INCOME TAXES
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act, among other things, reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, changes rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, and creates new taxes on certain foreign sourced earnings.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In other cases, the Company has not been able to make a reasonable estimate and continue to account for those items based on its existing accounting under ASC 740, Income Taxes, and the tax laws that were in effect immediately prior to enactment. The items for which the Company was able to determine a reasonable estimate did not have a material impact on income tax expense.
The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. For certain of our DTAs the Company has recorded a decrease of $15,884,000, with a corresponding adjustment to valuation allowance for the year ended December 31, 2017. The re-measurement of our indefinite lived DTLs resulted in an immaterial deferred income tax benefit.
The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $993,000 that is expected to be offset by current year net operating losses. However, the Company is continuing to gather additional information to more precisely compute the amount of the Transition Tax.
The Company must assess whether its valuation allowance analyses are affected by various aspects of the Tax Act (e.g., deemed repatriation of deferred foreign income, GILTI inclusions, new categories of FTCs). Since, as discussed herein, the Company has recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional.
The following table presents domestic and foreign components of consolidated loss before income taxes for the periods presented (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
2017 | | 2016 | | 2015 |
Domestic | $ | (15,378 | ) | | $ | (23,297 | ) | | $ | (36,197 | ) |
Foreign | 753 |
| | 639 |
| | 355 |
|
Loss before provision for income taxes | $ | (14,625 | ) | | $ | (22,658 | ) | | $ | (35,842 | ) |
The Company recorded an income tax expense of $167,000, $321,000, and $246,000 for the years ended December 31, 2017, 2016, and 2015. This tax expense is largely attributable to the deferred tax liability associated with the amortization of intangible assets and foreign income taxes associated with the Company’s operations in the United Kingdom and Australia. The Company continues to maintain a valuation allowance for its U.S. federal and state deferred tax assets.
The components of income tax expense were as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
2017 | | 2016 | | 2015 |
Current provisions for income taxes: | |
| | |
| | |
|
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 73 |
| | 39 |
| | 29 |
|
Foreign | 187 |
| | 162 |
| | 158 |
|
Total current | 260 |
| | 201 |
| | 187 |
|
Deferred tax provision (benefit): | |
| | |
| | |
|
Federal | (156 | ) | | 95 |
| | 93 |
|
State | 63 |
| | 19 |
| | 21 |
|
Foreign | — |
| | 6 |
| | (55 | ) |
Total provision for income taxes | $ | 167 |
| | $ | 321 |
| | $ | 246 |
|
The tax effects of temporary differences and related deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | |
| December 31, |
2017 | | 2016 |
Deferred tax assets: | |
| | |
|
Net operating losses carryforwards | $ | 31,699 |
| | $ | 39,520 |
|
Accrued expenses and reserves | 668 |
| | 844 |
|
Stock Compensation | 752 |
| | 2,226 |
|
Deferred revenue | 847 |
| | 1,270 |
|
Deferred rent | 513 |
| | 539 |
|
Depreciation | 1,340 |
| | 915 |
|
Other | 357 |
| | 224 |
|
Total deferred tax assets | 36,176 |
| | 45,538 |
|
Deferred tax liabilities: | | | |
|
Amortization | (393 | ) | | (216 | ) |
Other | (265 | ) | | (241 | ) |
Total deferred tax liabilities | (658 | ) | | (457 | ) |
Valuation allowance | (35,665 | ) | | (45,329 | ) |
Net deferred tax liabilities | $ | (147 | ) | | $ | (248 | ) |
The following table presents a reconciliation of statutory federal rate and the Company’s effective tax rate for the periods presented:
|
| | | | | | | | |
| Year Ended December 31, |
2017 | | 2016 | | 2015 |
Tax at statutory federal rate | 34 | % | | 34 | % | | 34 | % |
State tax – net of federal benefit | 4.8 |
| | 4.7 |
| | 5.0 |
|
Stock-based compensation — ISOs | 6.3 |
| | 1.0 |
| | (2.4 | ) |
Change in valuation allowance | (42.5 | ) | | (38.3 | ) | | (35.6 | ) |
Other | (3.7 | ) | | (2.8 | ) | | (1.7 | ) |
Effective tax rate | (1.1 | )% | | (1.4 | )% | | (0.7 | )% |
It is the Company’s intention to reinvest undistributed earnings of its foreign subsidiaries, which approximates $1,752,000 at December 31, 2017, and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes or United States income taxes, which may become payable if undistributed earnings of the foreign subsidiaries were paid as dividends to the Company. Should the Company decide to no longer indefinitely reinvest such earnings outside the United States, the Company would have to adjust the income tax provision in the period management makes such determination.
As of December 31, 2017 and 2016, respectively, deferred tax assets included federal net operating loss carryforwards of $118,864,000 and $103,047,000, and state net operating loss carryforwards of $104,049,000 and $88,929,000. The federal net operating loss carryforwards start to expire in the year ending December 31, 2025. State net operating losses started to expire in 2016 for the earliest net operating loss layers.
As of December 31, 2017 and 2016, the Company had no assurance that future taxable income would be sufficient to fully utilize the net operating loss carryforwards and other deferred tax assets in the future. Consequently, the Company determined that a valuation allowance of $35,665,000 and $45,329,000 as of the years ended December 31, 2017 and 2016, respectively, was needed to offset the deferred tax assets resulting mainly from the net operating loss carryforwards. The net change in the valuation allowance during the years ended December 31, 2017, 2016, and 2015 was a $9,664,000 decrease, $7,881,000 increase, and $13,435,000 increase, respectively.
Section 382 of the Internal Revenue Code of 1986, as amended, places a limitation on the realizability of Net Operating Losses (“NOLs”) in future periods when a loss corporation has undergone significant changes in stock ownership. During the year ended December 31, 2015, the Company completed an analysis under IRC Section 382 through December 31, 2014, and determined that the Company experienced multiple ownership changes during this period. U.S. federal NOLs of approximately $430,000 are expected to expire unused due to limitations under Section 382. The Company performed an IRC Section 382 analysis as of December 31, 2017 and determined that there would be no additional effects on the NOL deferred tax asset if ownership changes occurred between January 1, 2015 and December 31, 2017.
The Company evaluates tax positions for recognition using a more-likely-than-not recognition threshold, and those tax positions eligible for recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon the effective settlement with a taxing authority that has full knowledge of all relevant information. As of December 31, 2017 and 2016, the Company has not identified any unrecognized income tax benefits and uncertain tax positions, as well as any associated interest and penalties.
All tax years remain subject to examination by the U.S. federal and state tax authorities.