Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.21.1
Income Taxes
12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The domestic and foreign components of loss before income taxes for the years ended December 31, 2020 and 2019 are as follows (in thousands):
For the Years Ended December 31,
2020 2019
Domestic $ (24,387) $ (32,116)
Foreign (4,883) (2,450)
Loss from Continuing Operations before Provision for Income Taxes $ (29,270) $ (34,566)
The income tax benefit for the years ended December 31, 2020 and 2019 consists of the following (in thousands):
For the Years Ended December 31,
2020 2019
Foreign
Current $ 31  $ — 
Deferred (1,815) (844)
U.S. federal —  — 
Current —  — 
Deferred (5,367) (5,177)
State and local —  — 
Current — 
Deferred (1,181) (898)
(8,329) (6,919)
Change in valuation allowance 8,273  6,335 
Income Tax Benefit $ (56) $ (584)
The reconciliation between the U.S. statutory federal income tax rate and the Company’s effective rate for the years ended December 31, 2020 and 2019 is as follows:
For the Years Ended December 31,
2020 2019
U.S. federal statutory rate 21.0  % 21.0  %
State income taxes, net of federal benefit 3.2  % 2.0  %
Incentive stock options (0.4) % (0.7) %
US-Foreign income tax rate difference 1.0  % 0.4  %
Other permanent items —  % 0.1  %
Provision to return adjustments (0.8) % —  %
Deferred only adjustment 4.5  % (2.7) %
Change in valuation allowance (28.3) % (18.3) %
Effective Rate 0.2  % 1.8  %
As of December 31, 2020 and 2019, the Company’s deferred tax assets consisted of the effects of temporary differences attributable to the following:
As of December 31,
(in 000s) 2020 2019
Deferred Tax Asset
Net operating loss carryovers $ 30,731  $ 8,918 
Stock based compensation 1,253  1,114 
Research credits 138  135 
Accrued compensation 86  36 
Reserves 151  242 
Intangibles 7,411  2,361 
Fixed assets 471  39 
Other 3,349  3,046 
Total Deferred Tax Asset 43,590  15,891 
Less: valuation allowance (38,287) (13,902)
Deferred Tax Asset, Net of Valuation Allowance $ 5,303  $ 1,989 
As of December 31,
Deferred Tax Liabilities 2020 2019
Intangible assets $ (4,362) $ (1,671)
Fixed assets (135) — 
Other (440) (53)
Capitalized research (366) (352)
Total deferred tax liabilities (5,303) (2,076)
Net Deferred Tax Asset (Liability) $ —  $ (87)

The transition tax is based on total post-1986 earnings and profits which were previously deferred from U.S. income taxes. At December 31, 2020, the Company did not have any undistributed earnings of our foreign subsidiaries. As a result, no additional income or withholding taxes have been provided for. The Company does not anticipate any impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT) and as such, the Company has not recorded any impact associated with either GILTI or BEAT. 

In accordance with Section 382 of the Internal Revenue Code, deductibility of the Company’s NOL carryover is subject to an annual limitation in the event of a change of control, as defined by the regulations. The Company performed an analysis to determine the annual limitation as a result of the changes in ownership that occurred during 2019 and 2020. Based on the Company’s analysis, the NOL available to offset future taxable income after these ownership changes was approximately $16.3 million and $35.2 million, respectively. The NOLs generated in 2017, $1.5 million, will expire beginning in December 31, 2037 if not utilized. The remaining NOLs were generated after 2017 have an indefinite life and do not expire.
As of December 31, 2020 and 2019, Inpixon Canada, which was acquired on April 18, 2014 as part of the AirPatrol Merger Agreement, had approximately $16.8 million and $12.0 million, respectively, of Canadian NOL carryovers available to offset future taxable income. These NOLs, if not utilized, begin expiring in the year 2023. The NOLs as of December 31, 2020 include Jibestream, which was acquired on August 15, 2019 and amalgamated with Inpixon Canada effective January 1, 2020.
As of December 31, 2020, Nanotron GmbH, which was acquired on October 5, 2020, had approximately $53.1 million German NOL carryovers available to offset future taxable income. Although these NOLs do not expire, minimum taxation restrictions apply such that only a percentage of taxable income may be offset by NOL carryovers.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realization 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 temporary differences representing net future deductible amounts become deductible.
ASC 740, “Income Taxes” requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. After consideration of all the information available, management believes that uncertainty exists with respect to future realization of its deferred tax assets with respect to Inpixon, Inpixon Canada and Nanotron GmbH and has, therefore, established a full valuation allowance as of December 31, 2020 and 2019. As of December 31, 2020 and 2019, the change in valuation allowance was $9.1 million and $6.3 million, respectively.
ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company is required to file income tax returns in the United States (federal), Canada, India, Germany, United Kingdom and in various state jurisdictions in the United States. Based on the Company’s evaluation, it has been concluded that there are no material uncertain tax positions requiring recognition in the Company’s consolidated financial statements for the years ended December 31, 2020 and 2019.
The Company’s policy for recording interest and penalties associated with unrecognized tax benefits is to record such interest and penalties as interest expense and as a component of selling, general and administrative expense, respectively. There were no amounts accrued for interest or penalties for the years ended December 31, 2020 and 2019. Management does not expect any material changes in its unrecognized tax benefits in the next year.
The Company operates in multiple tax jurisdictions and, in the normal course of business, its tax returns are subject to examination by various taxing authorities. Such examinations may result in future assessments by these taxing authorities. The Company is subject to examination by U.S. tax authorities beginning with the year ended December 31, 2016. In general, the Canadian Revenue Authority may reassess taxes four years from the date the original notice of assessment was issued. The tax years that remain open and subject to Canadian reassessment are 2016 – 2020. The tax years that remain open and subject to India reassessment are tax years beginning March 31, 2015. The German tax authorities may reassess taxes four years generally four years from the end of the calendar year in which the return is filed. The tax years that remain open and subject to German reassessment are 2014 – 2020.
On March 27, 2020, the CARES Act was enacted in response to COVID-19 pandemic. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. The CARES Act made various tax law changes including among other things (i) increasing the limitation under Section 163(j) of the Internal Revenue Code of 1986, as amended (the “IRC”) for 2019 and 2020 to permit additional expensing of interest (ii) enacting a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k), (iii) making modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes and (iv) enhancing the recoverability of alternative minimum tax credits. The CARES Act did not have a material impact on the Company.