NOTE 18. INCOME TAXES

The components of the income tax provision are as follows:

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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 significant components of the Company’s deferred tax assets consisted 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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As required by ASC 740, the Company has evaluated the evidence bearing upon the realizability of its deferred tax assets. Based on the weight of available evidence, both positive and negative, the Company has determined that it is more likely than not that it will not realize the benefits of these assets. Accordingly, the Company recorded a valuation allowance of $24.0 million at December 31, 2024. The valuation allowance increased by $3.9 million during the year ended December 31, 2024, primarily as a result of the increase in NOL carryforwards generated in the current period.

As of December 31, 2024, the Company had federal and state NOL carryforwards of approximately $25.2 million and $31.2 million, respectively. The Federal NOL carryforwards do not expire, but $25.8 million of the state NOL carryforwards expire if not utilized prior to 2043.

Utilization of the U.S. federal and state NOL carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax liabilities, respectively. The Company has performed calculations through December 31, 2023 to support that its NOL carryovers are subject to limitations under section 382 (“382 Limitations”). Based on the analysis of the NOL carryovers subject to the 382 Limitations, the Company has concluded that the 382 Limitations would not prevent the Company from utilizing all of its NOL carryovers in 2023.

The Company is in the process of updating the study through December 31, 2024. As such, going-forward utilization of the net operating loss and credit carryforwards may be subject to an additional annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986.

At December 31, 2024 and 2023, the Company did not have any significant uncertain tax positions. The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2024 and 2023, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s consolidated statements of operations. The Company does not anticipate a material change to unrecognized tax benefits in the next twelve months.

The Company is subject to U.S. federal and state taxes. As of December 31, 2024, the earliest federal tax year open for the assessment of income taxes under the applicable statutes of limitations is its 2020 tax year. The expiration of the statute of limitations related to the various state income and franchise tax returns varies by state.