INCOME TAXES
On December 22, 2017, the United States enacted major tax reform legislation, Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (2017 Tax Act). The more significant attributes of the 2017 Tax Act impose a repatriation tax on accumulated earnings of foreign subsidiaries, implements a territorial tax system together with a current tax on certain foreign earnings and lowers the general corporate income tax rate to 21%.
The Company remeasured certain net deferred and other tax liabilities based on the tax rates at which they are expected to reverse in the future. The estimated amount recorded related to the remeasurement of these balances was a net benefit of $0. The net estimated impact of the 2017 Tax Act is $0 due to a full valuation allowance recorded against the U.S. deferred tax assets.
The components of net loss before taxes are as follows:
|
| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
| (In thousands) |
United States | $ | (1,890 | ) | | $ | (8,516 | ) |
Foreign | (19,948 | ) | | (24,486 | ) |
Loss before provision for income taxes | $ | (21,838 | ) | | $ | (33,002 | ) |
In accordance with ASC 740, the Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates in effect for the year in which the differences are expected to reverse. The Company records a valuation allowance against the net deferred tax asset to reduce the net carrying value to an amount that is more likely than not to be realized.
The provision for income taxes consists of the following components:
|
| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
| (In thousands) |
Current expense (benefit): | | | |
Federal | $ | — |
| | $ | — |
|
State | — |
| | — |
|
Foreign | 255 |
| | 385 |
|
Current income tax expense | 255 |
| | 385 |
|
| | | |
Deferred expense (benefit): | | | |
Federal | 549 |
| | 3,099 |
|
State | 3,330 |
| | (858 | ) |
Foreign | (92 | ) | | (213 | ) |
| 3,787 |
| | 2,028 |
|
Valuation allowance | (3,879 | ) | | (2,241 | ) |
Deferred income tax benefit | (92 | ) | | (213 | ) |
Total income tax expense | $ | 163 |
| | $ | 172 |
|
The following summarizes activity related to the Company’s valuation allowance:
|
| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
| (In thousands) |
Valuation allowance at beginning of period | $ | (55,968 | ) | | $ | (53,727 | ) |
Income tax provision | (3,879 | ) | | (2,241 | ) |
U.S. Tax Reform | 18,362 |
| | — |
|
Valuation allowance at end of period | $ | (41,485 | ) | | $ | (55,968 | ) |
Worldwide net deferred tax assets and liabilities are as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets | (In thousands) |
Depreciation and amortization | $ | 44 |
| | $ | 12 |
|
Other deferred tax assets | 707 |
| | 1,164 |
|
NOL carry-forwards | 33,980 |
| | 38,183 |
|
Research and development costs | 1,340 |
| | 3,063 |
|
Equity compensation | 3,686 |
| | 4,660 |
|
Collaboration agreement receivable reserves | 2,256 |
| | 9,327 |
|
Valuation allowance | (41,485 | ) | | (55,968 | ) |
Total deferred tax assets | $ | 528 |
| | $ | 441 |
|
Deferred tax liabilities | | | |
Other deferred tax liabilities | — |
| | (5 | ) |
Total deferred tax liabilities | — |
| | (5 | ) |
Net deferred tax assets and deferred tax liabilities | $ | 528 |
| | $ | 436 |
|
A reconciliation from the federal statutory rate to the total provision for income taxes is as follows:
|
| | | | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
| Amount | | Percent | | Amount | | Percent |
Federal tax benefit at statutory rate | $ | (7,425 | ) | | 34.0 | % | | $ | (11,219 | ) | | 34.0 | % |
State tax — net of federal benefit | (3,783 | ) | | 17.3 |
| | (10 | ) | | — |
|
Permanent items and other | 686 |
| | (3.1 | ) | | (225 | ) | | 0.7 |
|
Foreign rate differential | 6,880 |
| | (31.5 | ) | | 8,470 |
| | (26.1 | ) |
U.S. tax reform | 18,362 |
| | (84.1 | ) | | — |
| |
|
|
Deferred rate change | (212 | ) | | 1.0 |
| | 825 |
| | (2.5 | ) |
Other | 138 |
| | (0.6 | ) | | 90 |
| | (0.3 | ) |
Change in valuation allowance | (14,483 | ) | | 66.3 |
| | 2,241 |
| | (6.3 | ) |
Total tax expense (benefit) | $ | 163 |
| | (0.7 | )% | | $ | 172 |
| | (0.5 | )% |
The change in state taxes, net of federal benefit, is a result of the Company filing additional state income tax returns in 2017. This resulted in approximately $3.8 million of state NOLs being generated. The impact of the deferred rate change as a result of the 2017 Tax Act is $18.4 million. The U.S. corporate tax rate change and state NOLs are fully offset by a valuation allowance recorded against U.S. federal and state income taxes; therefore, the overall impact of these items is zero to income tax expense.
A rollforward of the Company’s uncertain tax positions is as follows:
|
| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
| (In thousands) |
Balance of uncertain tax positions at beginning of period | $ | 59 |
| | $ | 46 |
|
Gross increases - tax positions in current period | 4 |
| | 16 |
|
Gross increases - tax positions in prior period | — |
| | 13 |
|
Gross decreases - tax positions in prior period | (11 | ) | | (16 | ) |
Settlements | — |
| | — |
|
Lapse of statute of limitations | — |
| | — |
|
Balance of uncertain tax positions at end of period | $ | 52 |
| | $ | 59 |
|
Included in the balance of unrecognized tax benefits as of December 31, 2017 and 2016 are approximately $52,000 and $59,000, respectively, of tax benefits related to research and development tax credits. In accordance with ASC 740-10, such attributes are reduced to the amount that is expected to be recognized in the future. The Company does not accrue interest or penalties, as there is no risk of additional tax liability due to significant NOLs available. The Company does not expect any decreases to the unrecognized tax benefits within the next twelve months due to any lapses in statute of limitations. Tax years from 2014 to 2017 remain subject to examination in California, Georgia, Kentucky, Tennessee, Texas and on the federal level, with the exception of the assessment of NOL carry-forwards available for utilization, which can be examined for all years since 2009. The statute of limitations on these years will close when the NOLs expire or when the statute closes on the years in which the NOLs are utilized.
Significant management judgment is involved in determining the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets. Due to uncertainties with respect to the realization of deferred tax assets due to the history of operating losses, a valuation allowance has been established against the entire net deferred tax asset balance. The valuation allowance is based on management’s estimates of taxable income in the jurisdictions in which the Company operates and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, a change in the valuation allowance may be needed, which could materially impact the Company’s financial position and results of operations.
As of December 31, 2017 and 2016, the Company had federal net operating loss (NOL) carry-forwards of approximately $121,413,000 and $104,944,000 and state NOL carry-forwards of approximately $161,753,000, and $83,270,000 respectively, subject to further limitation based upon the final results of our Internal Revenue Code (IRC) sections 382 and 383 analyses. These NOLs are available to reduce future income unless otherwise taxable. If not utilized, the federal NOL carry-forwards will expire at various dates between 2029 and 2037 and the state NOL carry-forwards will expire at various dates between 2020 and 2037.
Sections 382 and 383 of the Internal Revenue Code limit the annual use of NOL carry-forwards and tax credit carry-forwards, respectively, following an ownership change. NOL carry-forwards may be subject to annual limitations under IRC Section 382 (Section 382) (or comparable provisions of state law) in the event that certain changes in ownership were to occur. The Company periodically evaluates its NOL carry-forwards and whether certain changes in ownership have occurred that would limit the Company’s ability to utilize a portion of its NOL carry-forwards. If it is determined that significant ownership changes have occurred since the Company generated its NOL carry-forwards, it may be subject to annual limitations on the use of these NOL carry-forwards under Section 382 (or comparable provisions of state law). The Company has determined that a Section 382 change in ownership occurred in late 2015. As a result of this change in ownership, the Company estimated that approximately $18.6 million of the Company’s federal NOLs and approximately $382,000 of federal tax credits generated prior to the change in ownership will not be utilized in the future. The Company is currently in the process of refining and finalizing these calculations, and upon finalization, will determine if a write-off is necessary. The reduction to the Company’s NOL deferred tax asset due to the annual Section 382 limitation and the NOL carryforward period would result in an offsetting reduction in valuation allowance recorded against the NOL deferred tax asset.
As of December 31, 2017, the Company had cumulative book losses in foreign subsidiaries of approximately $113,278,000. The Company has not recorded a deferred tax asset for the excess of tax over book basis in the stock of its foreign subsidiaries. The Company anticipates that its foreign subsidiaries will be profitable and have earnings in the future. Once the foreign subsidiaries do have earnings, the Company intends to indefinitely reinvest in its foreign subsidiaries all undistributed earnings of and original investments in such subsidiaries. As a result, the Company does not expect to record deferred tax liabilities in the future related to excesses of book over tax basis in the stock of its foreign subsidiaries in accordance with ASC 740-30-25.
The 2017 Tax Act transitions the U.S. from a worldwide tax system to a territorial tax system. Under previous law, companies could indefinitely defer U.S. income taxation on unremitted foreign earnings. The 2017 Tax Act imposes a one-time transition tax on deferred foreign earnings of 15.5% for liquid assets and 8% for illiquid assets, payable in defined increments over eight years. Due to the cumulative book losses discussed above, this provision of the new law will have no impact on the Company.