| 11. | Income Taxes |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act significantly revises U.S. tax law by, among other provisions, lowering the U.S. federal statutory income tax rate from 35% to 21%, changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017 and eliminating or reducing certain income tax deductions.
The effects of changes in tax laws are required to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the Tax Act’s provisions, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows companies to record the tax effects of the Tax Act on a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment.
In connection with the Company’s initial analysis of the Tax Act, it recorded a decrease of its net deferred tax assets of $7.2 million for the period ended December 31, 2017, to account for the rate reduction. This did not have an impact on the Company’s financial statements since its U.S. deferred tax assets are fully offset by a valuation allowance. However, given the significant complexity of the Tax Act, these estimates may be adjusted during the measurement period.
The geographical breakdown of loss before provision for income taxes is as follows:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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United States |
$ | (42,425 | ) | $ | (48,244 | ) | $ | (53,376 | ) | |||
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International |
566 | 520 | 171 | |||||||||
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Loss before provision for income taxes |
$ | (41,859 | ) | $ | (47,724 | ) | $ | (53,205 | ) | |||
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The components of the provision for income taxes are as follows:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Current tax provision: |
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Federal |
$ | — | $ | — | $ | — | ||||||
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State |
— | — | — | |||||||||
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Foreign |
183 | 170 | 59 | |||||||||
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Total current tax provision |
183 | 170 | 59 | |||||||||
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Deferred tax provision (benefit): |
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Foreign |
(27 | ) | (27 | ) | (4 | ) | ||||||
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Total deferred tax provision (benefit) |
$ | (27 | ) | $ | (27 | ) | $ | (4 | ) | |||
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Total provision for income taxes |
$ | 156 | $ | 143 | $ | 55 | ||||||
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The reconciliation between income taxes computed at the federal statutory income tax rate and the provision for income taxes is as follows:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (in thousands) | ||||||||||||
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Federal statutory rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||||
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Effect of: |
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Effect of ownership change on deferred tax assets |
(84.8 | ) | — | — | ||||||||
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Change in valuation allowance |
69.5 | (33.5 | ) | (27.8 | ) | |||||||
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US tax reform deferred impact of tax rate change |
(17.3 | ) | — | — | ||||||||
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Federal tax credit |
(0.9 | ) | 1.6 | 2.6 | ||||||||
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State income tax benefit, net of federal benefit |
0.1 | 0.1 | 2.9 | |||||||||
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Change in fair value of preferred stock warrants |
— | — | (11.1 | ) | ||||||||
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Other permanent items |
(1.0 | ) | (2.5 | ) | (0.7 | ) | ||||||
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Total provision for income taxes |
(0.4 | )% | (0.3 | )% | (0.1 | )% | ||||||
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The components of the deferred tax assets are as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
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Deferred tax assets: |
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Net operating loss carryforwards |
$ | 9,183 | $ | 35,244 | ||||
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Stock Based Compensation |
2,444 | 2,291 | ||||||
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59 (e) expenditures and amortization |
1,435 | — | ||||||
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License fee |
1,346 | 3,339 | ||||||
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Research and development credits |
365 | 2,597 | ||||||
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Other |
698 | 1,017 | ||||||
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Gross deferred tax assets |
15,471 | 44,488 | ||||||
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Valuation allowance |
(15,395 | ) | (44,440 | ) | ||||
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Total deferred tax assets |
76 | 48 | ||||||
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Deferred tax liabilities: |
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Other |
13 | 12 | ||||||
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Total deferred tax liabilities |
13 | 12 | ||||||
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Total net deferred tax assets |
$ | 63 | $ | 36 | ||||
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Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, which includes historical operating performance and the recorded cumulative net losses in prior fiscal periods, the Company recorded a full valuation allowance of $15.4 million and $44.4 million against the net U.S. deferred tax assets as of December 31, 2017 and 2016. The net valuation allowance decreased by $29.0 million for the year ended December 31, 2017 and increased by $16.0 million for the year ended December 31, 2016.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. Based on the weight of all evidence, including a history of operating losses and the Company’s ability to generate future taxable income to realize the assets, management has determined that it is more likely than not that the deferred tax assets will not be realized.
Utilization of the Company’s net operating loss and research and development credit carryforwards to offset taxable income are subject to an annual limitation, pursuant to Internal Revenue Code (IRC) Sections 382 and 383. As a result of stock offerings that occurred prior to 2016, subsequent changes in the stock ownership, and the stock offering in February 2017, an ownership change under Section 382 is deemed to have occurred. As such, certain of the Company’s tax attributes existing as of the date of the ownership change are not be available for future use. The loss of these attributes does not have any impact on the financial statements since the net U.S. deferred tax assets are offset by a full valuation allowance.
As of December 31, 2017, the Company has federal tax net operating loss carryforwards of $31.4 million expiring in 2037 and state operating loss carryforwards of $54.0 million expiring in years ranging from 2022 to 2037. The Company also had net tax credit carryforwards of $0.4 million which begin to expire in 2032.
Uncertain Tax Positions
The activity related to the gross amount of unrecognized tax benefits is as follows:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (in thousands) | ||||||||||||
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Beginning balance |
$ | 311 | $ | 232 | $ | 162 | ||||||
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Increases based on tax positions related to prior years |
— | — | — | |||||||||
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Decreases based on tax positions related to prior years |
(79 | ) | — | (77 | ) | |||||||
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Decreases due to ownership change |
(232 | ) | — | — | ||||||||
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Increases based on tax positions in current year |
43 | 79 | 147 | |||||||||
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Settlement |
— | — | — | |||||||||
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Lapse of statute of limitations |
— | — | — | |||||||||
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Ending balance |
$ | 43 | $ | 311 | $ | 232 | ||||||
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If recognized, gross unrecognized tax benefits would not have an impact on the Company’s effective tax rate due to the Company’s full valuation allowance position. While it is often difficult to predict the final outcome of any particular uncertain tax position, the Company does not believe that the amount of gross unrecognized tax benefits will change significantly in the next twelve months.
The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in the accompanying consolidated statement of operations. Accrued interest and penalties, if applicable, are included in accrued liabilities in the consolidated balance sheet. For the years ended December 31, 2017 and 2016, the Company did not recognize any accrued interest and penalties.
The Company is subject to taxation in the United States, various states, Canada and Australia. Tax years 2014 through 2016 remain open to examination by the United States, various state jurisdictions and Canada. The tax year ended December 31, 2016 remains open to examination in Australia. The Company is currently under examination by the Internal Revenue Service for the 2015 tax year. There are currently no other examinations in any other jurisdictions for any other year.