Income Taxes

12 Months Ended

Dec. 31, 2019

The Company is subject to U.S. federal income tax and files a consolidated federal income tax return which includes all eligible U.S. subsidiary companies. The Company is also subject to tax in the states of Alabama, Illinois, Montana, New Jersey and

Tennessee. The Company conducts significant operations in certain foreign countries and is, accordingly, subject to tax in those foreign jurisdictions consisting of Canada (including the province of Ontario), Estonia, Luxembourg and Jersey.

Loss before income tax for the years ended December 31, 2019 and 2018 consisted of the following (in thousands):


	2019		2018
U.S. operations	$	(20,212)	$	(32,183)
Foreign operations	(4,821)		(4,135)

Global Total	$	(25,033)	$	(36,318)

The Company’s current tax expense (benefit) was $0.1 million and $(0.1) million for the years ended December 31, 2019 and 2018, respectively. The provision (credit) for income taxes attributable to continuing operations before income taxes for the years ended December 31, 2019 and 2018 is as follows (in thousands):


	2019		2018
Current tax expense (benefit):
Federal	$	—	$	—
State and local	23		30
Foreign	87		(157)
Total current tax expense (benefit)	110		(127)
Deferred tax expense:
Federal	—		—
State and local	—		—
Foreign	(19)		65
Total deferred tax (benefit) expense	(19)		65

Total income tax expense (benefit)	$	91	$	(62)

A comparison of income tax (benefit) expense at the U.S. statutory rate of 21% in 2019 and 2018 to the Company's effective rate is as follows (in thousands):


	2019		2018
Expected Statutory benefit	$	(5,257)	$	(7,627)


Other non-deductible expenses	133		256
Change in valuation allowance	4,674		6,572
Research credits	(504)		—

Tax rate differential - foreign vs. U.S.	1,073		791
State income taxes, net of federal benefit	18		23

Prior year true-up	(45)		(93)
Exchange gain	(1)		16
	$	91	$	(62)

During the fourth quarter of 2018, the Company completed its full assessment and finalized the accounting for the impact of the United States Tax Cuts and Jobs Act (U.S. TCJA) and concluded that there was no additional impact.

Deferred tax balances included in the Consolidated Balance Sheets as of December 31, 2019 and 2018 consisted of the following (in thousands):


	2019		2018
Deferred Tax Assets:
Sales allowances and doubtful accounts	$	2,991	$	1,964
Inventory reserve	652		962
Deferred revenue	—		590
Accrued expenses	206		23
Property, plant and equipment	272		258
Tax operating loss carryforwards	10,851		9,951
Tax credit and other carryforwards	5,996		1,299
Stock compensation	566		538
Total deferred tax assets	21,534		15,585
Less valuation allowance	(18,562)		(12,120)
Net deferred tax assets	2,972		3,465

Deferred Tax Liabilities:
Convertible debt conversion features	(3,070)		(3,514)
Foreign exchange	(14)		(28)
Intangible assets	(93)		(138)
Total deferred tax liabilities	(3,177)		(3,680)
Net deferred tax liability	$	(205)	$	(215)

The Company evaluates the recoverability of its deferred tax assets based on its history of operating results, its expectations for the future, and the expiration dates of the net operating loss carry forwards. Based on the preponderance of the evidence, the Company has concluded that it is more likely than not that it will be unable to realize the net deferred tax assets in the immediate future and has established a full valuation allowance for substantially all deferred tax assets. Accordingly, the Company has provided a valuation allowance of $18.6 million and $12.1 million for the years ended December 31, 2019 and 2018, respectively, on its deferred tax assets. The valuation allowance increased $6.5 million during 2019. This increase was due to $5.6 million related to changes in deferred taxes and $0.9 million related to the 2019 net operating loss.

Operating loss, tax credit and other carry forwards as of December 31, 2019 and 2018 were as follows (in thousands):


	2019		2018
Federal:
Net operating losses (see below)	$	48,531	$	45,081
Disallowed interest expense (no expiration)	17,783		5,018
Contributions (expiring through 2024)	658		524
Research tax credits (expiring through 2026)	1342		135

State:
New Jersey (expiring in 2039)	4,942		2,976
Other states (expiring through 2039)	3,266		2,307
New Jersey research credits (expiring in 2026)	764		—

Foreign
Net operating losses (no expiration)	$	—	$	257

At December 31, 2019, the Company’s U.S. federal net operating loss carryforwards will expire as follows (in thousands):


Year	Net Operating Loss
2020 - 2023	$	8,227
2024 - 2029	9,063
2030 - 2032	9,926
2033 - 2036	6,296
2037	8,116
No expiration but subject to limitation	6,903
Total	$	48,531

Federal net operating losses arising during and after 2018 are not subject to expiration; however, their usage is limited to 80% of taxable income during the year of use.

The Company’s ability to use net operating loss carry forwards is subject to substantial limitation in future periods under certain provisions of Section 382 of the Internal Revenue Code of 1986, as amended, which limit the utilization of net operating losses upon a more than 50% change in ownership of the Company’s stock that is held by 5% or greater stockholders. The Company examined the application of Section 382 with respect to an ownership change that took place during 2010, as well as the limitation on the application of net operating loss carry forwards. The Company believes that operating losses subsequent to the change date in 2010 (aggregating $26.5 million) are not subject to Section 382 limitations. The Company has estimated that the annual limitation starting in 2010 aggregates from $1.0 million to $2.3 million per year including the effect of amortization of built in gains. The Company's loss carryforwards may be further limited in the future if additional ownership changes occur.

The Company is subject to the provisions of ASC 740-10-25, Income Taxes (ASC 740). ASC 740 prescribes a more likely-than-not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions.

Federal income tax returns for the years 2014 and 2015 have been examined by the U.S. Internal Revenue Service without any income tax expense consequences. For federal purposes (except for the years 2014 and 2015), post 1998 tax years remain open to examination as a result of net operating loss carryforwards. The Company is currently open to audit by the appropriate state income taxing authorities for tax years 2014 through 2018. The Company has not recorded any liability for uncertain tax positions at December 31, 2019 or December 31, 2018.