Note 15. Income Taxes

The significant components of the federal and state income tax provision consists of (in thousands):

The Company elected to prospectively adopt the guidance in ASU 2023-09. The following table reconciles the U.S. federal statutory income tax rate of 21% to the Company’s effective income tax rate for the year ended December 31, 2025 in accordance with ASU 2023-09 (in thousands, except percentages): 

* State taxes in CA and NY comprise the majority (greater than 50%) of the tax effect in this category.

In accordance with ASC 740 prior to the adoption of ASU 2023-09, a reconciliation of the differences between the U.S. statutory federal income tax rate of 21% and the Company’s effective income tax rate for the years ended December 31, 2024 is summarized as follows:

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 tax purposes, and (b) operating losses and tax credit carryforwards. The tax effects of significant components of the Company’s deferred tax assets (liabilities) are as follows (in thousands):

At December 31, 2025, and December 31, 2024, the Company had available Federal Net Operating Loss ("NOL") carryforwards of $112.7 million and $104.3 million, respectively. For State purposes, such NOL carryforwards were $56.0 million and $63.8 million, respectively. The net operating losses begin expiring in 2027. Use of these NOL carryforwards may be significantly limited under the tax rules regarding the use of losses following an ownership change under Internal Revenue Code (“IRC”) Section 382. The Company experienced a change in control during 2024 and 2025. Accordingly, utilization of its respective consolidated and/or separately computed NOLs is subject to an annual limitation for federal tax purposes under IRC Section 382. Due to this change in control, the Company estimates that $46.4 million of $112.7 million federal NOL carryforward is effectively eliminated under IRC Section 382. Moreover, $40.6 million of its $56.0 million state NOL carryforward is also eliminated. As a result of these eliminations, the Company's federal and state NOLs were reduced to approximately $66.3 million and $15.4 million, respectively, before valuation allowance as of December 31, 2025.

The valuation allowance relates to deferred tax assets for certain items that will be deductible for income tax purposes under very limited circumstances and for which the Company believes it is not more likely than not that it will realize the associated tax benefit. However, in the event that the Company determines that it would be able to realize more or less than the recorded amount of net deferred tax assets, an adjustment to the deferred tax asset valuation allowance would be recorded in the period such a determination is made. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion of all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax planning strategies in making this assessment. Based upon the levels of historical taxable income, projections of future taxable income and the reversal of deferred tax liabilities over the periods in which the deferred tax assets are deductible, management believes it is more-likely-than-not that the Company will not realize the benefits of these deductible differences, net of the existing valuation allowance. The amount of deferred tax asset considered realizable, however, could change in the near term if estimates which require significant judgment of future taxable income during the carryforward period are increased or decreased. The valuation allowance increased by $2.8 million from $11.0 million as of December 31, 2024 to $13.8 million as of December 31, 2025.

The Company recognizes interest and penalties relating to uncertain tax positions in income tax expense. No amounts were recorded in 2025 and 2024.

The Company files income tax returns as prescribed by tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and local jurisdictions where applicable based on the statute of limitations that apply in each jurisdiction. The Company has no open income tax audits with any taxing authority as of December 31, 2025. The Company is still subject to income tax examinations by U.S. federal and state tax authorities for the years 2021 through 2025. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward amount.