Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

6. Income Taxes

The domestic and foreign components of the income (loss) before expense for income taxes were as follows:

	Years Ended December 31,
	2022		2021
Domestic	$	2,375	$	1,359
Foreign		120		(1,167	)
	$	2,495	$	192

The expense for income taxes consisted of the following:

	Years Ended December 31,
	2022			2021
Current:
Federal	$	41		$	0
State		440			33
Foreign		(73	)		6
		408			39
Deferred:
Federal		0			0
State		0			0
Foreign		(782	)		0
		(782	)		0
Total	$	(374	)	$	39

A reconciliation of the expense for income taxes at the federal statutory rate compared to the expense at the effective tax rate is as follows:

	Years Ended December 31,
	2022			2021
Statutory federal income tax rate		21	%		21	%
State income tax, net of federal benefit		6	%		56	%
Tax effect of permanent differences		2	%		56	%
Change in valuation allowance		-25	%		16	%
Effective state rate change to deferred tax assets		-2	%		8	%
Stock-based compensation windfalls		5	%		-53	%
Foreign income taxed at different rates		-14	%		53	%
Research and development credits		-18	%		-134	%
Return to provision adjustments		10	%		-3	%
		-15	%		20	%

The Company recorded net income tax benefit of $0.4 million for the year ended December 31, 2022. The 2022 effective rate differed from the Federal rate of 21% primarily due to the partial release of the valuation allowance for the Company's Sweden subsidiary. The Company’s valuation allowance is due to the uncertainty regarding the utilization of the deferred tax assets.

The Company recorded net income tax expense of $39 for the year ended December 31, 2021. The 2021 effective rate differed from the Federal rate of 21% primarily because the Company had a full valuation allowance on its deferred tax assets. The Company’s valuation allowance is due to the uncertainty regarding the utilization of the deferred tax assets.

Under the U.S. tax guidelines, a U.S. shareholder of controlled foreign corporations (“CFCs”) is required to include in gross income the amount of its global intangible low-taxed income (“GILTI”). Generally, the GILTI inclusion is the U.S. shareholder’s allocable share of certain income earned through its CFCs (“net CFC tested income”) in excess of a deemed 10% return on the shareholder’s allocable share of certain of the CFC’s depreciable, tangible assets less certain interest expense items (“net deemed tangible income return”). The Company elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the period cost method). The amount included for GILTI did not have a significant impact on the Company’s tax provision for the years ended December 31, 2022 or December 31, 2021.

The Company recognizes all interest and penalties as income tax expense. There was no income tax expense related to interest and penalties for the years ended December 31, 2022 or 2021.

Deferred Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The net deferred tax accounts consist of the following:

	December 31,
	2022			2021
Deferred Tax Assets:
Net operating loss carryforwards	$	4,781		$	6,874
Federal, foreign, and state credits		3,049			2,666
Research and experimental expenditures		1,783			0
Amortization		1,768			2,346
Inventory reserves		926			1,076
Deferred gain		868			863
Stock compensation		779			498
Deferred rent		435			476
Depreciation		242			0
Accrued vacation		222			276
Other		520			417
Gross deferred tax assets		15,373			15,492
Valuation allowance		(14,275	)		(15,258	)
Net deferred tax asset		1,098			234
Deferred Tax Liabilities:
Amortization		(215	)		0
Depreciation		(1	)		(234	)
Net Deferred Tax Assets	$	882		$	0

At December 31, 2022, the Company had gross deferred tax assets of $15.4 million, deferred tax liabilities of $0.2 million and a valuation allowance of $14.3 million. At December 31, 2021, the Company had gross deferred tax assets of $15.5 million, deferred tax liabilities of $0.2 million and a valuation allowance of $15.3 million. At December 31, 2022 and 2021 respectively, the net deferred tax assets included $1.6 million and $2.3 million related to intangible assets acquired under purchase accounting which are amortized for tax purposes over 15 years, but for shorter periods under generally accepted accounting principles. At December 31, 2022, the net deferred tax assets also included $1.8 million related to Research and experimental expenditures which were capitalized in accordance with IRC section 174.

The deferred tax assets net of deferred tax liabilities consisted of the following balances by tax jurisdiction:

	December 31,
	2022			2021
United States	$	11,981		$	11,941
China		1,410			1,169
Sweden		1,766			2,148
Net Deferred Tax Assets before valuation allowance	$	15,157		$	15,258
Valuation Allowance		(14,275	)		(15,258	)
Net Deferred Tax Assets	$	882		$	0

The Company continually evaluates the realizability of deferred tax assets and the requirement for a valuation allowance against those not expected to be realized. As part of the analysis, the Company considers positive and negative evidence which may include the application of significant judgment. The Company’s net deferred tax assets consist of assets related to net operating losses and credits as well as assets related to timing differences. The Company’s net operating losses and credits have a finite life primarily based on the 20-year carryforward rule for federal net operating losses (NOLs) generated through December 31, 2017. The timing differences have a ratable reversal pattern over approximately 10 years. Under the new rules enacted with the Tax Act, tax losses incurred in 2018 and future periods will not expire, thereby extending the period by which the Company’s deferred tax assets can be realized. However, these post 2017 losses are subject to a limitation of 80% of current taxable income.

In accordance with ASC 740 “Accounting for Income Taxes” (“ASC 740”), the Company evaluates deferred income tax assets quarterly to determine if valuation allowances are required or should be adjusted. ASC 740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. At December 31, 2022 and December 31, 2021, the Company had a full valuation allowance on its deferred tax assets in its U.S. and China jurisdictions. For U.S. tax purposes, the Company recorded book and taxable income. While the Company has recorded pretax book income for the prior three years and believes its financial outlook remains positive, it did not meet revenue or earnings expectations for the U.S. jurisdiction. Additionally, the Company recognized revenue for one-time projects in fiscal year 2022 which may not repeat in 2023 or future years. Because of difficulties with forecasting financial results historically, and due to the uncertainties associated with inflationary and recessionary issues, the Company maintained a full valuation allowance on its U.S. and China deferred tax assets at December 31, 2022. The Company’s performance versus its projections in both of the prior two years are considered significant negative evidence that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. While the Company believes its financial outlook remains positive, under the accounting standards, objective verifiable evidence will have greater weight than subjective evidence such as the Company’s projections for future growth.

Based on positive book and taxable income for Smarteq Wireless in 2021 and 2022, because their results exceeded their projections, and because of higher backlog at December 31, 2022, these facts are considered significant positive evidence. As such, the Company recognized $0.8 million related to the partial release of its valuation allowance for Smarteq Wireless.

Based on an evaluation in accordance with the accounting standards, as of December 31, 2022, the Company has a valuation allowance of $12.0 million which was recorded against the net U.S. deferred tax assets, a valuation allowance of $1.4 million recorded against the net China deferred tax assets, and $0.9 million recorded against the net Sweden deferred tax assets in order to measure the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence.

Until an appropriate level of profitability is attained and sufficient positive evidence is available to outweigh negative evidence, the Company expects to maintain a full valuation allowance on its U.S. net deferred tax assets. Any U.S. or foreign tax benefits or tax expense recorded on its consolidated statements of income 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.

Accounting for Uncertainty for Income Taxes

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	December 31,
	2022		2021
Beginning of period	$	848	$	808
Addition related to tax positions in current year		67		40
Addition related to tax positions in prior years		67		0
End of period	$	982	$	848

Because the Company has a full valuation allowance against its U.S. deferred tax assets, the reversal of these unrecognized tax benefits would have no impact on its effective tax rate. The Company does not anticipate that its unrecognized tax benefits will significantly increase or decrease within the next twelve months.

Audits

The Company and its subsidiaries file income tax returns in the U.S. and various foreign jurisdictions. The Company’s U.S. federal tax returns remain subject to examination for 2017 and subsequent periods, although loss carryovers generated in prior years remain subject to examination. The Company’s state tax returns remain subject to examination for 2015 and subsequent periods. The Company’s foreign tax returns in China remain subject to examination for 2011 and subsequent periods. The Company's foreign tax returns in Sweden remain subject to examination for 2016 and subsequent periods. The Company's foreign tax returns in France remain subject to examination for 2020 and subsequent periods.

Summary of Carryforwards

At December 31, 2022, the Company has a federal net operating loss carryforward of $4.6 million with no expiration. The Company has state net operating loss carryforwards of $13.9 million that expire between 2024 and 2041. Additionally, the Company has $2.3 million of federal research credits that expire between 2030 and 2042 and $1.5 million of state research credits with no expiration. The Company has a China net operating loss carryforward of $3.8 million that expires between 2025 and 2028 and of China research credits of $0.4 million that expire between 2024 and 2027. The Company has a Sweden net operating loss carryforward of $9.2 million with no expiration.

Investment in Foreign Operations

Under the Tax Cut and Jobs Act of 2017, the Company included Section 965 income related to the deemed repatriation of earnings for its subsidiary in China and decreased its NOL carryforward for the tax year beginning January 1, 2018. The Company considers such earnings permanently reinvested. Upon actual repatriation of these earnings, the Company would be subject to local withholding taxes.

CARES Act

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 in 2020 and applied for a refund of its Alternative Minimum Tax credit. At December 31, 2021 the Company had deferred payroll taxes of $0.2 of payroll taxes and a deferred tax asset for the payroll tax liability that was not deductible for income tax purposes. In December 2022, the remaining deferred payroll taxes were remitted to the taxing authorities.