Annual report pursuant to Section 13 and 15(d)

Income Taxes

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Income Taxes
 12 Months Ended
Jan. 01, 2024
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The (benefit) from provision for income taxes is set forth below:

(in thousands) January 1, 2024 January 2, 2023
Current:
U.S. Federal $ —  $ — 
State 13  35 
Total current income tax expense $ 13  $ 35 
Deferred:
U.S. Federal (6,117) (10,002)
State (499) (1,469)
Total deferred income tax benefit (6,616) (11,471)
Valuation allowance 6,538  11,341 
Total deferred income tax benefit, net of valuation allowance
(78) (130)
Income tax benefit
 $ (65) $ (95)
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 1, 2024 January 2, 2023
Income tax provision at the U.S. federal statutory rate $ (6,462) $ (21,741)
Permanent differences 1,434  870 
Share-based compensation (33) (463)
State income taxes, net of federal benefit (675) (1,640)
Change in warrant liability (3) (527)
Goodwill impairment —  11,471 
True-up 221  1,983 
Change in valuation allowance 6,538  11,342 
Change in rate 13  (249)
Tax credits (1,098) (1,141)
Total income tax benefit
 $ (65) $ (95)

The components of the Company's deferred tax liabilities at January 1, 2024 and January 2, 2023 are set forth below:

(in thousands) January 1, 2024 January 2, 2023
Deferred tax assets (liabilities):
Allowance for doubtful accounts $ 30  $ 40 
Goodwill 3,503  4,625 
Fixed Assets 2,307  2,164 
Deferred franchise fees 187  277 
Deferred rent —  — 
Stock compensation 1,210  1,730 
Net operating losses, Federal 17,116  13,649 
Net operating losses, State 3,264  2,691 
Deferred payroll taxes —  — 
Interest expense 7,309  5,351 
Lease liability 14,128  13,104 
Tax credits 2,951  1,854 
Other 1,418  1,599 
     Gross deferred tax assets 53,423  47,084 
Valuation allowance (29,166) (22,629)
     Net deferred tax assets 24,257  24,455 
Intangible assets (13,571) (13,878)
Lease ROU asset (11,832) (11,800)
Fixed assets —  — 
     Deferred tax liabilities (25,403) (25,678)
Total net deferred tax liabilities
 $ (1,146) $ (1,223)
As of January 1, 2024, the Company’s federal net operating loss carryforwards for income tax purposes was $81.5 million. On a tax-effected basis, the Company also had net operating losses of $3.3 million related to various state jurisdictions. $71.9 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 2038.

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.

Section 382 of the Internal Revenue Code limits the Company’s ability to utilize certain tax deductions to offset taxable income in future years, due to the existence of a Net Unrealizable Built-In Loss at the time of the change in control. Such a limitation will be effective for a five-year period subsequent to the change in control. In the event the Company has Recognized Built-In Losses (“RBIL”) during the five-year period, those losses will be limited; losses exceeding the annual limitation are carried forward as RBIL carryovers. As of January 1, 2024 the Company has approximately $3.7 million of RBIL carryovers, which carry forward indefinitely.

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 $29.2 million has been recorded against the deferred tax asset.

The following table summarizes the Company's unrecognized tax benefits at January 1, 2024 and January 2, 2023:

(in thousands) January 1, 2024 January 2, 2023
Beginning balance $ 229  $ 660 
Additions based on tax positions related to the current year —  — 
Additions for tax positions of prior years —  — 
Reductions for positions of prior years (229) (431)
Ending balance $ —  $ 229 
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 2020 fiscal year forward remain subject to examination.