10.

Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act significantly revised U.S. tax law by, among other provisions, lowering the U.S. federal statutory income tax rate from 35% to 21%, changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017 and eliminating or reducing certain income tax deductions.

The effects of changes in tax laws are required to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the Tax Act’s provisions, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allowed companies to record the tax effects of the Tax Act on a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment.

In connection with the Company’s initial analysis of the Tax Act, it recorded a decrease of its net deferred tax assets of $7.2 million for the period ended December 31, 2017, to account for the rate reduction. This did not have an impact on the Company’s financial statements since its U.S. deferred tax assets are fully offset by a valuation allowance. The Company finalized the analysis during the third quarter of 2018, with no material changes to the initial estimated decrease of its net deferred tax assets, and the accounting is now complete.

The geographical breakdown of loss before provision for income taxes is as follows:


	Year Ended December 31,
	2018			2017			2016
	(in thousands)
United States	$	(54,395	)	$	(42,425	)	$	(48,244	)
International		758			566			520

Loss before provision for (benefit from) income taxes, net	$	(53,637	)	$	(41,859	)	$	(47,724	)

The components of the provision for (benefit from) income taxes are as follows:


	Year Ended December 31,
	2018			2017			2016
	(in thousands)
Current tax provision (benefit):
Federal	$	—		$	—		$	—
State		—			—			—
Foreign		(180	)		183			170

Total current tax provision (benefit)		(180	)		183			170

Deferred tax provision (benefit):
Foreign		(122	)		(27	)		(27	)

Total deferred tax provision (benefit)	$	(122	)	$	(27	)	$	(27	)

Total provision for (benefit from) income taxes	$	(302	)	$	156		$	143

The reconciliation between income taxes computed at the federal statutory income tax rate and the provision for (benefit from) income taxes is as follows:


	Year Ended December 31,
	2018			2017			2016
Federal statutory rate		21.0	%		34.0	%		34.0	%
Effect of:
Change in valuation allowance		(22.2	)		69.5			(33.5	)
Federal Tax Credit		2.4			(0.9	)		1.6
State income tax benefit, net of federal benefit		0.3			0.1			0.1
Effect of ownership change on deferred tax assets		—			(84.8	)		—
US tax reform deferred impact on tax rate change		—			(17.3	)		—
Other permanent items		(1.0	)		(1.0	)		(2.5	)

Total provision for (benefit from) income taxes		0.5	%		(0.4	)%		(0.3	)%

The components of the deferred tax assets are as follows:


	December 31,
	2018			2017
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	18,347		$	9,183
Stock based compensation		3,642			2,444
License fee		2,008			1,346
59 (e) expenditures and amortization		1,435			1,435
Research and development credits		1,137			365
Other		972			698

Gross deferred tax assets		27,541			15,471
Valuation allowance		(27,317	)		(15,395	)

Total deferred tax assets		224			76

Deferred tax liabilities:
Other		39			13

Total deferred tax liabilities		39			13

Total net deferred tax assets	$	185		$	63

Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, which includes historical operating performance and the recorded cumulative net losses in prior fiscal periods, the Company recorded a full valuation allowance of $27.3 million and $15.4 million against the net U.S. deferred tax assets as of December 31, 2018 and 2017. The net valuation allowance increased by $11.9 million for the year ended December 31, 2018. The net valuation allowance decreased by $29.0 million for the year ended December 31, 2017, primarily due to the effects of an ownership change and the Tax Act rate change.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing U.S. deferred tax assets. Based on the weight of all evidence, including a history of operating losses and the Company’s ability to generate future taxable income to realize the assets, management has determined that it is more likely than not that the U.S. deferred tax assets will not be realized.

Utilization of the Company’s net operating loss and U.S. research and development credit carryforwards to offset taxable income are subject to an annual limitation, pursuant to Internal Revenue Code (IRC) Sections 382 and 383. As a result of ownership changes that have occurred, certain of the Company’s tax attributes existing as of the date of the ownership change are not be available for future use. The loss of these attributes does not have any impact on the financial statements since the net U.S. deferred tax assets are offset by a full valuation allowance.

As of December 31, 2018, the Company has U.S. federal tax net operating loss carryforwards of $74.3 million, of which $31.4 million expire in 2037 and $42.9 million are eligible for indefinite carryforward, and state operating loss carryforwards of $56.3 million expiring in years ranging from 2022 to 2038. The Company also has U.S. net tax credit carryforwards of $1.1 million which begin to expire in 2032 and net tax credit carryforwards in a foreign jurisdiction of $0.2 million which begin to expire in 2037.

Uncertain Tax Positions

The activity related to the gross amount of unrecognized tax benefits is as follows:


	Year Ended December 31,
	2018		2017			2016
	(in thousands)
Beginning balance	$	43	$	311		$	232
Increases based on tax positions related to prior years		109		—			—
Decreases based on tax positions related to prior years		—		(79	)		—
Decreases due to ownership change		—		(232	)		—
Increases based on tax positions in current year		112		43			79
Settlement		—		—			—
Lapse of statute of limitations		—		—			—

Ending balance	$	264	$	43		$	311

If recognized, gross unrecognized tax benefits would not have a material impact on the Company’s effective tax rate due to the Company’s full valuation allowance position on the U.S. deferred tax assets. From time to time, the Company is subject to review by tax authorities. It is not possible to estimate the impact of changes, if any, to previously recorded uncertain tax positions. However, the Company does not expect the changes, if any, to be materially different from what is recorded and will adjust its estimate and liability as necessary.

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in the accompanying consolidated statement of operations. Accrued interest and penalties, if applicable, are included in accrued liabilities in the consolidated balance sheet. For the years ended December 31, 2018 and 2017, the Company did not recognize any accrued interest and penalties.

The Company is subject to taxation in the United States, various states, Canada and Australia. Tax years 2015 through 2017 remain open to examination by the United States, various state jurisdictions and Canada. The tax year ended December 31, 2017 remains open to examination in Australia. Other than routine reviews by tax authorities for tax credits claimed, the Company is not under examination in any tax jurisdiction for any year.