17. Income Taxes
On December 22, 2017, the United States enacted new tax reform (“Tax Act”). The Act contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118) which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, the Company considers the accounting of the transition tax and deferred tax re-measurements to be incomplete due to the forthcoming guidance and ongoing analysis of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.
Included in the Tax Act are provisions which repatriate the aggregate of post-1986 earnings and profits of foreign corporations. The Company has calculated the impact of repatriation on a provisional basis under SAB 118. Repatriation will reduce Federal U.S. tax attributes by $23 thousand for the year ended December 31, 2017. Beginning with the year ending December 31, 2018, the corporate statutory rates on U.S. earnings will be reduced from 34% to 21%. The impact of the future rate reduction resulted in a decrease to the deferred tax assets and an offset to the valuation allowance for the year ending December 31, 2017 by $28.9 million relating to the revaluation of the net deferred tax asset.
The Company is currently evaluating the impact of the Tax Act as it relates to the foreign subsidiaries. The Company intends to record any impact currently when it occurs rather than deferring the impact. Other than the repatriation tax referenced above and reduction in statutory rate, the Company does not anticipate the Tax Act will have a material impact on income taxes in future years.
Loss before provision for income taxes consisted of the following (in thousands):
|
|
|
Years Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Domestic |
|
$ |
(10,923 |
) |
|
$ |
(13,124 |
) |
|
Foreign |
|
|
47 |
|
|
|
41 |
|
|
Total |
|
$ |
(10,876 |
) |
|
$ |
(13,083 |
) |
The provision for income taxes in the accompanying consolidated statements of operations and comprehensive loss consisted of the following (in thousands):
|
|
|
Years Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Current Provision: |
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
1 |
|
|
|
17 |
|
|
Foreign |
|
|
13 |
|
|
|
16 |
|
|
Total |
|
|
14 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred (Benefit) Provision: |
|
|
|
|
|
|
|
|
|
Federal |
|
|
— |
|
|
|
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
— |
|
|
|
— |
|
|
Total |
|
|
— |
|
|
|
— |
|
|
Total provision |
|
$ |
14 |
|
|
$ |
33 |
|
A reconciliation of income taxes from operations computed using the U.S. federal statutory rate of 34% to that reflected in operations follows (in thousands):
|
|
|
Years Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Income tax benefit using U.S. federal statutory rate |
|
$ |
(3,698 |
) |
|
$ |
(4,449 |
) |
|
Rate Changes |
|
|
28,942 |
|
|
|
— |
|
|
Permanent differences |
|
|
35 |
|
|
|
16 |
|
|
State income taxes, net of federal benefit |
|
|
(141 |
) |
|
|
(661 |
) |
|
Stock compensation |
|
|
53 |
|
|
|
1,218 |
|
|
Tax credits |
|
|
(127 |
) |
|
|
(42 |
) |
|
Foreign tax rate differential |
|
|
(2 |
) |
|
|
1 |
|
|
Change in the valuation allowance |
|
|
(25,161 |
) |
|
|
1,303 |
|
|
Unrealized gain |
|
|
— |
|
|
|
2,673 |
|
|
Other |
|
|
113 |
|
|
|
(26 |
) |
|
Total |
|
$ |
14 |
|
|
$ |
33 |
|
Components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
59,823 |
|
|
$ |
79,648 |
|
|
Research and development credit carryforwards |
|
|
4,005 |
|
|
|
3,713 |
|
|
Capitalized research and development costs |
|
|
464 |
|
|
|
1,366 |
|
|
Capitalized start-up expenses |
|
|
2,846 |
|
|
|
4,594 |
|
|
Depreciation and other |
|
|
1,920 |
|
|
|
3,081 |
|
|
Total deferred tax assets |
|
|
69,058 |
|
|
|
92,402 |
|
|
Valuation allowance |
|
|
(69,058 |
) |
|
|
(92,402 |
) |
|
Net deferred tax asset |
|
$ |
— |
|
|
$ |
— |
|
Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of the Company’s deferred tax assets and determined that it is more likely than not that the Company will not recognize the benefits of the deferred tax assets related to the U.S. and the Netherlands. As a result, a valuation allowance of approximately $69.1 million and $92.4 million was established at December 31, 2017 and 2016, respectively. The valuation allowance decreased by approximately $23.3 million during the year ended December 31, 2017, primarily due to the revaluation of the net deferred tax asset at the reduced 21% U.S. corporate income tax future rate.
At December 31, 2017, the Company had U.S. federal and state net operating loss carryforwards of approximately $223.0 million and $205.6 million, respectively. These operating loss carryforwards will expire at various times beginning in 2024 through 2037 for federal purposes and begin to expire in 2030 and will continue to expire through 2037 for state purposes.
In addition, at December 31, 2017, the Company also has U.S. federal and state research and development tax credit carryforwards (excluding ASC 740, Income Taxes (“ASC 740”), reserve) of approximately $2.8 million and $1.2 million, respectively, to offset future income taxes. These tax credit carryforwards will expire at various times beginning in 2023 through 2037 for federal purposes and will expire at various times beginning in 2018 through 2032 for state purposes.
Utilization of net operating loss carryforwards and research and development 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 in accordance with Section 382 of the Internal Revenue Code of 1986 (“IRC Section 382”) and with Section 383 of the Internal Revenue Code of 1986, as well as similar state provisions. These ownership changes may limit the amount of net operating loss carryforwards and research and development credit carryforwards that can be utilized annually to offset future taxable income and taxes, respectively. In general, an ownership change, as defined by IRC Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. The Company has completed several financings since its inception, which may have resulted in a change in control as defined by IRC Section 382 or could result in a change in control in the future. As of December 31, 2017, the Company has not, as yet, conducted an IRC Section 382 study, which could impact its ability to utilize net operating loss and tax credit carryforwards annually in the future to offset the Company’s taxable income, if any.
The Company applies ASC 740-10, which provides guidance on the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. At December 31, 2017 and 2016, the Company had unrecognized tax liabilities of approximately $1.5 million and $1.4 million, respectively.
The following is a roll forward of the Company’s unrecognized tax benefits (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Unrecognized tax benefit – as of the beginning of the year |
|
$ |
1,449 |
|
|
$ |
1,426 |
|
|
Gross increases – tax positions of the prior periods |
|
|
— |
|
|
|
— |
|
|
Gross increases – current period tax positions |
|
|
32 |
|
|
|
23 |
|
|
Unrecognized tax benefits – as of the end of the year |
|
$ |
1,481 |
|
|
$ |
1,449 |
|
The Company will recognize interest and penalties related to uncertain tax positions, should they be assessed, 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 comprehensive loss.
The statute of limitations for assessment by the Internal Revenue Service (“IRS”) and state tax authorities is open for tax years ended December 31, 2013 through December 31, 2017, although carryforward attributes that were generated prior to tax year 2013 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period. The statute of limitations for assessment by foreign tax authorities is open for tax years ended December 31, 2013 through December 31, 2017. There are currently no federal or state audits in progress.
The Company has not yet completed a study of its research and development credit carryforwards. Once completed, this study may result in an adjustment to the Company’s research and development credit carryforwards. A full valuation allowance has been provided against the Company’s research and development credits, and if an adjustment is required at the time the study is completed, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development credit carryforward and the valuation allowance.