INCOME TAXES
The benefit from income taxes by jurisdiction consist of the following for the years ended December 31, 2016 and 2017:
|
| | | | | | | |
| Year Ended December 31, 2016 | | Year Ended December 31, 2017 |
U.S. federal | | | |
Current | $ | — |
| | $ | — |
|
Deferred | — |
| | — |
|
Total U.S. federal | — |
| | — |
|
U.S. state and local | | |
|
|
Current | 1,000 |
| | 1,000 |
|
Deferred | — |
| | — |
|
Total U.S. state and local | 1,000 |
| | 1,000 |
|
Foreign | | |
|
|
Current | — |
| | — |
|
Deferred | (23,000 | ) | | (15,000 | ) |
Total foreign | (23,000 | ) | | (15,000 | ) |
Benefit from income taxes | $ | (22,000 | ) | | $ | (14,000 | ) |
Income taxes differ from the amounts computed by applying the U.S. federal income tax rate to pretax income (loss) before income taxes as a result of the following for the years ended December 31, 2016 and 2017:
|
| | | | | | | |
| Year ended December 31, 2016 | | Year ended December 31, 2017 |
Expected income tax benefit | $ | (5,191,000 | ) | | $ | (7,357,000 | ) |
State income tax (benefit), net of federal benefit | (1,022,000 | ) | | (1,176,000 | ) |
Valuation allowance | 6,219,000 |
| | 7,398,000 |
|
Permanent differences: |
|
| |
|
|
Stock options | 173,000 |
| | 95,000 |
|
Warrants | — |
| | 914,000 |
|
Transaction costs | 31,000 |
| | — |
|
Research & development credit | (267,000 | ) | | (263,000 | ) |
Adjustment to deferred taxes | (12,000 | ) | | 267,000 |
|
Foreign rate differential | 28,000 |
| | 19,000 |
|
Other | 19,000 |
| | 89,000 |
|
Provision for (benefit from) for income taxes | $ | (22,000 | ) | | $ | (14,000 | ) |
For year ended December 31, 2016 and 2017, we recorded a net income tax benefit of $22,000 and $14,000, respectively, which included $1,000 and $1,000 of income tax expense offset by $23,000 and $15,000, respectively, for the change in deferred foreign taxes. Deferred income tax reflects the tax effects of temporary differences that gave rise to significant portions of our deferred tax assets and liabilities.
Deferred income taxes consisted of the following as of December 31, 2016 and 2017:
|
| | | | | | | | |
| | Year ended December 31, 2016 | | Year ended December 31, 2017 |
U.S. federal and state deferred tax assets—long term: | | | | |
Accrued payroll | | $ | 525,000 |
| | $ | 376,000 |
|
Accrued expenses | | — |
| | 21,000 |
|
Fixed assets | | 80,000 |
| | 111,000 |
|
Intangibles | | 702,000 |
| | 457,000 |
|
Research & development credit | | 1,257,000 |
| | 1,464,000 |
|
Net operating loss | | 11,515,000 |
| | 13,204,000 |
|
Stock compensation | | 772,000 |
| | 539,000 |
|
New jobs credit | | 7,000 |
| | 8,000 |
|
Total long-term assets | | 14,858,000 |
| | 16,180,000 |
|
Total deferred tax assets | | 14,858,000 |
| | 16,180,000 |
|
U.S. federal and state deferred tax liabilities—long term: | | | | |
Fixed assets | | — |
| | — |
|
Total deferred tax liabilities | | — |
| | — |
|
Net deferred tax assets - long term | | 14,858,000 |
| | 16,180,000 |
|
Less: Valuation allowance | | (14,858,000 | ) | | (16,180,000 | ) |
Net deferred tax assets | | $ | — |
| | $ | — |
|
| | | | |
Foreign deferred tax assets—long term: | | | | |
Net operating loss | | $ | 16,000 |
| | $ | 12,000 |
|
Total foreign deferred tax assets | | 16,000 |
| | 12,000 |
|
Foreign deferred tax liabilities—long term: | | | |
|
|
Intangibles | | (32,000 | ) | | (13,000 | ) |
Total foreign deferred tax liabilities | | (32,000 | ) | | (13,000 | ) |
Net foreign deferred tax liabilities | | $ | (16,000 | ) | | $ | (1,000 | ) |
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act represents major tax reform legislation that, among other provisions, reduced the U.S. corporate tax rate. The reduction in the tax rate reduced our federal and state net deferred tax assets by $6.1 million, primarily related to our net operating loss carryforwards. Due to the full valuation allowance recorded against our federal and state net deferred tax assets, there was no impact to our income tax expense for the year ended December 31, 2017.
We recorded a full valuation allowance against our U.S. federal and state net deferred tax assets at December 31, 2016 and December 31, 2017. In determining the need for a valuation allowance, we reviewed all available evidence pursuant to the requirements of FASB ASC 740. Based upon our assessment of all available evidence, we have concluded that it is more likely than not that the net deferred tax assets will not be realized. For the year ended December 31, 2016, the valuation allowance increased by $6.2 million. For the year ended December 31, 2017, the valuation allowance increased by $1.3 million.
As of December 31, 2017, we had federal net operating loss carryforwards of approximately $47.0 million, state net operating loss carryforwards of approximately $46.9 million and foreign net operating loss carryforwards of $75,000 in Switzerland. The federal net operating loss carryforwards will begin to expire in 2033, and the state net operating loss carryforwards will begin to expire in 2033. Our ability to utilize net operating loss carryforwards may be limited in the event that a change in ownership, as defined in Section 382 of the Internal Revenue Code, occurs in the future. In the event a change of ownership occurs, it will limit the annual usage of the carryforwards in future years. Management believes that certain changes in control have occurred which resulted in limitations on our net operating loss carryforwards; however, management has determined that these limitations will not impact the ultimate utilization of the net operating loss carryforwards.
We recognize interest and penalties related to income tax matters in income taxes, and there were none during the years ended December 31, 2016 and 2017.
The adoption of ASC 740 guidance required us to identify, evaluate and measure all uncertain tax positions taken or to be taken on tax returns and to record liabilities for the amount of these positions that may not be sustained, or may only partially be sustained, upon examination by the relevant taxing authorities. Although we believe that our estimates and judgments were reasonable, actual results may differ from these estimates. Some or all of these judgments are subject to review by the taxing authorities. We have no significant uncertain tax positions for the years ended December 31, 2016 and 2017.
Our annual income taxes and the determination of the resulting deferred tax assets and liabilities involve a significant amount of judgment. Our judgments, assumptions and estimates relative to current income taxes take into account current tax laws, their interpretation of current tax laws and possible outcomes of future audits conducted by domestic tax authorities. We operate within federal and state taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve. We are currently not being examined by any tax authorities. We are subject to taxation in the United States, California, Massachusetts and Switzerland. As of December 31, 2017, our tax years remain open to examination by the taxing authorities for all years since our incorporation in 2013.