11. Income Taxes
New Tax Legislation
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). This legislation reduced the U.S. corporate tax rate from the current rate of 34% to 21% for tax years beginning after December 31, 2017. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities existing as of December 31, 2017 from the 34% federal rate in effect through the end of 2017, to the new 21% rate. The Company has recognized the impact of the Tax Reform Act in these consolidated financial statements and related disclosures. Due to the complexities involved in accounting for the enactment of the Tax Reform Act, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which allows a registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. In accordance with SAB 118, the Company recorded provisional amounts reflecting the impact of the Tax Reform Act in these consolidated financial statements and related disclosures. The impact of the remeasurement of the Company’s U.S. deferred tax assets and liabilities to 21% resulted in the reduction of deferred tax assets of approximately $9.3 million, which is offset by a full valuation allowance. There was no impact to the Company’s income statement due to the reduction in the U.S. corporate tax rate. Our preliminary estimate of the TCJA and the remeasurement of our deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to certain estimates and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TJCA may require further adjustments and changes in our estimates. The final determination of the TCJA and the remeasurement of the Company’s deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the TCJA.
Income Taxes
The Company records a provision or benefit for income taxes on pre-tax income or loss based on its estimated effective tax rate for the year. During the year ended December 31, 2017, the Company recorded a net loss of approximately $21.7 million and, since it maintains a full valuation allowance on its deferred tax assets, the Company did not record an income tax benefit for the year ended December 31, 2017.
Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The significant components of the Company’s deferred tax assets are comprised of the following (in thousands):
|
|
|
December 31, |
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|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
21,190 |
|
|
$ |
23,028 |
|
|
Research and development credits |
|
|
4,732 |
|
|
|
3,418 |
|
|
Licenses |
|
|
24 |
|
|
|
38 |
|
|
Other |
|
|
370 |
|
|
|
118 |
|
|
Total gross deferred tax asset |
|
|
26,316 |
|
|
|
26,602 |
|
|
Less: Valuation allowance |
|
|
(26,316 |
) |
|
|
(26,602 |
) |
|
Net deferred tax asset |
|
$ |
— |
|
|
$ |
— |
|
ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, the Company has recorded a valuation allowance against its deferred tax assets at December 31, 2017 and 2016, respectively, because the Company's management has determined that it is more likely than not that the Company will not recognize the benefits of its federal and state deferred tax assets primarily due to its cumulative loss position and, as a result, a valuation allowance of $26.3 million and $26.6 million has been established at December 31, 2017 and 2016, respectively. The valuation allowance decreased by approximately $0.3 million in the year ended December 31, 2017 due primarily to the revaluation of the deferred tax assets at a 21% Federal tax rate and increased by approximately $6.3 million during the year ended December 31, 2016 due primarily to the generation of net operating losses.
The Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting on January 1, 2017, however the Company did not have any NOL carryforwards associated with deductible stock option exercises as of December 31, 2016 and therefore the adoption of ASU 2016-09 has no impact on the Company’s operations, financial position or cash flows.
A reconciliation of income tax expense computed at the statutory federal income tax rate to income taxes reflected in the financial statements is as follows:
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|
|
2017 |
|
|
2016 |
|
|
2015 |
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|||
|
Income tax computed at federal statutory tax rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
Permanent differences |
|
|
(2.4 |
)% |
|
|
(0.5 |
)% |
|
|
(0.4 |
)% |
|
State taxes, net of federal benefit |
|
|
4.8 |
% |
|
|
5.1 |
% |
|
|
(0.1 |
)% |
|
Research and development and other tax credits |
|
|
5.0 |
% |
|
|
6.1 |
% |
|
|
5.5 |
% |
|
Other |
|
|
— |
% |
|
|
— |
% |
|
|
0.1 |
% |
|
Federal rate change |
|
|
(42.7 |
)% |
|
|
— |
% |
|
|
— |
% |
|
Change in deferred tax asset valuation allowance |
|
|
1.3 |
% |
|
|
(44.7 |
)% |
|
|
(39.1 |
)% |
|
|
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
As of December 31, 2017 and 2016, the Company had U.S. federal net operating loss carryforwards of approximately $77.9 million and $58.8 million, respectively, which may be available to offset future income tax liabilities and expire at various dates through 2037. As of December 31, 2017 and 2016, the Company also had U.S. state net operating loss carryforwards of approximately $76.5 million and $57.5 million, respectively, which may be available to offset future income tax liabilities and expire at various dates through 2037.
As of December 31, 2017 and 2016, the Company had federal research and development tax credit carryforwards of approximately $3.3 million and $2.4 million, respectively, available to reduce future tax liabilities which expire at various dates through 2037. As of December 31, 2017 and 2016, the Company had state research and development tax credit carryforwards of approximately $1.9 million and $1.6 million, respectively, available to reduce future tax liabilities which expire at various dates through 2032. The Company has generated research credits but has not conducted a study to document the qualified activity. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development 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 credit carryforwards and the valuation allowance.
Under the provisions of the Internal Revenue Code, the net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit 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 resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code.
Ownership changes, as defined in the Internal Revenue Code, including those resulting from the issuance of common stock in connection with our public offerings, may limit the amount of net operating loss and tax credit carryforwards that can be utilized to offset future taxable income or tax liability. The amount of the limitation is determined in accordance with Section 382 of the Internal Revenue Code. We have performed an analysis of ownership changes through December 31, 2017. Based on this analysis, we do not believe that any of our tax attributes will expire unutilized due to Section 382 limitations.
The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017 and 2016, the Company had no accrued interest or penalties related to uncertain tax positions and no such amounts have been recognized in the Company’s statements of operations and comprehensive loss.