Note 10. Income Taxes
The domestic and foreign components of net loss were as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2015 |
|
|
2016 |
|
|
2017 |
|
|||
|
Domestic |
|
$ |
(6,191 |
) |
|
$ |
(6,744 |
) |
|
$ |
(10,125 |
) |
|
Foreign |
|
|
— |
|
|
|
(116 |
) |
|
|
305 |
|
|
Net Loss |
|
$ |
(6,191 |
) |
|
$ |
(6,860 |
) |
|
$ |
(9,820 |
) |
A reconciliation of income taxes at the statutory federal income tax rate to net income taxes included in the accompanying consolidated statements of operations is as follows (in thousands):
|
|
|
December 31, |
|
|||||||||
|
|
|
2015 |
|
|
2016 |
|
|
2017 |
|
|||
|
Income tax at statutory rate |
|
$ |
(2,104 |
) |
|
$ |
(2,331 |
) |
|
$ |
(3,339 |
) |
|
Change in valuation allowance |
|
|
3,137 |
|
|
|
2,146 |
|
|
|
(8,354 |
) |
|
Change in tax rate |
|
|
— |
|
|
|
— |
|
|
|
9,788 |
|
|
Change in deferreds |
|
|
(852 |
) |
|
|
— |
|
|
|
(39 |
) |
|
State tax |
|
|
(184 |
) |
|
|
9 |
|
|
|
536 |
|
|
Mark-to-market on warrants |
|
|
— |
|
|
|
178 |
|
|
|
1,267 |
|
|
Other |
|
|
3 |
|
|
|
(2 |
) |
|
|
301 |
|
|
Total |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary differences that gave rise to significant portions of the Company’s deferred tax assets and liabilities as of December 31, 2016 and 2017 were as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2016 |
|
|
2017 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating losses |
|
$ |
28,677 |
|
|
|
20,139 |
|
|
Credits |
|
|
1,414 |
|
|
|
1,654 |
|
|
Accruals and reserves |
|
|
519 |
|
|
|
643 |
|
|
Deferred revenue and contract costs |
|
|
871 |
|
|
|
464 |
|
|
Gross deferred tax assets |
|
|
31,481 |
|
|
|
22,900 |
|
|
Valuation allowance |
|
|
(31,143 |
) |
|
|
(22,789 |
) |
|
Net deferred tax assets |
|
|
338 |
|
|
|
111 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Fixed assets and intangibles |
|
|
(338 |
) |
|
|
(111 |
) |
|
Total deferred tax liabilities, net |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets is dependent upon future taxable income, if any, the timing and amount of which are uncertain. Management has determined that the deferred tax assets are not realizable on a more likely than not basis. Accordingly, deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by $8.4 million during the year ended December 31, 2017.
As of December 31, 2017, the Company had total net operating loss carryforwards for federal and state income tax purposes of approximately $80.2 million and $50.8 million, respectively, available to reduce future income subject to income taxes. The federal and state net operating loss carryforwards will begin to expire, if not utilized, in 2018 through 2036.
As of December 31, 2017, the Company had available for carryover research and experimental credits for federal and California income tax purposes of approximately $1.2 million and $1.3 million, respectively, which are available to reduce future income taxes. The federal research and experimental tax credits will begin to expire, if not utilized, in 2026. The California research and experimental tax credits carry forward indefinitely until utilized.
Section 382 of the Internal Revenue Code of 1986 (the “Code”), as amended, and similar California regulations impose substantial restrictions on the utilization of net operating losses and tax credits in the event of an “ownership change” of a corporation. Accordingly, the Company’s ability to utilize net operating losses and credit carryforwards may be limited as the result of such an “ownership change” as defined in the Code.
Uncertain Tax Positions
The Company applied FASB ASC 740-10-50, Accounting for Uncertainty in Income Tax, which prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company classifies interest and penalties as a component of tax expense.
The Company had unrecognized tax benefits of approximately $0.6 million as of December 31, 2017, all of which was offset by a full valuation allowance. No interest or penalties have been accrued as of December 31, 2017.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):
|
Balance as of December 31, 2015 |
|
$ |
813 |
|
|
Increases for current year tax positions |
|
|
63 |
|
|
Increases for prior year tax positions |
|
|
(302 |
) |
|
Balance as of December 31, 2016 |
|
|
574 |
|
|
Increases for current year tax positions |
|
|
46 |
|
|
Increases for prior year tax positions |
|
|
— |
|
|
Balance as of December 31, 2017 |
|
$ |
620 |
|
Unrecognized tax benefits may change during the next 12 months for items that arise in the ordinary course of business. The Company does not anticipate a material change to its unrecognized tax benefits over the next 12 months that would affect the Company’s effective tax rate.
The Company files income tax returns in federal, various state and U.S. territory jurisdictions, and South Africa. The statute of limitations remains open for fiscal years 2005 through 2017 in the United States and the various state and the U.S. territory jurisdictions. Years beyond the normal statute of limitations remain open to audit by tax authorities due to tax attributes generated in earlier years which are being carried forward and may be audited in subsequent years when utilized.
On December 22, 2017, the 2017 Tax Cut and Jobs Act (the “Tax Act”) was enacted into law and the new legislation contains several key tax provisions, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the estimated transition tax, re-measuring our U.S. deferred tax assets and liabilities at a 21% rate as well as reassessing the net realizability of our deferred tax assets and liabilities. The one-time transition tax does not generate a tax liability as the deemed distribution is offset by tax attributes. The provisional amount related to the re-measurement of our deferred tax balance is a reduction of approximately $9.8 million. Due to the corresponding valuation allowance fully offsetting deferred taxes, there is no income statement impact.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118) which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of the transition tax and deferred tax re-measurements to be incomplete. Additional work will be necessary for a more detailed analysis of our deferred tax assets and liabilities and our historical foreign earnings as well as potential correlative adjustments. We expect to complete our analysis within the measurement period in accordance with SAB 118. We do not expect any material subsequent adjustment to these amounts. Adjustment if any will have no impact to the income statement due to the Company’s loss position and valuation allowance.