Income Taxes

12 Months Ended

Dec. 31, 2023

Income Taxes [Abstract]

Income Taxes

13.  Income Taxes

The consolidated income before income taxes, by domestic and foreign sources, is as follows:

(in thousands)	Years ended December 31,
	2023			2022
Domestic	$	(8,584	)	$	(15,128	)
Foreign		(118	)		(164	)
Total	$	(8,702	)	$	(15,292	)

The provision (benefit) for income taxes is as follows:

(in thousands)	Years ended December 31,
	2023			2022
Current:
Federal	$	-		$	-
State		33			42
Foreign		(23	)		95
Subtotal		10			137
Deferred:
Federal		-			(47	)
State		12			(39	)
Foreign		-			-
Subtotal		12			(86	)
Total	$	22		$	51

The effective income tax rate for the years ended December 31, 2023 and 2022 differed from the statutory federal income tax rate as presented below:

	Effective Tax Rate percentage (%)
	Years ended December 31,
	2023			2022
Statutory federal income tax rate		21.0	%		21.0	%
State income taxes, net of federal tax benefit		2.4	%		2.4	%
Effect of foreign operations		(0.3	)%		(0.3	)%
Change in valuation allowance		(16.5	)%		(20.7	)%
Stock-based compensation		(2.1	)%		(0.9	)%
Convertible Note transactions		(5.0	)%		(1.2	)%
Uncertain tax positions		0.3	%		(0.7	)%
Other		(0.1	)%		0.1	%
Effective tax rate		(0.3	)%		(0.3	)%

The difference between the effective tax rate and statutory rate in 2023 primarily resulted from a change in valuation allowance, permanent differences related to disallowed interest expense and mark-to-market adjustments on the Convertible Note which is a disqualified debt instrument for tax purposes, accruals related to uncertain tax positions, the tax impact of stock compensation vests, and state tax expense.

Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. A summary of the tax effect of the significant components of the deferred income tax assets and liabilities is as follows:

(in thousands)	As of December 31,
	2023			2022
Deferred tax assets:
Net operating loss carryforwards	$	9,372		$	7,853
Accruals		330			62
Reserves		139			409
Stock-based compensation expense		228			283
Intangible assets		2,228			2,356
Goodwill		1,687			1,551
Operating lease liability		121			132
Fixed assets		27			65
Sec. 174 R&D costs		228			129
Other		196			231
Total deferred tax asset		14,556			13,071
Valuation allowance		(14,008	)		(12,572	)
Total deferred tax asset less valuation allowance		548			499
Deferred tax liabilities:
Software development costs		(17	)		(59	)
Indefinite-lived intangibles		(440	)		(346	)
Operating lease - right of use asset		(109	)		(100	)
Other		-			-
Total deferred tax liability		(566	)		(505	)
Net deferred tax liability	$	(18	)	$	(6	)

We file tax returns in the United States federal jurisdiction and in several state and foreign jurisdictions. Because of the net operating loss carryforwards, we are subject to U.S. federal and state income tax examinations for tax years 2003 and forward, and is subject to foreign tax examinations by tax authorities for the years 2018 and forward. Open tax years related to state and foreign jurisdictions remain subject to examination but are not considered material to our financial position, results of operations or cash flows.

In assessing the ability to realize our deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. Our ability to realize the deferred tax assets depends primarily upon the preponderance of positive evidence that could be demonstrated by three-year cumulative positive earnings, reversal of existing deferred temporary differences, and generation of sufficient future taxable income to allow for the utilization of deductible temporary differences.

As of each reporting date, our management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. This analysis is performed on a jurisdiction by jurisdiction basis.

We performed an analysis of the valuation allowance position for its worldwide deferred tax assets and determined that a valuation allowance continues to be necessary on its U.S. and foreign deferred tax assets at December 31, 2023.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (the TCJA) eliminated the option to deduct research and development expenses currently and requires taxpayers to amortize such costs over a period of five years for expenses incurred in the United States and a period of 15 years for expenses incurred outside the United States. While it is possible the federal government may enact future legislation which would repeal this provision of the TCJA, there is no assurance such legislation will be enacted or whether, if enacted, such legislation would be enacted on a retrospective basis to 2022. This provision of the TCJA resulted in increases of $100 thousand and $129 thousand in deferred tax assets, and an equal increase to the Company’s valuation allowance, during the year ended December 31, 2023 and December 31, 2022, respectively, related to research and development expenses incurred during the period. There was no material impact to the Company’s current or deferred tax provision or operating cash flows during the year ended December 31, 2023 and December 31, 2022 as a result of this provision of the TCJA given the Company incurred net operating losses (NOLs) during both periods. The Company does not currently expect this provision of the TCJA will have a material impact on its tax provision or operating cash flows for the year ended December 31, 2023, however, the actual impact of this provision to future periods is uncertain as of this time.

As of December 31, 2023, our largest deferred tax asset was $9.4 million of net operating net loss carry forwards. It primarily relates to a U.S. net operating loss carryforward of $7.8 million; $3.8 million of the net operating loss carryforward expires in various amounts between 2024 and 2038; $4.0 million of the net operating loss carryforward is an indefinite-lived deferred tax asset. We do not believe that it is more likely than not that we will be able to realize its deferred tax assets for its U.S. and foreign deferred tax assets at December 31, 2023 and therefore we have maintained a $14.0 million valuation allowance for our net deferred tax assets. The Company has a deferred tax liability in the amount of $18 thousand at December 31, 2023 related to the portion of Goodwill which cannot be offset by deferred tax assets, which is included as a part of other non-current liabilities on the consolidated balance sheets.

As of December 31, 2023 and 2022, our consolidated cash and cash equivalents totaled $2.3 million and $2.8 million, respectively, including cash and cash equivalents held at non-U.S. entities totaling $1.2 million and $0.8 million, respectively. The non-U.S. entities include operating subsidiaries located in China. We do not assert permanent reinvestment in China. Accordingly, we analyzed the cumulative earnings and profits and determined the US deferred liability related to this position is immaterial.

Uncertain Tax Positions

During 2023 and 2022, we recorded tax liabilities for certain foreign tax contingencies. We recorded these uncertain tax positions in income taxes payable on the consolidated balance sheets.

The following table outlines our uncertain tax liabilities, including accrued interest and penalties for each jurisdiction:

	China					South Korea					UK
(in thousands)	Tax			Interest and Penalties		Tax			Interest and Penalties		Tax			Interest and Penalties			Total
Balance, January 1, 2022	$	220		$	428	$	644		$	335	$	45		$	30		$	1,702
Increases		-			4		-			51		-			61			116
Decreases		(17	)		-		(22	)		-		(5	)		-			(44	)
Balance, December 31, 2022	$	203		$	432	$	622		$	386	$	40		$	91		$	1,774
Increases		-			25		-			57		-			-			82
Decreases		(5	)		-		(19	)		-		(40	)		(91	)		(155	)
Balance, December 31, 2023	$	198		$	457	$	603		$	443	$	-		$	-		$	1,701