Income Taxes

12 Months Ended

Dec. 31, 2020

16. INCOME TAXES

The tax provision includes estimated federal, state and foreign income taxes on the Company’s

pre-tax

income. The tax provisions also may include discrete items, generally related to increases or decreases in tax reserves, tax provision vs. tax return differences and accrued interest for potential liabilities.

The reconciliation of the federal statutory rate on the income (loss) before income taxes to the effective income tax rate for the years ended December 31 is as follows:


	2020			2019			2018
Statutory federal tax rate		21.0	%		21.0	%		21.0	%
State income taxes, net of federal income tax benefit		(0.5	)		(8.1	)		3.6
Increase (decrease) in valuation allowance		41.2			2.2			(9.1	)
Permanent items		(48.7	)		(3.9	)		(5.9	)
Tax credits		(11.2	)		(15.6	)		(5.5	)
Provision vs. tax return differences		0.7			9.0			(1.7	)
Foreign rate differential and deferred items		0.1			0.6			0.7
Change in tax reserves		—			—			0.1
Other		0.3			—			0.1

		2.9%			5.2%			3.3%

In 2020, the Company was in a taxable loss position which generated a net operating loss carryforward, primarily due to tax deductions on 2020 exercises of stock-based compensation of approximately $49,500,000.

In 2019, the Company utilized net operating loss carryforwards and tax credits to offset federal income tax expense.

In 2018, the Company utilized net operating loss carryforwards to offset federal income tax expense.

For financial reporting purposes, income before income taxes for the years ended December 31 include the following components (in thousands):


	2020		2019		2018
Domestic	$	17,688	$	13,493	$	31,455
Foreign		773		1,394		1,478

	$	18,461	$	14,887	$	32,933

Significant components of the provision (benefit) for income taxes for the years ended December 31 are as follows (in thousands):


	2020			2019		2018
Current:
Federal	$	215		$	—	$	—
State		93			268		231
Foreign		252			450		911

		560			718		1,142
Deferred:
Foreign		(21	)		60		(55	)

		(21	)		60		(55	)

	$	539		$	778	$	1,087

The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) eliminated the deferral of U.S. income tax on accumulated foreign earnings by imposing a

one-time

mandatory transition tax on such earnings. As a result, a provisional amount of approximately $122,000 was recorded in 2017 as additional tax expense related to approximately $813,000 of untaxed accumulated unremitted foreign earnings. As noted above, the additional tax of $122,000 was fully offset by existing net operating losses in the U.S. Effective for the Company’s 2018 tax year, foreign earnings were taxed in the U.S. under GILTI and FDII provisions of the Tax Act. As of December 31, 2020 and 2019, unremitted foreign earnings, which were not significant, were permanently

re-invested

in the Company’s foreign subsidiaries. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company could be subject to immaterial withholding taxes payable to the various foreign countries.

Significant components of the Company’s deferred tax assets and liabilities as of December 31 were as follows (in thousands):


	2020			2019
Deferred tax assets:
Research and development tax credit carryforwards	$	29,046		$	27,607
Net operating loss carryforwards		5,923			328
Inventory reserves		2,282			1,522
Investment tax credit carryforwards		1,927			2,102
Stock-based compensation		1,796			1,587
Vacation accrual		1,349			1,280
UNICAP		1,336			351
Accrued payroll tax deferral		764			—
Lease liabilities		518			679
Other		1,197			1,708

Total deferred tax assets		46,138			37,164
Less: Valuation allowance for deferred tax assets		(37,856	)		(30,363	)

Net deferred tax assets		8,282			6,801
Deferred tax liabilities:
Depreciation		(6,809	)		(5,296	)
Prepaid expenses		(616	)		(552	)
ROU assets		(490	)		(653	)
Other		(141	)		(95	)

Total deferred tax liabilities		(8,056	)		(6,596	)

Net deferred tax assets (liabilities)	$	226		$	205

As of December 31, 2020, the Company has a valuation allowance of ap

proximately $37,856,000

against all net domestic deferred tax assets, for which realization cannot be considered more likely than not at this time. Management assesses the need for the valuation allowance on a quarterly basis. In assessing the need for a valuation allowance, the Company considers all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance. While recent positive operating results, as a result of increases in bookings, caused the Company to be in a cumulative income position as of December 31, 2020, the Company faces uncertainties in forecasting its operating results due to the continued impact of the COVID-19 pandemic on the Company’s supply chain, certain process issues with the production of Advanced Products and the unpredictability in certain markets. This operating uncertainty also makes it difficult to predict the availability and utilization of tax benefits over the next

several years. As a result, management has concluded, at this time, is more likely than not the Company’s net domestic deferred tax assets will not be realized, and a full valuation allowance against all net domestic deferred tax assets is still warranted as of December 31, 2020. The valuation allowance against these deferred tax assets may require adjustment in the future based on changes in the mix of temporary differences, changes in tax laws, and operating performance. If the positive quarterly earnings and increases in bookings continue, and the Company’s concerns about industry uncertainty and world events, including the impact of the

COVID-19

pandemic on the Company’s supply chain, and process issues with the production of Advanced Products are resolved, and the amount of tax benefits the Company is able to utilize to the point that the Company believes future taxable income can be more reliably forecasted, the Company may release all or a portion of the valuation allowance in the near-term. Certain state tax credits, though, will likely never be released by the valuation allowance. If and when the Company determines the valuation allowance should be released (i.e., reduced), the adjustment would result in a tax benefit reported in that period’s Consolidated Statements of Operations, the effect of which would be an increase in reported net income.

The state and federal research and development tax credit carryforwards of approximately $11,344,000 and $19,423,000, respectively, expire beginning in 2020 for state purposes and in 2025 for federal purposes. The Company has federal net operating loss carryforwards generated after 2017 of approximately $24,990,000, which have an indefinite carryforward period and certain state operating loss carryforwards of approximately $10,241,000, which expire beginning in 2024.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


	2020			2019			2018
Balance on January 1	$	2,070		$	1,462		$	1,104
Additions based on tax positions related to the current year		244			571			245
(Reductions) additions for tax positions of prior years		(13	)		43			120
Lapse of statute		(4	)		(6	)		(7	)

Balance on December 31	$	2,297		$	2,070		$	1,462

The Company has reviewed the tax positions taken, or to be taken, in its tax returns for all tax years currently open to examination by a taxing authority. The total amount of unrecognized tax benefits, that is the aggregate tax effect of differences between tax return positions and the benefits recognized in the Company’s financial statements, as of December 31, 2020, 2019, and 2018 of $2,297,000, $2,070,000, and $1,462,000, respectively, if recognized, may decrease the Company’s income tax provision and effective tax rate. None of the unrecognized tax benefits as of December 31, 2020, are expected to significantly change during the next twelve months.

The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. During the years ended December 31, 2020, 2019, and 2018, the Company recognized approximately $17,000, $7,000, and $7,000, respectively, in net interest expense. As of December 31, 2020 and 2019, the Company had accrued approximately $58,000 and $41,000, respectively, for the potential payment of interest.

The Company files income tax returns in the United States and various foreign tax jurisdictions. These tax returns are generally open to examination by the relevant tax authorities from three to seven years from the date they are filed. The tax filings relating to the Company’s federal and state taxes are currently open to examination for tax years 2017 through 2019 and 2011 through 2019, respectively. In addition, the Company generated

federal research and development credits in tax years 2005 through 2015. These years may also be subject to examination when the credits are carried forward and utilized in future years.

There are no income tax examinations or audits currently in process.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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