8. Income Taxes
No provision for income taxes was recorded for the years ended December 31, 2017, 2016, and 2015. The Company has incurred net operating losses for all the periods presented. The Company has not reflected any benefit of such net operating loss carryforwards in the accompanying consolidated financial statements.
The domestic and foreign components of loss before provision for income tax are as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Domestic |
$ |
(27,826 |
) |
|
$ |
(38,004 |
) |
|
$ |
(32,644 |
) |
|
Foreign |
|
— |
|
|
N/A |
|
|
N/A |
|
||
|
Total |
$ |
(27,826 |
) |
|
$ |
(38,004 |
) |
|
$ |
(32,644 |
) |
The effective tax rate of the provision for income taxes differs from the federal statutory rate as follows:
|
|
Year Ended December, 31 |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal statutory income tax rate |
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
State income taxes, net of federal benefit |
|
0.5 |
|
|
|
— |
|
|
|
— |
|
|
Federal and state tax credits, net of reserves |
|
5.6 |
|
|
|
2.1 |
|
|
|
2.1 |
|
|
Stock-based compensation |
|
(1.8 |
) |
|
|
(1.8 |
) |
|
|
(1.8 |
) |
|
Other permanent differences |
|
(2.7 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
Tax cuts and Jobs Act impact |
|
(63.8 |
) |
|
|
— |
|
|
|
— |
|
|
Change in valuation allowance |
|
28.2 |
|
|
|
(34.2 |
) |
|
|
(34.2 |
) |
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
The components of the deferred tax assets and liabilities are as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
$ |
30,731 |
|
|
$ |
39,791 |
|
|
Tax credits, net of reserves |
|
4,805 |
|
|
|
2,986 |
|
|
Accrued liabilities |
|
918 |
|
|
|
1,056 |
|
|
Stock-based compensation |
|
1,366 |
|
|
|
1,280 |
|
|
Other |
|
381 |
|
|
|
676 |
|
|
Gross deferred tax assets |
|
38,201 |
|
|
|
45,789 |
|
|
Valuation allowance |
|
(38,201 |
) |
|
|
(45,789 |
) |
|
Net deferred tax assets |
$ |
— |
|
|
$ |
— |
|
Realization of the Company’s deferred tax assets is dependent upon the Company generating future taxable income, the timing and amount of which are uncertain. Accordingly, the deferred tax assets have been fully offset by a valuation allowance as of December 31, 2017 and 2016. The valuation allowance decreased by $7.6 million for the year ended December 31, 2017, and increased by $12.9 million for the year ended December 31, 2016. ASC Topic 740 requires that the tax benefit of deductible temporary differences of carryforwards be recorded as a deferred tax asset to the extent that management assesses that realization is "more likely than not." Future realization of the tax benefit ultimately depends on the existence of sufficient taxable income within the carryback or carryforward period available under the tax law. The Company has set up the valuation allowance against the federal and state deferred tax assets because based on all available evidence, these deferred tax assets are not more likely than not to be realizable.
As of December 31, 2017, the Company had approximately $129.3 million and $50.1 million, respectively, of federal and state operating loss carryforwards available to reduce future taxable income that will begin to expire in 2030 for federal and state tax purposes.
As of December 31, 2017, the Company also had research and development tax credit carryforwards of approximately $5.5 million and $3.2 million, respectively, for federal and state purposes available to offset future taxable income tax. If not utilized, the federal carryforwards will expire in various amounts beginning in 2030, and the state credits can be carried forward indefinitely.
Sections 382 and 383 place a limitation on the amount of taxable income which can be offset by carryforward tax attributes, such as net operating losses or tax credits, after a change in control. Generally, after a change in control, a loss corporation cannot deduct carryforward tax attributes in excess of the limitation prescribed by Section 382 and 383. Therefore, certain of the Company's carryforward tax attributes may be subject to an annual limitation regarding their utilization against taxable income in future periods. As a result of the Company's IPO in 2014, the Company triggered an "ownership change" as defined in Internal Revenue Code Section 382 and related provisions. However, the Company does not believe any of its net operating losses and research and development credits are limited by this ownership change in 2014. Subsequent ownership changes since 2014 may subject the Company to annual limitations of its net operating loss and credit carryforwards. Such annual limitation could result in the expiration of the net operating loss and credit carryforwards before utilization.
The Tax Cuts and Jobs Act (Act) was enacted on December 22, 2017 and provides for significant changes to U.S. tax law. Among other provisions, the Act reduces the U.S. corporate income tax rate to 21%, effective in 2018. As a result, the Company has remeasured its U.S. deferred tax assets and liabilities as of December 31, 2017 based on the reduction of the U.S. federal corporate tax rate from 35% to 21% and assessed the realizability of its deferred tax assets based on its current understanding of the provisions of the new law. The remeasurement results in an estimated one-time reduction in deferred tax assets of $17.8 million which is fully offset by a corresponding change to the Company’s valuation allowance.
The Act also provides for a transition to a new territorial system of taxation and generally requires companies to include certain untaxed foreign earnings of non-U.S. subsidiaries into taxable income in 2017 (“Transition Tax”). As the Company’s foreign subsidiary is dormant as of December 31, 2017, the Company estimates that it will have no Transition Tax inclusion.
Accounting Standards Codification (ASC) 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin 118 which will allow companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. The Company considers its accounting for the impacts of the new tax law to be provisional and it will continue to assess the impact of the recently enacted tax law (and expected further guidance from federal and state tax authorities as well as further guidance for the associated income tax accounting) on its business and consolidated financial statements over the next 12 months.
Uncertain Tax Positions
As of December 31, 2017, the Company’s total unrecognized tax benefit was $3.6 million, of which none of the tax benefit, if recognized, would affect the effective income tax rate due to the valuation allowance that currently offsets deferred tax assets. A reconciliation of the Company’s unrecognized tax benefits for the years ended December 31, 2017, 2016, and 2015 is as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at beginning of year |
$ |
2,326 |
|
|
$ |
1,714 |
|
|
$ |
1,194 |
|
|
Additions based on tax positions related to prior year |
|
— |
|
|
|
5 |
|
|
|
— |
|
|
Additions based on tax positions related to current year |
|
1,297 |
|
|
|
607 |
|
|
|
520 |
|
|
Balance at end of year |
$ |
3,623 |
|
|
$ |
2,326 |
|
|
$ |
1,714 |
|
The unrecognized tax benefits, if recognized and in absence of full valuation allowance, would increase the Company’s credit carryforwards and hence deferred tax assets. The Company does not expect the unrecognized tax benefits to change significantly over the next 12 months.
Interest and penalties are zero, and the Company’s policy is to account for interest and penalties in tax expense on the statement of operations and comprehensive loss. The Company files income tax returns in the U.S. federal and California tax jurisdictions. All periods since inception are subject to examination by U.S. federal and California tax jurisdictions, none of which are currently under examination.