Income Taxes
Income (loss) from continuing operations before income taxes include the following components (in thousands):
|
| | | | | | | |
| Years Ended
December 31, |
| 2016 | | 2015 |
U.S.-based operations | $ | (17,344 | ) | | $ | (7,770 | ) |
Non U.S.-based operations | (7,088 | ) | | (1,051 | ) |
| $ | (24,432 | ) | | $ | (8,821 | ) |
Income tax expense (benefit) attributable to loss from continuing operations is summarized as follows (in thousands):
|
| | | | | | | | | | | |
| Current | | Deferred | | Total |
Year ended December 31, 2016: | |
| | |
| | |
|
State and local | $ | 22 |
| | $ | — |
| | $ | 22 |
|
Foreign | (210 | ) | | (770 | ) | | (980 | ) |
Total | $ | (188 | ) | | $ | (770 | ) | | $ | (958 | ) |
Year ended December 31, 2015: | |
| | |
| | |
|
U.S. Federal | $ | — |
| | $ | — |
| | $ | — |
|
State and local | 4 |
| | — |
| | 4 |
|
Foreign | (269 | ) | | (134 | ) | | (403 | ) |
Total | $ | (265 | ) | | $ | (134 | ) | | $ | (399 | ) |
Income taxes attributable to loss from continuing operations differ from the amounts computed by applying the U.S. federal statutory rate of 34% to loss from continuing operations before income taxes as shown below (in thousands):
|
| | | | | | | |
| Years Ended
December 31, |
| 2016 | | 2015 |
Expected tax benefit | $ | (8,307 | ) | | $ | (2,999 | ) |
Net tax effects of: | |
| | |
|
Foreign tax rate differential | 1,331 |
| | 167 |
|
State taxes, net of federal benefit | 219 |
| | (602 | ) |
Return to provision adjustment | 13,386 |
| | (619 | ) |
Research and other credits | 443 |
| | (59 | ) |
Permanent difference on convertible notes and warrants | 2,923 |
| | (589 | ) |
Goodwill impairment | 533 |
| | — |
|
Other | 61 |
| | 52 |
|
Change in deferred tax asset valuation allowance | (11,547 | ) | | 4,250 |
|
| $ | (958 | ) | | $ | (399 | ) |
Deferred tax assets and liabilities consist of the following (in thousands):
|
| | | | | | | |
| December 31, |
| 2016 | | 2015 |
Deferred tax assets: | |
| | |
|
Research and development credits | $ | 2,063 |
| | $ | 2,763 |
|
Other credits | — |
| | 487 |
|
Operating loss carry forwards | 7,320 |
| | 17,249 |
|
Interest | 460 |
| | — |
|
Inventories | 289 |
| | 254 |
|
Allowance for doubtful accounts | 129 |
| | 116 |
|
Depreciation | 353 |
| | 382 |
|
Deferred research and development expenses for income tax | — |
| | 240 |
|
Non-cash compensation | 946 |
| | 1,120 |
|
Other | 929 |
| | 921 |
|
Total gross deferred tax assets | 12,489 |
| | 23,532 |
|
Valuation allowance | (11,441 | ) | | (23,091 | ) |
Net deferred tax assets | $ | 1,048 |
| | $ | 441 |
|
Deferred tax liabilities: | |
| | |
|
Other identifiable intangible assets | $ | (494 | ) | | $ | (634 | ) |
Total gross deferred tax liabilities | (494 | ) | | (634 | ) |
Net deferred tax assets (liabilities) | $ | 554 |
| | $ | (193 | ) |
The Company had approximately $14.7 million and $14.8 million of federal and state income tax net operating loss carryforwards at December 31, 2016, respectively. The foreign net operating losses can be carried forward indefinitely. Future utilization of the federal and state net operating losses and credit carryforwards is subject to a substantial annual limitation due to ownership change limitations as required by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the "Code"), as well as similar state limitations.
In connection with the settlement of the Kanis S.A. debt exchange (see Note 10), a change in control of the Company occurred with Kanis S.A. becoming the largest owner of the Company's common stock in an amount greater than 50% of the issued and outstanding shares of common stock. As a result, the Company performed a study to evaluate the status of net operating loss carryforwards as a result of the ownership change during the year. The results of the study provided that there was indeed an “ownership change” as of August 30, 2016 as defined for U.S. federal income tax purposes. The "ownership change" will significantly limit the use of the Company's net operating losses and credits in future tax years
Of the $14.7 million federal loss carryforwards approximately $11.9 million of the loss will be subject to an annual limitation of $1.1 million within the next 5 years and $0.3 million for the next 15 years. The federal net operating loss carryforwards will expire in fiscal year 2036. As a result of the "ownership change" the federal research and development credits have been limited and based on the limitation the Company does not anticipate being able to use any of these credits that existed as of the date of the Merger in future tax years. Of the $14.8 million of state net operating loss carryforwards approximately $10.4 million of the loss will be subject to an annual limitation of $1.1 million within the next 5 years and $0.3 million for the next 15 years. The state net operating loss carryforwards will expire in fiscal year 2036. The Company has state research and development credits of $3.9 million however they have placed a 20% reserve on the credit since a thorough R&D study was not performed. Since the state credits have an indefinite life, the Company did not write them off even though it is also limited under Section 383. The Company has a full valuation allowance against the related deferred tax assets for its U.S. and U.K. entities as it is more likely than not that they will not be realized by the Company.
In assessing the potential realization of deferred tax assets, consideration is given to whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during the periods in which those temporary differences become deductible. In addition, the utilization of net operating loss carryforwards may be limited due to restrictions imposed under applicable federal and state tax laws due to a change in ownership. Based upon the level of historical operating losses and future projections, management believes it is more likely than not that the Company will not realize the deferred tax assets.
The Company has not recognized a deferred tax liability on undistributed earnings of its foreign subsidiaries, because these earnings are intended to be permanently reinvested. The amount of the unrecognized deferred tax liability depends on judgment required to analyze the withholding tax due, the applicable tax law and factual circumstances in effect at the time of any such distributions. Therefore, the Company believes it is not practicable at this time to reliably determine the amount of unrecognized deferred tax liability related to its undistributed earnings; however, these undistributed earnings are immaterial. If circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted and income taxes have not been recognized by the parent entity, the parent entity shall accrue as an expense of the current period income taxes attributable to that remittance.
The following changes occurred in the amount of unrecognized tax benefits including related interest and penalties, included in the income taxes payable on the consolidated balance sheet (in thousands):
|
| | | | | | | |
| Years Ended
December 31, |
| 2016 | | 2015 |
Balance at beginning of year | $ | 634 |
| | $ | 683 |
|
Additions for current year tax provisions | 49 |
| | 32 |
|
Additions/Reduction for tax positions of prior years | 786 |
| | — |
|
Reduction for prior year tax provisions | — |
| | (81 | ) |
Balance at end of year | $ | 1,469 |
| | $ | 634 |
|
If recognized, the entire amount of the unrecognized tax benefits would affect the effective tax rate. As of December 31, 2016 and 2015, the Company had $0.2 million and $0.1 million , respectively, accrued for payment of interest and penalties related to unrecognized tax benefits.
The Company operates in multiple tax jurisdictions, both within and outside of the United States. Although the timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next twelve months. The following tax years remain open to examination by the major domestic taxing jurisdictions to which it is subject:
|
| |
| Open Tax Years |
United States—Federal | 2013 - 2016 |
United States—State | 2012 - 2016 |
Canada | 2011 - 2016 |
Sweden | 2014 - 2016 |
United Kingdom | 2012 - 2016 |