Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act of 2017, or the Tax Act, was enacted. The Tax Act contains several key tax provisions that affect us, including, but not limited to, reducing the U.S. federal corporate tax rate from 34% to 21% for tax years beginning after December 31, 2017, imposing a one-time mandatory transition tax on previously untaxed foreign earnings, and changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. On December 22, 2017, the SAB 118, which provides guidance on accounting for the Tax Act’s impact and allows registrants to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.

We currently maintain a full valuation allowance recorded against our U.S. federal deferred tax assets. As such, the provisional $19.7 million remeasurement of our deferred tax assets was offset by the change in our valuation allowance which resulted in no income tax expense or benefit. Because of our full valuation allowance and current year losses, there is no tax expense associated with the provisional $1.0 million of the one-time mandatory transition tax. We are still in the process of analyzing the impacts of the GILTI provision which may impact our effective tax rate in future years.

We expect to complete our assessment of the impacts of the Tax Act including the remeasurement of our deferred taxes, the one-time mandatory transition tax, and the policy decision regarding whether to record deferred taxes associated with GILTI within the measurement period provided by SAB 118. Our assessment of the impact of the Tax Act may differ from our provisional assessment during the measurement period due to, among other things, further refinement in our calculations, changes in interpretations and assumptions we have made, or guidance that may be issued.

The following table sets forth the geographical breakdown of the income (loss) before the provision for income taxes:



	Year Ended July 31,
	2018			2017			2016
	(in thousands)
Domestic	$	(36,455	)	$	(36,874	)	$	(28,227	)
International	4,146			2,291			1,257
Loss before income taxes	$	(32,309	)	$	(34,583	)	$	(26,970	)

The following table sets forth the components of the provision for income taxes:



	Year Ended July 31,
	2018			2017			2016
Current:	(in thousands)
Federal	$	—		$	—		$	—
State	(2		)	31			16
Foreign	1,480			874			452
Total current tax expense	1,478			905			468

Deferred:
Federal	—			—			—
State	—			—			—
Foreign	(141		)	(28		)	—
Total deferred tax expense	(141		)	(28		)	—

Total provision for income taxes	$	1,337		$	877		$	468

The following table presents the reconciliation of the statutory federal income tax rate to our effective tax rate:



	Year Ended July 31,
	2018		2017		2016
Tax at federal statutory rate	21.0	%	34.0	%	34.0	%
State taxes	—		1.5		1.8
Impact of foreign rate differential	0.3		(1.7	)	0.1
Meals and entertainment	(1.3	)	(0.5	)	(0.5	)
Stock-based compensation	(3.8	)	(2.8	)	(4.1	)
Impact of U.S. tax reform	(58.6	)	—		—
Provision to return adjustments	2.8		(0.3	)	—
U.S. tax credits	3.7		—		—
Change in valuation allowance	33.5		(32.4	)	(32.5	)
Other	(1.7	)	(0.3	)	(0.5	)
Effective tax rate	(4.1	)%	(2.5	)%	(1.7	)%

Our estimated effective tax rate for the periods presented differs from the U.S. statutory rate primarily due to the benefit of a portion of our earnings being taxed at rates lower than the U.S. statutory rate, offset by the impact of the valuation allowance we maintain against our U.S. federal and state deferred tax assets. The impact of the Tax Act includes the effect of remeasuring our deferred tax assets and liabilities at 21% plus the effects of the one-time mandatory transition tax.

The following table presents the tax effects of temporary differences that give rise to significant portions of our deferred tax assets and liabilities:



	July 31,
	2018			2017
	(in thousands)
Deferred tax assets:
Net operating losses carryovers	$	41,794		$	54,130
Accruals and reserves	2,863			2,807
Deferred revenue	6,071			5,436
Tax credits carryovers	6,118			—
Stock-based compensation	784			571
Property and equipment	303			339
Other	347			569
Gross deferred tax assets	58,280			63,852
Less: Valuation allowance	(45,578		)	(51,493		)
Total deferred tax assets	12,702			12,359

Deferred tax liabilities:
Deferred contract acquisition costs	(12,561		)	(12,331		)
Total deferred tax liabilities	(12,561		)	(12,331		)

Net deferred tax assets	$	141		$	28

As a result of certain realization requirements of ASC Topic 718, Compensation-Stock compensation, the table of deferred tax assets and liabilities does not include certain deferred tax assets as of July 31, 2017, that arose directly from tax deductions related to stock-based compensation which was in excess of the amount recognized for financial reporting. Additional paid-in capital will be increased by $0.9 million if and when such deferred tax assets are ultimately realized. As a result of the adoption of ASU 2016-09, as further discussed in Note 1 to these consolidated financial statements, in fiscal 2018 we recognized a U.S. federal and state deferred tax asset for this previously unrecognized excess tax benefits, which was offset by our U.S. federal and state valuation allowance.

A deferred tax liability has not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are indefinitely reinvested outside the U.S. Income taxes are generally incurred upon a repatriation of assets, a sale, or a liquidation of the subsidiary. The excess of the amount for financial reporting over the tax basis in the investments in foreign subsidiaries, as well as the unrecognized deferred tax liability, are not material for the periods presented.

The following table presents the change in the valuation allowance:



	Year Ended July 31,
	2018			2017		2016
	(in thousands)
Balance as of the beginning of the period	$	51,493		$	40,299	$	31,483
Change during the period	(5,915		)	11,194		8,816
Balance as of the end of the period	$	45,578		$	51,493	$	40,299

The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. We regularly assess the ability to realize our deferred tax assets and establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. We weigh all available positive and negative evidence, including our earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of objectively verifiable negative evidence, including our history of losses, we believe that it is more likely than not that our U.S. federal and, state deferred tax assets will not be realized as of July 31, 2018 and 2017, and as such, we have maintained a full valuation allowance against such deferred tax assets.

The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth. In the event we determine that we will be able to realize all or part of our net deferred tax assets in the future, the valuation allowance against deferred tax assets will be reversed in the period in which we make such determination. The release of a valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which the valuation allowance is released. The valuation allowance against our U.S. federal and state deferred tax assets decreased by $5.9 million, increased by $11.2 million and increased by $8.8 million in fiscal 2018, 2017, and 2016, respectively. The decrease in the valuation allowance in fiscal 2018 was primarily related to the change in the federal statutory rate, while the increase in the valuation allowance in fiscal 2017 and 2016, respectively, was related to tax losses for which insufficient positive evidence exists to support their realizability.

As of July 31, 2018 and 2017, we have net operating loss carryforwards for U.S. federal income tax purposes of $173.6 million and $150.0 million, respectively, which are available to offset future federal taxable income. The net operating losses for federal purposes will begin expiring in 2027. As of July 31, 2018 and 2017, we have net operating loss carryforwards for state income tax purposes of $62.4 million and $68.3 million, respectively. The net operating losses for state purposes will begin expiring at different periods beginning in 2024.

As of July 31, 2018, we had federal and California research and development tax credit carryforwards of approximately $4.5 million and $4.2 million, respectively. If not utilized, the federal credit carryforwards will begin expiring at different periods beginning in 2033. The California credit will carryforward indefinitely.

Federal and state tax laws impose restrictions on the utilization of net operating loss and research and development credit carryforwards in the event of a change in ownership of the Company as defined by the Internal Revenue Code, Sections 382 and 383. Under Section 382 and 383 of the Code, substantial changes in our ownership and the ownership of acquired companies may limit the amount of net operating loss and research and development credit carryforwards that are available to offset taxable income. The annual limitation would not automatically result in the loss of net operating loss or research and development credit carryforwards but may limit the amount available in any given future period.

We are subject to income taxes in the U.S. and various foreign jurisdictions. As of July 31, 2018, there are no significant tax jurisdictions under examination; however, all years are open for examination and may become subject to examination in the future. Significant judgment is required in evaluating our tax positions and determining our for income tax expense for the fiscal year. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. Our estimate of the potential outcome of any tax position is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. These unrecognized tax benefits are established when we believe that certain positions might be challenged despite of belief that our tax return positions are fully supportable. We recognize interest and penalties associated with our unrecognized tax benefits as a component of our income tax expense. For the periods presented, we did not have material interest or penalties associated with the unrecognized tax benefits in the consolidated financial statements.

We had $2.6 million of gross unrecognized tax benefits as of July 31, 2018. If recognized, these would affect our effective tax rate. However, the gross unrecognized tax benefits relate to income tax positions which, if recognized, would be in the form of carryforward deferred tax asset that would be offset by a valuation allowance. As of July 31, 2018, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.

The changes in our gross unrecognized tax benefits for fiscal 2018 consisted of the following:



	Amount
	(in thousands)
Balance as of July 31, 2017	$	—
Gross increase for tax positions of prior fiscal years	1,746
Gross increase for tax positions of current fiscal year	876
Balance as of July 31, 2018	$	2,622