|
10. |
Income Taxes |
From inception through December 31, 2016, the Company was a California LLC for federal and state income tax purposes, and therefore, all items of income or loss through December 31, 2016 flowed through to the members of the LLC. Effective January 1, 2017, the Company converted from an LLC to a C-corporation for federal and state income tax purposes. Prior to the conversion to a C-corporation, the Company did not record deferred tax assets or liabilities or have any net operating loss (“NOL”) carryforwards for federal income tax purposes. Effective upon the conversion to a C-corporation, the Company became subject to income tax at the federal and state levels.
We did not record a current or deferred income tax expense or benefit for the years ended December 31, 2017 and 2016. As we were an LLC for the year ended December 31, 2016, we were not subject to federal income tax. A reconciliation of income tax expense (benefit) computed at the statutory federal and state income tax rate of 28% for the year to income tax expense (benefit) as reflected in our financial statements for years ended December 31, 2017 and 2016 are as follows (in thousands):
|
|
|
December 31, |
|
|
|
|
|
2017 |
|
|
|
Federal income tax expense (benefit) at statutory rate |
|
$ |
(2,693 |
) |
|
Change in valuation allowance |
|
|
2,164 |
|
|
Impact of US tax reform |
|
|
1,022 |
|
|
State income tax expense net of federal benefit |
|
|
(514 |
) |
|
Other non-deductible expenses |
|
|
21 |
|
|
Total tax expense (benefit) |
|
$ |
— |
|
The significant components of the Company’s deferred tax assets as of December 31, 2017 are as follows (in thousands):
|
|
|
December 31, |
|
|
|
|
|
2017 |
|
|
|
Deferred tax assets: |
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
2,029 |
|
|
Non-qualified option |
|
|
29 |
|
|
Depreciation |
|
|
(31 |
) |
|
Accrued expenses |
|
|
137 |
|
|
Total deferred tax assets |
|
|
2,164 |
|
|
Valuation allowance |
|
|
(2,164 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on 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.
As of December 31, 2016, the Company had U.S. federal NOL carryforwards of approximately $0 as the company was a flow-through entity. As of December 31, 2017, the Company had U.S. federal NOL carryforwards of approximately $7.4 million which may be available to offset future income tax liabilities and expire at various dates through 2037.
Under the provisions of the Internal Revenue Code, the NOL carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL carryforwards 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 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 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.
Under 2017 Tax Cuts and Jobs Act, NOL deductions for NOLs arising in the tax years beginning after December 31, 2017 will be limited to 80% of taxable income and NOL carrybacks will be eliminated.
The Company files income tax returns in the United States at the federal level and in states in which the Company conducts business activities. The federal and state income tax returns are generally subject to tax examinations for the tax year ended December 31, 2017. 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.