15. Income Taxes
The Company derives its income only from the United States. The components of the provision (benefit from) for income taxes are as follows (in thousands):
|
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|
Years Ended December 31, |
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2017 |
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2016 |
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|
2015 |
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|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
Total current |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(514 |
) |
|
|
(20 |
) |
|
|
8 |
|
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total deferred |
|
|
(514 |
) |
|
|
(20 |
) |
|
|
8 |
|
|
Provision for (benefit from) income taxes |
|
$ |
(513 |
) |
|
$ |
(19 |
) |
|
$ |
10 |
|
A reconciliation of the Company’s effective tax rate to the statutory U.S. federal rate is as follows:
|
|
|
Years Ended December 31, |
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|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. federal taxes at statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
State tax, net of federal benefit |
|
|
7.6 |
% |
|
|
0.8 |
% |
|
|
0.8 |
% |
|
Stock compensation |
|
|
2.3 |
% |
|
|
(0.6 |
)% |
|
|
(1.1 |
)% |
|
Tax attributes subject to 382 limitation |
|
|
27.5 |
% |
|
|
0.0 |
% |
|
|
(35.4 |
)% |
|
Tax credits |
|
|
2.7 |
% |
|
|
2.2 |
% |
|
|
0.8 |
% |
|
Change in valuation allowance |
|
|
(9.3 |
)% |
|
|
(35.6 |
)% |
|
|
2.7 |
% |
|
Change in deferreds due to rate change |
|
|
(58.6 |
)% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Other |
|
|
(5.0 |
)% |
|
|
(0.8 |
)% |
|
|
(1.8 |
)% |
|
Total |
|
|
1.2 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
The types of temporary differences that give rise to significant portions of the Company’s deferred income tax liabilities are set out below (in thousands):
|
|
|
Year Ended December 31, |
|
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|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Net operating loss carryforwards |
|
$ |
24,682 |
|
|
$ |
24,528 |
|
|
$ |
5,688 |
|
|
Research and development credits |
|
|
5,757 |
|
|
|
2,683 |
|
|
|
1,337 |
|
|
Intangible—in-process R&D |
|
|
— |
|
|
|
81 |
|
|
|
88 |
|
|
Deferred revenue |
|
|
15,631 |
|
|
|
13,857 |
|
|
|
16,182 |
|
|
Accruals and deferred rent |
|
|
1,256 |
|
|
|
1,335 |
|
|
|
998 |
|
|
Stock-based compensation |
|
|
3,831 |
|
|
|
3,963 |
|
|
|
1,125 |
|
|
Other |
|
|
32 |
|
|
|
1 |
|
|
|
26 |
|
|
Total gross deferred income tax assets |
|
|
51,189 |
|
|
|
46,448 |
|
|
|
25,444 |
|
|
Less: valuation allowance |
|
|
(50,791 |
) |
|
|
(46,137 |
) |
|
|
(25,043 |
) |
|
Deferred tax assets, net of valuation allowance |
|
|
398 |
|
|
|
311 |
|
|
|
401 |
|
|
Fixed assets |
|
|
(282 |
) |
|
|
(229 |
) |
|
|
(313 |
) |
|
In-process R&D |
|
|
— |
|
|
|
(595 |
) |
|
|
(595 |
) |
|
Intangible assets |
|
|
(116 |
) |
|
|
— |
|
|
|
— |
|
|
Deferred tax liabilities |
|
|
(398 |
) |
|
|
(824 |
) |
|
|
(908 |
) |
|
Net deferred income tax liabilities |
|
$ |
— |
|
|
$ |
(513 |
) |
|
$ |
(507 |
) |
A valuation allowance has been established for the portion of deferred assets for which realization is not probable. The net change in the total valuation allowance for the year ended December 31, 2017 and 2016 was an increase of $4.7 million and an increase of $21.1 million, respectively and for the year ended December 31, 2015 was a decrease of $1.0 million.
The Company had net operating loss carryforwards for federal and state income tax purposes of approximately $105.6 million and $58.6 million, respectively, as of December 31, 2017 available to reduce future income subject to income taxes. The federal and state net operating loss carryforwards will begin to expire in 2030 if not utilized.
The Company also has federal and state research and development tax credits carryforwards of $4.6 million and $3.9 million, respectively, as of December 31, 2017 available to reduce future income taxes. The federal research and development tax credits will begin to expire in 2030 if not utilized. The state research and development tax credits have no expiration date.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. The Company has calculated its best estimate of the impact of the Tax Act in accordance with our understanding of the Tax Act and guidance available as of the date of this filing. The tax rate decrease resulted in a reduction of $25.7 million in our deferred tax assets, and a corresponding decrease of the same amount in the valuation allowance against these deferred tax assets, as substantially all of our U.S. deferred tax assets, net of deferred tax liabilities, are subject to a full valuation allowance. The deferred tax asset remeasurement is provisional because the Company continues to evaluate the impact of various domestic provisions of the Act as well as the impact of additional guidance that may be provided.
Due to the adoption of ASU 2016-09 in 2017, the Company recorded an immaterial increase in the deferred tax assets for previously unrecognized excess tax benefits that existed as of December 31, 2016, and a corresponding increase in the valuation allowance against these deferred tax assets. In addition, all excess tax benefits and deficiencies are recognized as income tax expense and will result in increased volatility in the Company’s income tax.
Internal Revenue Code section 382 (“IRC Section 382”) places a limitation (the “Section 382 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. California has similar rules. The Company has performed an IRC Section 382 analysis and determined there was an ownership change in 2017. None of the identified ownership changes resulted in Section 382 limitations with material restrictions such that all of the tax attributes become available for use prior to expiration of their respective carryforward periods. Accordingly, none of the tax attributes have been reduced. There may be further ownership changes after December 31, 2017. The Company has determined that, while an ownership change has occurred, the applicable limits would not impair the value or anticipated use of the Company’s federal and state net operating losses. Although realization is not assured, management believes it is more likely than not that any limitation under IRC Section 382 will not impair the realizability of the deferred income tax assets related to federal and state net operating loss carryforwards.
The Company had approximately $4.3 million and $1.2 million of unrecognized tax benefits as of December 31, 2017 and December 31, 2016, respectively, none of which would affect the Company’s effective tax rate if recognized, due to the Company’s valuation allowance.
A reconciliation of the beginning and ending unrecognized tax benefit amount is as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at the beginning of the year |
|
$ |
1,182 |
|
|
$ |
666 |
|
|
$ |
3,019 |
|
|
Additions based on tax positions related to current year |
|
|
521 |
|
|
|
23 |
|
|
|
(2,312 |
) |
|
Adjustment based on submitted prior year tax returns |
|
|
2,617 |
|
|
|
493 |
|
|
|
(41 |
) |
|
Balance at end of the year |
|
$ |
4,320 |
|
|
$ |
1,182 |
|
|
$ |
666 |
|
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the provision for income taxes in the period that such determination is made. Interest and penalties have not been accrued at December 31, 2017, 2016 and 2015.
The Company files income tax returns in the United States, including California state jurisdiction. The tax years 2010 to 2017 remains open to U.S. federal and state examination to the extent of the utilization of net operating loss and credit carryovers. As of December 31, 2017, the Company is not under examination by the Internal Revenue Service or any state or foreign tax jurisdiction.