Income Taxes
The following table presents the components of the income before income taxes and the provision for (benefit from) income taxes (in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2016 | | 2015 | | 2014 |
Income (loss) before income taxes: | | | | | |
United States | $ | 4,260 |
| | $ | (1,488 | ) | | $ | (4,769 | ) |
Foreign | (1,984 | ) | | 1,631 |
| | 2,866 |
|
Income (loss) before income taxes | $ | 2,276 |
| | $ | 143 |
| | $ | (1,903 | ) |
| | | | | |
Provision for (benefit from) income taxes: | | | | | |
Current: | | | | | |
Federal and state | $ | 848 |
| | $ | 965 |
| | $ | 4,718 |
|
Foreign | 2,571 |
| | 3,244 |
| | 1,726 |
|
Total current | $ | 3,419 |
| | $ | 4,209 |
| | $ | 6,444 |
|
Deferred: | | | | | |
Federal and state | $ | (2,354 | ) | | $ | (4,018 | ) | | $ | (5,360 | ) |
Foreign | 395 |
| | (227 | ) | | (3,283 | ) |
Total deferred | $ | (1,959 | ) | | $ | (4,245 | ) | | $ | (8,643 | ) |
Provision for (benefit from) income taxes | $ | 1,460 |
| | $ | (36 | ) | | $ | (2,199 | ) |
The following table presents the components of net deferred tax assets (liabilities) and the related valuation allowance (in thousands):
|
| | | | | | | |
| December 31, |
| 2016 | | 2015 |
Deferred tax assets: | | | |
Net operating loss carry-forward | $ | 2,795 |
| | $ | 2,509 |
|
Deferred revenue | 8,718 |
| | 8,296 |
|
Depreciation and amortization | 1,581 |
| | 1,428 |
|
Research tax credit carry-forward | 4,961 |
| | 2,869 |
|
Accrued expenses | 1,565 |
| | 2,927 |
|
Stock-based compensation | 10,094 |
| | 8,181 |
|
Other | 10,136 |
| | 7,726 |
|
Total deferred tax assets | $ | 39,850 |
| | $ | 33,936 |
|
Valuation allowance | (1,813 | ) | | (312 | ) |
Net deferred tax assets | $ | 38,037 |
| | $ | 33,624 |
|
Deferred tax liabilities: | | | |
Acquired intangibles | $ | (7,734 | ) | | $ | (6,181 | ) |
Convertible debt discount | (23,978 | ) | | (28,213 | ) |
Other | (177 | ) | | (537 | ) |
Total deferred tax liabilities | $ | (31,889 | ) | | $ | (34,931 | ) |
Net deferred tax assets | $ | 6,148 |
| | $ | (1,307 | ) |
The Company has $34.4 million and $35.9 million of U.S. net operating loss carryforwards as of December 31, 2016 and 2015, respectively. Additionally, the Company has $16.5 million and $11.1 million of tax credit carryforwards for tax return purposes as of December 31, 2016 and 2015, respectively. The U.S. net operating loss and tax credit carryforwards are scheduled to begin to expire in 2019 and 2020, respectively.
The Company has excluded certain U.S. net operating loss carryforwards from the calculation of deferred tax assets presented above, as they represent excess stock option deductions that do not reduce the Company’s income taxes payable. The excess tax benefits associated with stock option exercises and restricted stock vesting are recorded directly to stockholders' equity when realized. The Company uses a “with-and-without” method to determine the tax benefit realized from excess stock option deductions under the FASB's updated authoritative guidance on share-based payments. Accordingly, the Company recognizes the benefits of carryforwards in the following order: (a) net operating losses from items other than excess stock option deductions; (b) other tax credit carryforwards from items other than excess stock option deductions; and (c) net operating losses from excess stock option deductions. The amount of excess tax benefits not included in the deferred tax assets were $19.6 million and $17.9 million as of December 31, 2016 and 2015, respectively. As of December 31, 2016, the excess tax benefits not recognized are related to net operating losses of $34.4 million (tax effect of $12.8 million) and foreign tax credits of $4.2 million.
The Company has not recorded a deferred tax liability for undistributed earnings of $10.2 million of certain foreign subsidiaries, since such earnings are considered to be reinvested indefinitely. If the earnings were distributed, the Company would be subject to federal income and foreign withholding taxes. Determination of an unrecognized deferred income tax liability with respect to such earnings is not practicable.
Under the provisions of Internal Revenue Code Section 382, certain substantial changes in the Company’s ownership may result in a limitation on the amount of U.S. net operating loss carryforwards that could be utilized annually to offset future taxable income and taxes payable. A portion of the Company’s net operating loss carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue Code. The Company does not expect that this limitation will impact its ability to utilize all of our net operating losses prior to their expiration.
A deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward period. The accounting guidance requires the consideration of all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax-planning strategies.
As of December 31, 2016, the Company has a remaining valuation allowance of $1.8 million, which relates to certain foreign NOLs that are not more likely than not to be realized. The Company will continue to evaluate the need for a valuation allowance in foreign jurisdictions and may remove the valuation allowance in subsequent periods, which may have an impact on the results of operations.
The following table presents the provisions for income taxes compared with income taxes based on the federal statutory tax rate of 35% (in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2016 | | 2015 | | 2014 |
Tax provision (benefit) based on federal statutory rate | $ | 800 |
| | $ | 50 |
| | $ | (666 | ) |
State taxes | 411 |
| | 490 |
| | 430 |
|
Impact of foreign operations | 180 |
| | 201 |
| | (508 | ) |
Other permanent items | 414 |
| | 144 |
| | 193 |
|
IRC 162(m) add back | 699 |
| | 222 |
| | 456 |
|
Stock-based compensation | 1,202 |
| | 1,096 |
| | 1,002 |
|
Change in income tax valuation allowance | 1,506 |
| | 16 |
| | (2,804 | ) |
Business tax credits | (4,357 | ) | | (2,302 | ) | | (2,314 | ) |
Finland intellectual property transfer | (387 | ) | | (324 | ) | | (81 | ) |
Meals and entertainment | 464 |
| | 432 |
| | 198 |
|
Acquisition costs | 163 |
| | 248 |
| | 128 |
|
Change in tax rates | 365 |
| | (309 | ) | | 1,767 |
|
Provision for (benefit from) income taxes | $ | 1,460 |
| | $ | (36 | ) | | $ | (2,199 | ) |
The Company has separately disclosed the tax effect of items in excess of $0.3 million.
Accounting for Uncertainty in Income Taxes
The Company applies guidance for uncertainty in income taxes that requires the application of a more likely than not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, this guidance permits the Company to recognize a tax benefit measured at the largest amount of the tax benefit that, in the Company’s judgment, is more likely than not to be realized upon settlement.
During the year ended December 31, 2016, the Company's unrecognized income tax benefits increased primarily due to an increase in our research and development tax credit study for 2016 and prior years, permanent establishment exposure for a few of our branches, as well as an anticipated accounting method change for our US jurisdictions. During the years ended December 31, 2015 and 2014, there was no material adjustment in the liability for unrecognized income tax benefits.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2016 | | 2015 | | 2014 |
Unrecognized tax benefits balance at January 1, | $ | 4,927 |
| | $ | 4,619 |
| | $ | 4,875 |
|
Additions for tax positions of prior years | 1,395 |
| | 413 |
| | 243 |
|
Additions for tax provisions of current year | 2,449 |
| | 453 |
| | — |
|
Settlements of tax positions of prior years | (146 | ) | | (558 | ) | | (499 | ) |
Unrecognized tax benefits balance at December 31, | $ | 8,625 |
| | $ | 4,927 |
| | $ | 4,619 |
|
The amount of the unrecognized tax benefit if realized that would impact the rate is $6.8 million, $4.9 million and $4.6 million for years ended December 31, 2016, 2015 and 2014 respectively.
The Company records interest and penalties as a component of its income tax provision. The Company recorded interest and penalties of $0.4 million and $0.1 million for the years ended December 31, 2016 and 2015. The Company had not accrued interest with respect to uncertain tax positions in the prior years because unfavorable resolution of those positions would not result in cash tax due for those prior years.
The Company files income tax returns in the United States and in various foreign jurisdictions. The Company is no longer subject to U.S. Federal income tax examinations for years prior to 2013, with the exception that operating loss or tax credit carryforwards generated prior to 2013 may be subject to tax audit adjustment. The Company is no longer subject to state and local or foreign income tax examinations by tax authorities for years prior to 2009.