TAXES
The components of income (loss) before income tax expense (benefit) for the years ended May 31 are as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
(in thousands) | |
Income (loss) before tax expense: |
| |
| |
|
US | $ | 8,825 |
| | $ | (4,444 | ) | | $ | (8,965 | ) |
Non-US | 1,022 |
| | 1,191 |
| | 834 |
|
| $ | 9,847 |
| | $ | (3,253 | ) | | $ | (8,131 | ) |
Income tax expense (benefit) is comprised of the following:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
(in thousands) | |
Current |
| |
| |
|
Federal | $ | — |
| | $ | 34 |
| | $ | (242 | ) |
State and local | 141 |
| | 103 |
| | 205 |
|
Non U.S. | 270 |
| | 217 |
| | 417 |
|
| 411 |
| | 354 |
| | 380 |
|
Deferred | 4,428 |
| | 39,983 |
| | (5,123 | ) |
Income tax expense (benefit) | $ | 4,839 |
| | $ | 40,337 |
| | $ | (4,743 | ) |
In the fiscal years 2017 and 2016 income tax expense, the Company recorded tax expense of $4.8 million and $40.3 million, respectively, primarily driven by the impact of recording a deferred tax liability related to the amortization of intangibles, for tax purposes, that have an indefinite reversal period and cannot be used to support the deferred tax assets in fiscal 2017 and recording a valuation allowance of $40.4 million on the U.S. deferred tax assets in fiscal 2016.
In the fiscal year 2015 income tax benefit, the Company recorded a tax benefit of $4.7 million, primarily driven by a benefit of the $9.2 million nontaxable adjustment to the contingent liabilities related to Vortex Medical and Clinical Devices, and a seven month benefit from the R&D tax credit that expired on December 31, 2014, offset by non-deductible interest expense related to contingent payments, true-ups of our fiscal year 2014 US income tax returns and the impact of the elimination of the ASC 718 APIC pool.
Temporary differences that give rise to deferred tax assets and liabilities are summarized as follows:
|
| | | | | | | |
| May 31, 2017 | | May 31, 2016 |
(in thousands) | |
Deferred tax assets |
| |
|
Net operating loss carryforward | $ | 55,975 |
| | $ | 52,593 |
|
Stock-based compensation | 2,653 |
| | 4,135 |
|
Federal and state R&D tax credit carryforward | 2,548 |
| | 2,145 |
|
Inventories | 2,407 |
| | 4,535 |
|
Expenses incurred not currently deductible | 6,522 |
| | 3,018 |
|
Accrued liabilities | 1,289 |
| | 339 |
|
Gross deferred tax asset | 71,394 |
| | 66,765 |
|
Deferred tax liabilities |
| |
|
Excess tax over book depreciation and amortization | 49,158 |
| | 46,240 |
|
| 49,158 |
| | 46,240 |
|
Valuation Allowance | (48,348 | ) | | (42,209 | ) |
Net deferred tax liability | $ | (26,112 | ) | | $ | (21,684 | ) |
The Company's Federal net operating loss carryforwards as of May 31, 2017 after considering IRC Section 382 limitations are $161.6 million. The expiration of the Federal net operating loss carryforwards are as follows: $29.8 million between 2017 and 2023 and $131.8 million between 2027 and 2037.
The Company's state net operating loss carryforwards as of May 31, 2017 after considering remaining IRC Section 382 limitations are $32.7 million which expire in various years from 2017 to 2037.
As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of May 31, 2017 and 2016 that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. Equity will be increased by $0.6 million if and when such excess tax benefits are ultimately realized.
A valuation allowance is provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. After careful consideration and weighing of all the available positive and negative evidence, the weight given to the three year cumulative loss and lack of a recent history of core earnings was difficult to overcome and a full valuation allowance related to the U.S. deferred tax assets was established in the period ending May 31, 2016. Management considered all available positive and negative evidence at May 31, 2017, and considering the cumulative loss in the U.S. over the three year period, determined that the valuation allowance is still required. Management will continue to reevaluate the positive and negative evidence at each reporting period and if future results as projected in the U.S. and the Company's tax planning strategies are favorable, the valuation allowance may be removed, which could have a favorable material impact on the Company's results of operations in the period in which it is recorded.
The net deferred tax liability as of May 31, 2017 and 2016 relates to tax amortization of intangibles that have an indefinite reversal period for book purposes and cannot be used to support the deferred tax asset.
The Company's consolidated income tax expense has differed from the amount that would be provided by applying the U.S. Federal statutory income tax rate to the Company's income before income taxes for the following reasons:
|
| | | | | | | | | | | |
| For the year ended May 31, |
| 2017 | | 2016 | | 2015 |
(in thousands) | |
Income tax expense (benefit) at statutory tax rate of 35% | $ | 3,447 |
| | $ | (1,139 | ) | | $ | (2,845 | ) |
Effect of graduated tax rates | (98 | ) | | 33 |
| | 81 |
|
State income taxes, net of Federal tax benefit | (22 | ) | | (215 | ) | | (21 | ) |
Impact of Non-US operations | 403 |
| | (162 | ) | | 133 |
|
Research and development tax credit | (403 | ) | | (499 | ) | | (604 | ) |
Meals and entertainment | 266 |
| | 329 |
| | — |
|
Non-deductible interest on contingent payments | 174 |
| | 262 |
| | 265 |
|
Non-taxable gain on revaluation of contingent consideration liability | (5,576 | ) | | (170 | ) | | (3,102 | ) |
Tax law changes | — |
| | — |
| | (454 | ) |
Change in valuation allowance | 6,139 |
| | 40,685 |
| | — |
|
Effect of elimination of stock compensation APIC pool | 1,380 |
| | 739 |
| | 1,253 |
|
IPR&D intangible write-off | (1,224 | ) | | — |
| | — |
|
Other nondeductible expenses | 219 |
| | 207 |
| | 498 |
|
Over (under) accrual of prior year Federal and State taxes | (3 | ) | | 356 |
| | 38 |
|
Other | 137 |
| | (89 | ) | | 15 |
|
Income tax expense (benefit) | $ | 4,839 |
| | $ | 40,337 |
| | $ | (4,743 | ) |
The following table provides a reconciliation of the beginning and ending amount of unrecognized tax benefits:
|
| | | | | | | | | | | |
| For the year ended May 31, |
| 2017 | | 2016 | | 2015 |
(in thousands) | |
Unrecognized tax benefits balance at June 1 | $ | 899 |
| | $ | — |
| | $ | — |
|
Increase in gross amounts of tax positions related to prior years | — |
| | 899 |
| | — |
|
Unrecognized tax benefits balance at May 31 | $ | 899 |
| | $ | 899 |
| | $ | — |
|
The table above includes unrecognized tax benefits associated with the calculation of limitations placed on the utilization of tax attributes related to an acquired company. If recognized, $0.1 million of the balance of unrecognized tax benefits as of May 31, 2017 would affect the effective tax rate and the balance of $0.8 million would result in adjustments to other tax accounts.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. There are no accrued interest and penalties recognized in the consolidated balance sheet as of May 31, 2017 and May 31, 2016.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. Fiscal years 2014 through 2017 remain open to examination by the various tax authorities.
The Company does not anticipate that the amount of unrecognized tax benefits will significantly change in the next twelve months.
The accumulated undistributed earnings of the Company’s foreign operations were approximately $5.3 million, and are intended to remain indefinitely invested in foreign operations. Accordingly, no taxes have been provided on these earnings as of May 31, 2017. If these earnings were distributed, the Company would be subject to both foreign withholding taxes and U.S. income taxes that may not be fully offset by foreign tax credits. A reasonable estimate of the deferred tax liability on these earnings is not practicable at this time.