INCOME TAXES
The geographical breakdown of the Company’s loss before income taxes for the fiscal years ended December 31, 2017, 2016 and 2015 is as follows: |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
| | | | | |
Domestic | $ | (15,988 | ) | | $ | (27,520 | ) | | $ | (37,658 | ) |
Foreign | (6,335 | ) | | (9,122 | ) | | (6,208 | ) |
Loss before income Taxes | $ | (22,323 | ) | | $ | (36,642 | ) | | $ | (43,866 | ) |
The components of the income tax provision are as follows: |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Current: | | | | | |
State | $ | 13 |
| | $ | 23 |
| | $ | (39 | ) |
Federal | — |
| | — |
| | — |
|
Foreign | 506 |
| | 237 |
| | 638 |
|
Total current | $ | 519 |
| | $ | 260 |
| | $ | 599 |
|
Deferred: | | | | | |
State | $ | 1 |
| | $ | — |
| | $ | — |
|
Federal | (60 | ) | | 12 |
| | 12 |
|
Foreign | 143 |
| | (3 | ) | | (259 | ) |
Total deferred | $ | 84 |
| | $ | 9 |
| | $ | (247 | ) |
Total income tax provision | $ | 603 |
| | $ | 269 |
| | $ | 352 |
|
The Company has intercompany services agreements with its subsidiaries located in the United Kingdom, Netherlands, New Zealand, Australia, Canada and China, which require payment for services rendered by these subsidiaries at an arm’s-length transaction price. The foreign tax expense represents foreign income tax payable by these subsidiaries on profit generated on intercompany services agreements.
Undistributed earnings of the Company's foreign subsidiaries were approximately $11.0 million, $10.0 million and $7.9 million as of December 31, 2017, 2016 and 2015, respectively, and the Company considers them to be permanently reinvested outside of the United States. As such, no U.S. income taxes have been provided for on these earnings.
The reconciliation of federal statutory income tax provision to the Company’s effective income tax provision is as follows: |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
| | | | | |
U.S. federal taxes at statutory tax rate | $ | (7,590 | ) | | $ | (12,458 | ) | | $ | (14,915 | ) |
State taxes, net of federal benefit | 10 |
| | 15 |
| | (26 | ) |
Change in valuation allowance | (16,945 | ) | | 8,618 |
| | 11,637 |
|
Foreign tax rate differential | 2,802 |
| | 3,334 |
| | 2,752 |
|
Tax rate change | 20,999 |
| | — |
| | — |
|
Stock-based compensation | 2,006 |
| | 1,805 |
| | 1,775 |
|
Tax credits | (516 | ) | | (947 | ) | | (785 | ) |
Other | (163 | ) | | (98 | ) | | (86 | ) |
Provision for income taxes | $ | 603 |
| | $ | 269 |
| | $ | 352 |
|
Foreign tax rate differential is primarily due to losses incurred in foreign jurisdictions that are subject to tax rates that are lower than the United States tax rate.
The tax effects of temporary differences that give rise to significant components of the Company's deferred tax assets for federal and state income taxes are as follows:
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
| (in thousands) |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 30,522 |
| | $ | 43,482 |
|
Research and development credits | 8,053 |
| | 6,901 |
|
Accruals and reserves | 2,781 |
| | 3,682 |
|
Deferred revenue | 8,278 |
| | 12,006 |
|
Stock-based compensation | 2,573 |
| | 3,641 |
|
Other | 190 |
| | 113 |
|
Gross deferred tax assets | 52,397 |
| | 69,825 |
|
Valuation allowance | (50,112 | ) | | (65,791 | ) |
Total deferred tax assets | $ | 2,285 |
| | $ | 4,034 |
|
Deferred tax liabilities: | | | |
Internally developed software | $ | (687 | ) | | $ | (1,590 | ) |
Deferred Commission | (1,468 | ) | | (2,192 | ) |
Goodwill | (55 | ) | | (74 | ) |
Gross deferred tax liabilities | $ | (2,210 | ) | | $ | (3,856 | ) |
Net deferred tax asset (liabilities) | $ | 75 |
| | $ | 178 |
|
Realization of deferred tax assets is dependent on future taxable income, the existence and timing of which is uncertain. Based on the Company’s history of losses, management has determined it cannot conclude that it is more likely than not that the deferred tax assets will be realized, and accordingly has placed a valuation allowance on the net deferred tax assets. The Company recorded a valuation allowance of $50.1 million and $65.8 million against its deferred tax assets as of December 31, 2017 and 2016.
The undistributed earnings from the Company’s profitable foreign subsidiaries are not subject to a U.S. tax provision because it is management’s intention to permanently reinvest such undistributed earnings outside of the United States. The Company evaluates its circumstances and reassesses this determination on a periodic basis. As of December 31, 2017, the determination of the unrecorded deferred tax liability related to these earnings was immaterial. If circumstances change and it becomes apparent that some or all of the undistributed earnings of the Company’s foreign subsidiaries will be remitted in the foreseeable future, the Company will be required to recognize a deferred tax liability on those amounts.
The net operating loss and tax credit carryforwards as of December 31, 2017, are as follows:
|
| | | | | |
| Amount | | Year Begin to Expire |
| (in thousands) | | |
Net operating losses, federal | $ | 122,216 |
| | 2026 |
Net operating losses, state | 75,330 |
| | 2018 |
Research and development credits, federal | 6,073 |
| | 2026 |
Research and development credits, state | 7,524 |
| | No expiration |
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 the Internal Revenue Code of 1986, as amended (“Code”), and similar state provisions. The annual limitation may result in the expiration of net operation losses and credits before utilization. The Company completed an analysis under Sections 382 and 383 of the Code through the fiscal year ended December 31, 2017 and determined that an ownership change, as defined under Sections 382 and 383 of the Code, had not occurred. Future ownership changes may limit the Company's ability to utilize its net operating loss and credit carryforwards.
Uncertain Tax Positions
The following is a reconciliation of the beginning and ending amount of the Company’s total gross unrecognized tax benefit liabilities:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Gross unrecognized tax benefit - beginning balance | $ | 4,441 |
| | $ | 3,316 |
| | $ | 2,539 |
|
Decreases related to tax positions from prior years | (359 | ) | | (21 | ) | | — |
|
Increases related to tax positions taken during current year | 719 |
| | 1,146 |
| | 777 |
|
Gross unrecognized tax benefit - ending balance | $ | 4,801 |
| | $ | 4,441 |
| | $ | 3,316 |
|
The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available, including changes in tax regulations, the outcome of relevant court cases, and other information. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as income tax expense. During the fiscal years ended December 31, 2017, 2016 and 2015, the Company accrued an insignificant amount of interest and penalties related to unrecognized tax benefits.
The Company’s total unrecognized tax benefit, if recognized, would affect its effective tax rate by $0.06 million. The remainder of the unrecognized tax benefits would be offset by a change in the valuation allowance. While it is often difficult to predict the final outcome of any particular uncertain tax position, the Company does not believe that the amount of unrecognized tax benefits will change significantly in the next 12 months.
The Company files income tax returns in the U.S. federal, various U.S. state and foreign tax jurisdictions. The Company is currently subject to U.S. federal and various state income tax examinations for the 2006 through 2016 calendar tax years.
Fiscal years outside the normal statutes of limitation remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized. The Company is not currently being audited in any jurisdiction.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA makes numerous changes to the existing U.S. tax code, including a permanent reduction in the U.S. federal corporate tax rate from 35% to 21%, which takes effect on January 1, 2018. The TCJA also establishes new tax laws that will affect 2018, including a new provision designed to tax global intangible low-taxed income (GILTI), which allows for the possibility of using foreign tax credits (FTCs) and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations). Additionally, the TCJA requires companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. As the Company is currently in a cumulative loss position in the earnings and profits of its foreign jurisdictions and therefore will not have any current year inclusion related to the transition tax.
The SEC staff issued SAB 118, which provides guidance for companies to assess and complete the accounting for the tax effects of the TCJA under ASC 740 and permits the recording of the provisional amounts related to the impact of the TCJA during a measurement period which is not to extend beyond one year from the TCJA enactment date. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a Company's accounting for certain income tax effects of the TCJA is incomplete but if it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the tax laws that were in effect immediately before the enactment of the TCJA.
As of December 31, 2017, the Company has completed its analysis of the reduction of U.S. federal corporate tax rate to 21 percent, effective January 1, 2018. Consequently, the Company has recorded a decrease to its federal and state deferred tax assets of $21.0 million, with a corresponding net adjustment to the Company's valuation allowance of $21.0 million for the fiscal year ended December 31, 2017.
As of December 31, 2017, the Company has not completed its analysis of the GILTI which creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S. shareholder. Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the TCJA and the application of ASC 740. Therefore, the Company has not made a policy decision regarding whether to record deferred taxes on GILTI and has not made any adjustments related to potential GILTI tax in the Company's financial statements.