Income Taxes
The following are the domestic and foreign components of the Company’s income (loss) before income taxes for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| | (in thousands) |
Domestic | | $ | (104,750 | ) | | $ | 25,704 |
| | $ | 15,723 |
|
International | | (51,795 | ) | | (48,617 | ) | | (19,862 | ) |
Loss before income taxes | | $ | (156,545 | ) | | $ | (22,913 | ) | | $ | (4,139 | ) |
The following are the components of the provision (benefit) for income taxes for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| | (in thousands) |
Current: | | | | | | |
Federal | | $ | (140 | ) | | $ | 441 |
| | $ | 196 |
|
State | | 78 |
| | 713 |
| | 90 |
|
Foreign | | (250 | ) | | 613 |
| | 367 |
|
Total current provision | | (312 | ) | | 1,767 |
| | 653 |
|
Deferred: | | | | | | |
Federal | | (1,877 | ) | | — |
| | — |
|
State | | 288 |
| | (289 | ) | | 1 |
|
Foreign | | 139 |
| | (6,338 | ) | | (5,215 | ) |
Total deferred benefit | | (1,450 | ) | | (6,627 | ) | | (5,214 | ) |
Total provision (benefit) for income taxes | | $ | (1,762 | ) | | $ | (4,860 | ) | | $ | (4,561 | ) |
During the year ended December 31, 2016, the Company early adopted the new accounting guidance that simplifies several aspects of the accounting for share-based payments, including the requirement for income tax benefits and deficiencies to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. The Company recorded $7.5 million of net deferred tax assets related to net operating losses for income tax benefits as of January 1, 2016. The Company has a full valuation allowance, and thus the new standard did not have an impact on the consolidated financial statements. Excess tax benefits should be classified along with other income tax cash flows as an operating activity.
The Company recorded an income tax benefit for the years ended December 31, 2017, 2016 and 2015 of $1.8 million, $4.9 million and $4.6 million, respectively. The tax benefit for the year ended December 31, 2017 is the result of a deferred tax liability associated with the nToggle acquisition, while the benefits for 2016 and 2015 were the result of the net operating loss generated by the Canadian operations.
During the fourth quarter of 2017, the Company recorded a tax deduction of $145.8 million and increased its valuation allowance by a corresponding amount, resulting in no net tax benefit related to a worthless stock deduction generated by the Company's exit from its intent marketing business activities in Canada.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 34% to 21%; limitations on the deductibility of executive compensation and research and development (“R&D”) expenditures, immediate expensing of qualified property, the creation of new minimum taxes such as the base erosion anti-abuse tax (“BEAT”) and Global Intangible Low Taxed Income (“GILTI”) tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which will result in a one time U.S. tax liability on those earning which have not previously been repatriated to the U.S. (the “Transition Tax”).
The Tax Act imposes a Transition Tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, the Company determined, among other things, the amount of post-1986 E&P of the relevant subsidiaries. The Company recorded a provisional Transition Tax of $0.6 million which reduced its U.S. net deferred tax assets.
The Tax Act also reduced the U.S. corporate tax rate from 34% to 21%, effective January 1, 2018. Consequently, the Company has recorded a decrease to its tax effected U.S. net deferred tax assets of $31.6 million, with a corresponding decrease to the U.S. valuation allowance for the year ended December 31, 2017 as a result of re-measuring net deferred tax assets at the new lower corporate tax rate of 21%.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company has recognized the actual impact of the revaluation of deferred tax balances and the provisional impact related to the one-time transition tax. The Company included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may materially differ from these provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions that have been made, additional regulatory guidance that may be issued, and actions may be taken as a result of the Tax Act. The Company expects to complete our analysis within the measurement period in accordance with SAB 118.
In addition, it is unclear how many U.S. states will incorporate the federal law changes, or portions thereof, into their tax codes and foreign governments may enact tax laws in response to the Tax Act that could result in further changes to global taxation and materially affect the Company's financial position and results of operations.
The Tax Act allows for the immediate write off (“expensing”) of the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. Following January 1, 2023, the expensing phases down 20% annually through January 1, 2027. The Company recorded an immediate write off of $12.4 million for the year ending December 31, 2017.
Additionally, the Tax Act imposes a new BEAT, essentially a 10% minimum tax (5% for tax years beginning after December 31, 2017, increasing to 10% for years beginning after December 31, 2018) calculated on a base equal to taxpayer’s income determined without tax benefits arising from base erosion payments and, also, requires certain GILTI income earned by controlled foreign corporations (“CFCs”) to be included in the gross income of the CFCs’ U.S. shareholder (for tax years beginning after December 31, 2017). GAAP allows the Company to either (i) treat taxes due on future U.S. inclusions in taxable income related to BEAT and GILTI as current-period expense when incurred (the “period cost method”); or (ii) factor such amounts into the measurement of deferred taxes (the “deferred method”). The Company elected the period cost method. Given that these new rules are not yet effective, the Company has not made any adjustments to its financial statements for these items for the year ended December 31, 2017.
Set forth below is a reconciliation of the components that caused the Company’s provision (benefit) for income taxes to differ from amounts computed by applying the U.S. Federal statutory rate of 34.0% for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | |
| | Year Ended |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
U.S. federal statutory income tax rate | | 34.0 | % | | 34.0 | % | | 34.0 | % |
State income taxes, net of federal benefit | | — | % | | (2.1 | )% | | (1.4 | )% |
Foreign income (loss) at other than U.S. rates | | 0.2 | % | | (14.4 | )% | | (31.0 | )% |
Stock-based compensation expense | | (3.8 | )% | | 2.1 | % | | (31.5 | )% |
Meals and entertainment | | (0.1 | )% | | (1.5 | )% | | (14.2 | )% |
Acquisition and related items | | — | % | | — | % | | (8.6 | )% |
Goodwill impairment | | (19.0 | )% | | — | % | | — | % |
Non-deductible gifts | | — | % | | (0.1 | )% | | (0.8 | )% |
Research and development tax credits | | 0.8 | % | | 7.2 | % | | 42.3 | % |
Tax effect of intercompany financing | | — | % | | 4.9 | % | | 11.2 | % |
Worthless stock | | 31.7 | % | | — | % | | — | % |
Other permanent items | | (0.5 | )% | | — | % | | (0.5 | )% |
Provision (benefit) to return adjustments | | — | % | | 0.6 | % | | (9.4 | )% |
Change in valuation allowance | | (22.0 | )% | | (9.5 | )% | | 120.1 | % |
Tax rate change; U.S. tax reform | | (20.2 | )% | | — | % | | — | % |
Effective income tax rate | | 1.1 | % | | 21.2 | % | | 110.2 | % |
Set forth below are the tax effects of temporary differences that give rise to a significant portion of the deferred tax assets and deferred tax liabilities as of December 31, 2017 and 2016:
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | (in thousands) |
Deferred Tax Assets: | | | | |
Accrued liabilities | | $ | 2,648 |
| | $ | 1,287 |
|
Stock-based compensation | | 3,685 |
| | 7,381 |
|
Net operating loss carryovers | | 65,648 |
| | 21,375 |
|
Tax credit carryovers | | 13,494 |
| | 10,915 |
|
Other | | 1,502 |
| | 2,360 |
|
Total deferred tax assets | | 86,977 |
| | 43,318 |
|
Less valuation allowance | | (81,767 | ) | | (39,491 | ) |
Deferred tax assets, net of valuation allowance | | 5,210 |
| | 3,827 |
|
Deferred Tax Liabilities: | | | | |
Fixed assets | | (3,864 | ) | | (3,764 | ) |
Intangible assets | | (955 | ) | | 468 |
|
Other | | — |
| | — |
|
Total deferred tax liabilities | | (4,819 | ) | | (3,296 | ) |
Net deferred tax assets (liability) | | $ | 391 |
| | $ | 531 |
|
The change in valuation allowance for the years ended December 31, 2017, 2016 and 2015 was $42.3 million, $10.2 million and $3.2 million, respectively.
At December 31, 2017, the Company had U.S. federal net operating loss carryforwards, or NOLs, of approximately $238.7 million, which will begin to expire in 2027. At December 31, 2017, the Company had state NOLs of approximately $139.8 million, which will begin to expire in 2027. At December 31, 2017, the Company had foreign NOLs of approximately $23.8 million, which will begin to expire in 2026. At December 31, 2017, the Company had federal research and development tax credit carryforwards, or credit carryforwards, of approximately $10.2 million, which will begin to expire in 2027. At December 31, 2017, the Company had state research and development tax credits of approximately $8.0 million, which carry forward indefinitely. At December 31, 2017, the Company had foreign research tax credits of approximately $0.7 million, which carry forward indefinitely.
Utilization of certain NOLs and credit carryforwards may be subject to an annual limitation due to ownership change limitations set forth in the Internal Revenue Code of 1986, as amended, or the Code, and comparable state income tax laws. Any future annual limitation may result in the expiration of NOLs and credit carryforwards before utilization. A prior ownership change and certain acquisitions resulted in the Company having NOLs subject to insignificant annual limitations.
Additionally, for tax years beginning after December 31, 2017, the Tax Act limits the NOL deduction to 80% of taxable income, repeals carryback of all NOLs arising in a tax year ending after 2017, and permits indefinite carryforward for all such NOLs. NOL’s arising in a tax year ending in or before 2017 can offset 100% of taxable income, are available for carryback, and expire 20 years after they arise.
At December 31, 2017, unremitted earnings of the subsidiaries outside of the United States were approximately $5.1 million, on which the Company recorded a provisional transaction tax of $0.6 million, as discussed above. The Company’s intention is to indefinitely reinvest these earnings outside the United States. Upon distribution of those earnings in the form of a dividend or otherwise, the Company would be subject to withholding taxes payable to various foreign countries and, potentially, various state taxes. The amounts of such tax liabilities that might be payable upon actual repatriation of foreign earnings, after consideration of corresponding foreign tax credits, are not material.
The following table summarizes the activity related to the unrecognized tax benefits (in thousands):
|
| | | | |
| | Amount |
| | (in thousands) |
Balance at January 1, 2015 | | $ | 2,131 |
|
Increases related to 2015 tax positions | | 2,194 |
|
Decreases related to prior year tax positions | | — |
|
Balance as of December 31, 2015 | | 4,325 |
|
Increases related to 2016 tax positions | | 702 |
|
Decreases related to prior year tax positions | | — |
|
Balance as of December 31, 2016 | | 5,027 |
|
Increases related to current year tax positions | | 550 |
|
Increases related to prior year tax positions | | 69 |
|
Decreases related to prior year tax positions | | — |
|
Balance as of December 31, 2017 | | $ | 5,646 |
|
Interest and penalties related to the Company’s unrecognized tax benefits accrued at December 31, 2017, 2016 and 2015 were not material.
Due to the net operating loss carryforwards, the Company's United States federal and a majority of its state returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception. For Australia, Brazil, Canada, Germany, Italy, Japan, Singapore, and the United Kingdom, all tax years remain open for examination by the local country tax authorities, while for France only 2014 forward are open for examination. During the first quarter of 2017, the Internal Revenue Service ("IRS") commenced an examination of the 2015 tax year. The Company has not received and Notice of Proposed Adjustments (“NOPAs”) nor had a discussions with the IRS regarding any potential adjustments.
The Company does not expect its uncertain income tax positions to have a material impact on its consolidated financial statements within the next twelve months.