| 9. | Income Taxes |
The Company has a history of losses and therefore has made no provision for income taxes.
The amount computed by applying the federal statutory rate to loss before income taxes reconciles to the provision for income taxes is as follows (in thousands):
| Fiscal Years Ended December 31, |
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| 2017 | 2016 | 2015 | ||||||||||
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Tax at federal statutory rate |
$ | (5,563 | ) | $ | (8,575 | ) | $ | (9,056 | ) | |||
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State tax, net of federal benefit |
(575 | ) | (1,210 | ) | (589 | ) | ||||||
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Permanent items |
460 | 549 | 463 | |||||||||
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Stock-based compensation |
(2,919 | ) | 295 | 212 | ||||||||
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R&D tax credit |
(627 | ) | (536 | ) | (559 | ) | ||||||
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Change in U.S. federal tax rate |
20,974 | — | — | |||||||||
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Change in valuation allowance |
(11,750 | ) | 9,477 | 9,529 | ||||||||
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| $ | — | $ | — | $ | — | |||||||
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Significant components of net deferred tax assets are as follows (in thousands):
| December 31, | ||||||||
| 2017 | 2016 | |||||||
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Deferred tax assets: |
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Net operating losses |
$ | 38,531 | $ | 46,478 | ||||
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R&D tax credit |
5,983 | 4,612 | ||||||
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Accruals and other |
6,730 | 7,456 | ||||||
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| 51,244 | 58,546 | |||||||
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Deferred tax liabilities: |
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Depreciation and amortization |
(212 | ) | (337 | ) | ||||
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| (212 | ) | (337 | ) | |||||
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Net deferred tax assets: |
51,032 | 58,209 | ||||||
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Valuation allowance |
(51,032 | ) | (58,209 | ) | ||||
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| $ | — | $ | — | |||||
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In December 2017, the U.S. government enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax (“BEAT”), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing the rules related to uses and limitations of net operating loss (“NOL”) carryforwards created in tax years beginning after December 31, 2017.
The Company has not historically had significant non-U.S. operations and, as such, the only significant impact of the Tax Act for the Company will be the reduction in the U.S. corporate tax rate. The Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, we have recorded a decrease in our net deferred tax asset balance of $21.0 million, with a corresponding and fully offsetting adjustment to our valuation allowance for the year ended December 31, 2017.
In December 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. As of December 31, 2017, due to the complexities of the new law, we have not completed our accounting for all the tax effects of the Tax Act, however, as noted above we have made a reasonable estimate of the effects on our existing deferred tax balances. We are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. In all cases, we will continue to make and refine our calculations as additional analysis is completed. In addition, our provisional estimates may also be adjusted as we gain a more thorough understanding of the tax law.
Deferred income taxes reflect the tax effects of NOLs and tax credit carryforwards and the net temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Realization of the deferred tax assets is dependent upon the generation of future taxable income, if any, the amount and timing of which are uncertain. Based on available objective evidence, management believes it is more likely than not that the deferred tax assets are not recognizable and will not be recognizable until the Company has sufficient taxable income. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by $7.2 million and increased by $9.5 million during the years ended December 31, 2017 and 2016, respectively.
On January 1, 2017, the Company adopted ASU 2016-09, which simplified several aspects of accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The adoption of ASU 2016-09 did not have an impact on our balance sheet, results of operations, cash flows or statement of stockholders’ equity because we have a full valuation allowance on our deferred tax assets. Upon adoption, the Company recognized the previously unrecognized excess tax benefits using the modified retrospective transition method. The previously unrecognized excess tax effects were recorded as a deferred tax asset, which was fully offset by a valuation allowance. Without the valuation allowance, the Company’s deferred tax assets would have increased by $4.6 million.
As of December 31, 2017, the Company’s federal NOL carryforwards of $149.1 million will expire at various dates beginning in 2026, if not utilized, and federal research and development tax credits of $4.4 million will begin to expire in 2026. In addition, NOL carryforwards for state income tax purposes of $53.0 million will begin to expire in 2028 and state research and development tax credits of $3.9 million do not expire.
Utilization of the NOL carryforwards may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of the NOL before utilization.
Due to the Company’s full valuation allowance against all net deferred tax assets, the Company’s unrecognized tax benefits, if recognized, would not affect the effective tax rate.
A reconciliation of the change in the unrecognized tax benefit during the year is as follows (in thousands):
| December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Beginning of year |
$ | 1,374 | $ | 1,094 | $ | 861 | ||||||
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Additions for tax positions related to: |
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Current year |
286 | 294 | 227 | |||||||||
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Prior years |
— | (14 | ) | 6 | ||||||||
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End of year |
$ | 1,660 | $ | 1,374 | $ | 1,094 | ||||||
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The Company does not expect a significant change to its unrecognized tax benefits over the next twelve months.
The Company files income tax returns in the U.S. federal and various state jurisdictions. Tax years beginning in 2004 through 2017 remain open to examination by the major taxing authorities to which the Company is subject to. The Company’s policy is to record interest related to uncertain tax positions as interest expense and any penalties as other expense in its statements of operations and comprehensive loss. The Company has not recorded any interest expense or penalties associated with unrecognized tax benefits.