7. Income Taxes
Loss before the provision for income taxes consists of the following:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Domestic |
$ | (20,528 | ) | $ | (10,756 | ) | $ | (8,028 | ) | |||
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Foreign |
1,379 | 1,180 | 839 | |||||||||
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Total |
$ | (19,149 | ) | $ | (9,576 | ) | $ | (7,189 | ) | |||
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The provision for income taxes in the accompanying consolidated financial statements consists of the following:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Current provision: |
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Federal |
$ | — | $ | — | $ | — | ||||||
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State |
21 | 33 | 29 | |||||||||
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Foreign |
311 | 424 | 389 | |||||||||
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Total current |
332 | 457 | 418 | |||||||||
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Deferred (benefit): |
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Federal |
— | — | — | |||||||||
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State |
— | — | — | |||||||||
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Foreign |
38 | (47 | ) | (27 | ) | |||||||
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Total deferred |
38 | (47 | ) | (27 | ) | |||||||
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Total provision |
$ | 370 | $ | 410 | $ | 391 | ||||||
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A reconciliation of the U.S. federal statutory rate to the Company’s effective tax rate is as follows:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Tax at statutory rates |
(34.0 | )% | (34.0 | )% | (34.0 | )% | ||||||
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State income taxes |
(4.1 | ) | (6.1 | ) | 3.4 | |||||||
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Change in tax rate |
103.9 | 0.1 | 3.0 | |||||||||
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Permanent differences |
7.1 | 11.7 | 34.7 | |||||||||
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Foreign rate differential |
(0.7 | ) | (1.1 | ) | (1.2 | ) | ||||||
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Research and development credits |
(3.7 | ) | (6.7 | ) | (9.6 | ) | ||||||
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Change in valuation allowance |
(66.3 | ) | 40.8 | 7.7 | ||||||||
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Other, net |
(0.3 | ) | (0.4 | ) | 1.4 | |||||||
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Effective tax rate |
1.9 | % | 4.3 | % | 5.4 | % | ||||||
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The approximate income tax effect of each type of temporary difference and carryforward as of December 31, 2017 and 2016 is as follows:
| As of December 31, | ||||||||
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Deferred tax assets: |
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Net operating loss carry-forwards |
$ | 37,964 | $ | 45,850 | ||||
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Tax credit carry-forwards |
9,173 | 7,654 | ||||||
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Stock-based compensation |
1,856 | 2,236 | ||||||
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Fixed Assets |
267 | 154 | ||||||
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Account receivable reserves |
189 | 219 | ||||||
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Accrued compensation |
851 | 2,232 | ||||||
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Capitalized start-up costs |
138 | 279 | ||||||
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Other temporary differences |
371 | 761 | ||||||
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Total deferred tax assets |
50,809 | 59,385 | ||||||
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Deferred tax liabilities: |
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Intangible assets |
(3,611 | ) | (5,962 | ) | ||||
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Total deferred tax liabilities |
(3,611 | ) | (5,962 | ) | ||||
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Valuation allowance |
(47,111 | ) | (53,302 | ) | ||||
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Net deferred tax assets |
$ | 87 | $ | 121 | ||||
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The Company is required to compute income tax expense in each jurisdiction in which it operates. This process requires the Company to project its current tax liability and estimate its deferred tax assets and liabilities, including net operating loss (NOL) and tax credit carry-forwards. In assessing the ability to realize the net deferred tax assets, management considers whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
The Company has provided a valuation allowance against its remaining U.S. net deferred tax assets as of December 31, 2017 and 2016, as based upon the level of historical U.S. losses and future projections over the period in which the net deferred tax assets are deductible, at this time, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences. The decrease in the valuation allowance from 2016 to 2017 of $6.2 million principally relates to the reduction in federal deferred tax rate offset by the current year taxable loss.
Based upon the level of historical income in Japan and future projections, the Company believes it is probable it will realize the benefits of its future deductible differences. As such, the Company has not recorded a valuation allowance against its net deferred tax assets in Japan as of December 31, 2017 and 2016.
As of December 31, 2017, the Company had federal and state net operating losses of approximately $161.9 million and $66.7 million, respectively, which are available to offset future taxable income, if any, through 2037. The Company also had federal and state research and development tax credits of $6.1 million and $3.9 million, respectively, which expire in various amounts through 2037. The net operating loss and tax credit amounts are subject to annual limitations under Section 382 change of ownership rules under the U.S. Internal Revenue Code of 1986, as amended. Through June 30, 2014, the Company completed an assessment to determine whether there may have been a Section 382 ownership change and determined that it is more-likely-than-not that the Company’s net operating and tax credit amounts as disclosed are not subject to any material Section 382 limitations.
On January 1, 2009, the Company adopted the provision for uncertain tax positions under ASC 740, Income Taxes. The adoption did not have an impact on the Company’s retained earnings balance. At December 31, 2017 and 2016, the Company had no recorded liabilities for uncertain tax positions.
At December 31, 2017 and 2016, the Company had no accrued interest or penalties related to uncertain tax positions.
The Company files income tax returns in the U.S. federal tax jurisdiction, various state and various foreign jurisdictions. The Company is currently open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions for the tax years ended 2014 through 2017. Since the Company is in a U.S. loss carryforward position, carryforward tax attributes generated in prior years may still be adjusted upon future examination if they have or will be used in a future period. Additionally, certain non-U.S. jurisdictions are no longer subject for income tax examinations by authorities for tax years before 2012.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted in the United States. The Act reduces the U.S. federal corporate tax rate from 34% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. In December 2017, the SEC issued SAB 118, which directs taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law.
As of December 31, 2017, the Company had not yet completed its accounting for all of the tax effects of the enactment of the Act; however, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. The Company will continue to refine its calculations as additional analysis is completed. The Company expects that any additional changes will be offset by an increase or decrease in the Company’s valuation allowance as any transition tax will result in use of the net operating loss deferred tax asset, which is fully offset by a valuation allowance along with all other net deferred tax assets.
No additional U.S. income taxes or foreign withholding taxes have been provided for any additional outside basis differences inherent in the Company’s foreign entities as these amounts continue to be indefinitely reinvested in foreign operations based on management’s current intentions. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable. The Company is still in the process of analyzing the impact of the Act on its indefinite reinvestment assertion.