Income Taxes
Our loss before income taxes consists of the following (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Domestic | | $ | (56,885 | ) | | $ | (65,211 | ) | | $ | (46,757 | ) |
International | | (6,914 | ) | | (14,966 | ) | | (8,033 | ) |
Loss before income taxes | | $ | (63,799 | ) | | $ | (80,177 | ) | | $ | (54,790 | ) |
Significant components of our benefit for income taxes are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal | | $ | — |
| | $ | — |
| | $ | (30 | ) |
State | | (17 | ) | | (14 | ) | | (14 | ) |
Foreign | | (501 | ) | | 286 |
| | (1,319 | ) |
Total current tax (expense) benefit | | (518 | ) | | 272 |
| | (1,363 | ) |
Deferred: | | | | | | |
State | | — |
| | — |
| | — |
|
Foreign | | 3,782 |
| | 3,920 |
| | 2,838 |
|
Total deferred benefit | | 3,782 |
| | 3,920 |
| | 2,838 |
|
Total benefit for income taxes | | $ | 3,264 |
| | $ | 4,192 |
| | $ | 1,475 |
|
Reconciliation of income taxes at the statutory rate to the benefit from (provision for) income taxes recorded in the statements of operations is as follows:
|
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Tax benefit at federal statutory rate | | 34.0 | % | | 34.0 | % | | 34.0 | % |
State tax expense, net of federal benefit | | 5.5 |
| | 2.2 |
| | 1.4 |
|
Foreign tax benefit (expense) | | 0.4 |
| | (0.7 | ) | | (1.9 | ) |
Change in valuation allowance | | 39.2 |
| | (31.2 | ) | | (28.6 | ) |
Federal research and development credit | | 1.9 |
| | 1.3 |
| | 2.6 |
|
Unrecognized tax benefit | | (0.6 | ) | | (1.3 | ) | | (1.8 | ) |
Return to provision reconciliation | | — |
| | 1.5 |
| | (1.2 | ) |
Impact of the Tax Act | | (74.6 | ) | | — |
| | — |
|
Other, net | | (0.7 | ) | | (0.6 | ) | | (1.9 | ) |
Effective tax rate | | 5.1 | % | | 5.2 | % | | 2.6 | % |
The Tax Act was enacted in December 2017. The Tax Act introduced a broad range of tax reform measures that significantly change U.S. federal income tax laws. Among other provisions, the Tax Act reduces the federal tax rate from 34% to 21% and imposes a one-time transition tax on post-1986 foreign unremitted earnings. We have remeasured our deferred taxes as of December 31, 2017 using the reduced U.S. federal tax rate of 21%. Accordingly, our gross deferred tax assets, which primarily include our net operating loss carryforwards, decreased by $29.9 million with a corresponding decrease in our valuation allowance. There is no net impact on our income tax provision from the remeasurement of existing deferred taxes due to a full valuation allowance. In addition, the Tax Act requires companies to pay a one-time transition tax for accumulated foreign earnings not previously subject to U.S. income tax. We have reviewed the accumulated undistributed foreign earnings after previously taxed income and currently we do not anticipate a transition tax liability due to our estimated aggregate foreign deficit. We have made reasonable estimates to reflect the impact of the Tax Act and recorded provisional amounts, in accordance with SAB 118, for the remeasurement of deferred taxes and the one-time transition tax as of December 31, 2017.
We continue to analyze additional information and new guidance issued by relevant authorities related to the Tax Act, which could impact the determination of the net deferred taxes subject to the remeasurement, the related impact to the assessment of our valuation allowance, and the one-time transition tax. The prospects of supplemental legislation or regulatory processes to address questions that arise because of the Tax Act, or evolving technical interpretations of the tax law, may cause the final impact from the Tax Act to differ materially from the recorded amounts. We will finalize and record any adjustments related to the Tax Act within the one-year measurement period provided under SAB 118.
As of December 31, 2017, we changed our permanent reinvestment assertion and will not permanently reinvest our foreign earnings outside the United States. The cash generated from some of our foreign subsidiaries may be used domestically to fund operations. Any domestic, foreign and state taxes that may be due upon future repatriation of earnings is not expected to
be significant. In addition, we currently do not anticipate any significant impact from the one-time transition tax liability under the Tax Act due to our estimated aggregate foreign deficit.
Our Development and Expansion Incentive, or DEI, in Singapore was terminated in 2017 and we did not benefit from the reduced tax rate of 5% for qualifying income in Singapore because certain milestones were not met. In addition, the capital allowance provision under the Singapore Productivity and Innovation Credit Scheme ended in 2017. Due to the termination of our DEI and capital allowance deduction, we released the valuation allowance and are subject to the statutory tax rate for Singapore.
Significant components of our deferred tax assets and liabilities are as follows (in thousands):
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Net operating loss carryforwards | | $ | 91,701 |
| | $ | 123,913 |
|
Reserves and accruals | | 3,927 |
| | 4,281 |
|
Depreciation and amortization | | 5,591 |
| | 712 |
|
Tax credit carryforwards | | 14,838 |
| | 12,584 |
|
Stock-based compensation | | 5,994 |
| | 7,057 |
|
Total gross deferred tax assets | | 122,051 |
| | 148,547 |
|
Valuation allowance on deferred tax assets | | (119,228 | ) | | (146,285 | ) |
Total deferred tax assets, net of valuation allowance | | 2,823 |
| | 2,262 |
|
Deferred tax liabilities: | | | | |
Fixed asset and intangibles | | (18,912 | ) | | (22,000 | ) |
Total deferred tax liabilities | | (18,912 | ) | | (22,000 | ) |
Net deferred tax liability | | $ | (16,089 | ) | | $ | (19,738 | ) |
Upon adoption of ASU 2016-09 (see Note 2), we recorded to the opening balance of retained earnings $9.3 million in deferred tax assets for previously unrecognized excess tax benefits that existed as of January 1, 2017, and a corresponding increase of $9.3 million in valuation allowances against these deferred tax assets as substantially all of our U.S. deferred tax assets, net of deferred tax liabilities, were subject to a full valuation allowance. The net impact to retained earnings as a result of these adjustments was zero.
We evaluate a number of factors to determine the realizability of our deferred tax assets. Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Assessing the realizability of deferred tax assets is dependent upon several factors including historical financial results. The deferred tax assets have been partially offset by a valuation allowance because we have incurred losses since our inception. The valuation allowance decreased by $27.1 million and increased by $22.1 million during 2017 and 2016, respectively. The change in valuation allowance during 2017 is mainly due to the change in Federal statutory rate from 34% to 21%, offset by a significant increase in the taxable loss in 2017. The change in valuation allowance during 2016 is primarily due to a significant increase in the taxable loss in 2016 and an increase in research development credits.
The valuation allowances of $119.2 million and $146.3 million as of December 31, 2017 and 2016, respectively, primarily relate to temporary tax differences, net operating losses and research and development credits generated in the current and prior years. We believe it is more likely than not that U.S. federal, California and Japan deferred tax assets relating to temporary differences, net operating losses and research and development credits are not realizable. As such, full valuation allowances have been applied against the deferred tax assets relating to jurisdictions of the federal U.S., the state of California and Japan.
A reconciliation of the beginning and ending amount of the valuation allowance for the years ended December 31, 2017, 2016, or 2015 is as follows (in thousands):
|
| | | |
| Valuation Allowance |
December 31, 2014 | $ | 110,167 |
|
Charges to earnings | — |
|
Charges to other accounts | 13,970 |
|
December 31, 2015 | 124,137 |
|
Charges to earnings | — |
|
Charges to other accounts | 22,148 |
|
December 31, 2016 | 146,285 |
|
Charges to earnings | 830 |
|
Charges to other accounts | (27,887 | ) |
December 31, 2017 | $ | 119,228 |
|
As of December 31, 2017, we had net operating loss carryforwards for U.S. federal income tax purposes of $402.7 million, which expire in the years 2021 through 2038, and U.S. federal research and development tax credits of $8.3 million, which expire in the years 2021 through 2038. As of December 31, 2017, we had net operating loss carryforwards for state income tax purposes of $163.6 million, which expire beginning in 2018 through 2038, and California research and development tax credits of $10.4 million, which do not expire. As of December 31, 2017, we had foreign net operating loss carryforwards of $1.6 million, which expire in the years 2018 through 2038.
Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. In 2015, we completed a Section 382 analysis for the period from our inception in May 1999 through December 31, 2015, which excluded the net operating loss carryforwards for DVS prior to the acquisition, and determined that an ownership change as defined under Section 382 occurred in November 2001, which resulted in a reduction to our U.S. federal net operating losses by $1.2 million. In 2016 and 2017, we continued the Section 382 analysis through December 31, 2017 and determined that an ownership change did not occur during the periods.
Uncertain Tax Positions
The aggregate changes in the balance of our gross unrecognized tax benefits during 2017, 2016, and 2015 were as follows (in thousands):
|
| | | |
December 31, 2014 | $ | 7,672 |
|
Increases in balances related to tax positions taken during current period | 1,049 |
|
Decreases in balances related to tax position taken during prior period | (59 | ) |
December 31, 2015 | 8,662 |
|
Increases in balances related to tax positions taken during a prior period | 46 |
|
Increases in balances related to tax positions taken during current period | 1,673 |
|
Decreases in balances related to tax positions taken during prior period | (1,048 | ) |
December 31, 2016 | 9,333 |
|
Increases in balances related to tax positions taken during a prior period | — |
|
Increases in balances related to tax positions taken during current period | 61 |
|
Decreases in balances related to tax positions taken during prior period | (2,077 | ) |
December 31, 2017 | $ | 7,317 |
|
Accrued interest and penalties related to unrecognized tax benefits were included in the income tax provision and are immaterial as of December 31, 2017 and 2016.
As of December 31, 2017, there are no unrecognized tax benefits that, if recognized, would affect our effective tax rate. We do not anticipate that our existing unrecognized tax benefits will significantly increase or decrease within the next 12 months.
We file income tax returns in the United States, various states, and certain foreign jurisdictions. As a result of net operating loss carryforwards, all of our tax years are open to federal and state examination in the United States. Tax years from 2009 are open to examination in various foreign countries.