NOTE 11 — INCOME TAXES

 

The components of loss before income taxes by tax jurisdiction were as follows:

 

 

The components of income tax benefit/(expense) were as follows:

 

 

The difference between the actual rate and the federal statutory rate was as follows:

 

 

During 2017, the Company recorded a net release of its valuation allowance of $294 as result of the acquisition of Dairy Free Games Inc. in August 2017.

 

Deferred tax assets and liabilities consist of the following:

 

 

The Company has not provided deferred taxes on unremitted earnings attributable to foreign subsidiaries, excluding China, because their earnings are intended to be reinvested indefinitely. No deferred tax asset was recognized since the Company does not believe the deferred tax asset will be realized in the foreseeable future. The amount of accumulated foreign earnings of the Company’s foreign subsidiaries totaled $1,413 as of December 31, 2017. If the Company's foreign earnings were repatriated, additional tax expense might result. The Company determined that the calculation of the amount of unrecognized deferred tax liability related to these cumulative unremitted earnings attributable to foreign subsidiaries is not practicable. 

 

The Company recorded a release of its valuation allowance of $294,  $328, and $0 during 2017, 2016, and 2015, respectively. The 2017 and 2016 releases were associated with the acquisitions of Dairy Free and Crowdstar in August 2017 and November 2016, respectively. Pursuant to ASC 805-740, changes in the Company’s valuation allowance that stem from a business combination should be recognized as an element of the Company’s deferred income tax expense or benefit. The Company previously recognized a valuation allowance against its net operating loss carryforwards and determined that it should be able to utilize the benefit of those net operating losses against the deferred tax liabilities of Dairy Free and Crowdstar, respectively; therefore, it has partially released its pre-existing valuation allowance. 

In accordance with ASC 740 and based on all available evidence on a jurisdictional basis, the Company believes that it is more likely than not that its deferred tax assets will not be utilized and has recorded a full valuation allowance against its net deferred tax assets in each of its jurisdictions except for entities in Canada, China and India. The Company assesses on a periodic basis the likelihood that it will be able to recover its deferred tax assets. The Company considers all available evidence, both positive and negative, including historical levels of income or losses, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If it is not more likely than not that the Company expects to recover its deferred tax assets, the Company will increase its provision for taxes by recording a valuation allowance against the deferred tax assets that it estimates will not ultimately be recoverable. The available negative evidence at December 31, 2017 and 2016 included historical and projected future operating losses. As a result, the Company concluded that an additional valuation allowance of $1,950 and $18,240 net of the described releases, was required to reflect the change in its deferred tax assets prior to valuation allowance during 2017 and 2016, respectively.  As of  December 31, 2017 and 2016, the Company considered it more likely than not that its deferred tax assets would not be realized within their respective carryforward periods.

At December 31, 2017, the Company had net operating loss carryforwards of approximately $207,813 and $93,567 for federal and state tax purposes, respectively. These carryforwards will expire at various times between 2018 and 2037.  In addition, the Company has research and development tax credit carryforwards of approximately $13,009 for federal income tax purposes and $15,817 for California tax purposes.  The federal research and development tax credit carryforwards will begin to expire in 2023. The California state research credit will carry forward indefinitely. The Company has approximately $5,885 of foreign tax credits that will begin to expire in 2018. The Company’s ability to use its net operating loss carryforwards and federal and state tax credit carryforwards to offset future taxable income and future taxes, respectively, may be subject to restrictions attributable to equity transactions that result in changes in ownership as defined by Internal Revenue Code Section 382. 

 

A reconciliation of the total amounts of unrecognized tax benefits was as follows:

 

 

The total unrecognized tax benefits as of December 31, 2017 and 2016 included approximately $13,152 and $10,590, respectively, of unrecognized tax benefits that have been netted against deferred tax assets. As of December 31, 2017, the Company does not expect the unrecognized tax benefits, if recognized, to have a material impact on its financial statements. At December 31, 2017, the Company does not anticipate that the liability for uncertain tax positions, excluding interest and penalties, that could decrease within the next twelve months due to the expiration of statutes of limitation in foreign jurisdictions in which the Company does business will have a material impact on its financial statements.

 

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. The Company has accrued $131 of interest and penalties on uncertain tax positions as of December 31, 2017, as compared to $294 as of December 31, 2016. Approximately $96,  $128 and $78 of accrued interest and penalty expense related to estimated obligations for unrecognized tax benefits was recognized during 2017, 2016 and 2015, respectively. During 2017, the Company released $273 of interest and penalties on uncertain tax positions due to the expiration of certain statutes of limitation in foreign jurisdictions in which the Company does business and in relation to winding down of a foreign subsidiary.

 

The Company is subject to taxation in the United States and various foreign jurisdictions. The material jurisdictions subject to examination by tax authorities are primarily the State of California, the United States, Canada, China and India. The Company’s federal tax returns are open by statute for tax years 1998 and California tax returns are open by statute for tax years 2003 and forward and could be subject to examination by the tax authorities. The Company’s China income tax returns are open by statute for tax years 2015 and forward.

 

On December 22, 2017, the Tax Cuts and Jobs Act (“The Act”) was enacted, which made significant changes to various areas of the U.S. federal income tax law, including lowering of the U.S. corporate tax rate from 35 percent to 21 percent. U.S. GAAP accounting for income taxes requires that the Company record the impacts of any tax law change on its deferred income taxes in the quarter that the tax law change is enacted.  Due to the complexities involved in accounting for the enactment of the Act, in January 2018, SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to provide guidance for companies that have not completed their accounting for the income tax effects of The Act in the period of enactment. Specifically, SAB 118 states that companies that have not completed accounting for the effects of The Act by financial reporting deadlines may report provisional amounts based on reasonable estimates for items for which the accounting is incomplete. Those provisional amounts will be subject to adjustment during a measurement period that begins in the reporting period that includes The Act’s enactment date and ends when a company has obtained, prepared and analyzed the information needed to complete the accounting requirements under ASC 740 Income Taxes. The measurement period should not extend beyond one year from the enactment date. Furthermore, SAB 118 states that if a company cannot make a reasonable estimate for an income tax effect, it should not account for that effect until it can make such an estimate.

 

In accordance with SAB 118, the Company recorded a provisional amount of a one-time negative adjustment of $34.9 million for the re-measurement of deferred tax assets and liabilities, offset by a one-time positive adjustment of $34.9 million for the re-measurement of valuation allowance maintained on these items.  These amounts have been estimated as provisional as the Company believes that additional analysis of its deferred tax assets and liabilities is necessary, as well as the evaluation of potential correlative adjustments.  As the Company expects regulators to issue further guidance, among other things, its estimates may change during calendar year 2018.  Any subsequent adjustment to these amounts will be recorded to current tax expense in the period the analysis is completed, not to exceed the fourth quarter of 2018. 

 

The Act also required companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. Based on an analysis of its foreign subsidiaries and the current year financial statements, the Company does not expect to have a transition tax.

 

Based on its initial review of The Act, the Company does not expect that the new legislation will have a material impact on its financial statements for the year ended December 31, 2017 or its future operational results as long as the Company maintains a full valuation allowance. It is the Company’s policy to record valuation allowances when necessary to reduce deferred tax assets to the amount that it expects to realize. Currently, the Company maintains a full valuation allowance for its deferred tax assets in the U.S., Hong Kong, and China.

 

The Company will continue to analyze the impact of The Act on its financial statements and operations. Additional impacts, if any, will be recorded as they are identified during the measurement period as provided for in SAB 118.