Digital Turbine, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Mar. 31, 2017

The provision (benefit) for income taxes by taxing jurisdiction was as follows:



	Year Ended March 31, 2017			Year Ended March 31, 2016			Year Ended March 31, 2015
Current U.S. federal	$	—		$	—		$	—
Current state and local	17			—			25
Current non-U.S.	(24		)	270			324
Total current	(7		)	270			349
Deferred U.S. federal	—			—			—
Deferred state and local	—			—			—
Deferred non-U.S.	(137		)	(56		)	398
Total deferred	(137		)	(56		)	398
Total income tax provision	$	(144	)	$	214		$	747

A reconciliation of income tax expense using the statutory U.S. income tax rate compared with the actual income tax provision follows:



	Year Ended March 31, 2017			Year Ended March 31, 2016			Year Ended March 31, 2015
Statutory federal income taxes	$	(8,545	)	$	(9,736	)	$	(8,365	)
State income taxes, net of federal benefit	15			—			17
Non-deductible expenses	(350		)	821			2,171
Rate change	(88		)	(224		)	—
Change in uncertain tax liability	158			(123		)	324
Change in valuation allowance	8,896			10,106			6,600
Return-to-provision adjustments	(230		)	(630		)	—
Income tax provision / (benefit)	$	(144	)	$	214		$	747

Deferred tax assets and liabilities consist of the following:



	Year Ended March 31, 2017			Year Ended March 31, 2016			Year Ended March 31, 2015
Deferred income tax assets
Net operating loss carryforward	$	38,012		$	31,840		$	25,668
Stock-based compensation	3,806			1,965			1,270
Credit carryforwards	98			129			123
Other	1,502			1,469			1,324
Gross deferred income tax assets	43,418			35,403			28,385
Valuation allowance	(40,922		)	(32,026		)	(21,920		)
Net deferred income tax assets	$	2,496		$	3,377		$	6,465
Deferred income tax liabilities
Depreciation and amortization	$	(1,523	)	$	(754	)	$	(751	)
Intangibles and goodwill	(75		)	(1,947		)	(5,069		)
Convertible Debt	(228		)	—			—
Other	(318		)	(175		)	(780		)
Net deferred income tax assets / (liabilities)	$	352		$	501		$	(135	)

As of March 31, 2017, the Company had net operating loss (NOL) carry-forwards for U.S. federal and state tax of approximately $93,064, Australia federal tax of approximately $6,446, and Israel federal tax of approximately $2,944. The U.S. federal and state NOLs expire between 2028 and 2037, and the Australia and Israel NOLs have an unlimited carryover period. Utilization of the NOLs in the U.S. are subject to 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 Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state and foreign limitations. These ownership changes limit the amount of NOLs that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% percentage points of the outstanding stock of a company by certain stockholders or public groups.

As of March 31, 2017, realization of a large portion of the Company’s gross deferred tax assets was not considered more likely than not and, accordingly, a valuation allowance of $40,922 has been provided. During the year ended March 31, 2017, the valuation allowance increased by $8,896.

ASC 740 requires the consideration of a valuation allowance, on a jurisdictional basis, to reflect the likelihood of realization of deferred tax assets. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. Based on the history of cumulative book and tax losses, a valuation allowance has been recorded for assets that management believes are not more likely than not realizable.

ASC 740 provides guidance on the minimum threshold that an uncertain income tax position is required to meet before it can be recognized in the financial statements. ASC 740 contains a two-step approach to recognizing and measuring uncertain income tax positions. The first step is to evaluate the income tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. If it is not more likely than not that the benefit will be sustained on its technical merits, no benefit can be recorded. We recognize accrued interest and penalties related to uncertain income tax positions in income tax expense on our consolidated statement of income.

The Company’s income is subject to taxation in both the U.S. and foreign jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. The Company establishes liabilities for income tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These liabilities for tax contingencies are established when the Company believes that a tax position is not more likely than not sustainable. The Company adjusts these liabilities in light of changing facts and circumstances, such as the outcome of a tax audit or lapse of a statute of limitations. The provision for income taxes includes the impact of uncertain tax liabilities and changes in liabilities that are considered appropriate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended March 31, 2017, 2016, and 2015 is as follows:



	2017		2016			2015
Balance at April 1	$	783	$	905		$	61
Additions for tax position of prior years	158		—			844
Reductions for tax positions of prior years	—		(122		)	—
Balance at March 31	$	941	$	783		$	905

Included in the balances at March 31, 2017, 2016 and 2015 are $941, $783, and $905, respectively, of unrecognized tax benefits, which would affect the annual effective tax rate if recognized. The Company recognized $52 of expense for interest and penalties on uncertain income tax liabilities in its statement of operations for the year ended March 31, 2017. The Company recognized an interest benefit on uncertain income tax liabilities of $1 and $0 in its statement of operations for the years ended March 31, 2016 and 2015, respectively. The Company expects the amount of unrecognized tax benefits to decrease by approximately $140 in the next twelve months.

The Company’s U.S. federal, state, and foreign income tax returns generally remain subject to examination for the tax years ended 2013 through 2017.