11. INCOME TAXES
The components of income tax expense for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Current: |
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Federal |
$ | — | $ | — | $ | — | ||||||
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State and local |
23 | 67 | 58 | |||||||||
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Foreign |
2,793 | 1,130 | 514 | |||||||||
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Total current tax expense |
2,816 | 1,197 | 572 | |||||||||
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Total deferred tax (benefit) expense |
(330 | ) | 27 | (140 | ) | |||||||
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Income tax expense |
$ | 2,486 | $ | 1,224 | $ | 432 | ||||||
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The components of loss before income taxes by United States and foreign jurisdictions are as follows (in thousands):
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| United States | $157,688 | $209,882 | $137,713 | |||||||||
| Foreign | 44,333 | 40,582 | 40,972 | |||||||||
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Loss before income tax |
$ | 202,021 | $ | 250,464 | $ | 178,685 | ||||||
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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows (in thousands):
| December 31, | ||||||||
| 2017 | 2016 | |||||||
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Deferred tax assets: |
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Net operating loss carryforwards |
$ | 136,596 | $ | 132,744 | ||||
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Research and development credits |
14,445 | 8,997 | ||||||
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Warrant expense |
12,528 | 19,312 | ||||||
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Depreciation and amortization |
1,191 | 1,105 | ||||||
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Accruals and reserves |
1,206 | 3,005 | ||||||
| Deferred revenue | 14,000 | 9,093 | ||||||
| Stock-based compensation expense | 8,412 | 15,865 | ||||||
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Other |
1,145 | 2,037 | ||||||
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Gross deferred tax assets |
189,523 | 192,158 | ||||||
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Valuation allowance |
(189,298 | ) | (192,152 | ) | ||||
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Intangibles |
(201 | ) | (312 | ) | ||||
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Net deferred tax assets (liabilities) |
$ | 24 | $ | (306 | ) | |||
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The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Tax at federal statutory rate |
34.00 | % | 34.00 | % | 34.00 | % | ||||||
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State and local taxes, net of federal benefit |
2.28 | 2.54 | 2.93 | |||||||||
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Permanent differences and other items not individually material |
(0.16 | ) | (0.08 | ) | (0.26 | ) | ||||||
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Stock-based compensation expense |
1.39 | (8.24 | ) | (2.29 | ) | |||||||
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Credits |
2.24 | 2.01 | 0.62 | |||||||||
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Foreign tax differential |
(8.68 | ) | (5.97 | ) | (8.01 | ) | ||||||
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Change in valuation allowance |
1.41 | (24.75 | ) | (27.23 | ) | |||||||
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Change in federal tax rate |
(40.86 | ) | — | — | ||||||||
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Adoption of ASU 2016-09 |
7.15 | — | — | |||||||||
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Income tax expense |
(1.23 | )% | (0.49 | )% | (0.24 | )% | ||||||
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The Company’s effective tax rate for the period ended December 31, 2017 was lower than the statutory tax rate primarily because of the valuation allowance on its U.S. and foreign deferred tax assets and the losses of foreign subsidiaries taxed at lower rates, partially offset by state taxes and tax credits. The losses of the foreign subsidiaries were generated primarily by the Company’s cost sharing agreement with its Netherlands operations. The income tax expense for the years ended December 31, 2017, 2016 and 2015 primarily relate to state minimum income tax, non-recoverable withholding tax and income tax on the Company’s earnings in foreign jurisdictions.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The new legislation decreases the U.S. corporate federal income tax rate from 35 percent to 21 percent effective January 1, 2018. The Company revalued its deferred tax assets and liabilities accordingly. There was no net impact on recorded deferred tax balances, as the remeasurement of net deferred tax assets was offset by a change in valuation allowance. The Act imposes a one-time deemed repatriation tax on undistributed foreign earnings. The Company did not have a deemed repatriation due to its foreign earnings deficits. The Act also includes a number of other provisions including the elimination of loss carrybacks and limitations on the use of future losses, repeal of the alternative minimum tax regime and the introduction of a base erosion and anti-abuse tax. These provisions are not expected to have an immediate effect on the Company.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 23, 2017 regarding application of the Act. It provides a “measurement period,” lasting through December 22, 2018, to allow registrants time to obtain, prepare and analyze information to complete the accounting required under ASC 740, Income Taxes. While the Company was able to make reasonable estimates under SAB 118 for the impact of the reduction in the corporate tax rate and the deemed repatriation transition tax as noted above, the Company has not completed its analysis of other changes to the Act. The final impacts of the Act may differ from the above estimates, possibly materially, due to, among other things, changes in interpretations of the Act, any legislative action to address questions that arise because of the Act, any changes in accounting standards for income taxes or related interpretations in response to the Act or any updates or changes to estimates the Company has utilized under SAB 118. The Company will continue to analyze the impact of the Act as additional information and guidance is provided and complete our analysis within the measurement period in accordance with SAB 118.
A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. The Company has established a valuation allowance to offset net deferred tax assets at December 31, 2017 due to the uncertainty of realizing future tax benefits from its NOL carryforwards and other deferred tax assets. The net valuation allowance decreased by approximately $2.9 million during the year ended December 31, 2017. As of December 31, 2017, the Company had NOL carryforwards for federal and state and local tax purposes of approximately $525.3 million and $405.7 million, respectively. The NOL carryforwards will expire at various dates beginning in 2031 (federal) and 2018 (state and local), unless previously utilized. The Company also has federal and state research and development tax credit carryforwards of approximately $11.8 million and $9.5 million, respectively. The federal tax credits will expire at various dates beginning in 2031, unless previously utilized. The state tax credits do not expire and will carry forward indefinitely until utilized.
Current laws impose substantial restrictions on the utilization of NOLs and credit carryforwards in the event of an “ownership change” within a three-year period as defined by the Internal Revenue Code Section 382. If there should be an ownership change, the Company’s ability to utilize its carryforwards could be limited.
The Company previously considered the earnings in its non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. As noted above, the Company did not have a deemed repatriation due to its foreign earnings deficits. The Company has accumulated deficits for U.S. tax purposes in all of its non-U.S.subsidiaries as of December 31, 2017, and therefore, it does not have any foreign earnings to distribute under U.S. tax law. However, the actual repatriation of foreign undistributed earnings determined under foreign local tax law could still be subject to additional foreign withholding taxes.
The Company is currently analyzing its global working capital and cash requirements and the potential tax liabilities attributable to a repatriation, but it has not yet determined whether its analysis will result in repatriation of any earnings from its non-U.S. subsidiaries. Accordingly, the Company has not recorded any deferred taxes attributable to its investments in its foreign subsidiaries. The Company will record the tax effects of any change in its prior assertion in the period that it completes its analysis and is able to make a reasonable estimate, and disclose any unrecognized deferred tax liability for temporary differences related to its foreign investments, if practicable.
The Company adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting as of January 1, 2017. See Note 2—“Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements” for more information.
The Company recorded unrecognized tax benefits for uncertain tax positions of approximately $5.3 million and $3.5 million as of December 31, 2017 and 2016, respectively, of which none would impact the effective tax rate, if recognized, since the benefit would be offset by an increase in the valuation allowance.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. During the year ended December 31, 2017, the Company recognized no interest and penalties associated with unrecognized tax benefits. There are no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date.
The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions and foreign jurisdictions. The Company’s tax years for fiscal year end 2011 and forward are subject to examination by the U.S. tax authorities and various state tax authorities, and the Company’s tax years for fiscal year end 2013 and forward are subject to examination by various foreign tax authorities. During 2017, the IRS concluded its examination of the Company’s U.S. federal income tax returns for the tax year ended April 30, 2014 and the eight months ended December 31, 2014 with no changes made to the returns.
A reconciliation of the Company’s unrecognized tax benefits is as follows (in thousands):
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Balance as of December 31, 2015 |
$ | 1,585 | ||
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Increases related to prior years’ tax positions |
875 | |||
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Increases related to current year’s tax positions |
1,076 | |||
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Balance as of December 31, 2016 |
3,536 | |||
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Increases related to prior years’ tax positions |
333 | |||
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Increases related to current year’s tax positions |
1,444 | |||
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Balance as of December 31, 2017 |
$ | 5,313 | ||
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