(9) Income Taxes
The Company accounts for income taxes under ASC 740, Accounting for Income Taxes. Deferred income 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.
Loss before income tax (benefit) provision consists of the following (in thousands):
|
|
|
Year ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
United States |
|
$ |
(94,748 |
) |
|
$ |
(62,536 |
) |
|
$ |
(64,037 |
) |
|
Foreign |
|
|
(20,004 |
) |
|
|
(14,944 |
) |
|
|
(19,152 |
) |
|
Total loss before income taxes |
|
$ |
(114,752 |
) |
|
$ |
(77,480 |
) |
|
$ |
(83,189 |
) |
For the years ended December 31, 2017, 2016 and 2015 the Company did not have a current or deferred income tax expense or benefit.
A reconciliation of the Federal statutory tax rate of 34% to the Company’s effective income tax rate follows:
|
|
|
Year ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Statutory tax rate |
|
|
(34.00 |
)% |
|
|
(34.00 |
)% |
|
|
(34.00 |
)% |
|
State taxes, net of Federal benefits |
|
|
(4.37 |
)% |
|
|
(4.19 |
)% |
|
|
(4.02 |
)% |
|
Permanent differences |
|
|
1.18 |
% |
|
|
1.19 |
% |
|
|
0.71 |
% |
|
Credits |
|
|
(0.96 |
)% |
|
|
(1.47 |
)% |
|
|
(1.65 |
)% |
|
Change in valuation allowance |
|
|
(11.04 |
)% |
|
|
29.78 |
% |
|
|
30.74 |
% |
|
Foreign rate differential |
|
|
5.93 |
% |
|
|
6.56 |
% |
|
|
7.03 |
% |
|
Federal Rate Change - Tax Reform |
|
|
43.26 |
% |
|
|
— |
|
|
|
— |
|
|
Other |
|
|
— |
|
|
|
2.13 |
% |
|
|
1.19 |
% |
|
Effective tax rate |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
On December 22, 2017, the Tax Cuts and Jobs Act ("the Act") was enacted in the United States. The Act reduces the U.S. federal corporate tax rate from 34% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act, including the effects on our existing deferred tax balances and the one-time transition tax. For the year ended December 31, 2017, we recognized no transition tax and have not recorded any additional taxes on the outside basis difference of our foreign subsidiary as our investment in the foreign subsidiary is essentially permanent in duration. Determining the amount of unrecognized deferred tax liability is not practicable. We are still in the process of analyzing the impact of the Act on our indefinite reinvestment assertion.
As a result of the Act, we remeasured certain deferred tax assets and liabilities based on the rates at which they are anticipated to reverse in the future, which is generally 21%. This resulted in a decrease to our gross deferred tax assets and a corresponding decrease in our valuation allowance of in the amount of $49.7 million.
Any items reported are done so using provisional amounts until the initial accounting required by the Act is complete. Additional time and resources are needed to ensure the correct implementation of the Act.
As of December 31, 2017 the Company had federal net operating loss carryforwards of approximately $384.7 million and state net operating loss carryforwards of $350.5 million, which are available to reduce future taxable income. The Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, during the quarter ended March 31, 2017, upon which the net operating loss carryforward deferred tax assets was increased by the excess tax benefits of $10.5 million (tax-effected) with a corresponding increase to the Company’s valuation allowance.
The Company also had federal tax credits of $7.0 million and state tax credits of $2.6 million, which may be used to offset future tax liabilities. The net operating loss (NOL) and tax credit carryforwards will expire at various dates through 2037. The NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has not, as yet, conducted a study of research and development (“R&D”) credit carryforwards. This study may result in an adjustment to the Company’s R&D credit carryforwards.
The principal components of the Company’s deferred tax assets are as follows (in thousands):
|
|
|
Year ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards |
|
$ |
102,942 |
|
|
$ |
106,560 |
|
|
Equity-based compensation |
|
|
7,073 |
|
|
|
6,937 |
|
|
Other temporary differences |
|
|
1,169 |
|
|
|
1,235 |
|
|
Research and development credit and carry forwards |
|
|
9,079 |
|
|
|
7,682 |
|
|
Deferred tax assets |
|
|
120,263 |
|
|
|
122,414 |
|
|
Less valuation allowance |
|
|
(120,263 |
) |
|
|
(122,414 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
ASC 740 requires a valuation allowance to reduce the deferred tax assets reported, if based on the weight of available 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 the evidence, both positive and negative, the Company has recorded a valuation allowance against its deferred tax assets at December 31, 2017 and 2016, respectively, because the Company’s management has determined that is it more likely than not that these assets will not be realized. The $2.2 million decrease in the valuation allowance in 2017 primarily relates to the federal rate reduction from 34% to 21% as a result of the Tax Act, partially offset by the net loss incurred by the Company in 2017 and the impact of the adoption of ASU 2016-09.
ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statement by prescribing the minimum recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. The Company had gross tax-effected unrecognized tax benefits of $1.1 million and $1.0 million at December 31, 2017 and 2016, respectively. Unrecognized tax benefits represent tax positions for which reserves have been established. A full valuation allowance has been provided against the Company’s deferred tax assets, so that the effect of any unrecognized tax benefits would simply be to reduce the gross amount of the deferred tax asset and the corresponding valuation allowance. The Company anticipates that the amount of unrecognized tax benefits recorded will not change in the next twelve months.
As of December 31, 2017 and 2016, the Company had no accrued interest or penalties related to uncertain tax positions.
The aggregate changes in gross unrecognized tax benefits during the years ended December 31, 2017, 2016, and 2015 were as follows (in thousands):
|
|
|
Year ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at beginning of year |
|
$ |
967 |
|
|
$ |
822 |
|
|
|
— |
|
|
Increases for tax positions taken during current period |
|
|
152 |
|
|
|
145 |
|
|
|
249 |
|
|
Increases for tax positions taken in prior periods |
|
|
— |
|
|
|
— |
|
|
|
573 |
|
|
Decreases for tax positions taken during current period |
|
|
(12 |
) |
|
|
— |
|
|
|
— |
|
|
Decreases for tax positions taken in prior periods |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Balance at end of year |
|
$ |
1,107 |
|
|
$ |
967 |
|
|
$ |
822 |
|
The Company is currently open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions for the tax years ended 2014 through 2016. Carryforward tax attributes generated in years past may still be adjusted upon future examination if they have or will be used in a future period. The Company is currently not under examination by the Internal Revenue Service or any other jurisdictions for any tax years.