Income Taxes Loss before income taxes and income tax expense is comprised of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 |
| 2016 |
| 2015 |
Loss before income taxes: |
|
| |
|
| |
|
|
Domestic | $ | (10,156,858 | ) | | $ | (14,562,851 | ) | | $ | (21,560,050 | ) |
Foreign | (2,211,853 | ) | | (3,568,153 | ) | | (6,250,399 | ) |
| $ | (12,368,711 | ) | | $ | (18,131,004 | ) | | $ | (27,810,449 | ) |
Current provision: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | 60,773 |
|
State | 39,396 |
| | 735 |
| | 27,438 |
|
Foreign | 569,379 |
| | 594,987 |
| | 372,394 |
|
| $ | 608,775 |
| | $ | 595,722 |
| | $ | 460,605 |
|
Deferred provision: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | — |
| | — |
| | — |
|
Foreign | — |
| | — |
| | (192,380 | ) |
| $ | — |
| | $ | — |
| | $ | (192,380 | ) |
A reconciliation of the statutory U.S. federal tax rate to our effective rate is as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory U.S. federal tax rate (benefit) | (35.0 | )% | | (35.0 | )% | | (35.0 | )% |
State income taxes, net of federal benefit | 0.1 |
| | 0.1 |
| | 0.1 |
|
Foreign taxes | 6.5 |
| | 4.3 |
| | 5.6 |
|
Stock-based compensation | (1.6 | ) | | (3.3 | ) | | 0.1 |
|
Acquisition related expenses | — |
| | — |
| | 1.6 |
|
Effect of tax reform | 108.7 |
| | — |
| | — |
|
Change in valuation allowance | (77.0 | ) | | 37.5 |
| | 22.9 |
|
Non-deductible expenses and other | 3.2 |
| | (0.3 | ) | | 5.7 |
|
Effective tax rate | 4.9 | % | | 3.3 | % | | 1.0 | % |
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will not be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. We recorded a valuation allowance in the amount of $25,347,108 and $34,212,128 as of December 31, 2017 and 2016, respectively, as management believes it is more likely than not that we will not realize our net deferred tax assets. The net change in the valuation allowance during the years ended December 31, 2017 and 2016 was $(8,865,020), and $7,101,581, respectively.
We have subsidiaries in India, the United Kingdom, Hong Kong and China. The India entity is treated as a branch for U.S. tax purposes. As such, all income attributable to the Indian branch is currently recognized in the U.S. The India entity also pays taxes locally in India. The foreign current taxes consist of taxes paid locally in the United Kingdom and India. The state current taxes consist of taxes paid for statutory minimum taxes as well as state taxes for a subsidiary.
Deferred tax assets and liabilities are comprised of the following:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Current deferred tax asset: | | | |
Accrued bonuses | $ | 393,274 |
| | $ | 888,022 |
|
Accounts receivable reserve | 72,147 |
| | 154,230 |
|
Other | 145,826 |
| | 350,887 |
|
| | | |
Non-Current deferred tax asset: | | | |
Deferred revenue | 1,048,179 |
| | 1,410,565 |
|
NOLs | 24,720,025 |
| | 33,611,543 |
|
Other | 3,411,274 |
| | 4,238,400 |
|
Deferred tax assets | $ | 29,790,725 |
| | $ | 40,653,647 |
|
| | | |
Current deferred tax liability: | | | |
Deferred commissions | $ | (2,171,927 | ) | | $ | (3,119,841 | ) |
| | | |
Non-current deferred tax liability: | | | |
Intangibles | (635,723 | ) | | (814,819 | ) |
Fixed assets | (1,619,083 | ) | | (2,481,104 | ) |
Other | $ | (16,884 | ) | | $ | (25,755 | ) |
Deferred tax liabilities | $ | (4,443,617 | ) | | $ | (6,441,519 | ) |
Less: valuation allowance | $ | (25,347,108 | ) | | $ | (34,212,128 | ) |
Total | $ | — |
| | $ | — |
|
We have a federal net operating loss (NOL) carryforward of $90,901,000 and $82,141,000 as of December 31, 2017 and 2016, respectively. The federal NOL carryforward will begin to expire in 2019. These NOLs may be subject to limitation under Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under the regulations.
Under IRC section 382 of the Internal Revenue Code substantial changes in ownership may limit the amount of net operating loss carryforwards that may be utilized annually in the future to offset taxable income. We have completed an Internal Revenue Code section 382 study through June 30, 3016, which concluded that we have experienced several ownership changes, causing limitations on the annual use of the net operating loss carryforwards. Provided there is sufficient taxable income, $2,131,290 of the net operating loss carry forwards are expected to expire without utilization. Additionally, our ability to use our net operating loss carryforwards to reduce future taxable income may be further limited as a result of any future equity transactions, including, but not limited to, an issuance of shares of stock or sales of common stock by our existing stockholders.
For state income tax purposes, we have net operating loss carryforwards in a number of jurisdictions in varying amounts and with varying expiration dates from 2017 through 2037.
Tax benefits of uncertain tax positions are recognized only if it is more likely than not that we will be able to sustain a position taken on an income tax return. We have no liability for uncertain positions. Interest and penalties, if any, related to unrecognized tax benefits, would be recognized as income tax expense.
We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Tax years 2013 and forward remain open for examination for federal tax purposes and tax years 2012 and forward remain open for examination for our more significant state tax jurisdictions. To the extent utilized in future years’ tax returns, net operating loss carryforwards at December 31, 2017 will remain subject to examination until the respective tax year is closed. In July 2014, we were notified by the Internal Revenue Service that we had been selected at random for a compliance research examination related to the year ended December 31, 2012. In May 2016, they concluded their examination and the result of such examination was the adjustment of federal net operating loss carryforwards aggregating approximately $1,200,000.
On December 22, 2017, H.R. 1 (also, known as the Tax Cuts and Jobs Act (the “Act”)) was signed into law. Among its numerous changes to the Internal Revenue Code, the Act reduces U.S. federal corporate tax rate from 35% to 21%. As a result, we believe that the most significant impact on our consolidated financial statements will be reduction of approximately
$13,400,000 for the deferred tax assets related to net operating losses and other deferred tax assets. Such reduction was offset by an equal reduction to our valuation allowance. Additionally, we have investments in various foreign subsidiaries. At December 31, 2017 and November 2, 2017, the cumulative earnings and profits of these entities combined were negative. Accordingly, we are not liable for the transition tax enacted under the Act.
We have completed the accounting for the tax impact of the Act as of December 31, 2017 and have recorded no provisional amounts.