	Year Ended December 31,
	2023		2022
Tax at statutory federal rate	21.0	%	21.0	%
State taxes, net of federal benefit	1.7		1.9
Stock-based compensation	0.6		4.2
IRC section 162(m) limitation	3.9		1.1
Change in valuation allowance	(28.5)		(28.0)
Other	1.1		—
Provision for income taxes	(0.2)	%	0.2	%

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,
	2023		2022
Deferred tax assets:
Net operating loss carryforwards	$	22,068	$	27,110
Inventory		287		273
Accruals		863		737
Depreciation and amortization		13		27
Research and experimental expenditures		4,728		2,229
Stock-based compensation		268		270
Right of use liability		1,245		1,477
Gross deferred tax assets		29,472		32,123
Valuation allowance		(27,748)		(30,328)
Deferred tax assets		1,724		1,795
Deferred tax liabilities:
Right of use asset		(1,226)		(1,463)
Other		(348)		(332)
Deferred tax liabilities		(1,574)		(1,795)
Net deferred tax assets	$	150	$	—

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 projected taxable income, the Company determined that, based on all available evidence, there was substantial certainty as to whether it will recover recorded net deferred taxes for certain state jurisdictions in future periods. However, as it pertains to the federal, Arizona, and Colorado net deferred tax assets, based on all the available evidence, there is substantial uncertainty as to whether it will recover recorded net deferred taxes in future periods. Accordingly, the Company recorded a partial and full valuation allowance against all of its net deferred tax assets as of December 31, 2023 and 2022, respectively. The net valuation allowance decreased by $2.6 million in 2023.

As of December 31, 2023, the Company has federal net operating loss carryforwards of approximately $96.2 million, of which $55.8 million will expire in 2028 through 2037 if not utilized, and $40.5 million that will carryover indefinitely. In addition, the Company has state net operating loss carryforwards of approximately $48.7 million, of which $45.9 million will expire in 2028 through 2043 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, 2023 and 2022 was as follows (in thousands):

	Year Ended December 31,
	2023		2022
Unrecognized tax expense, beginning of the year	$	105	$	105
Decrease related to prior year tax positions		—		(16)
Increase related to prior year tax positions		368		—
Increase related to current year tax positions		—		16
Unrecognized tax expense, end of year	$	473	$	105

Included in the balance of unrecognized tax benefits as of December 31, 2023, are $105,000 of tax benefit that, if recognized, would affect the effective tax rate. Included in the balance of uncertain tax benefits as of December 31, 2023 is $368,000 of tax benefits that, if recognized, would result in adjustments to deferred taxes.

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, 2023 and 2022.