NOTE 11: INCOME TAXES

There was no current income tax expense or benefit for the years ended December 31, 2025 or 2024 because of net losses during those years. These net losses were generated from domestic operations. Loss from continuing operations before income taxes for the years ended December 31, 2025 and 2024 were $12,780,000 and $13,094,000, respectively.

Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets at December 31, 2025 and 2024. Therefore, there was no deferred income tax expense or benefit for the years ended December 31, 2025 or 2024.

The components of net deferred tax assets at December 31, 2025 and 2024 were as follows:

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Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation allowance has been established to offset the net deferred tax assets. In assessing the realization of deferred tax assets, management considered whether it was more likely than not that some, or all, of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income. Management has considered the history of the Company’s operating losses and believes that the realization of the benefit of the deferred tax assets cannot be reasonably assured.

Pursuant to Section 382 of the Internal Revenue Code, (the “IRC”), annual use of the Company’s net operating loss (“NOL”) carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. Such ownership change could result in annual limitations on the utilization of tax attributes, including NOL carryforwards and tax credits. The Company performed an estimated analysis to determine if any additional ownership changes occurred during the year ended December 31 ,2025 and changes were identified. Since the Company identified changes in ownership, the Company’s deferred tax assets related to its federal and state NOLs in the amount of $27,147,000 and $7,236,000, respectively, were eliminated or restricted. Therefore, the Company removed the related asset from the deferred tax asset schedule with a corresponding reduction in the valuation allowance.

The Company had federal definite life NOL carryforwards of approximately $1,938,000 and $30,512,000 at December 31,2025 and 2024, respectively. Approximately $1,938,000 of the NOL carryforwards begin to expire during the year ended December 31, 2025 and become fully expired by 2038 and approximately $141,991,000 of NOL carryforwards, which were generated after the enactment of Tax Cuts and Jobs Act, have an indefinite life.

The valuation allowance was $34,311,000 and $60,096,000 at December 31, 2025 and 2024, respectively. The decrease of approximately $25,785,000 between 2025 and 2024 is primarily due to adjustments to the domestic deferred tax assets related to NOLs.

The Company’s gross deferred tax asset for state net operating losses and the valuation allowance for the year ended December 31, 2025 are each reduced by $152,000 to apply the IRC Section 382 NOL utilization limitation to the state of California NOLs.

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The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2025 and 2024 was as follows:

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The Company files income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. The Company has not been audited by the Internal Revenue Service or any state income or franchise tax agency. As of December 31, 2025, the Company’s federal returns for the years ended 2023 through the current period and most state returns for the years ended 2022 through the current period are still open to examination. In addition, all of the net operating losses and research and development credits generated in years earlier than 2022 and 2021, respectively, are still subject to Internal Revenue Service audit. The federal and California tax returns for the year ended December 31, 2024 reflect research and development carryforwards of $3,401,000 and $5,856,000, respectively. The Company does not anticipate claiming any additional research and development credits for the year ended December 31, 2025.

As of December 31, 2025, the Company’s gross unrecognized tax benefits are approximately $0. A reconciliation of the change in the Company’s unrecognized tax benefits is as follows:

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The decrease for the year ended December 31, 2025 is related to the section 383 limitation carryforward.

The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. The Company recognizes interest and penalties related to unrecognized tax benefits within the interest expense line and other expense line, respectively, in its consolidated statement of operations and comprehensive loss. The Company has not recorded any interest or penalties as a result of uncertain tax positions as of December 31, 2025 and 2024. Accrued interest and penalties would be included within the related liability in the consolidated balance sheet.

The Company adopted ASU 2023-09, Improvements to Income Tax Disclosures (ASC 740), effective for the year ended December 31, 2025. ASU 2023-09 requires enhanced annual disclosures of the income tax rate reconciliation and income taxes paid, including disaggregation of reconciling items and cash taxes paid by jurisdiction, with separate disclosure for any reconciling item that equals or exceeds 5 percent of the amount computed by multiplying income (loss) from continuing operations before income taxes by the applicable statutory federal income tax rate. In connection with the adoption, the Company evaluated the disaggregation of its rate reconciliation and income taxes paid and determined that, other than the categories presented in the tables above, no additional reconciling items met the 5 percent significance threshold or were otherwise material for separate disclosure. For the year ended December 31, 2025, income taxes paid to the State of Texas totaled $10,712. Except for this additional disclosure, the adoption of ASU 2023-09 did not have a material impact on the Company’s income tax disclosures.