INCOME TAXES
In December 2017, H.R.1, known as the Tax Cuts and Jobs Act, was signed into law. The Tax Cuts and Jobs Act, among other items, reduces the corporate income tax rate from 35% to 21%, effective January 1, 2018. As such, the Company has completed a revaluation of the Company's net deferred tax assets. The Company's deferred tax assets, net of deferred tax liabilities, represent expected corporate tax benefits anticipated to be realized in the future. The reduction in the federal corporate tax rate reduces these benefits.
The Company has evaluated the impact of the Tax Cuts and Jobs Act and has determined that this results in a reduction in the Company's deferred tax asset of $111.7 million in the fourth quarter of 2017. However, our lack of earnings history and the uncertainty surrounding our ability to generate taxable income prior to the utilization of the deferred tax assets is offset in full by a valuation allowance.
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence, including current and historical results of operations, future income projections and the overall prospects of our business. Based upon management’s assessment of all available evidence, we believe that it is more-likely-than-not that the deferred tax assets will not be realizable; and therefore, a full valuation allowance is established. The valuation allowance for deferred tax assets was $216.0 million and $289.7 million as of December 31, 2017 and 2016, respectively, a decrease of $73.7 million.
As of December 31, 2017, we have U.S. net operating loss (“NOL”) carryforwards of approximately $812.2 million. For income tax purposes, these NOLs will expire in the years 2019 through 2037. Due to our various equity transactions, the utilization of certain NOLs could be subject to annual limitations imposed by Internal Revenue Code Section 382 relating to the change of control provision and/or the separate return limitation year losses limitation.
For the years ended December 31, 2017, 2016 and 2015, we recognized $(0.2) million, $0.1 million and $0.1 million, respectively, in income tax (benefit) expense related to the recording of a deferred tax liability associated with capitalized goodwill, an indefinite-lived intangible asset that is being amortized for tax purposes. Indefinite-lived intangibles are non-monetary assets which are not amortized under GAAP since there is no foreseeable limit to the cash flows provided by them. Our lack of earnings history and the uncertainty surrounding our ability to generate taxable income prior to the reversal or expiration of such deferred tax liability were the primary factors considered by management when recording the valuation allowance against our deferred tax assets. However, with the reduction of the corporate income tax rate from 35% to 21%, effective January 1, 2018, the deferred tax liability associated with capitalized goodwill was reduced by $0.3 million generating current year income of $0.3 million.
The income tax provision consists of the following:
|
| | | | | | | | | | | |
(in thousands) | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
Current: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | — |
| | — |
| | — |
|
Total current | — |
| | — |
| | — |
|
Deferred: | | | | | |
Federal | (258 | ) | | 73 |
| | 81 |
|
State | 23 |
| | 7 |
| | 9 |
|
Total deferred | (235 | ) | | 80 |
| | 90 |
|
Total income taxes | $ | (235 | ) | | $ | 80 |
| | $ | 90 |
|
Income tax expense differed from amounts computed by applying the U.S. federal income tax rate of 34% to pretax loss as follows:
|
| | | | | | | | | | | |
| For the years ended December 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
Loss before income taxes, as reported in the consolidated statements of operations | $ | (163,675 | ) | | $ | (161,015 | ) | | $ | (123,055 | ) |
Computed “expected” tax benefit | (55,650 | ) | | (54,745 | ) | | (41,838 | ) |
Increase (decrease) in income taxes resulting from: | | | | | |
Expected (benefit) expense from state & local taxes | (5,307 | ) | | (5,222 | ) | | (3,991 | ) |
Stock-based compensation expense | (360 | ) | | (17 | ) | | (2,328 | ) |
Tax impact of derivative liability | 23,450 |
| | — |
| | 16,977 |
|
Permanent differences | (305 | ) | | 3,087 |
| | 1,445 |
|
Impact of state NOL carryforward change | 111,681 |
| | — |
| | — |
|
Prior year true-up | (2 | ) | | (58 | ) | | 2,191 |
|
Change in the balance of the valuation allowance for deferred tax assets allocated to income tax expense | (73,742 | ) | | 57,035 |
| | 27,634 |
|
| $ | (235 | ) | | $ | 80 |
| | $ | 90 |
|
The significant components of deferred income tax expense (benefit) attributable to loss from operations are as follows:
|
| | | | | | | | | | | |
| For the years ended December 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
Deferred tax expense (benefit) | $ | 50,057 |
| | $ | (56,955 | ) | | $ | (44,521 | ) |
Tax impact of derivative liability | 23,450 |
| | — |
| | 16,977 |
|
Increase in the valuation allowance for deferred tax asset | (73,742 | ) | | 57,035 |
| | 27,634 |
|
| $ | (235 | ) | | $ | 80 |
| | $ | 90 |
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below.
|
| | | | | | | |
(in thousands) | December 31,
2017 | | December 31,
2016 |
Deferred tax assets (liabilities): | | | |
Net operating loss carryforwards | $ | 193,310 |
| | $ | 255,809 |
|
Stock-based compensation expense | 14,315 |
| | 16,735 |
|
Capitalized inventory | 24 |
| | 2,044 |
|
Inventory reserves | 3,829 |
| | 9,288 |
|
Research and development | 2,242 |
| | 2,087 |
|
Intangible assets due to different amortization methods | 1,546 |
| | 2,495 |
|
Tax-deductible goodwill | (635 | ) | | (870 | ) |
Other temporary differences | 691 |
| | 1,241 |
|
Net deferred tax asset, excluding valuation allowance | 215,322 |
| | 288,829 |
|
Less valuation allowance | (215,957 | ) | | (289,699 | ) |
Net deferred tax liabilities | $ | (635 | ) | | $ | (870 | ) |
We file income tax returns in the U.S federal and various state and local jurisdictions. For federal and state income tax purposes, the 2016, 2015 and 2014 tax years remain open for examination under the normal three-year statute of limitations. The statute of limitations for income tax audits in the United States will commence upon utilization of net operating losses and will expire three years from the filing of the tax return.
There was no accrual for uncertain tax positions or for interest and penalties related to uncertain tax positions for 2017, 2016 and 2015. We do not believe that there will be a material change in our unrecognized tax positions over the next twelve months. All of the unrecognized tax benefits, if recognized, would be offset by the valuation allowance.