Note 13. Income Taxes
The components of loss before income taxes are as follows (in thousands):
|
|
Year Ended December 31, |
|
||||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Domestic |
|
$ |
(15,681 |
) |
|
$ |
(19,599 |
) |
|
Foreign |
|
|
— |
|
|
|
— |
|
|
Loss before income taxes |
|
$ |
(15,681 |
) |
|
$ |
(19,599 |
) |
The components of the provision for income taxes for the years ended December 31, 2017 and 2016 are as follows (in thousands):
|
|
Year Ended December 31, |
|
||||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Current: |
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
2 |
|
|
|
1 |
|
|
Foreign |
|
|
24 |
|
|
|
24 |
|
|
Total current tax expense |
|
|
26 |
|
|
|
25 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
Federal |
|
|
— |
|
|
|
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
— |
|
|
|
— |
|
|
Total deferred tax benefit |
|
|
— |
|
|
|
— |
|
|
Total tax expense |
|
$ |
26 |
|
|
$ |
25 |
|
The Company operates in only one federal jurisdiction, the United States. The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|
|
Year Ended December 31, |
|
||||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Expected income tax provision at the federal statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
State taxes, net of federal benefit |
|
|
2.6 |
% |
|
|
4.7 |
% |
|
Change in valuation allowance |
|
|
91.4 |
% |
|
|
(37.8 |
)% |
|
Nondeductible expenses |
|
|
0.1 |
% |
|
|
(0.9 |
)% |
|
Impact of change in federal tax rate |
|
|
(124.6 |
)% |
|
|
— |
|
|
Withholding taxes |
|
|
(0.2 |
)% |
|
|
(0.1 |
)% |
|
Other |
|
|
(3.5 |
)% |
|
|
— |
|
|
Income tax provision |
|
|
(0.2 |
)% |
|
|
(0.1 |
)% |
The total income tax expense for the years ended December 31, 2017 and 2016 was $26,000 and $25,000, respectively, and is comprised of current state taxes and foreign taxes withheld by governmental agencies outside of the United States.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, net operating loss carryforwards (“NOLs”) and other tax credits. Significant components of the Company’s deferred tax assets are as follows (in thousands):
|
|
As of December 31, |
|
||||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
37,498 |
|
|
$ |
49,593 |
|
|
Unearned revenue |
|
|
783 |
|
|
|
1,501 |
|
|
Stock-based compensation |
|
|
2,273 |
|
|
|
2,861 |
|
|
Accrued payroll and benefits |
|
|
51 |
|
|
|
215 |
|
|
Research and development credits |
|
|
171 |
|
|
|
143 |
|
|
Capital loss carryover |
|
|
— |
|
|
|
13 |
|
|
Fixed asset basis difference |
|
|
128 |
|
|
|
191 |
|
|
Inventory reserve |
|
|
396 |
|
|
|
1,110 |
|
|
Charitable contributions |
|
|
3 |
|
|
|
5 |
|
|
Total deferred tax assets |
|
|
41,303 |
|
|
|
55,632 |
|
|
Less valuation allowance |
|
|
(41,303 |
) |
|
|
(55,632 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. Accordingly, the net deferred tax assets have been offset by a valuation allowance. The net valuation allowance decreased by $14.3 million and increased by $8.5 million during the years ended December 31, 2017 and 2016, respectively.
On December 22, 2017, the Tax Cuts and Jobs Act (the “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. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, we revalued our ending net deferred tax assets at December 31, 2017, which were fully offset by a valuation allowance. The Company has evaluated the other changes resulting from the Tax Act and does not expect them to have a material impact on the tax provision, therefore, the Company considers the accounting complete.
At December 31, 2017, the Company had federal and state NOLs aggregating approximately $152.9 million and $105.3 million, respectively. At December 31, 2017, the utilization of a portion of our NOLs is subject to an annual limitation under Section 382 of the Internal Revenue Code (IRC). Of the $152.9 million generated, $7.2 million will not be available to be utilized within the carryforward period. If not utilized, these federal NOLs will begin to expire in 2020 and these state NOLs began to expire in 2017. The Company continues to evaluate IRC Section 382, which may limit NOLs generated in future years.
The Company evaluates deferred tax assets, including the benefit from NOLs, to determine if a valuation allowance is required. Such evaluation is based on consideration of all available evidence using a “more likely than not” standard with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency, and severity of current and cumulative losses; forecasts of future profitability; the length of statutory carryforward periods; the Company’s experience with operating losses; and tax-planning alternatives. The significant piece of objective negative evidence evaluated was the cumulative loss incurred through the year ended December 31, 2017. Given this evidence and the expectation to incur operating losses in the foreseeable future, a full valuation allowance has been recorded against the net deferred tax asset. The Company will continue to maintain a full valuation allowance against the entire amount of its net deferred tax asset, until such time as the Company has determined that the weight of the objectively verifiable positive evidence exceeds that of the negative evidence and it is likely that the Company will be able to utilize all of its net deferred tax asset relating to its federal and state NOL carryforwards. Although the Company has established a full valuation allowance on its net deferred tax asset, it has not forfeited the right to carryforward tax losses up to 20 years and apply such tax losses against taxable income in such years, thereby reducing its future tax obligations. The Company is subject to taxation in the United States and various state jurisdictions. As of December 31, 2017, the Company’s tax years for 2000 through 2017 are generally subject to examination by the tax authorities. The years are open back to 2000 to the extent the NOLs being carried forward were generated then.
The Company applies the provisions of ASC 740 related to accounting for uncertain tax positions and concluded there were no such positions associated with the Company requiring accrual of a liability. As of December 31, 2017, the Company has not accrued for any such positions. The Company is currently not under audit for federal or state tax purposes. The Company does not expect a significant change to occur within the next 12 months.