11. Income Taxes

 

The Tax Cuts and Jobs Act (the "TCJA") was enacted on December 22, 2017 and became effective January 1, 2018. The Tax Act made significant changes to U.S. tax law, including lowering U.S. corporate income tax rates, implementing a territorial tax system, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries and modifying the taxation of other income and expense items.

 

The TCJA reduces the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the TCJA, the Company revalued its deferred tax liabilities, net as of December 31, 2017.  The impact of revaluation of the deferred tax liabilities, net was $18,507 of income tax expense, which was more than offset by a reduction in the valuation allowance of $20,344 resulting in a net impact of a $1,837 tax benefit.  The net tax benefit recorded was primarily the result of tax law changes which impacted the deferred tax liability the Company recorded for IPR&D related to the acquisition of Confluence.  Under GAAP, IPR&D is an indefinite lived intangible that is capitalized on the balance sheet, but which does not have a cost basis under U.S. tax law. 

 

The TCJA provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits. The Company did not have consolidated accumulated earnings and profits attributable to its foreign subsidiary; accordingly, the Company did not record any income tax expense related to the transition tax. 

 

Due to the timing of the enactment of the TCJA and the substantial changes it brings, the Staff of the SEC issued SAB 118 which provides a measurement period to report the impact of the TCJA.  During the measurement period, provisional amounts for the effects of the law are recorded to the extent a reasonable estimate can be made.  To the extent that all information necessary is not available, prepared or analyzed, companies may recognize provisional estimated amounts for a period of up to one year following enactment of the TCJA. 

 

During the years ended December 31, 2017,  2016 and 2015, the Company did not record an income tax benefit for net operating losses incurred in each year due to the uncertainty of realizing a benefit from those items.

 

Loss before income taxes is allocated as follows:

 

 

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:

 

 

Deferred tax liabilities, net as of December 31, 2017 and 2016 consisted of the following:

 

 

As of December 31, 2017, the Company had federal and state net operating loss carryforwards of $76,310 and $117,808, respectively, which begin to expire in 2032.  As of December 31, 2017, the Company also had federal research and development tax credit carryforwards of $2,202 which begin to expire in 2032, and state research and development tax credit carryforwards of $118 which begin to expire in 2022. The Company also has $1,292 of loss carry forwards in the United Kingdom which can be carried forward indefinitely. Utilization of the net operating loss carryforwards and research and development tax credit carryforwards in the United States may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes that may 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. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. The Company has completed an analysis under Section 382 for NOLs generated from July 13, 2012 through December 31, 2016. Although the Company has experienced Section 382 ownership changes since 2012, the Company has concluded that it should have sufficient ability to utilize NOLs accumulated during the periods tested. The Company has not yet determined if a Section 382 ownership change has occurred during the year ended December 31, 2017, or for Confluence prior to the acquisition. In addition, 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. 

 

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 or generation of any revenue from product sales 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, 2017 and 2016. The Company evaluates positive and negative evidence of its’ ability to realize deferred tax assets at each reporting period. 

 

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2017, 2016, and 2015 related primarily to the increases in net operating loss carryforwards, capitalized start-up costs, and research and development tax credit carryforwards and were as follows:

 

 

During the year ended December 31, 2015, the Company recorded unrecognized tax benefits in the amount of $4,400 related to start-up costs that were previously deducted beginning in the initial return filing period ended December 31, 2012.  During the year ended December 31, 2016, the Company filed a method of accounting change with the IRS related to the start-up costs, and reversed the related unrecognized tax position.  During the year ended December 31, 2017, the Company recorded uncertain tax benefits related to tax positions from the acquired Confluence business.  The following table summarizes the changes in the Company’s unrecognized tax benefits:

 

 

The total amount of unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate were $36 and $0 as of December 31, 2017 and 2016, respectively. The Company accrues interest and penalties related to unrecognized tax benefits in income tax expense (benefit) in the consolidated statements of operations and comprehensive loss.  During each of the years ended December 31, 2017, 2016 and 2015, the Company recognized expense (benefit) of $3,  $0 and $0, respectively, related to interest and penalties.

 

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 2012 to the present. All open 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.