Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.8.0.1
Income Taxes
12 Months Ended
Dec. 31, 2017
Income Tax Disclosure [Abstract]  
Income Taxes

12. Income Taxes

 

In accordance with the authoritative guidance for income taxes under ASC 740, a deferred tax asset or liability is determined based on the difference between the financial statement and the tax basis of assets and liabilities as measured by the enacted tax rates, which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.

 

The Company recognizes the impact of a tax position in the financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

 

The Company is subject to taxation in the U.S. and various state jurisdictions. Currently no years are under examination. All tax years are subject to examination by the U.S. and state tax authorities due to the carry-forward of unutilized net operating losses and research and development credits.

 

A reconciliation of income tax expense (benefit) for the years ended December 31, 2017, 2016, and 2015 is as follows:

 

    Year Ended December 31,  
    2017     2016     2015  
Current:                        
Federal   $ -     $ -     $ -  
State     -       19       19  
Total current income tax expense     -       19       19  
                         
Deferred:                        
Federal     (6,880 )     (32,421 )     (12,001 )
State     -       3,008       (3,266 )
Total deferred income tax benefit     (6,880 )     (29,413 )     (15,267 )
Total income tax benefit   $ (6,880 )   $ (29,394 )   $ (15,248 )

 

Significant components of the Company’s deferred income taxes at December 31, 2017 and 2016 are shown below (in thousands):

 

    December 31,  
    2017     2016  
Deferred Tax Assets:                
Net operating loss carryforwards   $ 15,003     $ 20,633  
Compensation     961       1,323  
Research and development tax credits     1,789       1,390  
Property and equipment     8       22  
Other     373       545  
                 
Total gross deferred tax assets     18,134       23,912  
                 
Deferred Tax Liabilities                
Acquired in-process research and development     (13,875 )     (20,462 )
                 
Total Deferred Tax Liabilities     (13,875 )     (20,462 )
                 
Net deferred tax assets     4,259       3,450  
Valuation allowance     (17,841 )     (23,912 )
                 
Net Deferred Tax Liability   $ (13,582 )   $ (20,462 )

 

The Company has established a valuation allowance against net deferred tax assets due to the uncertainty that such assets will be realized. The Company periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred tax assets will be realizable, the valuation allowance will be reduced.

  

At December 31, 2017, the Company had federal and California net operating losses, or NOL, carryforwards of approximately $61.7 million and $35.8 million, respectively. The federal NOL carryforwards begin to expire in 2026, and the California NOL carryforwards begin to expire in 2028. At December 31, 2017, the Company also had federal and California research tax credit carryforwards of approximately $1.6 million and $0.3 million, respectively. The federal research tax credit carryforwards begin to expire in 2028, and the California research tax credit carryforwards do not expire and can be carried forward indefinitely until utilized.

 

The above NOL carryforwards and the research tax credit carryforwards may be subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state provisions if the Company experienced one or more ownership changes, which would limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. The Company has not completed an IRC Section 382/383 analysis. If a change in ownership were to have occurred, NOL and tax credit carryforwards could be eliminated or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance.

 

The Company adopted ASU 2016-09 in 2017. The Company has excess tax benefits for which a benefit could not previously be recognized of approximately $13,000. The balance of the unrecognized excess tax benefits has been reversed with the impact recorded to retained earnings including any change to the valuation allowance as a result of the adoption. Due to the full valuation allowance on the U.S. deferred tax assets, there is no impact to the financial statements as a result of this adoption.

 

A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:

 

    Year Ended December 31,  
    2017     2016     2015  
                   
Statutory federal income tax rate     34.0 %     34.0 %     34 %
Change in fair value of warrant liability     4.1 %     0.9 %     (5.2 )%
State income taxes, net of federal benefit     (7.5 )%     4.8 %     0.1 %
Tax credits     3.2 %     0.4 %     0.3 %
Change in valuation allowance     81.2 %     (7.3 )%     (12.5 )%
Permanent differences     1.2 %     -       (0.8 )%
State rate adjustment     -       (5.3 )%     3.3 %
Tax Cuts and Jobs Act     (22.6 )%     -       -  
Equity compensation adjustment     (1.8 )%     -       -  
Return to provision     -       0.9 %     (0.1 )%
Other     -       -       4.5 %
Effective Rate     91.8 %     28.3 %     23.6 %

 

In December 2017, the Tax Cuts and Jobs Act (the “2017 Act”) was enacted. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The 2017 Tax Act also provides for the acceleration of depreciation for certain assets placed in service after September 27, 2017 as well as prospective changes beginning in 2018, including additional limitations on executive compensation, limitations on the deductibility of interest and capitalization of research and development expenditures.

 

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from the highest graduated tax 35 percent to a 21 percent flat tax. The remeasurement of deferred tax liabilities that are indefinite lived intangibles, generated an income tax benefit of $6.6 million, while the remeasurement of the deferred tax assets and liabilities that are not associated with indefinite lived intangibles generated an income tax expense of $8.3 million. The income tax expense of $8.3 million was entirely offset by the Company’s valuation allowance.

 

The Company files income tax returns in the United States and various state jurisdictions. Due to the Company’s incurred losses, the Company is essentially subject to income tax examination by tax authorities from inception to date. The Company’s policy is to recognize interest expense and penalties related to income tax matters as tax expense. At December 31, 2017, there were no significant accruals for interest related to unrecognized tax benefits or tax penalties.