Income Taxes

9 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

13. Income Taxes

The Company recorded an income tax benefit of $0.4 million for the nine months ended September 30, 2022, and income tax expense of $17 for the nine months ended September 30, 2021. The income tax benefit recorded for the nine months ended September 30, 2022 differs from the statutory rate primarily because it reflects a $0.4 million benefit related to a partial reversal of the valuation allowance, established in connection with the acquisition of Smarteq, for Swedish deferred tax assets. The expense recorded for the nine months ended September 30, 2021 differed from the Federal statutory rate of 21% primarily because the Company maintains a full valuation allowance on its deferred tax assets in all jurisdictions.

The Company’s valuation allowances are due to uncertainty regarding the utilization of the deferred tax assets. The Company had deferred tax assets net of deferred tax liabilities of $14.6 million at September 30, 2022 and $15.3 million at December 31, 2021. By jurisdiction at September 30, 2022, $11.9 million was associated with the U.S., $1.1 million was associated with China, and $1.6 million was associated with Sweden. The Company’s gross deferred tax assets consist of federal and state net operating losses (“NOLs”), credits, and timing differences. On a regular basis, the Company evaluates the recoverability of deferred tax assets and the need for a valuation allowance. Such evaluations involve the application of significant judgment. The Company considers multiple factors in its evaluation of the need for a valuation allowance.

The Company’s federal NOLs generated in 2018 and later periods will not expire, but the Company’s NOLs generated through December 31, 2017 have a finite life primarily based on the 20-year carry forward of federal net operating losses. The timing differences have a ratable reversal pattern over 12 years. The Company has met its projections in 2022, but did not meet its projections in 2020 or 2021. While the Company believes its financial outlook remains positive, the Company’s performance versus its projections in both of

the prior two years is considered significant negative evidence that is difficult to overcome on a “more likely than not” standard in the current year through objectively verifiable data. Under the accounting standards, objective verifiable evidence has greater weight than subjective evidence such as the Company’s projections for future growth. In addition, the Company faces uncertainties from recent macroeconomic trends, including inflationary pressures, the economic downturn and the potential for a recession. As a result of all these factors, the Company maintained a full valuation allowance on its U.S. deferred tax assets at September 30, 2022.

The pre-tax profits for the Sweden jurisdiction were positive in 2021 and have increased in 2022 due to higher revenues and profit margins. With revenue from new and existing customers, the revenue and profit forecast has increased for 2023. The Company considers the three-year cumulative income in the Sweden jurisdiction and the fact that the Company exceeded its projections associated with the Sweden jurisdiction for 2021 and 2022 as positive evidence of the ability to utilize a portion of its deferred tax assets. Thus, the Company recorded a partial reversal of the valuation allowance for the deferred tax assets associated with the Sweden jurisdiction.

Until an appropriate level of profitability is attained, the Company expects to maintain a full valuation allowance on its U.S. and China net deferred tax assets and a partial valuation allowance on its Sweden net deferred tax assets. Any U.S. or Chinese tax benefits or tax expense recorded on its consolidated statements of operations will be offset with a corresponding valuation allowance until such time that the Company changes its determination related to the realization of deferred tax assets. In the event that the Company changes its determination as to the amount of deferred tax assets that can be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such a determination is made.

The analysis that the Company prepared to determine the valuation allowance required significant judgment and assumptions regarding future market conditions as well as forecasts for profits, taxable income, and taxable income by jurisdiction. Due to the sensitivity of the analysis, changes to the assumptions in subsequent periods could have a material effect on the valuation allowance.

The Company files a consolidated federal income tax return, income tax returns with various states, and foreign income tax returns in various foreign jurisdictions. The Company’s U.S. federal tax returns remain subject to examination for 2018 and subsequent periods. The Company’s U.S. state tax returns remain subject to examination for 2017 and subsequent periods. The Company’s foreign tax returns remain subject to examination for 2011 and subsequent periods. The Company’s gross unrecognized tax benefit was $0.8 million at September 30, 2022 and December 31, 2021.

On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security Act” (CARES Act) was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. Under the CARES Act, the Company deferred the employer portion of social security taxes and applied for a refund of its Alternative Minimum Tax credit. As of September 30, 2022, the Company had deferred $0.2 million of payroll taxes which will be paid by December 31, 2022.