Annual report pursuant to Section 13 and 15(d)

Income Taxes

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Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”). ASC 740 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected tax consequences or events that have been recognized in our financial statement or tax returns. ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in the financial statements. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. There were no significant matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded in our financial statements for the year ended December 31, 2023. Tax years beginning in 2020 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.

ASC 740 provides guidance on the recognition of interest and penalties related to income taxes. There were no interest or penalties related to uncertain tax positions arising in the years ended December 31, 2023 and 2022. It is the Company’s policy to treat interest and penalties, to the extent they arise, as a component of income taxes.

The income tax provision from continuing operations consisted of the following for the years ended December 31, 2023 and 2022 (in thousands):
December 31,
2023 2022
Current:
   Federal $ —  $ — 
   State —  — 
Total Current —  — 
Deferred:
   Federal 24  24 
   State (10) 4 
Total Deferred 14  28 
Net income tax expense $ 14  $ 28 

The net deferred tax assets (liabilities) consisted of the following for the years ended December 31, 2023 and 2022 (in thousands):
  December 31,
  2023 2022
Deferred tax assets (liabilities):          
Net operating losses $ 37,268  $ 32,393 
Tax credits 5,854  5,706 
Capitalized research and development 6,945  6,567 
Stock-based compensation 3,557  3,532 
Basis difference in tangible and intangible assets, net 1,843  2,299 
Accrued compensation 118  585 
Installment sale and revenue recognition 1,601  1,566 
Other reserves 336  395 
Lease liability 410  523 
Prepaid expenses (118) (248)
Right-of-use asset (286) (408)
Goodwill (774) (702)
Total deferred tax assets, net 56,754  52,208 
Less valuation allowance (56,909) (52,349)
Net deferred taxes $ (155) $ (141)

As of December 31, 2023, the Company had approximately $160.4 million of gross net operating losses for federal and state tax purposes that do not expire and $3.4 million that will begin to expire in 2031. As of December 31, 2023, the Company had various research tax credits of $5.9 million that will begin to expire in 2038.

The income tax expense for the years ended December 31, 2023 and 2022 differed from the amounts computed by applying the U.S. federal income tax rate of 21% as follows:
  December 31,
  2023 2022
Federal statutory rate 21.00  % 21.00  %
Goodwill impairment (2.60) — 
Stock compensation (1.40) (2.72)
State taxes 0.03  (0.01)
Research tax credit 0.47  2.01 
Other —  (0.19)
Valuation allowance (17.54) (20.15)
Effective income tax rate (0.04) % (0.06) %

The valuation allowance recorded by the Company as of December 31, 2023 and 2022, which increased by $4.6 million from the prior year, resulted from the uncertainties of the future utilization of deferred tax assets mainly resulting from net operating loss carry forwards for federal and state income tax purposes as well as the federal research and experimental and orphan drug tax credits. In assessing the realization of deferred tax assets, management considers the reversal of deferred tax liabilities, as well as whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon generation of future taxable income during the periods in which temporary differences are expected to reverse. The Company has established deferred tax liabilities for indefinite lived intangible assets consisting of goodwill that are not amortized for financial reporting purposes, but are tax deductible and therefore amortized over 15 years for tax purposes. The Company has concluded that the resulting deferred tax liability will also have an indefinite life unless there is an impairment of the related assets (for financial reporting purposes), or the disposal of the business to which the assets relate. Losses generated in years after 2017 will also have an indefinite life and will be available to offset 80 percent of any federal tax liability and will be available to offset many of the state deferred tax liabilities subject to utilization limits. A portion of existing deferred tax assets will reverse in the future, potentially generating net operating losses that will also be available to offset a portion of the indefinite lived deferred tax liability. Based on the consideration of these facts, the Company concluded it is more likely than not that a significant portion of its remaining gross deferred tax assets less the reversal of deferred tax liabilities will not be realized in the future, accordingly, a full
valuation allowance continues to be recorded against the Company’s deferred tax asset as of December 31, 2023 and December 31, 2022.

The Company will continue to assess and evaluate strategies that will enable the deferred tax asset, or a portion thereof, to be utilized, and will reduce the valuation allowance appropriately at such time when it is determined that the “more likely than not” criteria is satisfied.

Sections 382 and 383 of the IRC subject the future utilization of net operating losses and certain other tax attributes, such as research and experimental tax credits, to an annual limitation in the event of certain ownership changes, as defined. The Company has undergone an ownership change study through June 2020 and has determined that a "change in ownership" as defined by IRC Section 382 of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder, did occur in February 2012, July 2014, and April 2017. Based on the Company having undergone multiple ownership changes throughout the history of these carryforwards, these NOLs will free up at varying rates each year. Subsequent to the changes in ownership previously listed, the NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three‑year period. This could limit the amount of NOLs and research and development credits that the Company can utilize annually to offset future taxable income or tax liabilities. The Company has not analyzed the historical or potential impact of its equity financings on beneficial ownership after June 30, 2020 and therefore no determination has been made whether the entire NOL carryforward balance is subject to any additional IRC Section 382 limitation. To the extent there is a limitation, which could be significant, there would be a reduction in the deferred tax asset with an offsetting reduction in the valuation allowance. Subsequent ownership changes may further affect the limitation in future years. All of the Company’s tax years are currently open to examination by each tax jurisdiction in which the Company is subject to taxation.