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, 2019

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



	Year ended March 31,
	2019			2018			2017
Current state and local	$	—		$	—		$	17
Current non-U.S.	(63		)	(116		)	(24		)
Total current	(63		)	(116		)	(7		)
Deferred non-U.S.	532			(835		)	(137		)
Total deferred	532			(835		)	(137		)
Total income tax provision	$	469		$	(951	)	$	(144	)

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,
	2019			2018			2017
Statutory federal income taxes	$	(1,163	)	$	(5,750	)	$	(8,545	)
State income taxes, net of federal benefit	—			—			15
Non-deductible expenses	2,074			1,355			(350		)
Rate change	—			14,830			(88		)
Change in uncertain tax liability	(5		)	(103		)	158
Change in valuation allowance	(2,422		)	(10,528		)	8,896
Return-to-provision adjustments	1,985			(755		)	(230		)
Income tax provision / (benefit)	$	469		$	(951	)	$	(144	)

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

The Securities Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

In connection with our initial analysis of the impact of the Tax Act, we determined that the tax law changes have no effect on the Company’s tax provision in the period ending March 31, 2018 due to the valuation allowance against the U.S. deferred tax assets. The Company remeasured its U.S. deferred tax assets and liabilities as of March 31, 2018 using the reduced statutory rate of 21%, resulting in a reduction of the U.S. deferred tax assets of $14,830, and adjusted the valuation allowance against the U.S. deferred taxes for a net zero impact on the tax provision. Additionally, the Company does not estimate having a liability for the Transition Tax as a result of deficits in earnings and profits of its non-U.S. subsidiaries. The Accounting for the Tax Act was completed in the year ended March 31, 2019 consistent with our initial accounting in the prior year.

Deferred tax assets and liabilities consist of the following:



	Year ended March 31,
	2019			2018			2017
Deferred income tax assets
Net operating loss carryforward	$	23,471		$	25,848		$	38,012
Stock-based compensation	3,996			3,095			3,806
Credit carryforwards	—			—			98
Other	1,228			2,732			1,502
Gross deferred income tax assets	28,695			31,675			43,418
Valuation allowance	(27,972		)	(30,394		)	(40,922		)
Net deferred income tax assets	$	723		$	1,281		$	2,496
Deferred income tax liabilities
Depreciation and amortization	$	(678	)	$	(680	)	$	(1,523	)
Intangibles and goodwill	—			—			(75		)
Convertible Debt	—			—			(228		)
Other	(5		)	(5		)	(318		)
Net deferred income tax assets / (liabilities)	$	40		$	596		$	352

As of March 31, 2019, the Company had net operating loss (NOL) carry-forwards for U.S. federal and state tax of approximately $86,896, Australia federal tax of approximately $6,043, and Israel federal tax of approximately $2,461. 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, 2019, 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 $27,972 has been provided. During the year ended March 31, 2019, the valuation allowance decreased by $2,422. The reduction primarily relates to a true-ups of state NOL deferred tax assets of $2,410 resulting in no net impact on income tax expense or benefit.

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, 2019, 2018, and 2017 is as follows:



	2019			2018			2017
Balance at April 1	$	838		$	941		$	783
Additions for tax position of prior years	—			59			158
Reductions for tax positions of prior years	(50		)	(162		)	—
Balance at March 31	$	788		$	838		$	941

Included in the balances at March 31, 2019, 2018, and 2017 are $788, $838, and $941, respectively, of unrecognized tax benefits, which would affect the annual effective tax rate if recognized. The Company recognized $45 and $26 of expense for interest and penalties on uncertain income tax liabilities in its statement of operations for the years ended March 31, 2019 and 2018, respectively. The Company recognized an interest benefit on uncertain income tax liabilities of $52 in its statement of operations for the year ended and March 31, 2017, respectively. The Company does not expect the amount of unrecognized tax benefits to change significantly 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 2014 through 2019.