Note 5—Income Taxes
As a result of its corporate structure, Straight Path and its subsidiaries file the following income tax returns.
Straight Path Spectrum files its own tax returns. There is no provision for Straight Path Spectrum for the years ended July 31, 2017, 2016 and 2015 as it incurred a taxable loss in those years. In addition, there is a 100% valuation allowance against the net operating losses generated by Straight Path Spectrum at both July 31, 2017 and 2016.
The operations of Straight Path IP Group are included in the consolidated tax return of Straight Path. There is no provision of current taxes for Straight Path for the years ended July 31, 2017, 2016 and 2015. In Fiscal 2014 and 2015, capital contributions were made to a wholly-owned limited liability company which allowed Straight Path to utilize certain suspended losses. The Company estimated that such suspended losses made available by the capital contributions would fully offset taxable income generated by Straight Path IP Group for the fiscal year. The remaining suspended losses can only be utilized by Straight Path if additional capital contributions are made. In addition, there is a 100% valuation allowance against the net deferred tax assets related to Straight Path at July 31, 2017 (see discussion below). The tax expense in Fiscal 2016 represents state income and franchise taxes. The benefit in Fiscal 2015 represents a federal refund from a prior year net of current state income and franchise taxes.
Straight Path Ventures files its own tax returns. There is no provision for Straight Path Ventures for the years ended July 31, 2017, 2016 and 2015 as it incurred a taxable loss in those periods. In addition, since it is a partnership return, its results are passed to its partners, both of which are included in the consolidated tax return of Straight Path.
The provision for income taxes for Fiscal 2015 consisted solely of certain state income taxes.
The benefit from (provision for) income taxes consists of the following:
| Year ended July 31, | ||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | |||||||||
| Current: | ||||||||||||
| Federal | $ | — | $ | 39 | $ | — | ||||||
| State and local | (13 | ) | (35 | ) | (34 | ) | ||||||
| (13 | ) | 4 | (34 | ) | ||||||||
| Deferred: | ||||||||||||
| Federal | — | — | (2,211 | ) | ||||||||
| State and local | — | — | (469 | ) | ||||||||
| — | — | (2,680 | ) | |||||||||
| INCOME TAX BENEFITS (PROVISION FOR INCOME TAXES) | $ | (13 | ) | $ | 4 | $ | (2,714 | ) | ||||
Significant components of the Company’s deferred income tax assets and liabilities consist of the following:
| July 31, (in thousands) |
2017 | 2016 | ||||||
| Deferred income tax assets (liabilities): | ||||||||
| Net operating loss carryforward | $ | 74,292 | $ | 57,098 | ||||
| Accrued expenses | 3,808 | 338 | ||||||
| Stock based compensation | (4,043 | ) | (464 | ) | ||||
| Valuation allowance | (74,057 | ) | (56,972 | ) | ||||
| TOTAL NET DEFERRED INCOME TAX ASSETS (LIABILITIES) | $ | — | $ | — | ||||
Because of its losses in the current and previous years, the Company concluded that it does not meet the criteria of more likely than not in order to utilize its deferred income tax assets in the foreseeable future for the Straight Path Spectrum line of business. Accordingly, the Company recorded a 100% valuation allowance against its deferred income tax assets.
Straight Path Ventures is treated as a partnership for Federal income tax purposes. Straight Path Ventures has generated material losses that are “suspended” in accordance with section 704(d) of the Internal Revenue Code, and accordingly, are not available to the Company unless the Company causes all or part of the suspension to be reversed. As a consequence of the “suspension,” no deferred tax asset is reflected herein with respect of such net operating losses. If any part of such net operating losses does become available, it is recorded as a tax benefit in the period used. In Fiscal 2014 and 2015, approximately $3.0 million of suspended losses became available to offset taxable income but the Company did not recognize a benefit due to taxable losses incurred. As discussed below, the Internal Revenue Service is in the process of auditing the Fiscal 2015 return and is anticipated to be completed in the near future.
The differences between income taxes expected at the federal statutory income tax rate and income taxes provided are as follows:
| Year ended July 31, | ||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | |||||||||
| Federal income tax at statutory rate | $ | 15,524 | $ | 2,939 | $ | (262 | ) | |||||
| Permanent differences | (759 | ) | (2 | ) | 1,048 | |||||||
| Valuation allowance | (17,085 | ) | (3,394 | ) | (3,500 | ) | ||||||
| Other | 15 | (3 | ) | — | ||||||||
| State and local income tax, net of federal benefit | 2,292 | 464 | — | |||||||||
| PROVISION FOR (INCOME TAXES) INCOME TAX BENEFITS | $ | (13 | ) | $ | 4 | $ | (2,714 | ) | ||||
At July 31, 2017, the Company had net operating loss carryforwards of approximately $187 million. These net operating losses are split $170 million from Straight Path Spectrum and $17 million from Straight Path IP Group (Straight Path). These carryforward losses are available to offset future taxable income. The net operating loss carryforwards will start to expire in Fiscal 2022, with the loss from Fiscal 2017 expiring in Fiscal 2037.
The change in the valuation allowance for deferred income taxes was as follows:
| Year ended July 31, (in thousands) |
Balance at beginning of year |
Additions charged to costs and expenses |
Deductions | Balance at end of year |
||||||||||||
| 2017 | ||||||||||||||||
| Reserves deducted from deferred income taxes, net: | ||||||||||||||||
| Valuation allowance | $ | 56,972 | $ | 17,085 | $ | — | $ | 74,057 | ||||||||
| 2016 | ||||||||||||||||
| Reserves deducted from deferred income taxes, net: | ||||||||||||||||
| Valuation allowance | $ | 53,681 | $ | 3,394 | $ | (103 | ) | $ | 56,972 | |||||||
| 2015 | ||||||||||||||||
| Reserves deducted from deferred income taxes, net: | ||||||||||||||||
| Valuation allowance | $ | 50,191 | $ | 3,500 | $ | (10 | ) | $ | 53,681 | |||||||
The table below summarizes the change in the balance of unrecognized income tax benefits:
| Year ended July 31, | ||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | |||||||||
| Balance at beginning of period | $ | 215 | $ | 210 | $ | — | ||||||
| Additions based on tax positions related to the current period | — | — | — | |||||||||
| Additions for tax positions of prior periods | 6 | 5 | 210 | |||||||||
| Reductions for tax positions of prior periods | — | — | — | |||||||||
| Settlements | — | — | — | |||||||||
| Lapses of statutes of limitations | — | — | — | |||||||||
| Balance at end of period | $ | 221 | $ | 215 | $ | 210 | ||||||
All of the unrecognized income tax benefits at July 31, 2017 and 2016 would have affected the Company’s effective income tax rate if recognized. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease within the next twelve months.
In the years ended July 31, 2017, 2016 and 2015, the Company recorded interest on income taxes of $6,000, $5,000 and $0, respectively. As of July 31, 2017 and 2016, there was no accrued interest included in current income taxes payable.
The Company’s various federal, state, and local tax returns for Fiscal 2015 through Fiscal 2017 remain subject to examination. The Internal Revenue Service is in the process of auditing the Fiscal 2015 return and is anticipated to be completed in the near future. The Company does not expect any adjustment to have a material impact on the Company’s consolidated financial statements.