Income Taxes
The following table presents components of loss before income taxes for the periods presented (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
United States | | $ | (9,434 | ) | | $ | (12,222 | ) | | $ | (26,305 | ) |
International | | 733 |
| | 416 |
| | 528 |
|
Loss before income taxes | | $ | (8,701 | ) | | $ | (11,806 | ) | | $ | (25,777 | ) |
Provision for income taxes for the periods presented consisted of (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
U.S. federal | | $ | — |
| | $ | — |
| | $ | — |
|
U.S. state | | 42 |
| | 16 |
| | 21 |
|
Foreign | | 226 |
| | 38 |
| | 40 |
|
Total provision for income taxes | | $ | 268 |
| | $ | 54 |
| | $ | 61 |
|
Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pre-tax loss for the periods presented as a result of the following (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
U.S. federal tax at statutory rate | | $ | (2,958 | ) | | $ | (4,014 | ) | | $ | (8,764 | ) |
U.S. state income taxes | | (708 | ) | | 490 |
| | (756 | ) |
Non-deductible expense (benefit) | | (5,673 | ) | | 931 |
| | 438 |
|
Research and development credit | | (402 | ) | | (262 | ) | | (440 | ) |
Stock-based compensation | | (14,622 | ) | | 983 |
| | 737 |
|
Impact of 2017 Tax Act | | 25,952 |
| | — |
| | — |
|
Other | | 2 |
| | (104 | ) | | 481 |
|
Change in valuation allowance | | (1,323 | ) | | 2,030 |
| | 8,365 |
|
Total provision for income taxes | | $ | 268 |
| | $ | 54 |
| | $ | 61 |
|
The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 related to the following (in thousands):
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Net operating loss and credit carryforwards | | $ | 47,991 |
| | $ | 48,533 |
|
Accrued liabilities | | 3,183 |
| | 3,801 |
|
Allowance for doubtful accounts | | 416 |
| | 429 |
|
Property and equipment | | (98 | ) | | 183 |
|
Deferred revenue | | 140 |
| | 23 |
|
Accrued compensation | | 900 |
| | 1,183 |
|
Intangibles | | 7 |
| | 14 |
|
Gross deferred tax assets | | 52,539 |
| | 54,166 |
|
Valuation allowance | | (52,275 | ) | | (53,598 | ) |
Net deferred tax assets | | 264 |
| | 568 |
|
Deferred tax liabilities: | | | | |
Amortized intangibles | | (264 | ) | | (568 | ) |
Gross deferred tax liabilities | | (264 | ) | | (568 | ) |
Net deferred taxes | | $ | — |
| | $ | — |
|
The Company has not provided for U.S. income taxes on undistributed earnings of its foreign subsidiaries because it intends to permanently re-invest those earnings outside the United States. The undistributed earnings of the Company's foreign subsidiaries was zero as of December 31, 2017 due to the one time transition tax, and were $1.2 million and $0.8 million as of December 31, 2016 and 2015, respectively.
A valuation allowance is provided for deferred tax assets where the recoverability of the assets is uncertain. The determination to provide a valuation allowance is dependent upon the assessment of whether it is more likely than not that sufficient future taxable income will be generated to utilize the deferred tax assets. Based on the weight of the available evidence, which includes the Company’s historical operating losses, lack of taxable income, and the accumulated deficit, for the year ended December 31, 2017, the Company has provided a valuation allowance against its U.S. net deferred tax assets. The net change in the valuation allowance for the years ended December 31, 2017 and 2016 was a decrease of $1.3 million and an increase of $2.0 million, respectively.
As of December 31, 2017, the Company had net operating loss carry-forwards for federal and state income tax purposes of $188.8 million and $104.4 million, respectively, available to reduce future income subject to income taxes. If not utilized, these carryforwards will begin to expire in 2024 for federal purposes. The state net operating loss started to expire in 2017. As of December 31, 2017, the Company also had research credit carryforwards for federal and California state tax purposes of $2.8 million and $2.4 million. If not utilized, the federal research credit carryforwards will begin to expire in 2022. The California state research credits can be carried forward indefinitely. The Internal Revenue Code (“IRC”) of 1986, as amended, imposes restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as prescribed under the IRC Section 382. Events which may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Utilization of the federal and state net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 and similar state provisions. In the event the Company has changes in ownership, net operating losses and research and development credit carryforwards, which are fully reserved by the deferred tax asset valuation allowance, could be limited and may expire unutilized.
Unrecognized Tax Benefits
The table below shows the changes in the gross amount of unrecognized tax benefits for the periods presented (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Unrecognized benefit — beginning of period | | $ | 2,805 |
| | $ | 2,485 |
| | $ | 1,975 |
|
Gross increases — current year tax positions | | 310 |
| | 324 |
| | 522 |
|
Gross decreases — prior year tax positions | | — |
| | (4 | ) | | (12 | ) |
Unrecognized benefit — end of period | | $ | 3,115 |
| | $ | 2,805 |
| | $ | 2,485 |
|
As of December 31, 2017 and 2016, an immaterial amount of the total unrecognized tax benefits, if recognized, would have an impact on the Company’s effective tax rate. The Company recognizes interest and penalties related to uncertain tax positions as income tax expense. The Company does not anticipate its total unrecognized tax benefits as of December 31, 2017 will significantly change due to settlement of examination or the expiration of statute of limitations during the next 12 months. The Company is currently unaware of any uncertain tax positions that could result in significant additional payments, accruals or other material deviation in this estimate over the next 12 months.
The Company is subject to taxation in the United States, various states and several foreign jurisdictions. Due to the Company’s net carryover of unused operating losses, all years from 2001 forward remain subject to future examination by the U.S. federal and state tax authorities. The Company’s foreign tax returns are open to audit under the statutes of limitations of the respective foreign countries in which the subsidiaries are located. The Company considers all undistributed earnings of its foreign subsidiaries indefinitely reinvested.
Tax Reform
In December 2017, President Trump signed into law new legislation (the “2017 Tax Act”) that significantly revises the Internal Revenue Code of 1986, as amended. The newly enacted federal income tax law, among other things, contains 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, limitation of the deduction for newly generated 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 (the “Transition Tax”), future taxation of certain classes of offshore earnings regardless of whether they are repatriated, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits beginning in 2018.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118 which provided a measurement period of up to one year from the enactment of the 2017 Tax Act for companies to complete the accounting for the 2017 Tax Act and its related impacts. The income tax effects of the 2017 Tax Act for which the accounting is incomplete include: the impact of the Transition Tax, whether to continue applying the exception to the presumption of the repatriation of foreign earnings and the impact of the reversal of the exception, the revaluation of deferred tax assets and liabilities to reflect the 21 percent corporate tax rate, the realizability of deferred tax assets relating to executive compensation, whether to elect to expense or depreciate new capital equipment, the US states tax impact to the aforementioned items, and the unrecognized tax benefits relating to the aforementioned items. The company has made reasonable estimates for each of these items; however it may be affected by other analyses related to the 2017 Tax Act, including but not limited to, any deferred adjustments related to the filing of the Company’s 2017 federal and state tax returns and further guidance yet to be issued.
The Transition Tax is estimated to have no impact on the Company’s US taxable income for the year ended December 31, 2017.
Principally because the 2017 Tax Act has now applied a tax on accumulated foreign earnings through December 31, 2017, the Company is evaluating whether to continue applying the exception to the presumption of the repatriation of foreign earnings. The Company has not provided for an estimate of the taxes associated with the reversal of the application of the exception. Although the historic foreign earnings have been taxed by the 2017 Tax Act for Federal and conforming states purposes, the impact of the reversal of the exception will also apply to US states which do not conform to the 2017 Tax Act, to foreign withholding taxes, and to foreign income taxes for repatriation of earnings from lower-tier foreign subsidiaries to higher-tier foreign subsidiaries. The Company is analyzing the optimal use of its US state attributes, foreign tax law regarding income recognition of distributions, as well as foreign corporation law relating to distributable foreign earnings.
Reduction of U.S. federal corporate tax rate: As a result of the 2017 Tax Act, the corporate tax rate decreased from 35% to 21% effective January 1, 2018. Accordingly, the Company’s deferred tax assets decreased by $26.0 million, fully offset by a decrease in the valuation allowance. For its deferred tax assets and liabilities, the Company recorded no provisional net decrease with no corresponding net adjustment to deferred income tax expense for the year ended December 31, 2017 due to a full valuation allowance. While the Company was able to make a reasonable estimate of the impact of the reduction in corporate rate, such estimates may be affected by other analyses related to the 2017 Tax Act, including, but not limited to, any deferred adjustments related to the filing of the Company's 2017 federal and state tax returns and the Company's calculation of the state tax effect of adjustments made to federal temporary differences.
Section 162(m): The Company's accounting for the changes to share-based payment awards and Section 162(m) of the 2017 Tax Act is incomplete, and the Company was not yet able to make reasonable estimates of the effects because the relevant regulations have yet to be issued. Therefore, no provisional adjustments were recorded.
In addition, the Company recorded no reduction to deferred tax asset related to the write-off of prior years’ post-vesting cancellations of non-qualified stock options as of fiscal year ended December 31, 2017.
The Company does not expect to have an impact from the implementation of certain limitations on executive stock-based compensation under the 2017 Tax Act.
Cost Recovery: While the Company has not yet completed all of the computations necessary or completed an inventory of its 2017 expenditures that qualify for immediate expensing, the Company has recorded no current benefit related to cost recovery due to domestic losses.
For the year ended December 31, 2017, the enactment of the 2017 Tax Act had no impact on the Company’s total income tax benefit and pretax income due to its full valuation allowance.