Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.23.1
Income Taxes
 12 Months Ended
Jan. 02, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The provision for (benefit) from income taxes is set forth below:

(in thousands) January 2, 2023 December 31, 2021
Current:
U.S. Federal $ —  $ — 
State 35  — 
Total current income tax expense 35  — 
Deferred:
U.S. Federal (10,002) (7,833)
State (1,469) (2,192)
Total deferred income tax benefit (11,471) (10,025)
Valuation allowance 11,341  10,337 
(130) 312 
Income tax (benefit) expense $ (95) $ 312 
The reconciliation of income tax computed at the U.S. federal statutory rate of 21% to the Company’s effective tax rate is set forth below:

(in thousands) January 2, 2023 December 31, 2021
Income tax provision at the U.S. federal statutory rate $ (21,741) $ (25,407)
Permanent differences 870  402 
Share-based compensation (463) 496 
State income taxes, net of federal benefit (1,640) (1,888)
Change in warrant liability (527) (2,900)
Goodwill impairment 11,471  19,820 
True-up 1,983  42 
Change in valuation allowance 11,342  10,337 
Change in rate (249) (406)
Tax credits (1,141) (184)
Total income tax (benefit) expense $ (95) $ 312 

The components of the Company's deferred tax liabilities at January 2, 2023 and December 31, 2021 are set forth below:

(in thousands) January 2, 2023 December 31, 2021
Deferred tax assets (liabilities):
Allowance for doubtful accounts $ 40  $ 57 
Goodwill 4,625  2,794 
Fixed Assets 2,164  — 
Deferred franchise fees 277  684 
Deferred rent —  239 
Stock compensation 1,730  1,250 
Net operating losses, Federal 13,649  11,215 
Net operating losses, State 2,691  2,066 
Deferred payroll taxes —  217 
Interest expense 5,351  3,540 
Lease liability 13,104  — 
Tax credits 1,854  713 
Other 1,599  1,075 
     Gross deferred tax assets 47,084  23,850 
Valuation allowance (22,629) (11,383)
     Net deferred tax assets 24,455  12,467 
Intangible assets (13,878) (13,300)
Lease ROU asset (11,800) — 
Fixed assets —  (520)
     Deferred tax liabilities (25,678) (13,820)
Total net deferred tax (liabilities) assets $ (1,223) $ (1,353)
As of January 2, 2023, the Company’s federal net operating loss carryforwards for income tax purposes was $64.9 million. On a tax-effected basis, the Company also had net operating losses of $2.7 million related to various state jurisdictions. $55.4 million of the federal net operating loss carryforwards will be carried forward indefinitely and will be available to offset 80% of taxable income. The remaining amount of the federal net operating loss carryforwards will expire at varying dates through 2037.

Pursuant to Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, the utilization of net operating loss carryforwards and tax credits may be limited as a result of a cumulative change in stock ownership of more than 50% over a three year period. The Company underwent such a change and consequently, the utilization of a portion of the net operating loss carryforwards and tax credits is subject to certain limitations.

In assessing the realizability of deferred income tax assets, ASC 740 requires that a more likely than not standard be met. If the Company determines that it is more likely than not that deferred income tax assets will not be realized, a valuation allowance must be established. The realization of deferred tax assets depends on the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies when making this determination. The Company has experienced cumulative losses in recent years which is significant negative evidence that is difficult to overcome in order to reach a determination that a valuation allowance is not required. Based on the Company's evaluation of its deferred tax assets, a valuation allowance of approximately $22.6 million has been recorded against the deferred tax asset.

The following table summarizes the Company's unrecognized tax benefits at January 2, 2023 and December 31, 2021:

(in thousands) January 2, 2023 December 31, 2021
Beginning balance $ 660  $ — 
Additions based on tax positions related to the current year —  — 
Additions for tax positions of prior years —  660 
Reductions for positions of prior years (431) — 
Ending balance $ 229  $ 660 
The statute of limitations for the Company’s state tax returns varies, but generally the Company’s federal and state income tax returns from its 2019 fiscal year forward remain subject to examination.