Note 9. Income Taxes
For financial reporting purposes, “loss before provision for income taxes,” includes the following components:
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Year Ended December 31, |
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2017 |
|
|
2016 |
|
|
2015 |
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|||
|
|
|
(in thousands) |
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|
Domestic |
|
$ |
(72,726 |
) |
|
$ |
(59,668 |
) |
|
$ |
(26,458 |
) |
|
Foreign |
|
|
(19,758 |
) |
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
(92,484 |
) |
|
$ |
(59,668 |
) |
|
$ |
(26,458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (Benefit) for Income Taxes
For the year ended December 31, 2017, the benefit from deferred income taxes was $2.2 million while the provision for current income taxes was immaterial. The provision for income taxes for the years ended December 31, 2016 and 2015 was immaterial.
Income tax provision (benefit) related to continuing operations differ from the amounts computed by applying the statutory income tax rate of 35% to pretax loss as follows:
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|
Year Ended December 31, |
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|
|
2017 |
|
|
2016 |
|
|
2015 |
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|||
|
|
|
(in thousands) |
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|||||||||
|
At statutory rate |
|
$ |
(32,369 |
) |
|
$ |
(20,884 |
) |
|
$ |
(9,260 |
) |
|
State taxes |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
Change in valuation allowance |
|
|
12,141 |
|
|
|
25,483 |
|
|
|
10,263 |
|
|
Tax law changes |
|
|
19,547 |
|
|
|
— |
|
|
|
— |
|
|
Tax credits |
|
|
(8,593 |
) |
|
|
(5,098 |
) |
|
|
(1,347 |
) |
|
Foreign tax differential |
|
|
6,900 |
|
|
|
— |
|
|
|
— |
|
|
Stock-based compensation |
|
|
42 |
|
|
|
445 |
|
|
|
160 |
|
|
Other |
|
|
85 |
|
|
|
53 |
|
|
|
183 |
|
|
Total |
|
$ |
(2,246 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
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|
H.R. 1 (the Act) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, changes the rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017 and creates new taxes on certain foreign sourced earnings. In 2017, we were not subject to a one-time transition tax as no accumulated earnings and profits exist. A provision benefit of $2.2 million resulted from the reduction in the corporate tax rate and the partial reversal of a valuation allowance on our deferred taxes, related to a portion of our existing deductible temporary differences that are scheduled to reverse in future periods and create net operating losses that will have an indefinite carryover life.
Deferred Tax Assets and Liabilities
Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which includes the change in federal rate to 21%. Significant components of our deferred tax assets for federal and state income taxes are as follows:
|
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|
December 31, |
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|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carryforward |
|
$ |
43,239 |
|
|
$ |
34,921 |
|
|
Research and other credits |
|
|
26,616 |
|
|
|
11,876 |
|
|
Intangibles |
|
|
1,249 |
|
|
|
1,714 |
|
|
Reserves and accruals |
|
|
2,016 |
|
|
|
1,802 |
|
|
Stock-based compensation |
|
|
1,291 |
|
|
|
326 |
|
|
Start-up costs |
|
|
100 |
|
|
|
160 |
|
|
Other |
|
|
1,109 |
|
|
|
1,091 |
|
|
Total gross deferred tax assets |
|
|
75,620 |
|
|
|
51,890 |
|
|
Less valuation allowance |
|
|
(73,064 |
) |
|
|
(50,678 |
) |
|
Total deferred tax assets |
|
|
2,556 |
|
|
|
1,212 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Other intangibles |
|
|
(2,239 |
) |
|
|
(3,260 |
) |
|
Property, plant and equipment |
|
|
(1,331 |
) |
|
|
(1,212 |
) |
|
Total gross deferred tax liability |
|
|
(3,570 |
) |
|
|
(4,472 |
) |
|
Net deferred tax liability |
|
$ |
(1,014 |
) |
|
$ |
(3,260 |
) |
|
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|
|
|
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Realization of our deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Due to a lack of earnings history, the net U.S. deferred tax assets have been fully offset by a valuation allowance.
Net Operating Loss and Tax Credit Carryforwards
As of December 31, 2017 and 2016, the Company had a net operating loss carryforward for federal income tax purposes of $126.3 million and $77.3 million, respectively, which will begin to expire in 2033. As of December 31, 2017 and 2016, the Company had a net operating loss carryforward for state income tax purposes of $175.3 million and $88.8 million, respectively, which will begin to expire in 2033.Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization. The Company has not performed an ownership changes analysis.
The Company has federal credits of $30.5 million, which will begin to expire in 2033 and state research credits of approximately $2.9 million that have no expiration date. These tax credits are subject to the same limitations discussed above.
Unrecognized Tax Benefits
The Company has incurred net operating losses since inception and has no significant unrecognized tax benefits. The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of operations. If in the future the Company recognizes uncertain tax positions, the Company’s effective tax rate will be reduced. Currently, the Company has a full valuation allowance against its net deferred tax asset that would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future. Any adjustments to uncertain tax positions would result in an adjustment of net operating loss or tax credit carryforwards rather than resulting in a cash outlay.
Income tax returns are filed in the U.S., California, and the United Kingdom. The Company is not currently under examination. Due to net operating losses and research credit carryovers, all of the tax years remain open to examination.
Unrecognized tax benefits were as follows:
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Year Ended December 31, |
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|
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|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Beginning balance |
|
$ |
2,970 |
|
|
$ |
714 |
|
|
$ |
121 |
|
|
Tax positions related to prior years: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and state |
|
|
(482 |
) |
|
|
— |
|
|
|
— |
|
|
Tax positions related to current year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and state |
|
|
3,074 |
|
|
|
2,256 |
|
|
|
593 |
|
|
Ending balance |
|
$ |
5,562 |
|
|
$ |
2,970 |
|
|
$ |
714 |
|
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Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next 12 months due to tax examination changes, settlement activities, expirations of statute limitations or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, the Company does not anticipate any significant changes to unrecognized tax benefits over the next 12 months. During the year ended December 31, 2017, 2016, and 2015, no interest or penalties were recognized relating to unrecognized tax benefits.