Note 18 - Income Taxes

The following table sets forth pretax book loss (in thousands):



	Year Ended December 31,
	2019			2018
United States	$	(7,882	)	$	(7,155	)
Foreign	121			—
Total	$	(7,761	)	$	(7,155	)

The following table sets forth income before taxes and the income tax expense for the years ended December 31, 2019 and 2018 (in thousands):



	Year Ended December 31,
	2019		2018
Current:
Federal	$	—	$	—
Foreign	—
State	—		13
	—		13

Deferred:
Federal	—		—
Foreign	—		—
State	—		—
	—		—
Income tax expense	$	—	$	13

Our effective tax rate differs from the statutory federal tax rate for the years ended December 31, 2019 and 2018 as shown in the following table (in thousands):



	Year Ended December 31,
	2019			2018
U.S. federal income taxes at the statutory rate	$	(1,630	)	$	(1,503	)
State taxes, net of federal effects	(130		)	(69		)
Permanent differences	21			38
UK Anti-Hybrid expense addback	397			—
Stock-based compensation	30			84
Transaction costs	74			93
Goodwill impairment	473			840
Change in state apportionment rate	(406		)	550
Change in valuation allowance	1,421			(20		)
Research and development credit	(136		)	—
Foreign rate differential	8			—
Other	(122		)	—
Income tax expense	$	—		$	13

The tax effect of the temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2019 and 2018 is presented below (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Tax benefit of operating loss carry forward - Federal	$	30,377		$	8,088
Tax benefit of operating loss carry forward - State	9,985			—
Accrued expenses	83			57
Deferred revenue	522			—
Stock-based compensation	671			701
Fixed assets	320			(37		)
Goodwill	236			292
Intangible amortization	—			50
R&D credit	2,700			—
Texas margin tax temporary credit	186			209
Other	126			10
Total deferred tax assets	$	45,206		$	9,370

Deferred tax liabilities:
Inventory	$	(61	)	$	—
Intangible amortization	(3,287		)	—
Total deferred tax liabilities	$	(3,348	)	$	—

Valuation allowance	(41,858		)	(9,370		)
Net deferred tax liability	$	—		$	—

The ending balances of the deferred tax asset have been fully reserved, reflecting the uncertainties as to realizability evidenced by the Company’s historical results. The change in valuation allowance for the year ended December 31, 2019 is an increase of $32,488,000. The change in valuation allowance for the year ended December 31, 2018 was a decrease of $20,000.

We and our subsidiary file federal and state tax returns on a consolidated basis. During 2013, we determined that an “ownership change” had occurred in 2013 (as defined under Section 382 of the Internal Revenue Code of 1986, as amended) which places an annual limitation on the utilization of the net operating loss (“NOL”) carryforwards accumulated before the ownership change. As a result of this annual limitation and the limited carryforward life of the accumulated NOLs, we determined that the ownership change resulted in the permanent loss of approximately $1,900,000 of tax benefit associated with the NOL carryforwards. If additional ownership changes occur in the future, the use of the net operating loss carryforwards could be subject to further limitation (see additional note below). At December 31, 2018, we had federal net operating loss carryforwards of $34,788,000 available to offset future federal taxable income which expire in various amounts from 2019 through 2037. At December 31, 2019, we had federal net operating loss carryforwards of $138,876,000 available to offset future federal taxable income which expire in various amounts from 2020 through 2037. As of December 31, 2019, the Company also has various state net operating loss carryforwards of $141,210,000. The determination of the state net operating loss carryforwards is dependent upon apportionment percentages and state laws that can change from year to year and impact the amount of such carryforwards.

On October 1, 2019 the Company acquired the stock of Oblong Industries that resulted in Oblong Industries' shareholders now owning 75% of the Company. Therefore, an “ownership change” is deemed to have been incurred during 2019 (as defined under Section 382 of the Internal Revenue Code of 1986, as amended), which places an additional annual limitation on the utilization of the net operating loss (“NOL”) carryforwards accumulated before the ownership change. The Section 382 study to determine the annual limitation is still on-going.

There were no significant matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return, in accordance with ASC Topic 740 “Income Taxes” (“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements, that have been recorded on the Company’s consolidated financial statements for the years ended December 31, 2019 and 2018. The Company does not anticipate a material change to unrecognized tax benefits in the next twelve months.

Additionally, ASC 740 provides guidance on the recognition of interest and penalties related to income taxes. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31, 2019 and 2018.

The federal and state tax returns for the 2016 and subsequent years are currently open.