The component of the loss before provision for income taxes were as follows (in thousands):
| | | For the Years Ended December 31, | |
| | | | | | | | | | |
| United States | | $ | (1,931 | ) | | $ | (521 | ) | | $ | (1,389 | ) |
| Canada | | | (6,697 | ) | | | (10,643 | ) | | | (12,808 | ) |
| Loss before provision for income taxes | | $ | (8,628 | ) | | $ | (11,164 | ) | | $ | (14,197 | ) |
The components of the provision for income taxes from continuing operations is as follows (in thousands):
| | | For the Years Ended December 31, | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Canada | | $ | — | | | $ | — | | | $ | — | |
| US | | | — | | | | — | | | | — | |
| State | | | — | | | | — | | | | — | |
| | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | |
| Canada | | $ | — | | | $ | — | | | $ | — | |
| US | | | — | | | | — | | | | — | |
| State | | | — | | | | — | | | | — | |
| | | | — | | | | — | | | | — | |
| | | $ | — | | | $ | — | | | $ | — | |
A reconciliation of income taxes to the amount computed by applying the statutory federal income tax rate to the net loss is as follows (in thousands, except income tax rates):
| | | For the Years Ended December 31, | |
| | | | | | | | | | |
| Combined federal and provincial income tax rates | | | 26.00 | % | | | 26.00 | % | | | 26.00 | % |
| Income tax benefit at statutory rates | | $ | (2,243 | ) | | $ | (2,902 | ) | | $ | (3,691 | ) |
| State income tax, net of federal benefit | | | (3 | ) | | | 1 | | | | (63 | ) |
| Permanent items | | | 3 | | | | (17 | ) | | | 36 | |
| Tax credits | | | — | | | | — | | | | (105 | ) |
| Non-deductible stock-based compensation | | | 429 | | | | 81 | | | | 155 | |
| Foreign accrual property income | | | 72 | | | | 69 | | | | 48 | |
| Expired NOLs | | | 140 | | | | 79 | | | | 887 | |
| Return to provision true up | | | 1 | | | | 60 | | | | (320 | ) |
| Uncertain tax positions | | | 718 | | | | 68 | | | | 296 | |
| Rate differential | | | (154 | ) | | | 60 | | | | (175 | ) |
| Effect of Canadian rate change | | | (1,428 | ) | | | — | | | | — | |
| Effect of U.S. federal rate change | | | 545 | | | | — | | | | — | |
| Effect of U.S. state rate change | | | — | | | | 183 | | | | — | |
| Other | | | 12 | | | | (112 | ) | | | (57 | ) |
| Revaluation of warrant liability | | | (860 | ) | | | 86 | | | | — | |
| CTA | | | — | | | | (312 | ) | | | (1,702 | ) |
| Change in valuation allowance | | | 2,768 | | | | 2,656 | | | | 4,691 | |
| Income tax expense | | $ | — | | | $ | — | | | $ | — | |
Significant components of the Company
’s deferred tax assets as of
December
31,
2017
and
2016
are shown below (in thousands):
| | | | |
| | | | | | | |
| Deferred tax assets: | | | | | | | | |
| Net operating loss carryforwards (non-capital losses) | | $ | 36,110 | | | $ | 32,140 | |
| Scientific research and development | | | 2,605 | | | | 2,509 | |
| Tax credits | | | 3,964 | | | | 4,066 | |
| Stock based compensation | | | 815 | | | | 1,116 | |
| Other, net | | | 164 | | | | 529 | |
| Share issue costs | | | 490 | | | | 1,042 | |
| Total deferred tax assets, net, before valuation allowance | | | 44,148 | | | | 41,402 | |
| Valuation allowance | | | (44,148 | ) | | | (41,402 | ) |
| Net deferred tax assets | | $ | — | | | $ | — | |
Due to the operating losses since inception, a valuation allowance has been recognized to offset net deferred assets as realization of such deferred tax assets is
not
more likely than
not.
During the years ended
December
31,
2017
and
2016,
the valuation allowance on the deferred tax assets increased by
$2.7
million and
$3.0
million, respectively.
At
December
31,
2017,
the Company had Canadian, U.S. federal and California net operating loss carryforwards of approximately
$133.7
million,
$2.1
million and
$1.4
million, respectively, which
may
be used to reduce future taxable income. The income tax benefit, if any, of these losses has
not
been recorded due to the uncertainty of their recovery. The net operating losses being to expire in
2026
for Canadian tax purposes,
2035
for U.S. federal tax purposes and
2034
for California tax purposes.
At
December
31,
2017,
the Company had Canadian Scientific Research and Experimental Development, or SR&ED, tax credits, investment tax credits and foreign tax credits of approximately
$9.6
million,
$2.6
million and
$0.2
million. The SR&ED tax credits carry forward indefinitely, while the investment tax credits and foreign tax credits begin to expire in
2018
and
2023,
respectively.
In addition, the Company has
U.S. federal and California research and development tax credits of
$1.6
million and
$0.6
million. The federal credits begin to expire in
2031
and the California credits carry forward indefinitely.
The Company
’s Canadian tax years are subject to inspection from
2011
forward. The Company’s U.S. federal and California
2011
tax returns are subject to examination by taxing authorities.
The future utilization of the Company
’s net operating loss carry forwards and research and development credit carry forwards to offset future taxable income and tax, respectively,
may
be subject to an annual limitation under Internal Revenue Code of
1986,
as amended, or the Code, Sections
382
and
383
as a result of ownership changes that
may
have occurred previously or
may
occur in the future. Section
382
and
383
limit
s
a company’s ability to utilize certain net operating loss carry forwards and tax credit carry forwards in the event of a cumulative change in ownerships in excess of
50%
as defined in the Code.
In accordance with
ASC740,
“
Income Taxes
”
(
ASC740
), tax benefits. In accordance with
ASC740,
tax benefits are only recognized when a position is more likely than
not
of being sustained. Tax benefits are then measured using a cumulative benefit approach whereby the largest amount of tax benefit that is more likely than
not
of being sustained is recognized.
The following table summarizes the activity related to
the Company’s unrecognized tax benefits (in thousands):
| | | For the Years Ended December 31, | |
| | | | | | | | | | |
| Beginning balance | | $ | 428 | | | $ | 325 | | | $ | — | |
| Increase related to prior year tax positions | | | 610 | | | | 103 | | | | 304 | |
| Increase related to current year tax positions | | | 113 | | | | — | | | | 21 | |
| Ending balance | | $ | 1,151 | | | $ | 428 | | | $ | 325 | |
The amount of unrecognized tax benefit that, if recognized and realized, would affect the effective tax rate is
zero
as of
December 31, 2017.
To the extent unrecognized tax benefits are recognized at a time such valuation allowance
no
longer exists, the addition amount that would affect the effective tax rate is approximately
$1.2
million. The Company does
not
anticipate any significant decreases in its unrecognized tax benefits over the next
12
months. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. For the years ended
December
31,
2017
and
2016,
the Company has
recognized any interest or penalties related to income taxes.
The Tax Cuts and Jobs Act
or Tax Act, which was enacted on
December 22, 2017,
reduced the U.S. federal corporate tax rate from
35%
to
21%
and repealed the corporate Alternative Minimum Tax. As a result of the Tax Act, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally
21%.
The amount recorded related to the remeasurement of the Company’s deferred tax balance was
million, which was fully offset by a decrease in the Company’s valuation allowance and resulted in
no
impact to income tax expense.
In conjunction with the tax law change, the Securities and Exchange Commission staff issued Staff Accounting Bulletin
No.
118
to address the application of GAAP in situations when a registrant does
not
have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company has recognized the provisional tax impacts related to the relevant tax provisions included in the Tax Act and has included these amounts in its consolidated financial statements for the year ended
December 31, 2017.
The ultimate impact
may
differ from these provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that
may
be issued, and actions the Company
may
take as a result of the Tax Act.
On
September 11, 2017,
British Columbia
’s Minister of Finance, presented the New Democratic Party’s
first
provincial budget. The budget increased the general and manufacturing and processing (M&P) income tax rate for British Columbia from
11%
to
12%
effective
January 1, 2018
and the combined federal and British Columbia rate increased from
26%
to
27%.
As a result of the change in the income tax rate, the Company remeasured certain deferred tax assets and liabilities based on the rate at which they are expected to be reverse in the future, which is generally
27%.
The amount recorded related to the remeasurment of our deferred tax balance was
$1.4
million. The corresponding increase in valuation allowance resulted in an income tax benefit.