10. Income Taxes
During the years ended December 31, 2016, 2015 and 2014, the Company recorded no income tax benefits for the net operating losses incurred in each year, due to its uncertainty of realizing a benefit from those items.
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
| Year Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
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Federal statutory income tax rate |
(34.0 | )% | (34.0 | )% | (34.0 | )% | ||||||
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Federal research and development tax credit |
(0.6 | ) | (0.5 | ) | (0.9 | ) | ||||||
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State taxes, net of federal benefit |
(5.2 | ) | (5.3 | ) | (4.5 | ) | ||||||
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Stock-based compensation expense |
1.3 | 0.4 | 1.1 | |||||||||
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Other |
— | 0.1 | 0.2 | |||||||||
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Increase in deferred tax asset valuation allowance |
38.5 | 39.3 | 38.1 | |||||||||
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Effective income tax rate |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
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Net deferred tax assets as of December 31, 2016 and 2015 consisted of the following:
| December 31, | ||||||||
| 2016 | 2015 | |||||||
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Deferred tax assets: |
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Capitalized research and development expenses |
$ | 47,594 | $ | 37,765 | ||||
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Net operating loss carryforwards |
14,252 | 10,224 | ||||||
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Stock-based compensation |
1,956 | 1,371 | ||||||
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Research and development tax credit carryforwards |
1,590 | 1,273 | ||||||
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Accrued expenses |
207 | 339 | ||||||
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Other |
44 | 56 | ||||||
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Total gross deferred tax assets |
65,643 | 51,028 | ||||||
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Valuation allowance |
(65,643 | ) | (51,028 | ) | ||||
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Net deferred tax assets |
$ | — | $ | — | ||||
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Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2016, 2015 and 2014 related primarily to the increase in capitalized research and development expenses, net operating loss carryforwards and stock-based compensation and were as follows:
| Year Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
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Valuation allowance as of beginning of year |
$ | 51,028 | $ | 33,272 | $ | 24,402 | ||||||
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Decreases recorded as benefit to income tax provision |
— | — | — | |||||||||
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Increases recorded to income tax provision |
14,615 | 17,756 | 8,870 | |||||||||
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Valuation allowance as of end of year |
$ | 65,643 | $ | 51,028 | $ | 33,272 | ||||||
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As of December 31, 2016, the Company had net operating loss carryforwards for federal and state income tax purposes of $38,200 and $34,300, respectively, which begin to expire in 2024 and 2030, respectively. As of December 31, 2016, the federal and state net operating loss carryforwards include $1,400 of deductions for stock option compensation for which the associated tax benefit will be credited to additional paid-in capital when realized. This amount is accounted for separately and is not included in the Company’s deferred tax assets. As of December 31, 2016, the Company also had available research and development tax credit carryforwards for federal and state income tax purposes of $1,279 and $471, respectively, which begin to expire in 2025 and 2028, respectively. Utilization of the net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. The Company has not conducted a formal study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382 of the Code, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards may be subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization.
The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2016 and 2015. Management reevaluates the positive and negative evidence at each reporting period.
The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2016 or 2015.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending income tax examinations. The Company’s tax years are still open under statute from 2013 to the present. Earlier years may be examined to the extent that tax credit or net operating loss carryforwards are used in future periods. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision.