Phunware, 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

Dec. 31, 2019

Deferred income taxes are recognized for the tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the combination of the tax payable for the year and the change during the year in deferred tax assets and liabilities.

For the years ended December 31, 2019 and 2018, the Company had net losses before income taxes of $12,866 and $10,177, respectively. Net losses relating to U.S. operations for were $12,766 and $9,880, respectively.

The difference between income taxes expected at the U.S. federal statutory income tax rate of 21% and the reported income tax expense (benefit) are summarized as follows:


	December 31,
				2019				2018
Income tax at statutory rate	$	(2,703)			$	(2,138)
Valuation allowance	2,948				2,266
State income tax, net of federal benefit	(606)				(521)
Business tax credit net of reserves	—				(325)
Non-deductible expenses	365				341
Foreign income taxes at different rate	1				3
Income tax benefit	$	5			$	(374)
Effective tax rate	(0.04)		%		3.67		%

The provision expense (benefit) for income taxes consists of the following:


	Year Ended December 31,
	2019		2018
Current:
Federal	$	—	$	—
State	5		13
Foreign	—		—
Total current	5		13
Deferred:
Federal	—		(346)
State	—		(41)
Foreign	—		—
Total deferred	—		(387)
Total	$	5	$	(374)

The components of net deferred income taxes consist of the following:


	December 31,
	2019		2018
Deferred tax assets:
Net operating loss	$	26,285	$	24,280
Reserves and accruals	3,842		2,836
Tax credits	1,463		1,349
Gross deferred tax assets	31,590		28,465

Less valuation allowance	(31,349)		(28,401)
Total deferred tax assets	241		64

Deferred tax liabilities:
Amortization of acquired intangibles	(241)		(64)
Total deferred tax liabilities	(241)		(64)
Net deferred tax liabilities	$	—	$	—

As of December 31, 2019, the Company had net operating loss carryforwards of $106,644 and $53,197 for federal and state income tax purposes, respectively. The federal net operating losses of $85,674 which were generated in tax years beginning before January 1, 2018, will begin to expire in 2030 if not utilized. The balance of the net operating losses, $20,970 do not expire. The state net operating losses expire at various times depending on the state with a majority beginning to expire in 2030 if not utilized.

As of December 31, 2019, the Company had R&D credit carryforwards of approximately $948 and $515 for federal and state income tax purposes, respectively. The federal and Texas R&D credits will begin to expire in 2034, unless previously utilized. California R&D credits carry forward indefinitely.

Utilization of the net operating losses ("NOL") and tax credit carryforwards 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 Internal Revenue Code (IRC) of 1986, as amended (the "Code"), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized annually to offset future taxable income. 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.

As of December 31, 2019, the Company had not yet completed its analysis of the deferred tax assets for its NOL and tax credits. The future utilization of the Company’s net operating loss to offset future taxable income may be subject to an annual limitation under IRC Section 382 as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has not yet determined whether such an ownership change has occurred. In order to make this determination, the Company will need to complete an analysis regarding the limitation of the net operating loss.

The Company has established a full valuation allowance for its deferred tax assets due to uncertainties that preclude it from determining that it is more likely than not that the Company will be able to generate sufficient taxable income to realize such assets. The Company monitors positive and negative factors that may arise in the future as it assesses the need for a valuation allowance against its deferred tax assets. As of December 31, 2019 and 2018, the Company has a valuation allowance of $31,349 and $28,401 respectively, against its deferred tax assets.

The Company accounts for the provisions under the Income Taxes topic of the ASC which addresses accounting for the uncertainty in income taxes.

The technical merits of a tax position derive from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the

largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate resolution with a taxing authority.

Uncertain tax positions are evaluated based upon the facts and circumstances that exist at each reporting period. Subsequent changes in judgment based upon new information may lead to changes in recognition, de-recognition, and measurement. Adjustments may result, for example, upon resolution of an issue with the taxing authorities, or expiration of a statute of limitations barring an assessment for an issue.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:


	December 31,
	2019		2018
Unrecognized tax benefits, beginning of period	$	1,516	$	889
Tax positions taken in prior periods:
Gross increases	—		166
Gross decreases	—		—

Tax positions taken in current period:
Gross increases	15		461
Settlements	—		—

Lapse of statute of limitations	—		—

Unrecognized tax benefits, end of period	$	1,531	$	1,516

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest and penalties on the consolidated balance sheets and has not recognized interest and/or penalties in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2019 and 2018.

The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years from inception are subject to examination by the United States and state taxing authorities due to the carryforward of unutilized NOLs.

On January 22, 2018, the FASB released guidance on the accounting for tax on the Global Intangible Low-Taxed Income (“GILTI”) provisions of H.R. 1, "The Tax Cuts and Jobs Act" signed into law in 2017 (the "Tax Act"). Under U.S. GAAP, the Company is allowed to make an accounting policy election of either (1) treating taxes due on the future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred, or the period cost method, or (2) factoring such amounts into the Company's measurement of its deferred taxes, or the deferred method. The Company has selected the period cost method as its accounting policy with respect to the potential GILTI tax obligations.

The Company has ownership interest in controlled foreign corporations. The Company analyzed the potential impact of the GILTI provisions of the Tax Act, as well as Base Erosion and Anti-Abuse Tax ("BEAT"). Based on the foreign subsidiaries' tax position, the Company did not incur any impact relating to these provisions for the years ended December 31, 2019 or 2018.