Income Taxes
Loss before income taxes was as follows for the years ended December 31, 2017, 2016 and 2015 (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
United States | | $ | (1,965 | ) | | $ | (6,906 | ) | | $ | (17,222 | ) |
Foreign | | 34 |
| | 48 |
| | 131 |
|
| | $ | (1,931 | ) | | $ | (6,858 | ) | | $ | (17,091 | ) |
The components of income tax (benefit) expense were as follows (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
U.S. federal & state | | $ | 183 |
| | $ | 25 |
| | $ | 31 |
|
Foreign | | 15 |
| | 13 |
| | 84 |
|
| | 198 |
| | 38 |
| | 115 |
|
Deferred: | | | | | | |
U.S. federal & state | | (620 | ) | | — |
| | — |
|
Foreign | | (6 | ) | | — |
| | (1 | ) |
| | (626 | ) | | — |
| | (1 | ) |
Income tax (benefit) expense | | $ | (428 | ) | | $ | 38 |
| | $ | 114 |
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code, including, but not limited to, a corporate tax rate decrease to 21% effective January 1, 2018. The Company has calculated its best estimate of the impact of the Tax Act for the year ended December 31, 2017, based on its understanding of the Tax Act and guidance available as of the date of filing, and recorded an income tax benefit of $0.6 million.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, the Company has determined that the $0.6 million income tax benefit recorded in connection with the remeasurement of its deferred tax liabilities was a provisional amount and a reasonable estimate as of December 31, 2017. Any necessary subsequent adjustments will be recorded in 2018.
A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the financial statements is presented below: |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Federal income taxes at statutory rate | | 34.0 | % | | 34.0 | % | | 34.0 | % |
U.S. state income taxes | | (9.5 | ) | | (0.6 | ) | | (0.7 | ) |
Equity compensation | | 189.1 |
| | 7.7 |
| | (1.2 | ) |
Change in valuation allowance | | (229.6 | ) | | (40.5 | ) | | (34.2 | ) |
Meals and entertainment | | (3.0 | ) | | (0.9 | ) | | (0.4 | ) |
Other, net | | 2.0 |
| | (0.3 | ) | | 1.8 |
|
Change in federal tax rate | | 32.1 |
| | — |
| | — |
|
Credits | | 7.1 |
| | — |
| | — |
|
Effective income tax rate | | 22.2 | % | | (0.6 | )% | | (0.7 | )% |
The principal components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
|
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Unearned premium reserves | | $ | 966 |
| | $ | 918 |
|
Accruals and reserves | | 606 |
| | 782 |
|
Net operating loss carryforwards | | 18,211 |
| | 22,632 |
|
Depreciation and amortization | | 317 |
| | 535 |
|
Equity compensation | | 1,024 |
| | 1,137 |
|
Credits | | 208 |
| — |
| — |
|
Other | | 270 |
| | 101 |
|
Total deferred tax assets | | 21,602 |
| | 26,105 |
|
Deferred tax liabilities: | | | | |
Deferred costs | | (183 | ) | | (226 | ) |
Intangible assets | | (1,002 | ) | | (1,623 | ) |
Total deferred tax liabilities | | (1,185 | ) | | (1,849 | ) |
Total deferred taxes | | 20,417 |
| | 24,256 |
|
Less deferred tax asset valuation allowance | | (21,419 | ) | | (25,879 | ) |
Net deferred tax liability | | $ | (1,002 | ) | | $ | (1,623 | ) |
At December 31, 2017, the Company had federal net operating loss carryforwards of $86.7 million and federal credits of $0.2 million. Use of the carryforwards is limited based on the future income of the Company. The federal net operating loss carryforwards currently would begin to expire in 2026. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company’s net operating loss carryforwards and credit carryforwards may be limited if the Company experiences an ownership change. As of December 31, 2017, the utilization of approximately $0.5 million of net operating losses are subject to limitation as a result of prior ownership changes; however, subsequent ownership changes may further affect the limitation in future years.
A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, the Company has recorded a full valuation allowance against its deferred tax assets as of December 31, 2017 and 2016 because the Company’s management has determined that it is more likely than not that these assets will not be fully realized.
The Company intends to reinvest all foreign earnings indefinitely outside of the U.S.
The Company is open to examination by the U.S. federal tax jurisdiction for the years ended December 31, 2014 through 2017. The Company is also open to examination for 2007 and forward with respect to net operating loss carryforwards generated and carried forward from those years in the United States. The Company is open to examination by the Canada Revenue Agency for the years ended December 31, 2013 through 2017 for all corporate tax matters, and open for the years ended December 31, 2009 through 2017 for transactions with non-arm’s length non-Canadian residents.
The Company accounts for uncertain tax positions based on a two-step process of evaluating recognition and measurement criteria. The first step assesses whether the tax position is more likely than not to be sustained upon examination by the taxing authority, including resolution of any appeals or litigation, on the basis of the technical merits of the position. If the tax position meets the more-likely-than-not criteria, the portion of the tax benefit greater than 50% likely to be realized upon settlement with the relevant tax authority is recognized in the financial statements. No significant changes in uncertain tax positions are expected in the next twelve months.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Balance, beginning of year | | $ | 120 |
| | $ | 80 |
| | $ | 65 |
|
Increases to tax positions related to prior periods | | 91 |
| | — |
| | — |
|
Increases to tax positions related to the current year | | 116 |
| | 40 |
| | 15 |
|
Balance, end of year | | $ | 327 |
| | $ | 120 |
| | $ | 80 |
|