(

)

Income Taxes

The Company's provision for income taxes for the years ended

December 31, 2020

and

2019

was

for both years.

The provision for income taxes differs from the amount which would result by applying the federal statutory income tax rate to pre-tax loss for the years ended

December 31, 2020

and

2019.

The reconciliation of the provision computed at the federal statutory rate to the Company's provision (benefit) for income taxes was as follows (in thousands):

	Years ended December 31,
	2020			2019
Tax at federal statutory rate	$	(3,151	)	$	(3,089	)
State, net of federal benefit		(449	)		(414	)
Research and development credit		(276	)		(225	)
Share-based compensation		649			446
PPP Note forgiveness		(107	)		-
Other		2			5
Change in valuation allowance		3,332			3,277
Total provision for income taxes	$	—		$	-

Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes as well as net operating loss and tax credit carryforwards, net of any adjustment for unrecognized tax benefits. The components of the net deferred income tax assets as of

December 31, 2020

and

2019

were as follows (in thousands):

	Years ended December 31,
	2020			2019
Accrued compensation	$	225		$	148
Inventory adjustments		335			297
Depreciation and amortization		90			98
Share-based compensation		686			744
Net operating loss and tax credit carryforwards		26,931			23,809
Other		173			11
Gross Deferred Tax Asset		28,440			25,107
Valuation Allowance		(28,440	)		(25,107	)
Net deferred tax asset	$	-		$	-

The Company has approximately

$91.5

million and

$62.7

million of federal and state net operating loss (NOL) carryforwards, respectively, as of

December 31, 2020.

For tax reporting purposes, operating loss carryforwards are available to offset future taxable income; such carryforwards expire in varying amounts beginning in

2022

and

2028

for federal and state purposes, respectively, with

2020,

2019,

and

2018

federal NOLs having

expiration date. Under current federal and California law, the amounts of and benefits from net operating losses carried forward

may

be impaired or limited in certain circumstances. Events which

may

cause limitations in the amount of net operating losses that the Company

may

utilize in any

one

year include, but are

not

limited to, a cumulative ownership change of more than

50%

over a

three

-year period.

Generally, utilization of the net operating loss carryforwards and credits

may

be subject to a substantial annual limitation due to the ownership change limitations provided by section

382,

which discusses limitations on NOL carryforwards and certain built-in losses following ownership changes, and section

383,

which discusses, special limitations on certain excess credits, etc., of the Internal Revenue Code (IRC) of

1986,

as amended and similar state provisions. Accordingly, the Company's ability to utilize net operating loss carryforwards and tax credit carryforwards

may

be limited, potentially significantly, as the result of such an “ownership change.” The Company has

not

yet performed a comprehensive study to determine if it has undergone any ownership changes. If the Company is able to potentially utilize its net operating loss carryforwards and tax credit carryforwards, it will perform a comprehensive section

382

and

383

study to determine what, if any, limitation on its ability to utilize its NOLs exists.

As of

December

31,

2020,

the Company has federal and state research and development credits of approximately

$2.8

million and

$2.1

million available to offset future federal and state income taxes, respectively. The federal tax credit carryforward expires beginning in

2028.

The state credit carryforwards have

expiration.

The Company does

not

believe that these assets are realizable on a more likely than

not

basis; therefore, the net deferred tax assets have been fully offset by a valuation allowance. The Company did

not

have deferred tax liabilities as of

December 31, 2020

2019.

The net increase in the total valuation allowance for the year ending

December 31, 2020

$3.3

million, primarily from the net operating losses generated. The net increase in the total valuation allowance for the year ending

December 31, 2019

$3.2

million, primarily from the net operating losses generated.

liability related to uncertain tax positions is reported in the financial statements.

The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in thousands):

	Years ended December 31,
	2020		2019
Balance, beginning of year	$	1,046	$	891
Additions based on tax positions related to the current year		189		155
Balance, end of year	$	1,235	$	1,046

Recognition of approximately

$895,000

and

$753,000

of unrecognized tax benefits would impact the effective rate at

December 31, 2020

and

2019

respectively, if recognized. Increases in

2020

and

2019

relate to increased research and development activity.

May 1, 2020,

the Company received loan proceeds in the amount of approximately

$506,413

under the Paycheck Protection Program. The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to

2.5

times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after

eight

weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.

The Consolidated Appropriations Act,

2021,

P.L.

116

260,

enacted on

Dec. 27, 2020,

resolved the issue of whether taxpayers can take deductions for expenses paid with forgiven PPP loans. The act clarified that gross income does

not

include any amount that would otherwise arise from the forgiveness of a PPP loan. It also clarified that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and that the tax basis and other attributes of the borrower's assets will

not

be reduced as a result of the loan forgiveness.

The Company applied for and received a PPP loan for

$506,413

during

2020.

The Company was approved for forgiveness on the entire loan balance and related interest payable of

$3,000

November 2, 2020.

The Company is subject to U.S. federal, California, Colorado, Florida and North Carolina income taxes. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company was incorporated in

2002

and is subject to U.S. federal, state, and local tax examinations by tax authorities for all prior years.