Note 11. Income Taxes
The Company has incurred net losses since inception and, consequently, has not recorded any U.S. Federal and state income tax expense or benefit for the years presented. In 2017, $2.1 million of the Company’s pre-tax loss was domestic and $16.5 million was foreign. The pre-tax losses in fiscal years 2016 and 2015 were all from the Company’s U.K. operations. The Company files tax returns in the United Kingdom as well as U.S. Federal and various State tax returns. Tax years 2017 and 2016 in the U.K. subsidiary remain open to examination by the Her Majesty’s Revenue and Customs (“HMRC”). Further, HMRC will be able to open an inquiry under the ‘discovery assessment’ for the 2014 tax year until April 30, 2018 if HMRC discovers facts which were not disclosed or readily inferable from the tax returns or accounts. The U.S. returns are open for all tax years since inception. The Company is not currently under examination in any jurisdiction for any tax years.
A reconciliation between the effective tax rates and statutory rates for the years ended April 30, is as follows:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Income tax benefit at U.S. federal statutory rate |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
Foreign rate differential |
|
|
(11.72 |
)% |
|
|
(14.00 |
)% |
|
|
(13.08 |
)% |
|
Nondeductible expenses |
|
|
(9.16 |
)% |
|
|
(6.85 |
)% |
|
|
(5.24 |
)% |
|
Other |
|
|
(1.29 |
)% |
|
|
— |
|
|
|
— |
|
|
Valuation allowance |
|
|
(11.83 |
)% |
|
|
(13.15 |
)% |
|
|
(15.68 |
)% |
|
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
The Company has net operating loss carry forwards available to offset future taxable income for federal and state income tax purposes. The ability to utilize the Company’s domestic net operating losses is limited due to changes in ownership as defined by Section 382 of the Internal Revenue Code (the “Code”). Under the provisions of Sections 382 and 383 of the Code, a change of control, as defined in the Code, imposes an annual limitation on the amount of the Company’s net operating loss and tax credit carryforwards, and other tax attributes that can be used to reduce future tax liabilities. The Company determined that an ownership change occurred as a result of the Company’s transaction in November 2016. As a result of this ownership change, the Company’s U.S. federal and California NOL’s may be limited to the extent of recognizing any previously unrecognized built-in gains of Carbylan as of November 2016.
The tax effect of significant temporary differences representing deferred tax assets and liabilities as of April 30, 2017 and 2016 is as follows (in thousands):
|
|
|
2017 |
|
|
2016 |
|
||
|
Net operating loss (“NOL”) carryforwards |
|
$ |
5,602 |
|
|
$ |
2,756 |
|
|
Other |
|
|
282 |
|
|
|
90 |
|
|
Valuation allowance |
|
|
(5,884 |
) |
|
|
(2,846 |
) |
|
Net deferred tax asset |
|
$ |
— |
|
|
$ |
— |
|
Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of NOL carryforwards. As a result of the fact that the Company has incurred tax losses from inception, management has determined that it is more likely than not that the Company will not recognize the benefits of net deferred tax assets and, as a result, a full valuation allowance has been established against its net deferred tax assets as of April 30, 2017 and 2016. During the years ended April 30, 2017, 2016 and 2015, the valuation allowance changed by $3.0 million, $0.4 million and $0.5 million, respectively. Realization of deferred tax assets is dependent upon the generation of future taxable income. As of April 30, 2017, the Company had NOL carryforwards for federal income tax purposes of approximately $1.3 million that begin to expire in 2024 through 2037, NOL carryforwards for state income taxes of $1.3 million that begin to expire in 2026 through 2037 and NOL carryforwards for U.K. income taxes of $26.7 million that do not expire.
The Company recognizes the financial statement effects of a tax position when it becomes more likely than not, based upon the technical merits, that the position will be sustained upon examination. The Company has no unrecognized tax benefits as of April 30, 2017 and April 30, 2016, respectively. The Company does not expect any material changes in the next 12 months in unrecognized tax benefits. The Company has not recognized interest and penalties related to uncertain tax positions.