Income Taxes

12 Months Ended

Dec. 31, 2017

Income Tax Disclosure [Abstract]

INCOME TAXES

8. INCOME TAXES

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”) which among other provisions reduced the U.S. corporate tax rate form 35% to 21% effective January 1, 2018. The SEC issued guidance on accounting for the tax effects of the Act. The guidance allows the Company to record provisional amounts for those impacts, with the requirement that the accounting be completed in a period not to exceed one year from the date of enactment. The Company has not completed its accounting for the tax effects of enactment of the Act; however the Company has made reasonable estimates of the effects on its existing deferred tax balances and the transition tax or deemed repatriation tax. As a result, the provision for income taxes and effective tax rate in 2017 included a non-cash charge of $28.0 million due primarily to the remeasurement of deferred tax assets and liabilities expected to apply when the temporary differences are realized/settled at a rate of 21% versus 35%. As the Company is in a full valuation allowance position, an equal benefit adjustment was recorded. Also, the Company estimated a deemed inclusion in the amount of $3.9 million related to the transition tax on untaxed earnings overseas which was applied against the 2017 net operating loss. Estimates will true up within the measurement period with the completion of filing of the federal and state tax returns.

Components of income before income taxes and the income tax provision are as follows:

(Loss) before income taxes

	Year ended December 31,
	2017			2016
	(in thousands)
U.S.	$	(17,104	)	$	(50,689	)
Foreign		(659	)		(12,413	)
Total	$	(17,763	)	$	(63,102	)

Income taxes

	Year ended December 31,
	2017		2016
	(in thousands)
Current
U.S.	$	—	$	—
State		—		—
Foreign		88		331
Total current income tax expense		88		331
Deferred
U.S.		—		—
State		—		—
Foreign		—		(554	)
Total deferred income tax expense (benefit)		—		(554	)
Total income tax expense (benefit)	$	88	$	(223	)

The reconciliation of income tax computed at the federal statutory rate to income before taxes is as follows:

	Year ended December 31,
	2017			2016
U.S. Federal statutory rate		(33.6	)%		(34.0	)%
State taxes net of federal benefit		(4.9	)		(4.1	)
Impact of new federal tax rate		157.8			—
Foreign rate differential and transactional tax		0.3			1.8
Impact of foreign tax holiday		—			(0.9	)
Valuation allowance		(118.4	)		36.6
Other		(0.7	)		0.2
		0.5	%		(0.4	)%

Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 

Significant components of the Company’s net deferred income taxes are as follows at December 31:

	2017			2016
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts	$	2		$	12
Inventory reserves		3,672			3,855
Accrued liabilities		4			11
Warrant interest expense		196			269
Stock compensation expense		2,022			2,774
State net operating loss—net of tax		15,954			9,189
Net operating loss carryforward		37,856			50,284
Tax credits		999			825
Depreciation		5,117			4,995
Valuation allowance		(65,817	)		(72,199	)
Total deferred tax assets		5			15
Deferred tax liability:
Prepaid expenses		(5	)		(15	)
Net deferred tax liability	$	—		$	—

The Company adopted the guidance in ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent in the balance sheet. As a result, each jurisdiction has one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that only permits offsetting within a jurisdiction. Companies are still prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The change in accounting principle did not have an impact on the Company’s results of operations, cash flows or stockholders’ equity.

In March 2016, the FASB issued ASU No. 2016-09 (“ASU 2016-09”), Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting which modifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted ASU 2016-09 at January 1, 2017, and the impact of adopting ASU 2016-09 for the twelve months ended December 31, 2017 was that the Company was required to bring the deferred tax assets related to off balance net operating losses onto the balance sheet. This increased the Company’s deferred tax assets by $10.3 million with a corresponding entry to retained earnings. Since the Company continues to be in a full valuation allowance, there was an entry made to the valuation allowance to offset the increase to the deferred tax assets with a corresponding entry to retained earnings.

In accordance with ASC740 “Accounting for Income Taxes” (“ASC740”), the Company evaluates its deferred income tax assets quarterly to determine if valuation allowances are required or should be adjusted. ASC740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. The Company is in a cumulative loss position for the past three years which is considered significant negative evidence that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. Based on an evaluation in accordance with the accounting standards, as of December 31, 2017 and 2016, a valuation allowance of $65.8 million and $72.2 million, respectively has been recorded against the net U.S. and Malaysia deferred tax assets in order to measure only the portion of the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence. Until an appropriate level of profitability is attained, the Company expects to maintain a full valuation allowance on its U.S. and Malaysia net deferred tax assets. Any U.S. or Malaysia tax benefits or tax expense recorded on the Company’s Consolidated Statement of Operations will be offset with a corresponding valuation allowance until such time that the Company changes its determination related to the realization of deferred tax assets. In the event that the Company changes its determination as to the amount of deferred tax assets that can be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

At December 31, 2017, the Company had separate Federal and Illinois net operating loss carryforwards (“NOL”) of $177.9 million and $212.0 million, respectively, which begin to expire in 2021 and 2019, respectively. With the adoption of ASU 2016-09 in 2017, the Company recorded a deferred tax asset related to $26.4 million of unrecorded federal and state NOL’s attributable to stock option exercises. The impact of bringing these NOL’s onto the balance sheet was fully offset by the valuation allowance. The Company has also recorded an uncertain tax position of $2.6 million that further reduces the net operating loss deferred tax assets reported in the financial statements. In addition, at December 31, 2017, the Company had Federal and Illinois research and development credits and Illinois investment tax credits of $805,000, $66,000 and $95,000, respectively which begin to expire in 2018. Tax credits are accounted for using the flow through method and therefore are taken in the year earned.

The Company completed an analysis of the utilization of net operating losses subject to limits based upon certain ownership changes as of December 31, 2017. The results of this analysis indicated no ownership change limiting the utilization of net operating losses and tax credits.

The Company prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. At December 31, 2017 and 2016, the Company had unrecognized tax benefits taken or expected to be taken in a tax return that have been recorded on the Company’s financial statements of $1.1 million that are related to tax positions taken in 2012. It is not reasonably possible that the amount will change in the next twelve months.

A reconciliation of the beginning and ending balance of the unrecognized tax benefit follows (in thousands):

Balance at December 31, 2016	$	1,141
Decrease related to prior year positions		—
Tax position related to current year		—
Balance at December 31, 2017	$	1,141

There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31, 2017 and 2016.

The Company files income tax returns in the United States federal jurisdiction and in a state jurisdiction. During 2009, the Company began foreign operations in Malaysia and is subject to local income taxes in that jurisdiction. The Company is exempt from Malaysian income tax for a five-year period beginning in 2009 with a five year renewal. As the Company believes the prospects of becoming profitable in the LED substrate market to be unlikely for the foreseeable future, the Company ceased production activities in the Rubicon Sapphire Technology (Malaysia) SDN BHD (“Rubicon Malaysia”) facility effective November 30, 2016. The Company requested the Malaysian government to modify the tax holiday to allow it to extend through 2016 even though the Company did not meet the original requirements. Due to the uncertainty of the modification being granted, at December 31, 2016 the Company recorded a current income tax provision of $42,000 of Malaysia income tax with the expectation that the holiday will not be granted. During 2017, the Company was granted approval for extension of the holiday and the $42,000 was reversed. The Company’s Malaysia tax returns for the periods ended December 31, 2010 through 2012 have been audited by the Malaysia Inland Revenue Board with no changes made to the taxable income for those years. All other tax years in Malaysia are open to examination by tax authorities.

The Company’s federal tax returns for the periods ended December 31, 2010, 2008 and 2007 have been audited by the Internal Revenue Service (IRS) with no changes made to the Company’s taxable losses for those years. The Company’s state tax returns for the periods ended December 31, 2009 through 2012 have been audited by the Illinois Department of Revenue with no changes made to the Company’s taxable losses for those years. Due to the existence of net operating loss carryforwards, tax years ended December 31, 2001 through 2006, 2008, 2009 and 2011 through 2016 are open to examination by tax authorities for Federal purposes. Due to net operating loss carryforwards at the State level, tax years ended 2004 through 2006 and 2008 through 2016 are open to examination by state tax authorities.

Due to the closing of the Rubicon Malaysia operations, the Company no longer considers the undistributed earnings of Rubicon Malaysia to be indefinitely reinvested. Upon liquidation of Rubicon Malaysia, it is anticipated any cash left after the liquidation will be brought back to the U.S. via a payment of principal towards the intercompany loan. A withholding tax will be payable to the Malaysian government on the interest portion of the loan. At December 31, 2017 and 2016, the Company accrued the withholding tax on the interest balance of the loan in the amount of $129,000 and $274,000, respectively, which represents the incremental tax.