INCOME TAXES
The domestic and foreign components of loss before provision for income taxes consisted of the following (in thousands): |
| | | | | | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
United States | $ | (67,631 | ) | | $ | (22,120 | ) | | $ | (8,732 | ) |
Foreign | 1,644 |
| | 1,417 |
| | 1,446 |
|
Total | $ | (65,987 | ) | | $ | (20,703 | ) | | $ | (7,286 | ) |
The provision for income taxes for the years presented is as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
Current: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 36 |
| | 44 |
| | 85 |
|
Foreign | 785 |
| | 693 |
| | 716 |
|
| 821 |
| | 737 |
| | 801 |
|
Deferred: |
| | | | |
Federal | 594 |
| | 652 |
| | — |
|
State | 59 |
| | 41 |
| | — |
|
Foreign | 1 |
| | (51 | ) | | (35 | ) |
| 654 |
| | 642 |
| | (35 | ) |
Provision for income taxes | $ | 1,475 |
| | $ | 1,379 |
| | $ | 766 |
|
A reconciliation of the provision for income taxes and the amount computed by applying the statutory federal income tax rate of 34% to loss before income taxes for the years presented is as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
Income tax benefit at statutory federal rate | $ | (22,435 | ) | | $ | (7,039 | ) | | $ | (2,477 | ) |
State taxes, net of federal benefit | 63 |
| | 56 |
| | (4,576 | ) |
Change in valuation allowance | 21,370 |
| | 7,812 |
| | 16,646 |
|
Foreign tax rate and tax law differential | 27 |
| | (29 | ) | | (43 | ) |
Tax credits | (1,179 | ) | | (1,553 | ) | | (5,619 | ) |
Stock-based compensation | 1,775 |
| | 1,932 |
| | 957 |
|
Other permanent items | 776 |
| | 61 |
| | 231 |
|
Other nondeductible/nontaxable items | 920 |
| | (72 | ) | | (4,586 | ) |
Uncertain tax positions | 158 |
| | 211 |
| | 233 |
|
Provision for income taxes | $ | 1,475 |
| | $ | 1,379 |
| | $ | 766 |
|
A summary of significant components of the Company’s deferred tax assets and liabilities as of December 31, 2016 and 2015 is as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2016 | | 2015 |
Deferred tax assets: | | | |
Allowances and reserves | $ | 16,032 |
| | $ | 14,639 |
|
Net operating loss and tax credit carryforwards | 67,875 |
| | 46,812 |
|
Stock-based compensation | 3,033 |
| | 3,055 |
|
Deferred revenue | 8,289 |
| | 5,966 |
|
Fixed assets and intangibles | 7,661 |
| | 6,830 |
|
Other | 2,857 |
| | 3,327 |
|
Subtotal | 105,747 |
| | 80,629 |
|
Less valuation allowance | (104,554 | ) | | (80,529 | ) |
Total deferred tax assets, net of valuation allowance | 1,193 |
| | 100 |
|
Deferred tax liabilities: |
|
| |
|
|
Goodwill | (1,346 | ) | | (693 | ) |
Unremitted foreign earnings | (748 | ) | | — |
|
Total deferred tax liabilities | (2,094 | ) | | (693 | ) |
Net deferred tax asset/(liability) | $ | (901 | ) | | $ | (593 | ) |
Accounting for income taxes requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers, among other matters, the nature, frequency and amount of recent losses, the duration of statutory carryforward periods, and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified. Due to the history of losses the Company has generated in the United States since inception, the Company believes that it is more-likely-than-not that all of its U.S. and state deferred tax assets will not be realized as of December 31, 2016. Therefore, the Company has recorded a full valuation allowance on its U.S. and state deferred tax assets at December 31, 2016. Should the Company determine that it would be able to realize its deferred tax assets in the foreseeable future, an adjustment to the deferred tax assets may cause a material increase to income in the period such determination is made. Significant management judgment is required in determining the period in which the reversal of a valuation allowance should occur.
During 2016, the Company re-evaluated its overall business strategy and determined that it no longer intends to permanently reinvest the earnings of the foreign subsidiaries abroad. The Company recorded a deferred tax liability related to the U.S. federal and state income taxes and foreign withholding taxes of $0.7 million related to remaining unremitted foreign earnings.
The Company has net operating loss carryforwards for federal and California income tax purposes of approximately $130.9 million and $70.9 million, respectively, as of December 31, 2016. The federal and state net operating loss carryforwards, if not utilized, will expire beginning in 2028. 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 (the “Code”), and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization. The Company has completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company became a loss corporation under the Code. However, the Company does not anticipate these limitations will significantly impact its ability to utilize the net operating losses and tax credit carryforwards.
The Company has approximately $10.9 million of federal research credit and $11.3 million of state research credit carryforwards. The federal credits begin to expire in 2026 and the state credits can be carried forward indefinitely.
As a result of certain realization requirements under income tax accounting for stock-based compensation, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of December 31, 2016 and 2015 that arose directly from tax deductions related to equity compensation greater than compensation recognized for financial reporting. Equity will be increased by $2.3 million if and when such deferred tax assets are ultimately realized.
The accounting for uncertain tax positions prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company is required to recognize in the financial statements the impact of a tax position, if that position is more-likely-than-not of being sustained on audit, based on the technical merits of the position. The Company recorded a net charge for unrecognized tax benefits in 2016 of $0.5 million.
The Company does not have any tax positions for which it is reasonably possible the total amount of gross unrecognized tax benefits will increase or decrease over the next year. The unrecognized tax benefits may increase or change during the next year for items that arise in the ordinary course of business. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
A tabular reconciliation of the total amounts of unrecognized tax benefits for the years presented is as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2016 | | 2015 | | 2014 |
Unrecognized tax benefits—at beginning of year | $ | 5,482 |
| | $ | 4,426 |
| | $ | 376 |
|
Increases in balances related to tax positions taken in prior years | — |
| | 14 |
| | 1,895 |
|
Increases in balances related to tax positions taken in current year | 571 |
| | 1,053 |
| | 2,155 |
|
Lapses in statutes of limitations | (37 | ) | | (11 | ) | | — |
|
Unrecognized tax benefits—at end of year | $ | 6,016 |
| | $ | 5,482 |
| | $ | 4,426 |
|
The Company’s tax returns continue to remain subject to examination by U.S. federal authorities for the years 2006 through 2016 and by California state authorities for the years 2006 through 2016 due to the use of net operating losses generated in tax years prior to the statutory three-year limit.