Income Taxes

Net loss before income taxes attributable to United States and international operations, consisted of the following:



	Year Ended December 31,
	2019			2018			2017
United States	$	(64,076	)	$	(70,176	)	$	(56,178	)
Foreign	(5,406		)	(9,254		)	(10,681		)
Net loss before income taxes	$	(69,482	)	$	(79,430	)	$	(66,859	)

Income tax expense (benefit) consisted of the following:



	Year Ended December 31,
	2019			2018			2017
Current:
Federal	$	—		$	—		$	(102	)
State	53			81			102
Foreign	172			260			237
Total current	225			341			237
Deferred:
Federal	(4,133		)	(27		)	(699		)
State	(819		)	(19		)	—
Foreign	2			(11		)	3
Total deferred	(4,950		)	(57		)	(696		)
Total:
Federal	(4,133		)	(27		)	(801		)
State	(766		)	62			102
Foreign	174			249			240
Income tax expense (benefit)	$	(4,725	)	$	284		$	(459	)

Income tax expense (benefit) was computed by applying the United States federal statutory rate to net loss before income taxes as follows:



	Year Ended December 31,
	2019			2018			2017
Income tax benefit at federal statutory rate	$	(14,591	)	$	(16,680	)	$	(22,732	)
State income tax benefit, net of federal benefit	(1,160		)	(1,756		)	(1,114		)
Meals and entertainment	178			230			454
Research and development credits	(931		)	(1,211		)	(913		)
Stock-based compensation	1,825			2,016			3,203
163(l) limited interest expense	4,391			994			—
Contingent consideration	(357		)	(1,491		)	(986		)
Foreign tax rate differential	(269		)	(405		)	692
Net change in valuation allowance	2,899			16,360			(24,976		)
Return to provision	2,387			1,612			5,719
Unrecognized tax benefits	466			605			457
Federal tax rate change	—			—			39,807
NOL expiration and other, net	437			10			(70		)
Income tax expense (benefit)	$	(4,725	)	$	284		$	(459	)

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



	Year Ended December 31,
	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	114,124		$	110,130
Accrued expenses	3,647			3,757
Tax credits	13,054			12,540
Bad debt	240			104
Inventory	4,056			4,821
Capitalized research and development	20,161			17,931
Equity compensation	2,965			2,669
Operating lease liabilities	3,239			—
Interest expense	8,418			3,718
Other	873			1,174
Deferred tax asset	170,777			156,844
Valuation allowance	(139,855		)	(135,216		)
Total deferred tax assets	30,922			21,628
Deferred tax liabilities:
Developed technology and trademark	(8,842		)	(8,830		)
Trademarks and trade names	(826		)	(765		)
Depreciation and amortization	(6,924		)	(8,034		)
Convertible debt	(12,878		)	(4,149		)
Operating lease right-of-use assets	(1,372		)	—
Other	(230		)	—
Total deferred tax liabilities	(31,072		)	(21,778		)
Net deferred tax liability	$	(150	)	$	(150	)

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 maintained a valuation allowance of $139.9 million against a substantial portion of its deferred tax assets as of December 31, 2019. For the year ended December 31, 2019, the total change in valuation allowance was $4.6 million, of which $2.9 million was recorded as a tax expense through the income statement and $1.7 million was due to state net operating loss not taking federal benefit on deferred balances. 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, 2019, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $350.8 million and $217.1 million, respectively. As a result of the Tax Cuts and Jobs Act (“TCJA”), the federal net operating losses generated in 2018 and 2019 will be carried forward indefinitely and are limited to an 80% deduction of taxable income. The 80% limitation is not applicable to net operating losses generated before 2018.

Federal and state net operating loss carryforwards began expiring in 2020 and will continue to expire through 2038. The federal net operating loss carryforwards generated after December 31, 2017 do not expire but are limited to 80% taxable income in the year of utilization. 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 $10.2 million and $15.9 million, respectively, which will begin to expire in 2021. 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 the Company’s 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 the Company of more than 50% within a 3-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’s net operating loss carryforwards and research and development credits are limited due to a change in ownership. The Company concluded that TriVascular 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:



	Year Ended December 31,
	2019			2018
Balance at January 1	$	12,888		$	12,207
Additions for tax positions related to prior periods	—			—
Decreases related to prior year tax positions	(26		)	(17		)
Lapse of statute of limitations	—			—
Additions for tax positions related to current period	538			698
Balance at December 31	$	13,400		$	12,888

The Company’s gross unrecognized tax benefits presented above would not reduce its annual effective tax rate if they were to be recognized because the Company has recorded a full valuation allowance on the deferred tax assets. The Company does not foresee any material changes to our gross unrecognized tax benefits within the next 12 months. The Company recognizes interests and/or penalties related to income tax matters in income tax expense. The Company did not recognize any accrued interest and penalties related to gross unrecognized tax benefits related to the year ended December 31, 2019.

The undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested. Accordingly, no provisions for United States federal and state income taxes or foreign withholding taxes have been provided on such undistributed earnings. As of December 31, 2019, the cumulative amount of earnings with respect to which United States income taxes have not been provided is approximately $0.1 million. Determination of the potential amount of unrecognized deferred United States 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 United States liability.

In general, the Company is no longer subject to United States federal, state, local, or foreign examinations by taxing authorities for years before 2015, 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 year ended December 31, 2019, the Company’s provision for income taxes was $4.7 million benefit and its effective tax rate was (6.8)%. The tax benefit recorded in continuing operations was due to the application of the exception to the tax intraperiod allocation rules. The exchange of 3.25% convertible notes for new 5.00% convertible notes in April 2019 resulted in an increase to the temporary difference between the carrying amount and tax basis of the convertible notes. The increase in the taxable temporary difference resulted in the recognition of a $5.0 million deferred tax liability (net of debt converted to equity), which was recorded as an offset to additional paid-in-capital. In accordance with ASC 740-20, Intraperiod Tax Allocation, the increase in the deferred tax liability provided an additional source of income to realize the benefit from the current year loss from continuing operations, which resulted in the recognition of a $5.0 million income tax benefit during the year ended December 31, 2019. This exception was eliminated in the recently issued ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes in 2019 which is required to be adopted by public business entities in 2021 and interim period within that year. Although early adoption is permitted, the Company did not early adopt during year ended 2019.

In the year ended December 31, 2019, The Company had legal entities operating in the United States, Italy, New Zealand, Singapore, Poland, Germany, Switzerland, South Korea and the Netherlands, as well as registered sales branches of the Company’s Dutch entity in certain countries in Europe.

In addition, the Company has federal alternative minimum tax credit carryforwards of $0.1 million that will be refundable in future years due to the TCJA.

While the TCJA provides for a territorial tax system, beginning in 2018, it includes two new United States tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax provisions.

The GILTI provisions require the Company to include in its United States 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.