Entity information:

10. Income Taxes

The components of the income tax (benefit) expense are as follows:

 

     Years Ended December 31,  
     2017      2016      2015  
     (in thousands)  

Current

    $ (172 )     $ (2,164 )     $ (680 ) 

Deferred

      —          1,955        1,132  
  

 

 

     

 

 

     

 

 

  

Total (benefit) expense

    $ (172 )     $ (209 )     $ 452  
  

 

 

     

 

 

     

 

 

  

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017.

Pursuant to the SEC Staff Accounting Bulletin (“SAB”) No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), a company may select between one of three scenarios to determine a reasonable estimate arising from the Tax Act. Those scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate as the law is still being analyzed. The Company was able to provide a reasonable estimate for the revaluation of deferred taxes by recording a net tax provision of $6.4 million in the period ending December 31, 2017 which is offset by a full valuation allowance. This tax expense is primarily due to the corporate rate reduction. The Company has also recorded a tax benefit of $0.2 million for the AMT credits which are refundable in tax year 2018 through 2022.

As of December 31, 2017, the Company had federal and state research and development credits carryforwards of approximately $4.1 million and $2.7 million, respectively, to offset potential tax liabilities. The federal research and development credits have a 20-year carryforward period and begin to expire in 2030 unless utilized. California research and development tax credits have no expiration. The Company has $43.6 million federal net operating loss carryforwards and $25.9 million of state net operating loss carryforwards as of December 31, 2017. The federal and state net operating losses can be carried forward until 2037 unless utilized.

The Company completed an IRC Section 382/383 analysis through December 31, 2014. The Company has not updated such Section 382 study through December 31, 2017. Future and current utilization of federal and state tax attribute carry-forwards may be limited, if, upon completion of our Section 382 study through December 31, 2017, it determines ownership changes within the meaning of Section 382 have occurred.

 

Significant components of the Company’s deferred tax assets as of December 31, 2017 and 2016 are shown below. A valuation allowance of $19.2 million and $14.5 million for the years ended December 31, 2017 and 2016, respectively, has been established to offset deferred tax assets as realization of such assets is uncertain.

 

     December 31,  
     2017      2016  
     (in thousands)  

Deferred tax assets

      

Net operating losses

    $ 10,968      $ 7,442  

Stock-based compensation

      1,196        1,069  

Research and development credits

      5,473        3,456  

Deferred revenue

      2,581        4,166  

Accruals and other

      696        846  
  

 

 

     

 

 

  

Total deferred tax assets

      20,914        16,979  
  

 

 

     

 

 

  

Deferred tax liabilities

      

Depreciation and amortization

      (436 )       (629 ) 

Intangible assets

      (1,267 )       (1,867 ) 
  

 

 

     

 

 

  

Total deferred tax liabilities

      (1,703 )       (2,496 ) 
  

 

 

     

 

 

  

Valuation allowance

      (19,211 )       (14,483 ) 
  

 

 

     

 

 

  

Net deferred tax asset

    $ —        $ —    
  

 

 

     

 

 

  

A reconciliation of the Company’s effective tax rate and federal statutory tax rate at December 31, 2017, 2016 and 2015 is as follows:

 

     December 31,  
     2017      2016      2015  
     (in thousands)  

Federal income taxes

    $  (8,791 )     $ 1,792      $  (9,440 ) 

State income taxes

      (949 )       190        (673 ) 

State rate changes

      (392 )        (1,080 )       743  

Impact of change in federal income tax rates

      6,401        —          —    

Stock-based compensation

      623        489        (117 ) 

Valuation allowance

      4,728        130        9,984  

Research and development credits

      (1,897 )       (1,683 )       (815 ) 

Permanent items and other

      105        (47 )       770  
  

 

 

     

 

 

     

 

 

  

Total income tax (benefit) expense

    $ (172 )     $ (209 )     $ 452  
  

 

 

     

 

 

     

 

 

  

In accordance with authoritative guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company established an uncertain tax position with respect to its research and development credits as of December 31, 2017.

 

Following is a tabular reconciliation of the Company’s Unrecognized Tax Benefits activity (excluding interest and penalties):

 

     December 31,  
     2017      2016      2015  
     (in thousands)  

Beginning balance of unrecognized tax benefits

    $ 730      $ 301      $  —    

Additions based on tax positions related to the current year

      361        369        162  

Additions based on tax positions of prior years

      —          79        139  

Reductions for tax positions of prior years

      (59 )       (19 )       —    
  

 

 

     

 

 

     

 

 

  

Ending balance of unrecognized tax benefits

    $ 1,032      $    730      $    301  
  

 

 

     

 

 

     

 

 

  

As of December 31, 2017, if recognized, approximately $0.9 million would affect the effective tax rate if the Company did not have a full valuation allowance.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. No accrued interest or penalties were included in its consolidated balance sheets at December 31, 2017, or 2016, and the Company did not recognize any interest and/or penalties in its consolidated statements of operations during the years ended December 31, 2017, 2016, or 2015.

The Company does not anticipate significant increases or decreases within the next 12 months with respect to its unrecognized tax benefit.

The Company is subject to income tax in the United States and California. The Company currently is under examination by the IRS for tax years December 31, 2015 and December 31, 2016. The Company’s tax years 2013 and forward are subject to examination by the United States tax authorities and tax years 2009 and forward are subject to examination by California and various state tax authorities.