9. Income Taxes

The Company has pre-tax book income of $15.9 million and $11.8 million for the year ended December 31, 2021 and 2020, respectively.  The Company has $0.1 million income tax expense and $1.5 million income tax benefit for the years ended December 31, 2021 and 2020, respectively.  

The provision (benefit) for income taxes, all classified as current, consists of the following (in thousands):

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Reconciliation between the tax provision computed at the federal statutory income tax rate and the Company’s actual effective income tax rate is as follows:

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On March 27, 2020, the CARES Act was enacted, which includes a five-year NOL carryback provision which enabled the Company to benefit from certain losses at the former federal tax rate of 34%. In 2020, the Company recorded tax benefits of $1.5 million related to the NOL carryback provision. During the year ended December 31, 2021, the Company received $1.5 million in cash for its income tax receivable.

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The significant components of net deferred tax assets at December 31, 2021 and 2020 were as follows (in thousands):

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The net decrease in the valuation allowance was $4.6 million and $3.9 million, for the years ended December 31, 2021 and 2020, respectively.

Accounting standards provide for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes the Company’s four sources of taxable income including historical operating performance and the repeal of NOL carryback, the Company has determined that total deferred tax assets should be fully offset by a valuation allowance.

Based on an analysis under Section 382 of the Internal Revenue Code (which subjects the amount of pre-change NOLs and certain other pre-change tax attributes that can be utilized to annual limitations), the Company experienced an ownership change in February 2017 which substantially limits the future use of its pre-change NOLs and certain other pre-change tax attributes per year. The Company has excluded the related tax attributes that will expire as a result of the annual limitations in the deferred tax assets as of December 31, 2021 and December 31, 2020. To the extent that the Company

does not utilize its carryforwards within the applicable statutory carryforward periods, either because of Section 382 limitations or the lack of sufficient taxable income, the carryforwards will expire unused.

As of December 31, 2021, the Company had federal NOL carry-forwards of approximately $78.8 million and state NOL carry-forwards of approximately $38.1 million to offset future taxable income. $13.6 million of federal NOL carryforwards will begin to expire in 2036 and the remainder may be carried forward indefinitely. The state NOL carryforwards will begin to expire in 2033. The Company had federal orphan credit of $2.0 million which if not utilized will expire in 2037. The Company also had $19.8 million of California research and development tax credits which have no expiration date.

Under the 2017 federal income tax law, as modified by the federal tax law changes enacted in March 2020, federal NOLs incurred in tax years beginning after December 31, 2017 may be carried forward indefinitely, but, for taxable years beginning after December 31, 2020, the deductibility of such federal NOLs may only be utilized to offset 80% of taxable income annually.  

The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company’s federal income tax returns for tax years 2018 and beyond remain subject to examination by the Internal Revenue Service. The Company’s state income tax returns for tax years 2017 and beyond remain subject to examination by state tax authorities. In addition, all of the NOLs and research and development credit carryforwards that may be used in future years are still subject to adjustment.

The following table summarizes the Company’s activity related to its unrecognized tax benefits (in thousands):

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As of December 31, 2021, the Company had a total of $5.9 million of gross unrecognized tax benefits, none of which would affect the effective tax rate upon realization as the Company currently has a full valuation allowance against its deferred tax assets. The reversal of related deferred tax assets will be offset by a valuation allowance, should any of these uncertain tax positions be favorably settled in the future.

The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months. The Company will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. Through December 31, 2021, the Company has not accrued interest or penalties related to uncertain tax positions.