Income Taxes
The components of loss before provision for income taxes were as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended January 31, |
| 2018 | | 2017 | | 2016 |
United States | $ | (57,903 | ) | | $ | (55,878 | ) | | $ | (44,218 | ) |
Foreign | (37,169 | ) | | (30,084 | ) | | (28,826 | ) |
Total | $ | (95,072 | ) | | $ | (85,962 | ) | | $ | (73,044 | ) |
The components of the provision for income taxes were as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended January 31, |
| 2018 | | 2017 | | 2016 |
Current: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 88 |
| | 97 |
| | 134 |
|
Foreign | 1,493 |
| | 626 |
| | 310 |
|
Total | 1,581 |
| | 723 |
| | 444 |
|
Deferred: | |
| | |
| | |
|
Federal | (96 | ) | | 39 |
| | 58 |
|
State | 6 |
| | 4 |
| | 8 |
|
Foreign | (204 | ) | | (47 | ) | | (68 | ) |
Total | (294 | ) | | (4 | ) | | (2 | ) |
Provision for income taxes | $ | 1,287 |
| | $ | 719 |
| | $ | 442 |
|
The items accounting for the difference between income taxes computed at the federal statutory income tax rate of 33.8% and the provision for income taxes consisted of the following (in thousands):
|
| | | | | | | | | | | |
| Years Ended January 31, |
| 2018 | | 2017 | | 2016 |
Income tax benefit at statutory rate | $ | (32,145 | ) | | $ | (29,228 | ) | | $ | (24,834 | ) |
State taxes, net of federal benefit | 564 |
| | 101 |
| | 141 |
|
Impact of foreign income taxes | 5,555 |
| | 7,053 |
| | 6,767 |
|
Stock based compensation | 1,741 |
| | 1,796 |
| | 827 |
|
Non-deductible expenses | 615 |
| | 531 |
| | 368 |
|
Change in valuation allowance | (7,605 | ) | | 19,390 |
| | 17,197 |
|
Research and development credits | (1,146 | ) | | (775 | ) | | (894 | ) |
Prior year true ups | (144 | ) | | 918 |
| | (103 | ) |
Change in tax rate due to the Tax Act | 33,110 |
| | — |
| | — |
|
Other | 742 |
| | 933 |
| | 973 |
|
Provision for income taxes | $ | 1,287 |
| | $ | 719 |
| | $ | 442 |
|
Impact of the 2017 Tax Cuts and Jobs Act
The Tax Act was enacted on December 22, 2017, impacting U.S. federal taxation of corporations. Due to the Tax Act, the Company re-measured its U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which changed from approximately 35% to 21%. However, the Company is currently analyzing certain aspects of the Tax Act and refining its calculations, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of the Company’s deferred tax balance was $33.1 million before the valuation allowance. The provisional decrease to the valuation allowance related to the re-measurement of the deferred tax balance was $33.1 million. The remaining impact of the change in tax rate was recorded to income tax benefit, which relates to the reduction of deferred tax liabilities with respect to indefinite-lived intangibles.
The Tax Act also includes a one-time transition tax on the Company’s total post-1986 earnings and profits (“E&P”), which were previously deferred from U.S. federal income taxes as the E&P were considered to be indefinitely reinvested. The Company has prepared a provisional estimate of the impact of the transition tax, and has determined that due to significant non-U.S. E&P deficits, the Company does not expect to be subject to the transition tax.
The Act also includes provisions for certain foreign-sourced earnings referred to as Global Intangible Low-Taxed Income (“GILTI”), which impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The FASB issued guidance in January 2018 to allow companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which the tax is incurred (the “period cost method”), or (ii) account for GILTI in the measurement of deferred taxes (the “deferred method”). Because of the complexity of the new provisions, the Company is continuing to evaluate the accounting impact under GAAP and will make an election once this analysis has been completed.
Given the significant complexity of the Tax Act, anticipated guidance from the Internal Revenue Service about implementing the Tax Act, and the potential for additional guidance from the SEC or the FASB related to the Tax Act, the Company’s estimates may be adjusted in future periods. Any subsequent adjustment to estimates will be recorded to current tax expense in future quarters at which point the Company’s analysis and accounting for all aspects of the Tax Act is complete.
Deferred Income Taxes
At January 31, 2018 the Company had NOL carryforwards for federal, state and Irish income tax purposes of $209.5 million, $166.5 million and $182.3 million, respectively, which begin to expire in the year ending January 31, 2028 for federal purposes and January 31, 2021 for state purposes. Ireland allows NOLs to be carried forward indefinitely. The deferred tax assets associated with the NOL carryforwards in each of these jurisdictions are subject to a full valuation allowance. Utilization of the federal 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, and similar state provisions. Under Section 382 of the U.S. Internal Revenue Code of 1986, a corporation that experiences an “ownership change” is subject to a limitation on the Company’s ability to utilize its pre-change NOLs to offset future taxable income. In April 2017, the Company completed an analysis under Section 382 to evaluate whether there are any limitations on its NOLs through January 31, 2017 and concluded that any prior ownership changes do not limit the utilization of the NOLs before they expire assuming sufficient future federal and state taxable income. However, it is possible that the Company could experience a future ownership change under Section 382 or other regulatory changes, such as suspension on the use of the NOLs, that could result in the expiration of its NOLs or otherwise cause them to be unavailable to offset future federal and state taxable income.
Deferred income taxes arise from temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax reporting purposes, as well as operating losses and tax credit carryforwards.
Significant components of the Company’s deferred tax assets for federal and state income taxes are as follows as of January 31, 2018, 2017 and 2016, respectively (in thousands):
|
| | | | | | | |
| Years Ended January 31, |
| 2018 | | 2017 |
Deferred tax assets: | |
| | |
|
Net operating loss carryforwards | $ | 77,434 |
| | $ | 82,762 |
|
Deferred revenue | 3,537 |
| | 1,683 |
|
Other liabilities and accruals | 6,852 |
| | 7,863 |
|
Depreciable assets | 1,583 |
| | 1,919 |
|
Other reserves | 339 |
| | 352 |
|
Gross deferred tax assets | 89,745 |
| | 94,579 |
|
Valuation allowance | (89,336 | ) | | (94,465 | ) |
Total deferred tax assets, net of valuation allowance | 409 |
| | 114 |
|
Deferred tax liability: | |
| | |
|
Goodwill | (101 | ) | | (108 | ) |
Total deferred tax liability | (101 | ) | | (108 | ) |
Net deferred tax assets | $ | 308 |
| | $ | 6 |
|
Deferred tax assets are recognized when management believes it more likely than not that they will be realized. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Due to the significant negative evidence resulting from losses since inception in the U.S. federal, U.S. state and Ireland jurisdictions, management maintains a full valuation allowance against the net deferred tax assets in these jurisdictions. The valuation allowance for deferred tax assets as of January 31, 2018 and 2017 was $89.3 million and $94.5 million, respectively. In assessing the realizabilty of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not 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. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax planning strategies in making this assessment.
Uncertain Tax Positions
The calculation of the Company’s tax obligations involves dealing with uncertainties in the application of complex tax laws and regulations. ASC 740, Income Taxes, provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company has assessed its income tax positions and recorded tax benefits for all years subject to examination, based upon the Company’s evaluation of the facts, circumstances and information available at each period end. For those tax positions where the Company has determined there is a greater than 50% likelihood that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is determined there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized.
Although the Company believes that it has adequately reserved for its uncertain tax positions, the Company can provide no assurance that the final tax outcome of these matters will not be materially different. As the Company expands internationally, it will face increased complexity, and the Company’s unrecognized tax benefits may increase in the future. The Company makes adjustments to its reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made.
The activity within the Company’s unrecognized gross tax benefits was as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended January 31, |
| 2018 | | 2017 | | 2016 |
Unrecognized tax benefits at beginning of year | $ | 4,400 |
| | $ | 3,411 |
| | $ | 2,229 |
|
Decreases in tax positions in prior years | (1,494 | ) | | (83 | ) | | — |
|
Additions based on tax positions in the current year | 1,143 |
| | 1,072 |
| | 1,182 |
|
Unrecognized tax benefits at end of year | $ | 4,049 |
| | $ | 4,400 |
| | $ | 3,411 |
|
Principally, because the Tax Act has now applied a federal tax on accumulated foreign earnings through January 31, 2018, as well as the potential that U.S state and foreign withholding taxes may also apply, the Company is continuing to evaluate the impacts of the Tax Act during the measurement period, including whether to continue applying the exception to the presumption of the repatriation of foreign earnings. The Company has not provided for foreign withholding taxes on approximately $0.8 million of undistributed earnings from non-U.S. operations as of January 31, 2018 because the Company intends to reinvest such earnings indefinitely outside of the United States. If the Company were to distribute these earnings, then foreign withholding tax would be payable. The amount of unrecognized deferred tax liability related to these earnings was estimated to be immaterial.
The Company is not currently under Internal Revenue Service, state, or foreign income tax examination. The Company does not anticipate any significant increases or decreases in its uncertain tax positions within the next twelve months. The Company files tax returns in the United States for federal, California and other states. All tax years remain open to examination for both federal and state purposes as a result of the net operating loss and credit carryforwards. The Company files foreign tax returns in various locations. These foreign returns are open to examination for the fiscal years ending January 31, 2012 through January 31, 2017.