8. Income Taxes
The Company follows FASB ASC 740, Income Taxes, for the computation and presentation of its tax provision. For the year ended December 31, 2017, the income tax provision of $1,000 represents a provision for income taxes of nil related to foreign income taxes and state minimum income taxes of $1,000.
The provision for annual income taxes consisted of the following (in thousands):
|
|
|
As of December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
U.S. Federal |
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
1 |
|
|
|
1 |
|
|
Foreign |
|
|
— |
|
|
|
6 |
|
|
Total current |
|
$ |
1 |
|
|
$ |
7 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
U.S. Federal |
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
— |
|
|
|
— |
|
|
Total deferred |
|
$ |
— |
|
|
$ |
— |
|
|
Total provision for income taxes |
|
$ |
1 |
|
|
$ |
7 |
|
The reconciliation of federal statutory income tax to the Company's provision for income taxes is as follows (in thousands):
|
|
|
As of December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Expected provision at statutory federal rate |
|
$ |
(3,641 |
) |
|
$ |
(5,400 |
) |
|
State tax—net of federal benefit |
|
|
1 |
|
|
|
1 |
|
|
U.S. federal research credit |
|
|
(654 |
) |
|
|
(843 |
) |
|
Non deductible expenses |
|
|
23 |
|
|
|
66 |
|
|
Others |
|
|
(9 |
) |
|
|
(9 |
) |
|
Change in valuation allowance |
|
|
(6,017 |
) |
|
|
6,192 |
|
|
Rate differential impact on tax cuts and jobs act |
|
|
10,298 |
|
|
|
— |
|
|
Provision for income taxes |
|
$ |
1 |
|
|
$ |
7 |
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
|
|
|
As of December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss federal and state |
|
$ |
18,494 |
|
|
$ |
36,594 |
|
|
Research and foreign tax credits |
|
|
10,007 |
|
|
|
13,783 |
|
|
Accrued compensation and vacation |
|
|
226 |
|
|
|
430 |
|
|
Deferred revenue, other accruals and reserves |
|
|
2,463 |
|
|
|
2,964 |
|
|
Stock-based compensation |
|
|
2,048 |
|
|
|
4,727 |
|
|
Patents |
|
|
723 |
|
|
|
2,065 |
|
|
Property and equipment |
|
|
1,225 |
|
|
|
1,203 |
|
|
Gross deferred tax assets |
|
$ |
35,186 |
|
|
$ |
61,766 |
|
|
Valuation allowance |
|
$ |
(35,186 |
) |
|
$ |
(61,766 |
) |
|
Total deferred tax asset |
|
$ |
— |
|
|
$ |
— |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Property and equipment |
|
$ |
— |
|
|
$ |
— |
|
|
Total deferred tax liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
The Company established valuation allowances for U.S. federal and state deferred tax assets. The valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction by jurisdiction basis. During the year ended December 31, 2017, the Company continued to maintain the valuation allowances for U.S. federal and state deferred tax assets. The Company intends to maintain a full valuation allowance until sufficient positive evidence exists to support reversal. The valuation allowance for deferred tax assets was $35.2 million and $61.8 million as of December 31, 2017 and 2016, respectively. The decrease in the valuation allowance during the year ended December 31, 2017 was $26.6 million. The increase in the valuation allowance during the years ended December 31, 2016 was $7.3 million.
As of December 31, 2017, the Company has net operating loss carryforwards for U.S. federal and state income tax purposes of approximately $67.0 million and $63.4 million, respectively. The U.S. federal net operating loss carryforwards will start to expire in 2026 while for state purposes, the net operating losses will begin to expire in 2029. The Internal Revenue Code (IRC) contains a provision which limits the amount of net operating loss (NOL) and research credit carryforwards that can be used in any given year if a significant change in ownership has occurred. As of December 31, 2017, $70.4 million and $45.4 million of the Company’s federal and California NOL carryovers, respectively, are both subject to an annual limitation of $1.2 million limitation, of which $23.1 million of both federal and California NOLs, would be available to offset future taxable income in the twenty-year carryforward period.
In addition, the Company has $3.0 million U.S. federal R&D credit and $12.0 million California R&D credit carryforwards to offset future income tax liabilities. U.S. federal R&D tax credits can be carried forward for 20 years and will start to expire in 2026. California R&D credits can be carried forward indefinitely. As of December 31, 2017, $7.8 million of the Company’s R&D credit carryovers is subject to an annual limitation of $1.2 million limitation, of which Nil R&D credits would be available to offset future taxable income in the twenty-year carryforward period.
Uncertain Tax Positions
For the year ended December 31, 2017, the total amount of unrecognized tax benefits excluding interest thereon was $3.0 million, none of which would impact the effective tax rate if realized during the year. The Company has not accrued interest and penalties related to the unrecognized tax benefits reflected in the financial statements for the years ended December 31, 2017 and 2016. Although the timing and outcome of income tax audits is highly uncertain, unrecognized tax benefits are not expected to decrease in the next twelve months.
The following table summarizes the activity related to unrecognized tax benefits (in thousands):
|
|
|
Years Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Unrecognized benefit—beginning of period |
|
$ |
4,212 |
|
|
$ |
3,757 |
|
|
Gross increase—prior period tax positions |
|
|
— |
|
|
|
— |
|
|
Gross decreases—prior period tax positions |
|
|
(1,557 |
) |
|
|
— |
|
|
Gross increases—current period tax positions |
|
|
352 |
|
|
|
455 |
|
|
Unrecognized benefit—end of period |
|
$ |
3,007 |
|
|
$ |
4,212 |
|
The Company's U.S. federal, state and local and foreign income tax returns are subject to audit by relevant tax authorities. The Company's income tax reporting periods beginning with tax year ended December 31, 2014 for the U.S., and tax year ended December 31, 2013 for the Company's major state and local jurisdictions remain generally open to audit by relevant tax authorities.
Tax Cuts and Jobs Act
On December 22, 2017, the United States (U.S.) enacted the Tax Cuts and Jobs Act (Tax Reform Legislation), which made significant changes to U.S. federal income tax law affecting Company. Set forth below is a discussion of certain provisions of the Tax Reform Legislation and Company's assessment of the impact of such provisions on its financials.
Reduction in Corporate Tax Rate: Effective January 1, 2018, the Company's U.S. income will be taxed at a 21 percent (subject to IRC Section 15 blended rate provisions) down from the 35 percent federal corporate rate. ASC 740-10-25-47 requires the Company to recognize the effect of this rate change on its deferred tax assets and liabilities in the period the tax rate change is enacted. As a result, the Company has concluded this will cause the Company's net deferred taxes to be remeasured at the new lower tax rate. The Company maintains a full valuation allowance on its U.S. net deferred tax assets. Deferred tax asset remeasurment (tax expense) of $10 million will be offset by a net decrease in valuation allowance, resulting no impact on Company's income tax expense.
Accelerated Expensing of Property: In addition, the Tax Reform Legislation allows 100% expensing of cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. The bonus depreciation percentage is phased down from 100 percent beginning in 2023 through 2026. Since the Company is in loss position, the Company is not expensing any fixed assets acquired and placed in service after September 27, 2017 for tax year 2017. The Company is not expecting this provision has any impact to the tax provision since the Company is currently in loss and under full valuation allowance.
Transition Tax: The Tax Reform Legislation provides for a one-time "deemed repatriation" of accumulated foreign earnings for the year ended December 31, 2017. Since the Company is generating a significant amount of loss during 2017 and all foreign operations are shut down during current year, the Company does not expect any impact to the financials.
Section 162(m): Effective for tax years beginning on January 1, 2018 or later, tax reform legislation modifies Section (162)m rules to repeal the performance-based compensation and commission exceptions to the $1 million deduction limitation. The Act contains a very important grandfather rule. Written binding contract in effect on November 2, 2017, including plans where the right to participate in the plan is part of a written contract with an executive, are grandfathered. Since the company's compensation to the CEO and other three highest paid executives is under $1 million, the Company does not expect these provisions will have a material impact to the Company for 2018.