17. Income Taxes

 

The components of loss before income taxes and the income tax benefit for the years ended December 31, 2018, 2017 and 2016, by jurisdiction, are as follows (in thousands):

 

 

The significant components of deferred income tax expense (benefit) for the years ended December 31, 2018, 2017 and 2016, 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, 2018 and 2017 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, 2018 and 2017 of approximately  $100.4 million and $89.8 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 due to cumulative losses.

 

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 an IRC Section 382 ownership change occurred in 2013 that limited the amount of pre-change net operating losses that can be used in future years to $13.5 million.  These net operating loss carryforwards will expire, if unused, at various dates from 2020 through 2033.  Net operating losses of $195.4 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 $208.8 million of U.S. net operating loss carryforwards.  The net operating loss carryforwards available at December 31, 2018, include $42.2 million of net operating loss that was generated in 2018 that does not expire.  The remainder, if unused, will expire at various dates from 2032 through 2037.

The ownership change in 2013 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 2018 U.S corporate income tax return of approximately $0.9 million that resulted in a gross deferred tax liability of zero at December 31, 2018.  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 $1.9 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, 2018.  The remaining credit carryforwards will expire during the periods 2033 through 2038.

 

At December 31, 2018, the Company has unused Canadian net operating loss carryforwards of approximately $13.6 million. The net operating loss carryforwards if unused will expire at various dates from 2026 through 2034.  At December 31, 2018, the Company has Scientific Research and Experimental Development (SR&ED) expenditures of $16.5 million available to offset future taxable income.  These (SR&ED) expenditures have no expiry date.  At December 31, 2017, the Company has Canadian ITC credit carryforwards of $1.2 million available to offset future income tax.  These credit carryforwards if unused will expire at various dates from 2022 through 2028. 

At December 31, 2018, the Company has unused French net operating loss carryforwards of approximately $17.6 million. The net operating loss may carryforward indefinitely or until the Company changes its activity.

As of December 31, 2018, 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 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 US range from 2014 to 2017.  Open tax years in the foreign jurisdictions range from 2009 to 2018.  However, upon examination in subsequent years, if net operating losses carryforwards and tax credit carryforwards are utilized, the US 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, 2018, the Company was not under audit in the U.S. or non-U.S. taxing jurisdictions.

 

The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act makes broad and complex changes to the U.S. tax code including a reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent effective for the 2018 tax year.  Accordingly, federal deferred tax assets were adjusted in 2017 by $42.5 million to reflect the reduction in tax rates.  Also, in 2017 the valuation allowance was reduced by $42.5 million resulting in no change to the net deferred tax asset.  The deferred tax asset adjustments reduced the tax benefit of the current year losses by 33.5% as shown in the effective tax rate schedule.  The valuation allowance rate impact includes an offsetting 33.5% for the tax rate reduction resulting in no change to the provision for income taxes.