15. Income Taxes
The Company recorded $0.8 million income tax benefit related to the change in the deferred tax liabilities balance due to intangible assets impairment recognized in the fourth quarter of 2016 and no income tax benefit or expense were recorded for the years ending December 31, 2017 and 2015.
The following table presents domestic and foreign components of loss before provision for income taxes:
|
|
|
Years ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
U.S. |
|
$ |
(36,923 |
) |
|
$ |
(96,498 |
) |
|
$ |
(47,235 |
) |
|
Foreign |
|
|
(19,224 |
) |
|
|
(18,024 |
) |
|
|
(218 |
) |
|
Loss before income taxes |
|
$ |
(56,147 |
) |
|
$ |
(114,522 |
) |
|
$ |
(47,453 |
) |
A reconciliation of income tax expense computed at the statutory federal income tax rate of 34% to income taxes as reflected in the financial statements is as follows:
|
|
|
Years ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Federal income tax expense at statutory rate |
|
$ |
(19,090 |
) |
|
$ |
(38,938 |
) |
|
$ |
(16,134 |
) |
|
Non-deductible foreign research expenses |
|
|
19 |
|
|
|
21 |
|
|
|
45 |
|
|
Stock-based compensation |
|
|
(76 |
) |
|
|
1,356 |
|
|
|
1,418 |
|
|
Non-deductible expenses |
|
|
61 |
|
|
|
985 |
|
|
|
295 |
|
|
Goodwill impairment |
|
|
— |
|
|
|
16,834 |
|
|
|
— |
|
|
Research and development tax credits |
|
|
(507 |
) |
|
|
(326 |
) |
|
|
(910 |
) |
|
Change in valuation allowance |
|
|
7,935 |
|
|
|
16,062 |
|
|
|
15,277 |
|
|
Foreign rate differential |
|
|
1,495 |
|
|
|
3,231 |
|
|
|
9 |
|
|
Rate change |
|
|
10,163 |
|
|
|
— |
|
|
|
— |
|
|
Total tax benefit |
|
$ |
— |
|
|
$ |
(775 |
) |
|
$ |
— |
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents significant components of the Company’s deferred tax assets:
|
|
|
As of December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
27,142 |
|
|
$ |
15,785 |
|
|
$ |
19,889 |
|
|
Accruals, reserve and other |
|
|
2,586 |
|
|
|
3,071 |
|
|
|
2,681 |
|
|
Stock-based compensation |
|
|
3,623 |
|
|
|
3,848 |
|
|
|
4,328 |
|
|
Tax credit carryforwards |
|
|
1,774 |
|
|
|
574 |
|
|
|
1,945 |
|
|
Property and equipment |
|
|
274 |
|
|
|
54 |
|
|
|
— |
|
|
Intangibles |
|
|
64 |
|
|
|
68 |
|
|
|
45 |
|
|
Total deferred tax assets before valuation allowance |
|
|
35,463 |
|
|
|
23,400 |
|
|
|
28,888 |
|
|
Valuation allowance |
|
|
(35,463 |
) |
|
|
(23,400 |
) |
|
|
(28,839 |
) |
|
Total deferred tax assets |
|
|
— |
|
|
|
— |
|
|
|
49 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
— |
|
|
|
— |
|
|
|
(49 |
) |
|
IPR&D |
|
|
(1,250 |
) |
|
|
(1,250 |
) |
|
|
— |
|
|
Total deferred tax liabilities |
|
$ |
(1,250 |
) |
|
$ |
— |
|
|
$ |
(49 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly known as the Tax Cuts and Jobs Act of 2017 (the “Act”), which significantly reforms the Internal Revenue Code of 1986, as amended. The Act contains broad and complex changes to corporate taxation, including in part reduction of the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously considered permanently reinvested, and creates new taxes on certain foreign sourced earnings.
As of December 31, 2017, the Company was able to determine a reasonable estimate, namely the one-time transition tax and the remeasurement of deferred tax at the new tax rate. The Company did not recognize any provisional tax expense due to its significant operating losses. The effect on the Company’s deferred tax balance due to the change of net tax rate was $10.2 million and was fully offset by its valuation allowance, therefore, there was no net effect to the Company’s effective tax rate for the year ended December 31, 2017.
The one-time transition tax is based on the Company’s post-1986 foreign earnings and profits which the Company had previously excluded from U.S. income taxes due to its position that it would permanently reinvest its future earnings. The one-time transition tax is applied at a 15.5% tax rate on cash assets and an 8% tax rate for other specified assets. Since the Company’s foreign operations incurred aggregated losses, the Company did not record provisional amount for its one-time transition tax liability for its foreign subsidiaries due to overall cumulative foreign losses.
Additionally, the SEC staff has issued SAB 118, which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. 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. Because the Company is still in the process of analyzing certain provisions of the Act including the application of new executive compensation limitation provisions under Internal Revenue Section 162(m) in accordance with SAB 118, the Company determined that the adjustment to its deferred taxes was a provisional amount and a reasonable estimate at December 31, 2017.
The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of December 31, 2017, 2016 and 2015. The valuation allowance increased approximately $12.0 million during the years ended December 31, 2017 and decreased approximately $5.3 million during the year ended December 31, 2016.
As of December 31, 2017, the Company had U.S. federal net operating losses (“NOLs”) carryforwards of approximately $53.2 million to offset future federal income. NOLs expire at various years beginning with 2036. As of December 31, 2017, the Company also had U.S. state NOL carryforwards of approximately $37.8 million to offset future state income. U.S. State NOLs expire at various years beginning with 2036. At December 31, 2017, the Company also had approximately $44.1 million of foreign net operating loss carryforwards which may be available to offset future foreign income; these carryforwards do not expire.
As of December 31, 2017, the Company had federal research and development tax credit carryforwards of approximately $0.8 million available to reduce future tax liabilities which expire at various years beginning with 2036. As of December 31, 2017, the Company had state credit carryforwards of approximately $1.0 million available to reduce future tax liabilities which do not expire.
Under Section 382 of the Internal Revenue Code of 1986, as amended (Code), the Company’s ability to utilize NOL carryforwards or other tax attributes, such as research tax credits, in any taxable year may be limited if the Company experiences an “ownership change.” Generally, a Section 382 ownership change occurs if there is a cumulative increase of more than 50 percentage points in the stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock within a specified testing period. Similar rules may apply under state tax laws. The Company believes that it has experienced ownership changes under Section 382, which will result in limitations in the Company’s ability to utilize net operating losses and credits. As a result, the amount of the NOLs and research and credit carryforwards presented in the Company’s consolidated financial statements are limited and will expire unutilized, and the Company removed a significant amount of NOLs and credits from its deferred taxes.
The Company files income tax returns in the U.S., and state and foreign jurisdictions. The federal, state and foreign income tax returns are open under the statute of limitations subject to tax examinations for the tax years ended December 31, 2012 through December 31, 2017. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service, state or foreign tax authorities to the extent utilized in a future period.
The Company has total unrecognized tax benefits as of December 31, 2017, 2016 and 2015 of approximately $2.7 million, $2.1 million and $1.6 million, respectively. No amount of the unrecognized tax benefits, if recognized, would reduce the Company’s annual effective tax rate because the benefits are in the form of deferred tax assets for which a full valuation allowance has been recorded. The Company does not anticipate a significant change to its unrecognized tax benefits over the next twelve months. A reconciliation of the unrecognized tax benefits is as follows:
|
|
|
Years ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Unrecognized tax benefits as of the beginning of the year |
|
$ |
2,157 |
|
|
$ |
1,568 |
|
|
$ |
471 |
|
|
Increase (decrease) related to prior year tax provisions |
|
|
— |
|
|
|
— |
|
|
|
172 |
|
|
Increase related to current year tax provisions |
|
|
588 |
|
|
|
589 |
|
|
|
925 |
|
|
Unrecognized tax benefits as of the end of the year |
|
$ |
2,745 |
|
|
$ |
2,157 |
|
|
$ |
1,568 |
|
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017 and 2016, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s consolidated statements of operations and comprehensive loss. There are no ongoing examinations by taxing authorities at this time.