Income Taxes
The provision (benefit) for income taxes consists of the following:
|
| | | | | | | | | | | |
| Year Ended |
| December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Federal: | | | | | |
Current | $ | 227 |
| | $ | 11 |
| | $ | (3,218 | ) |
Deferred | — |
| | — |
| | 5,153 |
|
Total Federal | 227 |
| | 11 |
| | 1,935 |
|
State and Local: | | | | | |
Current | 185 |
| | 149 |
| | 197 |
|
Deferred | — |
| | — |
| | 663 |
|
Total State and Local | 185 |
| | 149 |
| | 860 |
|
Foreign | | | | | |
Current | — |
| | — |
| | — |
|
Deferred | 181 |
| | (547 | ) | | (402 | ) |
Total Foreign | 181 |
| | (547 | ) | | (402 | ) |
Total | $ | 593 |
| | $ | (387 | ) | | $ | 2,393 |
|
The reconciliation between the provision (benefit) for income taxes and the expected provision (benefit) for income taxes at the U.S. federal statutory rate of 35% is as follows: |
| | | | | | | | | | | |
| Year Ended |
| December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
U.S. Operations | $ | (3,722 | ) | | $ | (88,084 | ) | | $ | (78,643 | ) |
Foreign Operations | 1,067 |
| | 515 |
| | (1,871 | ) |
Income (loss) before income taxes | (2,655 | ) | | (87,569 | ) | | (80,514 | ) |
Federal statutory rate | 35 | % | | 35 | % | | 35 | % |
Provision for income taxes at federal statutory rate | (929 | ) | | (30,649 | ) | | (28,180 | ) |
State taxes, net of federal benefit | 157 |
| | 113 |
| | 805 |
|
Foreign tax rate differential | (92 | ) | | (522 | ) | | 253 |
|
Change in valuation allowance | (10,043 | ) | | 18,969 |
| | 8,528 |
|
Impairment charge | — |
| | 10,903 |
| | 17,438 |
|
Change in Tax Rate | 10,526 |
| | — |
| | — |
|
Stock compensation | 424 |
| | 230 |
| | 3,384 |
|
Interest on Series B Preferred Stock | 504 |
| | 467 |
| | 430 |
|
Subpart F Income | 502 |
| | — |
| | — |
|
Excess Tax Benefit Recognized | (782 | ) | | — |
| | — |
|
Prior year adjustment | 241 |
| | 14 |
| | 518 |
|
Change in unrecognized tax benefits
| (27 | ) | | (26 | ) | | (1,024 | ) |
Other | 112 |
| | 114 |
| | 241 |
|
Provision (benefit) for income taxes | $ | 593 |
| | $ | (387 | ) | | $ | 2,393 |
|
The income tax provision (benefit) reflects the current and deferred tax consequences of events that have been recognized in the Company’s Consolidated Financial Statements or tax returns. The “Tax Cuts and Jobs Act,” enacted in December 2017, reduces the US federal corporate tax rate from 35% to 21% effective January 1, 2018. Consequently, we have re-measured our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. 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 Act. In accordance with SAB 118, the Company recorded a decrease in its net deferred tax assets of $10.5 million with a corresponding decrease to its valuation allowance to account for this rate reduction. The Act also requires a deemed repatriation of foreign earnings and profits, determined as of either November 2, 2017 or December 31, 2017, whichever amount is greater. As such, the Company reported a deemed repatriation of foreign earnings totaling $0.5 million as of December 31, 2017 related to its European subsidiary. The Company considers the earnings of certain non-U.S. subsidiaries to be indefinitely reinvested outside the United States and the current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
The tax effects of significant items comprising the Company’s deferred tax assets/(liabilities) are as follows:
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
| (in thousands) |
Allowance for doubtful accounts | $ | 16 |
| | $ | 52 |
|
Inventories | 1,028 |
| | 3,407 |
|
Employee benefits | 2,347 |
| | 3,754 |
|
Net operating loss | 14,766 |
| | 19,246 |
|
Unrecognized tax benefits | 676 |
| | 649 |
|
Depreciation and amortization
| (54 | ) | | 357 |
|
Intangible assets | — |
| | 209 |
|
Other | 1,085 |
| | 1,222 |
|
| 19,864 |
| | 28,896 |
|
Valuation allowance | (19,502 | ) | | (28,353 | ) |
Net deferred tax assets (liabilities) | $ | 362 |
| | $ | 543 |
|
At December 31, 2017, the Company has $57.4 million of net operating loss carryforwards and $30.6 million of state net operating loss carryforwards, which will begin to expire in 2029. An ownership change occurred on January 15, 2014, and
$12.7 million of federal net operating losses included in the above are pre-change losses subject to Section 382 of the Internal Revenue Code of 1986, as amended. The Company believes, based on the estimated Section 382 limitation and the net operating loss carryforward period, that the pre ownership change net operating losses can be fully utilized in future years if there is sufficient taxable income in such carryforward period.
The realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. During 2015, as a result of cumulative losses in recent years primarily due to incremental costs associated with the console transition, acquisition costs and initial investments in the HyperSound business, the Company concluded that a full valuation allowance is required on its net domestic deferred tax assets. However, the Company believes there is sufficient evidence to support the utilization of the Company’s international net deferred tax assets totaling $0.4 million and, therefore, no valuation allowance has been set-up against these assets.
In 2017, due to changes in the reporting of stock compensation, the Company’s previously unrecognized excess tax benefit related to the exercise of nonqualified stock options totaling $2.2 million was recognized in deferred tax assets. This increase to deferred tax assets was fully offset by the Company’s valuation allowance.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
| (in thousands) |
Gross unrecognized tax benefit, beginning of period | $ | 1,468 |
| | $ | 1,468 |
|
Additions based on tax positions related to the current year
| — |
| | — |
|
Decreases based on tax positions in a prior period | — |
| | — |
|
Gross unrecognized tax benefit, end of period | $ | 1,468 |
| | $ | 1,468 |
|
The Company recognizes only those tax positions that meet the more-likely-than-not recognition threshold, and establish tax reserves for uncertain tax positions that do not meet this threshold. To the extent these unrecognized tax benefits are ultimately recognized, approximately $1.5 million will impact the Company’s effective tax rate in a future period. Interest and penalties associated with income tax matters are included in the provision for income taxes. As of December 31, 2017, the Company had uncertain tax positions of $2.3 million, inclusive of $0.8 million of interest and penalties.
The Company files U.S., state and foreign income tax returns in jurisdictions with various statutes of limitations. Below is a summary of the filing jurisdictions and open tax years:
|
| |
| Open Years |
U.S. Federal | 2014 - 2016 |
California | 2013 - 2016 |
New Jersey | 2013 - 2016 |
New York | 2014 - 2016 |
Pennsylvania | 2014 - 2015 |
Texas | 2013 - 2016 |
United Kingdom | 2014 - 2016 |