Income Taxes
For the years ended December 31, 2017, 2016 and 2015, we recorded income tax expense of $58,000, $67,000, and $75,000, respectively, associated with state minimum taxes and the amortization of tax deductible goodwill that is not an available source of income to realize the deferred tax asset.
Our effective tax rate differs from the United States federal statutory rate of 34% primarily because our losses have been offset by a valuation allowance due to uncertainty as to the realization of the tax benefit of net operating losses ("NOLs". Set forth below is a reconciliation of the components that caused our provision for income taxes to differ from amounts computed by applying the United States federal statutory rate of 34% for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income tax benefit at the statutory rate | 34 | % | | 34 | % | | 34 | % |
State and local income taxes, net of federal benefit | (14 | ) | | 7 |
| | 3 |
|
Stock-based compensation expense | (15 | ) | | (4 | ) | | (2 | ) |
Meals and entertainment | 2 |
| | (2 | ) | | (1 | ) |
Permanent differences | — |
| | (1 | ) | | — |
|
Change in valuation allowance | (60 | ) | | (42 | ) | | (38 | ) |
Change in federal rate | 74 |
| | — |
| | — |
|
Research and development tax credits | (20 | ) | | 7 |
| | 3 |
|
Provision for income taxes | 1 | % | | (1 | )% | | (1 | )% |
| | | | | |
The components of deferred tax assets (liabilities) were as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred income tax assets: | | | |
Net operating loss carryforwards | $ | 19,519 |
| | $ | 31,436 |
|
Research and development tax credits | 8,278 |
| | 4,032 |
|
Other | 2,493 |
| | 2,771 |
|
Gross deferred tax assets | 30,290 |
| | 38,239 |
|
Valuation allowance | (23,827 | ) | | (29,417 | ) |
Deferred tax assets, net of valuation allowance | 6,463 |
| | 8,822 |
|
Deferred tax liabilities: | |
| | |
|
Property, equipment and software | (4,293 | ) | | (5,820 | ) |
Intangible assets | (6 | ) | | (403 | ) |
State taxes | (1,693 | ) | | (2,040 | ) |
Other | (549 | ) | | (632 | ) |
Total deferred tax liabilities | (6,541 | ) | | (8,895 | ) |
Total net deferred tax liabilities | $ | (78 | ) | | $ | (73 | ) |
As of December 31, 2017, we had federal net operating loss carryforwards of $73.5 million, which will begin to expire in 2027. As of December 31, 2017, we had state net operating loss carryforwards of $48.0 million, which will begin to expire in 2023. As of December 31, 2017 we also had federal and state research and development credit carryforwards of $5.0 million and $5.4 million, respectively. The federal credit carryforwards will begin to expire in 2027, while the majority of the state credits carryforward indefinitely.
The Internal Revenue Code of 1986, as amended (“IRC”), imposes substantial restrictions on the utilization of NOLs and other tax attributes in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use pre-change NOLs and may be limited as prescribed under IRC Section 382. Events which may cause limitation in the amount of the NOLs and credits that we utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. The Company has undertaken a NOL/382 analysis and has determined that there are no limitations on the NOL carryforwards at December 31, 2016.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets in the future. A significant piece of objective negative evidence evaluated was the cumulative loss incurred through December 31, 2017. Such objective evidence limits the ability to consider other subjective positive evidence such as current year taxable income and future income projections. On the basis of this evaluation, as of December 31, 2017, a valuation allowance of $23.8 million has been recorded since it is more likely than not that the deferred tax assets will not be realized.
The change in the valuation allowance for the years ended December 31, 2017, 2016 and 2015 was as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Valuation allowance, at beginning of year | $ | 29,417 |
| | $ | 25,926 |
| | $ | 19,900 |
|
Increase (decrease) in valuation allowance | (5,590 | ) | | 3,491 |
| | 6,026 |
|
Valuation allowance, at end of year | $ | 23,827 |
| | $ | 29,417 |
| | $ | 25,926 |
|
| | | | | |
The following is a reconciliation of the total amounts of unrecognized tax benefits (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Unrecognized tax benefit beginning of year | $ | 4,032 |
| | $ | 2,867 |
| | $ | 2,014 |
|
Decreases-tax positions in prior year | (2,210 | ) | | — |
| | — |
|
Increases-tax positions in current year | 283 |
| | 1,165 |
| | 853 |
|
Unrecognized tax benefit end of year | $ | 2,105 |
| | $ | 4,032 |
| | $ | 2,867 |
|
| | | | | |
The unrecognized tax benefits are recorded as a reduction to the deferred tax assets. Since there is a full valuation allowance recorded against the deferred tax assets, the recognition of previously unrecognized tax benefits on uncertain positions would result in no impact to the effective tax rate.
As of December 31, 2017 and 2016, we had no accrued interest and penalties related to uncertain income tax positions. We do not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.
We are subject to taxation in the United States and various states. Due to the net operating loss carryforwards, the Company's federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception. We are not currently under audit by any taxing authorities.
On December 22, 2017, the United States government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act significantly revises the existing tax law by, among other things, lowering the United States corporate income tax rate from 35% to 21% beginning in 2018. The Company reviewed and incorporated the impact of the Tax Act in its tax calculations and disclosures. The primary impact on the Company stems from the re-measurement of its deferred taxes at the new corporate tax rate of 21%, which reduced the Company's net deferred tax assets, before valuation allowance, by $7.2 million. Due to the full valuation allowance, the change in deferred taxes was fully offset by the change in valuation allowance, except for an immaterial amount that is reflected in income tax expense related to the rate re-measurement of the tax deductible goodwill. The Tax Act did not have a significant impact on the Company's Consolidated Financial Statements for the year ended December 31, 2017.