Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Note 15. Income Taxes

A reconciliation of the differences between the U.S. statutory federal income tax rate and the effective tax rate as provided in the statements of operations is as follows:

	Year Ended December 31,
	2022			2021
Tax computed at the federal statutory rate		21	%		21	%
Section 382 NOL limitation		(42.6	)		—
Nondeductible expenses		(1.3	)		—
State income taxes, net of federal benefits		0.2			1.3
Stock-based compensation		—			(2.6	)
Tax exempt income		—			1.7
Other		0.4			—
Change in valuation allowance		22.3			(21.4	)
		—			—

The federal and state income tax provision is summarized as follows (in thousands):

	Year Ended December 31,
	2022		2021
Current
Federal	$	—	$	—
State		3		4
		3		4
Deferred
Federal		—		—
State		—		—
		—		—
Income tax expense	$	3	$	4

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes, and (b) operating losses and tax credit carryforwards.

The tax effects of significant components of the Company’s deferred tax assets (liabilities) are as follows (in thousands):

	December 31,
	2022			2021
Deferred tax assets:
Net operating loss carryforwards	$	518		$	9,706
Stock-based compensation		5,162			4,605
Capitalized research and development		1,528			—
Reserves		95			169
Intangible assets		35			56
Accrued legal settlement		1,355			—
Operating lease liabilities		—			556
Accrued compensation		—			399
Other accruals		1			71
Total gross deferred tax assets		8,694			15,562
Deferred tax liabilities:
Property and equipment		—			(348	)
Operating lease right-of-use assets		—			(518	)
Other		—			—
Total gross deferred tax liabilities		—			(866	)
Valuation allowance		(8,694	)		(14,696	)
Total deferred taxes	$	—		$	—

At December 31, 2022, the Company had federal and state net operating loss (“NOL”) carryforwards of approximately $54.5 million and $47.8 million, respectively. The state NOL carryforwards begin expiring in 2030. Use of these NOL carryforwards may be significantly limited under the tax rules regarding the use of losses following an ownership change under Internal Revenue Code (“IRC”) Section 382. Management performed a Section 382 analysis regarding the limitation of net operating losses through December 31, 2020 and determined that ownership changes occurred in May 2020. The Company believes further ownership changes occurred during each of the years ended December 31, 2022 and 2021. Accordingly, utilization of the Company’s NOLs is subject to an annual limitation for federal tax purposes under IRC Section 382. Due to the changes in control, the Company estimated that all of its $54.5 million federal NOL carryforwards are effectively eliminated, in accordance with IRC Section 382. In addition, $40.8 million of its $47.8 million in state NOL carryforwards is also eliminated. As a result of these eliminations, the Company’s federal and state NOLs were reduced to zero and $6.9 million, respectively, before taking into consideration the valuation allowance. Also, as described in Note. 18 Subsequent Events, the Company completed the Merger on January 9, 2023.

The valuation allowance relates to deferred tax assets for certain items that will be deductible for income tax purposes under very limited circumstances and for which the Company believes it is not more likely than not that it will realize the associated tax benefit. However, in the even that the Company determines that it would be able to realize more or less than the recorded amount of net deferred tax assets, an adjustment to the deferred tax asset valuation allowance would be recorded in the period such a determination is made. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion of all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax planning strategies in making this assessment. Based upon the levels of historical taxable income, projection of future taxable income and the reversal of deferred tax liabilities over the periods in which the deferred tax assets are deductible, management believes it is more-likely- than-not that the Company will not realize the benefits of these deductible differences, net of the existing valuation allowance. The amount of deferred tax asset considered realizable, however, could change in the near term if estimates which require significant judgment of future taxable income during the carryforward period are increased or decreased.

As of December 31, 2022, the Company does not have any unrecognized tax benefits. The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase in the next 12 months. There were no interest and penalties accrued as of December 31, 2022. The Company files U.S. federal and various states income tax returns, which are subject to examination by the taxing authorities for years 2018 and later. However, the federal net operating loss carryover may be adjusted three years from the date the loss is utilized on an income tax return.