Note 10 - Income Taxes

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

10. Income Taxes

Loss before income taxes consists of the following:

	Year Ended December 31,
	2019			2018			2017
United States	$	(60,313	)	$	(71,978	)	$	(77,649	)
Foreign		(12,202	)		(31,984	)		(18,431	)
Total	$	(72,515	)	$	(103,962	)	$	(96,080	)

Income tax provision (benefit) consisted of the following:

	Year Ended December 31,
	2019			2018			2017
Current:
U.S. Federal	$	—		$	—		$	96
U.S. State		(11	)		42			51
Foreign		70			375			1,105
		59			417			1,252
Deferred:
U.S. Federal		—			(6,734	)		(11,312	)
U.S. State		—			—			(613	)
Foreign		337			(1,894	)		(10,503	)
		337			(8,628	)		(22,428	)
Total	$	396		$	(8,211	)	$	(21,176	)

Provision (benefit) for income taxes differed from the amounts computed by applying the U.S. federal income tax rate of 21% in 2019, 21% in 2018 and 34% in 2017 to loss before income taxes as a result of the following:

	Year Ended December 31,
	2019			2018			2017
Benefit at statutory rate	$	(15,228	)	$	(21,832	)	$	(32,562	)
State income taxes		(587	)		594			(585	)
Research and development credits		(16,933	)		(13,283	)		(12,983	)
Change in valuation allowance		31,917			13,757			40,028
Impact of foreign operations		(1,045	)		5,925			(1,951	)
Unrecognized tax benefits		6,725			5,340			3,596
Stock-based compensation		(4,731	)		(381	)		(10,248	)
Prior year return to provision adjustment		(1,167	)		1,422			1,105
Section 162(m)		1,046			—			—
Effect of U. S. tax law change		—			—			(4,602	)
Impairment of intangibles		—			—			(2,328	)
Other		399			247			(646	)
	$	396		$	(8,211	)	$	(21,176	)

Significant components of the Company’s net deferred taxes consist of the following:

	December 31,
	2019			2018
Deferred tax assets
Net operating loss carry forwards	$	48,481		$	39,888
Research and development credits		84,268			69,320
Stock-based compensation		8,884			9,055
Accrued expenses and allowances		1,897			2,334
Amortization and depreciation		—			1,408
Operating lease liability		7,345			—
Other temporary differences		6,884			6,411
Foreign tax credit		2,338			2,338
Valuation allowance		(123,989	)		(92,315	)
Total deferred tax assets		36,108			38,439
Deferred tax liabilities
Acquired intangible assets		(16,092	)		(22,593	)
Convertible debt		(6,444	)		(11,596	)
Amortization and depreciation		(2,123	)		—
Right of use asset		(6,806	)		—
Other deferred tax liabilities		(1,482	)		(603	)
Total deferred tax liabilities		(32,947	)		(34,792	)
Deferred tax assets, net	$	3,161		$	3,647

      On December 22, 2017, the Tax Reform Act was signed into law. The Tax Reform Act contains significant changes to U.S. federal corporate income taxation, including a reduction of the corporate tax rate from 35% to 21% effective January 1, 2018, a one-time transition tax on deemed mandatory repatriation of accumulated earnings and profits of foreign subsidiaries in conjunction with the elimination of U.S. tax on dividend distributions from foreign subsidiaries, and a temporary 100% first-year depreciation deduction for certain capital investments. In 2017, the Company recorded provisional amounts based on reasonable estimates for certain enactment-date effects of the Tax Reform Act in accordance with the guidance in SAB 118. In 2017, the Company recorded a net tax benefit related to the enactment-date effects of the Tax Reform Act that included the remeasurement of the federal deferred tax assets and liabilities, the tax effect of the one-time mandatory repatriation income, and related valuation allowance adjustments.

During 2018, the Company finalized the calculation of the deemed mandatory repatriation income upon filing its 2017 U.S. income tax return. The change in the mandatory repatriation income was fully absorbed by the U.S. net operating loss, which is subject to valuation allowance, and resulted in no current tax liability. These measurement period adjustments had no net tax effect after the offsetting change to the valuation allowance.

The Tax Reform Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. In January 2018, the FASB released guidance on the accounting for tax on the GILTI inclusion. Entities can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or account for GILTI as a period cost in the year the tax is incurred. The Company has elected to account for GILTI as a period cost in the year the tax is incurred. For the year ended December 31, 2019, the Company computed no GILTI inclusion as a result of current year aggregate loss of the Company’s foreign subsidiaries.

Valuation Allowance

The Company records a valuation allowance to reduce deferred tax assets to the amount the Company believes is more likely than not to be realized. The determination of recording or releasing tax valuation allowances is made, in part, pursuant to an assessment performed by management regarding the likelihood that the Company will generate sufficient future taxable income against which benefits of the deferred tax assets may or may not be realized. This assessment requires management to exercise significant judgment and make estimates with respect to the Company’s ability to generate revenue, gross profits, operating income and taxable income in future periods. Amongst other factors, management must make assumptions regarding overall current and projected business and semiconductor industry conditions, operating efficiencies, the Company’s ability to timely develop, introduce and consistently manufacture new products to customers’ specifications, acceptance of new products, customer concentrations, technological change and the competitive environment which may impact the Company’s ability to generate taxable income and, in turn, realize the value of the deferred tax assets. 

At December 31, 2019, 2018 and 2017, the Company has a full valuation allowance recorded against the deferred tax assets of Canada, United Kingdom, and the U.S., with the exception of the federal refundable AMT credit. The Company has a partial valuation allowance against the deferred tax assets of Taiwan.

The valuation allowance increased $31,674, $13,777 and $39,907 in the years ended December 31, 2019, 2018 and 2017, respectively.

 The net increase of $31,674 in the valuation allowance for the year ended  December 31, 2019 is comprised of $31,917 increase charged to income tax provision and $243 decrease charged to other comprehensive income. The net increase of $13,777 in the valuation allowance for the year ended December 31, 2018  is comprised of $20 increase charged to other comprehensive income and $13,757 charged to income tax provision. The net increase of $39,907 in the valuation allowance for the year ended December 31, 2017 is comprised of $134 increase charged to other comprehensive income, $158 decrease charged to goodwill, and $39,931 increase charged to income tax provision. The valuation allowance charged to income tax provision included an income tax benefit from the partial release of the federal and state valuation allowance. 

 General Income Tax Disclosures

The Company has net operating loss (“NOL”) carryforwards for federal and state income tax purposes of approximately $261,621 and $96,559, respectively at December 31, 2019, that will begin to expire in 2022 for federal income tax purposes and in 2026 for state income tax purposes. The Company’s federal NOL carryforward of $59,407 that was generated in 2018 and 2019 does not expire. At December 31, 2019, the Company has NOL carryforwards of $2,597 for its Taiwan subsidiary which begin to expire in 2020, and NOL carryforwards of $8,409 for the United Kingdom subsidiary, which do not expire. A full valuation allowance has been provided on U.S. NOL and United Kingdom NOL, and a partial valuation allowance has been provided on Taiwan NOL.

At December 31, 2019, the Company has federal and state research and development (“R&D”) tax credit carryforwards of $57,078 and $58,288, respectively. The federal tax credits will begin to expire in 2024. Some state tax credits will begin to expire in 2021 and some do not expire. At December 31, 2019, the Company has Canadian tax credits and research expenditure tax credit carryforwards for its Canadian subsidiary of $6,999 and $3,750, respectively. The tax credits will begin to expire in 2027, and the research expenditure claim carryforwards do not expire. A full valuation allowance has been provided on R&D tax credit and research expenditure claim carryforwards.

Pursuant to Internal Revenue Code of 1986, as amended (the “Code”) sections 382 and 383, use of the Company’s NOL and R&D credits generated prior to June 2004 are subject to an annual limitation due to a cumulative ownership percentage change that occurred in that period. The Company has had two changes in ownership, one in December 2000 and the second in June 2004, that resulted in an annual limitation on NOL and R&D credit utilization. The NOL and R&D credit carryover of Cortina, are also subject to annual limitation under the Code sections 382 and 383. The acquisition of Cortina caused an ownership change that resulted in an annual limitation, as well as Cortina’s legacy annual limitation amount from ownership changes prior to acquisition. The NOL and R&D credit carryforward which will expire unused due to annual limitations is not recognized for financial statement purposes and is not reflected in the above carryover amounts.

The Company’s NOL carryforwards include Cortina’s federal and state pre-acquisition NOL of $49,152 and $3,919, respectively. These NOL carryforwards will begin to expire in 2024 for federal and 2026 for state. The Company’s NOL carryforwards also include ClariPhy’s federal and state pre-acquisition NOL of $46,601 and $68,104, respectively. These NOL carryforwards will begin to expire in 2032 for federal and 2028 for state. The Company’s R&D credit carryforwards included Cortina’s federal and state pre-acquisition credits of $6,033 and $7,912, respectively. The federal R&D credit carryforward will begin to expire in 2027. While some state tax credits will begin to expire in 2021, most do not expire. The utilization of Cortina and ClariPhy’s pre-acquisition tax attributes is subject to certain annual limitations under the Code sections 382 and 383. No benefit for Cortina’s tax attributes was recorded upon the close of the acquisition, as the benefit from these tax attributes did not meet the "more-likely-than-not" standard.

The Company operates under tax holiday in Singapore. The Singapore tax holiday allows for a reduced income tax rate of 5% effective through April 2020, and the Company is currently pursuing a renewal of the reduced tax rate to apply subsequent to the current holiday period. The Singapore statutory rate is 17%. The tax holiday is conditional upon meeting certain employment, activities and investment thresholds. As of December 31, 2019, the Company believes it has met all of the required thresholds. The Company qualified for a tax incentive program in Argentina that reduced the income tax rate to 12%, starting January 1, 2018 through December 31, 2019, with a return to the full statutory rate of 30% in 2020. As a result of these reduced tax rates, foreign tax expense increased (decreased) by ($1,729), ($2,093) and $7,412 for the years ended  December 31, 2019, 2018 and 2017, respectively. The effect of the tax holidays on diluted earnings per share was ($0.04), ($0.05) and $0.18 for the years ended  December 31, 2019, 2018 and 2017, respectively.

The following table summarizes the changes in gross unrecognized tax benefits:

	Year Ended December 31,
	2019			2018			2017
Balance as of January 1	$	53,943		$	47,606		$	56,503
Increases based on tax positions related to the current year		7,926			5,747			4,656
Increases (decreases) based on tax positions of prior year		(518	)		708			(13,452	)
Statute of limitation expirations		(51	)		(118	)		(101	)
Balance as of December 31	$	61,300		$	53,943		$	47,606

As of December 31, 2019, the Company had approximately $5,478 of unrecognized tax benefits that if recognized would affect the effective income tax rate. The Company believes that before the end of next year, it is reasonably possible that the gross unrecognized tax benefit may decrease by approximately $58 due to statute of limitation expiration in foreign jurisdictions.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company recorded $16, $17 and $16 in interest expense in the years ended December 31, 2019, 2018 and 2017, respectively. The Company had $56, $65, and $113 of interest expense and penalties accrued as of December 31, 2019, 2018 and 2017, respectively.

The Company files income tax returns in the U.S. federal jurisdiction, various states and certain foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for tax years ended on or before December 31, 2011 or to California state income tax examinations for tax years ended on or before December 31, 2010. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or credit carryforward.

The Company does not provide for U.S. income taxes on undistributed earnings of its controlled foreign corporations as the Company intends to reinvest these earnings indefinitely outside the United States.  At December 31, 2019, foreign subsidiaries had cumulative undistributed earnings of $31,008 that, if repatriated, is expected to result in immaterial U.S. taxes.

The Company is currently under examination by the Inland Revenue Authority of Singapore (“IRAS”) for the years 2010, 2011 and 2012. The IRAS made an adjustment to the timing of deducting certain intercompany payments, the effect of which has been reflected in the provision and did not result in a material impact to the consolidated financial statements. As of the report date, the examination is ongoing.

The Company is currently under examination by the U.S. Internal Revenue Service for year 2016.  The Company believes it has adequate reserve for its uncertain tax positions, however, there is no assurance that the taxing authorities will not propose adjustments that are different from the Company’s expected outcome and such adjustments may impact the provision for income taxes.  The Internal Revenue Service examination is on-going as of the report date.