INCOME TAXES
The components of loss before income taxes for the years ended December 31, 2017, 2016 and 2015 were as follows (in thousands): |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Domestic | $ | (11,089 | ) | | $ | (10,761 | ) | | $ | (21,146 | ) |
Foreign | (5,184 | ) | | (2,904 | ) | | 10 |
|
Total loss before income taxes | $ | (16,273 | ) | | $ | (13,665 | ) | | $ | (21,136 | ) |
The provision for income tax expense (benefit) included the following for the years ended December 31, 2017, 2016 and 2015 (in thousands):
|
| | | | | | | | | | | |
| 2017 |
| 2016 |
| 2015 |
Current: | | | | | |
Federal | $ | (39 | ) | | $ | — |
| | $ | — |
|
State | — |
| | (19 | ) | | (101 | ) |
Foreign | 193 |
| | 10 |
| | 160 |
|
Total | 154 |
| | (9 | ) | | 59 |
|
Deferred: | | | | | |
Federal | (73 | ) | | 43 |
| | 37 |
|
State | 15 |
| | 6 |
| | 15 |
|
Foreign | 188 |
| | (5,698 | ) | | (296 | ) |
Total | 130 |
| | (5,649 | ) | | (244 | ) |
Total tax expense (benefit) | $ | 284 |
| | $ | (5,658 | ) | | $ | (185 | ) |
The Tax Cuts and Jobs Act of 2017 ("Tax Act"), which went into effect on December 22, 2017, significantly revises the Internal Revenue Code of 1986, as amended ("IRC"). The Tax Act contains, among other things, significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time and modifying or repealing many business deductions and credits. The Tax Act is complex and it will take time to assess the implications thoroughly. The Company is currently evaluating the Tax Act with its professional advisors and has included the effects of the following changes enacted in the Tax Act in this Annual Report on Form 10-K:
•The Company reduced its expected U.S. federal corporate income tax rate used to measure its deferred tax assets and liabilities to 21% from 34%, which had been used as of December 31, 2016. This resulted in a reduction of the Company’s net deferred tax assets of $16.6 million, which was offset by a corresponding reduction in the valuation allowance of $16.7 million that is recorded against its U.S. deferred tax assets, net of certain deferred tax liabilities.
•The Company incorporated the newly enacted rules relating to IRC Section 162(m), which provide for a limitation on the annual deduction of excessive executive compensation. The new rules have an impact on the deferred tax asset recorded on stock-based compensation at the end of 2017. This resulted in a de minimis reduction in the end of year deferred tax asset on stock compensation, which was completely offset by a reduction in the valuation allowance.
Other provisions of the law might have a significant impact on the Company, such as the new rules covering net operating loss carryforwards, the repeal of the alternative minimum tax, the new requirement to capitalize research and experimentation expenses, and the creation of the base erosion anti-abuse tax, the global intangible low taxed income inclusion, and the foreign derived intangible income deduction. However, the Company has determined that these changes will have no material impact on its financial results as of and for the year ended December 31, 2017. The Company is analyzing the other changes enacted in the Tax Act and has made a preliminary determination that they should not have a material impact on the Company's financial statements based on current operations. However, new developments such as changes in the Company’s operations or the issuance of additional guidance from the Internal Revenue Service could result in changes to the Company’s initial determination. In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, we have determined that the $16.6 million reduction to the Company's net deferred tax assets to account for the decrease in the U.S. federal tax rate and the de minimis reduction in the end of year deferred tax asset to account for the changes to IRC Section 162(m) were provisional amounts and a reasonable estimate at December 31, 2017. Additional work is necessary for a more detailed analysis of the impacts of the Tax Act. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. During the first quarter of 2016, the Company elected to early adopt ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740), to present balance sheet classification of deferred income taxes as noncurrent. This adoption was applied prospectively and, therefore, prior periods were not retrospectively adjusted.
The components of the Company’s net deferred tax asset (liability) as of December 31, 2017 and 2016 were as follows (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Domestic tax loss carryforwards | $ | 28,403 |
| | $ | 32,539 |
|
Foreign tax loss carryforwards | 6,849 |
| | 5,455 |
|
Stock-based compensation | 3,750 |
| | 4,864 |
|
Tax credits | 2,231 |
| | 1,624 |
|
Lease incentive obligation | 1,119 |
| | 1,978 |
|
Other assets | 2,232 |
| | 2,248 |
|
Valuation allowance | (38,054 | ) | | (41,926 | ) |
Total deferred tax assets | 6,530 |
| | 6,782 |
|
Deferred tax liabilities: | | | |
Fixed assets | 645 |
| | 1,328 |
|
Intangible assets | 604 |
| | 566 |
|
Total deferred tax liabilities | 1,249 |
| | 1,894 |
|
Net deferred tax asset | $ | 5,281 |
| | $ | 4,888 |
|
The Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718) effective January 1, 2017. As a result of this adoption, the Company recognized $8.2 million of deferred tax assets attributable to accumulated excess tax benefits that under the previous guidance could not be recognized until the benefits were realized through a reduction in income taxes payable. This adjustment was applied using a modified retrospective method with a cumulative-effect adjustment to the accumulated deficit for the excess tax benefits not previously recognized. However, given the full valuation allowance of $8.2 million placed on the additional deferred tax assets, the recognition upon adoption had no impact on the Company's accumulated deficit as of January 1, 2017. Further, the Company has elected to continue to estimate forfeitures to determine the amount of compensation cost to be recognized in each period.
At December 31, 2017 and 2016, the Company had federal net operating loss ("NOL") carryforwards of $114.2 million and $109.5 million, respectively, which expire beginning in 2022. At December 31, 2017 and 2016, the Company had state NOL carryforwards of $136.2 million and $128.3 million, respectively, which expire beginning in 2018. At December 31, 2017 and 2016, the Company had U.S. federal income tax credit carryforwards of $3.0 million and $2.1 million, respectively, which expire beginning in 2034. The utilization of the NOL and tax credit carryforwards may be subject to limitation under the rules regarding a change in stock ownership as determined by the Internal Revenue Code and state and foreign tax laws. Prior to the utilization of these tax attributes, the Company will assess any limitations, particularly related to NOL carryforwards from its acquired entities. For each of the periods ended December 31, 2017 and 2016, the Company also had foreign NOL carryforwards for use against future tax in those jurisdictions of $35.2 million and $27.3 million, respectively. The majority of the Company's foreign NOLs can be carried forward indefinitely.
A valuation allowance has been recognized to offset deferred tax assets, primarily attributable to NOL carryforwards that the Company has determined are not more likely than not to be realized. In 2016, the Company released $5.3 million of the valuation allowance on deferred tax assets in several of its foreign jurisdictions based on the result of the Company's evaluation of the likelihood of potential tax benefits related to the foreign entities’ most recent three years of operating results and projections of future profitability, which primarily resulted from a change in the Company’s global transfer pricing methodology. There was a net decrease in valuation allowance of $3.9 million during the year ended December 31, 2017, which was comprised of a net decrease of $12.6 million that was allocable to current operations (includes the reduction in the valuation allowance of $16.7 million noted above resulting from the Tax Act), an increase of $8.2 million from the adoption of ASU 2016-09 that was allocable to accumulated deficit and an increase of $0.5 million that was allocable to goodwill as part of the HubLogix acquisition. The Company does not generally consider deferred tax liabilities on indefinite-lived assets as a source of future taxable income available to be able to realize deferred tax assets. However, the Company considers the deferred tax liability associated with an indefinite-lived intangible asset as a source of future taxable income available to be able to realize the deferred tax asset recorded for the U.S. federal alternative minimum tax credit, which can be carried forward indefinitely. Since both the deferred tax liability and the deferred tax asset have indefinite lives, they offset each other to arrive at the net deferred tax liability.
Undistributed earnings of the Company’s foreign subsidiaries are indefinitely reinvested offshore and, accordingly, no provision for U.S. federal or state income taxes has been provided thereon. The cumulative amount of undistributed earnings of the Company’s non-U.S. subsidiaries for the years ended December 31, 2017 and 2016 was nominal. The determination of the deferred tax liability, which requires complex analysis of international tax situations related to repatriation, is not practicable at this time. The Company is presently investing in international operations located in Europe, Asia, Australia and South America. The Company is funding the working capital needs of its foreign operations through its U.S. operations. In the future, the Company will utilize any foreign undistributed earnings, as well as continued funding from its U.S. operations, to support its continued investment in foreign growth.
A reconciliation of the difference between the effective income tax rate and the statutory federal income tax rate for the years ended December 31, 2017, 2016 and 2015 is as follows: |
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
U.S. statutory federal rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
Increase (decrease) resulting from: | | | | | |
State taxes, net of federal benefit | 2.5 |
| | 3.2 |
| | 4.3 |
|
Change in U.S. federal statutory rate | (102.2 | ) | | — |
| | — |
|
Nondeductible expenses | (10.5 | ) | | (1.6 | ) | | (14.0 | ) |
Effect of foreign tax rate differential | (5.3 | ) | | (3.8 | ) | | (0.1 | ) |
Uncertain tax position | (1.6 | ) | | (0.8 | ) | | (1.5 | ) |
Research and development credit | 5.6 |
| | 4.1 |
| | 3.7 |
|
Change in valuation allowance | 77.1 |
| | 11.2 |
| | (20.3 | ) |
Other | (1.3 | ) | | (4.9 | ) | | (5.2 | ) |
Effective tax rate | (1.7 | )% | | 41.4 | % | | 0.9 | % |
The Company's effective tax rates for the years ended December 31, 2017 and 2015 are lower than the U.S. federal statutory rate of 34% primarily due to operating losses which are subject to a valuation allowance. The Company cannot recognize the tax benefit of operating loss carryforwards generated in certain jurisdictions due to uncertainties relating to future taxable income in those jurisdictions in terms of both its timing and its sufficiency, which would enable the Company to realize the benefits of those carryforwards. For the year ended December 31, 2016, the effective tax rate is higher than the U.S. federal statutory rate of 34% primarily due to the $5.3 million release of the valuation allowance on deferred tax assets in several of its foreign jurisdictions. In 2017, due to the release of the valuation allowance at the end of 2016, the Company recognizes tax expense in most of these foreign jurisdictions. In addition, during 2017 the Company no longer had sufficient deferred tax liabilities in one of its foreign subsidiaries necessary to realize the tax benefit of all of its deferred tax assets for that same foreign subsidiary. The Company recorded a valuation allowance against the deferred tax assets of that foreign subsidiary, net of deferred tax liabilities. As a result, the Company is not currently permitted to recognize the tax benefit of that subsidiary’s losses. The remeasurement of the Company’s U.S. net deferred tax assets to reflect the newly enacted U.S. statutory tax rate of 21% resulted in tax expense of $16.6 million, which was offset by a corresponding reduction to the valuation allowance of $16.7 million. The net result from the change in the U.S. federal statutory tax rate was a tax benefit of $0.1 million. The nondeductible expenses during the years ended December 31, 2017, 2016 and 2015 primarily related to stock-based compensation expense associated with nondeductible stock awards. Nondeductible stock award expense and share-based compensation shortfalls had a larger impact on the December 31, 2015 tax rate than they did on the tax rate for the years ended December 31, 2017 and 2016. The decrease in the effective tax rate impact from the effect of foreign tax rate differential for the years ended December 31, 2017 and 2016 compared to the year ended December 31, 2015, was primarily due to an increase in the percentage of the Company's worldwide book losses recorded outside the U.S. during these periods. The Company's foreign jurisdictions comprise a mix of income and loss making entities. In 2017 and 2016, foreign losses exceeded foreign income.
The Company accounts for uncertain tax provisions in accordance with Accounting Standards Codification Topic 740-10, Income Taxes ("ASC 740-10"). This guidance provides a comprehensive model for the recognition, measurement and disclosure in financial statements of uncertain income tax positions that a company has taken or expects to take on a tax return.
The following table shows the changes in unrecognized tax benefits in accordance with ASC 740-10 for the years ended December 31, 2017, 2016 and 2015 (in thousands): |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Balance as of January 1, | $ | 766 |
| | $ | 681 |
| | $ | 782 |
|
Increases related to current tax positions | 199 |
| | 146 |
| | 345 |
|
Increases related to prior year tax positions | 317 |
| | — |
| | 79 |
|
Decreases related to prior year tax positions | — |
| | (42 | ) | | (411 | ) |
Decreases related to the expirations of statutes of limitations | — |
| | (19 | ) | | (114 | ) |
Balance as of December 31, | $ | 1,282 |
| | $ | 766 |
| | $ | 681 |
|
Although the ultimate timing of the resolution and/or closure of audits is highly uncertain, the Company believes it is reasonably possible that a de minimis amount of unrecognized tax benefits could reverse in the next twelve months. If the total unrecognized tax benefit was recognized, there would be a de minimis impact on the effective tax rate. As of December 31, 2017 and 2016, the Company had no accrued interest or penalties related to the tax contingencies. The Company’s policy for recording interest and penalties is to record them as a component of provision for income taxes.
The Company has analyzed its filing positions in all significant federal, state and foreign jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state and local tax examinations by tax authorities for years prior to 2013, although carryforward attributes that were generated prior to 2013 may still be adjusted upon examination by the Internal Revenue Service if they either have been or will be used in a future period. The Company is no longer subject to examination in foreign tax jurisdictions for tax periods 2013 and prior. No income tax returns are currently under examination by taxing authorities.