Note 17—Income Taxes

The components of (loss) income before income taxes are as follows:

Year ended July 31 (in thousands)	2017			2016		2015
Domestic	$	(3,161	)	$	11,278	$	7,538
Foreign		10,781			18,190		84,665
INCOME BEFORE INCOME TAXES	$	7,620		$	29,468	$	92,203

Significant components of the Company’s deferred income tax assets consist of the following:

July 31 (in thousands)	2017			2016
Deferred income tax assets:
Bad debt reserve	$	535		$	575
Accrued expenses		7,888			5,327
Stock options and restricted stock		1,608			1,802
Charitable contributions		1,768			1,527
Impairment		27,944			25,746
Depreciation		4,438			6,785
Unrealized gain		317			193
Net operating loss		122,260			122,849
Credits		2,899			3,192
Total deferred income tax assets		169,657			167,996
Valuation allowance		(157,816	)		(158,442	)
Deferred tax assets, net of valuation allowance		11,841			9,554
Deferred income tax liabilities:
Unrealized loss		—			42
NET DEFERRED INCOME TAX ASSETS	$	11,841		$	9,512

The benefit from (provision for) income taxes consists of the following:

Year ended July 31 (in thousands)	2017			2016			2015
Current:
Federal	$	—		$	(83	)	$	—
State and local		(26	)		(30	)		—
Foreign		(282	)		(185	)		(311	)
		(308	)		(298	)		(311	)
Deferred:
Federal		(9,536	)		(3,148	)		(1,967	)
State and local		(66	)		(51	)		(245	)
Foreign		11,931			(613	)		(3,565	)
		2,329			(3,812	)		(5,777	)
BENEFIT FROM (PROVISION FOR) INCOME TAXES	$	2,021		$	(4,110	)	$	(6,088	)

The differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provided are as follows:

Year ended July 31 (in thousands)	2017			2016			2015
U.S. federal income tax at statutory rate	$	(2,667	)	$	(10,314	)	$	(32,271	)
Valuation allowance		626			—			—
Foreign tax rate differential		3,107			6,035			25,757
Nondeductible expenses		457			487			659
Other		64			(67	)		(73	)
Prior year tax benefit (expense)		494			(231	)		—
State and local income tax, net of federal benefit		(60	)		(20	)		(160	)
BENEFIT FROM (PROVISION FOR) INCOME TAXES	$	2,021		$	(4,110	)	$	(6,088	)

At July 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $180 million. This carry-forward loss is available to offset future U.S. federal and state taxable income. The net operating loss carryforwards will start to expire in fiscal 2018, with fiscal 2017’s loss expiring in fiscal 2038. The Company has foreign net operating losses of approximately $159 million, of which approximately $111 million does not expire, approximately $47 million expires in two to nine years and $1 million expires in twenty years. These foreign net operating losses are available to offset future taxable income in the countries in which the losses were incurred. The Company’s subsidiary, net2phone, which provides voice over Internet protocol communications services, has additional federal net operating losses of approximately $77 million, which will expire through fiscal 2027. With the reacquisition of net2phone by the Company in March 2006, its losses were limited under Internal Revenue Code Section 382 to approximately $7 million per year. The net operating losses do not include any excess benefits related to stock options or restricted stock.

The Company has not recorded U.S. income tax expense for foreign earnings, since such earnings are permanently reinvested outside the United States. The cumulative undistributed foreign earnings are included in accumulated deficit in the Company’s consolidated balance sheets, and consisted of approximately $375 million at July 31, 2017. Upon distribution of these foreign earnings to the Company’s domestic entities, the Company may be subject to U.S. income taxes and withholding of foreign taxes, however, it is not practicable to determine the amount, if any, which would be paid.

The change in the valuation allowance is as follows:

Year ended July 31 (in thousands)	Balance at beginning of year		Additions charged to costs and expenses		Deductions			Balance at end of year
2017
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	158,442	$	16,017	$	(16,643	)	$	157,816
2016
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	155,393	$	3,049	$	—		$	158,442
2015
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	151,975	$	3,418	$	—		$	155,393

In fiscal 2017, the Company determined that its valuation allowance on the losses of Elmion Netherlands B.V., a Netherlands subsidiary, was no longer required due to an internal reorganization that generated income and a projection of net income in future periods. The Company recorded a benefit from income taxes of $16.6 million in fiscal 2017 from the full recognition of the Elmion Netherlands B.V. deferred tax assets. In addition, in fiscal 2017, the Company determined that it would not be able to utilize its deferred tax assets in the United States and recorded a valuation allowance of $11.1 million against them.

At July 31, 2017 and 2016, the Company did not have any unrecognized income tax benefits. There were no changes in the balance of unrecognized income tax benefits in fiscal 2017, fiscal 2016 and fiscal 2015. At July 31, 2017, the Company did not expect any changes in unrecognized income tax benefits during the next twelve months. In fiscal 2017, fiscal 2016 and fiscal 2015, the Company did not record any interest and penalties on income taxes. At July 31, 2017 and 2016, there was no accrued interest included in current income taxes payable.

In August 2016, the Company and the New Jersey Economic Development Authority entered into an incentive agreement pursuant to which the Company may receive corporation business tax credits in exchange for investment in a qualified business facility and employment of the required number of full-time employees. The corporation business tax credits to be received are a maximum of $24.3 million. The Company’s tax certificate documents are currently being reviewed by Economic Development Authority. The tax credits are based on an estimated capital investment of $5.3 million in addition to retaining, as well as creating, a number of full-time jobs. The Company may claim a tax credit each tax year for ten years beginning when the Economic Development Authority accepts the Company’s project completion certification. The tax credit can be applied to 100% of the Company’s New Jersey tax liability each year, and the unused amount of the annual credit can be carried forward. In addition, the Company may apply for a tax credit transfer certificate to sell unused tax credits to another business. The tax credits must be sold for no less than 75% of the value of the tax credits. The tax credits are subject to reduction, forfeiture and recapture if, among other things, the number of full-time employees declines below the program or statewide minimum.

The Company currently remains subject to examinations of its tax returns as follows: U.S. federal tax returns for fiscal 2014 to fiscal 2017, state and local tax returns generally for fiscal 2013 to fiscal 2017 and foreign tax returns generally for fiscal 2013 to fiscal 2017.