|
8. |
INCOME TAXES |
On December 22, 2017, the Tax Reform Act was signed into law. This legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its net U.S. deferred income tax liabilities at December 31, 2017. The Company has reduced its income tax expense from continuing operations by approximately $34.1 million due to the revaluation of U.S. deferred tax liabilities, offset by a valuation allowance. The valuation allowance for deferred tax assets decreased by $1.9 million for the year ended December 31, 2017 and increased by $30.9 million for the year ended December 31, 2016. The 2017 change in the valuation allowance was due to an increase of deferred income tax assets of approximately $32.3 million mainly due to an increase in net operating losses and a reduction of deferred tax assets of approximately $34.2 million due to the revaluation of the deferred taxes due to the enactment of the Tax Reform Act.
The Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The one-time transition tax is based on the Company’s total post-1986 earnings and profits for which it has previously deferred from U.S. income taxes. The Company did not record a provisional amount in income tax expense for the transition tax as it has accumulated losses in its foreign subsidiaries, and thus does not anticipate being subject to the transition tax.
While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it also includes two new U.S. tax base erosion provisions - the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company does not expect that it will be subject to incremental U.S. tax on GILTI income beginning in 2018. Because of the complexity of the new GILTI tax rules, the Company continues to evaluate this provision of the Tax Reform Act and the application of ASC 740, Income Taxes. Under GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company's measurement of its deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. The Company is currently in the process of analyzing its structure and, as a result, is not yet able to reasonably estimate the effect of this provision of the Tax Reform Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its consolidated financial statements and has not made a policy decision regarding whether to record deferred tax on GILTI.
The BEAT provisions in the Tax Reform Act eliminates the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect to be impacted by this tax based on annual gross receipts threshold.
On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 118 to address the application of 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 Tax Reform Act. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from the provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete when the Company’s 2017 U.S. corporate income tax return is filed in 2018.
The Company recorded income tax expense of $0.1 million during the year ended December 31, 2017 and an income tax benefit of $0.3 million and $0.1 million for the years ended December 31, 2016 and 2015, respectively. Current year income tax expense is primarily attributable to foreign withholding taxes levied on income earned in Taiwan. The prior year income tax benefit is attributable to changes in deferred income tax liabilities that were recognized in connection with the Company’s acquisitions. The Company and its other subsidiaries were in a cumulative loss position as of December 31, 2017.
The components of loss before income tax expense (benefit) consist of the following (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Domestic |
|
$ |
(125,770 |
) |
|
$ |
(83,714 |
) |
|
$ |
(47,428 |
) |
|
Foreign |
|
|
(5,541 |
) |
|
|
(4,457 |
) |
|
|
(3,281 |
) |
|
|
|
$ |
(131,311 |
) |
|
$ |
(88,171 |
) |
|
$ |
(50,709 |
) |
The components of the income tax expense (benefit) consist of the following (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
64 |
|
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
(92 |
) |
|
|
61 |
|
|
|
80 |
|
|
Foreign |
|
|
440 |
|
|
|
165 |
|
|
|
136 |
|
|
|
|
|
412 |
|
|
|
226 |
|
|
|
216 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(3,222 |
) |
|
|
(26,386 |
) |
|
|
(15,488 |
) |
|
State |
|
|
5,799 |
|
|
|
(4,165 |
) |
|
|
(2,948 |
) |
|
Foreign |
|
|
(874 |
) |
|
|
(848 |
) |
|
|
(529 |
) |
|
|
|
|
1,703 |
|
|
|
(31,399 |
) |
|
|
(18,965 |
) |
|
Change in valuation allowance |
|
|
(2,030 |
) |
|
|
30,908 |
|
|
|
18,695 |
|
|
|
|
$ |
85 |
|
|
$ |
(265 |
) |
|
$ |
(54 |
) |
The income tax expense (benefit) differs from the federal statutory rate due to the following:
|
|
|
Year Ended December 31, |
|
||||||||
|
|
|
2017 |
|
|
2016 |
|
2015 |
|
|||
|
Statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
34.0 |
% |
|
State taxes, net of federal benefit |
|
|
(4.3 |
) |
|
|
5.4 |
|
|
5.7 |
|
|
Foreign rate differential |
|
|
(0.6 |
) |
|
|
(0.8 |
) |
|
(0.9 |
) |
|
Federal income tax rate change |
|
|
(25.9 |
) |
|
|
— |
|
|
— |
|
|
Valuation allowance |
|
|
1.5 |
|
|
|
(35.1 |
) |
|
(36.9 |
) |
|
Other |
|
|
(4.8 |
) |
|
|
(3.2 |
) |
|
(1.8 |
) |
|
|
|
|
(0.1 |
)% |
|
|
0.3 |
% |
|
0.1 |
% |
Deferred tax assets (liabilities) consist of the following (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Intangible assets |
|
$ |
8,923 |
|
|
$ |
8,534 |
|
|
Property and equipment |
|
|
70 |
|
|
|
28 |
|
|
Stock-based compensation |
|
|
6,489 |
|
|
|
9,437 |
|
|
Net operating loss carryforwards |
|
|
44,008 |
|
|
|
43,807 |
|
|
Other |
|
|
2,014 |
|
|
|
1,840 |
|
|
Gross deferred income tax assets |
|
|
61,504 |
|
|
|
63,646 |
|
|
Less: valuation allowance |
|
|
(60,379 |
) |
|
|
(62,308 |
) |
|
Net deferred income tax assets |
|
|
1,125 |
|
|
|
1,338 |
|
|
Intangible assets |
|
|
(1,004 |
) |
|
|
(1,296 |
) |
|
Property and equipment |
|
|
— |
|
|
|
(248 |
) |
|
Gross deferred income tax liabilities |
|
|
(1,004 |
) |
|
|
(1,544 |
) |
|
Net deferred income tax assets (liabilities) |
|
$ |
121 |
|
|
$ |
(206 |
) |
As of December 31, 2017, there exists $184.7 million federal net operating losses and $47.4 million of state net operating losses, respectively, which may be carried forward to offset future years’ tax liabilities and expire beginning in 2027. In addition, there exists $12.0 million of foreign net operating losses as of December 31, 2017 which may be carried forward indefinitely.
The Company considers whether any positions taken on the Company’s income tax returns would be considered uncertain tax positions that may require the recognition of a liability. The Company has concluded that there are no material uncertain tax positions as of December 31, 2017, 2016, and 2015. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income benefit in the consolidated statement of operations and comprehensive loss. There were no amounts recognized for interest and penalties related to unrecognized tax benefits during the years ended December 31, 2017, 2016, and 2015. The income tax returns for the taxable years 2012 to 2016 in the U.S., China, and Hong Kong remain open and subject to income tax audits.
The Company has not made provisions for the limitation of executive compensation associated with the tax reform legislation of 2017 due to a lack of further clarity regarding the application of the law. This provision of the tax reform legislation is not expected to have a material effect on the Company’s financial condition.
Provision has not been made for U.S. taxes on undistributed earnings of foreign subsidiaries. Those earnings have been and will continue to be indefinitely reinvested.
Under the provisions of Section 382 of the Internal Revenue Code (“IRC”), net operating loss and credit carryforwards and other tax attributes may be subject to limitation if there has been a significant change in ownership of the Company, as defined by the IRC. Future owner of equity shifts, including any public offerings, could result in limitations on net operating loss carryforwards.