13. Income Tax
For financial reporting purposes, loss before income taxes included the following components for the years ended December 31, 2017, 2016, and 2015 (in thousands):
| For the Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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United States |
$ | (138,881 | ) | $ | (108,363 | ) | $ | (97,398 | ) | |||
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Foreign |
(35,111 | ) | (14,828 | ) | (8,977 | ) | ||||||
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Loss before income taxes |
$ | (173,992 | ) | $ | (123,191 | ) | $ | (106,375 | ) | |||
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Significant components of the (benefit) provision for income taxes for the years ended December 31, 2017, 2016, and 2015, are as follows (in thousands):
| For the Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Current: |
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Federal |
$ | — | $ | — | $ | — | ||||||
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State |
235 | 451 | 396 | |||||||||
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Foreign |
49 | 24 | 15 | |||||||||
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| 284 | 475 | 411 | ||||||||||
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Deferred: |
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Federal |
(2,590 | ) | 764 | 764 | ||||||||
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State |
309 | 75 | 63 | |||||||||
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| (2,281 | ) | 839 | 827 | |||||||||
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Total |
$ | (1,997 | ) | $ | 1,314 | $ | 1,238 | |||||
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The benefit (provision) for income taxes differs from income taxes computed at the federal statutory tax rates for the years ended December 31, 2017, 2016, and 2015 as a result of the following items:
| For the Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
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Effect of: |
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Impact of change in tax rate |
(47.0 | ) | — | — | ||||||||
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Change in valuation allowance |
12.5 | (38.5 | ) | (37.1 | ) | |||||||
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State income taxes-net of federal tax benefit |
2.4 | 3.8 | 2.4 | |||||||||
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Other |
(1.8 | ) | (1.4 | ) | (1.5 | ) | ||||||
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Effective tax rate |
1.1 | % | (1.1 | )% | (1.2 | )% | ||||||
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Components of the net deferred income tax asset as of December 31, 2017 and 2016 are as follows (in thousands):
| December 31, 2017 |
December 31, 2016 |
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Deferred income tax assets: |
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Compensation accruals |
$ | 4,854 | $ | 5,944 | ||||
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Stock options |
13,256 | 15,480 | ||||||
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Inventory |
702 | 390 | ||||||
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Warranty reserves |
605 | 990 | ||||||
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Deferred rent |
9,868 | 14,976 | ||||||
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Deferred revenue |
51,295 | 65,391 | ||||||
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Federal net operating loss (NOL) |
129,064 | 125,257 | ||||||
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State NOL |
21,122 | 10,660 | ||||||
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UNICAP adjustment |
3,241 | 6,742 | ||||||
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Finite-lived intangible assets |
8,756 | 15,225 | ||||||
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Other |
7,500 | 3,924 | ||||||
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Total deferred income tax assets |
250,263 | 264,979 | ||||||
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Deferred income tax liabilities: |
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Fixed assets |
(59,885 | ) | (41,331 | ) | ||||
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Indefinite-lived intangible assets |
(5,983 | ) | (8,264 | ) | ||||
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Convertible Notes discount |
(12,243 | ) | (26,134 | ) | ||||
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Other |
(170 | ) | (264 | ) | ||||
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Total deferred income tax liabilities |
(78,281 | ) | (75,993 | ) | ||||
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Total deferred income tax |
171,982 | 188,986 | ||||||
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Valuation allowance |
(177,965 | ) | (197,250 | ) | ||||
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Net deferred income tax liability |
$ | (5,983 | ) | $ | (8,264 | ) | ||
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We assess the realizability of the deferred tax assets by considering whether it is more likely than not that some portion or all of the deferred tax assets would not be realized through the generation of future taxable income. We generated net losses in fiscal years 2017, 2016, and 2015, which means we are in a domestic three-year cumulative loss position. As a result of this and other assessments in fiscal 2017, we concluded that a full valuation allowance is required for all deferred tax assets and liabilities except for deferred tax liabilities associated with indefinite-lived intangible assets.
As of December 31, 2017, the federal net operating loss (“NOL”) carryforward amount was approximately $545 million and the state NOL carryforward amount was approximately $356 million. The federal NOLs begin to expire in 2031. The state NOLs expire in various tax years and began to expire in 2016.
Utilization of our NOL and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of the NOL and tax credit carryforwards before their utilization. The events that may cause ownership changes include, but are not limited to, a cumulative stock ownership change of greater than 50% over a three-year period.
We are subject to taxation in the United States, Canada, Switzerland, Japan, Mexico, Brazil, Singapore, the United Kingdom, Hong Kong, Australia, China, France and Germany. With few exceptions, as of December 31, 2017, we are no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2014.
As a result of the passage of H.R. 1, originally known as the Tax Cuts and Jobs Act (“Tax Reform”) in December 2017, the tax effected amounts of the deferred tax assets and liabilities decreased. A large portion of this change in the deferred tax balances will result in an offsetting change to the deferred tax asset valuation allowance and will not affect tax expense. For the deferred tax liabilities that are not offset by changes to the valuation allowance, our net deferred tax liability was reduced by approximately $3 million. We continue to evaluate the overall effect of U.S. Tax Reform on our business.
As of December 31, 2017, 2016 and 2015, we did not have any unrecognized tax benefits.
We record penalties and interest relating to uncertain tax positions in the income tax provision line item in the consolidated statement of operations. No penalties or interest related to uncertain tax positions were recorded for the years ended December 31, 2017, 2016 or 2015. As of December 31, 2017 and 2016, we did not have a liability recorded for interest or potential penalties.
We do not expect there will be a change in the unrecognized tax benefits within the next 12 months.