Vonage 2011 Annual Report Download - page 74

VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
The components of the income tax benefit (expense) are as follows:
For the Years Ended December 31,
2011 2010 2009
Current:
State and local taxes $ 1,674 $(304) $(836)
Foreign 24 (14) —
Federal 1,199 — —
$ 2,897 $(318) $(836)
Deferred:
State and local taxes $ (18,677) $ — $ —
Foreign (9,797) — —
Federal (297,127) — —
$(325,601) $ — $ —
$(322,704) $(318) $(836)
The following table summarizes deferred taxes resulting from differences between financial accounting basis and tax
basis of assets and liabilities.
December 31,
2011
December 31,
2010
Current assets and liabilities:
Deferred revenue $ 15,663 $ 17,150
Accounts receivable and inventory allowances 314 489
Accrued expenses 3,569 4,583
19,546 22,222
Valuation allowance — (22,222)
Deferred tax assets, net, current $ 19,546 $ —
Non-current assets and liabilities:
Depreciation and amortization $ 1,986 $ (8,332)
Accrued expenses — 4,789
Research and development and alternative minimum tax credit 1,711 519
Stock option compensation 11,891 22,153
Capital leases (2,455) (1,878)
Debt original issue discount — (426)
Net operating loss carryforwards 310,605 376,856
323,738 393,681
Valuation allowance (17,683) (393,681)
Deferred tax assets, net, non-current $306,055 $ —
We recognize deferred tax assets and liabilities at
enacted income tax rates for the temporary differences
between the financial reporting bases and the tax bases of
our assets and liabilities. Any effects of changes in income
tax rates or tax laws are included in the provision for
income taxes in the period of enactment. Our net deferred
tax assets primarily consist of net operating loss carry
forwards (“NOLs”). We are required to record a valuation
allowance against our net deferred tax assets if we con-
clude that it is more likely than not that taxable income
generated in the future will be insufficient to utilize the
future income tax benefit from our net deferred tax assets
(namely, the NOLs), prior to expiration. We periodically
review this conclusion, which requires significant
management judgment. Until the fourth quarter of 2011,
we recorded a valuation allowance fully against our net
deferred tax assets. In 2011, we completed our first full
year of taxable income and completed our budgetary
process for periods subsequent to 2011, which anticipates
continued taxable income in the future. Based upon these
factors and our sustained profitable operating performance
over the past three years excluding certain losses asso-
ciated with our prior convertible notes and our December
2010 debt refinancing, our evaluation determined that the
benefit resulting from our net deferred tax assets (namely,
the NOLs), are likely to be realized prior to their expiration.
Accordingly, we released the related valuation allowance
against our United States federal and Canada net deferred
tax assets, and a portion of the allowance against our state
net deferred tax assets as certain NOLs may expire prior to
utilization due to shorter utilization periods in certain
states, resulting in a one-time non-cash income tax benefit
of $325,601 and a corresponding net deferred tax asset of
$325,601 in the fourth quarter of 2011. We still maintain a
full valuation allowance against our United Kingdom net
deferred tax assets as we are unable to conclude that it is
more likely than not that some or all of the related United
Kingdom net deferred tax assets will be realized. In sub-
sequent periods, we would expect to recognize income tax
expense equal to our pre-tax income multiplied by our
effective income tax rate, an expense that has not been
recognized prior to the reduction of the valuation allow-
ance. In the future, if available evidence changes our con-
clusion that it is more likely than not that we will utilize our
net deferred tax assets prior to their expiration, we will
make an adjustment to the related valuation allowance at
that time.
F-18 VONAGE ANNUAL REPORT 2011