13. Income Taxes
The Company has available approximately $145,676,000 and $156,023,000 of unused operating loss carryforwards for federal and state tax purposes, respectively, that may be applied against future taxable income. The net operating loss carryforwards will expire through the year 2037 if not utilized prior to that date. The Company has evaluated the positive and negative evidence bearing upon the realizability of its net deferred tax assets. Based on the Company’s history of operating losses since inception, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, no provision for a deferred tax asset has been made for the tax benefits of the net operating loss carryforwards as the entire amount is offset by a valuation allowance. The valuation allowance decreased by approximately $7,797,000 and increased by approximately $12,846,000 during the years 2017 and 2016, respectively, and was approximately $45,146,000 and $52,943,000 at December 31, 2017 and 2016, respectively.
The Internal Revenue Code of 1986, as amended (the Code) provides for a limitation of the annual use of net operating losses and other tax attributes (such as research and development tax credit carryforwards) following certain ownership changes (as defined by the Code) that could limit the Company’s ability to utilize these carryforwards. At this time, the Company has not completed a study to assess whether an ownership change under Section 382 of the Code has occurred, or whether there have been multiple ownership changes since the Company’s formation, due to the costs and complexities associated with such a study. The Company may have experienced various ownership changes, as defined by the Code, as a result of past financing transactions. Accordingly, the Company’s ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes. Therefore, the Company may not be able to take full advantage of these carryforwards for federal or state income tax purposes.
The Company’s reserves related to taxes are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit. For the three years ended December 31, 2017, the Company had no unrecognized tax benefits or related interest and penalties accrued. The Company has not, as yet, conducted a study of research and development (R&D) credit carryforwards. This study may result in an adjustment to the Company’s R&D credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s R&D credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the balance sheet or statement of operations if an adjustment were required. The Company would recognize both accrued interest and penalties related to unrecognized benefits in income tax expense. The Company’s uncertain tax positions are related to years that remain subject to examination by relevant tax authorities. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available.
On December 22, 2017, the Tax Cuts and Jobs Act” (the “2017 Tax Act”) was enacted. The 2017 Tax Act lowered the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, the change in the U.S. federal tax rate required the Company tore-measure its federal deferred tax assets and liabilities. Effective for tax years beginning on January 1, 2018, the 2017 Tax Act repealed the performance exception permitting certain executive officer compensation greater than $1 million to be deducted.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) which also provides guidance on accounting for the impacts of the 2017 Tax Act. SAB 118 provides a measurement period of up to one year from enactment for a company to complete its tax accounting under ASC 740. Once a company is able to make a reasonable estimate and record a provisional amount for effects of the 2017 Tax Act, it is required to do so. Given the substantial uncertainties surrounding the Tax Act and the short period of time between December 22, 2017 and December 31, 2017 to calculate the impacts of the 2017 Tax Act, the Company is accounting for its impact on a provisional (estimated) basis as allowed by SAB 118. Such provisional measurement amounts are anticipated to change as remaining analysis and review are completed, until the Company records a final amount within the measurement period.
During the fourth quarter of 2017, the Company reduced its net deferred tax asset balance and offsetting valuation allowance by $18,284,538 as a provisional amount for the re-measurement of its U.S. deferred tax balances. This amount represents the Company’s reasonable estimate of the impact from the 2017 Tax Act.
The principal components of the Company’s deferred tax assets and liabilities are as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
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Deferred tax assets/liabilities: |
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Net operating loss carryovers |
$ | 40,879,826 | $ | 47,860,522 | ||||
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Share-based compensation |
1,702,036 | 2,168,126 | ||||||
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R&D tax credits |
1,750,785 | 1,783,716 | ||||||
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Accrued compensation and severance |
659,458 | 902,688 | ||||||
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Depreciation |
(201,288 | ) | (386,758 | ) | ||||
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Deferred rent |
200,968 | 392,715 | ||||||
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Intangible assets |
154,669 | 221,783 | ||||||
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| 45,146,454 | 52,942,793 | |||||||
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Valuation allowance |
(45,146,454 | ) | (52,942,793 | ) | ||||
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Net deferred tax assets (liabilities) |
$ | — | $ | — | ||||
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A reconciliation of the statutory U.S. Federal rate to the company’s effective tax rate is as follows:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Federal income tax benefit at statutory rate |
(34.00 | )% | (34.00 | )% | (34.00 | )% | ||||||
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State income tax, net of federal benefit |
(9.95 | ) | (5.49 | ) | (5.49 | ) | ||||||
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Permanent items including change in fair value of warrants |
(22.03 | ) | (1.54 | ) | 1.99 | |||||||
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Change in valuation allowance |
(50.33 | ) | 42.12 | 39.70 | ||||||||
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R&D tax credits |
(3.02 | ) | (1.03 | ) | (0.99 | ) | ||||||
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Deferred re-measurement |
118.03 | — | — | |||||||||
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Other |
(1.30 | ) | (0.06 | ) | (1.21 | ) | ||||||
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Effective income tax (benefit) expense rate |
0 | % | 0 | % | 0 | % | ||||||
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