| 15. Income Taxes | The income tax benefit/(expense)
consisted of the following for the years ended December 31, 2020 and 2019 (in thousands):
Year Ended December 31,
2020 2019
Current income tax expense:
Federal $ - $ -
State and local (13 ) (6 )
Current income tax expense (13 ) (6 )
Deferred income tax benefit:
Federal 4,708 -
State and local 1,346 -
Deferred income tax benefit 6,054 -
Total income tax benefit/(provision) $ 6,041 $ (6 ) The income tax provision
attributable to income before income tax benefit/(expense) for the years ended December 31, 2020 and 2019 differed from the amounts
computed by applying the U.S. federal statutory tax rate of 21% and 21%, respectively, as a result of the following (in thousands):
Year Ended December 31,
2020 2019
U.S. federal statutory income tax benefit/(expense) $ (399 ) $ (241 )
Increase in income tax benefit resulting from:
State and local income tax expense, net of federal effect (1,878 ) (831 )
Change in the valuation allowance for net deferred income tax assets 7,487 972
Stock-based compensation 626 102
Other, net 205 (8 )
Income tax benefit/(expense) $ 6,041 $ (6 ) As of December 31, 2020
and 2019, significant components of net deferred income tax assets and liabilities were as follows (in thousands):
December 31,
2020 2019
Deferred income tax assets:
Accrued expenses $ 110 $ 83
Deferred revenue 318 314
Net operating loss carry-forwards 5,485 4,760
Stock-based compensation 507 2,262
Other 285 398
Subtotal 6,705 7,817
Valuation allowance (61 ) (7,548 )
Total deferred income tax assets 6,644 269
Deferred income tax liabilities:
Property and equipment (6 ) (19 )
Prepaid expenses and other (584 ) (250 )
Total deferred income tax liabilities (590 ) (269 )
Net deferred income tax assets (liabilities) $ 6,054 $ - As of December 31, 2020,
we had NOL tax credit carry-forwards for U.S. federal income tax reporting purposes of approximately $20,477,000. $18,336,000 of
the NOLs will begin to expire in 2031 through 2037, and the remaining $2,141,000 of the NOLs will not expire. A valuation allowance
of $61,000 and $7,548,000 was recorded against our gross deferred tax asset balance as of December 31, 2020 and December 31, 2019,
respectively. For the years ended December 31, 2020 and December 31, 2019, we recorded a net valuation allowance release of $7,487,000
and $972,000, respectively, on the basis of management’s reassessment of the amount of its deferred tax assets that are more
likely than not to be realized. As of each reporting date,
management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred
tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods
in which those temporary differences become deductible. We reduce the carrying amounts of deferred tax assets by a valuation allowance
if, based on the evidence available, it is more-likely-than-not that such assets will not be realized. In making the assessment
under the more-likely-than-not standard, appropriate consideration must be given to all positive and negative evidence related
to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity
of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods by jurisdiction,
unitary versus stand-alone state tax filings, our experience with loss carryforwards expiring unutilized, and all tax planning
alternatives that may be available. As of December 31, 2020, management reviewed the weight of all the positive and negative evidence
available. Management reviewed positive evidence such as achievement of three years of cumulative pretax income in the U.S. federal
tax jurisdiction, projections of future pretax income and the duration of statutory carry-forward periods. As of December 31, 2020
the Company has achieved three years of cumulative pretax income, the achievement of three years of cumulative pretax income is
objectively verifiable positive evidence and is considered significant positive evidence. Management also evaluated projections
of future pretax income and the duration of statutory carry-forward periods to determine if the NOL carryforwards could be utilized
in whole or in part before they expire unutilized. Forecasts and projections of future income are inherently subjective and therefore
generally are given less weight, based on the extent to which the assumptions can be objectively verified based on historical experience.
Management utilized historical objectively verifiable revenue growth trends and operating expense trends as assumptions for projections
of future pretax income and determined that the Company would generate sufficient pre-tax income in future periods to utilize all
of our deferred tax assets. Although historical trends utilized in our projections are objectively verifiable we assigned less
weight to this positive evidence given the subjective nature of assumptions in projections. The combination of three years of cumulative
pretax income and projections of future pretax income was considered significant positive evidence. Management reviewed negative
evidence related to experience of credits and loss carryforwards expiring unutilized, and determined that although negative evidence
exists, it was not significant evidence, as the current loss carryforwards do not begin to expire until 2031 and therefore risk
is minimal. After reviewing the weight of the positive and negative evidence, management determined that there is sufficient positive
evidence to conclude that it is more likely than not that deferred taxes of $6,054,000 are realizable, and released the valuation
allowance accordingly. We also have state NOL and
research and development credit carry-forwards of approximately $20,997,000 and $61,000, which expire on specified dates as set
forth in the rules of the various states to which the carry-forwards relate. During the fiscal year ended
June 30, 2002 (our fiscal year was subsequently changed to December 31), we experienced a change in ownership, as defined by the
Internal Revenue Code, as amended (the “Code”) under Section 382. A change of ownership occurs when ownership of a
company increases by more than 50 percentage points over a three-year testing period of certain stockholders. As a result of this
ownership change we determined that our annual limitation on the utilization of our federal pre-ownership change net operating
loss (“NOL”) carry-forwards is approximately $461,000 per year. We determined that the Company would only be able to
utilize $4,760,000 of our pre-ownership change NOL carry-forwards and will forgo utilizing $14,871,000 of our pre-ownership change
NOL carry-forwards as a result of this ownership change. We do not account for forgone NOL carryovers in our deferred tax assets
and only account for the NOL carry-forwards that will not expire unutilized as a result of the restrictions of Code Section 382. On December 22, 2017, the
Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. The new law includes, among other items, a permanent
reduction to the U.S. corporate income tax rate from 34% to 21% effective January 1, 2018. As a result of the reduction of the
corporate income tax rate to 21%, U.S. GAAP requires companies to remeasure their deferred tax assets and liabilities as of the
date of enactment, with resulting tax effects accounted for in the reporting period of enactment. The Company remeasured deferred
tax assets and liabilities based on the rates at which they are expected to be utilized in the future. There was no charge to our
income tax expense as a result of the reduction in corporate income tax rate. Accounting guidance clarifies
the accounting for uncertain tax positions and requires companies to recognize the impact of a tax position in their financial
statements, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. Although we believe our
estimates are reasonable, there can be no assurance that the final tax outcome of these matters will not be different from that
which we have reflected in our historical income tax provisions and accruals. Such difference could have a material impact on our
income tax provision and operating results in the period in which it makes such determination. The aggregate changes in
the balance of unrecognized tax benefits during the years ended December 31, 2020 and 2019 were as follows (in thousands):
Balance as of January 1, 2019 $ -
Reductions due to lapsed statute of limitations -
Balance as of December 31, 2019 -
Reductions due to lapsed statute of limitations -
Balance as of December 31, 2020 $ - Estimated interest and penalties
related to the underpayment or late payment of income taxes are classified as a component of income tax provision in the consolidated
statements of operations. There were no accrued interest and penalties as of December 31, 2020 and 2019, respectively. Our U.S. federal income
tax returns for fiscal 2017 through 2020 are open tax years. We also file in various states, with few exceptions, we are no longer
subject to state income tax examinations by tax authorities for years prior to fiscal 2016. |
