Income Taxes

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

Income Taxes

12 — INCOME TAXES

The provision (benefit) for income taxes consists of the following:

	December 31,
	2018			2017
Current tax provision (benefit)
Federal	$	—		$	—
State		6,000			—
		6,000			—
Deferred tax provision (benefit)
Federal		(3,567,000	)		21,269,000
State		(1,720,000	)		(1,994,000	)
Foreign		(127,000	)		(885,000	)
Change in valuation allowance		5,414,000			(18,390,000	)
Income tax provision (benefit)	$	6,000		$	—

A reconciliation of the statutory tax rate to the effective tax rate is as follows:

	December 31,
	2018			2017
Statutory Federal income tax rate		21.00	%		34.00	%
State and local taxes, net of Federal benefit		10.93			13.96
Permanent differences		4.35			(2.74	)
Provision to return		1.40			1.21
IMT opening balance		(—	)		(—	)
Bargain purchase gain		(—	)		36.65
Vislink opening balance		(—	)		(36.65	)
Invested earnings of foreign subsidiary		(0.14	)		(8.30	)
Change in federal and state statutory rate		(0.80	)		(212.41	)
Valuation allowance		(36.78	)		174.28
Effective tax rate		(0.04	)%		(—	)%

Under the provisions of ASC 740, the Company may recognize the benefits of uncertain tax positions when it is more likely than not that the merits of the position(s) will be sustained upon audit by the relevant tax authorities. There were no uncertain tax positions taken or expected to be taken on a tax return that would be determined to be an unrecognized tax benefit recorded on the Company’s financial statements for the years ended December 31, 2018 or 2017. The Company does not expect its unrecognized tax benefit position to change during the next twelve months.

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial accounting purposes and the amounts used for income tax reporting. Significant components of the Company’s deferred tax assets are as follows:

	December 31,
	2018			2017
Deferred Tax Assets
Federal R&D credit	$	2,819,000		$	2,819,000
Inventory		78,000			836,000
Allowance for bad debt		32,000			102,000
Compensation Related		3,000			120,000
Pension		6,000			33,000
Other Accruals		305,000			88,000
State Net operating losses		8,532,000			6,909,000
Federal Net operating losses		36,079,000			33,657,000
Property & Equipment		12,000			119,000
Stock Options		6,214,000			5,240,000
Other		834,000			623,000
Valuation Allowance		(53,573,000	)		(48,159,000	)
Total Deferred Tax Assets		1,341,000			2,387,000
Deferred Tax Liabilities
Property and Equipment		(215,000	)		(197,000	)
Intangibles		(1,080,000	)		(1,567,000	)
Inventory		—			(623,000	)
Prepaid Expenses		(24,000	)		—
Compensation Related		(22,000	)		—
Total Deferred Tax Liabilities		(1,341,000	)		(2,387,000	)
Net Deferred Tax Asset/(Liability)	$	—		$	—

As of December 31, 2018, the Company has federal net operating losses (“NOL”) of approximately $156.9 million that will expire beginning in 2027. The Company has federal NOLs of approximately $10.4 million that may be carried forward indefinitely. The Company also has state NOL carryforwards of $152.7 million which will expire beginning in 2027. In addition, the Company has foreign NOL carryforwards of approximately $5.5 million that generally do not expire except under certain circumstances. The Company also has research and development credits of approximately $2.8 million which will begin to expire in 2027. The years that remain open for review by taxing authorities are 2015 to 2018 for Federal, Foreign and State Income Tax returns.

Realization of the NOL carryforwards and other deferred tax temporary differences is contingent on future taxable earnings. The Company’s deferred tax assets were reviewed for expected utilization using a “more likely than not” approach by assessing the available positive and negative evidence surrounding its recoverability. Accordingly, a valuation allowance has been recorded against the Company’s deferred tax assets, as it was determined based upon past and present losses that it was “more likely than not” that the Company’s deferred tax assets would not be realized. The valuation allowance was increased to the full carrying amount of the Company’s deferred tax assets. In future years, if the deferred tax assets are determined by management to be “more likely than not” to be realized, the recognized tax benefits relating to the reversal of the valuation allowance will be recorded. The Company will continue to assess and evaluate strategies that will enable the deferred tax asset, or portion thereof, to be utilized, and will reduce the valuation allowance appropriately as such time when it is determined that the “more likely than not” criteria is satisfied.

The net operating loss carryovers may be subject to annual limitations under Internal Revenue Code Section 382, and similar state provisions, should there be a greater than 50% ownership change as determined under the applicable income tax regulations. The amount of the limitation would be determined based on the value of the Company immediately prior to the ownership change and subsequent ownership changes could further impact the amount of the annual limitation. An ownership change pursuant to Section 382 may have occurred in the past or could happen in the future, such that the NOLs available for utilization could be significantly limited. The Company plans to perform a Section 382 analysis in the future.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into U.S. law. The Tax Act permanently reduces the U.S. statutory tax rate for corporations from 35% to 21% effective for tax years beginning after December 31, 2017, which affected the determination of deferred tax assets and liabilities as of December 31, 2017. The lower tax rate meant that the future tax benefits and expenses of the Company’s existing deferred tax assets and liabilities were revalued, as the tax benefits and expenses attributable to these assets and liabilities would be realized at a lower rate. The Company’s remeasurement of its U.S. deferred tax and liabilities based on the change in tax rate resulted in a tax expense of approximately $22.4 million, which has been fully offset by a corresponding remeasurement of the valuation allowance provided on the associated deferred tax assets and liabilities.

Effective for tax years beginning after December 31, 2017, the Tax Act includes a participation exemption system of taxation, which generally provides for 100% dividends received deduction on certain qualifying dividend distributions received by U.S. C-corporation shareholders from their 10% or more owned foreign subsidiaries. As a result of this new participation exemption system, it is generally anticipated that the Company should not be subject to additional U.S. federal income taxation on its future receipt of actual dividend income (as opposed to a deemed inclusion amounts under certain anti-deferral rules) from its foreign subsidiary.

In implementing a prospective participation exemption system, the Tax Act also imposed a one-time transition tax on a U.S. shareholder’s share of certain post-1986 earnings and profits of held specified foreign corporations where such earnings had not previously been subject to U.S. taxation (the “repatriation tax”). The net inclusion amounts attributable to a given specified foreign corporation is deemed distributed at the close of that specified foreign corporation’s last taxable year beginning before January 1, 2018. One of the Company’s subsidiaries is in the United Kingdom. However, the subsidiary’s operations generated an earnings and profits deficit. Accordingly, the Company did not incur a 2017 tax liability associated with a net inclusion amount and did not include a provision for the repatriation tax.

For tax years beginning after December 31, 2017, the Tax Act provides for an additional tax on U.S. shareholders on foreign earnings of foreign subsidiaries denoted as global intangible low-taxed income (“GILTI”) whereby certain income earned by our foreign subsidiaries may be subject to U.S. taxation. Due to yearly variations in the factors giving rise to the income and related tax, the Company is unable to reasonably estimate the future impact of GILTI and any potential effect on the tax rate used to measure deferred tax assets and liabilities. Accordingly, the Company accounts for the tax in the year (if any) in which it is incurred. For the year ended December 31, 2018, the Company’s foreign subsidiary did not generate foreign earnings that would subject the Company to U.S. tax for GILTI.

For tax years beginning after December 31, 2017, the Tax Act allows a foreign-derived intangible income deduction (“FDII”) which effectively taxes some foreign-derived income at a reduced rate. Due to yearly variations in income that might qualify for the deduction, the Company is unable to reasonably estimate a potential deduction’s effect on the tax rate used to measure deferred tax assets and liabilities as of December 31, 2017. The Company will account for this special deduction in the year (if any) in which the deduction is claimed.

For tax years beginning after December 31, 2017, the Tax Act introduced a new limitation on the deduction of interest expense whereby current year interest deductions are limited (among other limitations) to 30% of adjusted taxable income, with various modifications and exceptions. The Company does incur interest expense, and evaluates each year the impact, if any, of the new limitation.

The Company has not provided for deferred taxes and foreign withholding taxes on the excess of the financial reporting basis over the tax basis in our investments in foreign subsidiaries that are essentially permanent in duration. In general, it is the Company’s practice and intention to reinvest the earnings of our foreign subsidiary in those operations. Generally, the earnings of our foreign subsidiary have become subject to U.S. taxation based on certain provisions in U.S. tax law such as the recently enacted territorial transition tax under section 965 and under certain other circumstances. Due to the complexities of the provisions introduced with the Tax Act, and the underlying assumptions that would have to be made, it is not practicable to estimate the amount of tax provision required to account for these foreign undistributed earnings. The Company will account for any additional expense or deduction in the year it is claimed. The Company will continue to review each year whether this treatment is appropriate.

The Company is currently not subject to any income tax examinations that would be material to the Company’s financial position or results of operations.