Note 8—Income Taxes
The Company has accumulated net losses since inception and has not recorded an income tax provision or benefit during the year ended December 31, 2017 and the period from March 24, 2016 (Inception) to December 31, 2016.
A reconciliation of the statutory U.S. federal rate to the Company’s effective tax rate is as follows:
|
|
|
For the year |
|
For the period |
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate |
|
35 |
% |
35 |
% |
|
Federal tax rate change |
|
(22 |
)% |
— |
|
|
Flow-through income not subject to tax |
|
— |
|
(7 |
)% |
|
Incentive stock options |
|
(6 |
)% |
— |
|
|
Other |
|
(1 |
)% |
— |
|
|
Change in valuation allowance |
|
(6 |
)% |
(28 |
)% |
|
|
|
|
|
|
|
|
Income taxes provision (benefit) |
|
— |
|
— |
|
|
|
|
|
|
|
|
The components of the net deferred tax asset as of December 31, 2017 and 2016 are the following (in thousands):
|
|
|
As of December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
|
||
|
Deferred tax assets: |
|
|
|
|
|
||
|
Net operating loss carryovers |
|
$ |
10,266 |
|
$ |
8,983 |
|
|
Amortization of license |
|
— |
|
333 |
|
||
|
Charitable Contributions |
|
16 |
|
4 |
|
||
|
|
|
|
|
|
|
||
|
Total deferred tax assets |
|
10,282 |
|
9,320 |
|
||
|
Less valuation allowance |
|
(10,282 |
) |
(9,320 |
) |
||
|
|
|
|
|
|
|
||
|
Deferred tax asset, net of valuation allowance |
|
$ |
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
On December 22, 2017, “H.R.1”, formerly known as the “Tax Cuts and Jobs Act”, was signed into law. Among other items, H.R.1 reduces the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective January 1, 2018. As a result, the Company revalued its net deferred tax asset at the new lower tax rate. The Company has reduced the value of the deferred tax asset before valuation allowance by $6.5 million.
The Company has determined, based upon available evidence, that it is more likely than not that the net deferred tax asset will not be realized and, accordingly, has provided a full valuation allowance against its net deferred tax asset. Based on this analysis, the Company determined that a valuation allowance of $10.3 million was required as of December 31, 2017, resulting in $0 net deferred tax assets. The Company had recorded a valuation allowance of $9.3 million and $0 net deferred tax assets as of December 31, 2016.
As of December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $46.0 million. The federal and state net operating loss carryforwards generated in the 2016 and 2017 tax years will begin to expire, if not utilized, by 2036. Utilization of the net operating loss carryforwards may be subject to an annual limitation according to Section 382 of the Internal Revenue Code of 1986 as amended, and similar provisions. In connection with the Company’s recent IPO, it is possible that the Company has experienced an ownership change limitation. The Company may experience ownership changes in the future as a result of subsequent shifts in its stock ownership, some of which may be outside of the Company’s control.
At December 31, 2017, the Company did not have any uncertain tax positions. The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s consolidated statement of operations. The Company does not anticipate a material change to unrecognized tax benefits in the next twelve months.
The 2014 and subsequent federal and state tax years for AkaRx remain open for the assessment of income taxes. 2016 was Dova’s initial tax year which remains open for the assessment of income taxes. Due to the Company’s history of losses since inception, the Company believes the probability of an assessment is unlikely.