13. INCOME TAXES  

For the years ended December 31, 2017, 2016 and 2015, the Company did not record a current or deferred income tax expense or (benefit) due to current and historical losses incurred by the Company. The Company's losses before income taxes consist solely of losses from domestic operations. 

 

The enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017, as further described below, resulted in a remeasurement of the Company’s net deferred tax asset due to the reduction in corporate rates from 35% to a 21% flat tax, which is included in the Company’s 2017 rate reconciliation. A reconciliation of income tax expense (benefit) computed at the statutory federal income tax rate to income taxes as reflected in the consolidated financial statements is as follows:

 

Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The significant components of the Company’s deferred tax assets and liabilities are comprised of the following:

 

The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. As of December 31, 2017 and 2016, based on the Company's history of operating losses, the Company has concluded that it is not more likely than not that the benefit of its deferred tax assets will be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of December 31, 2017 and 2016. The valuation allowance decreased $6,196 primarily due to the enacted change in the corporate income tax rate from the enactment of TCJA signed into law in December 2017. The valuation allowance increased $34,499 during the years ended December 31, 2016 due primarily to net operating losses generated.

 

As of December 31, 2017, 2016, and 2015, the Company had U.S. federal net operating loss carryforwards of $249,511,  $190,926, and $104,888, respectively, which may be available to offset future income tax liabilities. TCJA will generally allow losses incurred after 2017 to be carried over indefinitely, but will generally limit the NOL deduction to the lesser of the NOL carryover or 80% of a corporation’s taxable income (subject to Code Section 382/383). Also there will be no carryback for losses incurred after 2017. Losses incurred prior to 2018 will generally be deductible to the extent of the lesser of a corporation’s NOL carryover or 100% of a corporation’s taxable income, and be available for twenty years from the period the loss was generated. The Company has not finalized its review of the impact of TCJA on the NOL rules, and the impact, if any, to the Company’s ability to utilize and carryover net operating losses.

 

As of December 31, 2017, 2016, and 2015, the Company also had U.S. state net operating loss carryforwards of $205,074,  $145,902, and $59,875 respectively, which may be available to offset future income tax liabilities and expire at various dates through 2037.

 

As of December 31, 2017, 2016 and 2015, the Company had federal research and development tax credit carryforwards of approximately $3,426,  $3,367, and $3,110, respectively, available to reduce future tax liabilities which expire at various dates through 2037. As of December 31, 2017, 2016 and 2015 the Company had state research and development tax credit carryforwards of approximately $589,  $522, and $469, respectively, available to reduce future tax liabilities which expire at various dates through 2032.

 

The TCJA was enacted in December 2017. Among other things, the TCJA reduces the U.S. federal corporate tax rate from 35 percent to 21 percent beginning in 2018. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for enactment effects of the TCJA. SAB 118 provides a measurement period of up to one year from the TCJA’s enactment date for companies to complete their accounting under ASC 740. In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.

 

In connection with the Company’s initial analysis of the impact of the enactment of the TCJA, the Company recorded no tax expense. For various reasons that are discussed more fully below, including the issuance of additional technical and interpretive guidance, the Company has not completed its accounting for the income tax effects of certain elements of the TCJA. However, with respect to the following, the Company was able to make reasonable estimates of the TCJA’s effects:

 

Remeasurement of deferred tax assets/liabilities and other impacts: The Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent under the TCJA. The impact of the remeasurement of the Company’s deferred tax assets and liabilities is included in the rate reconciliation above.

 

Code Section 162(m) Limitations: Employers can generally deduct reasonable compensation for personal services as an ordinary and necessary business deduction. Internal Revenue Code Section 162(m) limits the ability to deduct compensation expenses of certain “covered” employees of a publicly held corporation. TCJA has modified these rules by expanding the definition of “covered” employee and repealed the performance-based compensation and commissions exceptions of Section 162(m). The Company is still analyzing this issue to determine what impact, if any, this change may have on the Company’s ability to deduct performance-based compensation to its employees, and at this time cannot determine a provisional estimate to be included in its financial statements in accordance with SAB 118. 

 

The Company is still analyzing certain aspects of the TCJA, considering additional technical guidance, and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.

 

Under the provisions of the Internal Revenue Code, the net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50 percent, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed numerous financings as well as its IPO since its inception which may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code, or could result in a change in control in the future.

 

The Company files income tax returns in the United States and in several states. The federal and state income tax returns are generally subject to tax examinations for the tax years ended December 31, 2014 through December 31, 2017. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities to the extent utilized in a future period. The Company’s 2015 return is currently under examination with the IRS, and as a result the IRS is challenging certain positions on its return that may result in a decrease to the Company’s NOL carryover. The Company is protesting the matter with the IRS, but has reduced the NOL deferred tax asset for the amount of contested deductions. This is included in the tabular rollforward below of gross unrecognized tax benefits. Since a full valuation allowance has been provided against the Company’s net operating loss carryover, the reduction in the gross deferred tax asset established for net operating losses does not result in any financial statement impact.

 

For all years through December 31, 2017, the Company generated research credits but has not conducted a study to document the qualified activities. This study may result in an adjustment to the Company’s research and development credit carryforwards. The Company has reduced its deferred tax asset for its estimate of credits that could be reduced, and that is included in the tabular rollforward of uncertain tax positions. Since a full valuation allowance has been provided against the Company’s research and development credits the reduction in the gross deferred tax asset established for the research and development credit carryforwards does not result in any financial statement impact.

 

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (UTB) is as follows:

 

Federal, State and Foreign Tax