8. Income taxes
Effects of the Tax Cuts and Job Act
On December 22, 2017, The Tax Cuts and Job Act (the Tax Act) was signed into U.S. law. The Tax Act significantly changes the Internal Revenue Code of 1986, as amended (the Code). Changes under the new tax law include a reduction in the federal corporate tax rate from 34% to 21%, limitations or eliminations to certain tax deductions, and usage of tax benefits in the future. The Company has re-measured its assets and liabilities associated with such future tax benefits in the current year and recognized a decrease in its deferred tax asset of $939,000. This reduction in the deferred tax asset has been offset by a coinciding reduction in the associated valuation allowance, resulting in no net impact.
The U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year "measurement period" similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the change in tax law where accounting is not complete, but a reasonable estimate has been determined; and (3) current or deferred tax amounts reflected in accordance with law prior to the enactment of the change in tax law because the accounting of the effects of the change in tax law are not complete and a reasonable estimate has not been determined, together with qualitative disclosure of the effects of the changes in tax law for which the accounting is not compete, the reason why the accounting is not complete, and the additional information that is needed to be obtained, prepared or analyzed in order to complete the accounting. As the Tax Act was passed late in 2017 and ongoing guidance and accounting interpretation is expected over the next 12 months, the Company considers the accounting to be preliminary due to the forthcoming guidance and its ongoing analysis of final year-end data and tax positions. Adjustments to these preliminary amounts identified during the measurement period will be included as an adjustment to tax expense from continuing operations in the period the amounts are determined. SAB 118 provides that the measurement period is complete when a company's accounting is complete and that in no circumstances should the measurement period extend beyond one year from the enactment date of the applicable change in tax law.
Corporate Tax Rate Reduction
The Tax Act reduces the federal corporate tax rate to 21.0% effective January 1, 2018. In accordance with Section 15 of the Code, the Company will utilize this rate for its 2017 deferred tax asset and any future reversals. The Company recorded provisional charges for the re-measurement of the deferred tax assets of $939,000 to its income tax expense related to long-term deferred tax assets for the year ended December 31, 2017. The change had no impact on the Company’s financial statements due to a reduction of the valuation allowance.
Deemed Repatriation Transition Tax
The Deemed Repatriation Transition Tax (the Transition Tax) is a tax on previously untaxed accumulated earnings and profits (E&P) of certain foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Based on preliminary estimates, the Company recorded a provisional Transition Tax obligation of $0. This is due to Parent’s foreign subsidiaries being in a net E&P deficit at December 31, 2017.
Former Code Section 162(m)
Prior to the enactment of the Tax Act, Section 162(m) of the Code provided for a $1 million limitation on deductible compensation for certain covered employees of SEC filers that traded on an exchange. The definition of compensation did not include amounts related to certain performance-based compensation items. The Tax Act eliminates the exception for all performance-based compensation, including bonuses, stock options and restricted stock. In addition, the term “covered employees” was expanded to additional employees, including the chief financial officer. The new provisions require an analysis of deferred tax assets related to stock compensation to determine whether those assets are more likely than not to be realized, or whether they need to be written off at December 31, 2017. Based on preliminary estimates, the Company does not believe there is any limitation under this provision.
Bonus Depreciation/Immediate Expensing
For the period of September 27, 2017 through December 31, 2023, companies are allowed to claim 100% bonus depreciation on certain qualified property placed into service. Since the enactment impacts assets placed into service during a period of time for the year ended December 31, 2017, companies may need to recognize the deduction in the current year provision at the enacted tax rate for 2017 (35%) and the related deferral at the enacted tax rate for 2018 (21%). The Company expects to opt out of any bonus deprecation on post September 27, 2017 assets. Any and all deferred tax asset/liability related to the difference in depreciation has been determined using the newly enacted tax rates.
The Company has had an overall net operating loss position since its inception.
For the years ended December 31, 2017 and 2016, the components of loss before income taxes were as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
U.S. |
|
$ |
(2,031 |
) |
|
$ |
(5,555 |
) |
|
Foreign |
|
|
(22,171 |
) |
|
|
(10,733 |
) |
|
Total |
|
$ |
(24,202 |
) |
|
$ |
(16,288 |
) |
The components of income tax (benefit) for the years ended December 31, 2017 and 2016 were as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Current tax expense: |
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(1 |
) |
|
|
50 |
|
|
State |
|
$ |
(12 |
) |
|
|
12 |
|
|
Foreign |
|
|
225 |
|
|
|
— |
|
|
Total |
|
$ |
212 |
|
|
$ |
62 |
|
|
Deferred tax benefit: |
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
— |
|
|
$ |
— |
|
|
Total provision for income taxes |
|
$ |
212 |
|
|
$ |
62 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the U.S. statutory income tax rate to the consolidated effective income tax rate was as follows:
|
|
|
Year Ended December 31, |
|
||||||
|
|
|
2017 |
|
|
|
2016 |
|
||
|
U.S. statutory income tax rate |
|
|
34 |
% |
|
|
|
34 |
% |
|
Non-deductible interest expense |
|
|
— |
|
|
|
|
(6 |
%) |
|
Kreos warrant replacement |
|
|
— |
|
|
|
|
(2 |
%) |
|
Stock compensation |
|
|
(2 |
%) |
|
|
|
— |
|
|
Permanent differences |
|
|
— |
|
|
|
|
(1 |
%) |
|
State taxes, net of federal tax effect |
|
|
— |
|
|
|
|
2 |
% |
|
Change in valuation allowance |
|
|
125 |
% |
|
|
|
(20 |
%) |
|
Write off of disallowed recognized built in loss |
|
|
(143 |
%) |
|
|
|
— |
|
|
Change in U.S. tax rate |
|
|
(4 |
%) |
|
|
|
— |
|
|
Foreign tax rate differences |
|
|
(11 |
%) |
|
|
|
(7 |
%) |
|
Other items |
|
|
1 |
% |
|
|
|
— |
|
|
Effective income tax rate |
|
|
0.0 |
% |
|
|
|
0.0 |
% |
Deferred taxes are recognized for temporary differences between the bases of assets and liabilities for financial statement and income tax purposes. The tax effect of temporary differences that give rise to significant portions of the deferred tax assets are as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Tax loss carryforwards |
|
$ |
21,653 |
|
|
$ |
15,420 |
|
|
Capitalized expenses |
|
|
— |
|
|
|
36,254 |
|
|
Research and development credits |
|
|
127 |
|
|
|
140 |
|
|
Accrued expenses |
|
|
295 |
|
|
|
1,088 |
|
|
Stock compensation |
|
|
825 |
|
|
|
383 |
|
|
Other |
|
|
35 |
|
|
|
43 |
|
|
Total gross deferred tax assets |
|
|
22,935 |
|
|
|
53,328 |
|
|
Valuation allowance |
|
|
(22,910 |
) |
|
|
(53,257 |
) |
|
Total deferred tax assets |
|
|
25 |
|
|
|
71 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
$ |
25 |
|
|
$ |
40 |
|
|
Temporary difference on financial instruments |
|
|
— |
|
|
|
31 |
|
|
Total deferred tax liabilities |
|
|
25 |
|
|
|
71 |
|
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. Due to the uncertainty surrounding the realization of the favorable tax attributes in future returns, the Company has reserved against its deferred tax assets at December 31, 2017 and 2016. The Company had approximately $22.9 million and $53.3 million in valuation allowances recorded against its deferred tax assets as of December 31, 2017 and 2016, respectively. The Company recorded a benefit of $30.2 million due to the change in valuation allowance for the year ended December 31, 2017 and an expense of $3.2 million for the change in valuation allowance for the year ended December 31, 2016.
In connection with the Company’s 2017 sale of legacy Biodel IPR&D, the Company realized a previous unrealized built-in loss related to capitalized research expenses and wrote-off the remaining tax basis of $88.4 million, which, when tax effected is $34.7 million.
Total net deferred taxes are classified as follows (in thousands):
|
|
|
As of December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Noncurrent deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
|
Noncurrent deferred tax liabilities |
|
|
— |
|
|
|
— |
|
As of December 31, 2017, deferred tax assets related to net operating loss (NOL) carryforwards were $21.7 million, which may be used subject to certain limitations to offset future taxable income, if any. The NOL includes approximately $14.6 million for U.S. federal tax purposes and $146.0 million for U.S. state tax purposes. These loss carryforwards expire between 2024 and 2036. Additional NOL of approximately $43.8 million were generated in various non-U.S. jurisdictions and will not expire.
Utilization of the NOL and credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future as provided by Section 382 of the Code and similar state and foreign provisions. These ownership changes may limit the amount of NOL and credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Code Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three‑year period. During 2016, the Company completed an analysis to assess and concluded that an ownership change within the meaning of Code Section 382 occurred. The analysis has not yet been updated beyond 2016.
The Company also has state research and development credit carryforwards of approximately $160,000, which expire commencing in fiscal 2022. A valuation allowance has been established on the NOL carryforward and research and development credits as it is uncertain as to whether future taxable income will be generated.
The Company’s policy is for any earnings of non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company’s specific plans for reinvestment of those subsidiary earnings, if any.
Uncertain tax positions
The Company accounts for uncertain tax positions under the recognition and measurement criteria of ASC 740-10. For those tax positions for which it is more likely than not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. If the Company does not believe that it is not more likely than not that a tax benefit will be sustained, no tax benefit is recognized. As of December 31, 2017 and 2016, no uncertain tax positions have been recorded. Interest and penalties related to the settlement of uncertain tax positions, if any, will be reflected in income tax expense. The Company did not recognize any interest or penalties associated with unrecognized tax benefits in the accompanying consolidated financial statements. The Company does not expect any material changes to the unrecognized benefits within 12 months of the reporting date. Due to existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate.
The Company files U.S. federal and state tax returns and has determined that its major tax jurisdictions are the United States and Massachusetts, as well as United Kingdom and Sweden. There have been no uncertain tax benefits recognized, or related interest or potential penalties, as of December 31, 2017 or 2016. The Company’s tax returns may be examined for certain tax jurisdictions back to December 31, 2014.