Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes (“ASC 740-10”) under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect in the years in which the differences are expected to reverse. The Company reviews its deferred tax assets for recoverability considering historical profitability, projected future taxable income, and the expected timing of the reversals of existing temporary differences and tax planning strategies. The effect of a change in enacted tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. As of December 31, 2017, the Company had no uncertain tax positions.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act ("Tax Reform Act"). The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system, expanding the tax base and imposing a tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate federal income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Company has recognized the impact of the Tax Reform Act in these consolidated financial statements and related disclosures. Staff Accounting Bulletin No. 118 ("SAB 118") provides Companies with guidance on accounting for the impact of the Tax Reform Act. Specifically, SAB 118 provides for a measurement period, not to exceed one year, that begins on the date of enactment of December 22, 2017, and ends when the Company has obtained, prepared, and analyzed information needed to complete accounting requirements. In accordance with SAB 118, the Company recorded provisional amounts reflecting the impact of the Tax Reform Act in these consolidated financial statements and related disclosures. The impact of the remeasurement of the Company’s U.S. deferred tax assets and liabilities to 21% resulted in a tax benefit of approximately $0.3 million consisting of a reduction of the deferred tax assets of $60.5 million offset by a reduction in the valuation allowance of $60.8 million. The Company recorded no tax expense related to the deemed repatriation tax consisting of a reduction in net operating losses in 2017 of $0.8 million offset by a reduction in the valuation allowance of the $0.8 million. The impact of the deemed repatriation tax computation is still open due to finalization of the earnings and profits of the Company's foreign subsidiaries, as well as the Company’s evaluation of certain elections and guidance.
The Company files federal, state and foreign tax returns. These returns are generally open to examination by the relevant tax authorities from two to four years from the date they are filed or, in certain circumstances, from the end of the accounting period. The tax filings relating to the Company's federal and state tax returns are currently open to examination for tax years 2014 through 2016 and 2013 through 2016, respectively. In addition, the Company has generated tax losses since its inception in 2000. These years may be subject to examination if the losses are carried forward and utilized in future years.
At December 31, 2017 and 2016, the Company provided a full valuation allowance against its domestic net deferred tax asset as, in the judgment of the Company, it is not more likely than not that the future tax benefit will be realized. In addition, the Company has a net deferred tax asset in foreign jurisdictions where no valuation allowance is recorded as, in the judgment of the Company, it is more likely than not that the future tax benefit will be realized.
Income tax expense from continuing operations consists of the following:
|
| | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 151 |
| | 52 |
| | 72 |
|
Non-U.S. | 603 |
| | 539 |
| | 321 |
|
Total current expense | 754 |
| | 591 |
| | 393 |
|
Deferred: | | | | | |
Federal | (347 | ) | | — |
| | — |
|
State | 91 |
| | — |
| | — |
|
Non-U.S. | (241 | ) | | (199 | ) | | (181 | ) |
Total deferred expense | (497 | ) | | (199 | ) | | (181 | ) |
Total income tax expense | $ | 257 |
| | $ | 392 |
| | $ | 212 |
|
Income tax expense from discontinued operations was $0.4 million for the year ended December 31, 2016 and was primarily generated from federal deferred taxes. Income tax expense from discontinued operations was not significant for the year ended December 31, 2015.
The following table reconciles the federal statutory income rate to the Company's effective income tax rate:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax at U.S. statutory rate | 34.00 | % | | 34.00 | % | | 34.00 | % |
Changes from statutory rate: | | | | | |
State taxes, net of federal benefit | 10.21 |
| | (10.86 | ) | | 3.06 |
|
Tax credits | 13.28 |
| | 0.03 |
| | 1.51 |
|
Permanent items | (0.55 | ) | | (11.03 | ) | | (2.09 | ) |
Change in enacted rates | 0.98 |
| | — |
| | — |
|
Change in valuation allowance | (57.91 | ) | | (13.45 | ) | | (37.11 | ) |
Other | (0.98 | ) | | (0.15 | ) | | 0.28 |
|
Effective income tax rate | (0.97 | )% | | (1.46 | )% | | (0.35 | )% |
Pre-tax income attributable to the Company's operations located outside the U.S. was approximately $1.1 million, $0.8 million and $0.3 million for 2017, 2016 and 2015, respectively. In general, it is the Company's practice and intention to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2017, the Company has chosen to indefinitely reinvest approximately $6.4 million of earnings of certain of its non-U.S. subsidiaries. To the extent the Company repatriates its foreign earnings, certain withholding taxes and state taxes may apply. No provision has been recorded for taxes that could be incurred upon repatriation. The deferred tax liability related to repatriation of these earnings would not be material to the company's consolidated financial statements.
Significant components of the Company’s deferred tax assets (liabilities) consists of the following: |
| | | | | | | |
| Year Ended December 31, |
(in thousands) | 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 129,184 |
| | $ | 169,203 |
|
Start up expenditures | 462 |
| | 929 |
|
Tax credits | 12,705 |
| | 8,007 |
|
Provision for bad debts | 824 |
| | 1,330 |
|
Depreciation and amortization | 3,068 |
| | 6,368 |
|
Capital loss carryforwards | 12,850 |
| | 18,961 |
|
Stock-based compensation | 9,799 |
| | 10,359 |
|
Other | 4,449 |
| | 4,701 |
|
Total deferred tax assets | $ | 173,341 |
| | $ | 219,858 |
|
Deferred tax liabilities: | | | |
Prepaid assets | $ | (1,326 | ) | | $ | (1,173 | ) |
Amortization of acquired intangibles | (5 | ) | | (33 | ) |
Amortization of debt discount | (43,083 | ) | | (25,977 | ) |
Goodwill | (633 | ) | | (855 | ) |
Other | (259 | ) | | (313 | ) |
Total deferred tax liabilities | $ | (45,306 | ) | | $ | (28,351 | ) |
Valuation allowance | $ | (127,927 | ) | | $ | (191,922 | ) |
Net deferred tax liabilities | $ | 108 |
| | $ | (415 | ) |
The Company has recorded a deferred tax liability related to the tax basis in acquired goodwill that is not amortized for financial reporting purposes. The deferred tax liability will only reverse at the time of further impairment of the goodwill. Due to the uncertain timing of this reversal, the temporary difference cannot be considered as a source of future taxable income for purposes of determining a valuation allowance. Therefore, the deferred tax liability cannot be used to offset the deferred tax asset related to the net operating loss carryforward for tax purposes. The Tax Reform Act limits certain deductions and these limitations may impact the value of existing deferred tax assets. The Company will continue to review the impact of these limitations as regulatory guidance is issued.
A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the U.S. deferred tax assets will not be realized. After consideration of the available evidence, both positive and negative, the Company has determined that a $127.9 million valuation allowance at December 31, 2017 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The Company provided a valuation allowance for the full amount of its domestic net deferred tax asset for the years ended December 31, 2017 and 2016 because it is not more likely than not that the future tax benefit will be realized. In the year ended December 31, 2017, the Company’s valuation allowance decreased to $127.9 million from the balance at December 31, 2016 of $191.9 million. The change in the valuation allowance is primarily attributable to the reduction in the U.S. federal tax rate from 34% to 21% as a result of the 2017 Tax Reform Act, which had an impact of reducing the valuation allowance by approximately $60.8 million. Additional movement in the valuation allowance from December 31, 2016 to December 31, 2017 is comprised of an increase of approximately $15.6 million to offset current year net deferred tax asset and liability changes, a decrease of approximately $42.6 million to offset the net deferred tax liability related to the debt discount and deferred financing costs related to the Company’s 1.375% Notes issued during the year ended December 31, 2017, and an increase of approximately $23.8 million increase related to the adoption of ASU 2016-09 related to accounting for stock-based compensation.
At December 31, 2017, the Company had approximately $543.6 million, $250.6 million and $12.7 million of gross federal net operating loss carryforwards, state net operating loss carryforwards and research and development and other tax credits, respectively. If not utilized, these federal carryforwards will begin to expire in 2020 and will continue to expire through 2037, and the state carryforwards will continue to expire through 2037. At December 31, 2016, the Company had approximately $535.7 million, $216.2 million and $8.0 million of federal net operating loss carryforwards, state net operating loss carryforwards and research and development and other tax credits, respectively from continuing operations. The utilization of such net operating loss carryforwards and the realization of tax benefits in future years depends predominantly upon the Company's ability to generate taxable income. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company's ownership may result in a limitation on the amount of net operating loss carryforwards which may be used in future years whereby there would be a yearly limitation placed on the amount of net operating loss available for use in future years. Additionally, it is probable that a portion of the research and development tax credit carryforward may not be available to offset future income.
As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities does not include certain deferred tax assets as of December 31, 2016 that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. Upon adoption of ASU 2016-09 on January 1, 2017, the Company recorded $23.8 million of deferred tax assets, less a full valuation allowance related to these amounts.