Income Taxes
The domestic and foreign components of loss before provision for incomes taxes were as follows (in thousands):
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Domestic | | $ | (84,387 | ) | | $ | (28,931 | ) | | $ | (27,674 | ) |
Foreign | | 2,598 |
| | 1,876 |
| | 1,876 |
|
| | $ | (81,789 | ) | | $ | (27,055 | ) | | $ | (25,798 | ) |
Provision for income taxes consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
State | | $ | 115 |
| | $ | 102 |
| | $ | 90 |
|
Foreign | | 577 |
| | 673 |
| | 493 |
|
Current income tax | | 692 |
| | 775 |
| | 583 |
|
Deferred: | | | | | | |
Foreign | | 551 |
| | (428 | ) | | (48 | ) |
Deferred income tax | | 551 |
| | (428 | ) | | (48 | ) |
| | $ | 1,243 |
| | $ | 347 |
| | $ | 535 |
|
The differences between the statutory tax rate and the effective tax rate, expressed as a percentage of loss before income taxes, were as follows:
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Federal statutory rate | | 34.0 | % | | 34.0 | % | | 34.0 | % |
State statutory rate | | 4.5 | % | | 6.1 | % | | 2.6 | % |
Foreign operations | | 0.5 | % | | 0.6 | % | | 1.1 | % |
R&D tax credits | | 2.7 | % | | 6.4 | % | | 11.2 | % |
Foreign income inclusion | | (0.1 | )% | | (0.7 | )% | | (2.4 | )% |
Non-deductible stock compensation | | (3.7 | )% | | (5.1 | )% | | (1.9 | )% |
Other permanent items | | (0.4 | )% | | (1.4 | )% | | (2.0 | )% |
Tax true-up | | (1.7 | )% | | 21.0 | % | | (1.3 | )% |
Valuation allowance | | 67.3 | % | | (62.2 | )% | | (43.4 | )% |
Tax reform | | (104.6 | )% | | — | % | | — | % |
Effective tax rate | | (1.5 | )% | | (1.3 | )% | | (2.1 | )% |
The significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Net operating loss carryforwards | | $ | 134,731 |
| | $ | 167,668 |
|
Tax credit carryforwards | | 43,095 |
| | 36,026 |
|
Depreciation and amortization | | 1,892 |
| | 2,538 |
|
Accruals and reserves | | 7,933 |
| | 13,462 |
|
Deferred revenue | | 7,928 |
| | 12,954 |
|
Stock-based compensation | | 3,100 |
| | 6,159 |
|
Intangible assets | | 64 |
| | — |
|
Other | | 23 |
| | 1,124 |
|
Gross deferred tax assets | | 198,766 |
| | 239,931 |
|
Valuation allowance | | (198,746 | ) | | (239,238 | ) |
Net deferred tax assets | | 20 |
| | 693 |
|
Deferred tax liability - intangible assets | | — |
| | (157 | ) |
| | $ | 20 |
| | $ | 536 |
|
All deferred tax assets, along with any related valuation allowance, and net of all deferred tax liabilities are classified in the consolidated balance sheet as long-term.
Management reviews the recognition of deferred tax assets to determine if realization of such assets is more likely than not. The realization of the Company’s deferred tax assets is dependent upon future earnings. The Company has been in a cumulative loss position since inception, which represents a significant piece of negative evidence. Using the more likely than not criteria specified in the applicable accounting guidance, this negative evidence cannot be overcome by positive evidence currently available to the Company and as a result the Company has established a full valuation allowance against its deferred tax assets with the exception of certain foreign deferred tax assets. The Company’s valuation allowance decreased by $40.5 million in 2017 and increased by $16.8 million in 2016.
As of December 31, 2017, the Company had U.S. federal and state net operating losses of approximately $604.1 million and $210.2 million, respectively. The U.S. federal net operating loss carryforwards will expire at various dates beginning in 2019 and through 2037 if not utilized. The state net operating loss carryforwards will expire at various dates beginning in 2018 and through 2037, if not utilized. Additionally, the Company has U.S. federal, California and other U.S. states research and development credits of approximately $31.0 million, $33.4 million and $3.2 million, respectively, as of December 31, 2017. The U.S. federal research and development credits will begin to expire in 2020 and through 2036 and the California research and development credits have no expiration date. The credits related to other various U.S. states will begin to expire in 2018 and through 2032. Based on current activity during 2017, the Company does not anticipate to have further adjustments or limitations to the Company’s net operating loss carryforwards.
Uncertain Tax Positions
ASC Topic 740, “Income Taxes,” prescribes a recognition threshold and measurement attribute to the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The standard requires the Company to recognize the financial statement effects of an uncertain tax position when it is more likely than not that such position will be sustained upon audit. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively, in statements of comprehensive loss.
The following table reconciles the Company’s unrecognized tax benefits (in thousands):
|
| | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 |
Balance at beginning of year | | $ | 18,349 |
| | $ | 16,597 |
|
Additions for tax positions related to prior year | | — |
| | 420 |
|
Reductions for tax positions related to prior year | | — |
| | (145 | ) |
Additions for tax positions related to current year | | 1,940 |
| | 1,477 |
|
Balance at end of year | | $ | 20,289 |
| | $ | 18,349 |
|
As of December 31, 2017 and 2016, the Company had unrecognized tax benefits of $20.3 million and $18.3 million, respectively, none of which would affect the Company’s effective tax rate if recognized. There were no accrued interest or penalties for uncertain income tax as of December 31, 2017.
The Company files tax returns in the United State and various state jurisdictions, the United Kingdom, China and Brazil. The tax years 1999 through 2016 remain open and subject to examination by the appropriate governmental agencies in the U.S. due to tax attribute carryforwards.
U.S. Tax Reform
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 including but not limited to (1) reducing the U.S. federal corporate tax rate from 34% to 21%; (2) requiring companies to pay a one-time transition tax on certain repatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal income of certain earnings of controlled foreign corporations; (5) creating a new limitation on deductible interest expense; and (6) changing rules related to the uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
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.
There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. These transitional impacts resulted in a provisional net income inclusion of $1.1 million for the year ended December 31, 2017. The one-time transition tax is based on post-1986 earnings and profits that were previously deferred from U.S. income tax. While the Company has not yet finalized its calculation of the total post-1986 earnings and profits for its foreign corporations or the impact of foreign tax credits, it has prepared a reasonable estimate and calculated the provision amount. The Company is continuing to evaluate the calculation and accounting of the transition tax, which may change as the Company's interpretation of the provisions of the Tax Act evolve, additional information becomes available or interpretive guidance is issued by the U.S. Treasury. The final determination will be completed no later than one year from the enactment date. Based on current year and carryover losses and valuation allowance, the Company does not expect an impact to its consolidated financial statements upon completion of the analysis.
In addition, the reduction of U.S. federal corporate tax rate reduces the corporate tax rate to 21%, effective January 1, 2018. Consequently, the Company has accounted for the reduction of $84.4 million of deferred tax assets with an offsetting adjustment to the valuation allowance in the year ended December 31, 2017, which is reflected in the disclosures presented above.