INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code of 1986, as amended. Changes include, but are not limited to, a corporate tax rate decrease from 34% to 21% effective for tax years beginning after December 31, 2017, further limitation on deductibility of interest expense, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Consistent with the guidance under ASC 740, we will record any impacts from enactment of the Tax Act in the fourth quarter of 2017 subject to Staff Accounting Bulletin (“SAB”) 118 which provides for a measurement period to complete the accounting for certain elements of the tax reform.
We have calculated our best estimate of the impact of the Tax Act in our year end income tax provision in accordance with our understanding of the Tax Act and guidance available as of the date of this filing. The Tax Act did not result in any material tax expense during fourth quarter of 2017, the period in which the legislation was enacted. The Company remeasured the net deferred tax assets and corresponding valuation allowance at the 21% rate. Further, the impact of the one-time transition tax on the mandatory deemed repatriation of foreign earnings was immaterial due to an aggregate foreign earnings deficit.
The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, 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, or any updates or changes to estimates the company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts.
The components of the Company’s loss before provision (benefit) for income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | (32,853 | ) | | $ | (39,107 | ) | | $ | (59,797 | ) |
Foreign | (26,736 | ) | | (26,523 | ) | | (24,538 | ) |
Loss before provision for income taxes | $ | (59,589 | ) | | $ | (65,630 | ) | | $ | (84,335 | ) |
The components of the provision (benefit) for income taxes attributable to continuing operations are as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current income tax provision: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 114 |
| | 105 |
| | 147 |
|
Foreign | 1,580 |
| | 1,838 |
| | 1,139 |
|
Total current income tax provision | 1,694 |
| | 1,943 |
| | 1,286 |
|
Deferred income tax benefit: | | | | | |
Federal | — |
| | — |
| | — |
|
State | — |
| | — |
| | — |
|
Foreign | 52 |
| | (736 | ) | | (105 | ) |
Total deferred income tax benefit | 52 |
| | (736 | ) | | (105 | ) |
Total income tax provision (benefit) | $ | 1,746 |
| | $ | 1,207 |
| | $ | 1,181 |
|
On a consolidated basis, the Company has incurred operating losses and has recorded a full valuation allowance against its United States, United Kingdom, New Zealand, Hong Kong and Brazil deferred tax assets for all periods to date and, accordingly, has not recorded a provision (benefit) for income taxes for any of the periods presented other than a provision (benefit) for certain foreign and state income taxes. Certain foreign subsidiaries and branches of the Company provide intercompany services and are compensated on a cost-plus basis, and therefore, have incurred liabilities for foreign income taxes in their respective jurisdictions.
The differences in the total provision for income taxes that would result from applying the 34% federal statutory rate to loss before provision for income taxes and the reported provision for income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. Federal tax benefit at statutory rates | $ | (20,260 | ) | | $ | (22,310 | ) | | $ | (28,681 | ) |
State income taxes, net of federal tax benefit | (806 | ) | | (855 | ) | | (1,632 | ) |
Foreign rate differential | 5,220 |
| | 3,711 |
| | 3,964 |
|
Stock based compensation | 3,182 |
| | 4,467 |
| | 4,673 |
|
Other permanent differences | (494 | ) | | (750 | ) | | (99 | ) |
Deferred adjustments / U.S. rate change | 7,811 |
| | — |
| | — |
|
Other | 262 |
| | 1,494 |
| | 536 |
|
Valuation allowance | 6,831 |
| | 15,450 |
| | 22,420 |
|
Total income tax (benefit) provision | $ | 1,746 |
| | $ | 1,207 |
| | $ | 1,181 |
|
Major components of the Company’s deferred tax assets (liabilities) at December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Accrued expenses | $ | 2,371 |
| | $ | 3,037 |
|
Long-lived intangible assets and fixed assets — basis difference | 19,884 |
| | 22,146 |
|
Net operating loss carryforwards | 80,615 |
| | 68,356 |
|
Stock-based compensation | 16,886 |
| | 19,515 |
|
Deferred revenue | 2,739 |
| | 4,060 |
|
Convertible note hedge | 1,467 |
| | 6,387 |
|
Other | 2,721 |
| | 2,276 |
|
Total deferred tax assets | 126,683 |
| | 125,777 |
|
Valuation allowance | (118,606 | ) | | (111,775 | ) |
Deferred tax assets, net of valuation allowance | 8,077 |
| | 14,002 |
|
Deferred tax liabilities: | | | |
Prepaid expenses and deferred commissions | (5,672 | ) | | (7,718 | ) |
Convertible note discount | (1,074 | ) | | (4,721 | ) |
Other | (410 | ) | | (591 | ) |
Total deferred tax liabilities | (7,156 | ) | | (13,030 | ) |
Net deferred tax assets (liabilities) | $ | 921 |
| | $ | 972 |
|
At December 31, 2017, the Company had federal, state and foreign net operating losses of approximately $250.7 million, $257.9 million and $86.0 million, respectively. The federal net operating loss carryforward will begin expiring in 2022, the state net operating loss carryforward began expiring in 2017, and the foreign net operating loss has an unlimited carryforward period. The Internal Revenue Code of 1986, as amended, imposes substantial 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 Internal Revenue Code Section 382 (“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. Due to the effects of historical equity issuances, the Company has determined that the future utilization of a portion of its net operating losses is limited annually pursuant to IRC Section 382. The Company has determined that none of its net operating losses will expire because of the annual limitation.
The Company has recorded a full valuation allowance against its otherwise recognizable United States, United Kingdom, New Zealand, Hong Kong and Brazil deferred income tax assets as of December 31, 2017. Management has determined, after evaluating all positive and negative historical and prospective evidence, that it is more likely than not that these assets will not be realized. The net increase to the valuation allowance of $6.8 million, $15.5 million and $22.4 million for the years ended December 31, 2017, 2016 and 2015, respectively, was primarily due to additional net operating losses generated by the Company.
We adopted ASU No. 2016-09 effective January 1, 2017. The ASU eliminates the requirement to delay the recognition of excess tax benefits until they reduce current taxes payable. However, as of January 1, 2017, the previously unrecognized excess tax benefits of $39.4 million had no impact on our accumulated deficit balance as the related U.S. deferred tax assets were fully offset by a valuation allowance. The adoption did not have any other material impacts on the Company’s provision for income taxes.
Deferred income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries because the Company’s practice and intent is to permanently reinvest these earnings. The cumulative amount of such undistributed earnings was $3.3 million and $4.0 million at December 31, 2017 and December 31, 2016, respectively. Any future distribution of these non-U.S. earnings may subject the Company to state income taxes, as adjusted for tax credits, and foreign withholding taxes that the Company estimates would be $0.1 million and $0.8 million at December 31, 2017 and 2016, respectively. We are also estimating that the transition tax on any undistributed earnings that existed as of December 31, 2017 will be zero.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Balance at January 1 | $ | 276 |
| | $ | 276 |
| | $ | 276 |
|
Additions for tax positions related to the current year | 995 |
| | — |
| | — |
|
Balance at December 31 | $ | 1,271 |
| | $ | 276 |
| | $ | 276 |
|
The provision for uncertain tax positions relates to business in territories outside of the United States.
The Company’s policy is to classify interest and penalties on uncertain tax positions as a component of tax expense. An insignificant amount of interest and penalties on unrecognized tax benefits were accrued during the 2017 tax year. The amount of accrued interest and penalties on unrecognized tax benefits was insignificant, as of December 31, 2017 and 2016. The Company does not expect the change in uncertain tax positions to have a material impact on its financial position, results of operations or liquidity. The recognition of previously unrecognized tax benefits on uncertain tax positions would result in a $1.3 million tax benefit. The Company believes it is reasonably possible that within the next twelve months we may resolve certain matters related to the years under examination, which may result in reductions of our unrecognized tax benefits and income tax expense of up to $1.1 million.
The Company is subject to United States federal income tax as well as to income tax in multiple state and foreign jurisdictions, including the United Kingdom. Federal income tax returns of the Company are subject to IRS examination for the 2014 through 2017 tax years. State income tax returns are subject to examination for the 2013 through 2017 tax years. Foreign income tax returns are subject to examination for the 2007 through 2017 tax years.