Note O - Income Taxes

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE O—INCOME TAXES

The sources of the Company’s loss from operations before income taxes were as follows (in thousands):

	Years ended December 31,
	2022			2021			2020
Domestic	$	(45,404	)	$	(21,229	)		(20,288	)
Foreign		(20,992	)		(32,931	)		(30,936	)
Total loss before income taxes	$	(66,396	)	$	(54,160	)		(51,224	)

The provision for income tax expense (benefit) for the years ended December 31, was as follows (in thousands):

Current:	2022		2021		2020
Federal	$	—	$	—	$	41
State		1		2		2
Foreign		—		—		—
Total	$	1	$	2	$	43
Deferred:
Federal	$	—	$	—	$	(172	)
State		—		—		—
Foreign		—		—		7,357
Total	$	—	$	—	$	7,185
Income tax (benefit) expense	$	1	$	2	$	7,228

Deferred income tax assets and liabilities result principally from net operating losses, different methods of recognizing depreciation, reserves for doubtful accounts and inventory, research and development credits and foreign tax credits. At December 31, the net deferred tax assets and liabilities are comprised of the following approximate amounts (in thousands):

	2022			2021
NOL carryforward	$	47,901		$	44,448
Inventory reserves		2,892			2,872
Unrealized gains and losses		363			69
Share-based compensation		914			645
Foreign tax credit		4,599			4,599
Research and development credits		10,505			9,879
Interest		3,966			2,840
ASC 842 Assets		1,602			1,740
Other		776			728
Deferred tax assets		73,518			67,820
Less valuation allowance		(69,680	)		(57,721	)
Deferred tax assets, net		3,838			10,099
Depreciation and amortization		(2,441	)		(8,600	)
ASC 842 Liabilities		(1,397	)		(1,499	)
Deferred tax liabilities		(3,838	)		(10,099	)
Deferred tax assets, net	$	—		$	—

The Company has a U.S. net operating loss carry forward of approximately $111.5 million, $32.7 million of which, if unused, expires between 2026 and 2032 and $78.8 million of which, can be carried forward indefinitely. The Company has U.S. and state research and development tax credits of $10.5 million, which, if unused, expire between 2028 and 2042. In addition, the Company has foreign tax credits of $4.6 million, which, if unused, will expire in 2028. Utilization of U.S. net operating losses and tax credit carry forwards are subject to an annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382. As of December 31, 2022, the Company had Taiwan net operating loss carry forwards of approximately $72.5 million and China net operating loss carry forwards of approximately $58.8 million.  The carryforward period for the Taiwan net operating loss carry forwards is ten years, and the expiration period begins 2028.  The carryforward period for China net operating loss carry forwards is ten years, and the expiration period begins 2029.

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2022. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.

On the basis of this evaluation, as of December 31, 2022 and December 31, 2021, a valuation allowance of $69.7 million and $57.7 million, respectively, has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

The following table shows the change in the deferred tax valuation as follows:

	2022			2021		2020
Beginning Balance, January 1	$	57,721		$	43,462	$	25,736
Change charged to expense/(income)		14,196			13,822		17,137
Change charged to currency translation adjustment		(2,237	)		437		589
Ending Balance, December 31	$	69,680		$	57,721	$	43,462

A reconciliation of the U.S. federal income tax rate of 21% for the years ended December 31, 2022, 2021 and 2020, respectively, to the Company’s effective income tax rate follows (in thousands):

	2022			2021			2020
Expected taxes at statutory rate	$	(13,943	)	$	(11,374	)	$	(10,775	)
PPP loan forgiveness		—			(1,308	)		—
Non-deductible/non-taxable items		33			897			1,132
Foreign rate differences		552			107			1,153
Foreign permanent differences		(1,407	)		(1,320	)		(1,002	)
Changes in valuation allowance		14,196			13,822			17,137
Share-based compensation		879			468			426
Research and development credits		(626	)		(872	)		(744	)
Alternative Minimum Tax		—			—			(172	)
Foreign other		—			—			12
Other, net		317			(418	)		61
Tax (benefit) expense	$	1		$	2		$	7,228

The Company's provision for income taxes in 2022 was lower than 2021 primarily due to state taxes.

The Company's provision for income taxes in 2021 was lower than 2020 due to the recognition of a valuation allowance on the deferred tax assets, along with excess tax expense from stock-based compensation, partially offset by differences in pre-tax income and recording research and development credits.

The Company’s wholly owned subsidiary, Prime World is a tax-exempt entity under the Income Tax Code of the British Virgin Islands.

The Company’s wholly owned subsidiary, Global Technology, Inc., has enjoyed preferential tax concessions in China as a national high-tech enterprise. In March 2007, China’s parliament enacted the PRC Enterprise Income Tax Law, or the EIT Law, under which, effective January 1, 2008, China adopted a uniform income tax rate of 25% for all enterprises including foreign invested enterprises. However, Global Technology, Inc. has been recognized as a National high-tech enterprise since 2008 and entitled to a 15% reduced tax rate.  In December 2020, Global Technology, Inc. again renewed its National high-tech enterprise certificate and therefore extended its three-year tax preferential status until December 2023. This tax holiday reduced its 2022, 2021 and 2020 income tax provision by approximately $0.0 million, $0.0 million, and $1.4 million, respectively. This tax holiday reduced its fiscal 2022, 2021, and 2020 diluted earnings per share by approximately $0.00, $0.00, and $0.05 respectively. Effective January 1, 2016, China expanded the scope of the National high-tech enterprise to include additional deductions for qualifying research and development.

As of December 31, 2022, 2021 and 2020, the total amount of unrecognized tax benefit was $0.2 million, $0.2 million, and $0.2 million, respectively. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):

	2022		2021		2020
Unrecognized tax benefits — January 1	$	181	$	181	$	181
Gross increases — tax positions in prior period		—		—		—
Gross decreases — tax positions in prior period		—		—		—
Unrecognized tax benefits — December 31	$	181	$	181	$	181

The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related to the unrecognized tax benefits noted above, it has not accrued penalties or interest during 2022 as a result of net operating losses. During 2021 or 2020, the Company also accrued no penalties or interest.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company’s open tax years subject to examination in the U.S. federal and state jurisdictions are 2019 through 2021. To the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or tax credit carryforward. The Company is subject to examination for tax years 2011 forward for various foreign jurisdictions.

In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property (“QIP”). On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 was enacted as part of the Consolidated Appropriations Act, 2021, followed by the American Rescue Plan Act on March 1, 2021. These laws, among many other provisions, expand and extend the Paycheck Protection Program (“PPP”), refundable employee retention tax credits previously made available under the CARES Act and allow a full deduction for business meals for the 2021 and 2022 tax years. During 2021, the Company recognized a tax benefit of $1.3 million on the non-taxable forgiveness of the PPP loan. However, the legislation had no material impact to income tax expense on the Company’s financial statements as a result of our valuation allowance. 

On August 9, 2022, the Creating Helpful Incentives to Produce Semiconductors and Science Act, (the “CHIPS Act”) was signed into law. Among other things, the CHIPS Act provides for refundable tax credits and certain other financial incentives to further investments in domestic manufacturing. The Company is evaluating the provisions of the new law and the potential impacts to the Company.

On August 16, 2022, legislation commonly known as the Inflation Reduction Act was signed into law. Among other things, the Inflation Reduction Act includes a 1% excise tax on corporate stock repurchases, applicable to repurchases after December 31, 2022, and also a new minimum tax based on book income. We are in the process of evaluating the potential impacts of the Inflation Reduction Act to us. While we do not currently expect the Inflation Reduction Act to have a material impact on our effective tax rate, our analysis of the effect of the Inflation Reduction Act on us is ongoing and incomplete, and it is possible that the Inflation Reduction Act (or implementing regulations and other guidance, which have not yet been issued) could adversely impact our current and deferred federal tax liability.

The Company does not expect any earnings of foreign subsidiaries to be indefinitely invested outside the United States. As of December 31, 2022, however, the Company does not have any accumulated undistributed earnings generated by foreign subsidiaries and has estimated that its tax basis in foreign subsidiaries exceeds its book basis. The Company has concluded that no deferred tax asset (DTA) should be recorded  because at the present time it cannot conclude that the temporary book-tax basis difference that would create this DTA will reverse in the foreseeable future due to the uncertainties in the timing of the Divestiture described above.