18. Income Taxes

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Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.

The components of the income tax provision are as follows:

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For the years ended December 31, 2022 and 2021, income tax expense was $0.4 million and $0.5 million, respectively, resulting in an effective income tax rate of 0% and 0%. The income tax expense in 2022 is primarily due to the recording of uncertain tax positions and state income taxes.  

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The Company has incurred net operating losses since inception. The Company has not reflected any benefit of such net operating loss carryforwards (“NOL”) in the accompanying consolidated financial statements and has established a valuation allowance of $318.0 million against its net deferred tax assets. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.

The significant components of the Company’s deferred taxes consist of the following:

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A reconciliation of the statutory tax rates and the effective tax rates is as follows:

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The Company files a consolidated income tax return with subsidiaries for which the Company has an 80% or greater ownership interest. Subsidiaries and partner companies for which the Company does not have an 80% or more ownership are not included in the Company’s consolidated income tax group and file their own separate income tax return. As a result, certain corporate entities included in these financial statements are not able to combine or offset their taxable income or losses with other entities’ tax attributes.

ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of all positive and negative evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Realization of the deferred tax assets is substantially dependent on the Company’s ability to generate sufficient taxable income within certain future periods. Management has considered the Company’s history of cumulative tax and book losses incurred since inception, and the other positive and negative evidence, and has concluded that it is more likely than not that the Company will not realize the benefits of the net deferred tax assets as of December 31, 2022 and 2021. Accordingly, a full valuation allowance has been established against the net deferred tax assets as of December 31, 2022 and 2021. The valuation allowance increased by a net $67.0 million during the current year.

The Company has incurred net operating losses (“NOLs”) since inception. At December 31, 2021, the Company had federal NOLs of $680.1 million, which will begin to expire in the year 2032, state NOLs of $838.1 million, which will begin to expire in 2023, and federal income tax credits of $30.3 million and state income tax credits of $4.0 million, which will begin to expire in 2028. Approximately $476.7 million of the federal NOLs and $10.8 million of the state NOLs can be carried forward indefinitely. Under the provisions of Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change”, as defined therein, is subject to limitations on its use of pre-change NOLs and income tax credits carryforwards to offset future tax liabilities. It appears the Company  underwent previous ownership changes potentially limiting its use of tax attributes. The Company has recorded a full valuation allowance on all of its deferred tax assets, as it believes that it is more likely than not that the deferred tax assets will not be realized regardless of whether an “ownership change” has occurred.

In accordance with the provisions related to accounting for uncertainty in income taxes, the Company recognizes the benefit of tax position if the position is “more likely than not” to prevail upon examination by the relevant tax authority.  For the year ended December 31, 2022, the company added $3.2 million of unrecognized tax benefits.  If the $3.2 million of unrecognized tax benefits is recognized, approximately $0.7 million would affect the effective tax rate.  It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s recognized tax positions will significantly increase or decrease within the next 12 months.  At this time, the estimate of the range of the reasonably possible outcomes cannot be made.

The Company classifies interest and penalties related to uncertain tax positions as income tax expense. The Company had an immaterial amount of accrued interest and penalties at December 31, 2022 and 2021.  The NOLs from tax years 2006 through 2021 remain open to examination (and adjustment) by the Internal Revenue Service and state tax authorities.  In addition, Federal tax years ending December 31, 2019, 2020 and 2021 are open for assessment of federal taxes.  The expiration of the statute of limitations related to the various state income and franchise tax returns varies by state.