Income Taxes
Income (loss) before income taxes consists of the following (in thousands):
|
| | | | | | | | | | | |
| Year Ended February 28/29, |
| 2017 | | 2016 | | 2015 |
United States | $ | 12,276 |
| | $ | (7,792 | ) | | $ | (7,326 | ) |
Foreign | 9,712 |
| | 643 |
| | 2,730 |
|
| $ | 21,988 |
|
| $ | (7,149 | ) |
| $ | (4,596 | ) |
The provision for (benefit from) income taxes consists of the following (in thousands):
|
| | | | | | | | | | | |
| Year Ended February 28/29, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 7,880 |
| | $ | 2,519 |
| | $ | 2,479 |
|
State | 1,439 |
| | 839 |
| | 299 |
|
Foreign | 792 |
| | 507 |
| | 863 |
|
| 10,111 |
| | 3,865 |
| | 3,641 |
|
Deferred: | | | | | |
Federal | 357 |
| | (2,707 | ) | | 51,820 |
|
State | 13 |
| | (850 | ) | | 4,674 |
|
Foreign | 1,272 |
| | (3,035 | ) | | 2,767 |
|
| 1,642 |
| | (6,592 | ) | | 59,261 |
|
| $ | 11,753 |
|
| $ | (2,727 | ) |
| $ | 62,902 |
|
Deferred tax assets (liabilities) comprise the following (in thousands):
|
| | | | | | | |
| As of February 28/29, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Deferred revenue | $ | 65,152 |
| | $ | 63,357 |
|
Stock-based compensation | 9,335 |
| | 6,983 |
|
Accruals and other | 5,228 |
| | 4,606 |
|
Research and development credits | 5,436 |
| | 6,484 |
|
Net operating losses | 9,424 |
| | 12,705 |
|
Total deferred tax assets | 94,575 |
| | 94,135 |
|
Valuation allowance | (77,513 | ) | | (73,399 | ) |
Total deferred tax assets, net of valuation allowance | 17,062 |
| | 20,736 |
|
Deferred tax liabilities: | | | |
Depreciation and amortization | (12,642 | ) | | (14,954 | ) |
Prepaid expense and other | (1,372 | ) | | (1,151 | ) |
Deferred sales commission | (4,297 | ) | | (4,117 | ) |
Total deferred tax liabilities | (18,311 | ) | | (20,222 | ) |
Net deferred tax assets (liabilities) | $ | (1,249 | ) |
| $ | 514 |
|
The following is a reconciliation of the statutory federal income tax rate to our effective tax rate (in thousands):
|
| | | | | | | | | | | |
| Year Ended February 28/29, |
| 2017 | | 2016 | | 2015 |
Tax expense (benefit) at federal statutory rate | $ | 7,696 |
| | $ | (2,502 | ) | | $ | (1,608 | ) |
State taxes, net of federal benefit | 1,071 |
| | (363 | ) | | 4,845 |
|
Non-deductible expenses | 295 |
| | 368 |
| | 823 |
|
Stock-based compensation | 1,241 |
| | 2,134 |
| | 520 |
|
Transaction costs | 179 |
| | 732 |
| | (1,454 | ) |
Change in valuation allowance | 3,291 |
| | 1,674 |
| | 58,685 |
|
Foreign rate differential | 941 |
| | (2,752 | ) | | 2,730 |
|
Research and development credits | (1,995 | ) | | (2,482 | ) | | (1,792 | ) |
Domestic production activities deduction | (769 | ) | | (63 | ) | | — |
|
Litigation settlements | — |
| | 584 |
| | — |
|
Other | (197 | ) | | (57 | ) | | 153 |
|
| $ | 11,753 |
| | $ | (2,727 | ) | | $ | 62,902 |
|
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
In fiscal 2015, we established a valuation allowance against a significant portion of our deferred tax assets, including U.S. federal and state deferred tax assets and certain foreign deferred tax assets, because realization of these tax benefits through future taxable income did not meet the more-likely-than-not threshold. We intend to maintain the valuation allowances until sufficient positive evidence exists to support its reversal. A valuation allowance of $77.5 million and $73.4 million is provided against our deferred tax assets as of February 28, 2017 and February 29, 2016, respectively, primarily related to temporary differences, foreign net operating losses, research credits and net operating losses acquired as part of our acquisitions. The net change in valuation allowance for the year ended February 28, 2017 was $4.1 million and primarily related to the change in the temporary differences.
Net excess tax benefits resulting from our equity compensation plans are recorded as an increase in stockholders’ equity and were $1.9 million, $3.8 million and $8.9 million in fiscal 2017, 2016 and 2015, respectively.
As of February 28, 2017, we had $15.9 million of federal and $6.8 million of state net operating loss carryforwards available. If not utilized, the federal net operating losses expire in various fiscal years ending between 2019 and 2035. The state net operating losses expire in various fiscal years ending between 2028 and 2035. We have foreign net operating losses of $9.9 million. Of these, $9.6 million of the net operating losses can be carried forward indefinitely. The remaining foreign net operating losses expire in various fiscal years, starting with fiscal 2019, if not utilized.
We had research and development credit carryforwards of $0.6 million, $6.5 million and $0.3 million for federal, California and other state income tax purposes, respectively. If not utilized, the federal research and development credit begins to expire in fiscal 2029 while the California credit can be carried forward indefinitely. If not utilized, other state research and development credit begins to expire in fiscal 2021. We have a California Enterprise Zone credit of $0.3 million, which will begin to expire in fiscal 2024, if not utilized.
Utilization of our net operating loss and credit carryforwards may be subject to annual limitations due to ownership change provisions 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 tax credits before utilization. We have performed an analysis under Section 382 of the Internal Revenue Code on behalf of our recent acquisition of Intronis as of October 12, 2015 and it does not appear that Intronis has experienced an ownership change prior to our acquisition. As a result, the existing net operating losses and tax credits are not currently subject to limitations arising from an ownership change, other than the annual limitation arising from our acquisition of Intronis. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code and result in a limitation on our net operating losses and tax credits.
As of February 28, 2017, we had $6.7 million of cumulative undistributed earnings of our foreign subsidiaries. Deferred tax liabilities have not been recognized for undistributed earnings of foreign subsidiaries because we intend to permanently reinvest such undistributed earnings outside the United States. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income taxes previously paid on these earnings. Determination of the amount of an unrecognized deferred tax liability related to these earnings is not practicable.
Our total unrecognized tax benefits as of February 28, 2017, February 29, 2016 and February 28, 2015 were $10.0 million, $6.4 million and $5.3 million, respectively. Total unrecognized tax benefits that, if recognized, would affect our effective tax rate were $5.1 million, $2.6 million and $4.3 million as of February 28, 2017, February 29, 2016 and February 28, 2015, respectively.
The following table summarizes the activity related to our gross unrecognized tax benefits (in thousands):
|
| | | | | | | | | | | |
| Year Ended February 28/29, |
| 2017 | | 2016 | | 2015 |
Balance at beginning of year | $ | 6,388 |
| | $ | 5,322 |
| | $ | 4,980 |
|
Tax positions related to the current year: | | | | | |
Increases | 3,879 |
| | 1,841 |
| | 1,050 |
|
Tax positions related to prior years: | | | | | |
Increases | — |
| | 231 |
| | 58 |
|
Decreases | (34 | ) | | (4 | ) | | (53 | ) |
Settlements with taxing authorities: | | | | | |
Settlements | — |
| | (710 | ) | | — |
|
Releases—statute of limitations expired | (276 | ) | | (292 | ) | | (713 | ) |
Balance at the end of the year | $ | 9,957 |
|
| $ | 6,388 |
|
| $ | 5,322 |
|
We recognize interest and/or penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. During fiscal 2017, 2016 and 2015, interest and penalties recorded in the consolidated statements of operations were $0.1 million, zero and $0.1 million, respectively. The amounts of accrued interest and penalties recorded on the consolidated balance sheets as of February 28, 2017 and February 29, 2016 were $0.9 million and $0.8 million, respectively. We do not believe there will be material changes in our unrecognized tax positions over the next 12 months. Our policy to include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes did not change.
We file income tax returns in the U.S. federal jurisdiction, various states and certain foreign jurisdictions. The statute of limitations have not expired for audits of fiscal 2014 through 2017 and fiscal 2012 through 2017 in the U.S. federal and state jurisdictions, respectively, and for fiscal 2011 through 2017 in foreign jurisdictions. In fiscal 2017, we closed the tax audit of fiscal year 2015 by the Internal Revenue Service ("IRS") of the United States.