INCOME TAXES



a.	Tax Reform:

On December 22, 2017, the TCJA was signed into law. The TCJA makes broad and complex changes to the Code that impact the Company's provision for income taxes. The changes include, but are not limited to:

•Decreasing the corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017 (“Rate Reduction”);

•The Deemed Repatriation Transition Tax; and

•Taxation of GILTI earned by foreign subsidiaries beginning after December 31, 2017. The GILTI tax imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations.

Deemed Repatriation Transition Tax

The Deemed Repatriation Transition Tax is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Deemed Repatriation Transition Tax, the Company calculated the amount of post-1986 E&P of its foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Because the Company has a net cumulative deficit on the E&P of its foreign subsidiaries, it should not be subject to the Deemed Repatriation Transition Tax.

100% Dividend Received Deduction and Indefinite Reinvestment Assertion

Effective for tax years beginning after December 31, 2017, the TCJA provides a 100% dividend received deduction, subject to a one-year holding period, to a U.S. corporate shareholder for the foreign source portion of dividends received from a “specified 10-percent owned foreign corporation.”

Prior to the effectiveness of the TCJA, the Company did not recognize a deferred tax liability related to un-remitted foreign earnings because such earnings were expected to be reinvested indefinitely. Although the Company is not subject to the Deemed Repatriation Transition Tax, an actual repatriation from its non-U.S. subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes. The Company’s intention is to continue reinvesting the earnings from its non-U.S. subsidiaries indefinitely.

GILTI Tax

The TCJA creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder, over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.

For 2018, the Company is not subject to tax on account of GILTI as it has net CFC tested loss on an aggregated basis. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a component of current income tax expense when incurred or to factor such amounts into the Company’s measurement of its deferred tax expense. The Company has made an accounting policy election to treat GILTI as a component of current income tax expense.

Accounting for the TCJA

In March 2018, FASB issued Accounting Standards Update No. 2018-05, "Income Taxes Topic (740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118" ("ASU 2018-05") to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA.

The Company completed the accounting treatment related to the tax effects of the TCJA. As a result:

•The Company recognizes its accounting for changes in the US federal rate and deferred tax impact for the rate change to be complete.

•The Company's analysis for the Deemed Repatriation Transition Tax has been filed with its December 31, 2017 tax return and the Company considered its accounting for this area of the TCJA to be complete as of such date and did not make any measurement-period adjustments related to it.

•The Company accounted for the tax impact related to others areas of the TCJA and believe its analysis to be completed and consistent with the guidance in ASU 2018-05. In particular, the Company concluded that for 2018, it should not be subject to any tax on account of GILTI or base erosion and anti-abuse payments made by U.S. corporations to foreign related parties. Further, due to the NOL generated during 2018, the Company concluded that for 2018, it would not benefit from the reduced tax rate of 13.125% on its foreign derived intangible income.

The Company recognizes that the IRS, the Financial Accounting Standards Board and the SEC are continuing to publish and finalize ongoing guidance with respect to the TCJA which may modify accounting interpretation for the TCJA, the Company will account for these impacts in the period in which any changes are enacted.



b.	The Company:

The Company is taxed in accordance with U.S. tax laws.

As of December 31, 2018, the Company had net operating loss carry-forwards for federal, state and foreign income tax purposes of approximately $54,872, $57,530 and $1,204, respectively. If not utilized, these carryforwards will expire starting in 2028, 2020 and indefinitely for federal, state and foreign tax purposes, respectively. In addition, as of December 31, 2018, the Company had federal research credit, retention credit, foreign tax credit and Ireland Employment credit carryforwards of approximately $1,412, $24, $190 and $78, respectively. If not utilized, the federal tax carryforwards will begin to expire in 2033, 2032 and 2026, respectively. Ireland has no expiration on the employment credit.

A U.S. corporation's ability to utilize its federal and state NOL and tax credit carryforwards to offset its taxable income or income is limited under Section 382 of the Code if the corporation undergoes an ownership change (within the meaning of Code Section 382). In general, an “ownership change” occurs whenever the percentage of the stock of a corporation owned by “5-percent shareholders” (within the meaning of Code Section 382) increases by more than 50 percentage points over the lowest percentage of the stock of such corporation owned by such “5-percent shareholders” at any time over the testing period.

An ownership change under Code Section 382 would establish an annual limitation to the amount of NOL and tax credit carryforwards the Company could utilize to offset its taxable income or income tax in any single year. The Company performed a Section 382 analysis (the “Analysis”) which concluded that its ability to utilize its NOL and tax credit carryforwards is subject to an annual limitation as it underwent a section 382 ownership change during 2017. The Analysis further concluded that the Company's NOL carryforwards should be available for utilization by the Company before they expire, starting in 2028. As of December 31, 2017, the Company's U.S. federal NOL carryforwards was $22,907.

During 2018, the Company generated an additional $31,965 of NOLs which are not subject to the annual limitation described above. The TCJA also modified the rules regarding utilization of NOL and NOLs generated subsequent to the TCJA can only be used to offset 80% of taxable income with an indefinite carryforward period for unused carryforwards (i.e., they should not expire). Utilization of the federal and state net operating losses and credits may be subject to a substantial annual limitation due to an additional ownership change. The annual limitation may result in the expiration of net operating losses and credits before utilization and in the event we have a change of ownership, utilization of the carryforwards could be restricted.



c.	Loss before taxes on income is comprised as follows:



	Year ended
	December 31,
	2018			2017			2016
				(as adjusted)			(as adjusted)
Domestic	$	(25,557	)	$	(19,239	)	$	(13,940	)
Foreign	(2,608		)	8,182			1,060
	$	(28,165	)	$	(11,057	)	$	(12,880	)



d.	Taxes on income (loss) are comprised as follows:



	Year ended
	December 31,
	2018			2017			2016
				(as adjusted)			(as adjusted)
Current:
Domestic:
Federal	$	—		$	(92	)	$	92
State	169			191			109
Foreign	1,498			2,516			930
Total current income tax	$	1,667		$	2,615		$	1,131

Deferred:
Foreign	$	(1,254	)	$	172		$	182
Total deferred income tax	$	(1,254	)	$	172		$	182
Income tax expense	$	413		$	2,787		$	1,313



e.	Deferred income taxes:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s deferred tax assets are derived from its U.S. net operating loss carry forwards and other temporary differences.

ASC 740 requires an assessment of both positive and negative evidence concerning the realizability of our deferred tax assets in each jurisdiction. After considering evidence such as current and cumulative financial reporting incomes, the expected sources of future taxable income and tax planning strategies, the Company's management concluded that a valuation allowance is required for US, state and Israel deferred tax assets. Future changes in these factors, including the Company's anticipated results, could have a significant impact on the realization of the deferred tax assets which would result in an increase or decrease to the valuation allowance and a corresponding charge to income tax expense.



	December 31,
	2018			2017
				(as adjusted)
Deferred tax assets:
Carry forward losses and credits	$	15,547		$	7,407
Deferred revenues	13,995			14,226
Accrued payroll, commissions, vacation	1,912			2,685
Equity Compensation	5,737			908
Allowance for doubtful accounts	940			633
Accrued severance pay	297			238
Other	1,346			1,760
Deferred tax assets before valuation allowance	39,774			27,857
Valuation allowance	(39,365		)	(27,702		)
Deferred tax assets	$	409		$	155

Deferred tax liability:
Accrued compensation and other accrued expense	$	(272	)	$	(289	)
Deferred tax liability	$	(272	)	$	(289	)
Net deferred tax asset (liability)	$	137		$	(134	)

The change in the valuation allowance was approximately an increase of $15,826 and a decrease of $8,623 during 2018 and 2017, which included the Company’s adoption of ASC 606. The adoption resulted in a decrease to deferred tax assets of $3,796 and a decrease to valuation allowance of $2,493 with an offsetting entry of $1,302 to retained earnings. As the Company adopted ASC 606 using the full retrospective method, the 2017 and 2016 valuation allowances above have been adjusted for ASC 606 adoption. In addition, the 2017 and 2016 tax disclosures have been updated to reflect the ASC 606 adoption.



f.	Reconciliation of the theoretical tax expenses:

A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company, and the actual tax expense (benefit) as reported in the consolidated statements of operations is as follows:



	Year ended December 31,
	2018			2017			2016
				(as adjusted)			(as adjusted)
Loss before taxes, as reported in the consolidated statements of operations	$	(28,165	)	$	(11,057	)	$	(12,880	)
Statutory tax rate	21		%	34		%	34		%

Theoretical tax benefits on the above amount at the US statutory tax rate	$	(5,915	)	$	(3,759	)	$	(4,379	)
Income tax at rate other than the U.S. statutory tax rate	692			(1,047		)	(6		)
Tax advances and non-deductible expenses including equity based compensation expenses	(7,623		)	3,123			4,298
Operating losses and other temporary differences for which valuation allowance was provided	15,826			(8,623		)	1,885
Research and Development Tax Credit	—			1,126			(1,182		)
State tax	(1,221		)	(601		)	(426		)
Impact of rate change	—			10,920			(360		)
Change in tax reserve for uncertain tax positions	(1,728		)	1,576			1,209
Other individually immaterial income tax items	382			72			274
Actual tax expense	$	413		$	2,787		$	1,313



g.	A reconciliation of the beginning and ending amounts of unrecognized tax benefits in the years ended December 31, 2018 and 2017 are as follows:



Gross unrecognized tax benefits as of January 1, 2017	$	2,106
Increase in tax position for current year	1,752
Increase in tax position for prior years	135
Decrease in tax position for prior years	(311		)
Gross unrecognized tax benefits as of December 31, 2017	$	3,682
Increase in tax position for current year	169
Increase in tax position for prior years	241
Decrease in tax position for prior years	(720		)
Decrease for lapse of statute of limitations/ settlements	(1,418		)
Gross unrecognized tax benefits as of December 31, 2018	$	1,954

There was $1,954 of unrecognized income tax benefits that, if recognized, approximately $1,431 would impact the effective tax rate in the period in which each of the benefits is recognized. The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of operations. The total amount of penalties and interest is approximately $93 as of December 31, 2018.



h.	Foreign taxation:

1. Israeli tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”):

Conditions for entitlement to the benefits:

The benefits available to a Beneficiary Enterprise relate only to taxable income attributable to the specific investment program and are conditioned upon terms stipulated in the Investment Law and the related regulations and the criteria set forth in the applicable certificate of approval (for a Beneficiary Enterprise). If VSL does not fulfill these conditions, in whole or in part, the benefits can be cancelled, and VSL may be required to refund the benefits, in an amount linked to the Israeli consumer price index plus interest.

The Office of the Chief Scientist at Israel’s Ministry of Industry, Trade and Labor approved the Israeli subsidiary as an R&D-incentive enterprise for a foreign resident company in accordance with the Encouragement of Capital Investments (Consolidated Version) Law.

If cash dividends are distributed out of tax exempt profits in a manner other than upon complete liquidation, VSL will then become liable for tax at the rate of 10%-25% (depending on the level of foreign investments in VSL) in respect of the amount distributed.

2. Undistributed earnings of foreign subsidiaries:

As of December 31, 2018, the Company has accumulated undistributed earnings generated by its foreign subsidiaries of approximately $678. Because approximately $285 of such earnings have previously been subject to the one-time transition tax on foreign earnings required by the TCJA, any additional taxes due with respect to such earnings or the excess of the amount for financial reporting over the tax basis of our foreign investments would generally be limited to foreign and state taxes. The Company plans to indefinitely reinvest any additional cash on hand outside of the previously taxed income and expects future U.S. cash generation to be sufficient to meet future U.S. cash needs.



i.	Tax assessments:

The Company was audited by the Internal Revenue Service for tax year 2016. As of December 31, 2018, our federal returns for the years ended 2010 through the current period and most state returns for the years ended 2009 through the current period are still open to examination. In addition, all of the net operating losses and research and development credit carryforwards that may be used in future years are still subject to adjustment.

The Company has final tax assessments for VSL in Israel through 2015, VSUK in UK through 2016 and VSF in France through 2015.

VSG in Germany, VSC in Canada, VIRE in Ireland and VAUS in Australia do not have final tax assessments since their respective inceptions.