16.  Income Taxes

 

The components of loss before income taxes and the income tax benefit for the years ended December 31, 2016, 2015 and 2014, by jurisdiction, are as follows (in thousands):

 

 

The significant components of deferred income tax (benefit) expense for the years ended December 31, 2016, 2015 and 2014, by jurisdiction, are as follows (in thousands):

 

 

 

The Company’s effective income tax rate differed from the federal statutory rate as follows:

 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of certain assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2016 and 2015 are as follows (in thousands):

 

 

The Company has recorded a valuation allowance, as a result of uncertainties related to the realization of its net deferred tax asset, at December 31, 2016 and 2015 of approximately $101.4 million and $74.1 million, respectively.  A reconciliation of the current year change in valuation allowance is as follows (in thousands):

 

 

The deferred tax assets have been offset by a full valuation allowance because it is more likely than not that the tax benefits of the net operating loss carryforwards and other deferred tax assets may not be realized. Included in the valuation allowance at December 31, 2016 and December 31, 2015 are $0.1 million of deferred tax assets resulting from the exercise of employee stock options, which upon subsequent realization of the tax benefits, will be allocated directly to paid-in capital. 

 

Before the imposition of IRC Section 382 limitations described below, at December 31, 2016, the Company has unused federal and state net operating loss carryforwards of approximately $830.0 million, of which $117.0 million was generated from the operations of acquired companies prior to the dates of acquisition and $713.0 million was generated by the Company subsequent to the acquisition dates and through December 31, 2016.

 

Under Internal Revenue Code (IRC) Section 382, the use of loss carryforwards may be limited if a change in ownership of a company occurs. If it is determined that, due to transactions involving the Company’s shares owned by its 5 percent or greater shareholders, a change of ownership has occurred under the provisions of IRC Section 382, the Company's federal and state net operating loss carryforwards could be subject to significant IRC Section 382 limitations. 

 

Based on studies of the changes in ownership of the Company, it has been determined that IRC Section 382 ownership changes have occurred which significantly reduces that amount of pre-change net operating losses that can be used in future years to $13.5 million. In addition, net operating losses of $102.2 million incurred after the most recent ownership change are not subject to IRC Section 382 and are available for use in future years. Accordingly, the Company’s deferred tax assets include $115.6 million of U.S. net operating loss carryforwards. The net operating loss carryforwards available at December 31, 2016, if unused will expire at various dates from 2017 through 2036.

 

The ownership changes also resulted in net unrealized built in losses per IRS Notice 2003-65 which should result in recognized built in losses during the five year recognition period. These recognized built in losses will translate into unfavorable book to tax add backs in the Company’s 2017 to 2018 U.S. corporate income tax returns of approximately $7.6 million that resulted in a gross deferred tax liability of $2.9 million at December 31, 2016. This gross deferred tax liability offsets existing gross deferred tax assets effectively reducing the valuation allowance. This has no impact on the Company’s current financial position, results of operations, or cash flows because of the full valuation allowance.

 

Approximately $1.2 million of research credit carryforwards generated after the most recent IRC Section 382 ownership change are included in the Company’s deferred tax assets. Due to limitations under IRC Section 382, research credit carryforwards existing prior to the most recent IRC Section 382 ownership change will not be used and are not reflected in the Company’s gross deferred tax asset at December 31, 2016.

 

At December 31, 2016, the Company has unused Canadian net operating loss carryforwards of approximately $13.7 million. The net operating loss carryforwards if unused will expire at various dates from 2026 through 2034. At December 31, 2016, the Company has scientific research and experimental development (SR&ED) expenditures of $16.7 million available to offset future taxable income in Canada. These SR&ED expenditures have no expiration date. At December 31, 2016, the Company has Canadian ITC credit carryforwards of $1.6 million available to offset future income tax.  These credit carryforwards if unused will expire at various dates from 2021 through 2027. 

 

At December 31, 2016, the Company has unused French net operating loss carryforwards of approximately $15.4 million.  The net operating loss may carryforward indefinitely or until the Company changes its activity.

 

As of December 31, 2016, the Company has no un-repatriated foreign earnings.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

 

 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company had $0.4 million of interest and penalties accrued at December 31, 2015, which was released in 2016 upon the expiration of the statute of limitations.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.  In the normal course of business the Company is subject to examination by taxing authorities.  Open tax years in the U.S. range from 2013 to 2016, and open tax years in foreign jurisdictions range from 2008 to 2016.  However, upon examination in subsequent years, if net operating loss carryforwards and tax credit carryforwards are utilized, the U.S. and foreign jurisdictions can reduce net operating loss carryforwards and tax credit carryforwards utilized in the year being examined if they do not agree with the carryforward amount.  As of December 31, 2016, the Company was not under audit in the U.S. or non-U.S. taxing jurisdictions.