16. Income Taxes

Deferred income taxes result principally from temporary differences in the recognition of certain revenue and expense items and operating loss and tax credit carryforwards for financial and tax reporting purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2025 and December 31, 2024 are as follows (in thousands):

In determining its income tax provisions, the Company calculated deferred tax assets and liabilities for each separate jurisdiction. The Company then considered a number of factors, including positive and negative evidence related to the realization of its deferred tax assets, to determine whether a valuation allowance should be recognized with respect to its deferred tax assets.

The Company began to capitalize research and development (“R&D”) expenditures in 2022 in accordance with the Tax Cuts and Jobs Act of 2017 (“TCJA”) which requires that R&D expenditures be capitalized and amortized for income tax purposes over five years for domestic research and fifteen years for foreign research, rather than being deducted as incurred. This has the effect of increasing the Company’s cash taxes and deferred tax assets. In 2025 the Company’s deferred tax assets related to capitalized R&D expenditure increased $5.3 million, which also creates an effective tax rate benefit of 1.0% by increasing the Company's Foreign Derived Intangible Income deduction.

In 2025, the Company recorded an additional $4.6 million of valuation allowance. In 2024, the Company recorded an additional $1.9 million of valuation allowance.

As of December 31, 2025, the Company had valuation allowances on Canada net operating and capital loss carryforwards, U.K. capital loss carryforwards, certain U.S. state net operating losses, and state and foreign tax credits where the Company has determined that it is not more likely than not the future benefit would be realized. In conjunction with the Company’s ongoing review of its actual results and anticipated future earnings, the Company continuously reassesses the possibility of releasing the valuation allowance currently in place on its deferred tax assets.

As of December 31, 2025, the Company had net operating loss carry forwards of $7.6 million (tax effected). Of this amount, approximately $7.1 million relates to Canada and begins to expire starting in 2033 and had a full valuation allowance. The remainder $0.5 million relates to various U.S. jurisdictions, which will begin to expire in 2026 through 2045. In addition, the Company had capital loss carryforwards of $5.9 million, which can be carried forward indefinitely and had a full valuation allowance. Of this amount, $4.9 million, and $1.0 million related to Canada, and the U.K., respectively.

As of December 31, 2024, the Company had net operating loss carry forwards of $6.8 million (tax effected). Of this amount, approximately $6.5 million relates to Canada and begins to expire starting in 2033 and had a full valuation allowance. The remainder $0.3 million relates to various U.S. jurisdictions, of which $0.1 million can be carried forward indefinitely and the remaining $0.2 million will begin to expire in 2025 through 2036, on which the Company records a valuation allowance of $0.1 million. In addition, the Company had capital loss carryforwards of $5.8 million, which can be carried forward indefinitely and had a full valuation allowance. Of this amount, $4.9 million, $0.8 million and $0.1 million relates to Canada, the U.K and other foreign jurisdictions, respectively.

As of December 31, 2025, the Company had tax credit carryforwards of approximately $5.8 million, before accounting for $1.0 million of uncertain tax positions recorded against the credit carryforward. Approximately $1.5 million relate to U.S. Federal credits which will expire in 2045, and $2.7 million relate to U.S. state credits and will expire through 2046, and on which the Company maintains a full valuation allowance. $0.5 million relates to the U.S. Federal foreign tax credits which will expire through 2034, and on which the Company maintains a full valuation allowance. Approximately $0.4 million relate to other foreign jurisdictions. The remaining $0.7 million tax credit carryforwards were related to Canada and can be carried forward indefinitely. The Canadian credit carryforwards also have a full valuation allowance recorded against them.

As of December 31, 2024, the Company had tax credit carryforwards of approximately $3.8 million, before accounting for $0.6 million of uncertain tax positions recorded against the credit carryforward. Approximately $2.6 million relates to U.S. state credits and will expire through 2039, and on which the Company maintains a full valuation allowance, $0.5 million relates to the U.S. federal foreign tax credits which will expire through 2034. The remaining $0.7 million relates to Canada and can be carried forward indefinitely. The U.S. federal and Canadian tax credit carryforwards also have a full valuation allowance recorded against them.

As of December 31, 2025, the Company had disallowed business interest expense carryforwards of $0.1 million under Section 163(j) of the Internal Revenue Code. These carryforwards have no expiration date and can be utilized indefinitely to offset future taxable income, subject to the limitations of Section 163(j).

As of December 31, 2024, the Company had disallowed business interest expense carryforwards of $1.5 million under Section 163(j) of the Internal Revenue Code. These carryforwards have no expiration date and can be utilized indefinitely to offset future taxable income, subject to the limitations of Section 163(j).

Income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting purposes over the tax basis of investments in foreign subsidiaries that are essentially permanent in nature. This amount becomes taxable upon the repatriation of assets from a subsidiary or a sale or liquidation of a subsidiary. The estimated unrecognized income tax and foreign withholding tax liability on these undistributed earnings is approximately $5.4 million.

As of December 31, 2025, the Company’s total amount of gross unrecognized tax benefits was $4.4 million of which $3.7 million would favorably affect the effective tax rate if benefited. The Company believes there are no jurisdictions in which the outcome of unresolved issues or claims is likely to be material to its results of operations, financial position or cash flows. Furthermore, the Company believes that it has adequately provided for all significant income tax uncertainties.

The Company recognizes interest and penalties related to uncertain tax positions in income tax provision. As of December 31, 2025 and 2024, the Company had approximately $0.7 million and $0.8 million, respectively, of accrued interest and penalties related to uncertain tax positions. During the years ended December 31, 2025, December 31, 2024 and December 31, 2023, the Company recognized $(0.1) million, $0.1 million and $0.1 million, respectively, of expense for an increase in interest and penalties related to uncertain tax positions.

The Company files income tax returns in Canada, the U.S., and various foreign jurisdictions. Generally, the Company is no longer subject to U.S. or foreign income tax examinations, including transfer pricing tax audits, by tax authorities for the years before 2015.