Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.19.3.a.u2
Income Taxes
12 Months Ended
Dec. 31, 2019
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,
 
2019
 
2018
 
2017
Loss before income taxes:
 

 
 

 
 

Domestic
$
(5,466
)
 
$
(1,631
)
 
$
(11,524
)
Foreign
(1,171
)
 
(1,688
)
 
(558
)
Total loss before income taxes
$
(6,637
)
 
$
(3,319
)
 
$
(12,082
)

The provision for income tax expense (benefit) consists of the following (in thousands):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Current:
 

 
 

 
 

U.S. Federal
$

 
$
(8
)
 
$
(175
)
State
17

 
591

 
35

Foreign
(246
)
 
(314
)
 
(211
)
Total current
(229
)
 
269

 
(351
)
Deferred:
 

 
 

 
 

U.S. Federal

 

 

State
8

 
11

 
(12
)
Foreign
27

 
18

 
5

Total deferred
35

 
29

 
(7
)
Total provision for income tax expense (benefit)
$
(194
)
 
$
298

 
$
(358
)

Total income tax expense (benefit) differs from the expected income tax expense (benefit), computed by applying the federal statutory rate of 21% in both 2019 and 2018, and 34% in 2017, to earnings before income taxes as follows (in thousands):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Expected income tax benefit
$
(1,393
)
 
$
(697
)
 
$
(4,107
)
Federal R&D credit
(54
)
 
(32
)
 
(24
)
Refundable AMT credit

 
(12
)
 
(172
)
Effect of deferred rate change

 
8

 
11,851

Foreign tax
27

 
38

 
(87
)
Non-deductible stock issuance costs
3

 
85

 
186

Foreign unremitted earnings

 
130

 
(20
)
Change in valuation allowance
1,379

 
408

 
(7,764
)
State income taxes, net of federal tax effect
(219
)
 
455

 
(306
)
Other, net
63

 
(85
)
 
85

Total provision for income tax expense (benefit)
$
(194
)
 
$
298

 
$
(358
)

The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) are presented below (in thousands):
 
December 31,
 
2019
 
2018
Deferred tax assets:
 

 
 

Inventory provisions and uniform capitalization
$

 
$
1

Accounts receivable allowances
8

 
13

Non-qualified stock option and restricted stock expense
220

 
184

Deferred revenue
218

 
101

Lease liabilities
290

 

Loss and credit carryforwards of U.S. subsidiary
24,717

 
24,101

Loss carryforward of foreign subsidiaries
145

 
283

Excess interest expense
496

 
298

Other accruals and reserves
101

 
169

Total deferred tax assets before valuation allowance
26,195

 
25,150

Less valuation allowance
(25,406
)
 
(24,153
)
Total deferred tax assets
$
789

 
$
997

Deferred tax liabilities:
 

 
 

Acquired intangibles
$
(465
)
 
$
(901
)
Right of use assets
(207
)
 

Fixed assets
(26
)
 
3

Other
(70
)
 
(46
)
Total deferred tax liabilities
$
(768
)
 
$
(944
)
Total net deferred tax assets
$
21

 
$
53


As of December 31, 2019, the Company had $89.2 million of net operating loss carryforwards for U.S. federal tax purposes and $66.2 million of net operating loss carryforwards for various states. The loss carryforwards for state tax purposes will expire between 2020 and 2038 if not utilized. At December 31, 2019, $85.8 million of federal net operating loss carryforwards (losses originating in tax years beginning prior to January 1, 2018), expire in years 2022 through 2037, and federal net operating loss of $3.4 million generated since 2018 can be carryforward indefinitely and utilization is limited to 80% of taxable income. The net operating loss expiration related to the state income tax returns that the Company files varies by state.
As of December 31, 2019, the Company had federal and state research and development credit carryforwards of $3.3 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, 2019 and 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. During 2019 the U.K. shifted from a net deferred tax liability to net deferred tax asset position. As such, the Company no longer believes that it is more likely than not that the future results of the operations in the U.K. will generate sufficient taxable income to utilize the deferred tax assets. As of December 31, 2019, a full valuation allowance has been applied against its U.K. deferred tax assets. As of December 31, 2019, the Company had a cumulative foreign tax loss carryforward of $2.0 million in the U.K. This amount can be carried forward indefinitely. The valuation allowance will be reviewed quarterly and will be maintained until sufficient positive evidence exists to support the reversal of the valuation allowance.
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted, significantly altering U.S. corporate income tax law. Many of the new elements of the Tax Act became effective during 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 2019 and 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 would not result in an adverse tax impact on cash given that the future tax consequences of repatriation are expected to be insignificant as a result of the Tax Cuts and Jobs Act of 2017.
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,
 
2019
 
2018
Gross unrecognized tax benefits at beginning of year
$
1,724

 
$
1,136

Increases related to:
 

 
 

Prior year income tax positions
7

 
2

Current year income tax positions
49

 
586

Gross unrecognized tax benefits at end of year
$
1,780

 
$
1,724

Included in the balance of unrecognized tax benefits at December 31, 2019 are potential benefits of $585,000 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, 2019 will change significantly by December 31, 2020.
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 $28,000 and $5,600 on a gross basis at December 31, 2019 and 2018, 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 $22,000 and $4,200 in 2019 and 2018, respectively.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2019, the Company was no longer subject to income tax examinations for taxable years before 2017 in the case of U.S. federal taxing authorities, and taxable years generally before 2015 in the case of major state and local taxing jurisdictions.