Income Taxes

12 Months Ended

Dec. 31, 2019

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


	December 31,
	2019		2018		2017
United States	$	(325,769)	$	(35,838)	$	(32,112)
Foreign	(93,734)		(87,878)		(93,910)
Total	$	(419,503)	$	(123,716)	$	(126,022)

At December 31, 2019, our federal, state, and foreign net operating loss carryforwards, including the acquired net operating losses from our acquisition of Modis, were approximately $389.5 million, $234.6 million and $227.7 million, respectively, which may be subject to limitations as described below. If not utilized, a significant portion of our 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. However, the deductibility of such federal net operating losses is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to the Tax Act. Our net operating losses in the U.K. do not expire, but deductiblility of the net operating losses is limited to 50% of taxable income, subject to a regulatory established allowance per group.

In addition, we have federal and California research and development income tax credit carryforwards of approximately $6.0 million and $4.0 million. 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. As of December 31, 2019, we had federal orphan drug tax credit carryforwards of $2.0 million, which begin to expire in 2036. 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 we file tax returns. We are currently not under audit by any tax jurisdiction.

As of December 31, 2019, we have experienced at least three ownership changes. The first ownership change occurred in August 2006 and resulted in a reduction to our net operating loss carryforwards of $1.9 million. We had a second ownership change in September 2011 which resulted in reductions to our federal net operating loss carryforwards of $121.1 million, research and development income tax credits of $3.0 million, and California net operating loss carryforwards of $53.3 million. We 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. We recently completed an evaluation of the potential effect of Section 382 on our ability to utilize our net operating losses, including those acquired from our acquisition of Modis. However, we do not anticipate these limitations will significantly impact our ability to utilize our operating losses and tax credit carryforwards. Pursuant to the IRC, the use of our 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 income tax provision to amounts computed by applying the statutory federal income tax rate to loss from continuing operations before income taxes is shown as follows (in thousands):


	December 31,
	2019		2018		2017
Income tax at federal statutory rate	$	(88,096)	$	(26,022)	$	(42,846)
State taxes, net of federal benefit	(65)		(8)		(19)
Non-deductible acquired IPR&D charge and other expenses⁽¹⁾	52,044		—		—
Change in valuation allowance	21,155		16,949		(11,208)
Impact of U.S. statutory rate change on revaluing deferred tax assets	—		—		36,085
Impact of foreign rate change on deferred taxes	1,887		1,961		1,619
Other permanent differences	4,101		(701)		8,086
State tax rate benefit	(18)		169		56
Foreign rate differential	1,883		1,731		10,636
Stock-based compensation	(2,674)		(1,344)		(2,462)
Net operating losses surrendered under U.K.’s R&D tax relief scheme	9,349		6,322		—
Credits and other	434		943		53
Income tax provision	$	—	$	—	$	—

(1)Amounts attributable to our asset acquisition of Modis. See Note 3 for additional information.

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 Staff Accounting Bulletin No. 118, an entity may select between one of three scenarios to determine a reasonable estimate arising from the Tax Act. We were 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 a result, for the year ended December 31, 2017, we recorded a $36.1 million reduction in deferred tax assets for the revaluation of deferred taxes, which was offset by a corresponding decrease to our full valuation allowance. During the fourth quarter of 2018, we completed our accounting for the impact of the Tax Act and determined there were no material changes to our original analysis.

The significant components of deferred tax assets (liabilities) were as follows (in thousands):


	December 31,
	2019		2018
Deferred tax assets:
Federal and state net operating loss carryforwards	$	134,009	$	103,187
Capitalized research and development	925		1,537
Accrued expenses	1,311		1,300
Research and development credits	5,343		5,343
Amortization	1028		528
Lease liability	2,547		—
Stock-based compensation	6,464		5,868
Other, net	1,979		775
Total deferred tax assets	153,606		118,538
Less: valuation allowance	(151,544)		(118,064)
Total deferred tax assets, net of valuation allowance	2,062		474

Deferred tax liabilities:
Operating lease right-of-use asset	$	(1,640)	$	—
IPR&D	(17,425)		(17,425)
Depreciation	(422)		(474)
Total deferred tax liabilities	(19,487)		(17,899)
Total net deferred tax liabilities	$	(17,425)	$	(17,425)

For the years ended December 31, 2019, 2018 and 2017, no income tax provision was recorded due to recurring losses and our assessment a full valuation allowance should be established against any net deferred tax assets due to the uncertainty regarding our ability to realize them in the future. The increase in valuation allowance of $33.5 million during 2019 was attributable to our current year taxable loss and deferred tax assets related to acquired net operating loss carryovers from our acquisition of Modis.

As of December 31, 2019 and 2018, the net deferred tax liability of $17.4 million on the consolidated balance sheets is related to book and tax basis differences for intangible assets with indefinite lives from our 2014 business acquisition of Brabant. In accordance with accounting for income taxes guidance, the deferred tax liability related to the intangible assets cannot be used to offset deferred tax assets when determining the amount of the valuation allowance for deferred tax assets which are not more-likely-than-not to be realized. This results in a net deferred tax liability, even though we have a full valuation allowance on our other net deferred tax assets. This net deferred tax liability will continue to be reflected on the balance sheet until the related intangible assets are no longer held by us.

We recognize 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 our unrecognized tax benefits (in thousands):


	December 31,
	2019		2018		2017
Beginning balance of unrecognized tax benefits	$	1,487	$	2,030	$	1,248
Gross increases based on tax positions related to current year	1,495		—		633
Gross increases based on tax positions related to prior years	559		91		149
Gross decreases based on tax positions related to prior years	—		(634)		—
Settlements with taxing authorities	—		—		—
Expiration of statute of limitations	—		—		—
Ending balance of unrecognized tax benefits	$	3,541	$	1,487	$	2,030

As at December 31, 2019 and 2018, there were no unrecognized tax benefits that, if recognized, would affect our effective tax rate as any tax benefit would increase a deferred tax asset, which is currently offset by a full valuation allowance.

We record interest and, if applicable, penalties related to income tax matters as a component of income tax expense. No interest or penalties have been recorded for all periods presented. We do not expect any significant increases or decreases to our unrecognized tax benefits in the next twelve months.