Income Taxes

12 Months Ended

Dec. 31, 2019

Income Taxes

Income Taxes

14.    Income Taxes

The Company's effective tax rates for the years ended December 31, 2019, 2018 and 2017 differ from the U.S. federal statutory rate as follows:

	Year Ended December 31,
	2019				2018				2017
	(in thousands, except percentages)
U.S. federal taxes (benefit) at statutory rate	$	(25,794)	(21.00)	%	$	(26,800)	(21.00)	%	$	(46,206)	(34.00)	%
State tax expense		(6,607)	(5.38)	%		(4,468)	(3.50)	%		(6,559)	(4.83)	%
Research and development credits		(1,645)	(1.34)	%		(1,164)	(0.91)	%		(1,149)	(0.85)	%
Stock-based compensation		(7,544)	(6.14)	%		(3,148)	(2.47)	%		(5,036)	(3.71)	%
Change in federal tax rate		—	0.00	%		—	0.00	%		44,701	32.89	%
Mark to market fair value adjustments		—	0.00	%		865	0.68	%		(390)	(0.29)	%
Nondeductible settlement for claims		—	0.00	%		1	0.00	%		3,873	2.85	%
Foreign tax		1,612	1.31	%		195	0.15	%		153	0.11	%
Other nondeductible items		1,378	1.12	%		690	0.54	%		856	0.63	%
Change in valuation allowance		40,599	33.06	%		34,150	26.76	%		10,211	7.51	%
Provision for income taxes	$	1,999	1.63	%	$	321	0.25	%	$	454	0.31	%

During the year ended December 31, 2019, the Company recorded total income tax expense of $2.0 million. The Company incurred $1.9 million of foreign withholding tax on a license agreement signed in February 2019. The Company provides testing to clinics and also licenses its cloud-based software to licensees that are based in a foreign country, which contributed to a foreign income tax expense of $0.1 million. Total income tax expense also included a state income tax benefit of $41,000 for the year ended December 31, 2019.

During the year ended December 31, 2018, the Company recorded total income tax expense of $0.3 million, which included foreign income tax expense of $0.2 million and state income tax expense of $0.1 million. During the year ended December 31, 2017, the Company recorded total income tax expense of $0.5 million, which included foreign income tax expense of $0.3 million and state income tax expense of $0.2 million.

Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes as well as net operating loss and tax credit carryforwards. The components of the net deferred income tax assets are as follows:

	December 31,
	2019		2018
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	124,777	$	95,321
Research and development tax credit carryforwards		18,189		15,632
Reserves and accruals		10,002		7,839
Lease Liabilities		7,838		—
Deferred revenue		3,288		83
Stock-based compensation		6,106		4,076
Total deferred tax assets before valuation allowance		170,200		122,951
Less: valuation allowance		(163,040)		(122,441)
		7,160		510
Deferred tax liabilities:
Property and equipment		—		(510)
Right-of-use lease assets		(7,160)		—
Net deferred tax assets	$	—	$	—

The Company established a full valuation allowance against its net deferred tax assets in 2019 and 2018 due to the uncertainty surrounding realization of these assets. The valuation allowance increased to $163.0 million as of December 31, 2019 from $122.4 million as of December 31, 2018. The valuation allowance increased during 2019 due to current year losses and credits claimed. The valuation allowance increased to $122.4 million as of December 31, 2018 from $95.8 million as of December 31, 2017.

As of December 31, 2019, the Company had federal and state net operating loss (“NOLs”) carryforwards of approximately $514.0 million and $271.6 million, respectively, which begin to expire in 2027 and 2028, respectively, if not utilized. Approximately $194.2 million of federal net operating loss included above can be carried forward indefinitely.

The Company also had federal research and development credit carryforwards of approximately $15.7 million, which begin to expire in 2027, and state research and development credit carryforwards of approximately $13.0 million, which can be carried forward indefinitely. Realization of these deferred tax assets would require $650.1 million in taxable income to fully utilize. Realization is dependent on generating sufficient taxable income prior to expiration of the loss and credit carryforwards.

Federal and California tax laws impose substantial restrictions on the utilization of NOLs and credit carryforwards in the event of an "ownership change" for tax purpose, as defined in Section 382 of the Internal Revenue Code. Accordingly, the Company's ability to utilize these carryforwards may be limited as the result of such ownership change. Such a limitation could result in limitation in the use of the NOLs in future years and possibly a reduction of the NOLs available.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:

	Year Ended December 31,
	2019		2018		2017
	(in thousands)
Balance at beginning of year	$	7,362	$	5,945	$	4,293
Additions based on tax positions related to the current year		1,426		1,416		1,651
Additions (reductions) for tax positions of prior years		(169)		1		1
Balance at end of year	$	8,619	$	7,362	$	5,945

The Company adopted the provisions of ASC 740-10-50, Accounting for Uncertainty in Income Taxes, on January 1, 2009. During the years ended December 31, 2019, 2018 and 2017, the amount of unrecognized tax benefits increased $1.3 million, $1.4 million, and $1.7 million, respectively, due to additional research and development credits generated during the year. As of December 31, 2019, 2018 and 2017, the total amount of unrecognized tax benefits was $8.6 million, $7.4 million and $5.9 million, respectively. The reversal of the uncertain tax benefits would not affect the Company's effective tax rate to the extent that it continues to maintain a full valuation allowance against its deferred tax assets.

The Company is subject to U.S. federal income taxes and to income taxes in various states in the United States. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations, and require significant judgment to apply. The Company is subject to U.S. federal, state and local tax examinations by tax authorities for all prior tax years since incorporation. The Company does not anticipate significant changes to its current uncertain tax positions through December 31, 2020.

The Company recognizes any interest and/or penalties related to income tax matters as a component of income tax expense.  As of December 31, 2019, there were no accrued interest and penalties related to uncertain tax positions.