8. Income Taxes
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The 2017 Tax Act also provides for a one-time transition tax on certain foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017 as well as prospective changes beginning in 2018, including repeal of the domestic manufacturing deduction, acceleration of tax revenue recognition, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance for the tax effect of the 2017 Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the 2017 Tax Act’s enactment date for companies to complete the accounting under Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”). In accordance with SAB 118, the Company must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting under ASC 740 is complete. To the extent that our accounting for certain income tax effects of the Tax Act is incomplete, but we are able to determine a reasonable estimate, we must record a provisional estimate in our consolidated financial statements. If we cannot determine a provisional estimate to be included in our consolidated financial statements, we should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The amounts of the tax effects related to the Tax Act described in the paragraphs above represent our reasonable estimates and are provisional amounts within the meaning of SAB 118. Also, it is expected that the U.S. Treasury will issue regulations and other guidance on the application of certain provisions of the 2017 Tax Act. In subsequent periods, but within the measurement period, we will analyze that guidance and other necessary information to refine our estimates and complete our accounting for the tax effects of the 2017 Tax Act as necessary.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in the consolidated financial statements as of December 31, 2017. As the Company collects and prepares necessary data, and interprets the Tax Act and any additional guidance issued by the U.S. Department of Treasury and other standard-setting bodies, the Company may make adjustments to the provisional amounts.
Provisional amounts for the following income tax effects of the Tax Act have been recorded as of December 31, 2017 and are subject to change during 2018.
One-time transition tax
The Tax Act requires the Company to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. The Company recorded a provisional immaterial amount for a one-time transitional tax liability which was fully offset by utilization of its net operating loss.
Deferred tax effects
The Tax Act reduces the U.S. statutory tax rate from 35% to 21% for years after 2017. Accordingly, the Company remeasured its deferred taxes as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. The Company recognized the remeasurement of deferred taxes with an offset to the valuation allowance of $20.7 million. Although the tax rate reduction is known, the analysis of the effect of the Tax Act on the underlying deferred taxes are considered to be provisional.
The Company operates in the United States for tax reporting purposes. The Company did not record a provision or benefit for income taxes during the years ended December 31, 2017, 2016 and 2015, as it reported losses in each period which are not more likely than not to be realized. Due to the uncertainties surrounding the realization of deferred tax assets through future taxable income, the Company has provided a full valuation allowance and, therefore, no benefit has been recognized for the net operating loss carryforwards and other deferred tax assets.
The following table presents a reconciliation of the tax expense computed at the statutory federal rate and the Company’s tax expense for the period presented (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Tax at statutory federal rate |
|
|
(10,034 |
) |
|
$ |
(7,107 |
) |
|
$ |
(7,752 |
) |
|
Stock-based compensation |
|
|
(7,634 |
) |
|
255 |
|
|
|
251 |
|
|
|
Other |
|
|
53 |
|
|
916 |
|
|
|
(128 |
) |
|
|
Tax credits |
|
|
(644 |
) |
|
|
(139 |
) |
|
|
(178 |
) |
|
2017 Tax Act |
|
|
21,928 |
|
|
— |
|
|
— |
|
||
|
Change in valuation allowance |
|
|
(3,669 |
) |
|
|
6,075 |
|
|
|
7,807 |
|
|
Provision for income taxes |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company recorded a provisional adjustment to the U.S. deferred income taxes as of December 31, 2017 to reflect the reduction in the U.S. corporate income tax rate from 35% to 21% resulting from the 2017 Tax Act. Significant components of our deferred tax assets and liabilities are as follows (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
35,338 |
|
|
$ |
38,694 |
|
|
Tax credit carryforwards |
|
|
2,642 |
|
|
|
1,587 |
|
|
Allowances and other |
|
|
6,682 |
|
|
|
4,787 |
|
|
Depreciation and amortization |
|
|
(414 |
) |
|
|
(207 |
) |
|
Total deferred tax assets |
|
|
44,248 |
|
|
|
44,861 |
|
|
Valuation allowance |
|
|
(44,248 |
) |
|
|
(44,861 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
Due to the uncertainties surrounding the realization of deferred tax assets through future taxable income, the Company has provided a full valuation allowance and, therefore, no benefit has been recognized for the net operating loss carryforwards and other deferred tax assets. The valuation allowance decreased by $0.6 million and increased by $6.3 million for the years ended December 31, 2017 and December 31, 2016, respectively. The current year change in the valuation allowance is primarily related to the increase in net operating loss carryforwards generated during the year and offset by a decrease in the deferred taxes assets related to the reduction of the U.S. corporate income tax rate from the 2017 Tax Act.
As of December 31, 2017, the Company had approximately $143.1 million of federal and $82.4 million of state net operating loss carryforwards available to offset future taxable income which expires in varying amounts beginning in 2027 and 2018, respectively.
As of December 31, 2017, the Company had tax credit carryforwards of approximately $2.1 million, and $1.8 million available to reduce future taxable income, if any, for both federal and state purposes, respectively. The federal tax credit carryforwards expire beginning in 2028 and the state tax credits can be carried forward indefinitely.
Section 382 of the Internal Revenue Code, and similar state provisions, limits the use of net operating loss and tax credit carryforwards in certain situations where equity transactions result in a change of ownership as defined by Internal Revenue Code Section 382. In the event the Company should experience an ownership change, as defined, utilization of its net operating loss carryforwards and tax credits could be limited.
A reconciliation of the Company’s unrecognized tax benefit amount is as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at beginning of year |
|
$ |
616 |
|
|
$ |
570 |
|
|
$ |
460 |
|
|
Additions for tax positions taken in current year |
|
|
328 |
|
|
|
75 |
|
|
110 |
|
|
|
Decreases in balances related to prior year tax position |
|
|
(1 |
) |
|
|
(29 |
) |
|
|
— |
|
|
Balance at end of year |
|
$ |
943 |
|
|
$ |
616 |
|
|
$ |
570 |
|
The total amount of gross unrecognized tax benefits was $0.9 million, $0.6 million, and $0.6 million as of December 31, 2017, 2016, and 2015 respectively, all of which , if recognized, would affect the effective tax rate. The Company does not anticipate 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 the provision for taxes. Management determined that no accrual for interest or penalties was required as of December 31, 2017 and 2016.
The Company files income tax returns in the U.S. and UK jurisdictions. All of the Company's tax years are open to examination by the US federal, state and foreign tax authorities.