Income Taxes
The provision for income taxes for the years ended December 31, 2017, 2016 and 2015 was comprised as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current taxes: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 36 |
| | — |
| | — |
|
Total current taxes | 36 |
| | — |
| | — |
|
Deferred taxes: | | | | | |
Federal | — |
| | — |
| | — |
|
State | — |
| | — |
| | — |
|
Total deferred taxes | — |
| | — |
| | — |
|
Total provision for income taxes | $ | 36 |
| | $ | — |
| | $ | — |
|
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and introduced significant changes to United States income tax law. Among these changes, the federal statutory tax rate was reduced to 21% and net operating loss (“NOL”) carrybacks are no longer permitted.
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in its consolidated financial statements as of and for the year ended December 31, 2017. In accordance with SAB 118, the Company has determined that the revaluation of its deferred tax assets and associated valuation allowance reduction of $9.4 million are provisional amounts as of December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued and actions the Company may take as a result of the Tax Act. The accounting for the tax effects of the Tax Act will be completed during the year ended December 31, 2018.
A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income tax computed at federal statutory tax rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
Deferred tax effects from the Tax Act | (57.2 | )% | | — | % | | — | % |
State taxes, net of federal benefit | 4.7 | % | | 3.1 | % | | 5.3 | % |
Tax credit carryforwards | 26.8 | % | | 11.7 | % | | 4.5 | % |
Non-deductible income (expense) | (4.9 | )% | | (11.1 | )% | | 0.7 | % |
Change in valuation allowance | (1.8 | )% | | (39.4 | )% | | (44.5 | )% |
Other | (1.8 | )% | | 1.7 | % | | — | % |
Effective tax rate | (0.2 | )% | | — | % | | — | % |
The principal components of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 were comprised as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | |
| | |
Net operating loss carryforwards | $ | 26,926 |
| | $ | 24,435 |
|
Tax credit carryforwards | 8,432 |
| | 4,039 |
|
Deferred revenue | 31,735 |
| | — |
|
Deferred lease incentive | 120 |
| | 553 |
|
Deferred rent | 431 |
| | 426 |
|
Intangibles | 237 |
| | 187 |
|
Accrued expenses and other | 995 |
| | 1,018 |
|
Unrealized loss on available-for-sale securities | 112 |
| | 169 |
|
Stock-based compensation | 713 |
| | 293 |
|
Total deferred tax assets | 69,701 |
| | 31,120 |
|
Less: valuation allowance | (30,850 | ) | | (30,548 | ) |
Net deferred tax assets | 38,851 |
| | 572 |
|
Deferred tax liabilities: | | | |
Section 481(a) method change | (38,481 | ) | | — |
|
Depreciation | (370 | ) | | (572 | ) |
Total deferred tax liabilities | (38,851 | ) | | (572 | ) |
Net deferred taxes | $ | — |
| | $ | — |
|
The Company has incurred NOLs since inception. As of December 31, 2017, the Company had federal and state NOL carryforwards of $98.5 million and $98.6 million, respectively, which expire at various dates from 2032 through 2037. As of December 31, 2017, the Company had federal research and development tax credit carryforwards of $6.0 million which expire at various dates from 2032 through 2037. In addition, as of December 31, 2017, the Company had state research and development and investment tax credit carryforwards of $2.6 million and $0.5 million, respectively. The state research and development tax credit carryforwards expire at various dates from 2027 through 2032 and the state investment tax credit carryforwards expire at various dates from 2019 through 2020.
Management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are principally comprised of NOL carryforwards, tax credit carryforwards, deferred lease incentives and deferred rent. Management has determined that it is more likely than not that the Company will not realize the benefits of its deferred tax assets, and as a result, a valuation allowance of $30.9 million has been established at December 31, 2017. The increase in the valuation allowance of $0.3 million during the year ended December 31, 2017 was primarily due to the additional operating loss generated by the Company.
NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service (“IRS”) and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50% as defined under Sections 382 and 383 in the Internal Revenue Code (“IRC”). This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the Company’s value immediately prior to the ownership change. An IRC Section 382 study, completed in August 2016, identified three previous ownership changes for purposes of IRC Section 382. As a result of these ownership changes, the Company’s NOL and tax credit carryforwards allocable to the periods preceding each such ownership change are subject to limitations under IRC Section 382. Subsequent ownership changes may further affect the limitation in future years.
The Company had no unrecognized tax benefits as of either December 31, 2017 or 2016. During the year ended December 31, 2017, the Company completed a study of its research and development credit carryforwards generated during the years ended December 31, 2016 and 2015. The Company has not conducted a study of its research and development credit carryforwards generated during the year ended December 31, 2017. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credit carryforwards, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated statements of operations if an adjustment were required.
Interest and penalty charges, if any, related to income taxes would be classified as a component of the provision for income taxes in the consolidated statements of operations. As of December 31, 2017, the Company has not incurred any interest or penalty charges.
The Company files income tax returns in the United States federal tax jurisdiction and the Massachusetts state tax jurisdiction. Since the Company is in a loss carryforward position, it is generally subject to examination by federal and state tax authorities for all tax years in which a loss carryforward is available.