Income Taxes
The components of loss before income tax benefit were as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | (60,777 | ) | | $ | (58,548 | ) | | $ | (79,920 | ) |
As a result of the Company's history of net operating losses and full valuation allowance against its deferred tax assets, there was no current or deferred income tax provision for the years ended December 31, 2016 and 2015. For the year ended December 31, 2017, the Company recorded a tax benefit of $5.2 million as a result of the acquisition of Jiff in April 2017. This tax benefit is a result of the partial release of its existing valuation allowance since the acquired deferred tax liabilities from Jiff will provide a source of income for the Company to realize a portion of its deferred tax assets, for which a valuation allowance is no longer needed.
Reconciliations of the statutory federal income tax rate and the Company's effective tax rate consist of the following (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax at federal statutory rate | $ | (20,664 | ) | | $ | (19,812 | ) | | $ | (27,173 | ) |
State statutory rate (net of federal benefit) | (2,479 | ) | | (1,259 | ) | | (1,560 | ) |
Non-deductible stock compensation | 106 |
| | 1,594 |
| | 2,334 |
|
Effect of U.S. tax law change | 54,574 |
| | — |
| | — |
|
Change in valuation allowance | (33,098 | ) | | 14,365 |
| | 24,332 |
|
Benefit associated with Jiff Acquisition | (5,206 | ) | | — |
| | — |
|
Other | 1,561 |
| | 5,112 |
| | 2,067 |
|
| $ | (5,206 | ) | | $ | — |
| | $ | — |
|
Significant components of the Company's net deferred tax assets were as follows (in thousands):
|
| | | | | | | |
| As of December 31, |
Deferred tax assets: | 2017 | | 2016 |
Net operating loss carryforwards | $ | 105,247 |
| | $ | 105,100 |
|
Deferred rent | 474 |
| | 580 |
|
Accrued compensation | 2,792 |
| | 1,291 |
|
Stock-based compensation | 7,530 |
| | 6,369 |
|
Other reserves and accruals | 78 |
| | 3 |
|
Property and equipment | 283 |
| | 649 |
|
Deferred revenue | 1,729 |
| | 3,879 |
|
| 118,133 |
| | 117,871 |
|
Valuation allowance | (112,968 | ) | | (117,871 | ) |
Deferred tax assets, net of valuation allowance | 5,165 |
| | — |
|
Deferred tax liability: | | | |
Intangibles | (5,165 | ) | | — |
|
Deferred tax liability | (5,165 | ) | | — |
|
Total | $ | — |
| | $ | — |
|
The Company has provided a full valuation allowance for its deferred tax assets as of December 31, 2017 and 2016, due to the uncertainty surrounding the future realization of such assets. Therefore, no benefit has been recognized for the net operating loss carryforwards and other deferred tax assets.
The valuation allowance decreased by $4.9 million and increased by $14.6 million during the years ended December 31, 2017 and 2016, respectively. The decrease in the valuation allowance for the year ended December 31, 2017 was related to a decrease in the U.S. corporate federal income tax rate from 34% to 21%, as well as the acquired deferred tax liabilities from Jiff.
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 (the “Act”) into law. The new legislation decreases the U.S. corporate federal income tax rate from 35% to 21% effective January 1, 2018. The Act also includes a number of other provisions including the elimination of loss carrybacks and limitations on the use of future losses and repeal of the Alternative Minimum Tax regime. The Company has calculated its best estimate of the impact of the Tax Act in its year end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing. The provisional amount related to the re-measurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was a net decrease related to deferred tax assets and deferred tax liabilities of $54.6 million, with a corresponding offsetting change in valuation allowance of $54.6 million for the year ended December 31, 2017.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of 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. In accordance with SAB 118, the Company has determined that the adjustment to deferred taxes was a provisional amount and a reasonable estimate at December 31, 2017. The determination of the benefit from income taxes requires complex estimations, significant judgments and significant knowledge and experience concerning the applicable tax laws. Given that the Company is still in the transition period for the accounting for income tax effects of the Act, the current assessment on deferred tax assets is based on the currently available information and guidance. If in the future any element of the tax reform changes the related accounting guidance for income tax, it could affect the Company’s income tax position, and the Company may need to adjust the benefit from (provision for) income taxes accordingly.
As of December 31, 2017, the Company had approximately $421.6 million of federal and $276.7 million of state net operating loss carryforwards available to offset future taxable income. If not utilized, the federal and state net operating loss carryforwards begin to expire in 2028 and 2028, respectively.
As of December 31, 2017, the Company also had approximately $9.0 million and $9.8 million of research and development tax credit carryforwards available to reduce future taxable income, if any, for federal and California purposes, respectively. The federal credit carryforwards expire beginning in 2028, and the California research credits do not expire and may be carried forward indefinitely.
The Company's ability to utilize the net operating loss and tax credit carryforwards in the future may be subject to substantial restrictions in the event of past or future ownership changes as defined in Section 382 of the Internal Revenue Code and similar state tax laws. In the event the Company should experience an ownership change, as defined, utilization of the Company's net operating loss carryforwards and tax credits could be limited.
The Company evaluates tax positions for recognition using a more-likely-than-not recognition threshold, and those tax positions eligible for recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon the effective settlement with a taxing authority that has full knowledge of all relevant information.
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefit is as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Gross unrecognized tax benefits at the beginning of the year | $ | 13,568 |
| | $ | 9,540 |
| | $ | 7,214 |
|
Increases for tax positions of prior years | — |
| | — |
| | 133 |
|
Decreases for tax positions of prior years | (626 | ) | | (125 | ) | | (346 | ) |
Increases for tax positions related to the current year | 5,946 |
| | 4,153 |
| | 2,539 |
|
Gross unrecognized tax benefits at the end of the year | $ | 18,888 |
| | $ | 13,568 |
| | $ | 9,540 |
|
As of December 31, 2017, all unrecognized tax benefits are subject to a full valuation allowance and, if recognized, will not affect the Company's tax rate.
There were no material changes to the unrecognized tax benefits in the year ended December 31, 2017, and the Company does not anticipate that the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months.
The Company's policy is to include interest and penalties related to unrecognized tax benefits within its provision for income taxes. Due to the Company's net operating loss position, the Company has not recorded an accrual for interest or penalties related to uncertain tax positions for the years ended December 31, 2017, 2016 or 2015.