Entity information:

• Entity registrant name: AQUANTIA CORP
• CIK: 0001316016
• SEC filing page: http://www.sec.gov/Archives/edgar/data/1316016/000156459018004736/0001564590-18-004736-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/1316016/000156459018004736/aq-20171231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/1316016/000156459018004736/aq-20171231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0001316016
• Generator: Donnelley Financial Solutions
• Total assets: 110,366,000
• Income tax expense (benefit): -117,000
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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9. Income Taxes

The following table represents domestic and foreign components of income (loss) before income taxes for the periods presented (in thousands):

 

 

 The Company’s provision for (benefit from) income taxes was as follows (in thousands):

 

 

Reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:

 

 

Significant components of the Company’s net deferred tax assets were as follows (in thousands):

 

 

Income taxes are recorded using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and net operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income (or loss) in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income tax expense (benefit) in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that some portion of the deferred tax assets will not be realized.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Act”). The Act makes broad and complex changes to the U.S. tax code including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax, or AMT, and changing how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax, or BEAT, a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

The Company’s remeasured certain deferred tax assets and liabilities based on rates at which they are expected to reverse in the future, which is generally 21%. The rate reduction would generally take effect on January 1, 2018. Consequently, any changes in the U.S. corporate income tax rate will impact the carrying value of the deferred tax assets. Under the new corporate income tax rate of 21%, U.S. federal and state deferred tax assets decreased by approximately $15.7 million and the valuation allowance decreased by approximately the same amount.  Due to the valuation allowance on the deferred tax assets, the provisional amount recorded related to the remeasurement was zero.

As of December 31, 2017, the Company's foreign subsidiaries are in a cumulative deficit. Therefore, the one-time transition tax on deemed repatriation of previously untaxed accumulated earnings and profits of foreign subsidiaries has minimal impact on the Company. Undistributed earnings of foreign subsidiaries are determined to be reinvested indefinitely. Accounting for the transition tax and the conclusion on the Company’s indefinite reinvestment have been completed pursuant to the requirements of the Act.

The SEC staff issued Staff Accountant Bulletin No. 118, or SAB 118, which provides guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Act. As noted above, the Company has recorded a provisional amount associated with the deferred tax assets and related valuation allowance as of December 31, 2017.  At December 31, 2017, the Company is still analyzing certain aspects of the Act including (a) provisions for Global Intangible Low-Taxed Income, or GILTI, wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations (including related accounting policy elections) and (b) state tax implications of the Act.

Based on the available objective evidence, both positive and negative, management believes that it is more likely than not that the net deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance against net deferred tax assets as of December 31, 2017, 2016 and 2015. The valuation allowance for deferred tax assets was $42.0 million, $58.5 million and $61.7 million as of December 31, 2017, 2016 and 2015, respectively. The change in the valuation allowance for the years ended December 31, 2017, 2016 and 2015 was $(16.5) million, $(3.2) million and $(18.1) million, respectively. The changes in 2017 were primarily the result of the enacted federal tax rate decreased from 35% to 21%, resulting in a $15.7 million decrease in the deferred tax asset balance of net operating loss carryforwards.

As of December 31, 2017, the Company had net operating loss, or NOL, carryforwards of approximately $176.6 million and $102.4 million for federal and state income tax purposes, respectively. The NOL carryforwards begin to expire in 2025 and 2018 for federal and state purposes, respectively.

As of December 31, 2017, the Company had research and development tax credit carryforwards of approximately $6.9 million and $7.9 million for federal and state income tax purposes, respectively. The federal tax credit carryforwards begin to expire in 2026 and the state tax credits carry forward indefinitely.

Internal Revenue Code Section 382 and similar California rules place a limitation on the amount of taxable income that can be offset by NOL carryforwards after a change in control (generally greater than 50% change in ownership). Generally, after a control change, a corporation cannot deduct NOL carryforwards in excess of the Section 382 limitations. Due to these provisions, utilization of NOL and tax credit carryforwards may be subject to annual limitations regarding their utilization against taxable income in future periods. The Company completed Section 382 analysis in 2016 and determined ownership changes occurred in July 2005, November 2009 and August 2017, which resulted in reductions to the U.S. federal and California net operating losses of $34.9 million and $24.1 million, respectively, and U.S. federal research and development credits by $1.8 million.

Reconciliation of the beginning and ending balances of the gross unrecognized tax benefits during the years ended December 31, 2017, 2016 and 2015 were as follows (in thousands):

 

 

The Company’s policy is to classify interest and penalties associated with unrecognized tax benefits as income tax expense. The Company had no interest or penalty accruals associated with uncertain tax benefits in its balance sheets and statements of operations and comprehensive loss for the years ended December 31, 2017, 2016 and 2015.

Although the Company files U.S. federal and various state tax returns, the Company’s only major tax jurisdictions are the United States and California. As a result of NOL carryforwards, all of the Company’s tax years are open to federal and state examination in the United States. All tax years are open to examination in various foreign countries.