10. Income Taxes
A reconciliation of loss before income taxes for domestic and foreign locations for the years ended December 31, 2017, 2016 and 2015 is as follows:
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|||||
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2017 |
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|
2016 |
|
|
2015 |
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|||
|
United States |
|
$ |
(12,940,362 |
) |
|
$ |
(10,892,275 |
) |
|
$ |
(8,866,201 |
) |
|
Foreign |
|
|
33,176 |
|
|
|
30,050 |
|
|
|
28,481 |
|
|
Loss before income taxes |
|
$ |
(12,907,186 |
) |
|
$ |
(10,862,225 |
) |
|
$ |
(8,837,720 |
) |
A reconciliation of income tax benefit (expense) for the years ended December 31, 2017, 2016 and 2015 is as follows:
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|
Current: |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal |
|
$ |
— |
|
|
$ |
1,489 |
|
|
$ |
— |
|
|
State |
|
|
— |
|
|
|
412 |
|
|
|
— |
|
|
Foreign |
|
|
(10,158 |
) |
|
|
(5,655 |
) |
|
|
(7,359 |
) |
|
Total current income tax benefit (expense) |
|
|
(10,158 |
) |
|
|
(3,754 |
) |
|
|
(7,359 |
) |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
1,329,888 |
|
|
|
— |
|
|
|
— |
|
|
State |
|
|
424,320 |
|
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total deferred income tax benefit (expense) |
|
|
1,754,208 |
|
|
|
— |
|
|
|
— |
|
|
Total income tax benefit (expense) |
|
$ |
1,744,050 |
|
|
$ |
(3,754 |
) |
|
$ |
(7,359 |
) |
The significant components of deferred income taxes at December 31, 2017, 2016 and 2015 are as follows:
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Deferred tax assets: |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Net operating loss carryforwards |
|
$ |
59,480,000 |
|
|
$ |
90,211,000 |
|
|
$ |
88,900,000 |
|
|
Capitalized licenses |
|
|
429,000 |
|
|
|
838,000 |
|
|
|
1,084,000 |
|
|
Research tax credits |
|
|
8,160,000 |
|
|
|
7,776,000 |
|
|
|
7,677,000 |
|
|
Stock options |
|
|
2,585,000 |
|
|
|
2,384,000 |
|
|
|
2,624,000 |
|
|
Other, net |
|
|
572,000 |
|
|
|
777,000 |
|
|
|
763,000 |
|
|
Total deferred tax assets |
|
|
71,226,000 |
|
|
|
101,986,000 |
|
|
|
101,048,000 |
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
In process R&D |
|
|
(1,343,000 |
) |
|
|
(1,956,000 |
) |
|
|
(1,956,000 |
) |
|
Total deferred tax liabilities |
|
|
(1,343,000 |
) |
|
|
(1,956,000 |
) |
|
|
(1,956,000 |
) |
|
Net deferred tax assets |
|
|
69,883,000 |
|
|
|
100,030,000 |
|
|
|
99,092,000 |
|
|
Valuation allowance |
|
|
(70,086,000 |
) |
|
|
(101,986,000 |
) |
|
|
(101,048,000 |
) |
|
Net deferred tax liability |
|
$ |
(203,000 |
) |
|
$ |
(1,956,000 |
) |
|
$ |
(1,956,000 |
) |
The Company has established a valuation allowance against net deferred tax assets due to the uncertainty that such assets will be realized. The Company periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred tax assets will be realizable, the valuation allowance will be reduced.
At December 31, 2017, the Company has federal and California net operating losses, or NOL, carryforwards of approximately $239.9 million and $130.5 million, respectively. The federal NOL carryforwards begin to expire in 2020, and the California NOL carryforwards begin to expire in 2028. At December 31, 2017, the Company also had federal and California research tax credit carryforwards of approximately $6.8 million and $1.8 million, respectively. The federal research tax credit carryforwards begin to expire in 2024, and the California research tax credit carryforward does not expire and can be carried forward indefinitely until utilized.
The above NOL carryforward and the research tax credit carryforwards are subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state provisions due to ownership change limitations that have occurred which will limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. The Company has not completed an IRC Section 382/383 analysis since 2011 regarding the limitation of net operating loss and research and development credit carryforwards. There is a risk that additional changes in ownership have occurred since the completion of the Company’s analysis, which was through December 2011. If a change in ownership were to have occurred, additional NOL and tax credit carryforwards could be eliminated or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, related to the Company’s operations in the United States will not impact the Company’s effective tax rate.
A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
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2017 |
|
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2016 |
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|
2015 |
|
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|
Federal statutory income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State income taxes, net of federal benefit |
|
|
5.2 |
|
|
|
3.5 |
|
|
|
5.2 |
|
|
Tax credits |
|
|
1.1 |
|
|
|
0.9 |
|
|
|
1.4 |
|
|
Change in valuation allowance |
|
|
247.4 |
|
|
|
(8.4 |
) |
|
|
(13.5 |
) |
|
Permanent differences |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
Expiration of attributes |
|
|
(18.7 |
) |
|
|
(17.2 |
) |
|
|
(24.6 |
) |
|
Tax Cuts and Jobs Act |
|
|
(253.7 |
) |
|
|
— |
|
|
|
— |
|
|
Stock compensation |
|
|
(2.9 |
) |
|
|
(13.6 |
) |
|
|
(3.4 |
) |
|
Other |
|
|
0.4 |
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
Provision for income taxes |
|
|
13.5 |
% |
|
|
0.0 |
% |
|
|
(0.1 |
)% |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Under the Act, NOL deductions are limited to 80% of taxable income in future periods and NOLs can be carried forward indefinitely. The Company has calculated its best estimate of the impact of the Act in its year end income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing and as a result of the rate reduction, the company has reduced the deferred tax asset balance as of December 31, 2017 by $32.7 million and the valuation allowance by $33.4 million.
Due to uncertainties which currently exist in the interpretation of the provisions of the Tax Cuts and Jobs Act of 2017 regarding Internal Revenue Code Section 162(m), the Company has not evaluated the potential impacts of IRC Section 162(m) as amended by the Tax Cuts and Jobs Act of 2017 on its financial statements. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $0.1 million additional taxable income based on cumulative foreign earnings of $0.2 million.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US 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 Act. In accordance with SAB 118, the Company has determined that the $0.6 million of the deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $0.1 million of additional taxable income recorded in connection with the transaction tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at December 31, 2017. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustments to these amounts will be recorded in the third quarter of 2018 when the analysis is complete.
The Company recorded a deferred tax benefit of $1.1 million of income tax benefit as management has reassessed the ability to utilize deferred tax liabilities associated with indefinite-lived intangibles as a source of income against tax attributes that can be carried forward indefinitely.
The Company files income tax returns in the United States, California and foreign jurisdictions. Due to the Company’s losses incurred, the Company is essentially subject to income tax examination by tax authorities from inception to date. The Company’s policy is to recognize interest expense and penalties related to income tax matters as tax expense. At December 31, 2017, there are no unrecognized tax benefits, and there are not significant accruals for interest related to unrecognized tax benefits or tax penalties.