10. Income Taxes
The Company has not recorded a current or deferred tax expense or benefit for the years ended December 31, 2017, 2016 or 2015.
The (benefit) provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:
|
|
|
Years Ended December 31, |
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|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
Adjustments for tax effects of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net |
|
|
5.7 |
% |
|
|
5.6 |
% |
|
|
5.6 |
% |
|
Permanent adjustments |
|
|
(4.5 |
)% |
|
|
(5.4 |
)% |
|
|
(4.8 |
)% |
|
Tax Cuts and Jobs Act |
|
|
(3.7 |
)% |
|
|
— |
% |
|
|
— |
% |
|
Net operating loss carryovers not recognized |
|
|
(30.4 |
)% |
|
|
(32.8 |
)% |
|
|
(33.3 |
)% |
|
Valuation allowance |
|
|
(1.0 |
)% |
|
|
(1.1 |
)% |
|
|
(1.7 |
)% |
|
Other |
|
|
(0.1 |
)% |
|
|
(0.3 |
)% |
|
|
0.2 |
% |
|
Effective income tax rate |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. Significant components of the Company’s deferred taxes are as follows (in thousands):
|
|
|
December 31, |
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|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
52 |
|
|
$ |
52 |
|
|
Deferred license revenue |
|
|
15 |
|
|
|
38 |
|
|
Share-based compensation |
|
|
1,459 |
|
|
|
1,062 |
|
|
Accrued liabilities and other |
|
|
808 |
|
|
|
796 |
|
|
Total deferred tax assets |
|
|
2,334 |
|
|
|
1,948 |
|
|
Less valuation allowance |
|
|
(2,334 |
) |
|
|
(1,948 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based upon the Company’s history of operating losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of December 31, 2017 and 2016. During 2017 and 2016, the valuation allowance increased by $0.4 million and $0.4 million, respectively.
The Company has federal and California net operating loss carryforwards which may be available to offset future income tax liabilities. As of December 31, 2017, the Company has federal and California net operating loss carryforwards of $137.8 million and $41.5 million, respectively. The federal and state net operating losses begin to expire in 2028 unless previously utilized. Excluded from the California net operating loss carryforward are net operating losses for the years ended December 31, 2013, 2014, 2015, 2016 and 2017 which were impacted by a California Supreme Court ruling on December 31, 2015. This ruling clarified how companies are allowed to apportion income or losses in the state. As a result of the ruling, the Company has completed an analysis to determine the re-apportionment of its losses to California using the required single sales factor market sourcing method for 2013 through 2017 by treating its passive interest income as California-source income which results in a 100% apportionment percentage to California. While this portion may not reach the more-likely-than-not recognition threshold, the Company has excluded a cumulative net operating loss of $109.6 million from its California net operating loss carryforward.
As of December 31, 2017, the Company has federal and California research and development tax credit carryforwards of $20.5 million and $4.7 million, respectively. The federal research and development tax credits begin to expire in 2028 unless previously utilized. The California credits do not expire.
Pursuant to Internal Revenue Code (IRC) Sections 382 and 383, annual use of a company’s net operating loss and tax credit carryforwards may be limited if there is a cumulative change in ownership of greater than 50% within a three-year period. 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 several equity offerings since its inception which may have resulted in a change in control as defined by Sections 382 and 383 of the IRC, or could result in a change in control in the future. The Company has not completed an IRC Section 382 and 383 analysis regarding the limitation of net operating loss and research and development credit carryforwards. Until such an analysis has been completed, the Company has removed the deferred tax assets for net operating losses of $31.8 million and federal and California research and development credits of approximately $24.2 million from its deferred tax asset schedule, and has recorded a corresponding decrease to its valuation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits accordingly. The Company does not expect this analysis to be completed within the next 12 months and, as a result, the Company does not expect that the unrecognized tax benefits will change within 12 months of this reporting date. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.
The Company’s policy is to record interest and penalties relating to uncertain tax positions as a component of income tax expense. As of December 31, 2017 and 2016, there was no accrued interest or penalties for uncertain tax positions.
The Company is subject to taxation in the U.S. and state jurisdictions. As of December 31, 2017, the Company’s tax years beginning 2007 to date are subject to examination by federal and California taxing authorities due to the carry forward of unutilized net operating losses and research and development tax credits. 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.
Pursuant to the federal tax legislation that was enacted on December 22, 2017 (the Tax Act), the Company re-measured its existing deferred tax assets and liabilities based on 21%, the current rate at which they are expected to reverse in the future. As of December 31, 2017, the Company recorded a provisional amount of $1.4 million relating to the re-measurement of its existing deferred tax asset balance, and it was fully offset by a decrease in its valuation allowance.
As of December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Tax Act and it will continue to refine its calculations as additional analysis is completed. The additional analysis could potentially affect the measurement of the Company’s existing deferred tax balances or potentially give rise to new deferred tax amounts. In addition, the Company’s estimates may also be affected as it gains a more thorough understanding of the tax law.