Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes

Income Taxes

13.    Income Taxes

The Company's effective tax rates for the years ended December 31, 2020, 2019, and 2018 differ from the U.S. federal statutory rate as follows:

	December 31,
	2020				2019				2018
	(in thousands, except percentages)
U.S. federal taxes (benefit) at statutory rate	$	(48,226)	(21.00)	%	$	(25,794)	(21.00)	%	$	(26,800)	(21.00)	%
State tax expense		(10,672)	(4.65)	%		(6,607)	(5.38)	%		(4,468)	(3.50)	%
Research and development credits		(3,964)	(1.73)	%		(1,645)	(1.34)	%		(1,164)	(0.91)	%
Stock-based compensation		(23,791)	(10.36)	%		(7,544)	(6.14)	%		(3,148)	(2.47)	%
Change in federal tax rate		—	0.00	%		—	0.00	%		—	0.00	%
Mark to market fair value adjustments		—	0.00	%		—	0.00	%		865	0.68	%
Nondeductible settlement for claims		—	0.00	%		—	0.00	%		1	0.00	%
Foreign tax		55	0.02	%		1,612	1.31	%		195	0.15	%
Other nondeductible items		9,776	4.26	%		1,378	1.12	%		690	0.54	%
Change in valuation allowance		76,920	33.50	%		40,599	33.06	%		34,150	26.76	%
Provision for income taxes	$	98	0.04	%	$	1,999	1.63	%	$	321	0.25	%

During the year ended December 31, 2020, the Company recorded total income tax expense of $0.1 million. 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 $9,000 for the year ended December 31, 2020.

During the year ended December 31, 2019, the Company recorded total income tax expense of $2.0 million, which included a foreign withholding tax expense of $1.9 million, foreign income tax expense of $0.1 million and state income tax benefit of $0.04 million. 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.

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,
	2020		2019
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	177,899	$	124,777
Research and development tax credit carryforwards		24,332		18,189
Reserves and accruals		21,770		10,002
Lease Liabilities		7,123		7,838
Deferred revenue		6,386		3,288
Stock-based compensation		10,673		6,106
Total deferred tax assets before valuation allowance		248,183		170,200
Less: valuation allowance		(222,521)		(163,040)
		25,662		7,160
Deferred tax liabilities:
Convertible debt		(19,143)
Right-of-use lease assets		(6,519)		(7,160)
Net deferred tax assets	$	—	$	—

The Company established a full valuation allowance against its net deferred tax assets in 2020 and 2019 due to the uncertainty surrounding realization of these assets. The valuation allowance increased to $222.5 million as of December 31, 2020 from $163.0 million as of December 31, 2019 due to current year losses and credits claimed.

As of December 31, 2020, the Company had federal and state net operating loss (“NOLs”) carryforwards of approximately $727.2 million and $412.9 million, respectively, which begin to expire in 2027 and 2028, respectively, if not utilized. Approximately $407.3 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 $21.4 million, which begin to expire in 2027, and state research and development credit carryforwards of approximately $16.9 million, which can be carried forward indefinitely. Realization of these deferred tax assets would require $882.4 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:

	December 31,
	2020		2019		2018
	(in thousands)
Balance at beginning of year	$	8,619	$	7,362	$	5,945
Additions based on tax positions related to the current year		2,889		1,426		1,416
Additions (reductions) for tax positions of prior years		(8)		(169)		1
Balance at end of year	$	11,500	$	8,619	$	7,362

During the years ended December 31, 2020, 2019, and 2018, the amount of unrecognized tax benefits increased $2.9 million, $1.3 million, and $1.4 million, respectively, due to additional research and development credits generated during the year. As of December 31, 2020, 2019, and 2018, the total amount of unrecognized tax benefits was $11.5 million, $8.6 million, and $7.4 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.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act includes modifications for net operating loss carryovers and carrybacks, limitations of business interest expense for tax, immediate refund of alternative minimum tax (AMT) credit carryovers as well as a technical correction to the Tax Cuts and Jobs Act of 2017, for qualified improvement property. As of December 31, 2020, the Company expects that these provisions will not have a material impact as the Company has no net operating losses or AMT credits that would fall under these provisions and does not expect interest expense to be deductible due to current year losses.

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, 2021.

The Company recognizes any interest and/or penalties related to income tax matters as a component of income tax expense.  As of December 31, 2020, there were no accrued interest and penalties related to uncertain tax positions.