| 14. | Income Taxes |
The Company’s loss before tax is only attributable to U.S. operations. The components of the income tax (benefit) expense are as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Current (benefit from) provision for income taxes: |
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Federal |
$ | — | $ | — | $ | — | ||||||
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State |
— | — | — | |||||||||
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Total current (benefit from) provision for income taxes |
— | — | — | |||||||||
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Deferred (benefit from) provision for income taxes: |
— | — | — | |||||||||
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Federal |
— | — | — | |||||||||
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State |
— | — | — | |||||||||
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Total deferred tax (benefit from) provision for income taxes |
— | — | — | |||||||||
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(Benefit from) provision for income taxes |
$ | — | $ | — | $ | — | ||||||
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A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Federal statutory income tax rate |
34.0 | % | (34.0 | %) | (34.0 | %) | ||||||
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State income taxes, net of federal benefit |
— | (5.8 | ) | (5.8 | ) | |||||||
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Permanent items |
5.5 | 2.1 | 1.9 | |||||||||
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Excess tax benefit for stock-based compensation |
(2.0 | ) | — | — | ||||||||
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Research and development credits |
(7.2 | ) | (2.8 | ) | (2.1 | ) | ||||||
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Change in valuation allowance |
(224.1 | ) | 38.1 | 40.0 | ||||||||
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Change in tax rate |
193.8 | — | — | |||||||||
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Other |
— | 2.4 | — | |||||||||
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(Benefit from) provisions for income taxes |
— | % | — | % | — | % | ||||||
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The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets consist of the following (in thousands):
| December 31, | ||||||||
| 2017 | 2016 | |||||||
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Net operating loss carryforwards |
$ | 55,569 | $ | 102,269 | ||||
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Research and development credit |
10,470 | 8,719 | ||||||
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Amortization of deferred stock compensation - non-qualified |
6,385 | 10,567 | ||||||
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Reserves and accruals |
785 | 1,747 | ||||||
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Deferred revenue |
10,297 | — | ||||||
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Depreciation and amortization |
231 | 445 | ||||||
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Net deferred tax assets |
83,737 | 123,747 | ||||||
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Less: valuation allowance |
(83,737 | ) | (123,747 | ) | ||||
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Net deferred tax assets |
$ | — | $ | — | ||||
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On December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was enacted into law. The new tax legislation contains several key provisions including the reduction of the corporate income tax rate to 21%, effective January 1, 2018, as well as a variety of other changes including the limitation of the tax deductibility of interest expense, acceleration of expensing of certain business assets and reductions in the amount of executive pay that could qualify as a tax deduction. Additionally, the Act introduced a territorial-style system for taxing foreign source income of domestic multinational corporations. The Company has analyzed the potential impacts of the Act and due to the federal rate reduction it is expecting a reduction in its federal deferred tax assets by $36.0 million with an offset to the valuation allowance, which has been reflected in the financial statements for the tax year ended December 31, 2017.
Accounting Standards Codification (ASC) 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. Shortly after the enactment of the Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. The Company has adjusted its deferred tax assets and liabilities based on the reduction of the U.S. federal corporate tax rate from 34% to 21% and assessed the realizability of its deferred tax assets based on its current understanding of the provisions of the new law. The Company considers its accounting for the impacts of the new law to be provisional and the Company will continue to assess the impact of the recently enacted tax law (and expected further guidance from federal and state tax authorities as well as further guidance for the associated income tax accounting) on its business and consolidated financial statements over the next 12 months.
The Company has concluded that it is more likely than not that its deferred tax assets will not be realized. Accordingly, the total deferred tax assets have been fully offset by a valuation allowance. The Company’s valuation allowance decreased by approximately $40.0 million in 2017 and increased by approximately $15.2 million and $19.3 million during 2016 and 2015 respectively.
At December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $192.5 million and $247.9 million, respectively. The federal net operating loss carryforwards will begin to expire in 2031. The state net operating loss carryforwards will begin to expire in 2018.
The Company has federal and state research and development credit carryforwards of $11.2 million and $6.1 million, respectively. The federal research and development credits will begin to expire in 2019, if not utilized. California research and development credits can be carried forward indefinitely.
Utilization of the net operating loss and credit carryforwards may be subject to annual limitation due to historical or future ownership percentage change rules provided by the Internal Revenue Code of 1986, and similar state provisions. The annual limitation may result in the expiration of certain net operating loss and credit carryforwards before their utilization.
A reconciliation of the Company’s unrecognized tax benefits for the years ended December 31, 2017, 2016, and 2015, is as follows (in thousands):
| Unrecognized Income Tax Benefits |
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Balance as of December 31, 2015 |
$ | 4,872 | ||
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Additions for current tax positions |
558 | |||
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Balance as of December 31, 2016 |
$ | 5,430 | ||
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Additions for current tax positions |
603 | |||
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Additions for prior tax positions |
2,753 | |||
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Balance as of December 31, 2017 |
$ | 8,786 | ||
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As of December 31, 2017 and 2016, the Company had approximately $8.8 million and $5.4 million, respectively, of unrecognized tax benefits, none of which would currently affect the Company’s effective tax rate if recognized due to the Company’s deferred tax assets being fully offset by a valuation allowance. The Company is not aware of any items that will significantly increase or decrease its unrecognized tax benefits in the next 12 months.
For U.S. federal and California income tax purposes, the statute of limitations remains open for the years beginning 2014 and 2013, respectively, except for the carryforward of net operating losses and research and development credits generated in prior years.
If applicable, the Company would classify interest and penalties related to uncertain tax positions in income tax expense. Through December 31, 2017, there has been no interest expense or penalties related to unrecognized tax benefits.