Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Income tax (benefit) expense was as follows:

(in thousands)	For the Year Ended December 31,
	2020		2019
Current tax benefit
Federal	$	(2,299)	$	(238)
State	25		91
Foreign	13		99
Total current tax benefit	$	(2,261)	$	(48)
Deferred tax (benefit) expense
Federal	$	(1,710)	$	329
State	258		128
Total deferred tax (benefit) expense	(1,452)		457
Total tax (benefit) expense	$	(3,713)	$	409

The Company made net cash payments for income taxes of $0.2 million in 2020 while it received net cash refunds for income taxes of $0.3 million in 2019.

A reconciliation between the Company’s effective tax rate on income (loss) before income taxes and the statutory tax rate is as follows: 

(in thousands)	For the Year Ended December 31,
	2020				2019
	Amount		Percent		Amount		Percent
Income tax (benefit) expense at federal statutory rate	$	(5,606)	21.0	%	$	1,818	21.0	%
State income tax, net of federal benefit	(1,979)		7.4	%	618		7.1	%
Non-deductible warrant expense	—		—	%	284		3.3	%
Other permanent differences	(185)		0.7	%	46		0.5	%
Research and development tax credits	(551)		2.1	%	(715)		(8.3)	%
Other tax credits	(555)		2.1	%	1		—	%
Tax reserve reassessment	(7)		—	%	25		0.3	%
Impact of CARES Act	(1,390)		5.2	%	—		—	%
Change in valuation allowance	6,348		(23.8)	%	(2,696)		(31.1)	%
Return adjustment	213		(0.8)	%	752		8.7	%
Stock-based compensation	104		(0.4)	%	279		3.2	%
Other, net	(105)		0.4	%	(3)		—	%
Income tax (benefit) expense	$	(3,713)	13.9	%	$	409	4.7	%

For the year ended December 31, 2020, the Company recognized a pretax loss of $26.7 million. For the year ended December 31, 2019, the Company recognized pretax income of $8.7 million, which included $1.4 million of permanently excludable loss associated with the change in the valuation and exercise of the Weichai Warrant.

The Company generates R&D tax credits as a result of its R&D activities, which reduce the Company’s effective income tax rate. In general, these credits are general business credits and may be carried forward up to 20 years to be offset against future taxable income.

Significant components of deferred income tax assets and liabilities consisted of the following:

(in thousands)	As of December 31,
	2020		2019
Deferred tax assets:
Net operating loss carryforwards	$	19,167	$	16,389
Research and development credits	4,982		4,398
Other state credits	3,372		1,922
Inventory	2,693		1,718
Allowances and bad debts	1,356		1,009
Accrued warranty	8,441		6,344
Accrued wages and benefits	240		1,294
Other accrued expenses	1,789		1,393
Stock-based compensation	223		205
Capitalized research and development costs	210		486
163(j) disallowed interest	2,305		1,688
Intangible amortization	1,357		1,855
Contract liabilities	3,307		3,583
Operating lease liability	4,934		5,989
Other	612		356
Total deferred tax assets	54,988		48,629
Valuation allowance	(48,056)		(41,709)
Total deferred tax assets, net of valuation allowance	$	6,932	$	6,920
Deferred tax liabilities:
ROU operating lease asset	$	(4,545)	$	(5,652)
Tax depreciation in excess of book depreciation on property, plant and equipment	(3,273)		(2,373)
Total deferred tax liabilities	$	(7,818)	$	(8,025)
Net deferred tax liability	$	(886)	$	(1,105)

The Company’s net deferred tax liability is presented as a separate line item in the Consolidated Balance Sheets.

A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The guidance on accounting for income taxes provides important factors in determining whether a deferred tax asset will be realized, including whether there has been sufficient taxable income in recent years and whether sufficient income can reasonably be expected in future years in order to utilize the deferred tax asset.

The Company evaluated the need to maintain a valuation allowance for deferred tax assets based on an assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. As a result of this evaluation, the Company concluded that the negative evidence outweighed the positive evidence and that a full valuation allowance should be maintained against its net deferred tax assets as of December 31, 2020 and 2019. The Company’s net deferred tax liability of $0.9 million and $1.1 million as of December 31, 2020 and 2019, respectively, represents the deferred tax liability related to indefinite-lived assets which cannot serve as a source of income for the realization of deferred tax assets.

As of December 31, 2020, the Company has, on a tax-effected basis, $8.4 million in R&D and state tax credit carryforwards which begin to expire in 2021. The Company has $13.2 million and $6.0 million of federal and state (tax effected, net of federal tax benefit) net operating loss carryforwards that are available to offset taxable income in the future. The federal and state net operating loss carryforwards begin to expire in 2037 and 2026, respectively. On April 23, 2019, Weichai exercised the Weichai Warrant resulting in the Company issuing 4,049,759 shares of the Company’s Common Stock and Weichai becoming the owner of 51.5% of the outstanding shares of the Company’s Common Stock, at that time. The Company believes that this constituted an “ownership change” as defined in Section 382 of the Internal Revenue Code. Consequently, all pre-ownership

change tax attributes are subject to an annual Section 382 limitation. Based on the current estimated annual Section 382 limitation, the Company believes all tax attributes subject to Section 382 will be utilized prior to their expiration dates, if any.

The change in unrecognized tax benefits excluding interest and penalties were as follows:

(in thousands)	For the Year Ended December 31,
	2020		2019
Balance at beginning of year	$	1,430	$	1,421
Additions based on tax positions related to the current year	103		144
Reductions for tax positions of prior years	(102)		(135)
Balance at end of year	$	1,431	$	1,430

The Company recognizes interest and penalties related to unrecognized tax benefits in Income tax expense. As of December 31, 2020 and 2019, the amount accrued for interest and penalties was not material. The Company reflects the liability for unrecognized tax benefits as Other noncurrent liabilities in its Consolidated Balance Sheets. The amounts included in “reductions for tax positions of prior years” represent decreases in the unrecognized tax benefits relating to expiration of the statutes during each year shown.

As of December 31, 2020, the Company believes the liability for unrecognized tax benefits, excluding interest and penalties, could decrease by an immaterial amount in 2021 due to lapses in the statute of limitations. Due to the various jurisdictions in which the Company files tax returns, it is possible that there could be other significant changes in the amount of unrecognized tax benefits in 2021, but the amount cannot be estimated.

With few exceptions, the major jurisdictions subject to examination by the relevant tax authorities and open tax years, stated as the Company’s fiscal years, are as follows:

Jurisdiction	Open Tax Years
U.S. Federal	2014	to	2020
U.S. States	2013	to	2020
Canada	2018	to	2020

The Company is currently under federal income tax audit for tax years 2014, 2015 and 2016. The Company is currently under Illinois income tax audit for tax years 2013 and 2014.

Coronavirus Aid, Relief, and Economic Security Act

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Among the changes to the U.S. federal income tax rules, the CARES Act modified net operating loss carryback rules that were eliminated by the 2017 Tax Cuts and Jobs Act, restored 100% bonus depreciation for qualified improvement property, increased the limit on the deduction for net interest expense and accelerated the time frame for refunds of alternative minimum tax credits. The Company’s ability to carryback the net operating losses to earlier years is expected to result in a tax benefit of $2.2 million. There is no net impact to the Company’s deferred tax assets due to the full valuation allowance.