Income Taxes
The provision for income taxes is based on loss from operations for 2017, 2016 and 2015 before taxes as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 |
| 2016 |
| 2015 |
| (In thousands) |
U.S source loss | $ | (21,336 | ) | | $ | (8,167 | ) | | $ | (16,251 | ) |
Foreign source income | 975 |
| | 620 |
| | 1,065 |
|
Loss before income taxes | $ | (20,361 | ) | | $ | (7,547 | ) | | $ | (15,186 | ) |
The provision for income taxes consisted of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 |
| 2016 |
| 2015 |
| (In thousands) |
Current: | | | | | |
U.S. federal | $ | (238 | ) | | $ | — |
| | $ | — |
|
State | 7 |
| | 9 |
| | (7 | ) |
Foreign | 426 |
| | 200 |
| | 207 |
|
| $ | 195 |
| | $ | 209 |
| | $ | 200 |
|
Deferred: | | | | | |
U.S. federal | — |
| | — |
| | — |
|
State | — |
| | — |
| | — |
|
Foreign | (1 | ) | | 14 |
| | 107 |
|
| (1 | ) | | 14 |
| | 107 |
|
Provision for income taxes | $ | 194 |
| | $ | 223 |
| | $ | 307 |
|
Income tax expense was recorded for the year ended December 31, 2017, 2016, and 2015, of approximately $0.2 million, $0.2 million, and $0.3 million, respectively. The income tax expense recorded in the twelve months ended December 31, 2017, 2016, and 2015, primarily relates to foreign taxes on expected profits in the foreign jurisdictions.
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes as well as net operating loss and tax credit carry forwards. As of December 31, 2017 and 2016, the Company provided a full valuation allowance on its net deferred tax assets in the United States, United Kingdom, Israel, Singapore, Australia and Japan. The components of deferred tax assets (liabilities) consisted of the following: |
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
| (In thousands) |
Deferred tax assets: |
|
|
|
Net operating loss carry forwards | $ | 25,309 |
| | $ | 30,243 |
|
Reserves and accruals | 1,392 |
| | 1,507 |
|
Research and other tax credits | 7,099 |
| | 6,255 |
|
Share based compensation | 1,687 |
| | 2,456 |
|
Property and equipment | 1,336 |
| | 2,493 |
|
Total deferred tax assets | $ | 36,823 |
| | $ | 42,954 |
|
Valuation allowance | (36,177 | ) | | (41,788 | ) |
Net deferred tax assets | 646 |
| | 1,166 |
|
Deferred tax liabilities: | | |
|
Property and equipment | (437 | ) | | (958 | ) |
Total net deferred tax assets | $ | 209 |
| | $ | 208 |
|
The provision for income taxes for operations differed from the amounts computed by applying the U.S. federal income tax rate to pretax loss before income taxes as a result of the following:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | (35 | )% | | (35 | )% | | (35 | )% |
State taxes, net of federal benefit | (1 | ) | | (1 | ) | | (1 | ) |
Amortization of stock-based compensation | 1 |
| | 6 |
| | 1 |
|
Research and development benefit | (2 | ) | | (2 | ) | | (3 | ) |
Deemed repatriated foreign earnings | 1 |
| | 1 |
| | 6 |
|
Tax Cuts and Jobs Act of 2017 | 4 |
| | — |
| | — |
|
Other | — |
| | 1 |
| | — |
|
Rate differential impact on Tax Cuts and Jobs Act | 74 |
| | — |
| | — |
|
Valuation allowance | (41 | ) | | 33 |
| | 34 |
|
Provision for income taxes | 1 | % | | 3 | % | | 2 | % |
On December 22, 2017, the Tax Cuts and Jobs Act (P.L. 115-97, the "Act") was signed into law. Among other changes is a permanent reduction in the federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. As a result of the reduction in the corporate income tax rate, the Company revalued its net deferred tax assets at December 31, 2017. The Company measured a reduction in the value of the gross deferred tax assets of approximately $15.0 million, which was fully offset by the change in valuation allowance of $15.0 million.
Because of the complexity of the provision for the one-time deemed repatriation of accumulated foreign earnings for the year ended December 31, 2017, under the guidance of Staff Accounting Bulletin 118 the Company has reported a provisional amount of $5.6 million for the income inclusion and $3.1 million for the participation exemption under the Act, for which the accounting is incomplete but a reasonable estimate can be determined. The Company required additional time to gather the complete information and finalize the analysis. The analysis will be finalized upon the tax return filing. Provisional amounts or adjustments to provisional amounts identified in the measurement period, as defined, would be included as an adjustment to tax expense or benefit from operations in the period the amounts are determined. The Company has determined a reasonable estimate of $2.5 million one-time deemed repatriation of foreign earnings inclusion after the participation exemption for the tax reform effects, and reported the estimates as a provisional amount in its financial statements for which the accounting under ASC Topic 740 is completed. The Company will finalize the calculation in 2018 before filing the 2017 tax return.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provision of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period costs are both acceptable methods subject to an accounting policy election. Effective January 1, 2018, the Company will elect to treat any potential GILTI inclusions as a period cost as the Company is not projecting any material impact from the GILTI inclusions and any deferred taxes related to any inclusion would be immaterial.
As of December 31, 2017, the Company had gross cumulative net operating loss carry forwards for federal and state tax reporting purposes of approximately $103.5 million and $49.4 million, respectively, which expire in various periods between 2018 and 2037. Included in the valuation allowance as of December 31, 2017, is approximately $8.4 million related to net operating loss carry forwards in Israel. Utilization of the net operating loss and tax credit carryforwards are subject to annual limitations due to certain ownership change rules provided by the Internal Revenue Service Code of 1986, as amended and similar state provisions.
As of December 31, 2017, the Company also has research and development tax credit carry forwards of approximately $3.3 million and $4.8 million for federal and state income tax purposes, respectively. If not utilized, the federal carry forwards will expire in various amounts through 2037. The state credit can be carried forward indefinitely.
The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits (in thousands):
|
| | | |
| |
Balance at January 1, 2015 | $ | 6,674 |
|
Increases for positions taken in prior years | 483 |
|
Increases for positions related to the current year | 320 |
|
FX impact | (11 | ) |
Decreases for statutes lapsing | (20 | ) |
Settlements with taxing authorities | — |
|
Balance at December 31, 2015 | 7,446 |
|
Increases for positions taken in prior years | — |
|
Increases for positions related to the current year | 149 |
|
Decreases for positions taken in prior years | (1,359 | ) |
Decreases for statutes lapsing | (21 | ) |
FX impact | (7 | ) |
Balance at December 31, 2016 | 6,208 |
|
Increases for positions taken in prior years | — |
|
Increases for positions related to the current year | 170 |
|
Decreases for positions taken in prior years | (608 | ) |
Decreases for statutes lapsing | (23 | ) |
FX impact | 18 |
|
Balance at December 31, 2017 | $ | 5,765 |
|
The change in unrecognized tax benefits primarily relates to prior year operating losses, certain research and development tax credits, and transfer pricing.
As of December 31, 2017 and 2016, the company had $0.8 million and $0.7 million, respectively, of unrecognized tax benefits that, if recognized, will have an impact on the Company's effective tax rate.
It is reasonably possible that the total amount of unrecognized tax benefits will change in 2018. Decreases in the unrecognized tax benefits will result from the lapsing of statutes of limitations and the possible completion of tax audits in various jurisdictions. Increases will primarily result from tax positions expected to be taken on tax returns for 2018 or unanticipated findings on tax audits of open years in various jurisdictions.
In accordance with its accounting policy, the Company recognizes interest and penalties related to income tax matters in the provision for income taxes; which were not considered material during 2017, 2016, and 2015.
The Company’s major taxing jurisdictions are U.S. Federal, California, the U.K. and India. In the normal course of the Company’s business, the Company is subject to income tax audits in various jurisdictions. Years 2007 to 2017 remain open to examination by certain of these major taxing jurisdictions.
The Company currently has income tax audits in progress in India and has accrued approximately $0.7 million in connection with these audits.