Income Tax Expense

Net loss before income tax benefit attributable to United States and international operations, consists of the following:



	Year Ended December 31,
	2017			2016			2015
United States	$	(56,178	)	$	(135,925	)	$	(44,114	)
Foreign	(10,681		)	(18,254		)	(15,647		)
Net loss before income tax	$	(66,859	)	$	(154,179	)	$	(59,761	)

Income tax (benefit) expense consists of the following:



	Year Ended December 31,
	2017			2016			2015
Current:
Federal	$	(102	)	$	(50	)	$	50
State	102			90			100
Foreign	237			458			148
Total current	$	237		$	498		$	298
Deferred:
Federal	$	(699	)	$	—		$	(8,621	)
State	—			—			(1,008		)
Foreign	3			—			(6		)
Total deferred	$	(696	)	$	—		$	(9,635	)
Total:
Federal	$	(801	)	$	(50	)	$	(8,571	)
State	102			90			(908		)
Foreign	240			458			142
Income tax expense (benefit)	$	(459	)	$	498		$	(9,337	)

Income tax benefit was computed by applying the United States federal statutory rate of 34% to net loss before taxes as follows:



	Year Ended December 31,
	2017			2016			2015
Income tax benefit at federal statutory rate	$	(22,732	)	$	(52,418	)	$	(20,315	)
State income tax benefit, net of federal benefit	(1,114		)	(2,323		)	(937		)
Meals and entertainment	454			445			328
Research and development credits	(913		)	(2,041		)	(1,756		)
Stock-based compensation	3,203			2,604			1,633
Derivative loss	—			14,903			—
Contingent consideration	(986		)	(850		)	34
Foreign tax rate differential	692			1,394			1,013
Net change in valuation allowance	(24,976		)	35,678			10,052
Return to provision true-up	5,719			1,981			583
Unrecognized tax benefits	457			971			928
Federal tax rate change	39,807			—			—
Other, net	(70		)	154			(900		)
Income tax benefit	$	(459	)	$	498		$	(9,337	)

Significant components of the Company’s deferred tax assets and (liabilities) are as follows:



	Year Ended December 31,
	2017			2016
Deferred tax assets:
Net operating loss carryforwards	$	101,423		$	124,881
Accrued expenses	5,617			6,582
Tax credits	11,826			11,314
Bad debt	78			91
Inventory	2,160			4,424
Capitalized research and development	16,079			21,374
Deferred compensation	2,535			3,596
Other	1,099			964
Deferred tax asset	140,817			173,226
Valuation allowance	(118,551		)	(133,784		)
Total deferred tax assets	22,266			39,442
Deferred tax liabilities:
Developed technology and trademark	(9,033		)	(14,218		)
Trademarks and tradenames	(733		)	(1,027		)
Depreciation and amortization	(8,961		)	(15,316		)
Convertible debt	(3,740		)	(9,760		)
Other	—			—
Total deferred tax liabilities	(22,467		)	(40,321		)
Net deferred tax liability	$	(201	)	$	(879	)

The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets, including the amount and timing of future taxable income, and has determined that it is more likely than not that the domestic and foreign deferred tax assets will not be realized. Due to such uncertainties surrounding the realization of the domestic and foreign deferred tax assets, the Company maintains a valuation allowance of $118.6 million against a substantial portion of its deferred tax assets as of December 31, 2017. For the year ended December 31, 2017, the total change in valuation allowance was $(15.2) million, of which $(25.0) million was recorded as a tax benefit through the income statement and $9.8 million was recorded to equity mainly in connection with the Company's adoption of ASU 2016-09. Realization of the deferred tax assets will be primarily dependent upon the Company's ability to generate sufficient taxable income prior to the expiration of its net operating losses.

At December 31, 2017, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $314.0 million and $173.0 million, respectively.

Federal and state net operating loss carryforwards began expiring in 2017 and will continue to expire through 2037. The majority of the state net operating losses are attributable to California. In addition, the Company had research and development credits for federal and state income tax purposes of approximately $9.4 million and $14.3 million, respectively, which will begin to expire in 2020. The California research and development credits do not expire.

Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC”), substantial changes in our ownership may limit the amount of net operating loss and research and development income tax credit carryforwards that could be utilized annually in the future to offset taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such annual limitation may significantly reduce the utilization of the net operating loss carryforwards before they expire.

Since the Company's formation, the Company has raised capital through the issuance of capital stock on several occasions which, combined with the purchasing stockholders' subsequent disposition of those shares, may have resulted in such an ownership change, or could result in an ownership change in the future upon subsequent disposition. The Company intends to complete a study in the future to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company's formation.

The Company completed an analysis under IRC Sections 382 and 383 to determine if the acquired TriVascular Technologies, Inc.'s net operating loss carryforwards and research and development credits are limited due to a change in ownership. The Company concluded that TriVascular Technologies, Inc. had an ownership change as of February 3, 2016. As a result of the ownership change, the Company reduced the acquired federal and state net operating loss carryforwards by $230.3 million and $209.4 million, respectively, and federal research and development credits by $3.1 million.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):



	Year Ended December 31, 2017			Year Ended December 31, 2016
Balance at January 1, 2017	$	11,754		$	8,928
Additions for tax positions related to prior periods	—			1,654
Decreases related to prior year tax positions	(160		)	(95		)
Lapse of statute of limitations	—			—
Additions for tax positions related to current period	613			1,267
Balance at December 31, 2017	$	12,207		$	11,754

Our unrecognized gross tax benefits presented above would not reduce our annual effective tax rate if recognized because we have recorded a full valuation allowance on the deferred tax assets. We do not foresee any material changes to our gross unrecognized tax benefit within the next twelve months. We recognize interests and/or penalties related to income tax matters in income tax expense. We did not recognize any accrued interest and penalties related to gross unrecognized tax benefits related to the year ended December 31, 2017.

The undistributed earnings of the Company's foreign subsidiaries are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes have been provided on such undistributed earnings. As of December 31, 2017, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $0.1 million. Determination of the potential amount of unrecognized deferred U.S. income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation; however, net operating losses and unrecognized foreign tax credits would be available to reduce some portion of the U.S. liability.

In general, the Company is no longer subject to United States federal, state, local, or foreign examinations by taxing authorities for years before 2013, however, net operating loss and other tax attribute carryforwards utilized in subsequent years continue to be subject to examination by the tax authorities until the year to which the net operating loss and/or other tax attributes are carried forward is no longer subject to examination.

For the twelve months ended December 31, 2017, our provision for income taxes was $0.5 million benefit and our effective tax rate was (0.69%) for the year ended December 31, 2017. During the twelve months ended December 31, 2017, we had operating legal entities in the United States, Italy, New Zealand, Singapore, Poland, Germany, Switzerland, Korea and the Netherlands (plus registered sales branches of our Dutch entity in certain countries in Europe).

On December 22, 2017, the President of the United States signed into law the Tax Reform Act. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a $0.4 million tax benefit in the Company’s consolidated statement of income for the year ended December 31, 2017.

The Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company does not have undistributed foreign E&P subject to the deemed mandatory repatriation and therefore has not recognized income tax expense in the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2017.

While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.

The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets beginning in 2018. The Company does not believe that it will be subject to excess tax at this time under this new provision. In the event the Company becomes subject to this provision, it will elect to either account for the additional tax in the period in which it is incurred or to account for it through deferred taxes. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. 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 Tax Reform Act. The Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.