|12 Months Ended|
Dec. 31, 2017
|Income Tax Disclosure [Abstract]|
NOTE 5 — INCOME TAXES
The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management evaluates the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be recovered, and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is “more likely than not” that some or all of the deferred tax assets will not be realized. Management has determined that a full valuation allowance against the Company’s net deferred tax assets is appropriate.
The following table presents the current and deferred provision for income taxes for the years ended December 31 (in thousands):
The provision for income taxes differs from the amount that would result from applying the federal statutory rate as follows for the years ended December 31:
The components of the deferred income tax assets and liabilities as of December 31 (in thousands):
Based upon the Company’s operating losses incurred for each of three years ended December 31, 2017, and the available evidence, the Company has established a valuation allowance against its net deferred tax assets in the amount of $40.9 million as of December 31, 2017. Management considered factors such as the Company’s earnings history, future projected earnings, and tax planning strategies. If sufficient evidence of the Company’s ability to generate sufficient future taxable income tax benefits becomes apparent, the valuation allowance may be reduced, thereby resulting in tax benefits in the statement of operations and additional paid-in-capital. Management evaluates the potential realization of the Company’s deferred tax assets and assesses the need for reducing the valuation allowance periodically.
The reversal of valuation allowance is primarily due to reduction in corporate income tax rate resulting from enactment of Tax Cuts and Jobs Act further discussed below.
As of December 31, 2017, the Company had net operating loss (“NOL”) carryforwards for federal and state purposes of approximately $147.0 million and $87.0 million, respectively, which expire in 2018 through 2037. The utilization of NOL and credit carryforwards may be limited under the provisions of the Internal Revenue Code (“IRC”) Section 382 and similar state provisions. IRC Section 382 generally imposes an annual limitation on the amount of NOL carryforwards that may be used to offset taxable income where a corporation has undergone significant changes in stock ownership. As of December 31, 2017, the Company had research and development tax credit carryforwards for federal and state purposes of approximately $1.4 million and $1.8 million, respectively, which will begin to expire in 2018 through 2037 for federal purposes and will carry forward indefinitely for state purposes. An updated analysis may be required at the time the Company begins utilizing any of its net operating losses to determine if there is an IRC Section 382 limitation.
The following table summarizes the activity related to the Company’s unrecognized tax benefits during the year ended December 31, 2017 (in thousands):
The Company expects resolution of unrecognized tax benefits, if created, would occur while the full valuation allowance of deferred tax assets is maintained. The Company does not expect to have any unrecognized tax benefits that, if recognized, would affect the effective tax rate. As of December 31, 2017 and 2016, the Company does not have liability for potential penalties or interest. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.
The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2013 through 2017 tax years generally remain subject to examination by federal and most state tax authorities. In foreign jurisdictions, the 2011 through 2017 tax years remain subject to examination by their respective tax authorities.
On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (the “2017 Tax Act”). Management reviewed and incorporated the new tax bill implications in the 2017 financial statements. The main change is the remeasurement of deferred taxes at the new corporate tax rate of 21%, which reduced the Company’s net deferred tax assets, before valuation allowance, by $21.7 million. Due to full valuation allowance, the change in deferred taxes was fully offset by the change in valuation allowance other than deferred tax liability recorded against indefinite-lived intangible asset. The net impact of change in federal corporate rate against this deferred tax liability was $0.3 million. In addition and consistent with the 2017 Tax Act, net operating losses generated subsequent to December 31, 2017 have an indefinite carryforward period with a limitation on utilization of 80% of taxable income in any given year. Therefore, to the extent that deductible temporary differences are expected to reverse and generate an indefinite-lived net operating loss, such assets are available to offset the naked credit deferred tax liability balance up to 80%. Accordingly, the Company recorded a reduction in its deferred tax liability balance from $0.5 million to $0.1 million and recognized a corresponding deferred tax benefit of $0.4 million.
U.S. income taxes or withholding taxes were provided for all the distributed earnings for the Company’s foreign subsidiaries as of December 31, 2017. At December 31, 2017, unremitted earnings of foreign subsidiaries were approximately $0.6 million and have been included in our computation of the transition tax associated with the enactment of the 2017 Tax Act discussed above. We do not provide for U.S. taxes on our unremitted earnings of foreign subsidiaries that have not been previously taxed since we intend to invest such undistributed earnings indefinitely outside of the U.S.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef