Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.19.1
Income Taxes
12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The components of loss before income taxes consist of the following (in thousands):
 
Year Ended December 31,
 
2018
 
2017
 
2016
Loss before income taxes:
 

 
 

 
 

Domestic
$
(1,631
)
 
$
(11,524
)
 
$
(10,834
)
Foreign
(1,688
)
 
(558
)
 
(593
)
Total loss before income taxes
$
(3,319
)
 
$
(12,082
)
 
$
(11,427
)

The provision for income tax expense (benefit) consists of the following (in thousands):
 
Year Ended December 31,
 
2018
 
2017
 
2016
Current:
 

 
 

 
 

U.S. Federal
$
(8
)
 
$
(175
)
 
$
(6
)
State
591

 
35

 
50

Foreign
(314
)
 
(211
)
 
(249
)
Total current
269

 
(351
)
 
(205
)
Deferred:
 

 
 

 
 

U.S. Federal

 

 

State
11

 
(12
)
 
12

Foreign
18

 
5

 
(59
)
Total deferred
29

 
(7
)
 
(47
)
Total provision for income tax benefit
$
298

 
$
(358
)
 
$
(252
)

Total income tax expense (benefit) differs from the expected income tax expense (benefit), computed by applying the federal statutory rate of 21% in 2018, and 34% in both 2017 and 2016, to earnings before income taxes as follows (in thousands):
 
Year Ended December 31,
 
2018
 
2017
 
2016
Expected income tax benefit
$
(697
)
 
$
(4,107
)
 
$
(3,885
)
Federal R&D credit
(32
)
 
(24
)
 
(17
)
Refundable AMT credit
(12
)
 
(172
)
 

Effect of deferred rate change
8

 
11,851

 
(162
)
Foreign tax
38

 
(87
)
 
(105
)
Non-deductible stock issuance costs
85

 
186

 
(24
)
Foreign unremitted earnings
130

 
(20
)
 
58

Change in valuation allowance
408

 
(7,764
)
 
4,566

State income taxes, net of federal tax effect
455

 
(306
)
 
(789
)
Other, net
(85
)
 
85

 
106

Total provision for income tax expense (benefit)
$
298

 
$
(358
)
 
$
(252
)


The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) are presented below (in thousands):
 
December 31,
 
2018
 
2017
Deferred tax assets:
 

 
 

Inventory provisions and uniform capitalization
$
1

 
$
42

Accounts receivable allowances
13

 
3

Non-qualified stock option and restricted stock expense
184

 
447

Deferred revenue
101

 
147

Loss and credit carryforwards of U.S. subsidiary
24,101

 
23,996

Loss carryforward of foreign subsidiaries
283

 
430

Excess interest expense
298

 

Other accruals and reserves
169

 
407

Fixed assets
3

 

Other

 
58

Total deferred tax assets before valuation allowance
25,153

 
25,530

Less valuation allowance
(24,153
)
 
(24,285
)
Total deferred tax assets
$
1,000

 
$
1,245

Deferred tax liabilities:
 

 
 

Acquired intangibles
$
(901
)
 
$
(1,321
)
Other
(46
)
 

Total deferred tax liabilities
$
(947
)
 
$
(1,321
)
Total net deferred tax assets (liabilities)
$
53

 
$
(76
)

As of December 31, 2018, the Company had $85.6 million of net operating loss carryforwards for U.S. federal tax purposes and $63.3 million of net operating loss carryforwards for various states. The loss carryforwards for federal tax purposes will expire between 2022 and 2037 if not utilized. The loss carryforwards for state tax purposes will expire between 2022 and 2037 if not utilized.
As of December 31, 2018, the Company had federal and state research and development credit carryforwards of $3.2 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. The Company has not completed an IRC Section 382 study since 2011. It is possible additional ownership changes have occurred, which may result in additional Section 382 and 383 limitations. Due to the valuation allowance, it is not expected that any such limitation will have an impact on the results of operations of the Company.
The Company assessed that the valuation allowance against its U.S. deferred tax assets is still appropriate as of December 31, 2018, based on the consideration of all available positive and negative evidence, using the “more likely than not” standard required by ASC 740, Income Taxes. 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 the U.K. will generate sufficient taxable income due to the reversal of deferred tax liabilities to realize the tax benefits related to its deferred tax assets. As of December 31, 2018, the Company had a cumulative foreign tax loss carryforward of $1.8 million in the U.K. This amount can be carried forward indefinitely.
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted, significantly altering U.S. corporate income tax law. The SEC issued Staff Accounting Bulletin 118, which allows companies to record reasonable estimates of enactment impacts where all of the underlying analysis and calculations are not yet complete. The provisional estimates must be finalized within a one-year measurement period. The Company recorded several provisional estimates for the year ended December 31, 2017. As of December 31, 2018, the impacts of the Tax Act have been finalized as follows:
During 2017, the Company recorded a tax benefit of $172,000 for the impact of the Tax Act. The tax benefit primarily related to the future cash refund of excess AMT credits due to the repeal of the corporate AMT system. AMT credits previously had a full valuation allowance recorded, however a benefit was recorded as the AMT credits were subsequently expected to be realized. During 2018, an additional tax benefit of $12,000 was recorded with the finalization of this analysis.
During 2017, the Company reduced its net domestic deferred tax asset balance by $11.9 million due to the reduction in corporate tax rate from 34% to 21%. Additionally, no 2017 tax expense was provided for the mandatory repatriation provisions, as the Company had estimated there to be no untaxed accumulated E&P. The finalization of these tax reform matters did not have a material impact as the adjustments were fully offset by a change in the Company’s U.S. valuation allowance.
Many of the new elements of the Tax Act became effective during the 2018, including limitations on the deductibility of interest expense, limitations on executive compensation, as well as international provisions. The Company has considered and incorporated the new provisions into its tax calculations. Such provisions included in the Tax Act did not significantly impact the Company in 2018, due to the full valuation allowance on deferred tax assets.
The Company may repatriate cash associated with undistributed earnings of its foreign subsidiaries, such that they are not reinvested indefinitely. The repatriation of cash and cash equivalents held by the Company's international subsidiaries could result in a tax impact to the Company and as such the Company has recorded a deferred tax liability for the future tax consequences of a repatriation.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is presented in the table below (in thousands):
 
Year Ended December 31,
 
2018
 
2017
Gross unrecognized tax benefits at beginning of year
$
1,136

 
$
1,042

Increases related to:
 

 
 

Prior year income tax positions
2

 
70

Current year income tax positions
586

 
24

Gross unrecognized tax benefits at end of year
$
1,724

 
$
1,136


Included in the balance of unrecognized tax benefits at December 31, 2018 are potential benefits of $563,000 that if recognized, would affect the effective tax rate. The change in the liability for gross unrecognized tax benefits reflects an increase in reserves established for federal and state uncertain tax positions. The Company does not anticipate that the total amount of unrecognized tax benefits as of December 31, 2018 will change significantly by December 31, 2019.
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 $5,600 and $1,400 on a gross basis at December 31, 2018 and 2017, 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 of $4,200 and $1,300 in 2018 and 2017, respectively.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2018, the Company was no longer subject to income tax examinations for taxable years before 2016 in the case of U.S. federal taxing authorities, and taxable years generally before 2014 in the case of state taxing authorities, consisting primarily of Minnesota and California.