Income Taxes
On December 22, 2017, tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act reduced the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018. The Company re-measured its deferred tax assets and liabilities as of December 31, 2017, applying the reduced corporate income tax rate and recorded a provisional decrease to the deferred tax assets and liabilities of $16.7 million, with a corresponding adjustment to the valuation allowance.
Due to the complexity of the Tax Act, the Company has not finalized the accounting for the effects of the Tax Legislation, including the provisional amounts recorded related to the transition tax, re-measurement of the deferred taxes and the change to the valuation allowance. The impact of the Tax Legislation may differ from the Company’s estimate, during the one-year measurement period due to, among other things, further refinement of the Company's calculation, changes in interpretations and assumptions the Company has made, and guidance that may be issued and actions the Company may take as a result of the Tax Legislation.
The Tax Act taxes certain unrepatriated earnings and profits (“E&P”) of the Company’s foreign subsidiaries. In order to determine the Transition Tax, the Company must determine, along with other information, the amount of its accumulated post 1986 E&P for its foreign subsidiaries, as well as the non U.S. income tax paid by those subsidiaries on such E&P. The Company recorded a provisional amount of U.S. taxable income of $3.5 million, which did not result in additional tax expense due to the Company’s net operating losses. The Company continues to evaluate information which may adjust the computed Transition Tax. Since the Company has significant net operating losses, any change to this provisional amount would not have an impact on the Company’s financial position or results of operations.
The Company is subject to taxation in Canada and also in certain foreign tax jurisdictions. The Company's tax returns for calendar year 2012 and forward are subject to examination by the Canadian tax authorities. The Company's tax returns for fiscal year 2006 and forward are subject to examination by the U.S. federal and state tax authorities.
The Company recognizes the impact of an uncertain income tax position on its income tax return at the largest amount that is “more likely than not” to be sustained upon audit by the relevant taxing authority. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained.
The following is a summary of the changes in the amount of unrecognized tax benefits (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Unrecognized tax benefits, beginning of period | $ | 406 |
| | $ | 673 |
|
Decrease related to prior periods | — |
| | (267 | ) |
Unrecognized tax benefits, end of period | $ | 406 |
| | $ | 406 |
|
At December 31, 2017, there was $0.4 million of unrecognized tax benefits presented as a reduction of the related deferred tax asset for which there is full valuation allowance, and the entire amount of the unrecognized tax benefits at December 31, 2017 will affect the effective tax rate if recognized. However, the portion that would be recognized as an increase to deferred tax assets may result in a corresponding increase in the valuation allowance at the time of recognition resulting in no net effect to the effective tax rate, depending upon the Company’s assessment of the likelihood of realization of the tax benefits at the time they are recognized.
The Company believes it is reasonably possible that, within the next 12 months, the amount of unrecognized tax benefits may remain unchanged. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company had no material accrual for interest and penalties on its consolidated balance sheets at December 31, 2017 and 2016, and recognized no interest and/or penalties in the consolidated statements of operations for the years ended December 31, 2017 and 2016.
The components of loss before income taxes were as follows (in thousands):
|
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Domestic | $ | (5,294 | ) | | $ | (8,937 | ) |
Foreign | (22,522 | ) | | (58,698 | ) |
Total | $ | (27,816 | ) | | $ | (67,635 | ) |
The (benefit from) provision for income taxes includes the following (in thousands):
|
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Current: | | | |
Federal | $ | — |
| | $ | — |
|
State | — |
| | — |
|
Foreign | 484 |
| | 476 |
|
Total current | 484 |
| | 476 |
|
Deferred: | | | |
Federal | — |
| | — |
|
Foreign | (2,116 | ) | | 349 |
|
Total deferred | (2,116 | ) | | 349 |
|
(Benefit from) provision for income taxes | $ | (1,632 | ) | | $ | 825 |
|
A reconciliation of income taxes computed by applying the federal statutory income tax rate of 26.5% to loss before income taxes to the total income tax (benefit from) provision for reported in the accompanying consolidated statements of operations is as follows (in thousands):
|
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Income tax at statutory rate | $ | (7,371 | ) | | $ | (17,923 | ) |
Foreign rate differential | (2,367 | ) | | (1,652 | ) |
Change in tax rate | 16,715 |
| | — |
|
Change in valuation allowance | (12,080 | ) | | (34,477 | ) |
Share-based compensation expense | 2,296 |
| | 2,130 |
|
Goodwill impairment | — |
| | 8,699 |
|
Section 382 limitation | — |
| | 41,044 |
|
Other differences | 1,175 |
| | 3,004 |
|
(Benefit from) provision for income taxes | $ | (1,632 | ) | | $ | 825 |
|
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 are shown below. A valuation allowance has been recorded, as realization of such assets is uncertain. Deferred income taxes are comprised as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss carryforward | $ | 39,713 |
| | $ | 48,138 |
|
Intangible assets | 1,989 |
| | 2,791 |
|
Tax credits | 2,329 |
| | 2,133 |
|
Inventory | 1,112 |
| | 1,906 |
|
Share-based compensation | 475 |
| | 920 |
|
Warranty and extended warranty | 289 |
| | 550 |
|
Other | 2,107 |
| | 2,708 |
|
Deferred tax assets, gross | 48,014 |
| | 59,146 |
|
Valuation allowance for deferred tax assets | (46,959 | ) | | (59,039 | ) |
Deferred tax assets, net of valuation allowance | 1,055 |
| | 107 |
|
Deferred tax liabilities: | | | |
Intangible assets | (1,970 | ) | | (3,063 | ) |
Property and equipment | (172 | ) | | (144 | ) |
Deferred tax liabilities | (2,142 | ) | | (3,207 | ) |
Net deferred tax assets (liabilities) | $ | (1,087 | ) | | $ | (3,100 | ) |
The Company has assessed whether its valuation allowance analysis for deferred tax assets was affected by various aspects of the Tax Act (e.g., deemed repatriation of deferred foreign income, future tax on global intangible low-taxed income (“GILTI”), and new categories of foreign tax credits). Since the Company has recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional. The Company reduced its valuation allowance by $1.0 million as a result of the Tax Act and its effects on the realizability of its deferred tax assets.
At December 31, 2017, the Company had Canadian net operating loss carryforwards of $28.9 million. These carryforwards will begin expiring in 2031, unless previously utilized. At December 31, 2017, the Company had U.S. federal and state net operating loss carryforwards of $120.4 million and $79.2 million, respectively. The remaining federal net operating loss will begin expiring in 2023, unless previously utilized. State net operating loss carryforwards generally begin expiring in 2018, unless previously utilized.
The Company’s ability to use its U.S. federal and state net operating loss and research and development credit carryforwards may be substantially limited due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. The Company has completed a study through December 31, 2014, to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company became a “loss corporation” under the definition of Section 382. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations or financial position of the Company.
At December 31, 2017, the Company had California research and development tax credit carryforwards totaling $2.9 million. The California research credit may be carried forward indefinitely. The Company has federal alternative minimum tax credit carryforwards totaling $0.2 million which will be refundable through 2021 due to tax reform.