| Income taxes | 10.
Income taxes As
discussed in Note 1, Business Due
to the net losses in 2022 and 2021, the provision for income taxes consists only of minimum California franchise taxes presented
in general and administrative expenses. The
components of deferred income assets and liabilities as of December 31, 2022 and 2021 are as follows (in thousands):
As of December 31, 2022 As of
NPM Legacy SSMP Combined NPM
Deferred Tax :
Accruals/reserves $ 725 $ 750 $ 1,475 $ 226
Capitalized R&E §174 1,997 459 2,456
Lease ROU 48 — 48 56
Stock Compensation 1,079 420 1,499 776
Net operating loss 16,775 27,974 44,749 14,194
R&D credit 2,358 3,961 6,319 1,671
Gross Deferred Tax Assets 22,982 33,564 56,546 16,698
Investment in Sub (1,510 ) — (1,510 ) —
Accumulated depreciation/amortization (150 ) (52 ) (202 ) (120 )
Gross deferred tax liabilities (1,660 ) (52 ) (1,712 ) (120 )
Valuation Allowance (21,322 ) (33,512 ) (54,834 ) (16,804 )
Total Deferred Tax Assets, Net $ — $ — $ — $ —
Change in valuation allowance for the year ended $ 4,519 $ 461 $ 4,980 $ 4,204 The
reconciliation of income tax computed at the expected U.S. federal statutory tax rate of 21% to income tax expense (benefit) and
the corresponding rate from operations consist of the following (in thousands):
For
the Year Ended December 31, 2022
NPM Legacy
SSMP Combined
Pre-Tax
Loss (a) $ (13,889 ) $ (1,479 ) $ (13,889 )
Federal
tax (benefit) at statutory rate $ (2,916 ) 21.0 % $ (311 ) 21.0 % $ (2,916 ) 21.0 %
State
tax (benefit), net of federal tax benefit (970 ) 7.0 % (103 ) 7.0 % (1,073 ) 7.7 %
R&D
tax credit from current year (687 ) 4.9 % (20 ) 0.0 % (707 ) 5.1 %
Impact on effective rate of SSMP loss eliminated in consolidation — — (311 ) 2.2 %
Other 55 -0.4 % (27 ) 1.8 % 28 -0.2 %
Change
in valuation allowance 4,519 -32.5 % 462 -31.2 % 4,980 -35.9 %
Total
provision for income taxes $ 1 0.0 % $ 1 -0.1 % $ 2 0.0 %
(a) The
pre-tax losses for NPM and Legacy SSMP are presented on a stand-alone basis and do not
reflect elimination of intercompany balances and transactions; specifically, the net loss recognized by NPM on its investment in Legacy SSMP. The
combined pre-tax loss reflects the elimination of intercompany balances and transactions, including NPM’s interest in
Legacy SSMP’s pre-tax loss.
NPM
For
the year ended December 31, 2021
Pre-tax
income (loss) $ (12,773 )
Federal
tax (benefit) at statutory rate (2,682 ) 21.0 %
State
tax (benefit), net of federal tax benefit (893 ) 7.0 %
R&D
tax credit from current year (475 ) 3.7 %
Other (163 ) 1.3 %
Change
in valuation allowance 4,214 -33.0 %
Total
provision for income taxes $ 1 0.0 % The
pre-tax losses for NPM and Legacy SSMP in the preceding table are presented as if each entity filed separate returns;
and accordingly, the information does not reflect elimination of intercompany transactions or balances. The combined pre-tax
loss in the table reflects elimination of intercompany transactions
and balances. Since
NPM and Legacy SSMP file as separate taxpayers, deferred tax assets and liabilities and attributes such as NOL and R&D carry-forwards
of one taxpayer are not available to offset those of the other taxpayer. The combined data is presented for disclosure purposes
only. Management
assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize
the existing deferred tax assets. Based on this evaluation, as of December 31, 2022 and 2021, a full valuation allowance
has been recorded because deferred tax assets have been assessed to be less than “more likely than not” to be realized.
As
of December 31, 2022, we had federal and apportioned state net operating loss (“NOL”) and federal and
state R&D credit carry-forwards available to offset future taxable income and income taxes as follows (in thousands):
As
of December 31, 2022
NPM Legacy
SSMP
Pre TCJA
(Tax Cuts and Jobs Acts of 2017) period federal NOL carry-forward, begin expiring 2030 $ 18,257 $ 29,095
Post
TCJA period federal NOL carry-forward, with no carry-forward limitation 39,503 86,412
Total
federal NOL carry-forward $ 57,760 $ 115,508
State NOL carry-forward,
begin expiring 2030 $ 66,514 $ 30,439
Federal R&D tax
credit carry-forward, begin expiring in 2026 1,586 20
State R&D carry-forward,
begin expiring in 2026 1,973 4,989
Total R&E related
deferred income tax assets (net of applicable amortization) as of December 31, 2022, in the table above, was 1,997 459
Reserve for uncertain
income tax positions Nil Nil Under
recently enacted U.S. tax legislation, although the treatment of tax losses generated in taxable years ending before December
31, 2017, has generally not changed, tax losses generated in taxable years beginning after December 31, 2017, may only be utilized
to offset 80% of taxable income annually. This change may require NPM and Legacy SSMP to pay federal income taxes in future years
despite generating a loss for federal income tax purposes in prior years. To
the extent that each of the tax filers continue to generate taxable losses, unused losses will carry-forward to offset future
taxable income, if any, until these unused losses expire. However, the tax filers may be unable to use these losses to offset
taxable income before our unused losses expire at various dates that range from 2030 through 2038 for federal net operating losses
generated before 2018. Federal net operating losses generated for year 2018 and forward do not expire. State net operating losses
expire from 2030 through 2042. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation
undergoes an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in its
equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss, or NOL, carry-forwards
to offset its post-change taxable income may be limited. Limitations may also apply to the utilization of other pre-change tax
attributes as a result of an ownership change. Our
legal subsidiary, NPM experienced an “ownership change” within the meaning of Section 382(g) of the Internal
Revenue Code of 1986, as amended, during the third quarter of 2022 as a result of the merger. The ownership change will
subject its net operating loss carry-forwards to an annual limitation, which will significantly restrict its ability to use
them to offset taxable income in periods following the ownership change. In general, the annual use limitation equals the
aggregate value of stock at the time of the ownership change multiplied by a tax-exempt interest rate specified by the
Internal Revenue Service. We have not yet fully analyzed the available information to determine the amount of the annual
limitation. We
periodically review the uncertainties and judgments related to the application of complex income tax regulations to determine
income tax liabilities in several jurisdictions. We use a “more likely than not” criterion for recognizing the
income tax benefit of uncertain tax positions and establishing measurement criteria for income tax benefits. We have
evaluated the impact of these positions and believe tax filing positions and deductions will more likely than not
be sustained upon examination. Accordingly, no reserve for uncertain income tax positions has been recorded as of December
31, 2022. If
the cumulative unrecognized tax benefit is recognized, there will be no effect on our effective tax rate due to the full
valuation allowance. Due to the nature of the unrecognized tax benefits and the existence of tax attributes, we have not
accrued any interest or penalties associated with unrecognized tax benefits in the Consolidated Statement of Operations
nor recognized a liability in the Consolidated Balance Sheet. We do not believe the total amount
of unrecognized benefit as of December 31, 2022, will increase or decrease significantly in the next twelve
months. Beginning
January 1, 2022, we are required to capitalize certain research and development expenditures in accordance with section 174 of
the Internal Revenue Code, as amended by the Tax Cuts and Jobs Act of 2017, instead of previously being allowed to expense. Amortization
of such capitalized expenditures are allowed over a 5-year period if incurred in the U.S. or a 15-year period if incurred outside
the United States. We
file income tax returns in the U.S. federal jurisdiction and various states and are subject to income tax examinations by federal
tax authorities for tax years ended 2017 and later and by state authorities for tax years ended 2016 and later. We currently are
not under examination by any tax authority. Our policy is to record interest and penalties on uncertain tax positions as income
tax expense. As of December 31, 2021, and 2020, we have no accrued interest or penalties related to uncertain tax positions. Second
Sight Switzerland, our foreign subsidiary, has not had any taxable income in the prior and current years. |
