Income Taxes

12 Months Ended

Dec. 31, 2018

For financial reporting purposes, the components of loss from continuing operations before income taxes were as follows (in thousands):


	December 31,
	2018		2017		2016
United States	$	(35,838)	$	(32,112)	$	(24,285)
Foreign	(87,878)		(93,910)		(45,349)
Total	$	(123,716)	$	(126,022)	$	(69,634)

At December 31, 2018, the Company’s federal, state, and foreign net operating loss carryforwards were approximately $286.3 million, $190.3 million and $191.8 million, respectively, which may be subject to limitations as described below. If not utilized, the federal tax loss carryforwards incurred prior to 2018 will begin to expire in 2029 and the state tax loss carryforwards incurred prior to 2018 will begin to expire in 2021. Under the Tax Cut and Jobs Act of 2017 (Tax Act), federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. It is uncertain if and to what extent various states will conform to the Tax Act. In

addition, the Company has federal and California research and development income tax credit carryforwards of approximately $3.4 million and $4.1 million, respectively. If not utilized, the federal research and development income tax credit carryforwards will begin to expire in 2027. The California research and development income tax credit carryforwards do not expire and can be carried forward indefinitely. Due to the net operating loss carryforwards, all years remain open for income tax examination by tax authorities in the United States, various states and foreign tax jurisdictions in which the Company files tax returns.

As of December 31, 2018, the Company has experienced at least three ownership changes. The first ownership change occurred in August 2006 upon the issuance of the Series A-1 convertible preferred. As a result of this ownership change, the Company has reduced its net operating loss carryforwards by $1.9 million and research and development income tax credits by $8,000. The Company had a second ownership change in September 2011 upon the issuance of common stock in a follow-on offering. As a result of the second ownership change, the Company has reduced its federal net operating loss carryforwards as of December 31, 2011 by $121.1 million and research and development income tax credits as of December 31, 2011 by $3.0 million. In addition, the Company also reduced its California net operating loss carryforwards as of December 31, 2011 by $53.3 million as a result of the second ownership change. The Company had a third ownership change in January 2014, which did not result in any reductions of federal and California net operating loss carryforwards or research and development income tax credits. Based on the Company’s most recent assessment through December 31, 2018, no reduction was made to the federal and state net operating loss carryforwards or federal and state tax income tax credit carryforwards under these rules. Pursuant to the IRC, the use of the Company’s net operating loss and research and development income tax credit carryforwards may be limited in the event of a future cumulative change in ownership of more than 50% within a three-year period.

A reconciliation of the Company’s income tax benefit from continuing operations compared to the income tax benefit computed at the federal statutory tax is was as follows (in thousands):


	December 31,
	2018		2017		2016
Income tax at federal statutory rate	$	(26,022)	$	(42,846)	$	(23,675)
State taxes, net of federal benefit	(8)		(19)		(65)
Change in valuation allowance	16,949		(11,208)		16,024
Impact of U.S. statutory rate change on revaluing deferred tax assets	—		36,085		—
Permanent interest disallowed	(35)		(150)		(1,832)
Impact of foreign rate change on deferred taxes	1,961		1,619		521
Other permanent differences⁽¹⁾	(666)		8,236		630
Research and development tax credits	(51)		(274)		(145)
State tax rate benefit	169		56		578
Foreign rate differential	1,731		10,636		6,122
Stock-based compensation⁽¹⁾	(1,344)		(2,462)		1,132
Net operating losses surrendered under UK's R&D tax relief scheme	6,322		—		—
Credits and other⁽¹⁾	994		327		(238)
Income tax benefit	$	—	$	—	$	(948)

⁽¹⁾ Certain prior years’ amounts in the table above have been reclassified to conform with current year’s presentation.

The Tax Act has resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to a flat rate of 21% for tax years beginning after December 31, 2017, limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S. owned undistributed foreign earnings and profits known as the transition tax.

Pursuant to SAB 118, an entity may select between one of three scenarios to determine a reasonable estimate arising from the Tax Act. The scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate as the law is still being analyzed. The Company was able to provide a reasonable estimate for the revaluation of deferred taxes and the effects of the transition tax on undistributed foreign earnings and profits. As such, the Company has recorded a $36.1 million reduction in deferred tax assets for the revaluation of deferred taxes which was offset by a corresponding decrease to the Company’s full valuation allowance. As of December 31, 2018, the Company completed its accounting for the impact of the Tax Act and determined there were no material changes to its analysis originally performed.

Significant components of the Company’s deferred tax assets are presented below. A valuation allowance of $118.1 million and $101.1 million as of December 31, 2018 and 2017, respectively, has been established against the deferred tax assets for which it is more likely than not that the tax benefit will not be realized.


	December 31,
	2018		2017
Deferred tax assets:
Net operating losses	$	103,187	$	87,142
Capitalized research and development	1,537		2,155
Accrued expenses	1,300		1,310
Research and development credits	5,343		5,282
Amortization	528		630
Depreciation	—		163
Stock-based compensation⁽¹⁾	5,868		4,334
Other, net⁽¹⁾	775		98
Total gross deferred tax assets	118,538		101,114
Less valuation allowance	(118,064)		(101,114)
Net deferred tax assets	$	474	$	—

Deferred tax liabilities:
IPR&D	$	(17,425)	$	(17,425)
Depreciation	(474)		—
Total deferred tax liabilities	(17,899)		(17,425)
Net deferred tax liability	$	(17,425)	$	(17,425)

⁽¹⁾ Prior year’s amounts have been reclassified to conform with current year’s presentation.

In 2017 and 2018, no tax provision has been recognized because of the operating losses and the full valuation allowance provided on all deferred tax assets, including the net operating losses. In 2016, the Company recognized a tax benefit of $0.9 million primarily due to the impact of changes in tax laws (tax rate reductions) enacted in the UK, which decreased the Company’s deferred tax liability.

The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.

The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):


	December 31,
	2018		2017		2016
Beginning balance of unrecognized tax benefits	$	2,030	$	1,248	$	1,132
Gross increases based on tax positions related to current year	—		633		116
Gross decreases based on tax positions related to prior years	(634)		—		—
Gross increases based on tax positions related to prior years	91		149		—
Settlements with taxing authorities	—		—		—
Expiration of statute of limitations	—		—		—
Ending balance of unrecognized tax benefits	$	1,487	$	2,030	$	1,248

As at December 31, 2018 and 2017, there were no unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate as any tax benefit would increase a deferred tax asset, which is currently offset by a full valuation allowance.

The Company recognizes interest and, if applicable, penalties related to income tax matters as income tax expense. No interest or penalties have been recorded for all periods presented. The Company does not expect any significant increases or decreases to its unrecognized tax benefits in the next twelve months.