Note 6 - Income Taxes

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note 6 – Income Taxes

Income tax expense consists of the following (in thousands):

	December 31,
	2021		2020
Current:
Federal	$	-	$	-
State		-		12
Total current		-		12
Deferred:
Federal		234		-
State		39		-
Total deferred		273		-
Total income tax expense	$	273	$	12

A reconciliation of computed income taxes by applying the statutory federal income tax rate of 21% to loss from continuing operations before taxes to income tax expense as presented in our consolidated statements of operations for the years ended December 31, 2021 and 2020 is as follows (in thousands):

	December 31,
	2021			2020
Computed income taxes at 21% for 2021 and 2020, respectively	$	(1,634	)	$	(502	)
(Decrease) increase in income taxes resulting from:
State and local income taxes, net of federal impact		(272	)		(72	)
Change in valuation allowance		2,892			571
True-up adjustment		(238	)		-
Stock-based compensation		-			1
Paycheck Protection Plan loan forgiveness		(481	)		-
Other		6			14
Income tax expense	$	273		$	12

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all 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, projected future taxable income, and tax planning strategies in making this assessment.

During the first quarter of 2021, the Company experienced a change in control pursuant to the issuance of 4,199,998 shares of Company Common Stock. As a result of this change in control, and in accordance with Internal Revenue Code Section 382, the realizability of the Company's deferred tax assets became limited. Based on management's judgment, the Company estimates that as of  December 31, 2021, $273,000 of deferred tax liabilities could no longer be used as a source of income to recognize the benefits of deferred tax assets and, as such, required the recording of additional valuation allowance of $273,000 through deferred income tax expense for the year ended December 31, 2021. The Company recorded approximately $12,000 of income tax expense for the year ended December 31, 2020.

We have a requirement of reporting of taxes based on tax positions which meet a "more likely than not" standard and which are measured at the amount that is more likely than not to be realized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits. This standard also provides guidance on the presentation of tax matters and the recognition of potential IRS penalties and interest. As of December 31, 2021 and 2020, the Company does not have an unrecognized tax liability.

The Company has United States federal and state net operating loss carryforwards ("NOLs"), each of which were approximately $35.5 million as of December 31, 2021, that will partially expire in the years 2035 through 2037. The Company estimates that $18.6 million of federal and $7.4 million of state NOLs will expire unused due to IRC Section 382 limitations. Of the $35.5 million of federal NOLs, $15.3 million of these will not expire.

The components of deferred income taxes for the years ended December 31, 2021 and 2020 are as follows (in thousands):

	December 31,
	2021			2020
Deferred tax assets:
Reserves and accruals	$	603		$	183
Amortization		60			53
Capital losses and other		12			13
Non-qualified stock option expense		2			194
Loss carryforwards		8,700			7,066
Total deferred tax assets		9,377			7,509
Valuation allowance		(7,649	)		(4,757	)
Net deferred tax assets		1,728			2,752
Deferred tax liabilities:
Depreciation		(2,001	)		(2,752	)
Total deferred tax liabilities		(2,001	)		(2,752	)
Net deferred tax liabilities	$	(273	)	$	-

The Company uses significant judgment in forming conclusions regarding the recoverability of its deferred tax assets and evaluates all available positive and negative evidence to determine if it is more likely than not that the deferred tax assets will be realized. To the extent recovery does not appear likely, a valuation allowance must be recorded. The Company has a valuation allowance of approximately $7.6 million and $4.8 million as of December 31, 2021 and 2020, respectively.

It is possible that the relative weight of positive and negative evidence regarding the realization of deferred tax assets may change, which could result in a material increase or decrease in the Company’s valuation allowance. Such a change could result in a material increase or decrease to income tax expense in the period the assessment was made.

The Company classifies penalty and interest expense related to income tax liabilities as other expense, which is presented in the line item "Other income" on the consolidated statements of operations. The Company did not incur any penalty and interest expense for the years ended December 31, 2021 and 2020, respectively.

The Company files tax returns in various states in the United States, including but not limited to Colorado, Kansas, New Mexico, North Dakota, Oklahoma, Pennsylvania and Texas. The Company’s United States federal income tax filings for tax years 2018 through 2021 remain open to examination. In general, the Company’s various state tax filings remain open for tax years 2017 to 2021.