Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Note 13 – Income Taxes

In 2014 the Company recorded a valuation allowance against its deferred tax assets, reducing the carrying value of those assets to zero as a result of historical losses. The following table summarizes the change in the valuation allowance during 2022 and 2023, (in thousands):

Balance as of December 31, 2021	$	12,242
Change during 2022		(7,813	)
Balance as of December 31, 2022		4,429
Change during 2023		(2,205	)
Balance as of December 31, 2023	$	2,224

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. At December 31, 2022, and due primarily to the performance of the Company, management determined that there is sufficient positive evidence to conclude that is it more likely than not that additional deferred tax assets of $7.1 million are realizable. The Company therefore reduced the valuation allowance accordingly. At December 31, 2023, management reevaluated the Company's performance and forecast for the next five years and concluded that there is sufficient positive evidence to conclude that is it more likely than not that additional deferred tax assets of $2.2 million are realizable.

At December 31, 2023, the Company has aggregate federal net operating loss carry forwards of $50.0 million. These net operating loss carry forwards begin to expire in 2024.

The Company’s utilization of restricted net operating tax loss carry forwards against future income for tax purposes is restricted pursuant to the “change in ownership” rules in Section 382 of the Internal Revenue Code.

These rules, in general, provide that an ownership change occurs when the percentage shareholdings of 5% direct or indirect stockholders of a loss corporation have, in aggregate, increased by more than 50 percentage points during the immediately preceding three years.

Restrictions in net operating loss carry forwards occurred in 2001 as a result of the acquisition of the Company by Street Capital. Pursuant to Section 382 of the Internal Revenue Code, the annual usage of the Company’s net operating loss carry forwards was limited to approximately $2.5 million per annum until 2008 and $1.7 million per annum through December 31, 2023. There is no certainty that the application of these “change in ownership” rules may not recur, resulting in further restrictions on the Company’s income tax loss carry forwards existing at a particular time. In addition, further restrictions, reductions in, or expiration of net operating loss and net capital loss carry forwards may occur through future merger, acquisition and/or disposition transactions or failure to continue a significant level of business activities. Any such additional limitations could require the Company to pay income taxes on its future earnings and record an income tax expense to the extent of such liability, despite the existence of such tax loss carry forwards. The Company has not identified any change in ownership in prior years that would render current non-limited net operating loss carryforwards to be limited under Section 382.

All loss taxation years remain open for audit pending the application of the respective tax losses against income in a subsequent taxation year. In general, the statute of limitations expires three years from the date that a company files a tax return applying prior year tax loss carry forwards against income for tax purposes in the later year. The 2020 through 2022 taxation years remain open for audit.

The Company is subject to state income tax in multiple jurisdictions. In most states, the Company does not have tax loss carry forwards available to shield income attributable to a particular state from being subject to tax in that particular state.

The reported tax expense varies from the amount that would be provided by applying the statutory U.S. Federal income tax rate to the income before income tax expense for the following reasons in each of the years ended December 31, (in thousands):

	2023			2022
Expected federal statutory tax expense	$	2,939		$	2,311
Increase (reduction) in taxes resulting from:
State income taxes		996			470
Non-deductible expenses (permanent differences)		(196	)		(179	)
Change in valuation allowance		(2,205	)		(7,813	)
Other		(14	)		725
Income tax expense (benefit)	$	1,520		$	(4,486	)

Income tax expense/(benefit) for the years ended December 31, 2023 and 2022 was comprised of the following (amounts in thousands):

	2023			2022
Current:
Federal	$	-		$	-
State		1,188			475
Total current provision for (benefit from) income taxes		1,188			475
Deferred:
Federal		465			(4,812	)
State		(133	)		(149	)
Total deferred provision for (benefit from) income taxes		332			(4,961	)
Total provision for (benefit from) income taxes	$	1,520		$	(4,486	)

The components of the net deferred tax assets as of December 31, 2023 and 2022 are as follows in (thousands):

	2023			2022
Deferred tax assets:
Net operating loss carry forwards	$	11,012		$	14,097
Stock based compensation		348			317
Intangibles		224			0
Operating lease liabilities		628			742
Equity method investments		239			—
Allowance for credit loss		176			—
Accruals		131			—
Other		137			280
Total gross deferred tax assets		12,895			15,436
Deferred tax liabilities:
Trade names		(708	)		(686	)
Customer relationships		(48	)		(27	)
Equity method investments		(28	)		—
Operating lease right-of-use assets		(599	)		(718	)
Other		(173	)		(127	)
Total gross deferred tax liabilities		(1,556	)		(1,558	)
Total deferred tax assets		11,339			13,878
Less: valuation allowance		(2,224	)		(4,429	)
Deferred tax assets, net of valuation allowance	$	9,115		$	9,449

The Inflation Reduction Act (“IRA”) was enacted on August 16, 2022. The IRA has not had a material impact to the Company’s financial statements for the tax years ended December 31, 2023 or 2022 and management does not believe it will have a material impact on the Company's financial statements in future tax years.

Uncertain Tax Positions

The accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. Upon adoption of this principle in 2007, the Company derecognized certain tax positions that, upon examination, more likely than not would not have been sustained as a recognized tax benefit. As a result of derecognizing uncertain tax positions, the Company has recorded a cumulative reduction in its deferred tax assets of approximately $4.4 million associated with prior years’ tax benefits, which are not expected to be available primarily due to change of control usage restrictions, and a reduction in the rate of the tax benefit associated with all of its tax attributes.

Due to the Company’s historic policy of applying a valuation allowance against its deferred tax assets, the effect of the above was an offsetting reduction in the Company’s valuation allowance. Accordingly, the above reduction had no net impact on the Company’s financial position, operations or cash flow. As of December 31, 2023, the total unrecognized tax benefit has been determined to be $4.4 million.

In the unlikely event that these tax benefits are recognized in the future, the amount recognized at that time should result in a reduction in the Company’s effective tax rate.

The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. Because the Company has tax loss carry forwards in excess of the unrecognized tax benefits, the Company did not accrue for interest and penalties related to unrecognized tax benefits either upon the initial derecognition of uncertain tax positions or in the current period.

It is possible that the total amount of the Company’s unrecognized tax benefits will significantly increase or decrease within the next 12 months. These changes may be the result of future audits, the application of “change in ownership” rules leading to further restrictions in tax losses arising from changes in the capital structure of the Company, reductions in available tax loss carry forwards through future merger, acquisition and/or disposition

transactions, failure to continue a significant level of business activities, or other circumstances not known to management at this time. At this time, an estimate of the range of reasonably possible outcomes cannot be made.