INCOME TAX
The domestic and foreign components of loss before income taxes from operations for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Domestic | $ | 17,120 |
| | $ | 1,097 |
| | $ | (11,996 | ) |
Foreign | (469 | ) | | (744 | ) | | (601 | ) |
| | | | | |
| $ | 16,651 |
| | $ | 353 |
| | $ | (12,597 | ) |
The provision (benefit) for income tax for the years ended December 31, 2017, 2016 and 2015, consist of the following:
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Federal: | | | | | |
Current | $ | — |
| | $ | — |
| | $ | — |
|
Deferred | 7,694 |
| | 416 |
| | (3,868 | ) |
| | | | | |
State: | | | | | |
Current | 43 |
| | 3 |
| | 5 |
|
Deferred | 269 |
| | (380 | ) | | 488 |
|
| | | | | |
Foreign: | | | | | |
Current | — |
| | — |
| | — |
|
Deferred | (129 | ) | | (174 | ) | | (159 | ) |
| | | | | |
| 7,877 |
| | (135 | ) | | (3,534 | ) |
| | | | | |
Change in valuation allowance | (14,037 | ) | | 138 |
| | 3,539 |
|
Income tax provision (benefit) | $ | (6,160 | ) | | $ | 3 |
|
| $ | 5 |
|
The expected tax expense (benefit) based on the statutory rate is reconciled with actual tax expense (benefit) as follows:
|
| | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. Federal statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
State rate, net of federal benefit | 2.8 | % | | 7.8 | % | | 1.3 | % |
Permanent differences: | | | | | |
Change in tax rate | 16.4 | % | | (113.0 | )% | | — | % |
Impact of tax reform | (16.4 | )% | | — | % | | — | % |
Deferred tax adjustment | (0.3 | )% | | (19.1 | )% | | — | % |
| | | | | |
Stock based compensation | 0.1 | % | | 28.9 | % | | (1.1 | )% |
Foreign tax rate difference | 0.3 | % | | 19.3 | % | | (0.4 | )% |
Fair value measurement of warrants | (4.5 | )% | | — | % | | — | % |
Other | (1.6 | )% | | 3.0 | % | | — | % |
Change in valuation allowance | (67.9 | )% | | 40.0 | % | | (33.9 | )% |
Income tax provision (benefit) | (37.1 | )% | | 0.9 | % | | (0.1 | )% |
The approximate tax effects of temporary differences, which give rise to significant deferred tax assets and liabilities, are as follows:
|
| | | | | | | | | | | |
| As of December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Deferred tax assets | | | | | |
Net operating losses | $ | 3,912 |
| | $ | 10,032 |
| | $ | 9,666 |
|
Stock-based compensation | 572 |
| | 949 |
| | 890 |
|
Intangible assets | 2,190 |
| | 3,748 |
| | 3,752 |
|
Other | 115 |
| | 77 |
| | 50 |
|
Total deferred tax assets | 6,789 |
| | 14,806 |
| | 14,358 |
|
Valuation allowance | (462 | ) | | (14,497 | ) | | (14,358 | ) |
Deferred tax asset, net of valuation allowance | 6,327 |
| | 309 |
| | — |
|
Deferred tax liability | (126 | ) | | (309 | ) | | — |
|
Net deferred tax assets | $ | 6,201 |
| | $ | — |
| | $ | — |
|
As of December 31, 2017, 2016 and 2015, the Company had net operating losses ("NOL") carryforwards of approximately $12.7 million, $26.1 million and $25.5 million, respectively. The federal and state net operating loss carryforwards will begin to expire in 2026.
The use of NOL and tax credit carryfowards may be subject to a substantial annual limitation due to the ownership change limitations provided by Section 382 and 383 of the U.S. Internal Revenue Code (“IRC”), and similar state provisions. The annual limitation may result in the expiration of NOL and tax credit carryforwards before they are used. The Company completed an IRC Section 382 analysis through December 31, 2017 and determined that no ownership changes, within the meaning of Section 382 of the Code, had occurred for the loss making periods that could place significant limitations to the use of NOL or tax credit carryforwards. As such, the NOL and tax credit carryforwards presented are not expected to expire unused, unless there is a future ownership change as determined by Section 382 and 383 of the IRC.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will 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, carryback potential, projected future taxable income and tax planning strategies in making this assessment. Management has considered both positive and negative evidence in evaluating the need for a valuation allowance and has given more weight to the objective evidence available. At the end of 2017, the Company now has three-year cumulative profit and as a result of recent events is now projecting significant income for 2018. Based on its assessment, management has determined a valuation allowance against all of the domestic deferred tax assets in excess of the deferred tax liabilities is no longer needed, since it is more likely than not that the deferred tax assets will be realized. The Company’s foreign subsidiary had generated book and tax losses since its inception. Management has determined that it is not more likely than not that the foreign deferred tax assets will be realized. As such, the Company has maintained the valuation allowance against its foreign deferred tax assets. The change in valuation allowance for the years ended December 31, 2017, 2016 and 2015, is $14.0 million, $0.1 million and $3.5 million, respectively.
On December 22, 2017, the 2017 Tax Cut and Jobs Act (the "Act") was enacted into law and the new legislation contains several key tax provisions, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the estimated transition tax, re-measuring our U.S. deferred tax assets and liabilities at a 21% rate as well as reassessing the net realizability of our deferred tax assets and liabilities. The one-time transition tax does not generate a deemed distribution as the Company has no foreign deferred income. The provisional amount related to the re-measurement of our deferred tax balance is a reduction of approximately $2.8 million.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118") which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. We expect to complete our analysis within the measurement period in accordance with SAB 118. We do not expect any material subsequent adjustment to these amounts.