Income Taxes
The provision for income taxes for the years ended December 31, 2017, 2016, and 2015 is related to the profits generated in certain foreign jurisdictions by our consolidated subsidiaries.
The following table presents loss before provision for income taxes as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | (58,569 | ) | | $ | (41,915 | ) | | $ | (67,484 | ) |
Foreign | (19,758 | ) | | (6,345 | ) | | 2,907 |
|
Total loss before provision for income taxes | $ | (78,327 | ) | | $ | (48,260 | ) | | $ | (64,577 | ) |
The provision for income taxes consisted of (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 99 |
| | 14 |
| | 20 |
|
Foreign | 2,288 |
| | 1,410 |
| | 834 |
|
Total current tax expense | 2,387 |
| | 1,424 |
| | 854 |
|
Deferred: | | | | | |
Federal | (39 | ) | | 14 |
| | 14 |
|
State | 2 |
| | 2 |
| | 1 |
|
Foreign | (697 | ) | | (101 | ) | | (7 | ) |
Total deferred tax expense (benefit) | (734 | ) | | (85 | ) | | 8 |
|
Total provision for income taxes | $ | 1,653 |
| | $ | 1,339 |
| | $ | 862 |
|
The differences in the total provision for (benefit from) income taxes that would result from applying the 34% federal statutory income tax rate to loss before provision for (benefit from) income taxes and the reported provision for (benefit from) income tax were as follows: |
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax provision (benefit) at U.S. statutory rate | (34.00 | )% | | (34.00 | )% | | (34.00 | )% |
State income taxes, net of federal benefit | 0.10 |
| | 0.02 |
| | 0.02 |
|
Foreign income and withholding taxes | 10.59 |
| | 7.17 |
| | (0.31 | ) |
Change in valuation allowance | (8.21 | ) | | 24.18 |
| | 1.88 |
|
Gain from intercompany sale of intellectual property | — |
| | — |
| | 15.80 |
|
Uncertain tax positions | 0.40 |
| | 0.87 |
| | 17.46 |
|
Stock-based compensation expense | (3.04 | ) | | 6.18 |
| | 0.96 |
|
Impact of US Tax Reform | 37.51 |
| | — |
| | — |
|
Other | (1.24 | ) | | (1.65 | ) | | (0.48 | ) |
Provision for income taxes | 2.11 | % | | 2.77 | % | | 1.33 | % |
The tax effects of temporary differences that give rise to significant components of our deferred tax assets consist of (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Accruals and reserves | $ | 2,353 |
| | $ | 1,825 |
|
Deferred revenue | 1,411 |
| | 1,408 |
|
Net operating loss | 50,679 |
| | 48,759 |
|
Depreciation and amortization | 542 |
| | 468 |
|
Research and development credits and other credits | 6,325 |
| | 4,367 |
|
Stock-based compensation | 3,381 |
| | 1,170 |
|
Others | 33 |
| | 22 |
|
Gross deferred tax assets | 64,724 |
| | 58,019 |
|
Less valuation allowance | (63,673 | ) | | (57,750 | ) |
Total deferred tax assets | 1,051 |
| | 269 |
|
Deferred tax liabilities: |
| | |
Goodwill | (44 | ) | | (51 | ) |
Gross deferred tax liabilities | (44 | ) | | (51 | ) |
Net deferred tax assets | $ | 1,007 |
| | $ | 218 |
|
In assessing the realizability of deferred tax assets, we evaluate all available positive and negative evidence by considering whether it is more likely than not that some portion or all of the deferred tax assets will not be recognized. The ultimate realization of deferred tax assets is dependent upon future taxable income, future reversals of existing taxable temporary difference, taxable income in carryback years and tax-planning strategies. We believe it is more likely than not that the deferred tax assets in the U.S. will not be realized; accordingly, a valuation allowance has been established against our U.S. deferred tax assets. The net change in the valuation allowance for the years ended December 31, 2017 and 2016 was an increase of $5.9 million and $3.5 million, respectively.
As of December 31, 2017, we had NOL carryforwards for Federal, California and other state income tax purposes of approximately $231.8 million, $63.1 million, and $88.8 million, respectively, which will begin to expire in the year 2026, 2028, and 2025, respectively, if not utilized. As of December 31, 2016, we had net operating loss (NOL) carryforwards for Federal, California and other state income tax purposes of approximately $181.9 million, $56.9 million and $59.0 million, respectively.
As of December 31, 2017, we had Federal and California research credit carryforward of approximately $4.6 million and $3.9 million, respectively. The Federal research credits will begin to expire in 2030 while the California research credits have no expiration date. In addition, we have California enterprise zone credits of approximately $0.7 million, which begin to expire in the year 2023 if not utilized.
Generally, utilization of the NOL carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by Section 382, which discusses limitations on NOL carryforwards and certain built-in losses following ownership changes, and Section 383, which discusses, special limitations on certain excess credits, etc., of the Internal Revenue Code (IRC) of 1986, as amended and similar state provisions. Accordingly, our ability to utilize NOL carryforwards may be limited as the result of such an “ownership change”. A formal Section 382 study was performed through October 31, 2015 and concluded that we have undergone two “ownership changes” on August 8, 2006 and March 23, 2010, which resulted in the loss of $0.3 million Federal and $0.3 million California NOL, respectively, before their expiration due to the limitation, which have not been included in the above NOL carryover. A formal Section 382 study was performed through November 30, 2017 and concluded that we did not experience an "ownership change" between November 1, 2015 through November 30, 2017.
On December 22, 2017, the Tax Cuts and Jobs Acts ("the Act") was enacted into law. The new tax legislation contains several key tax provisions including the reduction of the corporate income tax rate to 21%, effective January 1, 2018, as well as a variety of other changes including the limitation of the tax deductibility of interest expense, acceleration of expensing of certain business assets and reductions in the amount of executive pay that could qualify as a tax deduction. Additionally, the Act introduced a territorial-style system for taxing foreign source income of domestic multinational corporations. We have analyzed the potential impacts of the Act and due to the federal rate reduction we are expecting a reduction in our federal deferred tax assets by $29.4 million with an offset to our valuation allowance, which has been reflected in our financial statements for the year ended December 31, 2017. Additionally, on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") 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 Act. We have recognized the tax impacts related to the revaluation of deferred tax assets, offset by the valuation allowance, and included these amounts in our consolidated financial statements for the year ended December 31, 2017, as the information related to the change in tax rate was readily available and analyzed as of year-end.
We continue to evaluate the impacts of the Act as we interpret the legislation, including the newly enacted global intangible low-taxed income ("GILTI") provisions which, effective in 2018, may subject our foreign earnings in the future to a minimum level of tax. Recent FASB guidance indicates that an accounting policy election can allow accounting for GILTI either as part of deferred taxes or as a period cost. Because of the complexities of the new legislation, we have not elected an accounting policy for GILTI at this time.
We have not provided U.S. income taxes for the unremitted earnings of foreign subsidiaries because such earnings are intended to be indefinitely reinvested in the foreign jurisdictions. As of December 31, 2017, we have unremitted earnings from our foreign subsidiaries of $1.0 million. Furthermore, as a result of the Act, we have accumulated deficits such that no US tax is expected to be due upon newly enacted IRC 965. Lastly, given the move to a territorial system beginning in 2018, the Act includes two new U.S. base erosion provisions, GILTI provisions and the base-erosion and anti-abuse tax ("BEAT") provisions. We are not subject to BEAT as we are below the applicable revenue threshold requirement and we do not believe GILTI applies as of December 31, 2017 given our foreign subsidiaries sum to a net loss.
We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. We use a two-step approach to recognize and measure uncertain tax positions. During the year ended December 31, 2017, we recorded a tax reserve of $0.6 million as a reduction of the net operating loss and research credit carryover.
The following table summarizes the activity related to our unrecognized benefits (in thousands):
|
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Beginning balance | $ | 13,647 |
| | $ | 12,603 |
|
Increases/(Decreases) related to tax positions taken during a prior year | (78 | ) | | 531 |
|
Increases related to tax positions taken during the current year | 655 |
| | 513 |
|
Decreases related to change in US tax rate | $ | (4,251 | ) | | $ | — |
|
Ending balance | $ | 9,973 |
| | $ | 13,647 |
|
At December 31, 2017, the unrecognized tax benefits for uncertain tax positions were offset against the deferred tax assets and would not affect the income tax rate if recognized due to our being in a valuation allowance position. Our policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of operations. We did not accrue any interest or penalties for the years ended December 31, 2017 and 2016. We do not have any tax positions for interest or penalties for the years ended December 31, 2017, 2016, and 2015. We do not have any tax positions for which it is reasonably possible that the total amount of gross unrecognized tax benefits will significantly change within 12 months of December 31, 2017.
We file federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. Due to our NOL carryforwards, our income tax returns generally remain subject to examination by federal and most state tax authorities. In most of our significant foreign jurisdictions, the 2012 through 2017 tax years remain subject to examination by their respective tax authorities.