XML 37 R15.htm IDEA: XBRL DOCUMENT

Income Taxes

12 Months Ended

Jun. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

For financial reporting purposes, income before income taxes includes the following components:

		Year Ended June 30,
		2019				2018
Pretax income:
United States		$	(4,649,593	)		$	359,027
Foreign			2,424,476				(126,000	)
Income before income taxes		$	(2,225,117	)		$	233,027

The components of the provision for income taxes are as follows:

		Year Ended June 30,
		2019				2018
Current:
Federal tax		$	(9,352	)		$	57,315
State			23,423				-
Foreign			469,135				(117,852	)
Total current			483,206				(60,537	)

Deferred:
Federal tax			21,803				(510,125	)
State			(49,803	)			(72,875	)
Foreign			-				(183,540	)
Total deferred			(28,000	)			(766,540	)

Total income tax (benefit)		$	455,206			$	(827,077	)

The reconciliation of income tax computed at the U.S. federal statutory rates to income tax expense is as follows:

		Year Ended June 30,
		2019				2018

U.S. federal statutory tax rate			21.0	%			27.5	%

Income tax provision reconciliation:
Tax at statutory rate:		$	(467,275	)		$	64,082
Net foreign income subject to lower tax rate			(303,288	)			25,927
State income taxes, net of federal benefit			(26,380	)			(107,997	)
Valuation allowance			652,262				(11,763,000	)
Changes in statutory income tax rates			-				9,114,886
IRC 965 repatriation			202,026				1,809,603
GILTI			251,869				-
Federal research and development and other credits			(84,440	)			(163,165	)
Stock-based compensation			3,034				43,818
Change in fair value of derivative warrants			-				53,524
Other permanent differences			74,099				30,758
Other, net			153,299				64,487
		$	455,206			$	(827,077	)

Tax Cuts and Jobs Act

In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “TCJA”), which changes existing U.S. tax law and includes various provisions that are expected to affect companies. Among other things, the TCJA: (i) changes U.S. corporate tax rates, (ii) generally reduces a company’s ability to utilize accumulated net operating losses, and (iii) requires the calculation of a one-time transition tax on certain foreign earnings and profits (“foreign E&P”) that had not been previously repatriated.

As of June 30, 2018, the Company had not fully completed our accounting for the income tax impact of enactment of the TCJA. In accordance with SEC Staff Accounting Bulletin No.118, the Company recognized provisional amounts for income tax effects of the TCJA that it was able to reasonably estimate.

Implementation of the TCJA required the Company to calculate a one-time transition tax on certain foreign E&P that had not been previously repatriated. During fiscal 2018, the Company provisionally determined its foreign E&P inclusion, and anticipated that it would not owe any one-time transition tax due to utilization of U.S. net operating loss (“NOL”) carryforward benefits against these earnings. During fiscal 2019, the Company completed its analysis of the TCJA, and although the Company did not owe any one-time transition tax, the deferred tax asset related to its NOL carryforwards was impacted by approximately $202,000. This amount is offset by a valuation allowance for a net impact of zero to its provision for income taxes for the year ended June 30, 2019.

Income Tax Law of the People’s Republic of China

The Company’s Chinese subsidiaries, LPOI and LPOIZ, are governed by the Income Tax Law of the People’s Republic of China concerning the privately run and foreign invested enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. During the three months ended December 31, 2017, the statutory tax rate applicable to LPOIZ was lowered from 25% to 15% in accordance with an incentive program for technology companies. The lower rate applies to LPOIZ’s 2017 tax year, beginning January 1, 2017. Accordingly, the Company recorded a tax benefit of approximately $100,000 during the year ended June 30, 2018 related to this retroactive rate change. For the fiscal year ended June 30, 2019, income taxes were accrued at the applicable rates. No deferred tax provision has been recorded for China, as the effect is deemed de minimis.

The Company currently intends to permanently invest earnings generated from its foreign Chinese operations and, therefore, has not previously provided for future Chinese withholding taxes on such related earnings. However, if in the future, the Company changes such intention, the Company would provide for and pay additional foreign taxes, if any, at that time.

Law of Corporate Income Tax of Latvia

The Company’s Latvian subsidiary, ISP Latvia, is governed by the Law of Corporate Income Tax of Latvia. Until December 31, 2017, ISP Latvia was subject to a statutory income tax rate of 15%. Effective January 1, 2018, the Republic of Latvia enacted tax reform with the following key provisions: (i) corporations are no longer subject to income tax, but are instead subject to a distribution tax on distributed profits (or deemed distributions, as defined), and (ii) the tax rate was changed to 20%; however, distribution amounts are first divided by 0.8 to arrive at the taxable amount of profit, resulting in an effective tax rate of 25%. As a transitional measure, distributions made from earnings prior to January 1, 2018, distributed prior to December 31, 2019, are not subject to tax. As such, any distributions of profits from ISP Latvia to ISP, its U.S. parent company, will be from earnings prior to January 1, 2018 and, therefore, will not be subject to tax. The Company currently does not intend to distribute any current earnings generated after January 1, 2018. If, in the future, the Company changes such intention, distribution taxes, if any, will be accrued as profits are generated. With this change, the concept of taxable income and tax basis in assets and liabilities was eliminated and is no longer relevant for determining income taxes; therefore, the previously recorded net deferred tax liability related to ISP Latvia was adjusted to zero during the fiscal year ended June 30, 2018, resulting in a tax benefit of approximately $184,000.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows at June 30:

		2019				2018
Deferred tax assets:
Net operating loss and credit carryforwards		$	16,044,000			$	16,282,000
Stock-based compensation			822,000				710,000
R&D and other credits			2,014,000				1,899,000
Capitalized R&D expenses			476,000				373,000
Inventory			156,000				143,000
Accrued expenses and other			111,000				83,000
Gross deferred tax assets			19,623,000				19,490,000
Valuation allowance for deferred tax assets			(16,725,000	)			(16,123,000	)
Total deferred tax assets			2,898,000				3,367,000
Deferred tax liabilities:
Depreciation and other			(277,000	)			(563,000	)
Intangible assets			(1,969,000	)			(2,180,000	)
Total deferred tax liabilities			(2,246,000	)			(2,743,000	)
Net deferred tax asset		$	652,000			$	624,000

As of June 30, 2019, the Company has also recorded a non-current income tax receivable of $214,000 related to previously paid alternative minimum tax that is expected to be recovered within the next five years pursuant to certain provisions of the TCJA.

In assessing the potential future recognition of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of approximately $74 million prior to the expiration of NOL carry-forwards from 2020 through 2035. Based on the level of historical taxable income, management has provided for a valuation adjustment against the deferred tax assets of $16,725,000 at June 30, 2019, an increase of approximately $602,000 as compared to June 30, 2018. The increase in the valuation allowance for deferred tax assets as compared to the prior year is primarily the result of the various movements in the current year deferred items. The net deferred tax asset of $652,000 results from federal and state tax credits with indefinite carryover periods, and approximately $510,000 in federal NOL carryforwards that management expects to utilize in a future period. State income tax expense disclosed on the effective tax rate reconciliation above includes state deferred taxes that are offset by a full valuation allowance.

At June 30, 2019, in addition to net operating loss carry forwards, the Company also has research and development credit carry forwards of approximately $2,014,000, which will expire from 2022 through 2039. A portion of the NOL carry forwards may be subject to certain limitations of the Internal Revenue Code Sections 382 and 383, which would restrict the annual utilization in future periods due principally to changes in ownership in prior periods.