Income Taxes

12 Months Ended

Dec. 31, 2019

11.

Income

Taxes

There is no provision for income taxes because the Company has incurred operating losses since inception. The reported amount of income tax expense for the years differs from the amount that would result from applying domestic federal statutory tax rates to pretax losses primarily because of the changes in the valuation allowance. Significant components of the Company’s deferred tax assets at December 31, 2019 and 2018 are as follows:


	December 31,
(in thousands)	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	124,115		$	106,430
Start-up and organizational costs		30,480			33,977
Research and development credit carryforwards		35,130			33,684
Stock compensation		1,087			990
Capitalized acquisition costs		4,501			5,160
Lease liability		626			—
Depreciation		176			132
Other		1,186			920

		197,301			181,293
Less valuation allowance		(196,696	)		(181,293	)

Total deferred tax assets		605			—

Deferred tax liabilities:
Right of use asset		(605	)		—

Total deferred tax liabilities	$	(605	)	$	—

Net deferred tax e s	$	—		$	—

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 2019, the Company has aggregate net operating loss carryforwards for federal tax purposes of approximately $470 million, of which $342 million is available to offset future federal taxable income to the extent permitted under the Internal Revenue Code, or IRC, expiring in varying amounts through 2039 and approximately $128 million can be carried forward indefinitely. The Company also has approximately $404 million of state net operating loss carryforwards available to offset future state taxable income, expiring at various dates through 2039. Additionally, the Company has approximately $35.0 million of research and development credits at December 31, 2019, expiring in varying amounts through 2039, which may be available to reduce future taxes.

In March 2016, the FASB issued ASU

No. 2016-09,

“Improvements to Employee Share-Based Payment Accounting” (ASU

2016-09),

which is intended to simplify several aspects of accounting for share-based payment transactions, including the income tax effects, statutory withholding requirements, forfeitures, and classification on the statement of cash flows. ASU

2016-09

is effective for annual reporting periods after December 15, 2016, including interim reporting periods within each annual reporting period. The Company adopted this standard on January 1, 2017. The update revises requirements in the following areas: minimum statutory withholding, accounting for income taxes, and forfeitures. Prior to adoption, the Company recognized share-based compensation, net of estimated forfeitures, over the vesting period of the grant. Upon adoption of ASU

2016-09,

the Company elected to change its accounting policy to recognize forfeitures as they occur. The new forfeiture policy election was adopted using a modified retrospective approach with a cumulative effect adjustment of $122 thousand recorded to retained earnings as of January 1, 2017. The update requires the Company to recognize the income tax effect of awards in the income statement when the awards vest or are settled without triggering a liability. The income tax related items had no effect on the current period presentation and the Company maintains a full valuation allowance against its deferred tax assets. As a result, an accumulated excess tax benefit of 10.2 million was recognized as a deferred tax asset with a full valuation allowance against it. Additionally, the Company continued to estimate the number of awards expected to be vested. The adoption had no material impact on the Company’s financial statements for the 2017 tax year or the interim periods within.

In May 2014, the FASB issued an accounting standard update which provides for new revenue recognition guidance, superseding nearly all prior revenue recognition guidance. The new revenue standard outlines a single comprehensive model for accounting for revenue from contracts with customers and requires more detailed revenue disclosures.

The Company adopted the new revenue standard on January 1, 2018 and as a result of the adoption increased deferred revenue by $8.1 million and decreased retained earnings by the same amount. Previously the Company had recorded revenue of $15.9 million and had deferred revenue of $41.5 million at December 31, 2017. The increase in the deferred revenue represented the recapture of revenue that was previously recorded and taxed. There was no impact to tax as the increase to the deferred tax asset was fully offset by the Company’s full valuation allowance.

Under the IRC Section 382, certain substantial changes in the Company’s ownership may limit the amount of net operating loss carryforwards that can be utilized in any one year to offset future taxable income.

Section 382 of the IRC provides limits to which a corporation that has undergone a change in ownership (as defined) can utilize any net operating loss, or NOL, and general business tax credit carryforwards it may have. The Company commissioned an analysis to determine whether Section 382 could limit the use of its carryforwards in this manner. After completing the analysis, it was determined an ownership change had occurred in February 2007. As a result of this change, the Company’s NOL’s and general business tax credits from February 23, 2007 and prior would be completely limited under IRC Section 382. The deferred tax assets related to NOL’s and general business credits have been reduced by $11.2 million and $636 thousand, respectively, as a result of the change. The Company updated the IRC Section 382 analysis through December 31, 2018. There was no change in ownership at this time.

The Company has provided a valuation allowance for the full amount of these net deferred tax assets, since it is more likely than not that these future benefits will not be realized. However, these deferred tax assets may be available to offset future income tax liabilities and expenses. The valuation allowance

creased by $15.4 million in 2019 primarily due to net operating loss carryforwards and the increase in research and development credits.

Income taxes using the federal statutory income tax rate differ from the Company’s effective tax rate primarily due to

non-deductible

expenses related to the Company’s issuance of preferred stock along with the change in the valuation allowance on deferred tax assets.

A reconciliation of income tax expense (benefit) at the statutory federal income tax rate and income taxes as reflected in the financial statements is as follows:


	Year Ended December 31,
(in thousands)	2019			2018			2017
Federal income tax at statutory rates		21	%		21	%		34	%
State income tax, net of federal tax benefit		3	%		4	%		4	%
Non-cash inducement warrant expense		-11	%		0	%		0	%
Research and development credits		1	%		2	%		3	%
Stock compensation		0	%		-1	%		-1	%
Research and development true-up		0	%		0	%		-7	%
Officers compensation		0	%		-1	%		-2	%
Other		-1	%		-2	%		-3	%
Federal rate change		0	%		3	%		-124	%
Change in valuation allowance		-13	%		-26	%		96	%

Effective tax rate		0	%		0	%		0	%

The Company adopted ASC740, “Accounting for Uncertain Tax Positions” on January 1, 2007. ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” ASC 740 prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. The Company did not establish any additional reserves for uncertain tax liabilities upon adoption of ASC 740. There were no adjustments to its uncertain tax positions in the years ended December 31, 2019, 2018, and 2017.

The Company has not recognized any interest and penalties in the statement of operations because of the Company’s net operating losses and tax credits that are available to be carried forward. When necessary, the Company will account for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes. The Company does not expect the amounts of unrecognized benefits will change significantly within the next twelve months.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state jurisdictions for the years ended December 31, 1999 through 2019.

The Tax Cuts and Jobs Act, or the “Tax Act,” was enacted in December 2017. The act significantly changes US tax law by, among other things, lowering US corporate income tax rates, implementing a territorial tax system, and imposing a

one-time

transition tax on deemed repatriated earnings of foreign subsidiaries. The Tax Act reduces the US corporate income tax rate from 35% to 21%, effective January 1, 2018. 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 US corporate tax rate from 35% to 21% under the Tax Act, the Company revalued its ending net deferred tax assets at December 31, 2017. There was no impact as a result of the revaluation of the deferred tax assets as the calculated provisional tax benefit of approximately $67.0 million was offset by the Company’s subsequent change in valuation allowance. There was no impact to the Company with regards to the implementation of the territorial tax system as the Company has no foreign subsidiaries.