15. Income Taxes
We file tax returns as prescribed by the tax laws of the jurisdictions in which we operate. In the normal course of business, our 2014 through 2017 tax years will be subject to examination by the federal and state jurisdictions where applicable. We have not been, nor are we currently, under examination by the federal or any state tax authority.
Our effective income tax rate differs from the statutory federal rate of 34% for the years ended December 31, 2017 and 2016, due to the following, in thousands:
|
|
|
Years Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Income taxes at statutory federal rate |
|
$ |
(12,048 |
) |
|
$ |
(9,370 |
) |
|
State income tax, net of federal benefit |
|
|
(2,226 |
) |
|
|
(1,823 |
) |
|
Share-based compensation |
|
|
1,046 |
|
|
|
564 |
|
|
Research and development tax credits |
|
|
(476 |
) |
|
|
(398 |
) |
|
Other |
|
|
(209 |
) |
|
|
(112 |
) |
|
Impact of Tax Act |
|
|
9,517 |
|
|
|
— |
|
|
Valuation allowance |
|
|
4,396 |
|
|
|
11,139 |
|
|
Income tax expense |
|
$ |
— |
|
|
$ |
— |
|
Significant components of our deferred tax assets at December 31, 2017 and 2016 are shown below, in thousands:
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
22,050 |
|
|
$ |
18,321 |
|
|
Research and development tax credit carryforwards |
|
|
1,690 |
|
|
|
971 |
|
|
Intangibles |
|
|
708 |
|
|
|
982 |
|
|
Accruals |
|
|
692 |
|
|
|
809 |
|
|
Share-based compensation |
|
|
601 |
|
|
|
267 |
|
|
Other |
|
|
110 |
|
|
|
104 |
|
|
Total deferred tax assets |
|
|
25,851 |
|
|
|
21,454 |
|
|
Less valuation allowance |
|
|
(25,851 |
) |
|
|
(21,454 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
Public Law No. 115-97 known as the Tax Cut and Jobs Act, or the Tax Act, was enacted on December 22, 2017. The Tax Act includes numerous changes in existing tax law, including a permanent reduction in the maximum federal corporate income tax rate from 35% to 21%. The rate reduction is effective January 1, 2018. As a result of the Tax Act, we have revalued our net deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally 21% for our Federal deferred tax assets. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our net deferred tax balance was a reduction of $9.5 million. The revaluation does not result in any additional income tax expense as our net deferred tax assets are fully offset by the valuation allowance. The calculations are subject to revision as additional analysis is completed and interpretation and examination of the tax legislation evolves.
At December 31, 2017, we had federal and state net operating loss, or NOL, carryforwards of $75.4 million and $90.9 million, respectively. The federal loss carryforwards begin to expire in 2034, unless previously utilized. We have $90.4 million of state losses that begin to expire in 2034 and $0.5 million of state loss carryforwards that begin to expire in 2030, unless previously utilized. We also have federal and state research and development credit carryforwards of $1.4 million (net of $0.5 million to be utilized as a payroll tax offset) and $1.0 million, respectively. The federal research and development credits will begin to expire in 2034, unless previously utilized. Of the state research and development credits, $0.9 million will carryforward indefinitely and approximately $0.1 million will begin to expire in 2031, unless previously utilized. In 2017 and 2016, pursuant to Section 41(h) of the Internal Revenue Code of 1986, as amended, or IRC, which was added as part of the Protecting Americans from Tax Hikes Act of 2015, we qualified to elect approximately $0.3 million federal research and development credits to be utilized as an offset against future payroll taxes. Accordingly, in 2017 and 2016, we have recognized benefit of approximately $0.3 million in each year as an offset to research and development expenses.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use existing deferred tax assets. Based on the weight of the evidence, including our limited existence and losses since inception, management has determined that it is more likely than not that the deferred tax assets will not be realized. The valuation allowance increased by $4.4 million and $11.1 million from December 31, 2016 to December 31, 2017 and from December 31, 2015 to December 31, 2016, respectively.
Pursuant to Sections 382 and 383 of the IRC annual use of our NOL or research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. We previously completed a study to assess whether an ownership change, as defined by IRC Section 382, had occurred from our formation through March 31, 2016. Based upon this study, we determined that an ownership change occurred but concluded the annual utilization limitation would be sufficient to utilize our pre-ownership change NOLs and research and development credits prior to expiration. We completed an additional study and concluded no further ownership changes occurred through December 31, 2017. Future ownership changes may limit our ability to utilize remaining tax attributes. Any carryforwards that will expire prior to utilization as a result of such additional limitations will be removed from deferred tax assets, with a corresponding reduction of the valuation allowance.
In accordance with authoritative guidance, the impact of an uncertain income tax position is recognized at the largest amount that is “more likely than not” to be sustained upon audit by the relevant taxing authority. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained.
The following table summarizes the activity related to our unrecognized tax benefits, in thousands:
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Gross unrecognized tax benefits at the beginning of the year |
|
$ |
358 |
|
|
$ |
167 |
|
|
Increases related to prior year tax positions |
|
|
42 |
|
|
|
— |
|
|
Increases from tax positions taken in the current year |
|
|
215 |
|
|
|
191 |
|
|
Gross unrecognized tax benefits at the end of the year |
|
$ |
615 |
|
|
$ |
358 |
|
Our practice is to recognize interest and penalties related to income tax matters in income tax expense. We did not have any accrued interest or penalties included on the balance sheets and have not recognized interest and penalties on the statements of operations and comprehensive loss for the years ended December 31, 2017 or 2016.
We do not expect that there will be a significant change in the unrecognized tax benefits over the next 12 months. Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits will not impact our effective tax rate.