Note 7.

INCOME TAXES

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. The Company and its subsidiaries are generally no longer subject to U.S. federal, state and local examinations by tax authorities for years before 2012.

As of September 30, 2016, the Company had deferred tax assets, net of deferred tax liabilities, of $83.2 million subject to a valuation allowance of $83.4 million. As of December 31, 2015, the Company had deferred tax assets, net of deferred tax liabilities, of $80.1 million subject to a valuation allowance of $80.2 million. Domestic net operating loss (“NOL”) carry forwards comprised $67.5 million and $64.4 million of the deferred tax assets as of September 30, 2016 and December 31, 2015, respectively. Katy’s history of operating losses in many of its taxing jurisdictions provides significant negative evidence with respect to the Company’s ability to generate future taxable income. The valuation allowance relates to federal, state and foreign net operating loss carry-forwards, foreign and domestic tax credits, and certain other deferred tax assets to the extent they exceed deferred tax liabilities.

On August 11, 2016, the VPC SBIC Fund acquired shares of the Company’s convertible preferred stock representing 70.3% of the Company’s outstanding common stock on an as-converted basis (see Note 12). As a result, the Company’s ability to utilize net operating losses and other tax attributes is subject to a limitation imposed by Internal Revenue Code Section 382.