Components of income (loss) before income taxes (in thousands):
|
| | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
United States operations | | $ | (15,731 | ) | | $ | (34,100 | ) | | $ | (76,450 | ) |
Foreign operations | | (4,461 | ) | | (2,897 | ) | | (8,302 | ) |
Income (loss) before income taxes | | $ | (20,192 | ) | | $ | (36,997 | ) | | $ | (84,752 | ) |
Components of income tax expense (benefit) (in thousands):
|
| | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
United States federal | | $ | 683 |
| | $ | 712 |
| | $ | 176 |
|
State and local | | 42 |
| | 59 |
| | (44 | ) |
Foreign | | 368 |
| | (125 | ) | | 136 |
|
Total current | | 1,093 |
| | 646 |
| | 268 |
|
Deferred: | | | | | | |
United States federal | | (3,643 | ) | | 3 |
| | (1,636 | ) |
State and local | | 2 |
| | 1 |
| | 1 |
|
Foreign | | (230 | ) | | 126 |
| | 77 |
|
Total deferred | | (3,871 | ) | | 130 |
| | (1,558 | ) |
Total income tax expense (benefit) | | $ | (2,778 | ) | | $ | 776 |
| | $ | (1,290 | ) |
Income tax expense differs from “expected” income tax expense (computed by applying the U.S. federal income tax rate of 35%) due to the following (in thousands):
|
| | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
United States federal tax expense (benefit) at statutory rate | | $ | (7,067 | ) | | $ | (12,949 | ) | | $ | (29,662 | ) |
State taxes, net of United States federal tax expense (benefit) | | (273 | ) | | (533 | ) | | (1,240 | ) |
Change in valuation allowance | | 1,133 |
| | 13,148 |
| | 27,821 |
|
Non-deductible stock compensation | | 587 |
| | 144 |
| | 218 |
|
Impact of non-U.S. jurisdictional tax rate difference | | 603 |
| | 335 |
| | 916 |
|
Research and development tax credit | | — |
| | (338 | ) | | (243 | ) |
Increase (reversal) of unrecognized tax benefits | | — |
| | 135 |
| | (1,269 | ) |
Basis difference in investment | | 1,397 |
|
| 538 |
|
| 1,584 |
|
Non-U.S. withholding tax | | 435 |
| | 452 |
| | 141 |
|
Other | | 407 |
| | (156 | ) | | 444 |
|
Total income tax expense (benefit) | | $ | (2,778 | ) | | $ | 776 |
| | $ | (1,290 | ) |
Net deferred tax assets, which are recorded at December 31, 2017 using a 21% tax rate in the U.S. following the passage of the Tax Act, are comprised of the following (in thousands):
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
United States federal net operating loss carryforwards | | $ | 59,457 |
| | $ | 93,985 |
|
Deferred expenses | | 926 |
| | 1,136 |
|
Research and development tax credit carryforwards | | 24,499 |
| | 24,702 |
|
Alternative minimum tax credit carryforward | | — |
| | 3,561 |
|
Net unrealized loss on investments | | 62 |
| | 97 |
|
Accrued loss on excess office facilities | | 489 |
| | 1,178 |
|
Stock-based compensation | | 2,738 |
| | 4,112 |
|
State net operating loss carryforwards | | 13,746 |
| | 11,354 |
|
Foreign net operating loss carryforwards | | 32,759 |
| | 29,863 |
|
Deferred revenue | | 108 |
| | 156 |
|
Equipment, software, and leasehold improvements | | 3,119 |
| | 4,636 |
|
Intangibles | | 2 |
| | 7 |
|
Net unrealized gains and basis differences on investments |
| 1,188 |
|
| 1,874 |
|
|
| | | | | | | | |
Other | | 183 |
| | 1,624 |
|
Gross deferred tax assets | | 139,276 |
| | 178,285 |
|
Less valuation allowance | | 137,117 |
| | 176,274 |
|
Gross deferred tax assets, net of valuation allowance | | $ | 2,159 |
| | $ | 2,011 |
|
Deferred tax liabilities: | | | | |
Other intangible assets | | $ | (62 | ) | | $ | (50 | ) |
Other | | (814 | ) | | (794 | ) |
Prepaid expenses | | (254 | ) | | (438 | ) |
Gross deferred tax liabilities | | (1,130 | ) | | (1,282 | ) |
Net deferred tax assets (liabilities) | | $ | 1,029 |
| | $ | 729 |
|
Income tax receivables were $3.6 million and insignificant at December 31, 2017 and 2016, respectively.
In 2017, we continued to record a valuation allowance on the deferred tax assets that we believe are not more likely than not to be realized. The net change in valuation allowance was a $39.2 million decrease and a $2.4 million increase during the years ended December 31, 2017 and 2016, respectively.
We maintain a valuation allowance of $137.1 million for our deferred tax assets due to uncertainty regarding their realization as of December 31, 2017. The net decrease in the valuation allowance since December 31, 2016 of $39.2 million was the result of a decrease in current year deferred tax assets, which was primarily related to the reduction in corporate tax rate as a result of the Tax Act, for which the Company maintains a valuation allowance.
RealNetworks' U.S. federal net operating loss carryforwards totaled $283.1 million and $268.5 million at December 31, 2017 and 2016, respectively. The increase is mainly due to the current year U.S. taxable loss. The remaining net operating loss carryforwards as of December 31, 2017 are from prior U.S. taxable losses and from acquired subsidiaries that are limited under Internal Revenue Code Section 382. These net operating loss carryforwards expire between 2024 and 2037.
In 2017, we evaluated the current and future impacts of the Tax Act. The primary impact in 2017 was the elimination of the AMT credit carryforward. We have concluded on a preliminary basis, as allowed under the SEC's SAB 118, that we will not owe U.S. taxes on previously untaxed accumulated and current E&P of certain foreign subsidiaries or on global intangible low-taxed income earned by controlled foreign corporations. This preliminary conclusion is based on our history of negative E&P generated by our foreign subsidiaries.
RealNetworks' AMT credit carryforward remained at $3.6 million from December 31, 2016 to December 31, 2017. The Tax Act repealed the corporate AMT for tax years beginning January 1, 2018, and provides that existing AMT credit carryovers are refundable beginning in 2018. The Company's $3.6 million of AMT credit carryovers are expected to be fully refunded by 2022. A $3.6 million benefit has been recognized in the 2017 income tax provision as a result of this change in the U.S. tax law.
RealNetworks' U.S. federal research and development tax credit carryforward totaled $24.5 million and $24.7 million at December 31, 2017 and 2016, respectively. The research and development credit carryforwards expire between 2020 and 2036.
As of December 31, 2017 and 2016, we had $0.4 million and $0.5 million of unrecognized tax benefits, respectively. The decrease in unrecognized tax benefits is due to federal research and development tax credit carryforward risks. As of December 31, 2017, there are no unrecognized tax benefits remaining that would affect our effective tax rate if recognized, as the offset would increase the valuation allowance. We do not anticipate that the total amount of unrecognized tax benefits will significantly change within the next twelve months.
We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of December 31, 2017, and 2016 we have no accrued interest or penalties related to uncertain tax positions.
Reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits (in thousands):
|
| | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
Balance, beginning of year | | $ | 493 |
| | $ | 320 |
| | $ | 3,541 |
|
Increases related to prior year tax positions | | — |
| | 38 |
| | — |
|
Decreases related to prior year tax positions | | (135 | ) | | — |
| | (33 | ) |
Settlements with taxing authorities | | — |
| | — |
| | (3,285 | ) |
Increases related to current year tax positions | | — |
| | 135 |
| | 97 |
|
Balance, end of year | | $ | 358 |
| | $ | 493 |
| | $ | 320 |
|