(10) Income Taxes
Effective June 1, 2005, the Company changed from an S-Corporation to a C-Corporation. As an S-Corporation, the net operating loss carryforwards were distributed to the Company’s stockholders; such amounts were not significant. As of December 31, 2017, the Company has net operating loss carryforwards of approximately $156.4 million, and approximately $1.7 million of research and development credits that may be used to offset future taxable income. The Company’s net operating loss carryforwards will expire beginning 2025 through 2037. Utilization of net operating losses and tax credits, including those acquired as a result of the Merger, will be subject to an annual limitation due to ownership change limitations provided by Internal Revenue Code Section 382. The Company believes that an ownership change limitation as defined under Section 382 of the U.S. Internal Revenue Code occurred as a result of its various historical financing transactions, and its offering of common stock completed in June 2015. Future utilization of the federal net operating losses and tax credit carryforwards accumulated from June 2005 to the change in ownership date will be subject to annual limitations to offset future taxable income. The annual limitation may result in the expiration of the net operating losses and credits before utilization. As such, a portion of the Company’s net operating loss carryforwards may be limited.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Due primarily to the Company’s history of operating losses, management is unable to conclude that it is more likely than not that the Company will realize the benefits of these deductible differences, and accordingly has provided a valuation allowance against the entire net deferred tax asset of approximately $41.6 million at December 31, 2017, reflecting a decrease of approximately $13.2 million from December 31, 2016. Deferred tax assets decreased $20.1 million related to the remeasurement of the deferred tax assets from 34% to the new 2018 U.S. Federal corporate income tax rate of 21%. The deferred tax assets are primarily comprised of net operating loss carryforwards and research and experimentation credit carryforwards. As of December 31, 2017, the Company has not performed an Internal Revenue Code Section 382 limitation study. Depending on the outcome of such a study, the gross amount of net operating losses recognizable in future tax periods could be limited. A limitation in the carryforwards would decrease the carrying amount of the gross amount of the net operating loss carryforwards, with a corresponding decrease in the valuation allowance recorded against these gross deferred tax assets.
Income tax benefit for the year ended December 31, 2017 was related to a federal research and experimentation income tax credits related to the Protecting Americans from Tax Hikes Act of 2015, or PATH Act, which allows qualified small businesses to monetize up to $250,000 of research and experimentation tax credits through payroll tax refunds. We had no income tax benefit during the year ended December 31, 2016, as the PATH Act refunds were not effective until 2017. Income tax benefit attributable to our loss from operations before income taxes differs from the amounts computed by applying the U.S. federal statutory income tax rate of 34% for 2017 and 2016, as a result of the following (in thousands):
|
|
Years ended December 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
U.S. federal income tax benefit at statutory rates |
$ |
(6,286 |
) |
|
$ |
(5,591 |
) |
|
State income tax benefit, net of federal benefit |
|
(565 |
) |
|
|
(502 |
) |
|
Research and experimentation credits |
|
(303 |
) |
|
|
(268 |
) |
|
Change in tax rate |
|
20,085 |
|
|
|
— |
|
|
Deferred tax asset adjustment |
|
37 |
|
|
|
65 |
|
|
Other |
|
122 |
|
|
|
137 |
|
|
Change in valuation allowance |
|
(13,151 |
) |
|
|
6,159 |
|
|
Income tax benefit |
$ |
(61 |
) |
|
$ |
— |
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes, as well as operating loss and tax credit carryforwards. The income tax effects of temporary differences and carryforwards that give rise to significant portions of the Company’s net deferred tax assets consisted of the following (in thousands):
|
|
As of December 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
Net operating loss carryforwards |
$ |
38,566 |
|
|
$ |
51,758 |
|
|
Charitable contribution carryforwards |
|
455 |
|
|
|
552 |
|
|
Research and experimentation credits |
|
1,682 |
|
|
|
1,440 |
|
|
Capitalized intangibles |
|
608 |
|
|
|
781 |
|
|
Stock based compensation |
|
148 |
|
|
|
193 |
|
|
Depreciation and amortization |
|
1 |
|
|
|
6 |
|
|
Accrued compensation |
|
168 |
|
|
|
35 |
|
|
Other |
|
— |
|
|
|
14 |
|
|
Total deferred tax assets |
|
41,628 |
|
|
|
54,779 |
|
|
Valuation allowance |
|
(41,628 |
) |
|
|
(54,779 |
) |
|
Net deferred tax assets |
$ |
— |
|
|
$ |
— |
|
Since the Company is in a loss carryforward position, the Company is generally subject to U.S. federal and state income tax examinations by tax authorities for all years for which a loss carryforward is available. Thus, the Company’s open tax years extend back to 2009. The Company believes that its tax filing positions and deductions related to tax periods subject to examination will be sustained upon audit and does not anticipate any adjustment will result in a material adverse effect on the Company’s financial condition, result of operations, or cash flow. For the years ended December 31, 2017 and 2016, the Company has no reserve for uncertain tax positions. The Company does not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease within the subsequent twelve months. In the event the Company concludes it is subject to interest or penalties arising from uncertain tax positions, the Company will record interest and penalties as a component of other income and expense. No interest or penalties were recognized in the financial statements for the years ended December 31, 2017 and 2016.