10. Income taxes
The Company recorded a benefit for income taxes in the year ended December 31, 2017. The Company did not record a provision or benefit for income taxes during the years ended December 31, 2016 and 2015. The components of loss before income taxes by U.S. and foreign jurisdictions are as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
United States |
|
$ |
124,108 |
|
|
$ |
99,793 |
|
|
$ |
88,112 |
|
|
Foreign |
|
|
1,128 |
|
|
|
463 |
|
|
|
1,670 |
|
|
Total |
|
$ |
125,236 |
|
|
$ |
100,256 |
|
|
$ |
89,782 |
|
The components of the provision for income taxes are as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Federal |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total Current |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1,704 |
) |
|
|
— |
|
|
|
— |
|
|
State |
|
|
(152 |
) |
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total Deferred |
|
|
(1,856 |
) |
|
|
— |
|
|
|
— |
|
|
Tax Provision |
|
$ |
(1,856 |
) |
|
$ |
— |
|
|
$ |
— |
|
The following table presents a reconciliation of the tax expense computed at the statutory federal rate and the Company’s tax expense for the periods presented:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. federal taxes at statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
State taxes (net of federal benefit) |
|
|
3.3 |
% |
|
|
1.4 |
% |
|
|
0.8 |
% |
|
Stock-based compensation |
|
|
(1.1 |
)% |
|
|
(1.7 |
)% |
|
|
(— |
)% |
|
Non-deductible expenses |
|
|
(— |
)% |
|
|
0.2 |
% |
|
|
(0.8 |
)% |
|
Foreign tax differential |
|
|
(0.3 |
)% |
|
|
(0.2 |
)% |
|
|
(0.2 |
)% |
|
Other |
|
|
(— |
)% |
|
|
1.1 |
% |
|
|
(— |
)% |
|
Change in valuation allowance |
|
|
(34.4 |
)% |
|
|
(34.8 |
)% |
|
|
(33.8 |
)% |
|
Change in deferred—Tax Reform |
|
|
(39.0 |
)% |
|
|
(— |
)% |
|
|
(— |
)% |
|
Change in valuation allowance—Tax Reform |
|
|
39.0 |
% |
|
|
(— |
)% |
|
|
(— |
)% |
|
Total |
|
|
1.5 |
% |
|
|
(— |
)% |
|
|
(— |
)% |
The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets are as follows (in thousands):
|
|
|
As of December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
70,825 |
|
|
$ |
76,353 |
|
|
Tax credits |
|
|
15 |
|
|
|
13 |
|
|
Revenue recognition reserves |
|
|
29,819 |
|
|
|
14,291 |
|
|
Accruals and other |
|
|
5,544 |
|
|
|
3,405 |
|
|
Gross deferred tax assets |
|
|
106,203 |
|
|
|
94,062 |
|
|
Valuation allowance |
|
|
(95,687 |
) |
|
|
(93,666 |
) |
|
Net deferred tax assets |
|
|
10,516 |
|
|
|
396 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Property and equipment |
|
|
(10,516 |
) |
|
|
(396 |
) |
|
Total deferred tax liabilities |
|
|
(10,516 |
) |
|
|
(396 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes including among other items, a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%. Although the Tax Act is generally effective January 1, 2018, GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017. As a result of the lower corporate tax rate enacted as part of the Tax Act, the Company recorded a provisional estimate to reduce deferred tax assets by $48.8. The reduction in deferred tax assets was offset by a corresponding reduction in the valuation allowance resulting in no net impact to tax expense.
On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. 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 been able to make a reasonable estimate of the impact to deferred taxes as a result of Tax Reform. The Company has recorded a provisional estimate which resulted in a $48.8 million reduction in deferred tax assets as of December 31, 2017. The provisional amount will be updated as IRS, Treasury and state tax guidance is issued and as the Company finalizes its deferred tax accounting for the GSG and CombiMatrix acquisitions.
The Company has established a full valuation allowance against its deferred tax assets due to the uncertainty surrounding realization of such assets. During 2017, the change in the valuation allowance of $2.0 million consisted of a $50.8 million increase as result of operations with an offsetting $48.8 million reduction due to the Tax Act. The valuation allowance increased by $33.4 million during the year ended December 31, 2016 as a result of operations.
As of December 31, 2017, the Company had net operating loss carryforwards of approximately $292.2 million and $145.6 million available to reduce future taxable income, if any, for Federal and state income tax purposes, respectively. The U.S. Federal and California state net operating loss carryforwards will begin to expire in 2018.
As of December 31, 2017, the Company had research and development credit carryforwards of approximately $5.5 million and $5.1 million available to reduce its future tax liability, if any, for Federal and California state income tax purposes, respectively. The Federal credit carryforwards begin to expire in 2030. California credit carryforwards have no expiration date.
Internal Revenue Code section 382 places a limitation (the “Section 382 limitation” or “annual limitation”) on the amount of taxable income that can be offset by net operating loss (“NOL”) carryforwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. Similar provisions exist for states. In addition, and as a result of the acquisitions of Good Start Genetics in August 2017 and CombiMatrix in November 2017, tax loss carryforwards from acquired entities are also subject to the Section 382 limitation due to the change in control in the acquired entities in the current year.
The Company performed an IRC Section 382 analysis for Good Start Genetics and CombiMatrix and concluded that a substantial portion of the acquired operating loss and credit carryovers would expire unused as a result of annual limitations under IRC sections 382 and 383. As a result, the federal and state operating loss and credit carryforwards acquired in connection with the Good Start Genetics and CombiMatrix acquisitions were reduced by the amount of tax attributes estimated to expire during their respective carryforward periods. In addition, as a result of equity issued in connection with its 2017 acquisitions, the Company also performed an IRC section 382 analysis through December 31, 2017 with respect to its legacy operating loss and credit carryforwards. The Company concluded while an ownership change occurred in 2017 as defined under IRC section 382, none of the Company’s legacy carryforwards would expire unused solely as a result of annual limitations imposed on the use of the carryforwards under IRC sections 382 and 383.
As of December 31, 2017, the Company had unrecognized tax benefits of $10.6 million, none of which would currently affect the Company’s effective tax rate if recognized due to the Company’s deferred tax assets being fully offset by a valuation allowance. Unrecognized tax benefits are not expected to change in the next 12 months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
Year ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Unrecognized tax benefits, beginning of period |
|
$ |
7,791 |
|
|
$ |
11,429 |
|
|
$ |
5,661 |
|
|
Gross increases—current period tax positions |
|
|
2,552 |
|
|
|
782 |
|
|
|
2,993 |
|
|
Gross increases—prior period tax positions |
|
|
218 |
|
|
|
(4,420 |
) |
|
|
2,775 |
|
|
Unrecognized tax benefits, end of period |
|
$ |
10,561 |
|
|
$ |
7,791 |
|
|
$ |
11,429 |
|
The Company’s policy is to include penalties and interest expense related to income taxes as a component of tax expense. 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, 2016 and 2015.
The Company’s major tax jurisdictions are the United States and California. All of the Company’s tax years will remain open for examination by the Federal and state tax authorities for three and four years, respectively, from the date of utilization of the net operating loss or research and development credit. The Company does not have any tax audits pending.