Income Taxes
The following table presents the components of income (loss) before income taxes (in thousands):
|
| | | | | | | | |
| | 2016 | | 2015 |
U.S. pre-tax income (loss) | | $ | (17,744 | ) | | $ | (20,183 | ) |
Foreign pre-tax income (loss) | | (16,743 | ) | | 1,653 |
|
Total pre-tax income (loss) | | $ | (34,487 | ) | | $ | (18,530 | ) |
The Company records no current income tax expense related to its domestic activities due to historical and/ or current net operating losses. The current tax is based on the Company’s activities in certain foreign jurisdictions which are currently profitable and for which no loss carryover is available to offset the income.
The income tax expense from continuing operations for the years ended December 31, 2016 and December 31, 2015, differs from the U.S statutory rate of 34.0% primarily due to changes in the Company's valuation allowance and foreign tax expense incurred in addition to U.S. tax in certain jurisdictions. The Company's income tax expenses for the fiscal year ended December 31, 2016 and December 31, 2015 of $447,000 and $349,000, respectively and is based on the Company's activities in certain foreign jurisdictions which are currently profitable and for which no loss carryover is available to offset the income. In addition, the expense for 2016 and 2015 includes $100,000 and $100,000, respectively, related to amortization of indefinite-lived intangibles for tax purposes that result in a deferred tax liability which, because the reversal cannot be determined, are excluded from the net asset covered by the Company's valuation allowance.
The income tax provision consists of the following (in thousands):
|
| | | | | | | | |
| | 2016 | | 2015 |
Current income tax: | | | | |
U.S. | | $ | — |
| | $ | — |
|
State | | — |
| | — |
|
Foreign | | 820 |
| | 212 |
|
Deferred income tax: | | | | |
U.S. | | (272 | ) | | 105 |
|
State | | — |
| | — |
|
Foreign | | (101 | ) | | 32 |
|
Total income tax | | $ | 447 |
| | $ | 349 |
|
A reconciliation of the expected U.S. tax expense/(benefit) to the income tax provision is as follows (in thousands):
|
| | | | | | | | |
| | 2016 | | 2015 |
Expected tax expense at U.S. statutory rate | | $ | (11,726 | ) | | $ | (6,271 | ) |
Permanent Adjustments | | 24 |
| | (303 | ) |
Foreign Income Tax | | — |
| | 244 |
|
Increase in Valuation Allowance | | 11,063 |
| | 7,467 |
|
Other | | (3,093 | ) | | (130 | ) |
Rate Difference—U.S. to Foreign | | 4,179 |
| | (658 | ) |
Total income tax | | $ | 447 |
| | $ | 349 |
|
As of December 31, 2016, the Company did not have a history of earnings that would allow it to record any of its net deferred tax assets without a corresponding valuation allowance. Therefore, no net deferred tax assets are reflected as of December 31, 2016. Additionally, due to some of the Company's historical acquisitions which included intangibles with an indefinite life that are amortized for tax purposes, the Company has accumulated a deferred tax liability which is recognized separately from net deferred tax assets and valuation allowance. A deferred tax liability is recorded within non-current liabilities in the amounts of $372,000 and $744,000 in the consolidated balance sheets as of December 31, 2016 and December 31, 2015, respectively.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of the Company's deferred income taxes as of December 31, 2016 and December 31, 2015 are as follows (in thousands):
|
| | | | | | | | |
| | 2016 | | 2015 |
Deferred Tax Assets: | | | | |
Intangibles | | $ | 1,143 |
| | $ | 1,268 |
|
Accrued expenses | | 738 |
| | 1,168 |
|
Other | | 218 |
| | — |
|
Net operating losses—U.S. | | 23,410 |
| | 16,618 |
|
Net operating losses—foreign | | 5,181 |
| | 512 |
|
Foreign tax credit | | 692 |
| | 692 |
|
Deferred Tax Liabilities: | | | | |
Intangibles | | $ | — |
| | $ | (370 | ) |
Fixed assets | | (3,318 | ) | | (3,810 | ) |
Prepaid expenses | | (47 | ) | | (50 | ) |
Valuation allowance | | (28,389 | ) | | (16,772 | ) |
Net deferred tax asset (liability) | | $ | (372 | ) | | $ | (744 | ) |
The Company has U.S. net operating loss carry-forwards of approximately $72.3 million which begin to expire in 2032. The Company has net operating losses of approximately $10.0 million in several foreign countries which will begin to expire at various times. The Company can only apply the net operating loss carry-forwards if the Company can sustain taxable profits in future years.
The Company has foreign tax credits of approximately $692,000 which will begin to expire in 2023.
Unrecognized tax benefits as of December 31, 2016 and December 31, 2015 are as follows (in thousands):
|
| | | | | | | | |
| | 2016 | | 2015 |
Unrecognized tax benefits, beginning of year | | $ | 62 |
| | $ | 168 |
|
Gross decreases—tax positions in prior period | | — |
| | (107 | ) |
Interest accrual | | — |
| | 1 |
|
Unrecognized tax benefits, end of year | | $ | 62 |
| | $ | 62 |
|
The Unrecognized Tax Benefits shown here relate to an ongoing audit in Spain of one entity acquired by the Company during 2013. This audit is ongoing and is in dispute. It is reasonable that the Company's existing liability for Unrecognized Tax Benefits may increase or decrease within the next twelve months primarily due to resolution of this audit. The Company cannot reasonably estimate a range of potential changes in such benefits due to the unresolved nature of the Spanish audit.
As of December 31, 2015, we had approximately $3.5 million of undistributed earnings in foreign subsidiaries. We expect to permanently reinvest these earnings outside of the United States to fund future foreign operations. We project that we will have sufficient cash flow in the United States and will not need to repatriate the foreign earnings to finance our domestic operations. If we were to distribute these earnings to the United States, we would be subject to U.S. income taxes, an adjustment for foreign tax credits, and foreign withholding taxes. We have not recorded a deferred tax liability on any portion of our undistributed earnings in foreign subsidiaries. If we were to repatriate these earnings to the United States, any associated income tax liability would be insignificant.
The Company expects to permanently reinvest earnings, when they occur, outside of the United States to fund future foreign operations. The Company projects that there will be sufficient cash flow in the United States and will not need to repatriate the foreign earnings to finance domestic operations. The Company has not recorded a deferred tax liability on any portion of our undistributed earnings in foreign subsidiaries. If the Company were to repatriate these earnings to the United States, any associated income tax liability would be insignificant.
The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions and, as such, are subject to examination in various jurisdictions. The material jurisdictions that are subject to examination by tax authorities primarily include the United States, Italy, Netherlands, Russia, Spain, and the United Kingdom, covering tax years 2011 through 2015.