Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

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INCOME TAXES
12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES

 

21. INCOME TAXES

 

The Company is subject to federal and various state income taxes in the U.S. as well as income taxes in various foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations. The Company is no longer subject to U.S. federal tax examinations for years through 2018, nor to corporate tax examination for years through 2018 in the U.K. In addition, the statute of limitations for years through 2016 in Israel has expired.

 

The income tax credit of $0.2 million in the year ended December 31, 2022 is comprised primarily of a $1.0 million claim of U.K. tax credits for 2021 and 2022 under the Research and Development Expenditure Credit (“RDEC”) regime, offset by an income tax charge of $0.3 million mainly incurred in Japan and a tax charge of $0.5 incurred in India due to Indian transfer pricing controls. The income tax credit of $0.7 million in the year ended December 31, 2021 is comprised primarily of a $1.5 million claim of U.K. tax credits for 2020 and 2021 under the Research and Development Expenditure Credit (“RDEC”) regime, offset by an income tax charge of $0.4 million mainly incurred in Japan, a tax charge of $0.3 incurred in India due to Indian transfer pricing controls and a $0.1 million charge related to various foreign jurisdictions.

 

The provision for income taxes consists of the following (in thousands):

 

               
   

Year Ended

December 31,

 
    2022     2021  
Current tax provision:                
Federal   $ -     $ -  
State     -       1  
Foreign     (197 )     (691 )
Total current     (197 )     (690 )
                 
Deferred tax provision:                
Federal     -       -  
State     -       -  
Total deferred     -       -  
Total income tax benefit   $ (197 )   $ (690 )

 

The loss before tax was $85.6 million and $71.2 million which includes $24.0 million and $30.7 million loss before tax attributable to domestic U.S. operations for the years ended December 31, 2022 and 2021, respectively. The Company did not record a material income tax benefit for the tax losses generated in any of the territories in which it operates because it has experienced operating losses since inception.

 

At December 31, 2022, the Company had the following net operating loss (“NOL”) carry-forwards (gross, in thousands):

 

         
Country   NOL
Carryforwards
  Expiry Terms
U.K.   $ 272,875   Does not expire
U.S.     228,737   Expires in up to 15 years
U.S.     29,512   Does not expire
Australia     5,225   Does not expire
Israel     316,367   Does not expire
Finland     105   Expires in up to 6 years
Other     917   Expires in up to 4 years

 

Significant components of the Company’s deferred tax assets are as follows (in thousands):

 

               
    As of
December 31,
 
    2022     2021  
Net operating loss carryforwards   $ 180,491     $ 154,210  
Fixed assets     2,714       2,037  
R&D amortization     7,928       6,613  
Accruals and reserves     17,585       10,813  
R&D and other credits     4,493       4,267  
Share-based compensation     8,143       2,645  
Total deferred tax assets     221,354       180,585  
Intangible assets     (1,049 )     (1,145 )
Total deferred tax liabilities     (1,049 )     (1,145 )
Valuation allowance     (220,305 )     (179,440 )
Total deferred tax assets, net   $ -     $ -  

 

The Company recorded a change in valuation allowance amounting to $40.9 million and $11.8 million for the years ended December 31, 2022 and 2021, respectively.

 

The following is a reconciliation of income taxes, calculated at the effective U.S. federal income tax rate, to the income tax benefit (expense) included in the accompanying consolidated statements of operations for each of the years (in thousands):

 

               
    Years Ended
December 31,
 
    2022     2021  
Expected income tax benefit at U.S. rates   $ 17,971     $ 14,713  
Difference between U.S. rate and rates applicable to subsidiaries in other jurisdictions     315       238
Expenditures not deductible for tax purposes     (118 )     (198 )
Non-deductible officer compensation     -       (1,656 )
Tax rate changes outside the U.S.     17,594       -  
Fair market value changes     1,701       1,590  
Expiry of foreign taxable losses     1,643       (4,493 )
Other     744       599  
Valuation allowance on tax benefits     (40,869 )     (11,817 )
UK R&D tax credits     1,216       1,714  
Income tax benefit   $ 197     $ 690  

 

Utilization of the U.S. net operating loss and research and development credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, and similar state provisions, due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. As of December 31, 2022, the Company has not completed a 2022 Section 382 study to assess whether a change of ownership has occurred in connection with certain of its U.S. net operating losses and credit carryforwards

 

Since the Company’s utilization of these deferred tax assets is dependent on future profits, a valuation allowance equal to the net deferred tax assets has been provided as it is considered more likely than not that such assets will not be realized. The valuation allowance includes a reduction in deferred tax assets through tax rate reductions in non-US jurisdictions. Through December 31, 2022, the Company has historically concluded that a full valuation allowance is required to offset the net deferred tax assets.