Income Taxes
The Company files U.S. federal and state tax returns as well as foreign income tax returns. The Company has accumulated significant losses since its inception in 2004. For financial reporting purposes, income (loss) before income taxes for the years ended December 31, 2017, 2016 and 2015 include the following components (in thousands): |
| | | | | | | | | | | |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Loss before income taxes:
| | | | | |
U.S. | $ | (53,274 | ) | | $ | (51,576 | ) | | $ | (50,155 | ) |
Non‑U.S. | (144 | ) | | (5,949 | ) | | (7,050 | ) |
| $ | (53,418 | ) | | $ | (57,525 | ) | | $ | (57,205 | ) |
Significant components of the provision for income taxes for the years ended December 31, 2017, 2016 and 2015 were as follows (in thousands): |
| | | | | | | | | | | |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | — |
| | — |
| | — |
|
Foreign | 125 |
| | 63 |
| | 41 |
|
| 125 |
| | 63 |
| | 41 |
|
Deferred: | | | | | |
Federal | 31 |
| | — |
| | — |
|
State | 6 |
| | — |
| | — |
|
Foreign | — |
| | — |
| | — |
|
| 37 |
| | — |
| | |
Total | $ | 162 |
| | $ | 63 |
| | $ | 41 |
|
The Company accounts for income taxes under FASB ASC 740 Accounting for Income Taxes. Deferred tax assets and liabilities are determined based upon differences between financial reporting and tax bases 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 reconciliation of the income tax expense (benefit) at the statutory federal income tax rate as reflected in the financial statements was as follows: |
| | | | | | | | |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax at U.S. statutory rate | (34.00 | )% | | (34.00 | )% | | (34.00 | )% |
State taxes, net of federal benefits | (3.12 | ) | | (2.70 | ) | | (2.27 | ) |
Permanent items | 1.96 |
| | 0.42 |
| | 1.52 |
|
Tax credit | (1.35 | ) | | (1.06 | ) | | (0.85 | ) |
Change in valuation allowance | (54.85 | ) | | 33.95 |
| | 31.07 |
|
Foreign rate differential | (0.17 | ) | | 1.04 |
| | 1.68 |
|
Rate change | 90.78 |
| | (0.06 | ) | | 0.01 |
|
Uncertain tax positions | 0.41 |
| | 2.06 |
| | 2.21 |
|
Other | 0.64 |
| | 0.46 |
| | 0.70 |
|
| 0.30 | % | | 0.11 | % | | 0.07 | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
On December 22, 2017, the Tax Act was signed into law. The new law did not have a significant impact on the Company’s consolidated financial statements for the year ended December 31, 2017 because it maintains a valuation allowance on the majority of its net operating losses and other deferred tax assets. However, the reduction of the U.S. federal corporate tax rate from 35% to 21% resulted in increases to the amounts reflected “Provision for (benefit from) income taxes attributable to valuation allowances” and “Rate change” captions for the year ended December 31, 2017 in the Company’s tax reconciliation table above compared to those amounts disclosed for the years ended December 31, 2016 and 2015.
Significant components of the Company’s deferred tax assets (liabilities) consisted of the following (in thousands): |
| | | | | | | |
| Years ended December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Federal and state net operating loss carryforwards | $ | 90,437 |
| | $ | 115,719 |
|
Foreign net operating loss carryforwards | 2,561 |
| | 2,561 |
|
Accrued expenses | 157 |
| | 280 |
|
Credits | 6,055 |
| | 5,091 |
|
Deferred revenue | 1,068 |
| | 1,709 |
|
Stock compensation expense | 1,805 |
| | 2,946 |
|
Other | 2,111 |
| | 2,757 |
|
Total deferred tax assets | 104,194 |
| | 131,063 |
|
Valuation allowance | (103,430 | ) | | (130,005 | ) |
Net deferred tax assets | 764 |
| | 1,058 |
|
Deferred tax liabilities: | | | |
Fixed assets | (664 | ) | | (841 | ) |
Intangibles | (134 | ) | | (217 | ) |
Other | (3 | ) | | — |
|
Net deferred tax liabilities | (801 | ) | | (1,058 | ) |
Net deferred tax liabilities | $ | (37 | ) | | $ | — |
|
A valuation allowance is required to reduce the deferred tax assets reported if, based on weight of evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all of the evidence, both positive and negative, the Company determined that a $103.4 million valuation allowance at December 31, 2017 was necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current year was $26.6 million.
The Company provided a valuation allowance for the full amount, with the exception of the naked credit related to goodwill amortization, of its net deferred tax asset for all periods because realization of any future tax benefit cannot be sufficiently assured as the Company does not expect income in the near term.
At December 31, 2017, the Company had approximately $373.6 million of federal net operating loss carryforwards and approximately $198.9 million of state net operating loss carryforwards that if not utilized, will begin to expire in 2020 for federal tax purposes and continue to expire at various dates starting in 2018 for state tax purposes. The utilization of such net operating loss carryforwards and realization of tax benefits in future years depends predominantly upon having taxable income.
Utilization of the NOL and credits may be subject to a substantial annual limitation due to ownership change limitations that have occurred or that could occur in the future, as required by Section 382 and Section 383 of the Code. These ownership changes may limit the amount of NOL that can be utilized annually to offset future taxable income and tax, respectively.
In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three‑year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders. The Company has completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since its formation. The results of this study indicated that the Company experienced ownership changes as defined by Section 382 of the Code. The Company has not identified NOLs or credits that, as a result of these restrictions, will expire unused.
The Company also had foreign net operating losses of approximately $25.0 million as of December 31, 2017, which may be available to offset future income recognized in the Federal Republic of Germany. The net operating losses in Germany have indefinite carryforward periods.
The Company has adopted the accounting guidance related to uncertainty in income taxes. The total liability for unrecognized income tax benefits was approximately $5.1 million as of December 31, 2017, $4.9 million as of December 31, 2016 and $3.7 million of December 31, 2015. Of the total liability at December 31, 2017 and 2016, $4.9 million and $4.8 million, respectively, were netted against deferred tax assets. The Company recognizes interest accrued and penalties, if applicable, related to unrecognized tax benefits in income tax expense. The Company does not expect any significant changes in the next 12 months.
The reconciliation below summarized the Company's unrecognized tax benefits for the respective periods. These amounts primarily relate to transactions between the Company and its foreign subsidiaries, including accrued interest.
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Unrecognized tax benefits beginning of year | $ | 4,918 |
| | $ | 3,730 |
| | $ | 2,466 |
|
Gross change for current year positions | 219 |
| | 1,187 |
| | 1,264 |
|
Unrecognized tax benefits end of the year | $ | 5,136 |
| | $ | 4,918 |
| | $ | 3,730 |
|
As of December 31, 2017, the Company was open to examination in the U.S. federal and certain state jurisdictions for all of the Company’s tax years since the net operating losses may potentially be utilized in future years to reduce taxable income. The Company has been audited in Germany through 2015. The net operating loss carryforward from periods prior to 2015 may be utilized against taxable income in future periods and the net operating loss carryforward can be challenged at that time.
At December 31, 2017, foreign earnings, which were not significant, have been retained indefinitely by foreign subsidiary companies for reinvestment; therefore, no provision has been made for income taxes that would be payable upon the distribution of such earnings, and it would not be practicable to determine the amount of the related unrecognized deferred income tax liability. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to U.S. federal income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.
ASU No. 2016-09, "Compensation - Stock Compensation", was issued and adopted in January 2017. ASU 2016-09 eliminates APIC pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, modified retrospective adoption of ASU 2016-09 eliminates the requirement that excess tax benefits be realized (i.e., through a reduction in income taxes payable) before the Company can recognize them and therefore, it has accounted for a cumulative-effect adjustment of $7.7 million during the twelve months ended December 31, 2017 to record excess tax benefits. Since the Company has a full valuation allowance on all deferred taxes, this has no impact on retained earnings or the tax position of the Company.
On December 22, 2017, the SEC staff issued SAB 118 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 Tax Act. The Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The Company has remeasured its deferred tax positions as of December 31, 2017 at the new enacted tax rate, resulting in a decrease to deferred tax assets in 2017 in the amount of $48.5 million. Since the Company has a valuation allowance on its deferred tax assets, there is no impact on current tax expense. For deferred taxes purposes, the Company recorded a benefit of approximately $19,000 due to the revaluation of the deferred tax liability hanging credit. These amounts are estimates and may change as U.S. treasury regulations and administrative guidance have not been finalized as of the date of this Form 10-K. The Company will continue to review the impact of these limitations as regulatory guidance is issued. The Company has an accumulated deficit from its foreign operations and does not have an associated liability from the repatriation tax on accumulated earnings in the Tax Act. The ultimate impact may differ from those provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. The Company's accounting treatment is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018. As of December 31, 2017, foreign earnings, which were not significant, have been retained indefinitely by the Company's foreign subsidiaries for reinvestment.