Income Taxes
The provision for income taxes is based on net loss before income taxes as follows: |
| | | | | | | | | | | |
| DECEMBER 31, |
(in thousands) | 2017 | | 2016 | | 2015 |
Net loss before income taxes: | | | | | |
United States | $ | (133,113 | ) | | $ | (88,123 | ) | | $ | (59,211 | ) |
Other | (13,750 | ) | | (10,743 | ) | | (15,013 | ) |
Net loss before income taxes | $ | (146,863 | ) | | $ | (98,866 | ) | | $ | (74,224 | ) |
| | | | | |
The components of the provision for income taxes are as follows:
| | |
| DECEMBER 31, |
(in thousands, except percentages) | 2017 | | 2016 | | 2015 |
Provision for income taxes: | | | | | |
Current: | | | | | |
United States | $ | (24 | ) | | $ | 193 |
| | $ | 139 |
|
Other | — |
| | — |
| | — |
|
Total | $ | (24 | ) | | $ | 193 |
| | $ | 139 |
|
Deferred: | | | | | |
United States | $ | (1,734 | ) | | $ | — |
| | $ | — |
|
Other | — |
| | — |
| | — |
|
Total | (1,734 | ) | | — |
| | — |
|
Provision for income taxes | $ | (1,758 | ) | | $ | 193 |
| | $ | 139 |
|
Effective tax rate | 1.20 | % | | (0.19 | )% | | (0.19 | )% |
Significant components of the Company’s net deferred income tax assets as of December 31, 2017 and 2016 consist of the following: |
| | | | | | | |
| DECEMBER 31, |
(in thousands) | 2017 | | 2016 |
Net deferred tax assets: | | | |
Net operating loss carryforwards | $ | 58,172 |
| | $ | 39,188 |
|
Stock-based compensation | 13,681 |
| | 11,845 |
|
U.S. tax credit carryforwards | 4,182 |
| | 4,566 |
|
Envisia asset acquisition | 7,107 |
| | — |
|
Other assets, net | 242 |
| | 1,138 |
|
Valuation allowance | (83,384 | ) | | (56,737 | ) |
Total net deferred income taxes | $ | — |
| | $ | — |
|
A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 31, 2017, 2016 and 2015 is as follows: |
| | | | | | | | |
| DECEMBER 31, |
| 2017 | | 2016 | | 2015 |
U.S. federal tax rate | 35.00 | % | | 35.00 | % | | 35.00 | % |
Impact of federal tax legislation | 25.82 | % | | — | % | | — | % |
State income taxes, net of federal benefit | 7.71 | % | | 5.34 | % | | (0.90 | )% |
Taxable gain resulting from IP Assignment | — | % | | — | % | | (75.31 | )% |
Non-taxable foreign loss | (0.51 | )% | | (2.69 | )% | | (6.98 | )% |
Tax deferral from IP Assignment | (0.10 | )% | | (0.19 | )% | | 3.56 | % |
Other | (2.11 | )% | | (1.45 | )% | | 0.02 | % |
Change in valuation allowance | (64.61 | )% | | (36.20 | )% | | 44.42 | % |
Effective tax rate | 1.20 | % | | (0.19 | )% | | (0.19 | )% |
On December 22, 2017, H.R. 1 (commonly referred to as the “Tax Act”) was signed into law and enacted significant changes to the Internal Revenue Code of 1986, as amended. This new tax legislation, among other changes, reduces the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Under U.S. GAAP, deferred tax assets and liabilities are required to be revalued during the period in which the new tax legislation is enacted. Therefore, the deferred tax assets and liabilities were remeasured during the period ended December 31, 2017, resulting in a reduction of the deferred tax asset balance and corresponding valuation allowance of $34.2 million due to the enacted changes in tax rate. The Tax Act also repealed the corporate AMT for tax years beginning after December 31, 2017, and provides that existing AMT credit carryovers are refundable in tax years beginning after December 31, 2017. The Company has approximately $1.7 million of AMT credit carryovers that are expected to be fully refunded between 2019 and 2022. This amount is recorded as a non-current receivable within other assets on the consolidated balance sheet as of December 31, 2017. On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant may not have the necessary information available in reasonable detail to complete the accounting for certain income tax effects. The Company has recognized provisional tax impacts related to the revaluation of its net deferred tax assets and the income tax benefit recognized for refundable AMT. The final impact assessment will be completed as additional information becomes available, but no later than one year from the enactment of the Tax Act, and may differ from provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, the filing of the Company’s tax return and actions the Company may take as a result of the Tax Act.
At December 31, 2017, the Company had federal and state net operating loss (“NOL”) carryforwards of approximately $196.2 million and $271.3 million, respectively, which expire from 2024 through 2037. Included in the NOL carryforwards are approximately $8.9 million and $2.3 million of federal and state NOL carryforwards, respectively, related to stock-based awards that were recognized as deferred tax assets upon the adoption of ASU 2016-09 on January 1, 2017. The $3.7 million tax-effected adjustment under ASU 2016-09 related to these NOLs had no net impact on accumulated deficit since this amount was fully offset by a valuation allowance. NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, 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.
Realization of future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. The Company provides a valuation allowance when it is more likely than not that deferred tax assets will not be realized. Due to the Company’s history of operating losses and lack of available evidence supporting future taxable income, the Company maintains a valuation allowance on all of its deferred tax assets as of December 31, 2017.
The Company reduced the valuation allowance on its deferred tax assets as of December 31, 2017 by $1.7 million related to federal AMT credit carryforwards which became fully refundable under the Tax Act. The increase in valuation allowance as of December 31, 2017 as compared to December 31, 2016 was primarily the result of the increase in NOL carryforwards.
The IP Assignment in 2015 resulted in the recognition of a taxable gain for U.S. federal and state income tax purposes. The income tax expense of $2.8 million was recorded as a prepaid asset and is being amortized into income tax expense over the estimated remaining patent life of the intellectual property subject to the IP Assignment. For the year ended December 31, 2017, the Company’s income tax benefit relates primarily to a deferred income tax benefit recognized for the refundable AMT, as discussed above, partially offset by amortization of the prepaid asset. For the years ended December 31, 2016 and 2015, the Company’s income tax expense relates to the amortization of the prepaid asset.
The IP Assignment is subject to complex tax and transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with the Company’s determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and the Company’s position were not sustained, the Company could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates and reduced cash flows than otherwise would be expected.