Income Taxes

Income (loss) before income taxes subject to taxes in the following jurisdictions is as follows:



	Twelve Months Ended December 31, 2018
(In millions)	2018			2017			2016
United States	$	(28.3	)	$	12.4		$	(44.4	)
Outside of the United States	(98.2		)	(61.0		)	(20.5		)
Total	$	(126.5	)	$	(48.6	)	$	(64.9	)

Significant components of the provision for income taxes are as follows:



	Twelve Months Ended December 31, 2018
(In millions)	2018			2017		2016
Current:
Federal	$	—		$	—	$	—
State	2.7			0.1		0.1
Foreign	0.1			1.5		0.8
Total current income taxes	2.8			1.6		0.9
Deferred:
Federal	(1.7		)	—		(0.1		)
State	(0.5		)	—		—
Foreign	—			—		(0.1		)
Total deferred income taxes	(2.2		)	—		(0.2		)
Total	$	0.6		$	1.6	$	0.7

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Act) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. We made provisional estimates of the impact of the Act in our 2017 year end income tax provision in accordance with our understanding of the Act and guidance available as of the date of our 2017 financial statements. As a result, we reduced our net U.S. deferred tax assets by a provisional amount of $105.7 million offset by a decrease in the valuation allowance, resulting in no tax expense. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was nil based on cumulative foreign deficits in earnings of $41.2 million.

On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company has determined that $105.7 million of deferred tax expense offset by an increase in valuation allowance in connection with the remeasurement of our U.S. deferred tax assets and liabilities, and the analysis of our foreign deficits in earnings in connection with the transition tax on the mandatory deemed repatriation of foreign earnings, were provisional amounts and reasonable estimates at December 31, 2017.

During 2018 we finalized the impact of remeasuring our net U.S. deferred tax assets resulting from the decrease in the federal tax rate. Our provisional estimate of the reduction in our U.S. deferred tax assets of $105.7 million decreased to $105.3 million, resulting in a $0.4 million increase to our opening balance of net U.S. deferred tax assets that was offset by an increase in the valuation allowance. The final amount related to the one-time mandatory deemed repatriation of foreign earnings is nil based on final cumulative foreign deficits of $24.6 million. The Act repealed U.S. taxation on the subsequent repatriation of foreign earnings. We intend to reinvest all of our foreign earnings and capital to support and expand existing operations outside the U.S. in those jurisdictions in which we would incur significant withholding taxes and other taxes upon repatriation of such amounts.

At December 31, 2018, we had federal, state and foreign tax net operating loss carryforwards of approximately $578.7 million, $417.2 million, and $129.3 million, respectively. The federal and state tax loss carryforwards will begin to expire in 2027 and 2025, respectively, unless previously utilized. The foreign net operating losses carry forward indefinitely.

At December 31, 2018, we also had federal and state research and development tax credit carryforwards of approximately $41.1 million and $41.4 million, respectively. $0.03 million of the federal research and development tax credit will begin to expire in 2020, unless previously utilized. The state research and development tax credit will carryforward indefinitely until utilized.

Utilization of net operating losses and credit carryforwards is subject to an annual limitation due to ownership change limitations provided by Section 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state provisions. An ownership change limitation occurred as a result of the stock offering completed in February 2009. The limitation will likely result in approximately $2.1 million of U.S. income tax credits that will expire unused. The related deferred tax assets have been removed from the components of our deferred tax assets as summarized in the table below. We performed a Section 382 study on the remaining federal and state net operating losses and tax credit carryforwards and have determined that there is no annual limitation on them as of December 31, 2018.

Significant components of our deferred tax assets as of December 31, 2018 and 2017 are shown below. A valuation allowance of approximately $330.1 million has been established as of December 31, 2018 to offset the deferred tax assets, as realization of such assets is uncertain. We maintain a deferred tax liability related to indefinite-lived intangible assets that is not netted against the deferred tax assets. Reversal of the taxable temporary difference for these intangible assets cannot serve as a source of income for realization of the deferred tax assets because the deferred tax liability will not reverse until the intangible assets are sold or written down due to impairment.



	December 31,
(In millions)	2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	162.0		$	188.7
Capitalized research and development expenses	62.1			8.4
Tax credits	59.0			47.8
Share-based compensation	12.5			13.8
Fixed and intangible assets	16.0			0.4
Accrued liabilities and reserves	22.5			20.5
Total gross deferred tax assets	334.1			279.6
Less: valuation allowance	(330.1		)	(263.5		)
Total net deferred tax assets	4.0			16.1
Deferred tax liabilities:
Fixed assets and acquired intangibles assets	(3.8		)	(0.1		)
Convertible debt discount	(0.1		)	(15.9		)
Total deferred tax liabilities	(3.9		)	(16.0		)
Net deferred tax assets (liabilities)	$	0.1		$	0.1

Of the $66.6 million increase in valuation allowance during the twelve months ended December 31, 2018, $56.9 million relates to income from continuing operations and $11.9 million relates to temporary differences established through additional paid-in capital, partially offset by $2.2 million that relates to temporary differences established through goodwill.

As of December 31, 2018, deferred tax assets for which any subsequently recognized tax benefits will be credited to additional paid-in capital rather than to income tax benefit totaled $56.2 million. In 2017 we adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718) (ASU 2016-09), which was intended to simplify several areas of accounting for share-based payment arrangements, including the recognition for excess tax benefits and deficiencies. As a result of our adoption of ASU 2016-09, we recorded $161.8 million of excess tax benefits as an increase in deferred tax assets, with an offsetting increase in valuation allowance through retained earnings.

The reconciliation between our effective tax rate on income (loss) from continuing operations and the statutory rate is as follows:



	Twelve Months Ended December 31, 2018
(In millions)	2018			2017			2016
Income taxes at statutory rates	$	(26.6	)	$	(17.0	)	$	(22.7	)
State income tax, net of federal benefit	(5.5		)	(0.7		)	1.2
Permanent items	1.3			0.7			0.8
Research and development credits	(11.7		)	(13.3		)	(11.7		)
Foreign rate differential	3.7			5.4			4.5
Stock and officers compensation	(5.1		)	(10.4		)	4.0
Rate change	—			(0.1		)	(0.1		)
Unrecognized tax benefits	—			(15.4		)	27.7
Impact of adoption of ASU 2016-16	(13.3		)	—			—
Impact of Tax Cuts and Jobs Act of 2017	(0.4		)	105.7			—
Other	1.3			(2.2		)	—
Change in valuation allowance	56.9			(51.1		)	(3.0		)
Income taxes at effective rates	$	0.6		$	1.6		$	0.7

The following table summarizes the activity related to our gross unrecognized tax benefits:



(In millions)
Balance at January 1, 2016	$	15.6
Decreases related to prior year tax positions	(8.4		)
Increases related to current year tax positions	32.6
Balance at December 31, 2016	39.8
Decreases related to prior year tax positions	(14.9		)
Increases related to current year tax positions	3.3
Decrease related to Tax Cuts and Jobs Act of 2017	(5.4		)
Balance at December 31, 2017	22.8
Decreases related to prior year tax positions	(0.3		)
Increases related to current year tax positions	3.4
Balance at December 31, 2018	$	25.9

Due to the valuation allowance recorded against our deferred tax assets, none of the total unrecognized tax benefits as of December 31, 2018 would reduce our annual effective tax rate if recognized. Interest and penalties are classified as a component of income tax expense and were not material for any period presented. Due to net operating losses incurred, tax years from 1999 and forward for federal and state purposes and from 2016 and forward for foreign jurisdictions remain open to examination by the major taxing jurisdictions to which we are subject. The IRS commenced an audit of our 2015 and 2016 federal income tax returns in February 2018. We expect that the audit will be completed in 2019. We do not expect any significant changes to our unrecognized tax benefits over the next twelve months.