9. INCOME TAXES
The components of loss before income taxes consist of the following:
|
|
|
Year Ended |
|
|||||||||
|
|
|
December 31, 2017 |
|
|
December 31, 2016 |
|
|
December 26, 2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
United States |
|
$ |
(63,831 |
) |
|
$ |
(42,977 |
) |
|
$ |
(41,696 |
) |
|
Foreign |
|
|
637 |
|
|
|
430 |
|
|
|
1,232 |
|
|
Net loss before income taxes |
|
$ |
(63,194 |
) |
|
$ |
(42,547 |
) |
|
$ |
(40,464 |
) |
The income tax expense consisted of the following:
|
|
|
Year Ended |
|
|||||||||
|
|
|
December 31, 2017 |
|
|
December 31, 2016 |
|
|
December 26, 2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
89 |
|
|
|
50 |
|
|
|
71 |
|
|
Foreign |
|
|
674 |
|
|
|
160 |
|
|
|
76 |
|
|
|
|
|
763 |
|
|
|
210 |
|
|
|
147 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
(448 |
) |
|
|
1 |
|
|
|
— |
|
|
Total |
|
$ |
315 |
|
|
$ |
211 |
|
|
$ |
147 |
|
The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate:
|
|
|
Year Ended |
|
|||||||||
|
|
December 31, 2017 |
|
|
December 31, 2016 |
|
|
December 26, 2015 |
|
||||
|
U.S. federal income tax at statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
U.S. state and local income taxes |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
Change in valuation allowance |
|
|
19.0 |
|
|
|
(36.9 |
) |
|
|
(33.7 |
) |
|
Federal research and development tax credit |
|
|
5.2 |
|
|
|
4.8 |
|
|
|
3.9 |
|
|
Convertible preferred stock warrants |
|
|
(21.7 |
) |
|
|
0.7 |
|
|
|
(1.5 |
) |
|
Stock-based compensation |
|
|
1.2 |
|
|
|
(2.5 |
) |
|
|
(1.7 |
) |
|
Permanent items |
|
|
(1.1 |
) |
|
|
(0.2 |
) |
|
|
(1.1 |
) |
|
Foreign rate differential |
|
|
0.2 |
|
|
|
— |
|
|
|
0.4 |
|
|
Tax rate change |
|
|
(36.4 |
) |
|
|
— |
|
|
|
— |
|
|
Other |
|
|
(0.7 |
) |
|
|
(0.2 |
) |
|
|
(0.5 |
) |
|
Effective tax rate |
|
|
(0.5 |
)% |
|
|
(0.4 |
)% |
|
|
(0.4 |
)% |
Significant components of the Company’s deferred income tax assets and liabilities consist of the following:
|
|
|
December 31, 2017 |
|
|
December 31, 2016 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
34,843 |
|
|
$ |
46,954 |
|
|
Reserves and accruals |
|
|
13,577 |
|
|
|
15,575 |
|
|
Research and development credits |
|
|
15,475 |
|
|
|
10,555 |
|
|
Depreciation and amortization |
|
|
288 |
|
|
|
1,568 |
|
|
Stock-based compensation |
|
|
4,098 |
|
|
|
4,068 |
|
|
Total deferred tax assets |
|
|
68,281 |
|
|
|
78,720 |
|
|
Valuation allowance |
|
|
(68,219 |
) |
|
|
(78,695 |
) |
|
Net deferred tax assets |
|
$ |
62 |
|
|
$ |
25 |
|
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized through future operations. As a result of the Company’s analysis of all available objective evidence, both positive and negative, as of December 31, 2017, management believes it is more likely than not that the deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its deferred tax assets with the exception of deferred tax assets related to foreign entities in the U.K., China and Denmark.
For federal and state income tax reporting purposes, respective net operating loss carryforwards of $135.2 million and $104.1 million are available to reduce future taxable income, if any. These net operating loss carryforwards will begin to expire in 2028 for federal and state income tax purposes.
During the year ended December 31, 2017 the Company adopted the requirements of ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share -Based Payment Accounting, issued by the FASB that simplifies the accounting for certain aspects of stock-based payments to employees. As a result of adoption, the previously unrecognized U.S. excess tax benefits of $1.3 million were recorded as a deferred tax asset, which was fully offset by a valuation allowance resulting in no impact to the accumulated deficit.
As of December 31, 2017, the Company has research and development tax credit carryforwards of $13.4 million and $9.1 million for federal and state income tax purposes, respectively. If not utilized, the federal carryforwards will begin to expire in 2028. The state tax credits can be carried forward indefinitely.
The Internal Revenue Code of 1986, as amended (the “Code”), contains provisions that may limit the net operating loss and credit carryforwards available for use in any given period upon the occurrence of certain events, including a statutorily defined significant change in ownership. Utilization of the net operating loss and tax credit carryforwards is subject to an annual limitation due to an ownership change, as defined by section 382 of the Code. The Company completed a recent study to assess whether any section 382 ownership change has occurred since the Company’s formation. Based on the study, the Company had a section 382 ownership change on December 18, 2009 and tax attributes generated by the Company through the ownership change date are subject to the limitation. The Company has determined that there is no additional ownership change since December 18, 2009.
The total amount of unrecognized tax benefits as of December 31, 2017 is $5.8 million which is fully composed of research and development credits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
December 31, 2017 |
|
|
December 31, 2016 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Unrecognized tax benefits at beginning of year |
|
$ |
4,368 |
|
|
$ |
2,917 |
|
|
Gross increase for tax positions of current years |
|
|
1,475 |
|
|
|
1,246 |
|
|
Gross increase for tax positions of prior year |
|
|
— |
|
|
|
205 |
|
|
Gross decrease for tax positions of prior years |
|
|
— |
|
|
|
— |
|
|
Unrecognized tax benefits balance at end of year |
|
$ |
5,843 |
|
|
$ |
4,368 |
|
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of its income tax expense. As of December 31, 2017, there were no accrued interest and penalties related to uncertain tax positions.
None of the Company’s unrecognized tax benefit, if recognized, would affect its effective tax rate. The Company does not believe that the amount of unrecognized tax benefits will change significantly in the next 12 months.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities. These audits include questioning the timing and amount of deductions; the nexus of income among various tax jurisdictions; and compliance with federal, state, and local tax laws. The Company is not currently under audit by the Internal Revenue Service or other similar state and local authorities. All tax years remain open to examination by major taxing jurisdictions to which the Company is subject.
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 reduces the US federal corporate tax rate from 35% to 21%, imposes a one-time repatriation tax, and numerous other provisions transitioning to a territorial system.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it 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.
Based on provisions of the Tax Act, the Company remeasured the deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The estimated amount of the re-measurement of our deferred tax balance was $23.0 million. However, as the Company recognizes a valuation allowance on deferred tax assets if it is more likely than not that the assets will not be realized in future years there is no impact to effective tax rate, as any change to deferred taxes would be offset by valuation allowances.
The one-time repatriation tax is based on the Company's post-1986 earnings and profits (E&P) that were previously deferred from US income taxes. The one-time repatriation tax did not result in additional tax liability for the Company as the Company has sufficient net operating loss to offset the estimated foreign earnings.
As a result of the one-time repatriation tax, the Company has not provided for any foreign withholding tax for any undistributed earnings of its foreign subsidiaries as of December 31, 2017. The Company has not yet made a determination of indefinite reinvestment assertion in light of the Tax Act and considers the conclusion to be incomplete under guidance issued by the SEC. The Company expects to reach a final determination within the measurement period in accordance with SAB 118.
The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. The Securities and Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The Company currently anticipates finalizing and recording any resulting adjustments by the year ending December 31, 2018.
The Act creates a new requirement that global intangible low-taxed income (GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S. shareholder. Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Act and the application of ASC 740. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. We have not yet made any adjustments related to potential GILTI tax in our financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI.