|
8. |
INCOME TAXES |
A reconciliation of the statutory U.S. Federal Tax Rate to the Company’s effective tax rate is as follows:
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
U.S. statutory federal income tax rate |
|
|
(34.0 |
)% |
|
|
(34.0 |
)% |
|
State income taxes, net of federal income tax benefit |
|
|
(3.8 |
)% |
|
|
(5.7 |
)% |
|
Permanent items |
|
|
0.8 |
% |
|
|
0.9 |
% |
|
Warrant adjustment |
|
|
8.3 |
% |
|
|
(3.8 |
)% |
|
R&D credit |
|
|
(0.3 |
)% |
|
|
(0.4 |
)% |
|
Change in valuation allowance |
|
|
— |
|
|
|
43.0 |
% |
|
Change in federal rate impact |
|
|
29.2 |
% |
|
|
— |
|
|
Other |
|
|
(0.2 |
)% |
|
|
— |
|
|
Effective income tax rate |
|
|
0.0 |
% |
|
|
0.0 |
% |
The significant components of the Company’s deferred tax assets as of December 31, 2017 and 2016 are as follows (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Net operating loss carryforwards |
|
$ |
16,781 |
|
|
$ |
16,634 |
|
|
Research and development credits |
|
|
520 |
|
|
|
385 |
|
|
Accrued expenses |
|
|
265 |
|
|
|
322 |
|
|
Property and equipment |
|
|
(11 |
) |
|
|
(1 |
) |
|
License payments |
|
|
663 |
|
|
|
1,025 |
|
|
Stock based compensation |
|
|
831 |
|
|
|
682 |
|
|
Other – net |
|
|
22 |
|
|
|
17 |
|
|
Deferred tax assets |
|
|
19,071 |
|
|
|
19,064 |
|
|
Valuation allowance |
|
|
(19,071 |
) |
|
|
(19,064 |
) |
|
Net deferred tax asset and liability |
|
$ |
— |
|
|
$ |
— |
|
Because of the Company’s recurring losses since inception, management has concluded that it is more likely than not that the benefits of losses to date which result in deferred tax assets will not be realized and, accordingly, the Company provided a full valuation allowance against the net deferred tax assets. The valuation allowance increased by approximately $8,000 in 2017 due to the increase in the deferred tax assets (primarily due to the net operating loss carryforwards) largely offset by a decrease from the deferred tax assets previously being valued at 34% and now being valued at 21%. The change in the tax rate is due to tax reform enacted during 2017, see further discussion below. The valuation allowance increased by approximately $7,464,000 in 2016 due to the increase in the deferred tax assets (primarily due to the net operating loss carryforwards). At December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $61,552,000 and $60,997,000, respectively available to reduce future taxable income, if any. The federal and state net operating loss carryforwards expire beginning in 2029 and ending in 2037, respectively. At December 31, 2017, the Company had available federal and state income tax credits of approximately $294,000 and $287,000, respectively, which are available to reduce future income taxes, if any, through 2037.
Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period. Under the provisions of the Internal Revenue Code, the net operating loss and tax credit carry-forwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit carry-forwards 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%, 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 taxable income or tax liabilities. The amount of the annual limitations 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 several financings 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 but has not completed an analysis of whether a limitation noted above exists. The Company has not performed a Section 382 study yet but it will complete an appropriate analysis before its tax attributes are utilized.
The Company has generated research and development tax credits but has not conducted a study to document its activities that qualify for research and development tax credits. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, since the Company has not conducted a study any adjustment is unknown, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development tax credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development tax credit carry-forwards and the valuation allowance.
The Company files income tax returns in the U.S. federal and Massachusetts jurisdictions. The statute of limitations for assessment by the Internal Revenue Service, or IRS, and state tax authorities is closed for tax years prior to 2014, although carryforward attributes that were generated prior to tax year 2014 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period. The Company is currently not under examination by the Internal Revenue Service or any other jurisdictions for any tax years. The Company’s policy is to record interest and penalties on any unrecognized tax benefits as part of tax expense. The Company has not recorded any interest or penalties on any unrecognized tax benefits since its inception. The Company does not believe material uncertain tax positions have arisen to date.
During the first quarter of 2016, the FASB issued ASU 2016-09 that amends its guidance on certain aspects of accounting for share-based payments to employees. Companies will no longer record excess tax benefits and tax deficiencies related to stock compensation in addition paid-in capital (APIC). Excess tax benefits occur when the amount deductible for an award of equity instruments on the employer’s tax return is more than the cumulative compensation cost recognized for financial reporting purposes. Tax deficiencies occur when the amount deductible for an award of equity instruments on the employer’s tax return is less than the cumulative compensation cost recognized for financial reporting purposes. Under ASU 2016-09, all excess tax benefits and tax deficiencies are recorded as income tax expense or benefit in the income statement in the interim period in which they occur. The Company adopted ASU 2016-09 in the first quarter of 2017 and there was no impact to the income tax provision or footnote as a result of the adoption because the Company did not have any historical excess tax benefits.
On December 22, 2017 the President signed the Tax Cuts and Jobs Act (“TCJA”) which reduced the US corporate income tax rate to 21% effective January 1, 2018 as well as a variety of other changes including the limitation of the tax deductibility of interest expense, acceleration of expensing of certain business assets and reductions in the amount of executive pay that could qualify as a tax deduction. ASC 740 requires us to recognize the effect of the tax law changes in the period of enactment. The Company recalculated its deferred tax balances at the new 21% corporate tax rate and recorded an offset for the net amount as a component of income tax expense. This change was offset by a corresponding change in the valuation allowance because the Company maintains a full valuation allowance as of December 31, 2017. The Securities and Exchange Commission staff issued Staff Accounting Bulletin 118 which allowed the Company to record provisional amounts for the impact of the TCJA during a measurement period which is similar to the measurement period used when accounting for business combinations. At December 31, 2017, the Company made a reasonable estimate of the effects of the TCJA on its existing deferred tax balances. The final impact of the TCJA may differ from this estimate, possibly materially, due to, among other things, changes in interpretations and assumptions the Company has made and guidance that may be issued.
In addition to the reduced corporate rate, TCJA creates a territorial tax system which allows companies to repatriate future foreign source income without incurring taxes and provides a 100% exemption for the foreign source portion of dividends. It also imposes a one-time transiting tax on unearned foreign earnings of foreign subsidiaries of US companies taxes at a 15.55% rate. The bill also imposes a base erosion anti-abuse tax, a tax for any costs paid by a US company to a foreign affiliate that would be capitalized to inventory. Given the Company does not have foreign operations, it determined these changes do not currently affect its income tax provision or footnote.