Income Taxes
The components of loss before income taxes were as follows:
|
| | | | | | | | | | | |
| Years Ended |
| December 31,
2017 | | January 1,
2017 | | December 27,
2015 |
| (in thousands) |
United States | $ | 33,451 |
| | $ | 16,535 |
| | $ | (7,584 | ) |
Foreign | (33,981 | ) | | (18,063 | ) | | 654 |
|
| $ | (530 | ) | | $ | (1,528 | ) | | $ | (6,930 | ) |
The components of the provision for income taxes were as follows:
|
| | | | | | | | | | | |
| Years Ended |
| December 31,
2017 | | January 1,
2017 | | December 27,
2015 |
| (in thousands) |
Federal | $ | (290 | ) | | $ | 266 |
| | $ | — |
|
State | 16 |
| | 1 |
| | 2 |
|
Foreign | 668 |
| | 132 |
| | 113 |
|
Total current provision for income taxes | 394 |
| | 399 |
| | 115 |
|
| | | | | |
Federal | (35,303 | ) | | — |
| | — |
|
State | (65 | ) | | — |
| | — |
|
Foreign | 32 |
| | (32 | ) | | — |
|
Total deferred provision | (35,336 | ) | | (32 | ) | | — |
|
| $ | (34,942 | ) | | $ | 367 |
| | $ | 115 |
|
The material components of the deferred tax assets were as follows:
|
| | | | | | | |
| December 31,
2017 | | January 1,
2017 |
| (in thousands) |
Deferred tax assets: | | | |
Accrual, reserve and other | $ | 1,471 |
| | $ | 2,112 |
|
Depreciation and amortization | (1,625 | ) | | (555 | ) |
Net operating loss and credits carry forwards | 48,401 |
| | 59,628 |
|
Stock based compensation | 1,645 |
| | 535 |
|
Others | 64 |
| | 519 |
|
Total gross deferred tax assets | 49,956 |
| | 62,239 |
|
Valuation allowance | (14,534 | ) | | (62,207 | ) |
Total net deferred tax assets | $ | 35,422 |
| | $ | 32 |
|
A reconciliation of the Company’s effective tax rate to the statutory U.S. federal rate is as follows:
|
| | | | | | | | |
| Years Ended |
| December 31,
2017 | | January 1,
2017 | | December 27,
2015 |
US Federal Rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
State income taxes, net of federal benefit | 867.1 |
| | — |
| | — |
|
Difference between statutory rate and foreign effective tax rate | (2,285.7 | ) | | (437.8 | ) | | 1.7 |
|
Other permanent Items | (52.3 | ) | | (125.2 | ) | | (0.8 | ) |
Stock based compensation | 1,650.1 |
| | (29.2 | ) | | (2.7 | ) |
Research and development credits | 610.3 |
| | 102.2 |
| | 9.5 |
|
Change in valuation allowance | 8,988.6 |
| | 477.6 |
| | (43.4 | ) |
Foreign Income | (96.1 | ) | | (75.8 | ) | | — |
|
Foreign Tax Credit | — |
| | 30.7 |
| | — |
|
Federal Rate Change | (3,128.1 | ) | | — |
| | — |
|
| 6,587.9 | % | | (23.5 | )% | | (1.7 | )% |
The reported amount of income tax expense differs from an expected amount based on statutory rates primarily due to the release of the company's valuation allowance, the change in the federal tax rate valuing the deferred tax assets, the stock compensation and the difference between the statutory rate and the foreign effective tax rate.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code that affect fiscal 2017, including, but not limited to requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years (the "Transition Tax"). The Tax Act also establishes new tax laws that will affect 2018 and later years, including, but not limited to, a reduction of the U.S. federal corporate tax rate from as high as 35% to 21%, a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, net operating loss deduction limitations, a base erosion, anti-tax abuse tax (“BEAT”) and a deduction for foreign-derived intangible income (“FDII”) and a new provision designed to tax global intangible low-taxed income ("GILTI"). As these provisions do not apply until 2018 the Company continues to evaluate the impact of such provisions of the Tax Act.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance on accounting for the tax effects of the Tax act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income taxes. In accordance with SAB 118 a company must reflect the income tax effects of those aspects of the tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
During the year ended December 31, 2017, the Company did not recognize a provisional income amount for the transition tax, due to the fact the foreign subsidiaries were in a cumulative loss. The final effects of the Tax Act may differ from these provisional amounts, due to among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, any updates or changes to the estimates utilized to calculate provisional amounts, or actions we may take as a result of the Tax Act. The associated accounting for the Tax Act is expected to be completed when our 2017 US corporate income tax return is filed in 2018.
In addition, the Company continues to evaluate its performance-based compensation plans within the new definitions under IRC Section 162(m) of the Internal Revenue Code. The preliminary assessment is that the Company believes that the performance based compensation provided prior to November 2, 2017 was provided pursuant to a written binding agreement and will be deductible. No further adjustment has been made at this time. The accounting for this item is incomplete and may change as our interpretation of the provisions of the Act evolve, additional information becomes available or interpretive guidance is issued by the U.S. Treasury. The associated accounting for the Tax Act is expected to be completed when our 2017 US corporate income tax return is filed in 2018.
As a result of the Tax Act, the Company revalued its federal deferred tax assets based on a 21% tax rate as opposed to a 34% tax rate. The net effect of this change which is provisional, is a decrease of $16.6 million to the Company's tax benefit.
A need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction by jurisdiction basis. In the fourth quarter of 2017, management concluded that the valuation allowance for the Company’s US federal and state (with the exception of California) deferred tax assets is no longer needed primarily due to the emergence from cumulative losses over the previous three years.
As of December 31, 2017, based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will be realized for federal and state purposes. Accordingly, management has recognized a non-recurring tax benefit of $52.5 million related to the valuation allowance reversal. As of December 31, 2017, we continued to maintain a valuation allowance of $14.5 million for California and Australia deferred tax assets until sufficient positive evidence exists to support reversal. Such assessment may change in the future as further evidence becomes available.
At December 31, 2017 and January 1, 2017, the Company has federal net operating loss carry-forwards of approximately $120.2 million and $134.1 million, respectively, and domestic state net operating loss carry-forwards of approximately $104.6 million and $104.7 million, respectively. These federal and state net operating loss carry-forwards will expire beginning in 2028 and 2017, respectively. At December 31, 2017 and January 1, 2017, the Company also has federal research and development tax credit carry-forwards of approximately $10.6 million and $7.2 million, respectively, and domestic state research and development tax credit carry-forwards of approximately $11.0 million and $7.7 million, respectively. The federal tax credits begin to expire in 2026, and the California tax credits carry forward indefinitely. The Company's ability to utilize its net operating loss and other credit carryforwards would be subject to limitation upon a change in control.
Under Internal Revenue Code Section 382, our ability to utilize NOL carry-forwards or other tax attributes such as research tax credits, in any taxable year may be limited if we experience, or have experienced, an "ownership change". A Section 382 "ownership change" generally occurs if one or more stockholders or groups of stockholders, who own at least 5% of our stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws.
During the year ended December 31, 2017, the liability for uncertain tax positions less accrued interest and penalties increased from $5.2 million for the prior year to $5.3 million. Of the total $5.3 million of unrecognized tax benefits, $2.8 million represents the amount that if recognized, would favorably affect the effective income tax rate in any future periods. The Company cannot conclude on the range of cash payments that will be made within the next twelve months associated with its uncertain tax positions.
A reconciliation of the beginning and ending unrecognized tax benefit amount is as follows:
|
| | | | | | | | | | | |
| December 31,
2017 | | January 1,
2017 | | December 27,
2015 |
| (in thousands) |
Beginning balance | $ | 5,221 |
| | $ | 4,425 |
| | $ | 3,738 |
|
Increases related to current year’s unrecognized tax benefits | 1,569 |
| | 888 |
| | 687 |
|
Increases related to prior year’s unrecognized tax benefits | 68 |
| | — |
| | — |
|
Decreases related to prior year’s unrecognized tax benefits | (1,540 | ) | | (92 | ) | | — |
|
Ending balance | $ | 5,318 |
| | $ | 5,221 |
| | $ | 4,425 |
|
The Company records interest and penalties related to unrecognized tax benefits in income tax expense. For the year ended December 31, 2017, the Company recorded no estimated interest or estimated penalties. For the period ended December 31, 2017, no accrued interest or penalties were accrued.
The Company and its subsidiaries are subject to taxation in various jurisdictions, including federal, state and foreign. The Company’s federal and state income tax returns are generally not subject to examination by taxing authorities for fiscal years before 2013 for federal purposes and 2012 for state purposes. The exceptions to this are the net operating loss carryovers and R&D credit carryovers. These amounts are subject to audit for a period of three years after utilization for federal purposes and four years after utilization for state purposes.
The Company intends to reinvest the earnings of its non-U.S. subsidiaries in those operations. The Company does not provide for U.S. income taxes on the earnings of foreign subsidiaries because the Company intends to reinvest such earnings offshore indefinitely. In addition, the Company has continued to not provide for any withholding taxes or state taxes for any of the undistributed earnings of its foreign subsidiaries as of December 31, 2017.