Income Taxes
The components of loss before income taxes consist of the following (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Loss before income taxes: | |
| | |
| | |
|
Domestic | $ | (11,524 | ) | | $ | (10,834 | ) | | $ | (26,889 | ) |
Foreign | (558 | ) | | (593 | ) | | (2,639 | ) |
Total loss before income taxes | $ | (12,082 | ) | | $ | (11,427 | ) | | $ | (29,528 | ) |
The provision for income tax expense (benefit) consists of the following (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | |
| | |
| | |
|
U.S. Federal | $ | (175 | ) | | $ | (6 | ) | | $ | (3 | ) |
State | 35 |
| | 50 |
| | 27 |
|
Foreign | (211 | ) | | (249 | ) | | (817 | ) |
Total current | (351 | ) | | (205 | ) | | (793 | ) |
Deferred: | |
| | |
| | |
|
U.S. Federal | — |
| | — |
| | 1 |
|
State | (12 | ) | | 12 |
| | (47 | ) |
Foreign | 5 |
| | (59 | ) | | — |
|
Total deferred | (7 | ) | | (47 | ) | | (46 | ) |
Total provision for income tax benefit | $ | (358 | ) | | $ | (252 | ) | | $ | (839 | ) |
Total income tax benefit differs from the expected income tax benefit, computed by applying the federal statutory rate of 34% to earnings before income taxes as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Expected income tax benefit | $ | (4,107 | ) | | $ | (3,885 | ) | | $ | (10,040 | ) |
State income taxes, net of federal tax effect | (306 | ) | | (789 | ) | | (830 | ) |
Effect of deferred rate change | 11,851 |
| | (162 | ) | | 48 |
|
Foreign tax | (87 | ) | | (105 | ) | | 80 |
|
Non-deductible stock issuance costs | 186 |
| | (24 | ) | | — |
|
Federal R&D credit | (24 | ) | | (17 | ) | | (82 | ) |
Foreign unremitted earnings | (20 | ) | | 58 |
| | — |
|
Change in valuation allowance | (7,764 | ) | | 4,566 |
| | 9,906 |
|
Refundable AMT credit | (172 | ) | | — |
| | — |
|
Other, net | 85 |
| | 106 |
| | 79 |
|
Total provision for income tax benefit | $ | (358 | ) | | $ | (252 | ) | | $ | (839 | ) |
The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) are presented below (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | |
| | |
|
Inventory provisions and uniform capitalization | $ | 42 |
| | $ | — |
|
Accounts receivable allowances | 3 |
| | 12 |
|
Non-qualified stock option and restricted stock expense | 447 |
| | 961 |
|
Deferred revenue | 147 |
| | 408 |
|
Loss and credit carryforwards of U.S. subsidiary | 23,996 |
| | 33,673 |
|
Loss carryforward of foreign subsidiaries | 430 |
| | 1 |
|
Other accruals and reserves | 407 |
| | 674 |
|
Other | 58 |
| | (349 | ) |
Total deferred tax assets before valuation allowance | 25,530 |
| | 35,380 |
|
Less valuation allowance | (24,285 | ) | | (32,930 | ) |
Total deferred tax assets | $ | 1,245 |
| | $ | 2,450 |
|
Deferred tax liabilities: | |
| | |
|
Acquired intangibles | $ | (1,321 | ) | | $ | (2,526 | ) |
Fixed Assets | — |
| | (148 | ) |
Total deferred tax liabilities | $ | (1,321 | ) | | $ | (2,674 | ) |
Total net deferred tax assets (liabilities) | $ | (76 | ) | | $ | (224 | ) |
As of December 31, 2017, the Company had $85.6 million of net operating loss carryforwards for U.S. federal tax purposes and $62.3 million of net operating loss carryforwards for various states. The loss carryforwards for federal tax purposes will expire between 2022 and 2037 if not utilized. The loss carryforwards for state tax purposes will expire between 2022 and 2037 if not utilized.
As of December 31, 2017, the Company had federal and state research and development credit carryforwards of $3.1 million, net of Section 383 limitations, which will begin to expire in 2022 if not utilized.
As a result of its acquisition of Qumu, Inc. in October 2011, utilization of U.S. net operating losses and tax credits of Qumu, Inc. are subject to annual limitations under Internal Revenue Code Sections 382 and 383, respectively. The Company has not completed an IRC Section 382 study since 2011. It is possible additional ownership changes have occurred, which may result in additional Section 382 and 383 limitations. Due to the valuation allowance, it is not expected that any such limitation will have an impact on the results of operations of the Company.
The Company assessed that the valuation allowance against its U.S. deferred tax assets is still appropriate as of December 31, 2017, based on the consideration of all available positive and negative evidence, using the “more likely than not” standard required by ASC 740, Income Taxes. The valuation allowance will be reviewed quarterly and will be maintained until sufficient positive evidence exists to support the reversal of the valuation allowance.
The Company generally believes that it is more likely than not that the future results of the operations of its subsidiaries in the U.K. will generate sufficient taxable income due to the reversal of deferred tax liabilities to realize the tax benefits related to its deferred tax assets. As of December 31, 2017, the Company had a cumulative foreign tax loss carryforward of $1.9 million in the U.K. This amount can be carried forward indefinitely.
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted, significantly altering U.S. corporate income tax law. The SEC issued Staff Accounting Bulletin 118, which allows companies to record reasonable estimates of enactment impacts where all of the underlying analysis and calculations are not yet complete. The provisional estimates must be finalized within a one-year measurement period.
The Company recorded a provision tax benefit of $172,000 for the impact of the Tax Act. The tax benefit primarily relates to the future cash refund of excess AMT credits due to the repeal of the corporate AMT system. AMT credits previously had a full valuation allowance recorded, however a benefit was recorded as the AMT credits are now expected to be realized. The estimated refundable AMT credit is included in other noncurrent assets. The Company also reduced its net domestic deferred tax asset balance by $11.9 million due to the reduction in corporate tax rate from 34% to 21% and reversed its deferred tax liability of $58,000 previously accrued for future tax on foreign earnings given that the future tax consequences of a repatriation are expected to be insignificant. These adjustments are fully offset by a change in the Company’s U.S. valuation allowance. Additionally, no tax expense was provided for the mandatory repatriation provisions, as the Company has estimated there to be no untaxed accumulated E&P. The Company notes that the final impacts of the Tax Act may differ from the provisional estimates, possibly materially, due to, among other things, changes in interpretations and assumptions the Company has made and additional guidance that may be issued.
The Company may repatriate cash associated with undistributed earnings of its foreign subsidiaries, such that they are not reinvested indefinitely. The repatriation of cash and cash equivalents held by the Company's international subsidiaries would not result in an adverse tax impact to the Company as a result of the mandatory repatriation included in the Tax Act and an expectation of immaterial withholding taxes on any repatriation.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is presented in the table below (in thousands):
|
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Gross unrecognized tax benefits at beginning of year | $ | 1,042 |
| | $ | 970 |
|
Increases related to: | |
| | |
|
Prior year income tax positions | 70 |
| | 58 |
|
Current year income tax positions | 24 |
| | 14 |
|
Gross unrecognized tax benefits at end of year | $ | 1,136 |
| | $ | 1,042 |
|
Included in the balance of unrecognized tax benefits at December 31, 2017 are potential benefits of $3,000 that if recognized, would affect the effective tax rate. The Company does not anticipate that the total amount of unrecognized tax benefits as of December 31, 2017 will change significantly by December 31, 2018.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Total accrued interest and penalties amounted to $1,400 and $3,000 on a gross basis at December 31, 2017 and 2016, respectively, and are excluded from the reconciliation of unrecognized tax benefits presented above. Interest and penalties recognized in the consolidated statements of operations related to uncertain tax positions amounted to net tax expense of $1,300 and $1,000 in 2017 and 2016, respectively.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2017, the Company was no longer subject to income tax examinations for taxable years before 2015 in the case of U.S. federal taxing authorities, and taxable years generally before 2013 in the case of state taxing authorities, consisting primarily of Minnesota and California.