Entity information:
7
.        
Income Taxes
 
In
December 2017,
the Tax Cuts and Jobs Act (the
“2017
Tax Act”) was enacted. The
2017
Tax Act includes
many changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from
35%
to
21%
for tax years beginning after
December 31, 2017.
The
2017
Tax Act also provides for a
one
-time transition tax on certain foreign earnings and the acceleration of depreciation for certain assets placed into service after
September 27, 2017
as well as prospective changes beginning in
2018,
including repeal of the domestic manufacturing deduction, acceleration of tax revenue recognition, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest.
 
The Company recognized the income tax effects of the
2017
Tax Act in its
2017
financial statements in accordance with Staff Accounting Bulletin
No.
118,
which provides SEC staff guidance for the application of ASC Topic
740,
Income Taxes, in the reporting
period in which the
2017
Tax Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the
2017
Tax Act for which the accounting under ASC Topic
740
is complete and provisional amounts for those specific income tax effects of the
2017
Tax Act for which the accounting under ASC Topic
740
is incomplete but a reasonable estimate could be determined. The ultimate impact of the
2017
Tax Act on our financial statements and related disclosures for
2017
and beyond
may
differ from our current provisional amounts, possibly materially, due to, among other things, changes in interpretations and assumptions we have made, guidance that
may
be issued, and other actions we
may
take as a result of the
2017
Tax Act that differ from those presently contemplated.
 
The changes to existing U.S. tax laws as a result of the
2017
Tax Act, which we believe have the most significant impact on the
Company’s federal income taxes are as follows:
 
Reduction of the U.S. Corporate Income Tax Rate
 
The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company
’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from
35%
to
21%,
resulting in a
$5.6
million increase in income tax expense for the year ended
December 31, 2017
and a corresponding
$5.6
million decrease in net deferred tax assets as of
December 31, 2017.
 
The following table summarizes
loss before income taxes for the years ended
December 31 (
in thousands):
 
   
2017
    
2016
  
U.S loss
   $
(5,419
 )   $
(600
 )
Non-U.S. income
    
162
      
236
  
Loss before income taxes
   $
(5,257
 )   $
(364
 )
 
The following table summarizes the
Company’s components of the consolidated provision for income taxes for the years ended
December 
31
(in thousands):
 
   
2017
    
2016
  
U.S Federal income tax (expense) benefit
                
Current
   $
73
     $
-
  
Deferred
    
(13,830
 )    
157
  
Total U.S. Federal income tax (expense) benefit
    
(13,757
 )    
157
  
State and local income tax (expense) benefit
                
Current
    
(45
 )    
(58
 )
Deferred
    
(1,560
 )    
83
  
Total state and local income tax (expense) benefit
    
(1,605
 )    
25
  
Foreign income tax (expense) benefit
                
Current
    
(88
 )    
(40
 )
Total income tax (expense) benefit
   $
(15,450
 )   $
142
  
 
The following table summarizes activity related to the Company
’s valuation allowance for the years ended
December 31 (
in thousands):
 
   
2017
    
2016
  
Valuation allowance at the Beginning of Period
   $
-
     $
-
  
Income tax expense
    
(11,435
 )    
-
  
Release of valuation allowance
    
-
      
-
  
Valuation allowance at the End of Period
   $
(11,435
 )   $
-
  
 
The following table summarizes a reconciliation of the effective income tax rate to the U.S. federal statutory rate for the years ended
December 31:
 
   
2017
    
2016
  
Income tax expense at the statutory rate
    
34.00
 %    
34.00
 %
State and local income tax expense
    
4.60
 %    
9.16
 %
Foreign income tax
    
(1.17
 %)    
(3.79
 %)
Permanent differences
    
(8.25
 %)    
(38.40
 %)
Research & development credits
    
0.00
 %    
37.81
 %
Increase in valuation allowance
    
(217.49
 %)    
0.00
 %
Impacts related to the 2017 Tax Act
    
(105.95
 %)    
0.00
 %
Other adjustments
    
0.37
 %    
0.31
 %
Effective income tax rate
    
(293.89
 %)    
39.09
 %
 
The following table summarizes the temporary differences and carryforwards that give rise to deferred tax assets and liabilities as of
December 31 (
in thousands):
 
   
2017
    
2016
  
Deferred Federal tax assets
–
                
Bad debt reserves
   $
1,375
     $
1,710
  
Stock based compensation
    
305
      
668
  
Net operating loss
    
7,319
      
8,184
  
Accrued compensation
    
249
      
280
  
Alternative minimum tax credit
    
-
      
73
  
Inventories
    
18
      
69
  
Accrued rent
    
30
      
46
  
Goodwill and intangible assets
    
3,323
      
6,675
  
Research & development credits
    
533
      
534
  
Other credits
    
5
      
5
  
Other
    
103
      
189
  
Total deferred Federal tax assets
    
13,260
      
18,433
  
Less: valuation allowance
    
(9,599
 )    
-
  
Net deferred tax assets
    
3,661
      
18,433
  
Deferred Federal tax liabilities
–
                
Depreciation and asset basis differences
    
(3,672
 )    
(4,725
 )
Other
    
(51
 )    
(157
 )
Total deferred Federal tax liabilities
    
(3,723
 )    
(4,882
 )
Net deferred Federal tax assets
    
(62
 )    
13,551
  
Net deferred state and local tax assets
    
1,836
      
1,560
  
Less: valuation allowance
    
(1,836
 )    
-
  
Net deferred tax (liabilities) assets
   $
(62
 )   $
15,111
  
 
As of
December 31,
201
7
and
2016,
the Company recognized a tax benefit of
$0.0
million and
$0.6
million, respectively, for research and development credits pertaining to the Company’s development of software that enables
third
parties to interact, initiate functions or review data on the Company’s system.
 
As of
December 31,
201
7
and
2016,
the Company had federal net operating loss carryforwards remaining of approximately
$34.9
million and
$24.1
million, respectively.
 
The Company
’s federal net operating loss carryforwards of approximately
$34.9
million will begin to expire in various years beginning in
2028.
The state net operating losses of approximately
$1.4
million can be used for a period of
5
to
20
years and vary by state, and if unused, begin to expire in
2018,
though a substantial portion expires beyond
2018.
Tax benefits of operating loss and tax credit carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances. The Company recorded a full valuation allowance for tax benefits of operating loss and tax credit carryforwards, which is described in more detail below.
 
The Company
’s realization of its deferred tax assets is dependent upon many factors, including, but
not
limited to, the Company’s ability to generate sufficient taxable income. 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. As of
December 31, 2017,
the Company established a full valuation allowance for all deferred tax assets, as management determined that it is more likely than
not
the Company will
not
recognize the benefits of its federal and state deferred tax assets. Cumulative losses in recent years and
no
assurance of future taxable income is the basis for the Company’s assessment that the deferred tax assets require a full valuation allowance. A valuation allowance of
$11.4
million has been established at
December 31, 2017.
 
The Company had
no
uncertain tax position
s for the years ended
December 
31,
2017
and
2016.
 
The Company is subject to taxation for Federal and various state jurisdictions in the United States and Canada.
The Federal income tax returns of the Company for the years
2014
through
2017
are subject to examination by the Internal Revenue Service. The state income tax returns and other state tax filings of the Company are subject to examination by the state taxing authorities, for various periods generally up to
four
years after they are filed. Canadian income tax returns of the Company for the years
2013
through
2017
are subject to examination by the Canada Revenue Agency.
 
T
he Company completed an update to its analysis of past ownership (as defined under Section
382
of the Code), and as a result, the Company believes that, consistent with previously completed analyses, it has
not
experienced an ownership change since
December 31, 2010.
The Company has undertaken a definitive analysis necessary to quantify the effect of ownership change as of
December 31, 2010
on the net operating loss carryforwards generated prior to
December 31, 2010.
Based on the analysis, the Company is subject to an annual limitation of
$1.8
million on its use of
remaining pre-ownership change net operating loss carryforwards of
$4.7
million (and certain other pre-change tax attributes).