Income Taxes
The geographical breakdown of loss before provision for income taxes is as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
Domestic loss | $ | (22,978 | ) | | $ | (41,677 | ) | | $ | (35,593 | ) |
Foreign income | 2,795 |
| | 2,390 |
| | 2,380 |
|
Loss before provision for income taxes | $ | (20,183 | ) | | $ | (39,287 | ) | | $ | (33,213 | ) |
The provision for income taxes consists of the following (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
Current provision for income taxes: | | | | | |
State | $ | 41 |
| | $ | 55 |
| | $ | 24 |
|
Foreign | 1,009 |
| | 675 |
| | 1,054 |
|
Total current | 1,050 |
| | 730 |
| | 1,078 |
|
Deferred tax expense (benefit): | | | | | |
Federal | 17 |
| | — |
| | — |
|
Foreign | (310 | ) | | 17 |
| | 429 |
|
Total deferred | (293 | ) | | 17 |
| | 429 |
|
Provision for income taxes | $ | 757 |
| | $ | 747 |
| | $ | 1,507 |
|
The reconciliation of the statutory federal income tax and our effective income tax is as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
| Amount | | Percentage | | Amount | | Percentage | | Amount | | Percentage |
Tax at statutory rate | $ | (6,862 | ) | | 34.0 | % | | $ | (13,358 | ) | | 34.0 | % | | $ | (11,292 | ) | | 34.0 | % |
State tax - net of federal benefits | 27 |
| | (0.1 | ) | | 36 |
| | (0.1 | ) | | 16 |
| | (0.1 | ) |
Foreign rate differential | (666 | ) | | 3.3 |
| | (422 | ) | | 1.1 |
| | 231 |
| | (0.7 | ) |
Changes in federal valuation allowance | 7,141 |
| | (35.4 | ) | | 11,926 |
| | (30.4 | ) | | 10,547 |
| | (31.8 | ) |
Stock-based compensation | 88 |
| | (0.4 | ) | | 1,845 |
| | (4.7 | ) | | 1,041 |
| | (3.1 | ) |
Other permanent items | 583 |
| | (2.9 | ) | | 415 |
| | (1.1 | ) | | 513 |
| | (1.5 | ) |
Expenses for uncertain tax positions | 358 |
| | (1.8 | ) | | 227 |
| | (0.6 | ) | | 330 |
| | (1.0 | ) |
Other | 88 |
| | (0.4 | ) | | 78 |
| | (0.1 | ) | | 121 |
| | (0.4 | ) |
Provision for income taxes | $ | 757 |
| | (3.7 | )% | | $ | 747 |
| | (1.9 | )% | | $ | 1,507 |
| | (4.6 | )% |
The tax effects of temporary differences that give rise to significant portions of deferred tax assets (liabilities) are as follows (in thousands):
|
| | | | | | | |
| December 31,
2016 | | December 31,
2015 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 47,197 |
| | $ | 46,317 |
|
Research and development credits, net of uncertain tax positions | 12,953 |
| | 9,517 |
|
Accruals, reserves, and other | 21,288 |
| | 17,904 |
|
Stock-based compensation | 4,055 |
| | 2,700 |
|
Depreciation and amortization | 2,892 |
| | 2,735 |
|
Gross deferred tax assets | 88,385 |
| | 79,173 |
|
Valuation allowance | (86,935 | ) | | (77,643 | ) |
Total deferred tax assets | 1,450 |
| | 1,530 |
|
Deferred tax liabilities: | | | |
Other | (431 | ) | | (805 | ) |
Total deferred tax liabilities | (431 | ) | | (805 | ) |
Net deferred tax assets | $ | 1,019 |
| | $ | 725 |
|
Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and the recorded cumulative net losses in prior fiscal periods, we recorded a full valuation allowance of $86.9 million and $77.6 million against the net U.S. deferred tax assets as of December 31, 2016 and 2015, respectively. For the years ended December 31, 2016, 2015 and 2014, the valuation allowance increased by $9.3 million, $14.0 million and $11.2 million, respectively.
As of December 31, 2016 and 2015, we had U.S. federal net operating loss carryforwards of $139.0 million and $130.6 million and state net operating loss carryforwards of $68.6 million and $68.4 million, respectively. We track the portion of our net operating loss attributable to stock option benefits in accordance with ASC 718 Compensation-Share Compensation, therefore, these amounts are no longer included in our gross or net deferred tax assets. The gross tax benefit of stock options totals $10.8 million at December 31, 2016, and will only be recorded to additional paid in capital when these benefits reduce cash taxes payable. The federal net operating loss carryforwards will expire at various dates beginning in the year ending December 31, 2026, if not utilized. The state net operating losses expire in various years ending between 2017 and 2036, if not utilized.
Additionally, as of December 31, 2016 and 2015, we had U.S. federal research and development credit carryforwards of $8.5 million and $6.4 million and state research and development credit carryforwards of $8.8 million and $6.4 million. The federal credit carryforwards will begin to expire at various dates beginning in 2027 while the state credit carryforwards can be carried over indefinitely.
Utilization of the net operating losses and credit carryforwards may be subject to an annual limitation provided for in the Internal Revenue Code Section 382 and similar state codes. Any annual limitation could result in the expiration of net operating loss and credit carryforwards before utilization.
With respect to our undistributed foreign subsidiaries' earnings we consider those earnings to be indefinitely reinvested and, accordingly, no related provision for U.S. federal and state income taxes has been provided. Upon distribution of those earnings' in the form of dividends or otherwise, we may be subject to both U.S. income taxes subject to an adjustment for foreign tax credits and withholding taxes in the various countries. As of December 31, 2016 and 2015, the undistributed earnings approximated $5.1 million and $3.9 million, respectively. The determination of the future tax consequence of the remittance of these earnings is not practicable.
Uncertain Tax Positions
As of December 31, 2016 and 2015, we had gross unrecognized tax benefits of $3.3 million and $2.6 million. We have accrued net interest expense of $9,000 (i.e., there was $20,000 of gross accrued interest expense offset by $11,000 of interest released due to a lapse of statute of limitations) related to unrecognized tax benefits reflected in the consolidated financial statements for the year ended December 31, 2016. Our policy for classifying interest and penalties associated with unrecognized income tax benefits is to include such items in income tax expense.
The activity related to the unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
Gross unrecognized tax benefits—beginning balance | $ | 2,552 |
| | $ | 2,195 |
| | $ | 1,846 |
|
Increases (decrease) related to tax positions from prior years | 66 |
| | (4 | ) | | 340 |
|
Increases related to tax positions taken during current year | 690 |
| | 361 |
| | 278 |
|
Decreases related to tax positions taken during the current year | — |
| | — |
| | (269 | ) |
Gross unrecognized tax benefits—ending balance | $ | 3,308 |
| | $ | 2,552 |
| | $ | 2,195 |
|
These amounts are related to certain deferred tax assets with a corresponding valuation allowance. As of December 31, 2016, the total amount of unrecognized tax benefits, if recognized, that would affect the effective tax rate is $1.1 million. We believe that there will not be any significant changes in our unrecognized tax benefits in the next 12 months.
We are subject to taxation in the United States, various states, and several foreign jurisdictions. Because we have net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state and foreign taxing authorities may examine our tax returns for all years from 2004 through the current period. During January 2017, the Internal Revenue Service (IRS) notified us that it intends to examine the 2014 and 2015 tax returns beginning in the first quarter of 2017.