NOTE 10 — INCOME TAXES

Net Operating Loss Carryforwards

The Company files income tax returns in the U.S. federal jurisdiction and in several states including California, Colorado, and Oregon. The Company’s federal and state tax returns for the 2020 fiscal year and forward are subject to examination by taxing authorities. Federal and state laws impose substantial restrictions on the utilization of federal net operation loss (“NOL”) carryforwards in the event of an ownership change for income tax purposes, as defined in Section 382 of the Internal Revenue Code (“IRC”). Pursuant to IRC Section 382, annual use of the Company’s NOL carryforwards is limited in the event that a cumulative change in ownership of more than 50% occurs within a three-year period. During the fiscal year ended June 30, 2022, the Company completed an IRC Section 382 analysis and concluded that the Company’s NOL carryforwards are subject to limitations as a result of past ownership changes.

As of June 30, 2023, the Company has U.S. federal net operating loss (“NOL”) carryforwards of approximately $153.2 million, of which approximately $33.4 million of NOL carryforwards will never be available for use due to the limitations under IRC section 382 discussed above. The remainder of the Company’s NOL carryforwards of $119.8 million consists of (i) $17.1 million that never expires and is currently available to offset taxable income, (ii) $7.9 million that is currently available to offset taxable income but if not utilized expires in 2031 through 2035, (iii) $13.4 million that become available through fiscal year 2038 and that expires by June 30, 2038 if not utilized, and (iv) $81.4 million that never expires. With respect to the $81.4 million of NOL carryforwards that never expire, this amount will become available in varying annual amounts for an aggregate approximately $15.6 million through fiscal year 2038 and $1.2 million annually thereafter. If the Company experiences future ownership changes that meet the aforementioned criteria under Section 382, further limitations will be imposed on the use of all NOL carryforwards existing through the date of such change.  The Company also has Colorado and California NOL carryforwards that begin to expire in 2031 and are expected to be subject to similar limitations as those imposed under IRC Section 382.

Income Tax Expense

For the fiscal years ended June 30, 2023 and 2022, the reconciliation between the income tax benefit computed by applying the statutory U.S. federal income tax rate to the pre-tax loss before income taxes, and total income tax expense recognized in the consolidated financial statements is as follows (in thousands):

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For the fiscal years ended June 30, 2023 and 2022, the Company did not recognize any current income tax expense or benefit due to a full valuation allowance on its net deferred income tax assets.

Deferred Income Tax Assets and Liabilities

As of June 30, 2023 and 2022, the income tax effects of temporary differences that give rise to significant deferred income tax assets and liabilities are as follows (in thousands):

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For the fiscal year ended June 30, 2023, the valuation allowance increased by $12.5 million, primarily as a result of the increase in net operating losses and capitalization of research and experimental costs that was required beginning in the fiscal year ended June 30, 2023. In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized.

Unrecognized Tax Benefits

The Company did not have any unrecognized tax benefits as of June 30, 2023 and 2022. The Company’s policy is to account for any interest expense and penalties for unrecognized tax benefits as part of the income tax provision. The Company does not anticipate that unrecognized tax benefits will significantly increase or decrease within the next twelve months.