|
16. |
Income Taxes |
The Company has generated losses since inception. Accordingly, there is no tax provision or benefit for the years ended December 31, 2017, 2016, and 2015, respectively .
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal statutory income tax rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
State taxes, net of federal benefit |
|
|
3.0 |
|
|
|
5.0 |
|
|
|
4.9 |
|
|
Federal and state research and development tax credits |
|
|
0.9 |
|
|
|
2.7 |
|
|
|
4.7 |
|
|
Change in deferred tax asset valuation allowance |
|
|
(11.6 |
) |
|
|
(40.0 |
) |
|
|
(45.4 |
) |
|
Tax law change |
|
|
(25.1 |
) |
|
|
|
|
|
|
|
|
|
Other |
|
|
(1.2 |
) |
|
|
(1.7 |
) |
|
|
1.8 |
|
|
Effective income tax rate |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
The Company’s net deferred tax assets consisted of the following:
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Net operating loss carryforwards |
|
$ |
48,496 |
|
|
$ |
36,880 |
|
|
Research and development tax credit carryforwards |
|
|
7,725 |
|
|
|
7,078 |
|
|
Accruals and other temporary differences |
|
|
3,578 |
|
|
|
4,897 |
|
|
Debt discount |
|
|
(14,630 |
) |
|
|
0 |
|
|
Capitalized research and development expenses, net |
|
|
29,673 |
|
|
|
34,579 |
|
|
Total deferred tax assets |
|
|
74,842 |
|
|
|
83,434 |
|
|
Valuation allowance |
|
|
(74,842 |
) |
|
|
(83,434 |
) |
|
Net deferred tax asset |
|
$ |
— |
|
|
$ |
— |
|
As of December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $190.1 million and $147.8 million, respectively, which begin to expire in 2029 for federal purposes and in 2030 for state purposes. In addition, the Company had federal and state research and development tax credit carryforwards of approximately $5.4 million and $2.9, respectively, available to reduce future tax liabilities, which begin to expire in 2029 for federal purposes and 2025 for state purposes. Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards and capitalized research and development expenses. Management has considered the Company’s history of cumulative net losses incurred since inception, as well as its lack of commercialization of any products or generation of any revenue from product sales since inception, and determined that it is more likely than not that the Company will not realize the benefits of its deferred tax assets. As a result, a full valuation allowance has been established at December 31, 2017 and 2016.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current corporate federal tax rate to 21% from 35%. The rate reduction is effective January 1, 2018. The Company concluded that the Act will cause our deferred tax assets to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense in the period of enactment. During the fourth quarter, we estimated the reduction in the value of our deferred tax assets to be $34.5 million as a result of the Act, which was offset by a corresponding change in the valuation allowance.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 23, 2017. SAB 118 provides a one-year measurement period from a registrant’s reporting period that includes the Act’s enactment date to allow the registrant sufficient time to obtain, prepare and analyze information to complete the accounting required under ASC 740.
The ultimate impact of the Act on our reported results in 2018 and beyond may differ from the estimates provided herein, possibly materially, due to, among other things, changes in interpretations and assumptions we have made, guidance that may be issued, and other actions we may take as a result of the Act, different from that presently contemplated.
During year ended December 31, 2017, the Company recorded to equity a deferred tax liability relating to the discount on its 2024 Convertible Notes (see Note 10) with an equal and offsetting adjustment to the valuation allowance.
Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”), contains rules that limit the ability of a company that undergoes an ownership change to utilize its net operating losses (“NOLs”) and tax credits existing as of the date of such ownership change. Under the rules, such an ownership change is generally any change in ownership of more than 50% of a company’s stock within a rolling three-year period. The rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning, directly or indirectly, 5% or more of the stock of a company and any change in ownership arising from new issuances of stock by the company. During the quarter ended June 30, 2014, the Company completed a Section 382 study through February 11, 2014. The results of this study showed that as of February 11, 2014, one historical ownership change within the meaning of section 382 had occurred in 2009. As a result of this Section 382 limitation, approximately $0.3 million of NOLs will expire unutilized.
Through the quarter ending December 31, 2017, the Company has completed periodic updates to its Section 382 study through October 31, 2017, which have indicated ownership changes within the meaning of Section 382 have occurred in December 2014 and June 2016, however, it is not anticipated that a portion of the Company’s NOLs will expire unutilized as a result of the Section 382 limitations arising from these ownership changes. Subsequent ownership changes defined by Section 382 may further limit the amount of NOL carryforwards that could be utilized annually to offset future taxable income.
Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2017 and 2016 were as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Valuation allowance as of beginning of year |
|
$ |
(83,434 |
) |
|
$ |
(54,773 |
) |
|
$ |
(33,826 |
) |
|
Decreases recorded as benefit to income tax provision |
|
|
36,606 |
|
|
|
4,771 |
|
|
|
2,858 |
|
|
Decreases recorded as benefit to equity |
|
|
24,537 |
|
|
|
— |
|
|
|
— |
|
|
Increases recorded to income tax provision |
|
|
(52,551 |
) |
|
|
(33,432 |
) |
|
|
(23,805 |
) |
|
Valuation allowance as of end of year |
|
$ |
(74,842 |
) |
|
$ |
(83,434 |
) |
|
$ |
(54,773 |
) |
In each reporting period, the Company considers whether a tax position of the Company is more likely than not to be sustained upon examination, including resolution of any related appeals of litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon the ultimate settlement with the relevant taxing authority. No liabilities for unrecognized tax benefits were recorded as of December 31, 2017 and 2016.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from 2013 to the present. Earlier years may be examined to the extent that tax credit or net operating loss carryforwards are used in future periods. The resolution of tax matters is not expected to have a material effect on the Company’s consolidated financial statements.