10. Income Taxes
Pursuant to Internal Revenue Code (IRC) Sections 382 and 383, annual use of the Company’s net operating loss and research and development credit carryforwards may be limited in the event that a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has completed an IRC Section 382/383 analysis, regarding the limitation of net operating loss and research and development credit carryforwards as of December 31, 2017. As a result of the analysis, three ownership changes were determined to have occurred. Based on these changes, the deferred tax assets for net operating losses and federal research and development credits of $2.2 million and $0.3 million, respectively, have been removed from the deferred tax asset schedule and the Company has recorded a corresponding decrease in the valuation allowance. The California research and development credits were not limited as these credits carry forward indefinitely. The Company will continue to consider changes in ownership that may cause losses of tax attributes in the future.
Significant components of the Company’s deferred tax assets are as follows (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
53,666 |
|
|
$ |
64,246 |
|
|
Research and development credits |
|
|
6,603 |
|
|
|
5,263 |
|
|
Depreciation and amortization |
|
|
15,916 |
|
|
|
21,631 |
|
|
Accrued expenses |
|
|
394 |
|
|
|
1,619 |
|
|
Deferred rent |
|
|
636 |
|
|
|
238 |
|
|
Stock compensation |
|
|
5,610 |
|
|
|
6,437 |
|
|
Other, net |
|
|
451 |
|
|
|
133 |
|
|
Total deferred tax assets |
|
|
83,276 |
|
|
|
99,567 |
|
|
Less: valuation allowance |
|
|
(83,276 |
) |
|
|
(99,567 |
) |
|
Total |
|
$ |
— |
|
|
$ |
— |
|
Due to the Company’s history of losses and uncertainty regarding future earnings, a full valuation allowance has been recorded against the Company’s deferred tax assets, as it is more likely than not that such assets will not be realized. A valuation allowance of approximately $83.3 million and $99.6 million has been established as of December 31, 2017 and 2016, respectively.
The Company elected to early adopt ASU 2016-09 as of January 1, 2016. As a result of the adoption, the balance of the Company’s unrecognized excess tax benefits of $1.1 million was reversed as of December 31, 2016 with the impact recorded to retained earnings. Due to the full valuation allowance on the Company's deferred tax assets, there was no impact to the financial statements.
At December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $241.6 million and $101.3 million, respectively, net of IRC Section 382 limitations. The federal and state net operating loss carryforwards will begin to expire in 2030, unless previously utilized. At December 31, 2017, the Company also had federal and California research and development credit carryforwards of approximately $7.9 million net of IRC Section 383 limitations and $3.9 million, respectively. The federal research and development credit carryforwards will begin expiring in 2030 unless previously utilized. The California research credit will carry forward indefinitely.
The following is a reconciliation of the expected recovery of income taxes between those that are based on enacted tax rates and laws, to those currently reported for the years ended December 31 (in thousands):
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal statutory rate |
|
$ |
(30,645 |
) |
|
$ |
(37,599 |
) |
|
$ |
(20,967 |
) |
|
State tax (net of federal benefit) |
|
|
(462 |
) |
|
|
(2,079 |
) |
|
|
2 |
|
|
Permanent items, other |
|
|
1,376 |
|
|
|
164 |
|
|
|
11 |
|
|
Stock compensation |
|
|
1,720 |
|
|
|
609 |
|
|
|
292 |
|
|
Other adjustments |
|
|
— |
|
|
|
— |
|
|
|
(847 |
) |
|
Rate change |
|
|
45,421 |
|
|
|
(2,251 |
) |
|
|
1,637 |
|
|
Research and development credits |
|
|
(1,830 |
) |
|
|
(3,210 |
) |
|
|
(1,672 |
) |
|
Uncertain tax positions |
|
|
732 |
|
|
|
2,124 |
|
|
|
2,865 |
|
|
Change in valuation allowance |
|
|
(16,312 |
) |
|
|
42,243 |
|
|
|
18,680 |
|
|
Provision for income taxes |
|
$ |
0 |
|
|
$ |
1 |
|
|
$ |
1 |
|
The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and business. For businesses, the Act reduces the corporate tax rate from a maximum of 35% to a flat 21% rate. The rate reduction is effective on January 1, 2018. At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing tax balances. The Company will continue to make and refine its calculations as additional analysis is completed. In addition, the Company’s estimates may also be affected as it gains a more thorough understanding of the tax law.
The Company remeasured certain deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally 21%. As a result, the Company has reduced its deferred tax asset balance as of December 31, 2017 by $44.5 million. Due to the Company’s full valuation allowance position, the Company has also reduced the valuation allowance by the same amount. The Company is still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
Due to the uncertainties which currently exist in the interpretation of the provisions of the Act regarding Internal Revenue Code Section 162(m), the Company has not evaluated the potential impact of IRC Section 162(m) as amended by the Act on its financial statements. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax assets.
On December 22, 2017, 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 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. 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.
The following table summarizes the activity related to our gross unrecognized tax benefits (in thousands):
|
|
|
December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at the beginning of the year |
|
$ |
8,391 |
|
|
$ |
5,709 |
|
|
$ |
1,774 |
|
|
Adjustments related to prior year tax positions |
|
|
— |
|
|
|
1,872 |
|
|
|
3,188 |
|
|
Increases related to current year tax positions |
|
|
798 |
|
|
|
1,409 |
|
|
|
747 |
|
|
Decreases for tax positions from prior years |
|
|
(91 |
) |
|
|
(599 |
) |
|
|
— |
|
|
Decreases due to statute of limitations expiration |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Decreases due to IRC Section 382/383 limitation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
$ |
9,098 |
|
|
$ |
8,391 |
|
|
$ |
5,709 |
|
The Company’s policy is to include interest and penalties related to unrecognized income tax benefits as a component of income tax expense. The Company has no accruals for interest or penalties in the balance sheets as of December 31, 2017 and 2016 and has not recognized interest or penalties in the statements of operations for the years ended December 31, 2017, 2016 and 2015.
Due to the valuation allowance recorded against the Company’s deferred tax assets, future changes in unrecognized tax benefits will not impact the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly in the next 12 months.
The Company is subject to taxation in the United States for federal and state purposes. Due to the net operating loss carryforwards, the U.S. federal and state returns are open to examination by the IRS and state tax authorities for all years since inception. The Company is not currently under examination by the federal or any state tax authority.