7. Income Taxes
The following is a reconciliation of the Company’s expected federal income tax provision (benefit) to the actual income tax provision (in thousands):
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Tax computed at federal statutory rate |
|
$ |
(14,603 |
) |
|
$ |
(11,377 |
) |
|
$ |
(10,198 |
) |
|
State tax, net of federal tax benefit |
|
|
(1,315 |
) |
|
|
(2,089 |
) |
|
|
2,226 |
|
|
Permanent differences |
|
|
795 |
|
|
|
292 |
|
|
|
43 |
|
|
Stock compensation |
|
|
539 |
|
|
|
968 |
|
|
|
213 |
|
|
R&D tax credits |
|
|
(2,934 |
) |
|
|
(971 |
) |
|
|
(594 |
) |
|
Reserve for uncertain tax positions |
|
|
1,326 |
|
|
|
2,076 |
|
|
|
1,733 |
|
|
Tax attribute limitation |
|
|
— |
|
|
|
54 |
|
|
|
2,727 |
|
|
Tax Cuts and Jobs Act |
|
|
25,280 |
|
|
|
— |
|
|
|
— |
|
|
Other |
|
|
46 |
|
|
|
(74 |
) |
|
|
(37 |
) |
|
Valuation allowance |
|
|
(9,134 |
) |
|
|
11,121 |
|
|
|
3,887 |
|
|
Income tax expense |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Significant components of the Company’s deferred tax assets are summarized as follows (in thousands):
|
|
|
As of December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Section 59e amortization |
|
$ |
14,365 |
|
|
$ |
17,699 |
|
|
Net operating losses |
|
|
27,699 |
|
|
|
35,049 |
|
|
R&D tax credits |
|
|
5,421 |
|
|
|
2,175 |
|
|
Depreciation and amortization |
|
|
581 |
|
|
|
1,020 |
|
|
Deferred revenue |
|
|
594 |
|
|
|
1,677 |
|
|
Stock compensation |
|
|
876 |
|
|
|
1,222 |
|
|
Other |
|
|
96 |
|
|
|
(76 |
) |
|
Deferred tax assets |
|
|
49,632 |
|
|
|
58,766 |
|
|
Valuation allowance |
|
|
(49,632 |
) |
|
|
(58,766 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
A valuation allowance of $49.6 million and $58.8 million at December 31, 2017 and 2016, respectively, has been established to offset the deferred tax assets, as realization of such assets is uncertain.
At December 31, 2017, the Company had federal and California net operating loss (NOL) carryforwards of $121.2 million and $120.8 million, respectively, which may be available to offset future taxable income. The federal and California NOL carryforwards begin to expire in 2027 and 2028, respectively, unless previously utilized. At December 31, 2017, the Company had federal and California research and development (R&D) credit carryforwards of $5.7 million and $4.2 million, respectively. The federal R&D tax credit carryforwards will begin to expire in 2035 unless previously utilized. The California R&D credit carryforwards will carry forward indefinitely.
Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, (the Code), substantial changes in the Company’s ownership may limit the amount of net operating loss and research and development credit carryforwards that could be used annually in the future to offset taxable income. The tax benefits related to future utilization of federal and state net operating loss carryforwards, credit carryforwards, and other deferred tax assets may be limited or lost if cumulative changes in ownership exceeds 50% within any three-year period. The Company completed a study to assess whether an ownership change, as defined by Section 382 of the Code, had occurred from the Company’s formation through December 31, 2015. Based upon this study, the Company determined that several ownership changes had occurred. Accordingly, the Company reduced its deferred tax assets related to the federal NOL carryforwards and the federal R&D credit carryforwards that are anticipated to expire unused as a result of these ownership changes. These tax attributes were excluded from deferred tax assets with a corresponding reduction of the valuation allowance with no net effect on income tax expense or the effective tax rate. The Company updated the study through December 31, 2017 and concluded there were no ownership changes during 2016 and 2017. Future ownership changes may further limit the Company’s ability to utilize its remaining tax attributes.
The Company files income tax returns in the United States and California, and has historically filed income tax returns in Canada. The Company currently has no years under examination by any jurisdiction; however, the Company is subject to income tax examination by federal, Californian and Canadian tax authorities for years beginning in 2014, 2013, and 2013, respectively. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where NOLs and tax credits were generated and carried forward, and make adjustments up to the amount of the carryforwards.
The change in the Company’s unrecognized tax benefits is summarized as follows (in thousands):
|
Balance at December 31, 2014 |
|
$ |
1,820 |
|
|
Increase related to current year tax positions |
|
|
374 |
|
|
Increase related to prior year tax positions |
|
|
2,624 |
|
|
Decrease related to prior year tax positions |
|
|
(949 |
) |
|
Balance at December 31, 2015 |
|
$ |
3,869 |
|
|
Increase related to current year tax positions |
|
|
2,268 |
|
|
Increase related to prior year tax positions |
|
|
1,625 |
|
|
Decrease related to prior year tax positions |
|
|
(32 |
) |
|
Balance at December 31, 2016 |
|
$ |
7,730 |
|
|
Increase related to current year tax positions |
|
|
4,077 |
|
|
Increase related to prior year tax positions |
|
|
6 |
|
|
Decrease related to prior year tax positions |
|
|
(13 |
) |
|
Balance at December 31, 2017 |
|
$ |
11,800 |
|
The Company does not anticipate that the amount of unrecognized tax benefits as of December 31, 2017 will significantly change within the next twelve months. Due to the valuation allowance recorded against the Company’s deferred tax assets, none of the total unrecognized tax benefits as of December 31, 2017 would reduce the effective tax rate if recognized. The Company has not recognized interest or penalties in its consolidated statements of operations and comprehensive loss since inception.
The Company adopted ASU No. 2016-09 on January 1, 2017. ASU 2016-09 simplifies how several aspects of share-based payments are accounted for and presented in the financial statements. The Company had excess tax benefits for which a benefit could not be previously recognized of $0.1 million. Due to the full valuation allowance on the deferred tax assets, there was no impact to the Company’s consolidated financial statements as a result of the adoption.
The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 34% to 21%. The reduction in the rate caused the Company to remeasure its deferred tax assets and liabilities at December 31, 2017. This resulted in a provisional reduction of the Company’s deferred tax balance by $25.3 million, offset by an equal change in the valuation allowance.
On December 22, 2017, SEC Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of US 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 effect of the Act. In accordance with SAB 118, the Company has determined that $25.3 million of the deferred tax expense recorded in connection with remeasuring certain deferred tax assets and liabilities is a provisional amount and reasonable estimate at December 31, 2017. Additional work is necessary to do a more detailed analysis. Any subsequent adjustment to these amounts will be recorded to current tax expense in the period the analysis is complete.