Entity information:
INCOME TAXES

The components of loss before provision for income taxes are as follows (in thousands):
 
Year ended December 31,
 
2017
 
2016
 
2015
Domestic
$
(42,185
)
 
$
(69,020
)
 
$
(66,728
)
Foreign
(4,810
)
 
(15,354
)
 
(7,906
)
Loss before provision for income taxes
$
(46,995
)
 
$
(84,374
)
 
$
(74,634
)


The income tax (benefit) expense is as follows (in thousands):
 
Year ended December 31,
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
Federal
$
(250
)
 
$
(958
)
 
$
932

State
47

 
113

 
(10
)
Foreign
5,365

 
5,865

 
1,424

Total current income tax expense
5,162

 
5,020

 
2,346

 
 
 
 
 
 
Deferred:
 
 
 
 
 
Federal
(5,497
)
 
(7,550
)
 
(34,589
)
State
(372
)
 
(31
)
 
(2,506
)
Foreign
(1,182
)
 
(439
)
 
(1,340
)
Total deferred income (benefit) expense
(7,051
)
 
(8,020
)
 
(38,435
)
 
 
 
 
 
 
Income tax (benefit) expense
$
(1,889
)
 
$
(3,000
)
 
$
(36,089
)


The reconciliation of income tax at the federal statutory rate to the actual effective income tax rate (benefit) is as follows:
 
Year ended December 31,
 
2017
 
2016
 
2015
Federal statutory rate
(35.0
)%
 
(35.0
)%
 
(35.0
)%
Foreign rate differential
1.5
 %
 
2.1
 %
 
0.7
 %
Losses of foreign subsidiaries disregarded for US income tax
(2.5
)%
 
(3.2
)%
 
—
 %
State income taxes, net of federal benefit
(3.0
)%
 
—
 %
 
(2.5
)%
Nondeductible loan costs
1.4
 %
 
1.9
 %
 
1.5
 %
Nondeductible transaction costs
—
 %
 
—
 %
 
1.6
 %
Other differences
(4.0
)%
 
4.2
 %
 
0.4
 %
Rate change - impact of the U.S. Tax Cuts and Jobs Act
19.9
 %
 
—
 %
 
—
 %
Repatriation tax - impact of the U.S. Tax Cuts and Jobs Act
4.1
 %
 
—
 %
 
—
 %
Tax credits - impacts of the U.S. Tax Cuts and Jobs Act
(6.0
)%
 
—
 %
 
—
 %
Valuation allowance - impacts of the U.S. Tax Cuts and Jobs Act
(35.3
)%
 
—
 %
 
—
 %
Withholding tax
2.5
 %
 
1.5
 %
 
1.1
 %
Tax credits
(2.1
)%
 
(0.7
)%
 
(1.3
)%
Uncertain tax positions
7.3
 %
 
1.9
 %
 
0.3
 %
Valuation allowance
47.2
 %
 
23.7
 %
 
(15.2
)%
Effective tax rate
(4.0
)%
 
(3.6
)%
 
(48.4
)%


The components of the net deferred tax assets (liability) consist of the following (in thousands):
 
December 31,
 
2017
 
2016
Deferred tax assets:
 
 
 
Accrued expenses
$
624

 
$
662

Allowance for bad debt
443

 
1,175

Payroll accruals
1,732

 
1,818

Foreign tax credits
11,454

 
9,541

Net operating loss carryforwards
42,205

 
47,019

Property and equipment, net
—

 
1,830

Research and development credits
3,320

 
1,420

Loan costs and interest
2,551

 
3,441

Other
1,119

 
1,654

Total deferred tax assets
63,448

 
68,560

Valuation allowance
(33,774
)
 
(28,211
)
Deferred tax assets, net of valuation allowance
$
29,674

 
$
40,349

 
 
 
 
Deferred tax liabilities:
 
 
 
Prepaid expenses and other
$
(359
)
 
$
(512
)
Intangible assets
(25,493
)
 
(46,785
)
Property and equipment, net
(3,723
)
 
—

Deferred tax liabilities
(29,575
)
 
(47,297
)
Net deferred tax assets (liabilities)
$
99

 
$
(6,948
)


Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2017 in certain tax jurisdictions. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of December 31, 2017, a valuation allowance of $33.8 million has been recorded on US and certain foreign deferred tax assets to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

The Company’s Mexican customers are required under the U.S.-Mexico tax treaty to withhold 10% of their payments due to the Company for license fees, which can be used as foreign tax credits on the Company’s U.S. federal income tax return. The foreign tax credits are not refundable, but can be carried forward for 10 years to offset future tax liability. As of December 31, 2017, the Company has $11.5 million in foreign tax credits which, if unused, will expire in years 2018 through 2027. In addition, the Company has $3.3 million of research and development credits which begin to expire in 2028. A full valuation allowance has been recorded on the foreign tax credits and research and development credits.

The Company has net operating loss (“NOL”) carryforwards for U.S. federal purposes of $168.0 million, in foreign jurisdictions of $21.4 million and various U.S. states of $100.9 million. The U.S. federal NOL carryforwards begin to expire in 2031, the foreign NOL carryforwards begin to expire in 2021, and the U.S. state NOL carryforwards begin to expire in 2018.

Utilization of the net operating loss carryforwards and credits may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended (the “Code”), and similar state provisions. Any annual limitation may result in the expiration of net operating losses and credits before utilization.
    
The Company has uncertain tax positions with respect to prior tax filings. The uncertain tax positions, if asserted by taxing authorities, would result in utilization of the Company’s tax credit and operating loss carryovers. The credit and operating loss carryovers presented as deferred tax assets are reflected net of these unrecognized tax benefits.

The Company had the following activity for unrecognized tax benefits in 2017 and 2016 (amounts in thousands):
 
 
 
 
December 31, 2017
December 31, 2016
Balance-beginning of year
$
30,164

$
29,523

Acquisitions
—

—

Increases based on tax positions of the current year
2,065

1,005

Decreases due to lapse of statute
(392
)
(236
)
Increases based on tax positions of the prior years
1,217

1,963

Decreases based on tax positions of the prior years
(4,908
)
(664
)
Currency translation adjustments
527

(1,427
)
Balance-end of year
$
28,673

$
30,164


    
The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes the impact of a tax position in the financial statements when the position is more likely than not of being sustained on audit based on the technical merits of the position.

The total amount of unrecognized tax benefits as of December 31, 2017 was $28.7 million. Of this amount, $13.2 million, if recognized, would be included in our Consolidated Statements of Operations and Comprehensive Loss and have an impact on our effective tax rate. The Company anticipates a reduction of its liability for unrecognized tax benefits of up to $5.1 million before December 31, 2018, primarily related to lapse of statute, all of which would impact our Consolidated Statements of Operations and Comprehensive Loss.

The Company interest and penalties accrued for unrecognized tax benefits in income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued penalties and interest of $2.5 million during 2017 and in total, as of December 31, 2017, has recognized a liability for penalties and interest of $10.9 million.

The Company is subject to taxation and potential examination in the United States and various state and foreign jurisdictions. The Company is currently under a Federal income tax examination by the Internal Revenue Service (IRS) for the 2014, 2015, and 2016 tax years, and under examination in Mexico for the 2008 tax year. The Company believes that adequate amounts have been reserved in these jurisdictions. Generally, all tax years remain subject to examination in the United States and various state jurisdiction due to the Company’s NOLs and the 2011 to 2017 tax years remain subject to examination in Mexico. The Company remains subject to possible examination in various other jurisdictions that are not expected to result in material tax adjustments.
    
The Company entered into an indemnification agreement with the prior owners of Cadillac Jack whereby the prior owners have agreed to indemnify the Company for changes in tax positions by taxing authorities for periods prior to the acquisition. As of December 31, 2017, an indemnification receivable of $18.8 million has been recorded as an other asset in the financial statements. This amount includes the indemnification of the original pre-acquisition tax positions along with any related accrued interest and penalties and is also recorded as a liability for unrecognized tax benefits in other long-term liabilities. The Company concluded that it is probable the indemnification receivable is realizable based on an evaluation of the ability of Cadillac Jack’s prior owner, including a review of its public filings, that demonstrates its financial resources are sufficient to support the amount recorded. If the related unrecognized tax benefits are subsequently recognized, a corresponding charge to relieve the associated indemnification receivables would be recognized in our Consolidated Statements of Operations and Comprehensive Loss and have an impact on operating income.

On December 22, 2017, President Trump signed the Tax Act into law, which significantly reformed the Internal Revenue Code of 1986, as amended. The new legislation, among other things, changed the U.S. federal tax rates (including permanently reducing the U.S. corporate income tax rate from a maximum of 35% to a flat 21% % rate), allowed the expensing of capital expenditures, and put into effect the migration from a “worldwide” system of taxation to a territorial system. As a result, we recorded a provisional net benefit of $8.1 million during the fourth quarter of 2017. This amount, which is included in Income tax benefit (expense) in the consolidated financial statements is comprised of a $9.4 million charge resulting from the re-measurement of the Company’s deferred tax assets and liabilities based on the Tax Act’s new corporate tax rate of 21.0%, a $1.9 million million charge for the one-time mandatory deemed repatriation of foreign earnings, a $2.8 million benefit for related foreign tax credits and a $16.6 million benefit related to the reduction in the existing valuation allowance recorded against certain U.S. federal deferred tax assets. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) that allows for companies to provide provisional amounts for certain income tax effects of the Tax Act for which the company can provide a reasonable estimate. The guidance also addresses 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 Tax Act, in which case the company would not be expected to provide a provisional amount for those specific items. Additionally, the guidance allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact of the Tax Act on our consolidated financial statements may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, and actions the Company may take as a result of the Tax Act.