12. Income Taxes
A reconciliation of the tax provision to the amount computed by applying the statutory federal rate to the net income/(loss) is summarized as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal income taxes at 34% |
$ |
2,426 |
|
|
$ |
(18,393 |
) |
|
$ |
(28,082 |
) |
|
State income taxes, net of federal benefit |
|
(226 |
) |
|
|
(1,484 |
) |
|
|
(1,513 |
) |
|
Research and development tax credits |
|
(556 |
) |
|
|
(889 |
) |
|
|
(650 |
) |
|
Changes in fair value of convertible notes and common stock warrant liability |
|
(11,972 |
) |
|
|
8,584 |
|
|
|
19,308 |
|
|
Increase in valuation allowance |
|
(24,704 |
) |
|
|
10,583 |
|
|
|
8,789 |
|
|
Accrued interest on convertible notes |
|
1,555 |
|
|
|
698 |
|
|
|
944 |
|
|
Expiration of state net operating losses |
|
— |
|
|
|
641 |
|
|
|
692 |
|
|
State rate adjustment |
|
1,411 |
|
|
|
— |
|
|
|
— |
|
|
Tax Cuts and Jobs Act of 2017 |
|
31,541 |
|
|
|
— |
|
|
|
— |
|
|
Stock-based compensation expense |
|
815 |
|
|
|
223 |
|
|
|
287 |
|
|
Other |
|
(290 |
) |
|
|
37 |
|
|
|
225 |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Our deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:
|
|
December 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
Net operating loss carryforwards |
$ |
57,278 |
|
|
$ |
80,382 |
|
|
Research and development credits |
|
9,636 |
|
|
|
8,422 |
|
|
Amortization |
|
4,422 |
|
|
|
4,302 |
|
|
Stock-based compensation expense |
|
3,723 |
|
|
|
6,766 |
|
|
Depreciation |
|
265 |
|
|
|
416 |
|
|
Accrued operating expenses |
|
11 |
|
|
|
22 |
|
|
Debt issuance costs |
|
479 |
|
|
|
142 |
|
|
Other |
|
196 |
|
|
|
262 |
|
|
|
|
76,010 |
|
|
|
100,714 |
|
|
Valuation allowance |
|
(76,010 |
) |
|
|
(100,714 |
) |
|
|
$ |
— |
|
|
$ |
— |
|
As of December 31, 2017, we had aggregate federal and California state net operating loss carryforwards of approximately $221.3 million and $154.6 million, respectively, which may be available to offset future taxable income for income tax purposes. The federal and California net operating loss carryforwards begin to expire in 2019 and 2027, respectively.
As of December 31, 2017, we also had federal and California state research tax credit carryforwards of approximately $7.5 million and $6.8 million, respectively. The federal research tax credit carryforwards begin to expire in 2020. The California state research tax carryforwards have no expiration.
Under Internal Revenue Code Sections 382 and 383, annual use of our net operating loss and research tax credit carryforwards to offset taxable income may be limited based on cumulative changes in ownership. An analysis of the impact of this provision from December 1, 1999 through December 31, 2017 has been performed and it was determined that, although ownership changes have occurred, the carryovers should be available for use by the Company before they expire, provided we generate sufficient future taxable income. Future ownership changes could result in limitations and may impact the realizability of these loss and credit carryforwards in future periods.
On December 22, 2017, new tax reform legislation in the U.S., known as the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law. At December 31, 2017, the Company has not yet completed its accounting assessment for the tax effects of the enactment of the Act; however, as described below, the Company has made a reasonable estimate of the effects on the existing deferred tax balances.
As a result of the lower enacted corporate tax rate, the Company has remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The provisional amount recorded related to the remeasurement of our deferred tax balance was $31.5 million that is fully offset by a corresponding decrease to our valuation allowance.
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 effects of the Act. In accordance with SAB 118, the Company has provisionally determined that there is no deferred tax benefit or expense with respect to the remeasurement of certain deferred tax assets and liabilities due to the full valuation allowance against net deferred tax assets. The Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Additional analysis of the law and the impact to the Company will be performed and any impact will be recorded in the respective quarter in 2018.
As of December 31, 2017, we had deferred tax assets of $76.0 million and have established a valuation allowance against those deferred tax assets due to the uncertainty surrounding our ability to generate future taxable income to realize those assets. The change in the valuation allowance for the years ended December 31, 2017 and 2016 was ($24.7 million) and $10.6 million, respectively.
We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition at the effective date to be recognized. As of December 31, 2017, the unrecognized tax benefits recorded were approximately $3.6 million. We do not anticipate a significant change in the unrecognized tax benefits within the next 12 months.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2017 and 2016, excluding interest and penalties, is as follows:
|
|
December 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
Balance at beginning of year |
$ |
3,345 |
|
|
$ |
4,298 |
|
|
Additions (reductions) for prior year tax positions |
|
— |
|
|
|
(1,297 |
) |
|
Additions for current year tax positions |
|
222 |
|
|
|
344 |
|
|
|
$ |
3,567 |
|
|
$ |
3,345 |
|
Due to our valuation allowance position, none of the unrecognized tax benefits, if recognized, will impact our effective tax rate. Our policy is to record interest and penalties within tax expense. As of December 31, 2017 and 2016, we had no accrued interest or penalties related to uncertain tax positions.
The Company is subject to taxation in the U.S. federal and state jurisdictions. As of December 31, 2017, the Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2012 and 2011, respectively. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward amount. The Company is not currently under IRS, state or local tax examination.