Income Taxes
Loss before provision for income taxes, classified by source of (loss)/income, is as follow:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
U.S. | $ | (69,034 | ) | | $ | (9,521 | ) | | $ | — |
|
Canada | (24,177 | ) | | (46,733 | ) | | (22,987 | ) |
Other Foreign | (32,916 | ) | | 3,849 |
| | — |
|
Loss before provision for income taxes | $ | (126,127 | ) | | $ | (52,405 | ) | | $ | (22,987 | ) |
(Provision) benefit for income taxes for the years ended December 31, 2017, 2016 and 2015 is as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Current (provision) benefit: | | | | | |
U.S. | $ | 106 |
| | $ | (2 | ) | | $ | — |
|
Canada | (3 | ) | | 105 |
| | — |
|
Other Foreign | (633 | ) | | (517 | ) | | — |
|
| (530 | ) | | (414 | ) | | — |
|
Deferred (provision): | | | | | |
Canada | — |
| | — |
| | (22 | ) |
Other Foreign | (53 | ) | | (51 | ) | | — |
|
| (53 | ) | | (51 | ) | | (22 | ) |
(Provision) for income taxes | $ | (583 | ) | | $ | (465 | ) | | $ | (22 | ) |
Differences between the Company’s statutory income tax rates and its effective income tax rates, as applied to the loss from continuing operations before income taxes for the years ended December 31, 2017, 2016 and 2015 are reconciled as follows:
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Canadian statutory tax rates | 26 | % | | 26 | % | | 26 | % |
Loss before income taxes | $ | (126,127 | ) | | $ | (52,405 | ) | | $ | (22,987 | ) |
Expected income tax benefit | 32,793 |
| | 13,625 |
| | 5,977 |
|
Net increase in valuation allowance | (13,895 | ) | | (13,684 | ) | | (2,486 | ) |
Investment tax credits | (172 | ) | | 868 |
| | (222 | ) |
Stock-based compensation | (270 | ) | | (133 | ) | | (606 | ) |
Foreign rate differential | 1,198 |
| | 532 |
| | — |
|
U.S. and Canada rate change | (19,774 | ) | | — |
| | — |
|
Non-taxable expenditures | — |
| | — |
| | 76 |
|
Change in uncertain tax positions | (20 | ) | | — |
| | (1,784 | ) |
Adjustments to capital losses for settlement of uncertain tax positions | — |
| | — |
| | (560 | ) |
Other | (443 | ) | | (1,673 | ) | | (417 | ) |
(Provision) for income taxes | $ | (583 | ) | | $ | (465 | ) | | $ | (22 | ) |
Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The primary components of the Company’s deferred tax assets and liabilities are comprised of the following:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in thousands) |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 68,915 |
| | $ | 51,808 |
|
Research and development credits | 14,198 |
| | 14,028 |
|
Stock-based compensation | 761 |
| | 108 |
|
Capitalized research expenses | 1,028 |
| | 2,124 |
|
Capital loss carryforwards | 39,087 |
| | 37,452 |
|
Depreciable and amortizable assets | 10,859 |
| | 13,597 |
|
Other temporary differences | 11,761 |
| | 13,736 |
|
Total gross deferred tax assets | 146,609 |
| | 132,853 |
|
Valuation allowance | (145,753 | ) | | (131,858 | ) |
Net deferred tax assets | $ | 856 |
| | $ | 995 |
|
As of December 31, 2017, the Company has a $0.9 million net deferred tax asset attributable to its profitable foreign subsidiaries. Additionally, as of December 31, 2017, the Company has a $145.8 million valuation allowance recorded against its U.S., Canadian and Swiss deferred tax assets. The valuation allowance increased approximately $13.9 million during the year ended December 31, 2017, primarily due to the deferred tax assets established in connection with the Company’s net operating loss carryforwards. If the Company is subsequently able to utilize all or a portion of the deferred tax assets for which the remaining valuation allowance has been established, the Company may be required to recognize these deferred tax assets through the reduction of the valuation allowance which could result in a material benefit to results of operations in the period in which the benefit is determined.
The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and concluded that based on the Company’s history of operating losses that it is more likely than not that the benefit of its U.S., Canadian and Swiss deferred tax assets will not be realized. Therefore, Company has provided a valuation allowance against its U.S., Canadian and Swiss deferred tax assets for all years presented.
As of December 31, 2017, the Company had approximately $267.2 million of U.S., Canadian and foreign net operating losses (“NOL”) of which $60.5 million relate to the Company's U.S. subsidiaries, $176.9 million relate to Canada and $29.8 million relate to the Company's Swiss subsidiary. The U.S. federal NOL carryforwards will expire at various dates from 2025 through 2037, if not utilized. As of December 31, 2017, the Company also had approximately $39.3 million of U.S. state NOL carryforwards that will expire at various dates from 2029 through 2037, if not utilized.
As of December 31, 2017, the Company also had approximately $13.5 million of Canadian national and provincial research and development credits available for carryforward. The research and development credit carryforwards will expire at various dates through 2036. As of December 31, 2017, the Company's Canadian Scientific, Research and Experimental Development pool was $11.4 million. Furthermore, as of December 31, 2017, the Company had approximately $289.5 million of Canadian capital loss carryforwards, which carryforward indefinitely. The deferred tax benefit of these loss carryforwards and research and development credits is ultimately subject to final determination by the respective taxation authorities.
Upon acquiring a company that has U.S. federal and state net operating loss carryforwards and federal and state tax credits, the Company prepared an assessment to determine if it has a legal right to use the acquired net operating losses and tax credits. In performing this assessment, the Company followed the regulations within the Internal Revenue Code ("IRC") Sections 382 and 383. The Company determined that the U.S. net operating losses and tax credits acquired in the Aegerion acquisition are subject to limitations under IRC Sections 382 and 383. Due to the ownership changes, the Company determined that its U.S. subsidiaries, including Aegerion, will only be able to utilize approximately $13.3 million of its pre-ownership change NOLs before expiration as a result of the annual Section 382 limitation. The Company has adjusted its NOL carryforward and the amounts above reflect the reduction for pre-ownership change NOLs that will expire before becoming available. The total available post-ownership change NOLs total $47.2 million. The Company has not performed a formal analysis to determine if the post-ownership change NOLs are subject to limitation under IRC Sections 382 and 383. The U.S. subsidiaries may experience ownership changes in the future as a result of subsequent shifts in share ownership that could further limit the use of the available net operating losses and credits.
The Company recorded a provision for uncertain tax positions ("UTP") of approximately $7.8 million offset by $7.4 million of the Company's deferred tax assets at December 31, 2017, for a net of $0.4 million for the provision for UTP as of December 31, 2017.
The following table summarizes the activity related to the Company’s provision for UTP:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Total provision for UTP as of January 1, | $ | 7,660 |
| | $ | 7,278 |
| | $ | 5,557 |
|
Current year acquisitions | — |
| | 911 |
| | — |
|
Increases related to current year tax positions | 62 |
| | — |
| | 347 |
|
Changes in tax positions of a prior period | 55 |
| | — |
| | 1,934 |
|
Lapse due to statute of limitations | — |
| | (342 | ) | | — |
|
Settlements with taxing authorities | — |
| | (187 | ) | | (560 | ) |
Total provision for UTP as of December 31, | 7,777 |
| | 7,660 |
| | 7,278 |
|
Deferred tax assets available to offset provision for UTP | (7,360 | ) | | (7,279 | ) | | (6,936 | ) |
Total provision for UTP as of December 31, | $ | 417 |
| | $ | 381 |
| | $ | 342 |
|
As of December 31, 2017, 2016 and 2015, the Company has accrued an insignificant amount of interest as a result of the deferred assets available to offset its provision for UTP. The increase in provision for UTP during 2016 was the result of transfer pricing adjustments made at the Company’s Swiss subsidiary as a result of its acquisition of Aegerion. During 2016, the Company settled a dispute with the Canadian Revenue Authority surrounding its capital loss carryover as a result of the remaining contingent consideration owed from the Company's previous sale of its subsidiaries, QLT USA, Inc., and Eligard® to TOLMAR Holding, Inc., which resulted in a decrease of unrecognized tax benefits. Additionally, during 2016, the period in which the 2008 Canadian income tax return was subject to reassessment expired, which resulted in a reduction of the provision for UTP surrounding its share buyback costs that arose during that tax year.
The Company and its subsidiaries file income tax returns in Canada, the U.S., and various U.S. states and in foreign jurisdictions. The Canadian income tax returns are generally subject to tax examination for the tax years ended December 31, 2011 through December 31, 2017. The U.S., U.S. state and foreign income tax returns are generally subject to tax examinations for the tax years ended December 31, 2014 through December 31, 2017. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the tax authorities.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). This Act includes significant changes in U.S. tax law, including a reduction in the corporate tax rates and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. The Act reduced the U.S. corporate tax rate from the current rate of 35% to 21% for tax years beginning after December 31, 2017. As a result of the Act, the Company was required to revalue its existing U.S. deferred tax assets and liabilities as of December 31, 2017 from the 35% federal rate in effect through the end of 2017, to the new 21% rate. As a result of the change in law, the Company recorded a current period tax expense of $21.5 million and a corresponding reduction in the associated valuation allowance for a net adjustment of zero to its consolidated statement of operations for the year ended December 31, 2017. The Act will require the Company to pay tax on the unremitted earnings of its foreign subsidiaries through December 31, 2017. The Company has estimated that its foreign subsidiaries are in an overall net earnings deficit and as such would have no incremental U.S. tax and therefore has recorded no tax liability on its unremitted earnings at December 31, 2017.
As a result of the enactment of the Act, the Company has reviewed the unremitted earnings of its foreign subsidiaries and estimated that because the foreign subsidiaries are in an overall earnings deficit at December 31, 2017 that there is no incremental amount of earnings to include in its U.S. taxable income, and no incremental U.S. tax due to the current year losses. As a result, the Company does not have any untaxed, undistributed earnings. However, the Company is indefinitely invested in the foreign subsidiaries, and has not provided deferred taxes for any other basis differences in its foreign subsidiaries.
The Act creates a new requirement that certain income earned by a foreign subsidiary must be included in the income of the foreign subsidiaries U.S. shareholder. This income (called Global Intangible Low-Taxed Income, or "GILTI") is defined as the excess of a foreign subsidiary's income over a nominal return on fixed assets. The Company expects to be subject to this inclusion in future years. The Company has elected to treat the effects of this provision as a period cost, and therefore has not considered the impacts of GILTI on its deferred taxes as of December 31, 2017.
The Company’s preliminary estimate of the Act and the remeasurement of the Company's U.S. deferred tax assets and liabilities is subject to the finalization of the its analysis related to certain matters, such as developing interpretations of the provisions of the Act, changes to certain estimates and the filing of the Company's U.S. tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Act may require further adjustments and changes in the Company's estimates.
In conjunction with the tax law changes, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Act.