Income Taxes
Income (Loss) before income taxes subject to taxes in the following jurisdictions is as follows: |
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | 12.4 |
| | $ | (44.4 | ) | | $ | (57.8 | ) |
Outside of the United States | (61.0 | ) | | (20.5 | ) | | 0.3 |
|
Total | $ | (48.6 | ) | | $ | (64.9 | ) | | $ | (57.5 | ) |
Significant components of the provision for income taxes are as follows: |
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 0.1 |
| | 0.1 |
| | 0.1 |
|
Foreign | 1.5 |
| | 0.8 |
| | — |
|
Total current income taxes | 1.6 |
| | 0.9 |
| | 0.1 |
|
Deferred: | | | | | |
Federal | — |
| | (0.1 | ) | | — |
|
State | — |
| | — |
| | — |
|
Foreign | — |
| | (0.1 | ) | | — |
|
Total deferred income taxes | — |
| | (0.2 | ) | | — |
|
Total | $ | 1.6 |
| | $ | 0.7 |
| | $ | 0.1 |
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has made a provisional calculation of the impact of the Act in its year end income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing. As a result, we have reduced our net U.S. deferred tax assets by a provisional amount of $105.7 million offset by a decrease in the valuation allowance, resulting in no tax expense. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was nil based on cumulative foreign deficits in earnings of $41.2 million.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US 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. In accordance with SAB 118, the Company has determined that the $105.7 million of deferred tax expense offset by an increase in valuation allowance in connection with the remeasurement of our U.S. deferred tax assets and liabilities, and the analysis of our foreign deficits in earnings in connection with the transition tax on the mandatory deemed repatriation of foreign earnings were provisional amounts and reasonable estimates at December 31, 2017. Additional work is necessary to do a more detailed analysis of the gross balances of our U.S. deferred tax assets and liabilities. Any subsequent adjustment to these amounts are expected to have no tax effect due to our valuation allowance against net deferred tax assets. We are evaluating the newly enacted tax on global intangible low-taxed income ("GILTI") and have not yet made an accounting policy election to reflect GILTI in deferred taxes or as period costs. This analysis will be completed within one year of the enactment date.
At December 31, 2017, we had federal, state and foreign tax net operating loss carryforwards of approximately $761.6 million, $456.3 million, and $42.1 million respectively. The federal and state tax loss carryforwards will begin to expire in 2020 and 2018, respectively, unless previously utilized. California net operating loss carryforwards of $20.7 million will expire in 2028. California net operating loss carryforwards of $324.2 million will expire from 2029 through 2037. Other state net operating loss carryforwards of $111.4 million will begin to expire in 2020. The foreign net operating losses carry forward indefinitely.
We also had federal and state research and development tax credit carryforwards of approximately $33.3 million and $33.8 million, respectively. The federal research and development tax credit will begin to expire in 2020, unless previously utilized. The state research and development tax credit will carryforward indefinitely until utilized.
Utilization of net operating losses and credit carryforwards are subject to an annual limitation due to ownership change limitations provided by Section 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state provisions. An ownership change limitation occurred as a result of the stock offering completed in February 2009. The limitation will likely result in approximately $2.1 million of U.S. income tax credits that will expire unused. The related deferred tax assets have been removed from the components of our deferred tax assets as summarized below. The tax benefits related to the remaining federal and state net operating losses and tax credit carryforwards may be further limited or lost if future cumulative changes in ownership exceed 50% within any three-year period.
Significant components of our deferred tax assets as of December 31, 2017 and 2016 are shown below (in millions). A valuation allowance of approximately $263.5 million has been established as of December 31, 2017 to offset the deferred tax assets, as realization of such assets is uncertain. |
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 188.7 |
| | $ | 101.9 |
|
Capitalized research and development expenses | 8.4 |
| | 14.3 |
|
Tax credits | 47.8 |
| | 30.7 |
|
Share-based compensation | 13.8 |
| | 24.9 |
|
Fixed and intangible assets | 0.4 |
| | — |
|
Accrued liabilities and reserves | 20.9 |
| | 26.0 |
|
Total gross deferred tax assets | 280.0 |
| | 197.8 |
|
Less: valuation allowance | (263.5 | ) | | (193.4 | ) |
Deferred tax liability: | | | |
Fixed assets and acquired intangibles assets | (0.1 | ) | | (4.3 | ) |
Convertible debt discount | (15.9 | ) | | — |
|
Unrealized exchange gain | (0.4 | ) | | — |
|
Net deferred tax asset (liability) | $ | 0.1 |
| | $ | 0.1 |
|
In February 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) ("ASU 2016-09"), which is intended to simplify several areas of accounting for share-based payment arrangements. The amendments in this update cover such areas as the recognition for excess tax benefits and deficiencies, the classification of those excess benefits on the statement of cash flows, an accounting policy election for forfeitures, an amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. $161.8 million of excess tax benefits was recorded as an increase in deferred tax assets, with an offsetting increase in valuation allowance, through retained earnings.
The reconciliation between our effective tax rate on income (loss) from continuing operations and the statutory rate is as follows: |
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Income taxes at statutory rates | $ | (17.0 | ) | | $ | (22.7 | ) | | $ | (20.1 | ) |
State income tax, net of federal benefit | (0.7 | ) | | 1.2 |
| | (1.0 | ) |
Permanent items | 0.7 |
| | 0.8 |
| | 0.3 |
|
Research and development credits | (13.3 | ) | | (11.7 | ) | | (10.0 | ) |
Foreign rate differential | 5.4 |
| | 4.5 |
| | — |
|
Stock and officers compensation | (10.4 | ) | | 4.0 |
| | 3.1 |
|
Rate change | (0.1 | ) | | (0.1 | ) | | 0.2 |
|
Unrecognized tax benefits | (15.4 | ) | | 27.7 |
| | — |
|
Impact of Tax Cuts and Jobs Act of 2017 | 105.7 |
| | — |
| | — |
|
Other | (2.2 | ) | | — |
| | 0.2 |
|
Change in valuation allowance | (51.1 | ) | | (3.0 | ) | | 27.4 |
|
Income taxes at effective rates | $ | 1.6 |
| | $ | 0.7 |
| | $ | 0.1 |
|
The following table summarizes the activity related to our gross unrecognized tax benefits (in millions): |
| | | |
Balance at January 1, 2015 | $ | 7.6 |
|
Increases related to prior year tax positions | 2.6 |
|
Increase related to current year tax positions | 5.4 |
|
Balance at December 31, 2015 | 15.6 |
|
Decreases related to prior year tax positions | (8.4 | ) |
Increases related to current year tax positions | 32.6 |
|
Balance at December 31, 2016 | 39.8 |
|
Decreases related to prior year tax positions | (14.9 | ) |
Increases related to current year tax positions | 3.3 |
|
Decrease related to Tax Cuts and Jobs Act of 2017 | (5.4 | ) |
Balance at December 31, 2017 | $ | 22.8 |
|
Due to the valuation allowance recorded against our deferred tax assets, none of the total unrecognized tax benefits as of December 31, 2017 would reduce our annual effective tax rate if recognized. Interest and penalties are classified as a component of income tax expense and were not material for all the periods presented. Due to net operating losses incurred, tax years from 1999 and forward for federal and state purposes and foreign jurisdictions from 2016 and forward remain open to examination by the major taxing jurisdictions to which we are subject. The IRS commenced an audit of our 2015 and 2016 federal income tax returns in February 2018. We do not expect any changes to our unrecognized tax benefits over the next twelve months.
We intend to indefinitely reinvest all current accumulated earnings and profits related to our foreign subsidiaries to ensure working capital to support and expand existing operations outside of the United States. Accordingly, no U.S. income taxes have been provided on $1.2 million of undistributed earnings of our foreign subsidiaries, as we currently intend to indefinitely reinvest these earnings in our foreign operations as of December 31, 2017. The amount of unrecognized deferred U.S. income tax liability related to these earnings is $0.4 million.