The components of loss before income taxes are as follows for the years ended
December
| | | | | | | | | | |
| Domestic (United Kingdom) | | $ | 18,171 | | | $ | (730 | ) | | $ | 1,400 | |
| Foreign (United States) | | | (49,422 | ) | | | (25,393 | ) | | | (25,732 | ) |
| Loss before income taxes | | $ | (31,251 | ) | | $ | (26,123 | ) | | $ | (24,332 | ) |
The components for the income tax
(expense) benefit are as follows for the years ended
December
31:
| | | | | | | | | | |
| Current: | | | | | | | | | | | | |
| Federal | | $ | — | | | $ | — | | | $ | — | |
| | | | — | | | | — | | | | — | |
| Japan | | | (14 | ) | | | (85 | ) | | | (116 | ) |
| China | | | (39 | ) | | | (12 | ) | | | — | |
| State | | | (46 | ) | | | (51 | ) | | | (30 | ) |
| Total current provision | | | (99 | ) | | | (148 | ) | | | (146 | ) |
| Deferred: | | | | | | | | | | | | |
| Federal | | | — | | | | 752 | | | | — | |
| | | | (1,535 | ) | | | 2,630 | | | | — | |
| State | | | — | | | | 540 | | | | — | |
Total deferred (expense) benefit | | | (1,535 | ) | | | 3,922 | | | | — | |
Income tax (expense) benefit | | $ | (1,634 | ) | | $ | 3,774 | | | $ | (146 | ) |
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes
.
The Company
’s effective income tax rate differs from the statutory domestic (United Kingdom) income tax rate as follows for the years ended
December 31:
| | | | | | | | | | |
| Income tax rate | | 19.3 | % | | 20.0 | % | | 20.3 | % |
| U.K. research and development credit | | | 1.5 | | | | 1.8 | | | | 1.3 | |
Effect of U.S. tax reform – Federal tax rate change | | | (68.6 | ) | | | — | | | | — | |
| Permanent items | | | 5.8 | | | | (1.8 | ) | | | (1.0 | ) |
| Other | | | 3.7 | | | | (0.3 | ) | | | (0.1 | ) |
| Effect of foreign tax rate differential | | | 33.2 | | | | 16.8 | | | | 10.7 | |
| Valuation allowance | | | (0.2 | ) | | | (22.1 | ) | | | (31.7 | ) |
| Effective income tax rate | | | (5.3 | )% | | | 14.4 | % | | | (0.5 | )% |
The Company is headquartered in the United Kingdom and the effective U.K. corporate tax rate for the years ended
December 31, 2017,
2016
and
2015
was
19.3%,
20.0%,
20.3%,
respectively. The U.S. federal corporate tax rate was
for the years ended
December 31, 2017,
2016
and
2015.
The Company is subject to taxation in the U.S. and various state, local and foreign jurisdictions. The Company remains subject to examination by various tax authorities for tax years
2014
. With a few exceptions, the Company is
no
longer subject to examinations by tax authorities for the tax years
2013
and prior. However, net operating losses from the tax years
2013
and prior would be subject to examination if and when used in a future tax return to offset taxable income. The Company’s policy is to recognize income tax related penalties and interest, if any, in its provision for income taxes and, to the extent applicable, in the corresponding income tax assets and liabilities, including any amounts for uncertain tax positions.
The United Kingdom
’s Summer Finance Bill, which was enacted on
September 15, 2016,
contained reductions in corporation tax to
19%
from
April 1, 2017
and
17%
from
April 1, 2020.
The Company has adopted a
17%
tax rate in respect of the deferred tax disclosures, reflecting the anticipated timing of the unwinding of the deferred tax balances.
Significant components of the Company
’s deferred tax assets and deferred tax liabilities are as follows for the years ended
December
31:
| | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Long term deferred tax assets: | | | | | | | | |
U.S. federal net operating losses | | $ | 33,713 | | | $ | 42,165 | |
State net operating loss (net of federal) | | | 8,450 | | | | 5,198 | |
U. S. federal research and development credit | | | 587 | | | | 273 | |
| | | | 1,894 | | | | 2,419 | |
| | | | 2,611 | | | | 1,884 | |
| | | | 393 | | | | 526 | |
| Intangible assets | | | 2,392 | | | | — | |
| State credits | | | 377 | | | | 85 | |
| Other | | | 167 | | | | — | |
Total deferred tax assets | | | 50,584 | | | | 52,550 | |
| | | | (48,098 | ) | | | (46,473 | ) |
Total deferred tax assets | | $ | 2,486 | | | $ | 6,077 | |
| | | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Long term deferred tax liabilities: | | | | | | | | |
| | | $ | — | | | $ | (29 | ) |
| Intangible assets | | | — | | | | (3,418 | ) |
Total deferred tax liabilities | | $ | — | | | $ | (3,447 | ) |
On
December 22, 2017,
the Tax Cuts and Jobs Act of
2017,
or the TCJA, was enacted. This tax reform legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of
34%
to
21%
effective on
January 1, 2018.
As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the
21%
rate. This results in a decrease in the company’s net deferred tax asset and corresponding valuation allowance of
$21.4
million. As the Company maintains a full valuation allowance against its net deferred tax asset position in the United States, this revaluation does
not
result in an income tax expense or benefit in the current period. The other provisions of the TCJA did
not
have a material impact on the
2017
consolidated financial statements.
For the years ended
December
31,
2017
and
2016,
the Company had United Kingdom Net Operating Losses (U.K. NOLs) of
$11.1
million and
$14.2
million, respectively. U.S. federal net operating loss carry forwards for the years ended
December
31,
2017
and
2016
were
$160.5
million and
$125.3
million, respectively. U.S. State net operating loss carryforwards for the years ended
December
31,
2017
and
2016
were
$154.9
million and
$112.5
million, respectively.
The U.S. federal and state net operating loss carryforwards begin to expire in
2027
and
2017,
respectively and the U.K. NOLs can be carried forward indefinitely.
For the year ended
December 31, 2017,
the Company
continues to recognize its deferred tax assets in the U.K related to OI Limited. The Company has determined that it is more likely than
not
that this asset of
$2.5
million will be realized in the future. The Company continues to record a full valuation allowance against all other net deferred tax assets since it is
not
more likely than
not
that these amounts will be realized.
The following table reflects the rollforward of the Company
’s valuation allowance:
| | | | | | | | | | |
Beginning of year (January 1) | | $ | 46,473 | | | $ | 43,076 | | | $ | 35,361 | |
| Increase in valuation allowance | | | 1,625 | | | | 3,397 | | | | 7,715 | |
End of year ( December 31) | | $ | 48,098 | | | $ | 46,473 | | | $ | 43,076 | |
The Company reviewed its historical tax filings and tax positions and has determined
no
material uncertain tax positions exist at
December
31,
2017
and
2016.
The Company continues to monitor its tax filings and positions.
The Company generates research and development credits in the United Kingdom which are refundable if a
current year loss is incurred. In the United Kingdom for the year ended
December
31,
2017,
no
amounts were reimbursed for research and development tax credits.
The SEC staff issued SAB
118
which allowed the Company to record provisional amounts for the impact of the T
CJA during a measurement period which is similar to the measurement period used when accounting for business combinations. At
December 31, 2017,
the Company made a reasonable estimate of the effects of the TCJA on our existing deferred tax balances. The final impact of the TCJA
may
differ from this estimate, possibly materially, due to, among other things, changes in interpretations and assumptions the Company has made and guidance that
may
be issued.