Income Taxes
The components of the Company’s loss before income tax provision for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Loss from continuing operations before income taxes: | | | | | | |
Domestic | | $ | (18,147 | ) | | $ | (17,365 | ) | | $ | (28,027 | ) |
Foreign | | (1,900 | ) | | (6,321 | ) | | (949 | ) |
Total loss from continuing operations before income taxes | | $ | (20,047 | ) | | $ | (23,686 | ) | | $ | (28,976 | ) |
The Company’s income tax provision, which is comprised of minimum U.S. federal, state and local taxes and taxes from foreign jurisdictions, consists of the following:
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Provision for current income taxes: | | | | | | |
U.S. federal | | $ | — |
| | $ | — |
| | $ | — |
|
U.S. state and local | | (2 | ) | | 22 |
| | 90 |
|
Foreign | | 154 |
| | 234 |
| | 172 |
|
Total provision for current income taxes | | 152 |
| | 256 |
| | 262 |
|
Benefit for deferred income taxes: | | | | | | |
U.S. federal | | (332 | ) | | — |
| | — |
|
U.S. state and local | | — |
| | — |
| | — |
|
Foreign | | (167 | ) | | (92 | ) | | (62 | ) |
Total benefit for deferred income taxes | | (499 | ) | | (92 | ) | | (62 | ) |
Total (benefit) provision for income taxes | | $ | (347 | ) | | $ | 164 |
| | $ | 200 |
|
A reconciliation between the U.S. federal statutory income tax rate to the effective tax rate, by applying such rates to loss before income tax provision, for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
U.S. federal statutory income tax rate | | (34.00 | )% | | (34.00 | )% | | (34.00 | )% |
State income tax rate, net of U.S. federal tax benefit | | (0.01 | ) | | 0.06 |
| | 0.21 |
|
Stock-based compensation expense | | — |
| | 1.23 |
| | 1.56 |
|
Acquisition related costs | | 3.11 |
| | 5.08 |
| | — |
|
Mark-to-market expense | | 0.25 |
| | 1.80 |
| | — |
|
Change in income tax rates | | (1.03 | ) | | 2.89 |
| | 0.70 |
|
Change in deferred tax asset valuation | | 29.03 |
| | 22.52 |
| | 5.74 |
|
Goodwill impairment charge | | 1.46 |
| | — |
| | 24.51 |
|
AMT credit | | (1.65 | ) | | — |
| | — |
|
Meals and Entertainment | | 1.10 |
| | — |
| | — |
|
Other | | 0.01 |
| | 1.11 |
| | 1.98 |
|
Effective tax rate | | (1.73 | )% | | 0.69 | % | | 0.70 | % |
Significant components of the Company’s deferred tax assets and liabilities reported on a net cross jurisdictional basis are summarized as follows:
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Net operating losses and tax credits | | $ | 27,474 |
| | $ | 46,336 |
|
Stock-based compensation expense | | 2,440 |
| | 3,883 |
|
Deferred rent | | 881 |
| | 1,483 |
|
Depreciation and amortization expense | | 672 |
| | 61 |
|
Accrued expenses | | 316 |
| | 192 |
|
Intangible assets | | 294 |
| | — |
|
Deferred revenue | | 166 |
| | 2 |
|
Allowance for doubtful accounts | | 89 |
| | 1 |
|
Unrealized gains and losses | | 88 |
| | 94 |
|
Total deferred tax assets before valuation allowance | | 32,420 |
| | 52,052 |
|
Less: valuation allowance | | (32,028 | ) | | (50,211 | ) |
Total deferred tax assets, net of valuation allowance | | 392 |
| | 1,841 |
|
| | | | |
Deferred tax liabilities: | | | | |
Intangible assets | | (392 | ) | | (2,277 | ) |
Other | | (6 | ) | | (11 | ) |
Total deferred tax liabilities | | (398 | ) | | (2,288 | ) |
| | | | |
Total deferred tax liabilities, net | | $ | (6 | ) | | $ | (447 | ) |
For financial and tax reporting purposes, the Company incurred net operating losses in each period since its inception, except for 2017 and, therefore, a significant portion of the deferred tax assets recognized relate to such net operating losses. In determining whether the Company may realize the benefits from these deferred tax assets, the Company considers all available objective and subjective evidence, both positive and negative. Based on the weight of such evidence, a valuation allowance on a jurisdiction by jurisdiction basis is necessary for some portion, or all, of the deferred tax assets since the Company cannot be assured that, more likely than not, such amounts will be realized. Based on the available objective and subjective evidence, including the Company’s history of net operating losses, management believes it is more likely than not that the deferred tax assets will not be fully realizable at December 31, 2017 and 2016. Accordingly, the Company provided a valuation allowance on substantially all of its deferred tax asset balance to reflect the uncertainty regarding the realizability of these assets for the periods presented, with the exception of a deferred tax asset related to AMT credits.
Impact of U.S. Tax Reform
On December 22, 2017, the U.S. President signed the Tax Cuts and Jobs Act (the “Act”) into law. Effective January 1, 2018, among other changes, the Act (1) reduces the U.S. federal corporate tax rate from 35 percent to 21 percent, (2) changes the rules relating to net operating loss ("NOL") carryforwards and carrybacks, (3) eliminates the corporate alternative minimum tax ("AMT") and changes how existing AMT credits can be realized; and (4) requires companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. The impact on the Company's financial statements for the period ended December 31, 2017 is immaterial, primarily because the Company has a valuation allowance on deferred tax assets in the U.S. In addition, the Act makes the AMT credit refundable in tax years beginning after 2017. As a result of this change, the Company does not have a valuation allowance on its AMT credit.
The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification (ASC) 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
The Tax Act did not have a material impact on our financial statements since our deferred temporary differences in the United States are fully offset by a valuation allowance and we do not have any significant off shore earnings from which to record the mandatory transition tax.
For the year ended December 31, 2017, the Company’s valuation allowance has decreased to $32,028 compared to $50,211 as of December 31, 2016, largely due to the change in federal corporate tax rate of 21% as a result of the Tax Act.
As of December 31, 2017, the Company has U.S. federal and state net operating loss carry-forwards of approximately $100,840 and $56,876, respectively, and foreign net operating loss carry-forwards of $7,590, $6,787 and $158 related to its international subsidiaries in the United Kingdom, Germany and Brazil respectively, which are available to reduce future taxable income in those jurisdictions. The U.S. federal net operating losses will expire in various years beginning in 2028 through 2036. The Company’s foreign net operating loss carry-forwards can be carried forward without limitation in each respective country. The U.S. federal net operating losses includes acquired tax loss carry-forwards of Transpera, Inc. (“Transpera”) and ScanScout, Inc. (“ScanScout”), and net operating losses from Telaria, Inc. ("Telaria") which experienced an ownership change in 2010 which are subject to limitation on future utilization under Section 382 of the Internal Revenue Code of 1986 (“Section 382”). Section 382 imposes limitations on the availability of a company’s net operating losses after a more than 50 percentage point ownership change occurs. It is estimated that the effect of Section 382 will generally limit the amount of the net operating loss carry-forwards of Transpera, ScanScout and Telaria that are available to offset future taxable income to approximately $161, $2,060 and $7,550, respectively, annually.
Telaria’s U.S. federal and U.S. state net operating loss carryforwards include approximately $3,885 of excess tax benefits related to tax deductions from stock-based compensation. As a result of the adoption of ASU 2016-09, the Company will no longer exclude excess tax benefits in its U.S. federal and U.S. state net operating loss carryforwards. There was no net impact on our opening accumulated deficit upon application of this guidance using the modified retrospective transition method as the total cumulative-effect adjustment for previously deferred excess tax benefits was offset by a related change in the valuation allowance.
The Company did not record any amounts related to uncertain tax positions or tax contingencies at December 31, 2017 and 2016. As of December 31, 2017 and 2016, the primary tax jurisdictions in which the Company is subject to tax were the U.S. federal and state jurisdictions, Australia, Canada, Singapore, Malaysia, New Zealand, Brazil and United Kingdom. Since the Company is in an overall net operating loss position, the Company is generally subject to U.S. federal and state income tax examinations by tax authorities for all years for which a net operating loss carry-forward is available. The Company’s open tax years extend back to 2005. In the event that the Company concludes that it is subject to interest or penalties arising from uncertain tax positions, the Company will record interest and penalties as a component of provision for income taxes. No amounts of interest or penalties were recognized in the consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015.