Income Taxes

12 Months Ended

Dec. 31, 2019

14. INCOME TAXES

The Company files federal, state, local and foreign income tax returns in jurisdictions with varying statutes of limitations. Income taxes are computed using the asset and liability method in accordance with FASB ASC 740, “Income Taxes”, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. Deferred taxes are measured using provisions of currently enacted tax laws. A valuation allowance against deferred tax assets is recorded when it is more likely than not that such assets will not be fully realized. The Company has recorded a full valuation allowance against substantially all net deferred tax assets as it is more likely than not that the benefit of the deferred tax assets will not be recognized in future periods.

On December 22, 2017, H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the Tax Reform Act) was enacted and amends the Internal Revenue Code to reduce tax rates and modify policies, credits and deductions for businesses. For businesses, U.S. GAAP requires resulting tax effects of accounting for the Tax Reform Act to be recorded in the reporting period of enactment. On December 22, 2017, the SEC staff also issued Staff Accounting Bulletin No. 118 (SAB 118) which allowed businesses to record provisional amounts in the application of U.S. GAAP during a measurement period, not to extend beyond one year from the enactment of the Tax Reform Act, in situations when a registrant did not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. As of December 31, 2018, the Company completed our accounting for the tax effects of enactment of the Tax Reform Act. The Tax Reform Act provided companies with the ability to elect to reclassify the income tax effects of the Tax Cuts and Jobs Act on items within accumulated other comprehensive income (loss) to retained earnings. The Company did not make this election due to its full valuation allowance.

The Company’s provision for income taxes for each of the years ended December 31 is as follows:



	2019		2018		2017
Current Tax Expense
Federal	$	(26)	$	(51)	$	—
State		34		28		44
Foreign		165		198		72
Total current tax expense		173		175		116
Deferred Tax Expense
Federal	$	(7,655)	$	(3,048)	$	18,485
State		(1,368)		178		(1,337)
Foreign		(1,690)		45		(2,241)
Change in valuation allowance		10,739		2,876		(15,009)
Total deferred tax expense		26		51		(102)
Total tax expense	$	199	$	226	$	14

The detail of deferred tax assets and liabilities at December 31 is as follows:



	2019		2018
Deferred tax assets (liabilities):
Net operating loss carryforward	$	111,000	$	68,563
Research and development and AMT credit carryforwards, net		8,193		6,206
Deferred interest		909		774
Equity compensation		8,233		4,750
Accruals and reserves		3,513		802
Inventories		1,007		726
Intangible assets		(30,996)		(11,448)
Property and equipment, net		(1,482)		(608)
Finance and operating lease liabilities		4,016		—
Right-of-use assets		(3,476)		—
Other, net		287		135
Subtotal		101,204		69,900
Less valuation allowance		(101,178)		(69,849)
Total	$	26	$	51

The Company recorded $20,590 of net deferred tax assets and offsetting valuation allowances as part of the SentreHEART acquisition.

The Company has federal net operating loss carryforwards of $340,079 which have expirations between 2021 and 2038 and $80,101 which has no expiration as a result of the Tax Reform Act. The Company has state and local net operating loss carryforwards of $260,924 with varying expirations from 2020 to 2040. A portion of the Company’s federal and state net operating loss carryforwards are subject to certain limitations under Internal Revenue Code Sections 382 and 383. The Company has federal research and development credit carryforwards of $8,168 which have expirations between 2023 and 2040. Additionally, the Company has foreign net operating loss carryforwards of approximately $42,712 which have expirations between 2020 and 2028. On January 1, 2017, the Company adopted ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” and recognized $2,816 of previously unrecognized deferred tax assets with a corresponding increase in its valuation allowance. On January 1, 2019 the Company adopted ASC 842 and recognized $400 of operating lease liability deferred tax assets and $400 of offsetting right-of-use asset deferred tax liabilities.

The Company’s 2019, 2018 and 2017 effective income tax rates differ from the federal statutory rate as follows:



	2019				2018				2017
Federal tax at statutory rate	21.00	%	$	(6,950)	21.00	%	$	(4,391)	34.00	%	$	(9,139)
Federal and Foreign tax rate change	1.40			(462)	(6.84)			1,430	(109.68)			29,480
Federal R&D credit	2.53			(837)	4.39			(918)	(0.40)			107
Federal deferred adjustment	3.28			(1,085)	(10.77)			2,253	—			—
Federal NOL adjustment for ASU	—			—	—			—	10.48			(2,816)
Valuation allowance	(32.45)			10,739	(13.75)			2,876	55.84			(15,009)
State income taxes	4.02			(1,334)	(0.99)			206	4.81			(1,292)
Foreign NOL rate change	(1.17)			388	(1.22)			256	1.30			(348)
Foreign tax rate differential	(0.38)			126	(0.60)			125	(2.45)			658
Permanent differences and other	1.17			(386)	7.70			(1,611)	6.05			(1,627)
Effective tax rate	(0.60)	%	$	199	(1.08)	%	$	226	(0.05)	%	$	14

The Company’s pre-tax book loss for domestic and international operations was $(28,002) and $(6,993) for 2019, $(13,443) and $(7,468) for 2018 and $(19,409) and $(7,469) for 2017.

The Company had undistributed earnings of foreign subsidiaries of approximately $304 at December 31, 2019. The Company does not consider these earnings as permanently reinvested and thus has recognized appropriate U.S. current and deferred taxes on such amounts.

Federal, state and local tax returns of the Company are routinely subject to examination by various taxing authorities. Federal income tax returns for periods beginning in 2016 are open for examination. Generally, state and foreign income tax returns for periods

beginning in 2015 are open for examination. However, taxing authorities have the ability to adjust net operating loss and tax credit carryforwards from years prior to these periods. The Company has not recognized certain tax benefits because of the uncertainty of realizing the entire value of the tax position taken on income tax returns upon review by the taxing authorities.

A reconciliation of the change in federal and state unrecognized tax benefits for 2019, 2018 and 2017 is presented below:



	2019		2018		2017
Balance at the beginning of the year	$	1,157	$	1,157	$	3,175
Increases (decreases) for prior year tax positions		620		—		(2,018)
Increases (decreases) for current year tax positions		—		—		—
Increases (decreases) related to settlements		—		—		—
Decreases related to statute lapse		—		—		—
Balance at the end of the year	$	1,777	$	1,157	$	1,157

The Internal Revenue Service completed its review of the Company’s 2014 federal income tax return in February 2017. In 2017, the Company also completed a detailed analysis of R&D credit carryforwards for the tax years 2008 through 2016. As a result of this analysis, as well as completion of the IRS audit of the 2014 credit, the Company has reduced both the R&D credit carryforward and related unrecognized tax benefits by $2,018. The Company’s increase for prior year tax positions relates to uncertain income tax benefits assumed pursuant to the SentreHEART acquisition. Historically, the Company did not have any interest and penalties accrued for unrecognized income tax benefits as a result of offsetting net operating losses. The Company has accrued interest and penalties associated with uncertain income tax benefits assumed pursuant to the SentreHEART acquisition as of December 31, 2019, and recognized interest and penalties within income tax expense. The amount is not significant.

There are no amounts included in the balance of unrecognized tax benefits at December 31, 2018 and 2017 that, if recognized, would affect the effective tax rate. The balance of unrecognized tax benefits at December 31, 2019 includes $1,777 of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes and valuation allowance. The Company does not expect that its unrecognized tax benefits for research credits will significantly change within twelve months of December 31, 2019.