Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.8
Income Taxes
12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The components of income (loss) before income taxes consist of the following (in thousands):
 
Years Ended December 31,
 
2013
 
2012
 
2011
Income (loss) before income taxes:
 

 
 

 
 

Domestic
$
(8,827
)
 
$
(37,941
)
 
$
4,177

Foreign
(1,051
)
 
(1,847
)
 
492

Total income (loss) before income taxes
$
(9,878
)
 
$
(39,788
)
 
$
4,669


The provision for income tax expense (benefit) consists of the following (in thousands):
 
Years Ended December 31,
 
2013
 
2012
 
2011
Current:
 

 
 

 
 

U.S. Federal
$
(626
)
 
$
(2,461
)
 
$
3,103

State
(35
)
 
2

 
723

Foreign

 
(97
)
 
259

Total current
(661
)
 
(2,556
)
 
4,085

Deferred:
 

 
 

 
 

U.S. Federal
711

 
9,885

 
(1,633
)
State

 
1,537

 
(455
)
Foreign
(109
)
 
(57
)
 

Total deferred
602

 
11,365

 
(2,088
)
Total provision for income tax expense (benefit)
$
(59
)
 
$
8,809

 
$
1,997


Total income tax expense (benefit) differs from the expected income tax expense (benefit), computed by applying the federal statutory rate of 34% to earnings before income taxes as follows (in thousands):
 
Years Ended December 31,
 
2013
 
2012
 
2011
Expected income tax expense (benefit)
$
(3,359
)
 
$
(13,528
)
 
$
1,587

State income taxes, net of federal tax effect
(318
)
 
(314
)
 
177

Change in tax rate
(39
)
 
170

 
102

Manufacturer's deduction

 

 
(155
)
Federal R&D credit
(95
)
 

 
(163
)
Tax-exempt interest income

 

 
(18
)
Change in valuation allowance
3,351

 
13,967

 
(97
)
Goodwill impairment

 
7,554

 

Non-deductible acquisition costs

 

 
363

Foreign tax
265

 
431

 

Other, net
136

 
529

 
201

Total provision for income tax expense (benefit)
$
(59
)
 
$
8,809

 
$
1,997


The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) are presented below (in thousands):
 
December 31,
 
2013
 
2012
Deferred tax assets:
 

 
 

Inventory provisions and uniform capitalization
$
225

 
$
299

Accounts receivable allowances
73

 
57

Fixed assets
244

 
414

Non-qualified stock option and restricted stock expense
2,367

 
2,455

Deferred maintenance revenue
726

 
1,354

Unrecognized tax benefits
13

 
9

Loss and credit carryforwards of U.S. subsidiary
15,502

 
13,124

Loss carryforward of foreign subsidiaries and joint venture
1,332

 
1,103

Other accruals and reserves
880

 
374

Other
62

 
70

Total deferred tax assets before valuation allowance
21,424

 
19,259

Less valuation allowance
(18,110
)
 
(14,988
)
Total deferred tax assets
$
3,314

 
$
4,271

Deferred tax liabilities:
 

 
 

Acquired intangibles
(3,029
)
 
(3,425
)
Total deferred tax liabilities
$
(3,029
)
 
$
(3,425
)
Total net deferred tax assets
$
285

 
$
846



As of December 31, 2013, the Company had net operating loss carryforwards of $34.2 million for U.S. federal tax purposes. The Company also had $38.6 million of various state net operating loss carryforwards. The loss carryforwards for federal tax purposes will expire between 2023 and 2034 if not utilized. The loss carryforwards for state tax purposes will expire between 2022 and 2034 if not utilized.
As of December 31, 2013, the Company had federal and state research and development credit carryforwards of $2.7 million, net of Section 383 limitations, which will begin to expire in 2022 if not utilized.
As a result of its acquisition of Qumu, Inc. in October 2011, utilization of U.S. net operating losses and tax credits of Qumu, Inc. are subject to annual limitations under Internal Revenue Code Sections 382 and 383, respectively.
During the year ended December 31, 2012, the Company recorded a non-cash charge of approximately $14 million primarily associated with the establishment of a valuation allowance on its U.S. deferred tax assets, including the deferred tax assets established as part of the acquisition of Qumu, Inc. ASC 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence, using a “more likely than not” standard. Accordingly, the Company determined a U.S. valuation allowance is appropriate, except to the extent of carryback potential. The valuation allowance will be reviewed quarterly and will be maintained until sufficient positive evidence exists to support the reversal of the valuation allowance.

The Company generally believes that it is more likely than not that the future results of the operations of its subsidiaries in Germany and the U.K. will generate sufficient taxable income to realize the tax benefits related to its net deferred tax assets. However, the Company continues to carry a full valuation allowance on the tax benefits of loss carryforwards for its subsidiaries in Japan, China and Singapore. The cumulative foreign tax loss carryforwards amounted to approximately $3.8 million as of December 31, 2013, and if unutilized, will expire between tax years 2014 and 2020, except for the Singapore loss which can be carried forward indefinitely. The valuation allowances were calculated in accordance with the requirement that a valuation allowance be established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized.

The Company has not provided deferred taxes on unremitted earnings attributable to its international subsidiaries that are considered to be reinvested indefinitely. Accumulated undistributed foreign earnings relate primarily to ongoing operations of the Company's subsidiary in Germany, and amount to approximately $5.9 million as of December 31, 2013. The amount of cash, cash equivalent and marketable securities held by the Company's international subsidiaries that are not available to fund domestic operations unless repatriated was $5.6 million as of December 31, 2013. The Company currently does not intend to repatriate the cash and related balances held by its international subsidiaries. However, if circumstances change and these funds are needed to meet cash requirements in the U.S., the Company would be required to accrue and pay U.S. taxes, net of related foreign tax credits, to repatriate these funds. Based on current tax laws and structures, the Company does not believe this would have a material impact on its consolidated financial statements and cash flows.

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits for the years ended December 31 is presented in the table below (in thousands):
 
Years Ended December 31,
 
2013
 
2012
Gross unrecognized tax benefits at beginning of year
$
1,017

 
$
977

Increases related to:
 

 
 

Prior year income tax positions
97

 
37

Current year income tax positions
84

 
3

Decreases related to:
 

 
 

Prior year income tax positions - closure of statute of limitations
(162
)
 

Gross unrecognized tax benefits at end of year
$
1,036

 
$
1,017


Included in the balance of unrecognized tax benefits at December 31, 2013 are potential benefits of $97,000 that if recognized, would affect the effective tax rate. The Company does not anticipate that the total amount of unrecognized tax benefits as of December 31, 2013 will change significantly by December 31, 2014.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Total accrued interest and penalties amounted to $18,000 and $16,000 on a gross basis at December 31, 2013 and 2012, respectively, and are excluded from the reconciliation of unrecognized tax benefits presented above. Interest and penalties recognized in the Consolidated Statements of Operations related to uncertain tax positions amounted to net tax expense in 2013 of $3,000 and a net benefit in 2012 of $1,000.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2013, the Company was no longer subject to income tax examinations for taxable years before 2010 and 2011 in the case of U.S. federal and German taxing authorities, respectively, and taxable years generally before 2009 in the case of state taxing authorities, consisting primarily of Minnesota and California.