Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

The components of income (loss) before income tax provision are as follows for the years ended December 31:

	2019			2018			2017
	(in thousands)
United States	$	(15,647	)	$	(39,334	)	$	(40,090	)
International		428			512			565
Total loss before income tax provision	$	(15,219	)	$	(38,822	)	$	(39,525	)

Income tax expense (benefit) from continuing operations consists of the following for the years ended December 31:

	2019			2018			2017
	(in thousands)
Current:
Federal	$	—		$	32		$	—
State		10			(6	)		36
Foreign		—			—			139
		10			26			175
Deferred:
Federal		(2,065	)		(6,213	)		(2,916	)
State		(417	)		(1,188	)		(175	)
Foreign		—			—			—
		(2,482	)		(7,401	)		(3,091	)
Change in federal tax rate		—			—			11,693
Valuation allowance		2,482			7,369			16,662
Total income tax expense (benefit)	$	10		$	(6	)	$	25,439

The reconciliations of the U.S. federal statutory rate to the effective income tax rate for the years ended December 31, 2019, 2018 and 2017 are as follows:

	2019			2018			2017
Tax provision at U.S. federal statutory rates		21.0	%		21.0	%		34.0	%
State income taxes net of federal benefit		3.0			3.2			2.7
Deferred tax asset adjustments – NOL related		(0.4	)		(0.2	)		(12.1	)
Non-deductible permanent items		(0.3	)		(0.2	)		(0.1	)
Stock options		(3.2	)		(3.4	)		(0.1	)
Goodwill impairment		—			(1.5	)		(17.5	)
Other		(3.9	)		(0.2	)		0.3
Transition tax adjustment		—			—			0.2
Change in rate		—			—			(29.6	)
Change in valuation allowance		(16.3	)		(18.7	)		(42.2	)
Effective income tax rate		(0.1	)%		0.0	%		(64.4	)%

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes as of December 31, 2019 and 2018 are as follows:

	2019			2018
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	187		$	143
Accrued liabilities		826			781
Net operating loss carryforwards		23,933			20,686
Intangible assets		4,334			4,473
Share-based compensation expense		2,120			2,250
Other		406			363
Total gross deferred tax assets		31,806			28,696
Valuation allowance		(31,168	)		(28,687	)
Total deferred tax assets		638			9
Deferred tax liabilities:
Right of use assets		(638	)		—
Fixed assets		—			(9	)
Total gross deferred tax liabilities		(638	)		(9	)
Net deferred tax assets	$	—		$	—

On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the TCJA. The TCJA established new tax laws that will take effect in 2018, including, but not limited to (i) reduction of the U.S. federal corporate tax rate from a maximum of 35% to 21%; (ii) elimination of the corporate AMT; (iii) a new limitation on deductible interest expense; (iv) the Transition Tax; (v) limitations on the deductibility of certain executive compensation; (vi) changes to the bonus depreciation rules for fixed asset additions: and (vii) limitations on NOLs generated after December 31, 2017, to 80% of taxable income.

ASC 740, “Income Taxes”, requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the TCJA’s provisions, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740.

In 2017, we recorded provisional amounts for certain enactment date effects of the TCJA, for which the accounting had not been finalized, by applying the guidance in SAB 118. At December 31, 2017, the Company recorded a decrease in deferred tax assets and deferred tax liabilities of $11.7 million and $0.0 million, respectively, with a corresponding net adjustment to deferred income tax expense of $11.7 million for the year ended December 31, 2017. In addition, the Company recognized a deemed repatriation of $0.6 million of deferred foreign income from its Guatemala subsidiary, which did not result in any incremental tax cost after application of foreign tax credits. Accordingly, we completed our accounting for the effects of the TCJA in 2018 and did not recognize any material adjustments to the 2017 provisional income tax expense.

The TCJA created a provision known as GILTI that imposes a U.S. tax on certain earnings of foreign subsidiaries that are subject to foreign tax below a certain threshold. We have made an accounting policy election to reflect GILTI taxes, if any, as a current income tax expense in the period incurred.

The Company adopted the provisions of ASU 2016-09 as of January 1, 2017, which requires recognition through opening retained earnings of any pre-adoption date NOL carryforwards from nonqualified stock options and other employee share-based payments (e.g., restricted shares and share appreciation rights), as well as recognition of all income tax effects from share-based payments arising on or after January 1, 2017 in income tax expense. As a result, the Company has recognized $18.4 million of pre-adoption date NOL carryforwards with remaining carryforward periods of at least seven years. The Company recognized excess tax benefits of $6.5 million as an increase to deferred tax assets and a cumulative-effect adjustment to retained earnings of $6.5 million. Based on the weight of available evidence, the Company believes that it is more likely than not that these NOLs will not be realized and has placed a valuation allowance against the deferred tax asset.

During 2017, management assessed the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred over the three-year period ended December 31, 2017. The Company was projecting pre-tax income for 2017 until the three months ended December 31, 2017, in which the Company incurred a significant pre-tax loss due to goodwill impairment. The Company experienced increased costs in servicing its customers, as well as a decrease in market share resulting from increased competition. Additionally, the Company also projected that 2018 pre-tax profits, if any, may not offset the cumulative three-year pre-tax loss as of December 31, 2017. Based on this evaluation, the Company recorded an additional valuation allowance of $16.7 million against its deferred tax assets during the year ended December 31, 2017. At December 31, 2017, the Company has recorded a valuation allowance of $21.3 million against its deferred tax assets.

Duriing 2019 and 2018, the Company continued to experience losses and is not projecting taxable income in the near future. Based on this evaluation, the Company recorded an additional valuation allowance of $2.5 million and $7.4 million against its deferred tax assets during the years ended 2019 and 2018, respectively. Based on the weight of available evidence, the Company believes that it is more likely than not that these deferred tax assets will not be realized.

At December 31, 2019, the Company had federal and state NOLs of approximately $100.5 million and $46.2 million, respectively.  $26.4 million of the federal NOLs have an indefinite life and do not expire. The remaining $74.1 million of the federal and the all of the state NOLs expire through 2038 as follows (in millions):

The federal NOLs expire through 2035 as follows (in millions):

2025	$	4.2
2026		25.5
2027		15.5
2028		5.2
2029		7.7
2030		10.6
2031		1.3
2032		—
2033		0.1
2034		2.5
2035		1.5
Do not expire		26.4
	$	100.5

The state NOLs expire through 2038 as follows (in millions):

2028	$	2.6
2029		5.8
2030		11.0
2034		1.4
2035		0.8
2038		2.3
2039		2.4
California NOLs		26.3
Other State NOLs		19.9
Total State NOLs	$	46.2

Utilization of the NOLs and tax credit carry-forwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the IRC, as well as similar state provisions. These ownership changes may limit the amount of NOLs and research and development credit carry-forwards that can be utilized annually to offset future taxable income and tax, respectively.  A Section 382 ownership change occurred in 2006 and any changes have been reflected in the NOLs presented above as of December 31, 2019.  As a result of an acquisition in 2001, approximately $9.9 million of the NOLs are subject to an annual limitation of approximately $0.5 million per year.

The federal and state NOLs begin to expire in 2025 and 2028, respectively. Approximately $10.8 million and $5.0 million, respectively, of the federal and state NOLs were incurred by subsidiaries prior to the date of the Company’s acquisition of such subsidiaries. The Company established a valuation allowance of $4.1 million at the date of acquisitions related to these subsidiaries. The tax benefits associated with the realization of such NOLs was credited to the provision for income taxes.

At December 31, 2019, the Company has federal and state research and development tax credit carryforwards of $0.3 million and $0.2 million, respectively.  The federal credits begin to expire in 2021.  The state credits do not expire.

As of December 31, 2019, and 2018, the Company had unrecognized tax benefits of approximately $0.5 million and $0.5 million, respectively, all of which, if subsequently recognized, would have affected the Company’s tax rate.  A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	2019		2018
	(in thousands)
Balance at January 1,	$	464	$	464
Reductions based on tax positions related to prior years and settlements		—		—
Balance at December 31,	$	464	$	464

The Company is subject to taxation in the United States and various foreign and state jurisdictions. In general, the Company is no longer subject to U.S. federal and state income tax examinations for years prior to 2015 (except for the use of tax losses generated prior to 2015 that may be used to offset taxable income in subsequent years). The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company has not accrued any interest associated with its unrecognized tax benefits in the years ended December 31, 2019 and 2018.