Income Taxes
The components of loss before income taxes for the years ended December 31 are as follows:
|
| | | | | | | | | | | |
(In thousands) | 2016 |
| 2015 | | 2014 |
United States | $ | 39,892 |
| | $ | 28,236 |
| | $ | 4,746 |
|
Canada | 9,263 |
| | 4,829 |
| | — |
|
Loss before income taxes | $ | 49,155 |
| | $ | 33,065 |
| | $ | 4,746 |
|
Significant components of income tax benefit for the years ended December 31 are as follows:
|
| | | | | | | | | | | |
(In thousands) | 2016 |
| 2015 | | 2014 |
Current: | | | | | |
United States | $ | 1,826 |
| | $ | (1,638 | ) | | $ | — |
|
Canada | — |
| | — |
| | — |
|
Total current | 1,826 |
| | (1,638 | ) | | — |
|
Deferred: | | | | | |
United States | 4,460 |
| | 8,203 |
| | — |
|
Canada | — |
| | 459 |
| | — |
|
Total deferred | 4,460 |
| | 8,662 |
| | — |
|
Income tax benefit | $ | 6,286 |
| | $ | 7,024 |
| | $ | — |
|
A reconciliation between the provision for income taxes calculated at the U.S. federal statutory income tax rate and the income tax benefit recognized in the consolidated statements of operations for the years ended December 31 is as follows:
|
| | | | | | | | |
| 2016 |
| 2015 | | 2014 |
Benefit at the U.S. federal statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
State taxes, net of federal benefit | 1.3 |
| | 1.5 |
| | 4.9 |
|
Foreign tax rate differential | (1.4 | ) | | (1.3 | ) | | — |
|
Non-deductible transaction costs | — |
| | (3.7 | ) | | (33.0 | ) |
Change in valuation allowance | (2.3 | ) | | (1.8 | ) | | (5.9 | ) |
Changes in contingent and other additional consideration | 3.7 |
| | (4.5 | ) | | — |
|
Goodwill impairment | (26.3 | ) | | — |
| | — |
|
Reduction in reserves for uncertain tax positions | 7.2 |
| | — |
| | — |
|
Other non-deductible expenses | (2.1 | ) | | (2.8 | ) | | — |
|
Other | (1.3 | ) | | (0.2 | ) | | — |
|
Income tax benefit effective rate | 12.8 | % | | 21.2 | % | | — | % |
The deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| 2016 | | 2015 |
(In thousands) | U.S. | Canada | Combined | | U.S. | Canada | Combined |
Deferred tax assets | | | | | | | |
Accrued expenses and reserves | $ | 1,164 |
| $ | 114 |
| $ | 1,278 |
| | $ | 714 |
| $ | 22 |
| $ | 736 |
|
Net operating loss carryforwards | 247 |
| 1,432 |
| 1,679 |
| | 92 |
| 903 |
| 995 |
|
Intangibles | — |
| 1,105 |
| 1,105 |
| | — |
| 65 |
| 65 |
|
Share-based compensation | 792 |
| — |
| 792 |
| | 961 |
| — |
| 961 |
|
State tax credits | 26 |
| — |
| 26 |
| | 33 |
| — |
| 33 |
|
Total deferred tax assets | $ | 2,229 |
| $ | 2,651 |
| $ | 4,880 |
| | $ | 1,800 |
| $ | 990 |
| $ | 2,790 |
|
Deferred tax liabilities | | | | | | | |
Inventories | $ | (1,683 | ) | $ | — |
| $ | (1,683 | ) | | $ | (6,397 | ) | $ | (317 | ) | $ | (6,714 | ) |
Intangibles | (5,904 | ) | — |
| (5,904 | ) | | (7,831 | ) | — |
| (7,831 | ) |
Property and equipment | (2,812 | ) | (219 | ) | (3,031 | ) | | (3,196 | ) | (14 | ) | (3,210 | ) |
Contingent consideration | — |
| (695 | ) | (695 | ) | | — |
| (55 | ) | (55 | ) |
Total deferred tax liabilities | $ | (10,399 | ) | $ | (914 | ) | $ | (11,313 | ) | | $ | (17,424 | ) | $ | (386 | ) | $ | (17,810 | ) |
Valuation allowance | — |
| (1,737 | ) | (1,737 | ) | | — |
| (604 | ) | (604 | ) |
Net deferred tax liability | $ | (8,170 | ) | $ | — |
| $ | (8,170 | ) | | $ | (15,624 | ) | $ | — |
| $ | (15,624 | ) |
From its inception through May 2015, the Company incurred start-up costs that resulted in pre-tax losses. A full valuation allowance was established as of December 31, 2014 and through the IPO date against this potential benefit because the uncertainty of the Company’s future prospects at those balance sheet dates resulted in it being more likely than not that the deferred income tax asset relating to the benefit would not be realized. However, upon the successful closing of the Combinations in May 2015 and the concurrent recognition of significant deferred income tax liabilities, as well as the expectation of future pre-tax income from the acquired operating companies, the Company concluded that it was more likely than not that the deferred tax assets will be realized, and accordingly, recorded an income tax benefit from reversing the allowance of approximately $0.3 million upon the closing of the Combinations.
The Canadian operations were acquired as a taxable asset purchase and the Canadian deferred income tax liability created upon acquisition was thus significantly less than in the United States, where Fenix acquired the stock of most of its U.S. Founding Companies and Subsequent Acquisitions. As of December 31, 2016 and 2015, the Company had a net deferred tax asset of $1.7 million and $0.6 million, respectively, attributable to Canadian subsidiaries, primarily because of net operating loss carryforwards generated in 2015 and 2016 and goodwill impairment in 2016. Based on the available evidence and given the uncertainties associated with generating future taxable income in Canada, the Company has recorded a full valuation allowance for its net Canadian deferred tax assets.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company’s uncertain tax position reserves, including the reserves for related interest and penalties of approximately $0.5 million and $2.4 million, were approximately $2.2 million and $5.7 million as of December 31, 2016 and 2015, respectively, and were all originally assumed as part of the acquisitions of its Subsidiaries. The tax reserves are reviewed periodically and adjusted in light of changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations, and changes in tax law. Under certain conditions, payments made by the Company, including interest and penalties, for assumed uncertain tax positions are indemnified by the previous owners of the Subsidiaries for a period of three years from the acquisition and there is an indemnification receivable of $2.0 million and $5.1 million recorded in the consolidated balance sheets as of December 31, 2016 and 2015, respectively. During the year ended December 31, 2016, the statute of limitations lapsed without audit for certain tax returns filed by acquired companies for which reserves for uncertain tax positions and indemnification receivables had been established. As a result, the Company reversed approximately $3.4 million of uncertain tax position reserves, which included $1.9 million of accrued interest and penalties, as a credit to current income tax benefit in the consolidated statement of operations for 2016. Correspondingly, the indemnification receivables were reduced by $2.9 million through a charge to operating expenses. If a reserved uncertain tax position results in an actual liability and the Company is unable to collect on or enforce the related indemnification provision or if the actual liability occurs after the applicable three-year indemnity period has expired, there could be a material charge to the Company's consolidated financial results and reduction of cash resources.
The Company files income tax returns in the United States and Canada. The Company is not currently subject to any income tax examinations; however, tax returns of Fenix for 2014 (year of inception) and 2015 (consolidated after the Combination) and tax returns of the acquired Subsidiaries for tax years 2013 through pre-acquisition periods in 2015 remain open under the statute of limitations.
The Company has a current tax liability of approximately $1.5 million recorded in accrued expenses in the accompanying consolidated balance sheet as of December 31, 2016, attributable to taxes that it anticipates will be due in 2017 for its consolidated U.S. federal return and certain states' returns where its operations generated taxable income in 2016. The Company had tax loss and credit carryforwards at December 31, 2016, as follows (in thousands):
|
| | | | | |
| 2016 | | Beginning year of Expiration |
State loss carryforwards | $ | 4,845 |
| | 2023 |
Canadian loss carryforwards | 5,405 |
| | 2035 |
State tax credits | 26 |
| | 2025 |