13. Income Taxes
(Loss) income before provision for income taxes was as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
United States |
|
$ |
(54,894 |
) |
|
$ |
(47,112 |
) |
|
$ |
(47,911 |
) |
|
Foreign |
|
|
4,855 |
|
|
|
2,083 |
|
|
|
2,270 |
|
|
Total |
|
$ |
(50,039 |
) |
|
$ |
(45,029 |
) |
|
$ |
(45,641 |
) |
The benefit (provision) for income taxes consists of the following:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Current income tax provision |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
(144 |
) |
|
|
(95 |
) |
|
|
(61 |
) |
|
Foreign |
|
|
(1,077 |
) |
|
|
(579 |
) |
|
|
(401 |
) |
|
Total current income tax provision |
|
|
(1,221 |
) |
|
|
(674 |
) |
|
|
(462 |
) |
|
Deferred income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
10,435 |
|
|
|
61 |
|
|
|
(10 |
) |
|
State |
|
|
977 |
|
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
134 |
|
|
|
80 |
|
|
|
60 |
|
|
Total deferred income tax benefit |
|
|
11,546 |
|
|
|
141 |
|
|
|
50 |
|
|
Total income tax benefit (provision) |
|
$ |
10,325 |
|
|
$ |
(533 |
) |
|
$ |
(412 |
) |
The following reconciles the differences between income taxes computed at the federal statutory rate of 35% and the provision for income taxes:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Expected income tax benefit at the federal statutory rate |
|
$ |
17,166 |
|
|
$ |
15,761 |
|
|
$ |
15,974 |
|
|
State taxes net of federal benefit |
|
|
5,150 |
|
|
|
916 |
|
|
|
2,257 |
|
|
Stock-based compensation |
|
|
10,939 |
|
|
|
(2,001 |
) |
|
|
(1,685 |
) |
|
Difference in foreign tax rates |
|
|
988 |
|
|
|
415 |
|
|
|
482 |
|
|
U.S. tax credits |
|
|
1,717 |
|
|
|
1,609 |
|
|
|
2,738 |
|
|
Convertible debt and acquisition |
|
|
11,573 |
|
|
|
— |
|
|
|
— |
|
|
Federal rate change |
|
|
(49,123 |
) |
|
|
— |
|
|
|
— |
|
|
Transition tax |
|
|
(1,063 |
) |
|
|
|
|
|
|
|
|
|
Change in valuation allowance |
|
|
13,988 |
|
|
|
(16,413 |
) |
|
|
(19,421 |
) |
|
Other |
|
|
(1,010 |
) |
|
|
(820 |
) |
|
|
(757 |
) |
|
Income tax benefit (provision) |
|
$ |
10,325 |
|
|
$ |
(533 |
) |
|
$ |
(412 |
) |
On December 22, 2017, the United States of America signed tax legislation (the “2017 Act”) which enacts a wide range of changes to the U.S. corporate income tax system. The 2017 Act reduces the U.S. corporate tax rate to 21% effective in 2018, broadens the tax base and changes rules for expensing and capitalizing business expenditures, establishes a territorial tax system for foreign earnings as well as a minimum tax on certain foreign earnings, provides for a one-time transition tax on previously undistributed foreign earnings, and introduces new rules for the treatment of certain export sales.
At December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the 2017 Act; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects on existing deferred tax balances and the one-time transition tax. For the items for which the Company was not able to determine a reasonable estimate, no net income tax expense or benefit was recognized.
The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% for U.S. federal tax purposes. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of deferred tax balances was $49.1 million, which was offset by a corresponding reduction in the valuation allowance.
The one-time transition tax is based on the Company’s total post-1986 earnings and profits (E&P) for which the Company previously deferred from U.S. income taxes. The one-time transition tax results in an estimated inclusion of $6.9 million of foreign earnings in U.S. taxable income, which reduces U.S. federal and state net operating losses generated during 2017. The Company has not yet completed the calculation of the total post-1986 foreign E&P for these foreign subsidiaries, and therefore this estimate may change as additional clarifying and interpretative technical guidance is issued related to the calculation of our one-time transition tax.
The changes included in the 2017 Act are broad and complex. The final transition impacts of the 2017 Act may differ from the above estimates, possibly materially, due to, among other things, changes in interpretations of the 2017 Act, any legislative action to address questions that arise because of the 2017 Act, actions taken by U.S. state governments and taxing authorities in response to the 2017 Act, any changes in accounting standards for income taxes or related interpretations in response to the 2017 Act, or any updates or changes to estimates that have been utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. The Securities Exchange Commission has issued rules that allow for a measurement period of up to one year after the enactment date of the 2017 Act to finalize the recording of the related tax impacts. The Company currently anticipate finalizing and recording any resulting adjustments during 2018.
Deferred Tax Assets and Liabilities —Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows:
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
87,521 |
|
|
$ |
73,750 |
|
|
Research and investment credits |
|
|
9,402 |
|
|
|
6,674 |
|
|
Accruals and reserves |
|
|
6,627 |
|
|
|
6,699 |
|
|
Depreciation |
|
|
911 |
|
|
|
744 |
|
|
Intangible assets |
|
|
— |
|
|
|
215 |
|
|
Stock-based compensation |
|
|
4,146 |
|
|
|
8,115 |
|
|
Total deferred tax assets |
|
$ |
108,607 |
|
|
$ |
96,197 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
(1,273 |
) |
|
|
— |
|
|
Convertible debt |
|
|
(5,664 |
) |
|
|
— |
|
|
Capitalized costs |
|
|
(4,648 |
) |
|
|
(4,843 |
) |
|
Total deferred tax liabilities |
|
|
(11,585 |
) |
|
|
(4,843 |
) |
|
Valuation allowance |
|
|
(96,630 |
) |
|
|
(91,132 |
) |
|
Net deferred tax assets |
|
$ |
392 |
|
|
$ |
222 |
|
The Company reviews all available evidence to evaluate its recovery of deferred tax assets, including its recent history of accumulated losses in all tax jurisdictions over the most recent three years as well as its ability to generate income in future periods. The Company has provided a valuation allowance against its U.S. net deferred tax assets as it is more likely than not that these assets will not be realized given the nature of the assets and the likelihood of future utilization.
The valuation allowance increased by $5.5 million in 2017, $16.5 million in 2016 and $19.4 million in 2015, primarily due to the increase in the U.S. net operating loss deferred tax asset. The Company does not expect any significant changes in its valuation allowance positions within the next 12 months.
At December 31, 2017, undistributed foreign earnings of approximately $6.9 million have been taxed due to the one-time transition tax on previously undistributed foreign earnings required by the 2017 Act. For any future foreign earnings, the Company will generally be free of additional U.S. federal tax consequences due to a dividends received deduction implemented as part of the move to a territorial tax system for foreign subsidiary earnings. No provision has been made for additional deferred taxes related to any remaining historical outside basis differences in our non-U.S. subsidiaries, which could include U.S. state taxes and foreign withholding taxes. The Company continues to assess the impact of the 2017 Act on its indefinite reinvestment in these outside basis differences generated on or before December 31, 2017 and intends to finalize this assessment within the one-year measurement period as allowed for by the Securities and Exchange Commission.
The Company had federal and state net operating loss carryforwards of $352.5 million and $224.7 million, respectively at December 31, 2017, which expire at various dates through 2037
The Company had federal research and development credit carryforwards of $5.8 million at December 31, 2017 that expire at various dates through 2037. The Company also has state research and investment credit carryforwards of $2.5 million and $756 thousand, respectively that expire at various dates through 2032.
Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in the Company's ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of the Company of more than 50% within a three-year period. Any such annual limitation may significantly reduce the utilization of net operating loss carryforwards before they expire. The Company performed an analysis through December 31, 2016, and determined any potential ownership change under Section 382 during the year would not have a material impact on the future utilization of US net operating losses and tax credits. There was no material change to this conclusion in 2017. However, future transactions in the Company's common stock could trigger an ownership change for purposes of Section 382, which could limit the amount of net operating loss carryforwards and other attributes that could be utilized annually in the future to offset taxable income, if any. Any such limitation, whether as the result of sales of common stock by our existing stockholders or sales of common stock by the Company, could have a material adverse effect on results of operations in future years.
Uncertain Tax Positions —The Company accounts for uncertainty in income taxes using a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination by the tax authority, including resolutions of any related appeals or litigation processes, based on technical merit. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
The following summarizes activity related to unrecognized tax benefits:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Unrecognized benefit—beginning of the year |
|
$ |
1,742 |
|
|
$ |
673 |
|
|
$ |
1,713 |
|
|
Gross increases—current period positions |
|
|
983 |
|
|
|
1,069 |
|
|
|
171 |
|
|
Gross decrease—prior period positions |
|
|
— |
|
|
|
— |
|
|
|
(1,211 |
) |
|
Unrecognized benefit—end of period |
|
$ |
2,725 |
|
|
$ |
1,742 |
|
|
$ |
673 |
|
All of the gross unrecognized tax benefits represent a reduction to the research and development tax credit carryforward. The gross decrease to prior period positions, for the period ending December 31, 2015 is a result of the Company completing IRS documentation of all credits generated since inception.
All of the unrecognized tax benefits decrease deferred tax assets with a corresponding decrease to the valuation allowance. None of the unrecognized tax benefits would affect the Company’s effective tax rate if recognized in the future.
The Company has elected to recognize interest and penalties related to uncertain tax positions as a component of income tax expense. No interest or penalties have been recorded through December 31, 2017.
The Company does not expect any significant change in its unrecognized tax benefits within the next 12 months.
The Company files tax returns in the United States, Ireland, Australia, Singapore, Japan, Germany and various state jurisdictions. All of the Company’s tax years remain open to examination by major taxing jurisdictions to which the Company is subject, as carryforward attributes generated in past years may still be adjusted upon examination by the Internal Revenue Service or state and foreign tax authorities if they have or will be used in future periods. The Company is routinely examined by various taxing authorities. The IRS completed a federal income tax audit for the tax year 2013 during 2016. The completed federal income tax audit did not yield a material effect on the Company’s financial condition or results of operations.