Income Taxes
The Company’s U.S. and foreign components of consolidated income (loss) before income taxes and the benefit from income taxes is presented in the following table.
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| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Income (loss) before income taxes: | | | | | |
U.S. | $ | 11,992 |
| | $ | 6,158 |
| | $ | (7,566 | ) |
Foreign | (7,726 | ) | | (5,514 | ) | | (4,406 | ) |
Total income (loss) before income taxes | $ | 4,266 |
| | $ | 644 |
| | $ | (11,972 | ) |
| | | | | |
Current tax provision (benefit): | | | | | |
Federal | $ | 441 |
| | $ | — |
| | $ | — |
|
State | 12 |
| | 16 |
| | (3 | ) |
Foreign | 18 |
| | 46 |
| | 20 |
|
Current tax provision | $ | 471 |
| | $ | 62 |
| | $ | 17 |
|
| | | | | |
Deferred tax (benefit) provision: | | | | | |
Federal | $ | (8,997 | ) | | $ | 248 |
| | $ | 225 |
|
State | (1,138 | ) | | 3 |
| | (17 | ) |
Foreign | 1,270 |
| | (703 | ) | | (559 | ) |
Total deferred tax benefit | $ | (8,865 | ) | | $ | (452 | ) | | $ | (351 | ) |
Total benefit for income taxes | $ | (8,394 | ) | | $ | (390 | ) | | $ | (334 | ) |
On December 22, 2017, President Trump signed into law the Tax Act, which significantly changes existing U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21%, a move from a worldwide tax system to a territorial system, as well as other changes. As a result of enactment of the legislation, the Company incurred a one-time income tax expense during the fourth quarter of 2017 of $7.0 million related to the deemed repatriation tax on accumulated foreign earnings (of which $0.3 million is a cash charge and the remaining $6.7 million represents a non-cash discrete tax expense largely from the utilization of net operating loss carryovers). The Company will continue to review and refine this amount as additional guidance is provided on the taxation of deemed repatriation income through the filing of the 2017 U.S. federal income tax return. The Company also incurred a non-cash income tax expense of $2.5 million related to the remeasurement of certain deferred tax assets and liabilities based on the recently enacted rates from the Tax Act.
The Company continues to evaluate the impact of the tax law changes related to state income taxes, the new income tax provisions related to global intangible low-taxed income and deductions related to foreign derived intangible income. The Company continues to assert that the accumulated foreign earnings are permanently reinvested. The Company should have no U.S. federal income tax obligation should the Company decide in the future to repatriate its accumulated foreign earnings. The Company has not estimated what the future foreign income tax or state income tax impact will be if the Company decides to repatriate its accumulate foreign earnings in the future. As of December 31, 2017, the Company did not record any provisional estimates related to the Tax Act.
A reconciliation of income taxes computed at the statutory federal income tax rate to the effective tax rate implied by the accompanying Statements of Operations is presented in the following table.
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| | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. federal taxes at statutory rate | 34 | % | | 34 | % | | 34 | % |
State income tax, net of federal benefit | 3 | % | | 3 | % | | — | % |
Deemed repatriation transition tax | 165 | % | | — | % | | — | % |
Deferred tax remeasurement - Change in tax rates | 55 | % | | — | % | | — | % |
Foreign rate differential | 44 | % | | 359 | % | | (17 | )% |
Stock-based compensation | (14 | )% | | (1 | )% | | (8 | )% |
Non-deductible expenses | 2 | % | | 13 | % | | — | % |
Federal research credits | (9 | )% | | (64 | )% | | 2 | % |
Valuation allowance | (476 | )% | | (405 | )% | | (9 | )% |
Other | (1 | )% | | — | % | | 1 | % |
Effective tax rate | (197 | )% | | (61 | )% | | 3 | % |
The Company’s total deferred tax assets and liabilities is presented in the following table.
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| | | | | | | |
| December 31,
2017 | | December 31,
2016 |
| (In thousands) |
Deferred tax assets: | | | |
Net operating loss carry forwards | $ | 5,918 |
| | $ | 14,082 |
|
Accruals and reserves | 2,816 |
| | 4,896 |
|
Research and development credit carry forwards | 3,957 |
| | 2,609 |
|
Acquired intangibles | 909 |
| | 1,415 |
|
Charitable contributions | 11 |
| | 5 |
|
Total deferred tax assets | 13,611 |
| | 23,007 |
|
Valuation allowance | (3,411 | ) | | (21,067 | ) |
Net deferred tax assets | 10,200 |
| | 1,940 |
|
Deferred tax liabilities: | | | |
Depreciation on property and equipment | (650 | ) | | (630 | ) |
Unrecognized gain on translation of foreign currency | (5 | ) | | (40 | ) |
Goodwill | (1,643 | ) | | (2,233 | ) |
Total deferred tax liabilities | (2,298 | ) | | (2,903 | ) |
Net deferred tax assets (liabilities) | $ | 7,902 |
| | $ | (963 | ) |
| | | |
As reported on the balance sheet: | | | |
Non-current assets | $ | 7,902 |
| | $ | 1,270 |
|
Non-current liabilities | — |
| | (2,233 | ) |
Net deferred tax assets (liabilities) | $ | 7,902 |
| | $ | (963 | ) |
The Company had gross deferred tax assets of approximately $13.6 million and $23.0 million at December 31, 2017 and 2016, respectively, relating principally to accrued expenses and tax effects of net operating loss and tax credit carry-forwards. In asserting the recoverability of deferred tax assets, management considers whether it is more likely than not that the assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. In making such a determination, we consider all available positive and negative evidence including recent results of operations, scheduled reversals of deferred tax liabilities, projected future income, and available tax planning strategies.
In the U.S., significant pieces of objective positive evidence evaluated were the cumulative profit incurred in the U.S. entity. The Company’s U.S. entity emerged out of 12 quarters of cumulative loss in the third quarter of 2017 into a position of cumulative income, and followed in the fourth quarter of 2017 with strong results. The forecast for the Company’s U.S. entity indicates that it is likely to continue to be in a profitable position, going forward. In addition, in December 2017, due to the Tax Act, the Company’s U.S. entity had additional deemed repatriation income of $21.0 million. The Company’s U.S. entity plans to use its net operating loss carryforwards to settle this transition tax, and, therefore, expects that it is more likely than not that deferred tax assets will be used up by 2020. The impact of the Tax Act was a new piece of heavily weighted evidence in the fourth quarter of 2017.
In Ireland, a significant piece of negative evidence was the cumulative losses of $16.6 million that incurred in the Company’s Irish entity since inception over the three year period ended December 31, 2017. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome, and there was limited positive evidence.
On the basis of this evaluation, as of December 31, 2017, the Company released the valuation allowance, totaling $10.1 million on its U.S. federal (“Federal”) deferred tax assets and all of the Company’s U.S. state deferred tax assets with the exception of the State of California (“California”) Research and Development (“R&D”) credit carryovers. As of December 31, 2017, the Company continues to maintain a valuation allowance on its California R&D credit carryovers of approximately $1.4 million. The Company will maintain a valuation allowance on its California R&D credit carryovers because it is more likely than not, based on scheduling of utilization, that utilization would likely not occur until 2022, and it is projected at that time that the Company will only be utilizing new California R&D credits as they are generated, that is, not resulting in a net reduction. The Company’s policy with respect to California R&D credits is that they are utilized on a last-in first-out basis.
In addition, as of December 31, 2017, the Company established a valuation allowance on its Irish entity’s deferred tax assets totaling $2.0 million. The valuation allowance represents a provision for uncertainty as to the realization of tax benefits from these deferred income tax assets. The Company will continue to evaluate the tax benefit uncertainty and will adjust, if warranted, the valuation allowance in future periods to the extent that the Company’s deferred income tax assets become more likely than not to be realizable.
The following table presents the Company’s Federal, California, and foreign net operating loss carryforwards.
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| | | | | | | |
| December 31,
2017 | | December 31,
2016 |
| (In thousands) |
Federal | $ | 14,227 |
| | $ | 41,801 |
|
California | 12,081 |
| | 14,009 |
|
Ireland | 16,644 |
| | 10,043 |
|
Total net operating loss carryforwards | $ | 42,952 |
| | $ | 65,853 |
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The net operating loss carryforwards, if not utilized, will begin to expire in 2019 for Federal, and 2031 for California. Utilization of the net operating loss carryforward may be subject to a substantial annual limitation due to the ownership change limitations provided by the U.S. Internal Revenue Code (“IRC”) and similar California provisions. The annual limitation will result in the expiration of the net operating loss carryforwards before utilization. The Company has estimated the amount which may ultimately be realized and recorded deferred tax assets accordingly. The Ireland net operating loss carryforwards does not have an expiration date.
The following table presents the Company’s Federal and California R&D credit, minimum tax credit and foreign tax credit carryforwards.
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| | | | | | | |
| December 31,
2017 | | December 31,
2016 |
| (In thousands) |
Federal | $ | 2,572 |
| | $ | 1,635 |
|
California | 1,753 |
| | 1,476 |
|
Total credit carryforwards | $ | 4,325 |
| | $ | 3,111 |
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The federal R&D credit carryforwards, if not utilized, will start to expire in 2030. The foreign tax credit carryforwards will begin to expire in 2026. The federal minimum tax credit carryforward will be refunded if not utilized no later than 2021. The California credit carryforwards do not expire. Utilization of the credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the IRC and similar California provisions.
Accounting for uncertain tax positions is based on judgment regarding the largest amount that is greater than 50% likely of being realized upon the ultimate settlement with a taxing authority. The aggregate changes in the balance of the gross unrecognized tax benefits is presented in the following table.
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| | | | | | | |
| December 31,
2017 | | December 31,
2016 |
| (In thousands) |
Gross unrecognized tax benefits as of December 31, | $ | 603 |
| | $ | 394 |
|
Gross increases related to prior year tax position | 117 |
| | — |
|
Gross increases related to current year tax position | 191 |
| | 209 |
|
Gross unrecognized tax benefits as of December 31, | $ | 911 |
| | $ | 603 |
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As of December 31, 2017, the Company had $0.9 million of unrecognized tax benefits, $0.5 million of which, if recognized, would affect our effective tax rate.
The Company adopted the accounting policy that interest and penalties are classified as part of its income taxes. There are no accrued interest or penalties associated with any unrecognized tax benefits.
There are currently no examinations for Federal, California taxing authorities, and foreign tax authorities. The Company believes that, as of December 31, 2017, the gross unrecognized tax benefits will not materially change in the next twelve months. The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to any tax audits and that any settlement will not have a material adverse effect on the consolidated financial position or results of operations. However, there can be no assurances as to the possible outcomes.