13. Income Taxes
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act, or the Act. The Act amends the Internal Revenue Code of 1986, as amended, or the Code, to reduce tax rates and modify policies, credits and deductions for individuals and businesses. For businesses, the Act reduces the corporate tax rate from a maximum of 35% to a flat 21% rate. The rate reduction is effective on January 1, 2018.
As a result of the rate reduction, the Company has reduced the deferred tax asset balance as of December 31, 2017 by $9.0 million. Due to the Company’s full valuation allowance position, the Company has also reduced the valuation allowance by the same amount.
A U.S. shareholder of a specified foreign corporation, or SFC, must include in gross income, at the end of the SFC’s last tax year beginning January 1, 2018, the U.S. shareholder’s pro rata share of the SFC’s undistributed and previously untaxed post-1986 foreign earnings and profits. The amount of earnings and profits taken into account is the greater of the amounts determined as of November 2, 2017, or December 31, 2017, unreduced by dividends to other SFCs during the SFC’s last taxable year beginning before January 1, 2018. As of December 31, 2017, the Company’s controlled foreign corporations have negative cumulative earnings and profits; therefore, the Company will not have an income inclusion as a result of the mandatory deemed repatriation.
Due to the uncertainties which currently exist in the interpretation of the provisions of the Act regarding Code Section 162(m), the Company has not evaluated all of the potential impacts as amended by the Act on its financial statements.
On December 22, 2017, Staff Accounting Bulletin No. 118, or SAB 118, was issued 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. In accordance with SAB 118, the Company has determined that there is no deferred tax benefit or expense with respect to the remeasurement of certain deferred tax assets and liabilities due to the full valuation allowance against net deferred tax assets. Additional analysis of the law and the impact to the Company will be performed and any impact will be recorded in the respective quarters, within the available measurement period in 2018.
The amount of loss before taxes (in thousands):
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
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U.S. loss before taxes |
$ | (48,258 | ) | $ | (20,937 | ) | ||
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Foreign loss before taxes |
(2,577 | ) | (225 | ) | ||||
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Loss before income taxes |
$ | (50,835 | ) | $ | (21,162 | ) | ||
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Income tax benefit for the years ended December 31, 2017 and 2016 consists of the following (in thousands):
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
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Current: |
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Federal |
$ | (226 | ) | $ | — | |||
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State |
(64 | ) | — | |||||
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Foreign |
— | — | ||||||
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Total Current |
$ | (290 | ) | $ | — | |||
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Deferred: |
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Federal |
— | — | ||||||
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State |
— | — | ||||||
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Foreign |
— | — | ||||||
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Total Deferred |
— | — | ||||||
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Income Tax Benefit |
$ | (290 | ) | $ | — | |||
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A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows (in thousands):
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
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Tax computed at federal statutory rate |
$ | (17,284 | ) | $ | (7,407 | ) | ||
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State income taxes, net of federal tax benefit |
(1,713 | ) | (1,058 | ) | ||||
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Rate difference on non-US earnings |
482 | 33 | ||||||
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Research and development credits |
(929 | ) | (359 | ) | ||||
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Success based payments |
688 | 199 | ||||||
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Valuation allowance |
6,222 | 7,582 | ||||||
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Uncertain Tax Positions |
— | 379 | ||||||
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Transaction costs |
— | 587 | ||||||
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Tax Cut and Jobs Act |
8,960 | — | ||||||
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Contingent Consideration |
1,016 | — | ||||||
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Return to provision and true-ups |
2,499 | — | ||||||
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Permanent items |
(231 | ) | 44 | |||||
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Income tax benefit |
$ | (290 | ) | $ | — | |||
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The components that comprise the Company’s net deferred tax assets at December 31, 2017 and 2016 consist of the following (in thousands):
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
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Deferred tax assets: |
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Net operating loss carryforwards |
$ | 15,815 | $ | 12,950 | ||||
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Amortization |
8,818 | 6,035 | ||||||
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Stock-based compensation |
392 | 298 | ||||||
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R&D credit carryforwards |
1,367 | 437 | ||||||
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Accrued expenses |
600 | 289 | ||||||
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Other |
168 | 3 | ||||||
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Total deferred tax assets |
$ | 27,160 | $ | 20,012 | ||||
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Deferred tax liabilities |
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Foreign intangibles |
$ | (10,964 | ) | $ | (9,325 | ) | ||
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Fixed Assets |
(30 | ) | — | |||||
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Total deferred tax liabilities |
$ | (10,994 | ) | $ | (9,325 | ) | ||
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Net deferred tax assets |
$ | 16,166 | $ | 10,687 | ||||
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Valuation allowance |
(27,130 | ) | (20,012 | ) | ||||
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Net deferred tax liabilities |
$ | (10,964 | ) | $ | (9,325 | ) | ||
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Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Management periodically evaluates the recoverability of the deferred tax assets and assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. Because of the Company’s recent history of operating losses, management believes the future benefits of deferred tax assets are not likely to be realized. Based on the weight of all evidence, including a history of operating losses and the Company’s ability to generate future taxable income to realize these assets, management has determined it is more likely than not that the net deferred tax assets will not be realized and a full valuation allowance has been established to offset the net deferred tax asset. The Company’s valuation allowance increased by $7.1 million from 2016 to 2017. Additionally, the company has recorded a deferred tax liability of $11.0 million related the acquisition of in-process research and development assets in a non-taxable transaction. This deferred tax liability cannot be assumed to be a source of future income to provide benefit to our deferred tax assets given the uncertainties as to the timing of its realization.
As of December 31, 2017, the Company had federal net operating loss carryforwards of approximately $33.2 million, and state net operating loss carryforwards of approximately $11.2 million and foreign net operating loss carryforwards of $38.1 million which may be available to offset future taxable income for tax purposes. The federal and state net operating loss will expire between 2031 and 2037 and the foreign net operating losses carryforward indefinitely. In addition, the Company also has federal credit carryforwards of approximately $1.4 million as of December 31, 2017 which may be available to offset future tax liabilities. These federal credits will expire between 2036 and 2037.
Utilization of the net operating loss and research credit carryforwards may be subject to substantial annual limitations due to ownership change limitations that may have occurred or that could occur in the future, as required by Sections 382 and 383 of the Code, as well as similar state provisions. Under Sections 382 and 383 of the Code, if a corporation undergoes an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (such as research and development tax credits) to offset its post-change income or taxes may be limited.
The Company has not completed a study to assess whether an ownership change has occurred. If the Company has experienced an ownership change, utilization of the net operating loss and research credit carryforwards would be subject to an annual limitation under Sections 382 and 383 of the Code. Any limitation may result in expiration of a portion of the net operating loss carryforwards before utilization. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.
The following table summarizes the changes in the amount of our unrecognized tax benefits (in thousands):
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Unrecognized tax benefits at December 31, 2015 |
$ | 402 | ||
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Increase / (Decrease) for prior year tax positions |
— | |||
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Increase for current year tax positions |
582 | |||
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Unrecognized tax benefits at December 31, 2016 |
984 | |||
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Increase / (Decrease) for prior year tax positions |
4 | |||
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Increase for current year tax positions |
— | |||
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Unrecognized tax benefits at December 31, 2017 |
$ | 988 | ||
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Any uncertain tax positions would be related to tax years that remain open and subject to examination by the relevant tax authorities. The Company has no liabilities related to uncertain tax positions, but does have unrecognized tax benefits of $1.0 million which have been recorded as a direct reduction to the deferred tax asset as of the year ended December 31, 2017. At December 31, 2017 and 2016, the Company had unrecognized tax benefits of $1.0 million and $1.0 million, respectively. The Company does not expect any significant increases or decreases to the Company’s unrecognized tax benefits within the next 12 months. If recognized, none of the unrecognized tax benefits would impact the Company’s effective tax rate due to the existence of the valuation allowance. The Company is subject to U.S. federal tax authority examinations and U.S. state tax authority examinations for all years with the net operating loss and credit carryforwards. At December 31, 2017, the Company has not accrued for interest or penalties associated with unrecognized tax liabilities. In subsequent periods, any interest and penalties related to uncertain tax positions will be recognized as a component of income tax expense.