Income Taxes
The components of (loss) income before income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | (62,526 | ) | | $ | (67,988 | ) | | $ | (50,031 | ) |
Foreign | 1,713 |
| | 803 |
| | (203 | ) |
Total | $ | (60,813 | ) | | $ | (67,185 | ) | | $ | (50,234 | ) |
The components of the provision (benefit) for income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Current Provision: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 18 |
| | 93 |
| | — |
|
Foreign | 333 |
| | 345 |
| | 334 |
|
Total current provision | 351 |
| | 438 |
| | 334 |
|
Deferred Provision: | | | | | |
Federal | — |
| | (7 | ) | | (8 | ) |
State | — |
| | — |
| | — |
|
Foreign | (87 | ) | | (129 | ) | | (411 | ) |
Total deferred provision | (87 | ) | | (136 | ) | | (419 | ) |
Total income tax provision (benefit) | $ | 264 |
| | $ | 302 |
| | $ | (85 | ) |
The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes consist of the following:
|
| | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Federal statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
Effect of: | | | | | |
State taxes, net of federal benefits | 2.4 |
| | 2.4 |
| | 1.5 |
|
Stock-based compensation | (1.8 | ) | | (1.5 | ) | | (4.5 | ) |
Research and development credit | 3.5 |
| | 3.5 |
| | 1.8 |
|
Recognition of assets not previously recognized | — |
| | 2.9 |
| | — |
|
Other | 0.4 |
| | (0.3 | ) | | — |
|
Valuation allowance | (38.9 | ) | | (41.4 | ) | | (32.6 | ) |
Effective tax rate | (0.4 | %) | | (0.5 | %) | | 0.2 | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company’s deferred tax assets and liabilities for the periods presented (in thousands):
|
| | | | | | | |
| As of March 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Accrued expenses | $ | 5,120 |
| | $ | 2,950 |
|
Depreciation and amortization | 3,183 |
| | 1,677 |
|
Net operating loss carryforwards | 75,949 |
| | 62,909 |
|
Stock based compensation | 7,109 |
| | 4,645 |
|
Research and development credits | 8,079 |
| | 5,840 |
|
Gross deferred tax assets | 99,440 |
| | 78,021 |
|
Valuation allowance | (94,352 | ) | | (72,528 | ) |
Total deferred tax assets | 5,088 |
| | 5,493 |
|
Deferred tax liabilities: | | | |
Prepaids | (1,912 | ) | | (1,402 | ) |
Intangibles | 72 |
| | (25 | ) |
Capitalized research and development | (3,108 | ) | | (4,013 | ) |
Total deferred tax liabilities | (4,948 | ) | | (5,440 | ) |
Total net deferred tax assets | $ | 140 |
| | $ | 53 |
|
The net deferred tax assets increased from the prior year primarily due to a reversal of deferred tax liabilities resulting from the acquisition of intangibles in Spain as well as increased deferred taxes from stock based compensation charges in the U.K.
Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. Management assesses the available positive and negative evidence to estimate if sufficient taxable income will be generated to use the existing deferred tax assets. Based upon the weight of available evidence, which includes the Company’s historical operating performance and the U.S. cumulative net losses in all prior periods, the Company has provided a valuation allowance against its U.S. deferred tax assets. The Company’s valuation allowance increased by $21.8 million and $28.8 million for the fiscal years ended March 31, 2017 and 2016, respectively.
As of March 31, 2017, the Company has U.S. federal and state net operating losses of approximately $313.8 million and $161.4 million, respectively, which expire beginning in the year 2028 and 2024, respectively. Of these amounts, $105.0 million and $51.4 million, respectively, represent federal and state tax deductions from stock-based compensation which will be recorded as an adjustment to additional paid-in capital when they reduce taxes payable. The Company also has federal, California, and Oregon research and development credits of $8.3 million, $1.8 million, and $1.8 million, respectively. The federal tax credit carryforwards will expire beginning in 2028 if not utilized. The California tax credit carryforwards do not expire. The Oregon tax credit carryforwards began to expire in 2014.
Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended (“Code”), and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
Code Section 382 (“Section 382”) ownership change generally occurs if one or more stockholders or groups of stockholders who own at least 5% of the Company’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three years period. Similar rules may apply under state tax laws. The Company did experience one or more ownership changes in financial periods ending on or before March 31, 2017. In this regard, the Company has determined that based on the timing of the ownership changes and the corresponding Section 382 limitations, none of its net operating losses or other tax attributes appear to expire subject to such limitation.
The Company has not provided U.S. income tax on certain foreign earnings that are deemed to be indefinitely invested outside the U.S. As of March 31, 2017, 2016, and 2015, the amount of accumulated unremitted earnings from the Company’s foreign subsidiaries was approximately $2.2 million, $0.9 million, and $0.1 million.
The Company had unrecognized tax benefits of $5.0 million, $3.5 million, and $1.8 million as of March 31, 2017, 2016, and 2015. As of March 31, 2017, if recognized, the unrecognized tax benefit of $5.0 million would affect income tax expense, before consideration of any valuation allowance. The Company does not expect the unrecognized tax benefits to change significantly over the next 12 months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows (in thousands):
|
| | | |
| |
Balance at March 31, 2014 | $ | 735 |
|
Additions based on tax positions taken during the current period | 1,009 |
|
Additions based on tax positions taken during the prior period | 84 |
|
Reductions based on tax positions taken during the prior period | (2 | ) |
Balance at March 31, 2015 | 1,826 |
|
Additions based on tax positions taken during the current period | 1,414 |
|
Additions based on tax positions taken during the prior period | 249 |
|
Balance at March 31, 2016 | 3,489 |
|
Additions based on tax positions taken during the current period | 1,503 |
|
Reductions based on tax positions taken during the prior period | (7 | ) |
Balance at March 31, 2017 | $ | 4,985 |
|
The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statement of operations. Accrued interest and penalties have not been significant for the fiscal years ended March 31, 2017, 2016, and 2015.
The Company files income tax returns in the U.S., certain states, Ireland, Canada, Germany, Switzerland, UK, and Spain. All of the tax years, from the date of inception, are open for examination for foreign jurisdictions. Carryover attributes beginning March 31, 2008 remain open to adjustment by the U.S. and state authorities.