11. Income Taxes
The components of the Company’s loss before provision for (benefit from) income taxes were as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Domestic |
$ |
12,770 |
|
|
$ |
18,041 |
|
|
$ |
25,385 |
|
|
Foreign |
|
3,009 |
|
|
|
1,197 |
|
|
|
1,906 |
|
|
Total |
$ |
15,779 |
|
|
$ |
19,238 |
|
|
$ |
27,291 |
|
The components of the provision for (benefit from) income taxes are as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
$ |
— |
|
|
$ |
43 |
|
|
$ |
— |
|
|
State |
|
4 |
|
|
|
8 |
|
|
|
2 |
|
|
Foreign |
|
173 |
|
|
|
84 |
|
|
|
91 |
|
|
Total current income tax expense (benefit) |
|
177 |
|
|
|
135 |
|
|
|
93 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
(673 |
) |
|
|
142 |
|
|
|
(317 |
) |
|
State |
|
84 |
|
|
|
14 |
|
|
|
(23 |
) |
|
Foreign |
|
(290 |
) |
|
|
(50 |
) |
|
|
(314 |
) |
|
Total deferred income tax expense (benefit) |
|
(879 |
) |
|
|
106 |
|
|
|
(654 |
) |
|
Total |
$ |
(702 |
) |
|
$ |
241 |
|
|
$ |
(561 |
) |
A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal tax |
|
(34.00 |
%) |
|
|
(34.00 |
%) |
|
|
(34.00 |
%) |
|
State income tax, net of federal tax benefit |
|
0.56 |
% |
|
|
0.11 |
% |
|
|
(0.08 |
%) |
|
Tax credits |
|
(8.29 |
%) |
|
|
(8.14 |
%) |
|
|
(4.60 |
%) |
|
Stock-based compensation |
|
(0.54 |
%) |
|
|
1.52 |
% |
|
|
0.67 |
% |
|
Foreign income taxes at other than U.S. rates |
|
5.74 |
% |
|
|
2.29 |
% |
|
|
1.56 |
% |
|
Acquisition related costs |
|
1.66 |
% |
|
|
— |
|
|
|
0.76 |
% |
|
Contingent consideration related to acquisitions |
|
12.28 |
% |
|
|
(9.04 |
%) |
|
|
— |
|
|
Other |
|
2.93 |
% |
|
|
2.77 |
% |
|
|
0.41 |
% |
|
IRS Settlement |
|
— |
|
|
|
(12.42 |
%) |
|
|
— |
|
|
Tax Cuts and Jobs Act |
|
175.93 |
% |
|
|
— |
|
|
|
— |
|
|
Valuation allowance, net |
|
(160.72 |
%) |
|
|
58.16 |
% |
|
|
33.22 |
% |
|
Effective tax rate |
|
(4.45 |
%) |
|
|
1.25 |
% |
|
|
(2.06 |
%) |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “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%, effective 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 cumulative foreign earnings. The Company has calculated its best estimate of the impact of the Act in our year end income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing and as a result have recorded $0.7 million as an income tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the re-measurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was $27.7 million, with a corresponding provisional valuation allowance of $28.4 million, resulting in a provisional income tax benefit of $0.7 million attributable to the re-measurement of certain indefinite lived deferred tax liabilities related to tax deductible goodwill. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was immaterial based on cumulative foreign deficits from our foreign subsidiaries.
The Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, the Company is still evaluating the effects of the GILTI provisions and have not yet determined its accounting policy. At December 31, 2017, because the Company is still evaluating the GILTI provisions and its analysis of future taxable income that is subject to GILTI, it is unable to make a reasonable estimate and has not reflected any adjustments related to GILTI in its financial statements
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company has determined that the $27.7 million recorded in connection with the re-measurement of certain deferred tax assets and liabilities, and corresponding valuation allowance of $28.4 million, was a provisional amount and a reasonable estimate at December 31, 2017. Additional work is necessary for a more detailed analysis of its deferred tax assets and liabilities. Any subsequent adjustment to these amounts may be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
The Company recorded a benefit from income taxes of $0.7 million for the year ended December 31, 2017, a provision for income taxes of $0.2 million for the year ended December 31, 2016, and benefit from income taxes of $0.6 million for the year ended December 31, 2015. The benefit for income taxes for the year ended December 31, 2017 was primarily attributable to the provisional impact of the re-measurement of certain indefinite lived deferred tax liabilities related to tax deductible goodwill as a result of the Act. The provision for income taxes for the year ended December 31, 2016 was primarily attributable to an increase in deferred tax liabilities associated with the change in fair value of contingent consideration from prior year acquisitions and a decrease in foreign income taxed at non-US tax rates. The benefit from income taxes for the year ended December 31, 2015 was primarily attributable to a decrease in deferred tax liabilities that arose from a gain the Company recorded from the change in the fair value of contingent consideration from prior year acquisitions and net foreign tax benefit, partially offset by state income taxes.
Based on the Company’s provisional analysis, the one-time transition tax is expected to be immaterial. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.
As a result of meeting certain employment and capital investment actions under Section 10AA of the India Income Tax Act, the Company’s India subsidiary is wholly exempt from income tax for tax years beginning April 1, 2014 through March 31, 2019 and partially exempt from income tax for tax years beginning April 1, 2019 through March 31, 2024. A portion of these tax incentives will expire at the beginning April 1, 2020.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The guidance requires all of the tax effects related to share based payments to be recorded through the income statement. The guidance also removes the present requirement to delay recognition of an excess tax benefit (“windfall tax benefit”) until it reduces current taxes payable; instead it is recognized at the time of settlement, subject to normal valuation allowance consideration. As a result of adopting ASU 2016-09, in the first quarter of 2017, the Company recorded a cumulative-effect adjustment of $25.5 million to opening retained earnings and corresponding deferred tax assets, fully offset by a valuation allowance, for the previously unrecognized windfall tax benefit associated with stock-based compensation.
The components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Credits and net operating loss carryforward |
$ |
90,729 |
|
|
$ |
78,813 |
|
|
Accrued compensation |
|
(31 |
) |
|
|
2,771 |
|
|
Deferred revenues |
|
54 |
|
|
|
112 |
|
|
Stock-based compensation |
|
7,416 |
|
|
|
9,910 |
|
|
Property and equipment |
|
1,231 |
|
|
|
(898 |
) |
|
Other deferred tax assets |
|
1,495 |
|
|
|
3,073 |
|
|
Total deferred tax assets |
|
100,894 |
|
|
|
93,781 |
|
|
Valuation allowance |
|
(84,619 |
) |
|
|
(87,190 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Basis difference on purchased intangible assets |
|
6,559 |
|
|
|
9,160 |
|
|
Other deferred tax liabilities |
|
11,406 |
|
|
|
— |
|
|
Total deferred tax liabilities |
|
17,965 |
|
|
|
9,160 |
|
|
Net deferred tax assets (liabilities) |
$ |
(1,690 |
) |
|
$ |
(2,569 |
) |
Other deferred tax assets and liabilities are primarily comprised of the tax effects of accounts receivable reserves, sales allowances, deferred rent, and other miscellaneous accruals. As of December 31, 2017 and 2016, the Company had gross deferred tax assets of $100.9 million and $93.8 million, respectively. The Company also had deferred tax liabilities of $18.0 million and $9.2 million as of December 31, 2017 and 2016, respectively. Realization of the deferred tax assets is dependent upon the generation of future taxable income, if any, the amount and timing of which is uncertain. Based on the available objective evidence, and historical operating performance, management believes that it is more likely than not that all U.S. and certain foreign deferred tax assets are not realizable. Accordingly, the net deferred tax assets have been fully offset with a valuation allowance. The net valuation allowance decreased by approximately $2.6 million and increased $1.4 million for the years ended December 31, 2017 and 2016, respectively.
As of December 31, 2017, the Company had federal net operating loss carryforwards of approximately $271.4 million which will begin to expire in 2018. The Company had state net and foreign operating loss carryforwards of approximately $187.1 million and $11.7 million, respectively, of which $7.4 million have expired in 2017. As of December 31, 2017, the Company has research credit carryforwards for federal income tax purposes of approximately $12.9 million which will begin to expire in the year 2032. The Company also had state net research credit carryforwards for income tax purposes of approximately $14.9 million which can be carried forward indefinitely.
A reconciliation of the gross unrecognized tax benefit is as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Unrecognized tax benefit - beginning balance |
$ |
6,447 |
|
|
$ |
8,759 |
|
|
$ |
1,366 |
|
|
Increases for tax positions taken in prior years |
|
16 |
|
|
|
313 |
|
|
|
5,611 |
|
|
Decreases for tax positions taken in prior years |
|
— |
|
|
|
(785 |
) |
|
|
— |
|
|
Increases for tax positions taken in current year |
|
1,064 |
|
|
|
1,163 |
|
|
|
1,782 |
|
|
Settlements |
|
— |
|
|
|
(3,003 |
) |
|
|
— |
|
|
Unrecognized tax benefit - ending balance |
$ |
7,527 |
|
|
$ |
6,447 |
|
|
$ |
8,759 |
|
The unrecognized tax benefits, if recognized, would not impact the Company's effective tax rate as the recognition of these tax benefits would be offset by changes in the Company's valuation allowance. The Company does not believe there will be any material changes in its unrecognized tax benefits over the next twelve months.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2017 and 2016, the Company had no accrued interest or penalties related to uncertain tax positions. Due to the Company’s historical loss position, all tax years from inception through December 31, 2017 remain open due to unutilized net operating losses.
The Company files income tax returns in the United States and various states and foreign jurisdictions and is subject to examination by various taxing authorities including major jurisdiction like the United States. As such, all its net operating loss and research credit carryforwards that may be used in future years are subject to adjustment, if and when utilized.
Utilization of the 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. The annual limitation may result in the expiration of net operating losses and credits before their utilization.
During the year ended December 31, 2017, the Internal Revenue Service (IRS) and Quotient settled all outstanding items related to its federal income tax returns for the tax year 2014. The effect of the IRS settlement is zero as of December 31, 2017.