INCOME TAXES
The components of loss before provision for income taxes are as follows:
|
| | | | | | | | | | | |
| For the Years Ended
December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | (109,678 | ) | | $ | (69,976 | ) | | $ | (58,411 | ) |
Foreign | 1,652 |
| | (2,107 | ) | | 6,175 |
|
Total | $ | (108,026 | ) | | $ | (72,083 | ) | | $ | (52,236 | ) |
The (benefit) provision for income taxes consist of the following:
|
| | | | | | | | | | | |
| For the Years Ended
December 31, |
| 2017 | | 2016 | | 2015 |
Current: |
| |
| |
|
Federal | $ | (10,608 | ) | | $ | (2,001 | ) | | $ | 113 |
|
State | (940 | ) | | (216 | ) | | 5 |
|
Foreign | 7 |
| | 8 |
| | 148 |
|
| $ | (11,541 | ) | | $ | (2,209 | ) | | $ | 266 |
|
Deferred: |
| |
| |
|
Federal | (5,256 | ) | | (93 | ) | | 114 |
|
State | 19 |
| | (11 | ) | | 26 |
|
Foreign | — |
| | — |
| | — |
|
| (5,237 | ) | | (104 | ) | | 140 |
|
Total income tax (benefit) provision | $ | (16,778 | ) | | $ | (2,313 | ) | | $ | 406 |
|
The income tax (benefit) provision differs from that computed using the federal statutory rate applied to income before taxes as follows:
|
| | | | | | | | | | | |
| For the Years Ended
December 31, |
| 2017 | | 2016 | | 2015 |
Tax provision computed at the federal statutory rate | $ | (37,809 | ) | | $ | (25,217 | ) | | $ | (18,269 | ) |
State tax, net of federal benefit | (1,849 | ) | | (307 | ) | | 163 |
|
Research credits | (1,176 | ) | | (3,232 | ) | | (2,974 | ) |
Change in tax credit carryforwards | 386 |
| | 11,042 |
| | (4,965 | ) |
Officers compensation | (9,292 | ) | | 1,196 |
| | 1,577 |
|
Stock based compensation | (2,735 | ) | | 588 |
| | 535 |
|
Permanent items and other | 1,450 |
| | 12 |
| | (487 | ) |
Tax differential on foreign earnings | 33 |
| | 15 |
| | 1,435 |
|
Change in tax rate | 37,769 |
| | (744 | ) | | (903 | ) |
Refundable ATM credit | (1,336 | ) | | — |
| | — |
|
Change in FIN48 Reserve | (561 | ) | | — |
| | — |
|
Change in prior year deferred taxes | (1,218 | ) | | — |
| | — |
|
Valuation allowance | (440 | ) | | 14,334 |
| | 24,294 |
|
Income tax (benefit) provision | $ | (16,778 | ) | | $ | (2,313 | ) | | $ | 406 |
|
Significant components of our deferred tax assets and liabilities as of December 31, 2017 and 2016 are presented below. A valuation allowance has been recognized to offset the net deferred tax assets as realization of such deferred tax assets no longer meets the “more-likely-than-not” threshold under GAAP.
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: |
| |
|
Net operating loss carry forwards | $ | 60,771 |
| | $ | 57,404 |
|
Research credits | 14,255 |
| | 11,480 |
|
Stock based compensation | 10,046 |
| | 5,963 |
|
Deferred revenue | 1,017 |
| | 1,380 |
|
Development costs | 4,143 |
| | 7,180 |
|
Returns and allowances | 1,636 |
| | 2,178 |
|
Other, net | — |
| | 10,530 |
|
Total deferred tax assets before valuation allowance | 91,868 |
| | 96,115 |
|
Valuation allowance | (86,021 | ) | | (85,239 | ) |
Total deferred tax assets | 5,847 |
| | 10,876 |
|
Deferred tax liabilities: |
| |
|
Basis difference in debt | (28 | ) | | (447 | ) |
Depreciation and amortization differences | (6,836 | ) | | (17,104 | ) |
Other, net | (421 | ) | | — |
|
Net deferred tax liabilities | $ | (1,438 | ) | | $ | (6,675 | ) |
At December 31, 2017 and 2016, we recorded a valuation allowance of $86.0 million and $85.2 million, respectively. The valuation allowance increased by $0.8 million and $13.4 million during 2017 and 2016, respectively. The increase in the valuation allowance in 2017 and 2016 was due to an increase in net operating loss carryforwards from operating losses and the reversal of deferred tax liabilities from the financial statement amortization of intangible assets which have no basis.
We had federal and state net operating loss carryforwards of approximately $257.2 million and $138.4 million, at December 31, 2017, respectively. We have approximately $8.3 million of foreign loss carryforwards that will begin to expire in 2022. The federal and state loss carry forwards began to expire in 2018, unless previously utilized. At December 31, 2017, we had federal and state tax credits of approximately $11.0 million and $4.1 million, respectively. The federal tax credit carryovers begin to expire in 2027 unless previously utilized. The state research and development credit carryforwards have an indefinite carryover period.
As a result of the prior ownership changes, the utilization of certain net operating loss and research and development tax credit carryforwards including those acquired in connection with the acquisition of Allos and Talon are subject to annual limitations under Sections 382 and 383 of the Internal Revenue Code of 1986 and similar state provisions. Any net operating losses or credits that would expire unutilized as a result of Section 382 and 383 limitations have been removed from the table of deferred tax assets and the accompanying disclosures of net operating loss and research and development carryforwards.
Accounting guidance clarifies the accounting for uncertain tax positions and prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, the authoritative guidance addresses the de-recognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized.
The following tabular reconciliation summarizes activity related to unrecognized tax benefits:
|
| | | | | | | | | | | |
| For the Years Ended
December 31, |
| 2017 | | 2016 | | 2015 |
Balance at beginning of year | $ | 3,271 |
| | $ | 4,498 |
| | $ | 1,944 |
|
Adjustments related to prior year tax positions | (39 | ) | | (1,638 | ) | | 1,318 |
|
Increases related to current year tax positions | 374 |
| | 411 |
| | 1,236 |
|
Decreases due to expiration of tax statutes | (891 | ) | | — |
| | — |
|
Balance at end of year | $ | 2,715 |
| | $ | 3,271 |
| | $ | 4,498 |
|
We continue to believe that our tax positions meet the more-likely-than-not standard required under the recognition phase of the authoritative guidance. However, we consider the amounts and probabilities of the outcomes that can be realized upon ultimate settlement with the tax authorities and determined unrecognized tax benefits primarily related to credits should be established as noted in the summary rollforward above.
Approximately $0.2 million, $0.7 million, and $0.7 million of the total unrecognized tax benefits as of December 31, 2017, 2016, and 2015, respectively, would reduce our annual effective tax rate if recognized. Additional amounts in the summary rollforward could impact our effective tax rate if we did not maintain a full valuation allowance on our net deferred tax assets.
We do not expect our unrecognized tax benefits to change significantly over the next 12 months. With a few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations for years before 2013. Our policy is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of operations.
On January 1, 2017, we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, on a modified prospective basis. Under ASU 2016-09, differences between the tax deduction for share based awards and the related compensation expenses recognized under ASC 718 are now accounted for as a component of the provision for income taxes. In addition, ASU 2016-09 eliminated the requirement that excess tax benefits from share based compensation reduce taxes payable prior to being recognized in the financial statements. As of December 31, 2016, we had cumulative excess benefits related to share based compensation of $2.7 million which had not been reflected as a deferred tax asset. As a result of the adoption of ASU 2016-09, the excess benefits were reclassified to our net operating loss carryover resulting in an increase in our deferred tax assets and valuation allowance of $2.7 million as of January 1, 2017. There is no impact to retained earnings as a result of the adoption of ASU 2016-09 on January 1, 2017.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning in 2018, the transition of U.S international taxation from a worldwide tax system to a territorial system, which includes a new federal tax on global intangible low-taxed income (Global Minimum Tax or GMT), and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has calculated its best estimate of the impact of the Tax Act in its 2017 income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing.
In addition, the SEC Staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Our accounting for the following elements of the Tax Act is incomplete. However, we were able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments. The provisional amounts described below are subject to revisions as we complete our analysis of the Tax Act, collect data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service, or IRS, FASB, and other standard-setting and regulatory bodies. Adjustments to the provisional amounts may materially impact our consolidated income tax provision (benefit) and effective tax rates in the period(s) in which such adjustments are made. Our accounting for the tax effects of the Tax Act will be completed during the one-year measurement period.
Reduction of US federal corporate tax rate: For certain of its deferred tax assets and deferred tax liabilities, we have recorded a provisional decrease in net deferred tax assets of $38.9 million, with a corresponding decrease in the valuation allowance of $41.4 million and a benefit to income tax expense of $2.5 million for the year ended December 31, 2017. This provisional estimate may be affected by other analysis related to the Tax Act, including, but not limited to, the state tax effect of adjustments made to federal temporary differences.
Deemed Repatriation Transition Tax: Based upon our preliminary analysis, we have concluded that a net accumulated E&P deficit exists as of December 31, 2017 for our foreign subsidiaries. As a result, we did not accrue any provisional transition tax liabilities. We will continue to gather additional and perform additional analysis to more precisely determine past foreign earnings and related taxes and will update our provisional estimate with respect to the transition tax liability when such work is completed within the one-year measurement period.
Valuation allowance: The Tax Act limits the amount taxpayers are able to deduct for net operating loss carryforwards generated in taxable years beginning after December 31, 2017 to 80% of the taxpayer’s taxable income. However, net operating loss carryforwards generated in taxable years ending after December 31, 2017 can be carried forward indefinitely. A taxable temporary difference associated with an indefinite-lived asset is generally considered to be a source of taxable income to support realization of a net operating loss with an unlimited carryforward period. Due to the restriction on the ability to use the net operating loss with unlimited carryforward periods arising in taxable years beginning after December 31, 2017, only 80% of the indefinite-lived taxable temporary difference would serve as a source of taxable income. As a result, the valuation allowance decreased by $2.9 million related to the 80% utilization of the indefinite-lived taxable temporary as a source of taxable income.
Under U.S. GAAP, we are allowed to make an accounting policy choice with respect to the GMT of either (1) treating taxes due on future U.S. inclusions in taxable income related to GMT as a current-period expense when incurred or (2) as a component of deferred income taxes. We will make our accounting policy election for this item when our analysis is complete, during the measurement period.