14. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “TCJA”) was signed into law, making significant changes to the Internal Revenue Code. Key aspects include, but are not limited to, a decrease in the highest corporate tax bracket from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of the U.S international taxation from the existing worldwide tax system to a territorial system, and a one-time transition tax on previously deferred foreign earnings as of December 31, 2017. The Company has calculated the impact of the TCJA in accordance with its interpretation and guidance available as of the date of these financial statements. No additional income tax expense has been recorded in 2017 based on the use of existing net operating losses, or NOLs, to offset the additional income inclusion generated by the provisions of the TCJA.
Additionally, the TCJA restructured the existing NOL deduction and carryforward credit for companies with NOL deferred tax assets. Any NOLs generated in years after December 31, 2017 will now be allowed to be carried forward indefinitely, but will be limited to 80% of taxable income. The TCJA removes the carryback period on NOLs generated after 2017, however the 20-year carryfoward and 2-year carryback period still apply to existing NOLs generated through 2017.
Loss before income taxes consisted of the following:
|
|
|
Years Ended December 31, |
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|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
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|||
|
|
|
(in thousands) |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
(288,860 |
) |
|
$ |
(156,409 |
) |
|
$ |
(85,595 |
) |
|
Foreign |
|
|
(19 |
) |
|
|
155 |
|
|
|
125 |
|
|
Loss before income taxes |
|
$ |
(288,879 |
) |
|
$ |
(156,254 |
) |
|
$ |
(85,470 |
) |
The effective income tax rate of the Company’s provision for income taxes differed from the federal statutory rate of 34% for 2015 through 2017 as follows:
|
|
|
Years Ended December 31, |
|
|
|
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory income tax rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
|
|
Stock-based compensation |
|
|
2.5 |
% |
|
|
(1.0 |
%) |
|
|
(1.0 |
%) |
|
|
|
|
Research and development credits |
|
|
1.4 |
% |
|
|
2.4 |
% |
|
|
2.4 |
% |
|
|
|
|
Other |
|
|
0.0 |
% |
|
|
(0.1 |
%) |
|
|
(0.1 |
%) |
|
|
|
|
U.S. federal statutory rate change |
|
|
(30.5 |
%) |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
Change in valuation allowance |
|
|
(7.4 |
%) |
|
|
(35.3 |
%) |
|
|
(35.3 |
%) |
|
|
|
|
Effective tax rate |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
The Company’s net deferred income tax assets and liabilities are as follows:
|
|
|
December 31, |
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|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
|
|
(in thousands) |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
135,053 |
|
|
$ |
119,810 |
|
|
Research and development credits |
|
|
15,589 |
|
|
|
11,540 |
|
|
Other |
|
|
7,502 |
|
|
|
5,443 |
|
|
Total deferred income tax assets |
|
|
158,144 |
|
|
|
136,793 |
|
|
Less: Valuation allowance |
|
|
(158,144 |
) |
|
|
(136,793 |
) |
|
Net deferred income tax assets |
|
$ |
— |
|
|
$ |
— |
|
At December 31, 2017, the Company had U.S. net operating loss (“NOL”) carryforwards of $643.1 million, which may be used to offset future taxable income. The Company adopted ASU 2016-09 “Compensation – Stock Compensation” during 2017, and therefore the $27.5 million of historical excess tax benefits associated with stock option exercises recorded directly to stockholder’s equity were released from off-balance sheet tracking and added to the balance sheet as deferred tax assets. The NOL carryforwards expire from 2025 to 2037 if not utilized. In addition, the Company has U.S. research and development tax credit carryforwards of $17.9 million, which will expire from 2024 to 2037. The Company establishes reserves or reduces deferred tax assets to address potential uncertain tax positions that it believes could be challenged by taxing authorities even though the Company believes the positions it has taken are more likely than not to stand during a tax examination. The Company reviews the uncertain tax positions as changes in factors to law warrant adjustments to the potential liability for additional taxes. It is often difficult to predict the final outcome or timing of resolution of any particular tax matter. Various events, some of which cannot be predicted, such as clarification of tax law by administrative or judicial means, may occur and would require the Company to increase or decrease its uncertain tax positions and effective income tax rate.
The Company calculated $0.3 million of taxable income inclusion related to the mandatory deemed repatriation of all foreign earnings as of December 31, 2017 that was offset in its entirety by existing NOLs. Prior to 2017, the Company recorded a deferred tax liability related to unremitted foreign earnings. This deferred tax liability was reversed in 2017 after the deemed repatriation and the Company’s assessment that any future earnings will be permanently invested overseas.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. 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. This standard will not have a material impact to the financial statements.
In certain circumstances, where there is a change in control, utilization of NOLs and tax credit carryforwards are subject to certain limitations under Section 382 and 383 of the Internal Revenue Code of 1986, as amended. A change in control is generally defined as a cumulative change of 50% or more in the ownership positions of certain stockholders during a rolling three-year period. The Company performed a Section 382 analysis through 2017 and determined that an ownership change occurred in 2015 and is applicable to NOLs and tax credits created through 2015. However, based on the analysis, the Company does not believe that the Section 382 annual limitation will impact the Company’s ability to utilize the tax attributes that existed as of the date of the ownership change in a material manner. NOLs and tax credits created after 2015 are not subject to an ownership change. The Company continues to monitor ownership changes for purposes of Section 382. If it is determined that Section 382 ownership changes have occurred subsequent to 2015, the NOLs and tax credit carryforwards may be subject to an additional limitation such that a portion may not be utilizable.
The Company records a valuation allowance to reduce deferred tax assets to the extent it believes more likely than not that a portion of such assets will not be realized. In making such determinations, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and the ability to carry back NOLs to prior years. Currently the Company believes that it is not more likely than not that it will realize its current and long-term deferred tax assets. Accordingly, a valuation allowance has been recorded against the full value of the deferred income tax assets. There was a release in the valuation allowance for the effect of the Federal statutory rate change on the deferreds, which adjusts the ending balances for the rate differential that will never be realized.
The table below summarizes changes in the deferred tax valuation allowance:
|
|
|
Balance at Beginning of Year |
|
|
Charged to Costs and Expenses |
|
|
Write-offs |
|
|
Balance at End of Year |
|
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|
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|
(in thousands) |
|
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|
Deferred income tax valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For year ended December 31, 2016 |
|
$ |
81,676 |
|
|
$ |
55,117 |
|
|
$ |
— |
|
|
$ |
136,793 |
|
|
For year ended December 31, 2017 |
|
|
136,793 |
|
|
|
109,600 |
|
|
|
88,249 |
|
|
|
158,144 |
|
The Company determines whether a tax position is more likely than not to be sustained upon examination based on the technical merits of the position in accordance with ASC 740. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority.
The total balance of unrecognized gross tax benefits was as follows:
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|
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
|
|
(in thousands) |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits at beginning of year |
|
|
|
$ |
1,593 |
|
|
$ |
952 |
|
|
$ |
592 |
|
|
Additions based on tax positions taken in prior years |
|
|
|
|
— |
|
|
|
35 |
|
|
|
— |
|
|
Additions based on tax positions taken in the current year |
|
|
|
|
714 |
|
|
|
606 |
|
|
|
360 |
|
|
Unrecognized tax benefits at end of year |
|
|
|
$ |
2,307 |
|
|
$ |
1,593 |
|
|
$ |
952 |
|
In addition to any uncertain tax positions, it is the Company’s policy to recognize potential accrued interest and/or penalties related to such positions within income tax expense. For 2017, 2016 and 2015, the Company has not recognized any liability related to uncertain tax positions and does not anticipate that the amount of existing unrecognized tax benefits will significantly change within the next 12 months.
The Company is subject to U.S. federal income tax audit for tax years after 2012. However, carryforward attributes that were generated prior to 2013 may still be adjusted by the taxing authority upon examination if the attributes have been or will be used in a future period. The Company is also subject to examination of foreign returns tax years 2014 to present as the statute of limitations is still open.