Income Taxes
Prior to its conversion to a Delaware corporation in February 2015, the Company was a Delaware limited liability company, or LLC, that passed through income and losses to its members for U.S. federal and state income tax purposes. As a result of its conversion to a Delaware corporation, the Company recognized deferred income taxes through income tax expense related to temporary differences that existed as of the date of its tax status change.
As of the date of the conversion to a taxable corporation, the Company recognized approximately $17.9 million of deferred tax assets which consisted principally of excess tax-over-book basis in intangible assets and property, plant and equipment and certain accruals that were transferred from the limited liability company to the corporation. The Company also recognized a full valuation allowance since it had a cumulative loss position and no positive evidence of taxable income to support recovery of the deferred tax assets. The Company incurred transaction costs of approximately $8.1 million in connection with its initial public offering in 2015 were recorded as a reduction of equity. These costs are nondeductible until and if the Company liquidates or terminates operations, which is not expected in the foreseeable future. Therefore, the Company did not recognize a deferred tax asset for such costs.
The Company’s tax rate for 2017 is a 0.00% because the Company expects to generate additional losses and currently has a full valuation allowance. The Company’s tax rate for 2016 is a 1.8% benefit due to the sale of R&D tax credits in November 2016. The Company was an LLC as of December 31, 2014 and until February 12, 2015 when it converted to a C corporation. Although, the Company was not subject to income taxes in any jurisdiction while it was an LLC, one of the Company’s subsidiaries was a C-corporation and subject to state and federal income taxes. This subsidiary generated an immaterial operating loss in the short year ended February 12, 2015. Accordingly, no provision or benefit for income taxes is reflected in the Company’s 2015 consolidated financial statements.
On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1), or the Tax Act, was signed into law. The Tax Act contains significant changes to corporate taxation, including (i) the reduction of the corporate income tax rate to 21%, (ii) the acceleration of expensing for certain business assets, (iii) the one-time transition tax related to the transition of U.S. international tax from a worldwide tax system to a territorial tax system, (iv) the repeal of the domestic production deduction, (v) additional limitations on the deductibility of interest expense, and (vi) expanded limitations on executive compensation.
The key impacts of the Tax Act on our financial statement for the year ended December 31, 2017, were the re-measurement of deferred tax balances to the new corporate tax rate. Due to the fact that the company maintains a full valuation allowance on its deferred tax assets and there was no impact to the balance sheet or statements of operations for this re-measurement.
We may be subject to certain limitations in our annual utilization of NOL carry forwards to off-set future taxable income (and of tax credit carry forwards to off-set future tax expense) pursuant to Section 382 of the Internal Revenue Code, which could result in tax attributes expiring unused.
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2017, 2016 and 2015 is as follows:
|
| | | | | | | | |
| Year Ended December 31,
2017 | | Year Ended December 31,
2016 | | Year Ended December 31,
2015 |
U.S. federal statutory rate | 34 | % | | 34 | % | | 34 | % |
2017 Tax Act | (23.9 | )% | | — | % | | — | % |
State and local taxes, net of federal tax effect | 5.7 | % | | 6.6 | % | | 5.8 | % |
Research tax credits | 10.4 | % | | 13.7 | % | | 15.8 | % |
Valuation allowance | (4.5 | )% | | (38.9 | )% | | (55.1 | )% |
Prior year adjustments | 0.9 | % | | (13.7 | )% | | — | % |
Sale of R&D tax credits | — | % | | (1.8 | )% | | — | % |
Expenses associated with common stock warrant liability (a) | (18.9 | )% | | (1.3 | )% | | — | % |
Incentive stock options, non-deductible | (3.8 | )% | | (0.4 | )% | | (0.5 | )% |
| 0 | % | | (1.8 | )% | | 0 | % |
(a) Represents change in fair value and attributable issuance costs
Deferred taxes as of December 31, 2017 and 2016 reflect the tax effects of the differences between the amounts recorded as assets and liabilities for financial reporting purposes and the comparable amounts recorded for income tax purposes.
Significant components of the deferred tax assets (liabilities) at December 31, 2017 are as follows (in thousands):
|
| | | | | | | |
| December 31, 2017 |
| Assets | | (Liabilities) |
Net operating loss carryforwards | $ | 21,006 |
| | $ | — |
|
Research tax credit carryforwards | 22,246 |
| | — |
|
Property and equipment | — |
| | (89 | ) |
Stock based compensation | 980 |
| | — |
|
Intangible assets | 7,354 |
| | — |
|
Accrued expenses | 562 |
| | — |
|
Subtotal | 52,148 |
| | (89 | ) |
Valuation allowance | (52,059 | ) | | — |
|
Total deferred tax assets (liabilities) | $ | 89 |
| | $ | (89 | ) |
Net deferred tax assets | $ | — |
| | |
|
Significant components of the deferred tax assets (liabilities) at December 31, 2016 are as follows (in thousands):
|
| | | | | | | |
| December 31, 2016 |
| Assets | | (Liabilities) |
Net operating loss carryforwards | $ | 21,469 |
| | $ | — |
|
Research tax credit carryforwards | 15,310 |
| | — |
|
Property and equipment | — |
| | (161 | ) |
Stock based compensation | 881 |
| | — |
|
Intangible assets | 11,389 |
| | — |
|
Accrued expenses | 713 |
| | — |
|
Subtotal | 49,762 |
| | (161 | ) |
Valuation allowance | (49,601 | ) | | — |
|
Total deferred tax assets (liabilities) | $ | 161 |
| | $ | (161 | ) |
Net deferred tax assets | $ | — |
| | |
|
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2017, management believed that it was more likely than not that the deferred tax assets would not be realized, based on future operations, consideration of tax strategies and the reversal of deferred tax liabilities. The valuation allowance is required until the Company has sufficient positive evidence of taxable income necessary to support realization of its deferred tax assets. A valuation allowance release is recognized as an income tax benefit.
As of December 31, 2017, the Company has available net operating loss, or NOL, carry forwards for federal income tax reporting purposes of approximately $69.3 million and for state income tax reporting purposes of approximately $90.6 million, which expire at various dates between fiscal 2034 and 2037. The Company has sold $61.5 million of state NOLs and $0.2 million of Research and Development credits under the State of New Jersey’s Technology Business Tax Certificate Transfer Program in February 2018 and plans to sell additional NOLs and credits under the same program later in 2018 subject to state approval. As of December 31, 2017 and 2016, the Company had no material uncertain tax positions.