INCOME TAXES

12 Months Ended

Sep. 30, 2018

Recent Tax Legislation

The Tax Act was enacted on December 22, 2017. The Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. federal corporate tax rate from a maximum of 35% to a flat 21%, effective January 1, 2018.

In conjunction with the tax law changes, the Securities and Exchange Commission staff issued Staff Accounting Bulletin 118 ("SAB 118") to address the application of U.S. 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 Tax Act. In these instances, an entity can record provisional amounts in its financial statements for the income tax effects for which a reasonable estimate can be determined. For items for which a reasonable estimate cannot be determined, an entity should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. In accordance with SAB 118, the Company has determined that the re-measurement of deferred tax assets and liabilities were provisional amounts and reasonable estimates at September 30, 2018.

Due to the Company’s fiscal year end, the Company is subject to transitional tax rate rules. Therefore, the blended rate of 24.3% was computed as effective for the fiscal year ended September 30, 2018. Also, as a result of the Tax Act, the Company has remeasured its deferred tax assets based on the rates at which they are expected to reverse in the future, resulting in a reduction in the net deferred tax asset balance of $4.9 million. The decrease in the Company’s tax rate is primarily due to the impact of the Tax Act.

Provision for Income Taxes

Income (loss) before income taxes for the years ended September 30, 2018, 2017, and 2016 is comprised of the following (amounts shown in thousands):


	2018		2017		2016
Domestic	$	(1,584)	$	4,057	$	2,732
Foreign	(7,157)		(886)		(774)
Total	$	(8,741)	$	3,171	$	1,958

For the years ended September 30, 2018, 2017, and 2016 the income tax benefit (provision) was as follows (amounts shown in thousands):


	2018		2017		2016
Federal—current	$	(87)	$	(127)	$	(129)
Federal—deferred	(4,537)		8,291		—
State—current	(26)		(20)		(16)
State—deferred	773		2,748		—
Foreign—current	(270)		29		146
Foreign—deferred	1,081		—		—
Total	$	(3,066)	$	10,921	$	1

Deferred Income Tax Assets and Liabilities

Significant components of the Company’s net deferred tax assets and liabilities as of September 30, 2018 and 2017 are as follows (amounts shown in thousands):


	2018		2017
Deferred tax assets:
Stock-based compensation	$	3,067	$	3,671
Net operating loss carryforwards	8,568		3,453
Research credit carryforwards	3,890		3,171
AMT credit carryforwards	—		392
Foreign net operating losses	—		386
Other, net	354		770
Total deferred assets	15,879		11,843
Deferred tax liabilities:
Intangibles	(181)		(393)
Foreign deferred liabilities	(8,032)		(280)
Net deferred tax asset	7,666		11,170
Valuation allowance for net deferred tax assets	(472)		(105)
Net deferred tax asset	$	7,194	$	11,065

The net change in the total valuation allowance for the fiscal years ended September 30, 2018 and 2017 was an increase of $0.4 million and a decrease of $10.1 million, respectively. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. The Company considers projected future taxable income and planning strategies in making this assessment. Based on the level of historical operating results and the projections for future taxable income, the Company has determined that it is more likely than not that the deferred tax assets may be realized for all deferred tax assets with the exception of the net foreign deferred tax assets at Mitek Systems B.V.

As of September 30, 2018, the Company has available net operating loss carryforwards of $27.6 million for federal income tax purposes, which will start to expire in 2032. The net operating losses for state purposes are $30.2 million and will begin to expire in 2028. As of September 30, 2018, the Company has available federal research and development credit carryforwards, net of reserves, of $2.2 million. The federal research and development credits will start to expire in 2022. As of September 30, 2018, the Company has available California research and development credit carryforwards, net of reserves, of $1.9 million, which do not expire.

Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the "IRC") limit the utilization of tax attribute carryforwards that arise prior to certain cumulative changes in a corporation’s ownership. The Company has completed an IRC

Section 382/383 analysis through March 31, 2017 and any identified ownership changes had no impact to the utilization of tax attribute carryforwards. Any future ownership changes may have an impact on the utilization of the tax attribute carryforwards.

The Company adopted ASU 2016-09 prospectively as of October 1, 2017, resulting in net cumulative-effect adjustment to increase retained earnings by $8.3 million, primarily related to the recognition of the previously unrecognized excess tax benefits using the modified retrospective method. The previously unrecognized excess tax effects were recorded as an increase to deferred income taxes in the consolidated balance sheets.

Income Tax Provision Reconciliation

The difference between the income tax benefit (provision) and income taxes computed using the U.S. federal income tax rate was as follows for the years ended September 30, 2018, 2017, and 2016 (amounts shown in thousands):


	2018		2017		2016
Amount computed using statutory rate	$	2,122	$	(1,078)	$	(666)
Net change in valuation allowance for net deferred tax assets	(367)		10,058		1,889
AMT and other	(191)		20		(148)
Foreign rate differential	22		(169)		(70)
Non-deductible items	(276)		(370)		(1,136)
State income tax	50		(34)		(15)
Foreign net operating loss	—		—		147
Impact of tax reform on deferred taxes	(4,901)		—		—
Research and development credits	475		2,494		—
Income tax benefit (provision)	$	(3,066)	$	10,921	$	1

Uncertain Tax Positions

In accordance with authoritative guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

The following table reconciles the beginning and ending amount of unrecognized tax benefits for the fiscal years ended September 30, 2018, 2017, and 2016 (amounts shown in thousands):


	2018		2017		2016
Gross unrecognized tax benefits at the beginning of the year	$	1,181	$	—	$	—
Additions from tax positions taken in the current year	140		140		—
Additions from tax positions taken in prior years	—		1,041		—
Reductions from tax positions taken in prior years	—		—		—
Tax settlements	—		—		—
Gross unrecognized tax benefits at end of the year	$	1,321	$	1,181	$	—

Of the total unrecognized tax benefits at September 30, 2018, $1.3 million will impact the Company's effective tax rate. The Company does not anticipate that there will be a substantial change in unrecognized tax benefits within the next 12 months.

The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of September 30, 2018, no accrued interest or penalties related to uncertain tax positions are recorded in the consolidated financial statements.

The Company is subject to income taxation in the U. S. at the Federal and state levels. All tax years are subject to examination by U.S., California, and other state tax authorities due to the carryforward of unutilized net operating losses and tax credits. The Company is also subject to foreign income taxes in the countries in which it operates. The Company is not currently under examination by any taxing authorities.