Note 7. Income Taxes

Revision of Previously Issued Financial Statements  

The Company’s ability to utilize its net operating loss (NOL) carryforwards may be substantially limited due to ownership changes that have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change,” as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percent of the outstanding stock of a company by certain stockholders or public groups.

During the course of preparing the Company’s consolidated financial statements as of and for the year ended December 31, 2022, the Company completed a preliminary assessment of the available NOL carryforwards under Section 382 of the Code. The Company determined that it likely had undergone multiple ownership changes from 2009 to 2022 as defined under Section 382. As a result of these identified ownership changes, the portion of NOL carryforwards attributable to the pre-ownership change periods are subject to a substantial annual limitation under Section 382 of the Code. A conclusive Section 382 study had not been performed due to the Company’s current projections of the lack of taxable income for the foreseeable future. The Company has adjusted its previously reported NOL carryforwards to address the impact of these 382 ownership changes. This resulted in a reduction of available total federal and state NOL carryforwards of $109 million, as originally reported at December 31, 2021, to $47 million (post-2017 NOLs) at December 31, 2022. The write-down of $62 million (pre-2018 NOLs) reduced the net operating losses line as of December 31, 2021 within gross deferred tax assets, as previously disclosed, by $15.9 million, with a corresponding decrease in the valuation allowance. NOLs created in years beginning after 2017 now only offset 80% of taxable income but no longer have a 20-year expiration.

Since the limitation affected the prior period, the Company has determined that its December 31, 2021 tax footnote presentation overstated the gross deferred tax asset and corresponding valuation allowance by $15.9 million. However, there was no net impact to the net deferred tax asset and tax expense as the decrease in the net operating loss was offset completely by a corresponding adjustment to the Company’s overall valuation allowance. For comparative purposes, the Company’s prior year tax footnote has been revised to reflect the adjustment to the net operating losses and valuation allowance. The revision had no effect on the previously reported balance sheets, statements of operations, cash flows and stockholders’ equity.

The Company’s revised deferred tax asset disclosures are below:

Deferred tax assets consisted of the following (rounded in millions):

The 2022 and 2021 annual effective tax rate is estimated to be 25% for the combined U.S. federal and state statutory tax rates. The Company reviews tax uncertainties in light of changing facts and circumstances and adjusts them accordingly. As of December 31, 2022 and 2021, there were no tax contingencies or unrecognized tax positions recorded.

On August 16, 2022, President Biden signed the Inflation Reduction Act (the “IRA”). The IRA contains a number of tax related provisions including a 15% minimum corporate income tax on certain large corporations as well as an excise tax on stock repurchases. Both provisions are effective for tax years beginning after December 31, 2022. The Company is in the process of evaluating the IRA but does not expect it to have a material impact on the Company’s consolidated financial statements.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting, and the amounts recognized for income tax purposes. The significant components of deferred tax assets (at an approximate 25% effective tax rate) as of December 31, 2022 and 2021, respectively, are as follows.

Deferred tax assets consisted of the following (rounded in millions):

The Company has NOL carryforwards for federal and state tax purposes of approximately $54 million at December 31, 2022, that is potentially available to offset future taxable income.

For financial reporting purposes, no deferred tax asset was recognized because as of December 31, 2022 and 2021, management currently estimates that it is more likely than not that substantially all of the deferred tax assets, the majority of which are NOLs, will be unused. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences are deductible. Any unused annual limitation may be carried over to later years, and the amount of the limitation may under certain circumstances be increased by the built-in gains in assets held by us at the time of the change that are recognized in the five-year period after the change.

The reconciliation between income taxes (benefit) at the U.S. and State statutory combined tax rates of approximately 25% and the amount recorded in the accompanying consolidated financial statements is as follows (rounded in millions):

Recent Change in U.S. Tax Law 

Prior to 2022, Internal Revenue Code Section 174 allowed taxpayers to deduct R&D expenditures in the year in which they were incurred. The 2017 Tax Act amended Section 174, effective for amounts paid or incurred in tax years beginning after December 31, 2021, to require taxpayers to charge their R&D expenditures to a capital account. Capitalized research and development costs are required to be amortized over five years (15 years for expenditures attributable to foreign research).

Due to the Company’s future significant R&D expenses, the impact of this tax law change will mean that a significant portion of our total operating expenses will be taken as a deduction over a 5-year period rather than being currently deductible. The Company does not expect to pay cash taxes as a result of this change as our remaining operating expenses after excluding research and development expenses are significant and the Company expects to continue to generate losses for tax purposes.