; ForgeRock, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.22.4
Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of loss before income taxes are as follows (in thousands):
December 31,
2022 2021 2020
Domestic
 $ (38,670) $ (25,163) $ (29,166)
International
 (25,924) (21,721) (12,063)
Total loss before income taxes
 $ (64,594) $ (46,884) $ (41,229)
The provision for income taxes consisted of the following (in thousands):
December 31,
2022 2021 2020
Current:
Federal $ —  $ —  $ — 
State 52  56  27 
Foreign 1,626  828  538 
Total 1,678  884  565 
Deferred:
Federal —  —  — 
State —  —  — 
Foreign —  —  — 
Total —  —  — 
Provision for income taxes
 $ 1,678  $ 884  $ 565 
For the years ended December 31, 2022, 2021 and 2020, the federal statutory income tax rate of 21% differs from the effective tax rate primarily due to the valuation allowance.
A reconciliation of the statutory federal income tax rate to our effective tax rate is as follows (in thousands):
December 31,
2022 2021 2020
Pre-tax loss $ (64,594) $ (46,884) $ (41,229)
Federal tax at statutory rate (13,565) (9,846) (8,658)
Stock-based compensation (3,996) (3,102) 24 
Revaluation of preferred warrants and option —  2,110  1,542 
Foreign provision differential (5,127) (5,382) (670)
Change in valuation allowance 27,624  18,389  8,936 
State taxes (1,202) (1,343) (785)
R&D tax credits (5,362) —  — 
Sec 162(m) adjustment 2,354  —  — 
Acquisition related cost 1,296  —  — 
Other (344) 58  176 
Tax expense $ 1,678  $ 884  $ 565 
Significant components of the Company’s net deferred tax assets and liabilities were as follows (in thousands):
December 31,
2022 2021
Deferred tax assets:
Stock-based compensation $ 3,732  $ 2,756 
Accruals and reserves 2,943  3,693 
Deferred revenue 900  228 
Net operating loss carryforwards – domestic 29,405  30,221 
Net operating loss carryforwards – foreign 38,180  28,245 
Property and equipment 264  307 
Operating lease liabilities 2,230  2,529 
Capitalized research and development 11,326  — 
R&D tax credits 5,363  — 
Tax basis intangible assets 2,758  3,202 
Other 378  — 
Total deferred tax assets 97,479  71,181 
Valuation allowance (91,281) (65,404)
Deferred tax assets, net of valuation allowance 6,198  5,777 
Deferred tax liabilities:
Operating lease right-of-use assets (2,007) (2,489)
Deferred costs (4,191) (3,074)
Other —  (214)
Total deferred tax liabilities (6,198) (5,777)
Net deferred tax assets/(liabilities) $ —  $ — 
The Company regularly assesses the ability to realize its deferred tax assets and establishes a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. Due to the weight of objectively verifiable negative evidence, including its history of losses, the Company believes that it is more likely than not that its deferred tax assets will not be realized. The valuation allowance increased by approximately $25.9 million and $18.4 million for the years ended December 31, 2022 and 2021, respectively.
As of December 31, 2022, the Company had approximately $121.2 million and $65.9 million of federal and state net operating loss carryforwards, respectively. The federal net operating loss carryforwards will expire at various dates beginning in 2031 if not utilized, and the state net operating loss carryforwards will expire at various dates beginning in 2023, but mainly beginning in 2032, if not utilized. As of December 31, 2022, the Company had approximately $160.0 million of foreign net operating loss carryforwards, predominantly in Norway and the United Kingdom. The foreign net operating loss carryforwards do not expire. As of December 31, 2022, the Company had approximately $6.6 million and $0.9 million of U.S. Federal and California R&D credits, respectively. The federal R&D credits will expire at various dates beginning in 2033 if not utilized, and the California R&D credits do not expire.
As of December 31, 2022, the Company had uncertain tax positions of $1.8 million and $0.2 million respectively, related to U.S Federal and California R&D credits and $0.1 million of uncertain tax positions related to foreign jurisdictions. As of December 31, 2021, the Company had uncertain tax positions of $4.2 million and $1.5 million related to U.S. Federal and California R&D credits, respectively and $0.1 million related to foreign jurisdictions. As of December 31, 2022, the unrecognized tax benefits related to U.S. Federal and California R&D credits, if realized, would not impact the effective tax rate because of the valuation allowances and the uncertain tax position related to foreign jurisdictions as of December 31, 2022 would impact the effective tax rate if realized. During 2022, the Company completed a research and development tax credit study for US federal and California, which resulted in immaterial changes to the research and development tax credit amount. However, the completion of the study resulted in a partial recognition of the deferred tax asset for research and development tax credit, which did not impact the effective tax rate due to the valuation allowance. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense. The Company did not accrue any material interest or penalties during 2022 and 2021.
A reconciliation of beginning and ending amount of unrecognized tax benefit is as follows (in thousands):
December 31,
2022 2021 2020
Gross amount of unrecognized tax benefits as of the beginning of the year $ 5,786  $ 2,811  $ 2,184 
Additions based on tax positions related to a prior year —  853  — 
Additions based on tax positions related to the current year 963  2,154  627 
Reductions based on tax positions related to a prior year (4,687) (32) — 
Reductions resulting from statute of limitation lapses (19) —  — 
Gross amount of unrecognized tax benefits as of the end of the year $ 2,043  $ 5,786  $ 2,811 
The Company files income tax returns in the U.S. and foreign jurisdictions and is subject to income tax examinations by taxing authorities in federal, state and foreign jurisdictions with varying statutes of limitations. The federal statute of limitations is three years and the state statutes of limitations are three to four years. Due to net operating loss carryforwards, the federal and state statutes of limitations remain open for tax years 2011 and thereafter. Foreign statute of limitations vary by country with open tax years ranging from 2018 - 2022. The Company is currently under audit for income tax in a single foreign jurisdiction. The audit is ongoing but is not expected to materially impact the consolidated financial statements.
Under Section 382 of the Tax Reform Act of 1986, the Company’s domestic net operating loss carryforwards may be limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three-year period. The Company completed a Section 382 study in 2022 and determined that its domestic net operating loss carryforwards were not materially limited. The impact of any limitations that may be imposed due to such ownership changes has not been determined for the year ended 2022.
On December 22, 2017, the United States passed the Tax Cuts and Jobs Act (the “Tax Act”) which enacts a broad range of changes to the US Tax Code. The Tax Act subjects a U.S. shareholder to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The Company recognizes the expense related to GILTI in the year the tax is incurred.
In addition, the Tax Act amended the Section 174 rules relating to the federal tax treatment of R&D expenditures paid or incurred during the year. The new Section 174 rules, beginning with the 2022 tax year, require taxpayers to capitalize and amortize specific R&D expenditures over a period of five years and fifteen years for domestic and foreign R&D, respectively. As such, qualified R&D expenditures for the current year have been capitalized and amortized in accordance with the amended Section 174 rules.