Income Taxes
Significant components of the provision (benefit) for income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (615 | ) | | $ | (117 | ) | | $ | 948 |
|
State | 314 |
| | 246 |
| | 399 |
|
Foreign | 57 |
| | 84 |
| | 41 |
|
Total current (benefit) provision | (244 | ) | | 213 |
| | 1,388 |
|
Deferred: | | | | | |
Federal | 131 |
| | (2,545 | ) | | (4,624 | ) |
State | 238 |
| | (63 | ) | | — |
|
Foreign | 4 |
| | 4 |
| | 18 |
|
Total deferred benefit | 373 |
| | (2,604 | ) | | (4,606 | ) |
Provision (benefit) for income taxes | $ | 129 |
| | $ | (2,391 | ) | | $ | (3,218 | ) |
The Company’s (loss) before provision (benefit) for income taxes was subject to taxes in the following jurisdictions for the following periods (in thousands):
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | (8,198 | ) | | $ | (16,426 | ) | | $ | (9,480 | ) |
Foreign | 162 |
| | 227 |
| | 183 |
|
Loss before benefit for income taxes | $ | (8,036 | ) | | $ | (16,199 | ) | | $ | (9,297 | ) |
Significant components of the Company’s deferred tax assets and deferred tax liabilities as of December 31, 2017 and 2016 are shown below (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 3,924 |
| | $ | 3,255 |
|
Intangible assets | 2,935 |
| | 2,351 |
|
Sale-leaseback, net | 628 |
| | 888 |
|
Allowance for returns and discounts | 5,358 |
| | 4,043 |
|
Stock-based compensation | 5,933 |
| | 10,963 |
|
Tax credit carryforwards | 5,247 |
| | 3,430 |
|
Other, net | 4,580 |
| | 4,066 |
|
Total deferred tax assets | 28,605 |
| | 28,996 |
|
Valuation allowance for deferred tax assets | (15,204 | ) | | (7,774 | ) |
Total deferred tax assets, net of valuation allowance | 13,401 |
| | 21,222 |
|
Deferred tax liabilities: | | | |
Convertible Senior Notes | (3,633 | ) | | (7,592 | ) |
Intangible assets | (2,935 | ) | | (7,557 | ) |
Property, plant and equipment | (7,263 | ) | | (6,131 | ) |
Total deferred tax liabilities | (13,831 | ) | | (21,280 | ) |
Net deferred tax liabilities | $ | (430 | ) | | $ | (58 | ) |
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative before-tax loss incurred over the three-year periods ended December 31, 2017 and 2016. Such objective evidence limits the ability to consider other subjective evidence such as the Company's projections for future profitability. On the basis of this evaluation, as of December 31, 2017, the Company had recorded a valuation allowance of $15.2 million, which represents the portion of the deferred tax asset that management could no longer conclude was more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted in the future based on changes in available evidence and additional weight may be given to subjective evidence such as the Company's projections for profitability. During the year ended December 31, 2017, the allowance increased by $7.4 million.
As of December 31, 2017, the Company had federal net operating loss ("NOL") carryforwards of approximately $13.0 million which will begin to expire in 2018, unless previously utilized. The Company also had state NOLs of approximately $23.3 million which will begin to expire in 2026, unless previously utilized. The Company has federal research credits of $4.3 million which will begin to expire on December 31, 2031, unless previously utilized. Additionally, the Company has federal alternative minimum tax credits of $0.6 million which have been reclassified to a tax receivable based on the new federal tax legislation. The Company has state research credits of $9.8 million, of which $9.5 million do not expire. The remaining $0.3 million begin to expire in 2028, unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, the Company’s use of its NOL and research credit carryforwards may be limited as a result of cumulative changes in ownership of more than 50% over a three-year period.
The provision (benefit) for income taxes reconciles to the amount computed by applying the federal statutory rate to loss before taxes as follows (in thousands): |
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax benefit at statutory tax rate | $ | (2,812 | ) | | $ | (5,775 | ) | | $ | (3,254 | ) |
State tax benefits, net of federal tax benefit | (239 | ) | | (390 | ) | | (235 | ) |
Permanent differences | 327 |
| | 129 |
| | 157 |
|
Federal and state research credits—current year | (484 | ) | | (979 | ) | | (722 | ) |
Accrual of uncertain tax positions | 142 |
| | 43 |
| | 101 |
|
Stock-based compensation | (5,851 | ) | | — |
| | — |
|
Impact of change in federal and state tax rate on revaluing deferred tax assets | 3,357 |
| | (4 | ) | | 56 |
|
Change in valuation allowance | 5,799 |
| | 4,687 |
| | 756 |
|
Other | (110 | ) | | (102 | ) | | (77 | ) |
Provision (benefit) for income taxes | $ | 129 |
| | $ | (2,391 | ) | | $ | (3,218 | ) |
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted into legislation, which includes a broad range of provisions affecting businesses. The Tax Act significantly revises how companies compute their U.S corporate tax liability by, among other provisions, reducing the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S. owned undistributed foreign earnings and profits known as the transition tax.
Pursuant to the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), a company may select between one of three scenarios to determine a reasonable estimate arising from the Tax Act. Those scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate, as the law is still being analyzed. The Company was able to provide a reasonable estimate for the revaluation of deferred taxes and the effects of the transition tax on undistributed foreign earnings and profits. As such, the Company has recorded a reduction in deferred tax assets for the revaluation of deferred taxes and a reduction of the net operating losses for the impacts of the transition tax, with both reductions offset by a decrease in the Company's full valuation allowance.
As of December 31, 2017, the Company had $1.0 million of undistributed foreign earnings and profits. Pursuant to the Tax Act, the Company’s undistributed foreign earnings and profits were deemed repatriated as of December 31, 2017. As a result, the Company utilized net operating losses and generated foreign tax credits, each offset by the Company’s change in valuation allowance. Upon the distribution of foreign earnings and profits, certain foreign countries impose withholding taxes. The Company did not provide for foreign withholding taxes on the undistributed earnings and profits from certain non-U.S. subsidiaries that will be permanently reinvested outside the United States. If the foreign earnings and profits were distributed, the Company would need to accrue an additional income tax liability, potentially generating foreign tax credits for use against the Company’s U.S. tax liability, subject to certain limitations.
The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes that it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcome of examinations by tax authorities in determining the adequacy of its provision for income taxes.
The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Beginning balance | $ | 8,604 |
| | $ | 7,684 |
| | $ | 7,065 |
|
Increases (decreases) related to prior year tax positions | 10 |
| | (10 | ) | | (12 | ) |
Increases related to current year tax positions | 951 |
| | 773 |
| | 631 |
|
Other | $ | — |
| | $ | 157 |
| | $ | — |
|
Ending balance | $ | 9,565 |
| | $ | 8,604 |
| | $ | 7,684 |
|
As of December 31, 2017 and 2016, the unrecognized tax benefits of $9.6 million and $8.6 million, respectively, of which $8.1 million and $6.4 million, respectively, would reduce the Company’s annual effective tax rate, subject to the valuation allowance. The Company does not anticipate any significant decreases in its unrecognized tax benefits over the next 12 months. The Company's policy is to recognize the interest expense and penalties related to income tax matters as a component of income tax expense. The Company has accrued approximately $0.3 million and $0.2 million of interest and penalties associated with uncertain tax positions for each of the years ended December 31, 2017 and 2016 respectively. There was no interest expense, net of accrued interest (reversed) in 2016. Interest expense, net of accrued interest (reversed) was approximately $0.1 million for both the years ended December 31, 2017 and 2015, respectively.
The Company is subject to periodic audits by domestic and foreign tax authorities; however there are no known audits at this time.
Due to the carryforward of unutilized net operating loss and credit carryovers, the Company's federal tax years from 2009 and forward and state tax years 2001 and forward are subject to examination by tax authorities.
The Company believes that it has appropriate support for the income tax positions taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.