Income Taxes
On December 22, 2017 the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). Under FASB Accounting Standards Codification (“ASC 740”), the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (3) bonus depreciation that will allow for full expensing of qualified property; (4) creating a new limitation on deductible interest expense; (5) eliminating the corporate alternative minimum tax ("AMT"); (6) limitation on the deductibility of executive compensation under Internal Revenue Code §162(m); and (7) new tax rules related to foreign operations.
On December 22, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance on accounting for the tax effects of TCJA. The purpose of SAB No. 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, Income Taxes in the reporting period in which the TCJA was enacted. SAB No. 118 addresses situations where the accounting is incomplete for certain income tax effects of the TJCA upon issuance of a company’s financial statements for the reporting period that includes the enactment date. SAB No. 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB No. 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.
In connection with the initial analysis of the impact of the TCJA, the Company has recorded a provisional decrease in our deferred tax assets and liabilities with a corresponding adjustment to the related valuation allowance. In addition, the Company recorded an income tax benefit of $2.7 million related to the elimination of the AMT as such amounts will be refundable, in cash, under TCJA. The Company expects to collect the refund no later than 2021. The estimated refundable AMT credit is included in deferred tax assets as of December 31, 2017. While the Company is able to make a reasonable estimate of the impact of the reduction in the corporate rate, such estimate is subject to further analysis, interpretation and clarification of the TCJA, which could result in changes to this estimate during 2018.
The Company's (benefit) provision for income taxes comprises the following: |
| | | | | | | | | | | |
| For the year ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 623,060 |
| | $ | (5,093 | ) | | $ | 439,934 |
|
State and local | 1,179 |
| | (1,446 | ) | | 946 |
|
Total current provision (benefit) | 624,239 |
| | (6,539 | ) | | 440,880 |
|
Deferred: | | | | | |
Federal | (2,724,371 | ) | | 21,252 |
| | 19,006 |
|
State and local | 6,342 |
| | (829 | ) | | 2,097 |
|
Total deferred (benefit) provision | (2,718,029 | ) | | 20,423 |
| | 21,103 |
|
Total (benefit) provision | $ | (2,093,790 | ) | | $ | 13,884 |
| | $ | 461,983 |
|
The Company’s deferred tax assets and liabilities comprise the following:
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred income tax assets: | | | |
Net operating losses | $ | 38,087,782 |
| | $ | 72,726,440 |
|
Deferred research and development costs | 205,527 |
| | 669,602 |
|
Amortization of intangible assets | 282,213 |
| | 665,531 |
|
Share-based compensation | 1,001,662 |
| | 1,687,243 |
|
Fixed assets | 417,085 |
| | 667,008 |
|
Deferred revenue | 84,130,212 |
| | 102,520,433 |
|
Alternative minimum tax credits | 2,652,250 |
| | 2,029,190 |
|
Other | 1,024,082 |
| | 1,337,941 |
|
Deferred income tax assets | 127,800,813 |
| | 182,303,388 |
|
Less: valuation allowance | (102,556,657 | ) | | (155,465,173 | ) |
Deferred income tax assets, net of valuation allowance | $ | 25,244,156 |
|
| $ | 26,838,215 |
|
Deferred income tax liabilities: | | | |
Amortization of goodwill | (193,458 | ) | | (287,729 | ) |
Capitalized contract costs | (21,518,646 | ) | | (25,854,435 | ) |
Other | (1,100,089 | ) | | (982,117 | ) |
Deferred income tax asset (liability), net | $ | 2,431,963 |
| | $ | (286,066 | ) |
The recognition of a valuation allowance for deferred taxes requires management to make estimates and judgments about the Company’s future profitability which is inherently uncertain. The Company assesses all available positive and negative evidence to determine if its existing deferred tax assets are realizable on a more-likely-than-not basis. In making such assessment, the Company considered the reversal of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operating results. The ultimate realization of a deferred tax asset is ultimately dependent on the Company's generation of sufficient taxable income within the available net operating loss carryback and/or carryforward periods to utilize the deductible temporary differences. Based on the weight of available evidence including three-year cumulative pre-tax losses, the Company continued to conclude that its deferred tax assets are not realizable on a more-likely-than-not basis and that a full valuation allowance is required with the exception of its alternative minimum tax carryforward that is refundable as a result of TCJA.
The valuation allowance decreased by $53.0 million from December 31, 2016. The decrease is primarily related to the re-measurement of deferred tax assets and liabilities using the new U.S. federal statutory rate of 21%.
As of December 31, 2017, the Company had $174.3 million of federal net operating loss carryforwards, which expire in 2034 to 2036, to offset future taxable income.
The Company’s effective tax rate differs from the U.S. federal statutory income tax rate as follows:
|
| | | | | | | | |
| As of December 31, |
| 2017 | | 2016 | | 2015 |
Statutory federal income tax rate | (35.0 | )% | | (35.0 | )% | | (35.0 | )% |
State tax benefit | (3.9 | )% | | 0.6 | % | | — | % |
Increase in fair value of common stock warrants | 4.3 | % | | 0.8 | % | | — | % |
Reorganization costs | — | % | | 3.3 | % | | 7.0 | % |
Other | (1.8 | )% | | 0.2 | % | | 1.4 | % |
U.S. federal tax law change | (5.1 | )% | | — | % | | — | % |
Valuation allowance on deferred tax assets | 36.0 | % | | 30.1 | % | | 27.8 | % |
Effective tax rate | (5.5 | )% | | — | % | | 1.2 | % |
For the year ended December 31, 2017 and December 31, 2016, the Company’s effective tax rate differs from the statutory rate principally due to operating losses for which no tax benefit was provided, coupled with the impact of the TCJA. For the year ended December 31, 2015, the Company's effective tax rate differs from the statutory rate principally due to the operating losses for which no tax benefit was provided and non-deductible reorganization expenses.
The Company applies the applicable authoritative guidance which prescribes a comprehensive model for the manner in which a company should recognize, measure, present and disclose in its financial statements all material uncertain tax positions that the Company has taken or expects to take on a tax return. As of December 31, 2017 and 2016, the Company has no uncertain tax positions. There are no uncertain tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months from December 31, 2017.
The Company files federal income tax returns and income tax returns in various state and local tax jurisdictions. The open tax years for U.S. federal, state and local tax returns are 2013-2017; open tax years relating to any of the company’s net operating losses begin in 2001. In the event that the Company concludes that it is subject to interest and/or penalties arising from uncertain tax positions, the Company will present interest and penalties as a component of income taxes. No amounts of interest or penalties were recognized in the Company’s consolidated financial statements for each of the years in the three-year period ended December 31, 2017.