Entity information:
Income Taxes
The Tax Reform, which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income tax system. The Tax Reform reduces the corporate income tax rate from 35% to 21%, requires companies to pay a one-time transaction tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted subject to Staff Accounting Bulletin 118 which provides for a measurement period to complete the accounting for certain elements of the tax reform. We have not yet completed our evaluation of the impact of the Tax Reform on our financial statements; however, we have remeasured assets at December 31, 2017 based on the new Federal income tax rate of 21%. We will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we gain a more thorough understanding of the Tax Reform. The following is a summary of income (loss) before income taxes by geography (in thousands):
 
Years Ended December 31,
 
2017

2016

2015
U.S.
$
(19,314
)
 
$
(9,265
)
 
$
(17,672
)
Foreign
3,844

 
3,050

 
2,489

Total
$
(15,470
)
 
$
(6,215
)
 
$
(15,183
)

The components of the provision for income taxes are as follows (in thousands):
 
Years Ended December 31,
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
U.S. - Federal
$
(1,269
)
 
$
—

 
$
—

U.S. - State
96

 
73

 
86

Foreign
1,540

 
1,200

 
1,225

Total Current
367

 
1,273

 
1,311

Deferred:
 
 
 
 
 
Foreign
(512
)
 
(171
)
 
(234
)
Total Deferred
(512
)
 
(171
)
 
(234
)
Total Provision
$
(145
)
 
$
1,102

 
$
1,077


We recognized a provision for income taxes during each of 2017, 2016 and 2015 related to the profitable operations of certain foreign subsidiaries. However, the provision recognized during 2017 includes the impact of an allocation of U.S. tax expense between continuing operations and total other comprehensive income (loss) (Intraperiod Tax Allocation). Such allocation resulted in a decrease to the provision for income taxes of $1.3 million during 2017. This allocation has no impact on total comprehensive loss or total stockholders' equity for 2017.
A reconciliation of the U.S. federal statutory tax rate to the effective tax rate is as follows:
 
Years Ended December 31,
 
2017
 
2016
 
2015
Federal statutory rate
34.0
 %
 
34.0
 %
 
34.0
 %
Stock compensation
25.7
 %
 
(1.5
)%
 
(2.5
)%
State income tax, net of federal tax benefit
2.3
 %
 
(2.3
)%
 
(2.8
)%
U.S. research credits
6.7
 %
 
18.9
 %
 
(0.3
)%
Foreign income inclusion in the U.S.
(4.7
)%
 
(10.4
)%
 
(5.0
)%
Valuation allowance
149.4
 %
 
(47.4
)%
 
(25.8
)%
Change in tax reserves
(1.4
)%
 
(0.5
)%
 
(0.5
)%
Minority Interest
(1.6
)%
 
(15.9
)%
 
(0.9
)%
Tax Reform impact
(344.6
)%
 
—
 %
 
—
 %
Intraperiod tax allocation
8.2
 %
 
—
 %
 
—
 %
ASU 2016-09
126.7
 %
 
—
 %
 
—
 %
Other, net
0.2
 %
 
7.4
 %
 
(3.3
)%
Effective tax rate
0.9
 %
 
(17.7
)%
 
(7.1
)%

We remeasured certain deferred tax assets and liabilities based on the new Federal income tax rate of 21%. Such remeasurement resulted in a one-time net decrease of approximately $53 million to our U.S. deferred tax assets and liabilities with a corresponding decrease to our valuation allowance. This change represents our best estimate of the effects of the Tax Reform at the time of the preparation of this Annual Report on Form 10-K. The actual impact is subject to change from these estimates and such change may be significant, pending the completion of our analysis of certain aspects of the Tax Reform and refining our calculations.
Effective January 1, 2017 we adopted ASU No. 2016-09: “Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09) which resulted in an increase in our gross U.S. federal and state net operating loss carryforwards net operating loss carryforwards deferred tax asset of $52.9 million and $34.3 million, respectively, with a corresponding increase to our valuation allowance.
Deferred income tax assets and liabilities reflect the tax effects of differences in the recognition of income and expense items for tax and financial reporting purposes. Deferred tax assets (liabilities) are made up of the following (in thousands):
 
December 31,
 
2017
 
2016
Deferred tax assets:
 
 
 
Net operating loss carryforwards
$
92,315

 
$
115,151

Tax credits
12,706

 
11,180

Stock-based compensation
4,922

 
7,339

Capitalized research and development
1,126

 
2,167

Financing liabilities
5,531

 
5,161

Other
7,613

 
8,349

Total deferred tax assets
124,213

 
149,347

Deferred tax liabilities:
 
 
 
Fixed assets
(5,485
)
 
(5,754
)
Intangible assets
(1,902
)
 
(3,606
)
Other
(222
)
 
(187
)
Total deferred tax liabilities
(7,609
)
 
(9,547
)
 
 
 
 
Net deferred tax assets before valuation allowance
116,604

 
139,800

Less valuation allowance
(115,035
)
 
(138,795
)
Net deferred tax assets
$
1,569

 
$
1,005


As of December 31, 2017, we had gross U.S. federal and state net operating loss carryforwards of approximately $390 million and $182 million, respectively, available to offset future taxable income. The federal and state net operating loss carryforwards will expire between 2018 and 2037 if not utilized. We also had federal and state research and development credit carryforwards of $8.5 million and $3.0 million ($3.9 million gross), respectively, which begin to expire in 2020 if not utilized. We also had foreign tax credits of approximately $1.0 million that will expire between 2018 and 2021 if not utilized. All years remain open for examination by the United States Internal Revenue Service (IRS) due to the losses incurred and years 2011 through 2017 remain open for examination in the various states and non-US tax jurisdictions in which we files tax returns.
During 2017, the valuation allowance decreased by approximately $23.8 million, primarily due to the reduction in our deferred tax assets resulting from remeasuring them at the new Federal income tax rate, offset in part by an increase in our net operating loss carryfowards resulting from the adoption of ASU 2016-09.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A full valuation allowance has been recorded in the accompanying consolidated financial statements to offset our U.S. and specific foreign deferred tax assets because the future realizability of such assets is uncertain. In assessing the realizability of deferred tax assets we consider, among other things, the expected reversal of deferred tax liabilities and projected future taxable income. Valuation allowances are reversed only when we have adequate history of taxable income and projections for future taxable income. We believe that the future realization of these assets is not more likely than not given the expected future tax losses in these jurisdictions.
Under the provisions of the Internal Revenue Code, the net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50 percent, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed several financings since its inception which it believes has resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code. We believe $1.5 million of our net operating losses will expire unused due to limitations.
For applicable years, the Company generated research credits but has not conducted a study to document its qualified activities. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development credit carry-forwards and the valuation allowance.
The below table details the changes in unrecognized tax benefits, which if recognized would favorably impact our effective tax rate (in thousands):
 
Years Ended December 31,
 
2017
 
2016
 
2015
Balance at beginning of the year
$
517

 
$
379

 
$
347

Increase in unrecognized tax benefits as a result of tax positions taken during the current year
275

 
89

 
66

Increase (decrease) in unrecognized tax benefits as a result of tax positions taken during a prior year
50

 
115

 
(34
)
Reductions due to lapse of applicable statute of limitations
(78
)
 
(66
)
 
—

Balance at end of year
$
764

 
$
517

 
$
379


As of December 31, 2017, we had a liability for unrecognized tax benefits included in the balance sheet of approximately $0.8 million, all of which would impact our effective tax rate if recognized. We had less than $0.1 million accrued as of December 31, 2017, 2016 and 2015 for interest and penalties related to unrecognized tax benefits.
We monitor the undistributed earnings of foreign subsidiaries and, as necessary, provide for income taxes on those earnings that are not deemed permanently invested. As of December 31, 2017, there were no significant undistributed earnings of foreign subsidiaries that were deemed permanently invested.