INCOME TAXES
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the federal tax rate, the Company remeasured its ending net deferred tax assets and liabilities as of December 31, 2017. This remeasurement resulted in a $10.8 million revaluation to net deferred tax assets, which was equally offset by a reduction to the recorded valuation allowance.
Since its inception, the Company has incurred net taxable losses, and accordingly, no current provision for income taxes has been recorded. This amount differs from the amount computed by applying the U.S. federal income tax rate of 35.0% to pretax loss due to the provision of a valuation allowance to the extent of the Company’s net deferred tax asset, as well as to state income taxes and nondeductible expenses.
The effective income tax rate of the provision for income taxes differs from the federal statutory rate as follows:
|
| | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Federal statutory income tax rate | 35.0 | % | | 35.0 | % |
State income taxes, net of federal benefit | 3.1 |
| | 3.2 |
|
Federal and state tax credits | (4.8 | ) | | 5.2 |
|
Transaction costs | (2.9 | ) | | — |
|
Amortization of interest and related charges | — |
| | (0.1 | ) |
Other permanent items | 1.9 |
| | (0.4 | ) |
Change in valuation allowance | 14.5 |
| | (43.0 | ) |
Change in tax rate | (40.7 | ) | | — |
|
Net operating loss reduction | (6.7 | ) | | — |
|
Other, net | 0.6 |
| | 0.1 |
|
Effective income tax rate | — | % | | — | % |
Temporary differences and carryforwards giving rise to deferred tax assets and liabilities were as follows:
|
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
| (in thousands) |
Net operating loss carryforwards | $ | 18,257 |
| | $ | 20,961 |
|
Tax credits | 2,287 |
| | 2,785 |
|
Accruals and reserves | 697 |
| | 1,182 |
|
Start-up costs | 829 |
| | 1,414 |
|
Stock-based expense | 439 |
| | — |
|
Gross deferred tax assets | 22,509 |
| | 26,342 |
|
Valuation allowance | (22,509 | ) | | (26,342 | ) |
Net deferred tax assets | $ | — |
| | $ | — |
|
At December 31, 2017, the Company had approximately $73.2 million and $2.3 million of net operating loss and research and experimentation tax carryforwards, respectively, which will begin to expire in 2028. In addition, the realization of net operating losses to offset potential future taxable income and related income taxes that would otherwise be due is subject to annual limitations under the provisions of Internal Revenue Code Sections 382 and 383 and similar state provisions, which may result in the expiration of additional net operating losses before future utilization as a result of ownership changes. As a result of these ownership change provisions, the Company estimated an aggregate limitation on the utilization of net operating losses of $4.6 million. In addition to the limitation of net operating losses of $4.6 million, approximately $2.8 million of research and development tax credits were derecognized with the inability of the Company to ever realize a benefit from those credits in the future.
As of December 31, 2017 and 2016, the Company’s net deferred tax assets before valuation allowance was $22.5 million and $26.3 million, respectively. In assessing the realizability of its deferred tax assets, the Company considers whether it is more likely than not that some portion or all of its 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 periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As the Company does not have any historical taxable income or projections of future taxable income over the periods in which the deferred tax assets are deductible, and after consideration of its history of operating losses, the Company does not believe it is more likely than not that it will realize the benefits of its net deferred tax assets, and accordingly, has established a valuation allowance equal to 100% of its net deferred tax assets at December 31, 2017 and 2016. The change in valuation allowance was a decrease of $3.8 million in 2017 and an increase of $7.4 million in 2016.
The Company has concluded that there were no significant uncertain tax positions relevant to the jurisdictions where it is required to file income tax returns requiring recognition in the consolidated financial statements for the years ended 2017 and 2016. As of December 31, 2017 and 2016, the Company had no accrued interest related to uncertain tax positions.
The Company’s federal and state returns for 2013 through 2017 remain open to examination by tax authorities.