Income Taxes
Loss before income taxes included in the consolidated statements of operations was as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
United States | $ | (22,757 | ) | | $ | (41,466 | ) | | $ | (43,020 | ) |
Foreign | (24,949 | ) | | (7,561 | ) | | (6,341 | ) |
Loss before income taxes | $ | (47,706 | ) | | $ | (49,027 | ) | | $ | (49,361 | ) |
Income tax (benefit) expense included in the consolidated statements of operations was as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Current: | | | | | |
Federal | $ | 333 |
| | $ | 493 |
| | $ | — |
|
State and local | 128 |
| | 61 |
| | 116 |
|
Foreign | 163 |
| | (656 | ) | | 261 |
|
Total current (benefit) expense | 624 |
| | (102 | ) | | 377 |
|
Deferred: | | | | | |
Federal | (2,885 | ) | | 98 |
| | 98 |
|
State and local | 8 |
| | 13 |
| | 11 |
|
Foreign | 17 |
| | (36 | ) | | 10 |
|
Total deferred expense | (2,860 | ) | | 75 |
| | 119 |
|
Income tax (benefit) expense | $ | (2,236 | ) | | $ | (27 | ) | | $ | 496 |
|
The table below reconciles the differences between income taxes computed at the federal statutory rate of 34% and our provision for income taxes:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Expected income tax | 34.0 | % | | 34.0 | % | | 34.0 | % |
State taxes, net of federal benefit | (0.2 | ) | | (0.1 | ) | | (0.1 | ) |
Permanent differences | 4.2 |
| | (1.4 | ) | | (3.0 | ) |
Federal research and development credit | 1.0 |
| | 2.4 |
| | 0.6 |
|
Foreign rate differential | (8.7 | ) | | (3.0 | ) | | (3.3 | ) |
Change in valuation allowance | (26.1 | ) | | (31.9 | ) | | (29.9 | ) |
Other | 0.5 |
| | 0.1 |
| | 0.7 |
|
Total income tax benefit (expense) | 4.7 | % | | 0.1 | % | | (1 | )% |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (Tax Act) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings (transition tax). We have recorded a one-time income tax benefit of $0.4 million in the fourth quarter of 2017 as a result of the Tax Act. The one-time income tax benefit includes $0.2 million related to the remeasurement of certain deferred tax assets and liabilities based on the lower tax rates at which they are expected to reverse in the future. The one-time income tax benefit also includes a provisional amount of $0.2 million related to the release of valuation allowance against alternative minimum tax (AMT) credits that we will receive a benefit for in the form an AMT tax refund. We have not recorded any transition tax on foreign earnings as we have preliminarily concluded that all our foreign subsidiaries have an accumulated deficit.
On December 22, 2017, the SEC issued Staff Accounting Bulletin (SAB) 118, which provides guidance for companies analyzing their accounting for the income tax effects of the Tax Act. SAB 118 provides that a company may report provisional amounts based on reasonable estimates. The provisional estimates are then subject to adjustment during a measurement period up to one year and should be accounted for as a prospective change. We continue to evaluate our transition tax obligation and expect to finalize our conclusion by the end of fiscal 2018. The provisional amounts recorded are based on our current interpretation and understanding of the Tax Act, are judgmental and may change as we receive additional clarification and implementation guidance. Changes to these provisional amounts could result in additional charges or credits in future reporting periods.
Net deferred tax assets and liabilities, as set forth in the table below, reflect the impact of temporary differences between the amounts of assets and liabilities recorded for financial statement purposes and such amounts measured in accordance with tax laws:
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
| (in thousands) |
Deferred tax assets: | | | |
Accruals and reserves | $ | 636 |
| | $ | 458 |
|
Net operating loss carryforwards | 36,778 |
| | 35,492 |
|
Deferred revenue | 11,985 |
| | 16,471 |
|
Amortization | — |
| | 3,356 |
|
Research and development credits | 2,441 |
| | 1,775 |
|
Stock-based compensation | 3,702 |
| | 4,999 |
|
Other | 2,194 |
| | 3,959 |
|
Total deferred tax assets | 57,736 |
| | 66,510 |
|
Deferred tax liabilities: | | | |
Intangible assets | (616 | ) | | (534 | ) |
Depreciation | (54 | ) | | (102 | ) |
Total deferred tax liabilities | (670 | ) | | (636 | ) |
Less: Valuation allowance | (57,359 | ) | | (66,395 | ) |
Net deferred tax liabilities | $ | (293 | ) | | $ | (521 | ) |
We recorded a deferred tax provision of $0.1 million for 2017, 2016 and 2015 relating to tax amortization of goodwill with a corresponding increase to the deferred tax liability. As of December 31, 2017, we have evaluated the need for a valuation allowance on deferred tax assets. In assessing whether the deferred tax assets are realized, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to our history of generating losses in the United States, the United Kingdom and Ireland, we continue to record a full valuation allowance against our deferred tax assets in these jurisdictions. If we achieve future profitability, a significant portion of these deferred tax assets could be available to offset future income taxes.
The valuation allowance decreased by $9.0 million for the year ended December 31, 2017, primarily due to the revaluation of U.S. deferred tax assets and liabilities at a lower U.S. corporate income tax rate of 21% required as part of the Tax Act and a deferred tax benefit recorded as part of the Komand acquisition purchase accounting adjustments partially offset by additional operating losses generated during the year.
We have not provided for U.S. income taxes on the undistributed earnings of our non-U.S. subsidiaries, as we plan to permanently reinvest these amounts.
As of December 31, 2017, we had federal and state net operating loss carryforwards of $116.6 million and $81.0 million, respectively. The federal and state net operating loss carryforward expire at various dates beginning in 2030. As of December 31, 2017, we had foreign net operating loss carryforwards of $65.3 million that can be carried forward indefinitely.
We also had federal, state and international research and development credit carryforwards of $1.8 million , $0.7 million and $0.1 million as of December 31, 2017, respectively. These credit carryforwards expire at various dates beginning in 2023.
We believe that a change of ownership within the meaning of Section 382 and 383 of the Internal Revenue Code of 1986, as amended, occurred in 2011. Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, and other pre-change tax attributes, such as research and development credits, to offset its post-change income may be limited. As a result, our U.S. federal net operating loss and research and development credit utilization will be limited to an amount equal to the market capitalization at the time of the ownership change multiplied by the federal long-term tax exempt rate. We do not believe that any of our net operating losses or research and development credits will expire as a result of this limitation.
We file income tax returns in all jurisdictions in which we operate. We have established reserves to provide for additional income taxes that management believes will more likely or not be due in future years. The reserves have been established based upon our assessment as to the potential exposure. Changes in our reserves for unrecognized income tax benefits are as follows:
|
| | | |
| Amount |
| (in thousands) |
Balance at December 31, 2015 | $ | 141 |
|
Additions based on current year tax positions | 247 |
|
Balance at December 31, 2016 | 388 |
|
Decreases based on settlements with taxing authorities | (343 | ) |
Reductions based on lapse in statute of limitations | (16 | ) |
Balance at December 31, 2017 | $ | 29 |
|
In the normal course of business, we are subject to examination by federal, state, and foreign jurisdictions, where applicable. The statute of limitations for these jurisdictions is generally three to six years. However, to the extent we utilize net operating losses or other similar carryforward attributes such as credits, the statute remains open to the extent of the net operating losses or credits that are utilized. We have no tax returns under examination as of December 31, 2017. We record interest and penalties on any income tax liability as income tax expense. We recorded nominal interest and penalties in 2017, 2016 and 2015. During the next 12 months, we do not expect any material changes to our uncertain tax positions other than the accrual of interest in the normal course of business.