Income Taxes
The income tax (benefit) provision was $(0.3) million, $0.1 million and $(2.0) million and the effective rates were approximately 0%, 0% and 2% for the years ended December 31, 2017, 2016 and 2015, respectively. The income tax (benefit) for the year ended December 31, 2017 reflects the reversal of the valuation allowance related to alternative minimum tax (AMT) that the Company paid in 2009. As a result of the Tax Act, the Company recorded a noncurrent receivable to reflect the refund due to the Company in future periods relating to the previously paid AMT. In addition, the income tax (benefit) provision for the years ended December 31, 2017 and 2016 reflected current income tax expense recorded as a result of the taxable income in certain of the Company's subsidiaries in Europe. The income tax benefit recorded and the effective tax rates for the year ended December 31, 2015 primarily reflected the reversal of valuation allowances previously recorded against the Company's New Jersey State net operating losses (NOLs) that resulted from the Company's sale of $24.3 million of its New Jersey State NOLs under the State of New Jersey's Technology Business Tax Certificate Transfer Program (the Program) for cash of $2.0 million, respectively, net of commissions. The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of NOLs and defined research and development tax credits for cash. In 2015, the Company reached the lifetime maximum cap of NOLs that can be sold to the State of New Jersey.
The Company is subject to US federal and state income taxes and the statute of limitations for tax audit is open for the federal tax returns for the years ended 2014 and later, and is generally open for certain states for the years 2013 and later. The Company has incurred net operating losses since inception, except for the year ended December 31, 2009. Such loss carryforwards would be subject to audit in any tax year in which those losses are utilized, notwithstanding the year of origin.
The Company's policy is to recognize interest accrued related to unrecognized tax benefits and penalties in income tax expense. The Company has recorded no such expense. As of December 31, 2017 and 2016, the Company has recorded no reserves for unrecognized income tax benefits, nor has it recorded any accrued interest or penalties related to uncertain tax positions. The Company does not anticipate any material changes in the amount of unrecognized tax positions over the next 12 months.
For the years ended December 31, 2017 and 2016, the Company was also subject to foreign income taxes as a result of legal entities established for activities in Europe. The Company's loss before income taxes in the US and globally was as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
2017 | | 2016 | | 2015 |
US | $ | (136,682 | ) | | $ | (140,354 | ) | | $ | (100,278 | ) |
Foreign | (56,239 | ) | | (35,821 | ) | | (19,876 | ) |
Total | $ | (192,921 | ) | | $ | (176,175 | ) | | $ | (120,154 | ) |
The Company's income tax (benefit) provision consisted of the following (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | |
| | |
| | |
|
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 3 |
| | 3 |
| | (2,015 | ) |
Foreign | 142 |
| | 95 |
| | 44 |
|
| 145 |
| | 98 |
| | (1,971 | ) |
Deferred: | |
| | |
| | |
|
Federal | (417 | ) | | — |
| | — |
|
State | — |
| | — |
| | — |
|
Foreign | — |
| | — |
| | — |
|
| (417 | ) | | — |
| | — |
|
Total | $ | (272 | ) | | $ | 98 |
| | $ | (1,971 | ) |
The reconciliation between the federal statutory tax rate of 34% and the Company's effective tax rate is as follows:
|
| | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Statutory federal tax rate | 34 | % | | 34 | % | | 34 | % |
Permanent items | (3 | )% | | (3 | )% | | (4 | )% |
State income taxes, net of federal benefit | 4 | % | | 4 | % | | 4 | % |
R&D and other tax credits | 8 | % | | 8 | % | | 12 | % |
Foreign income taxes | (6 | )% | | (4 | )% | | (1 | )% |
Impact of 2017 Tax Act | (49 | )% | | — | % | | — | % |
Change in valuation allowance | 12 | % | | (39 | )% | | (43 | )% |
Other | — | % | | — | % | | — | % |
Effective tax rate | — | % | | — | % | | 2 | % |
Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities consist of the following:
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred tax assets: | |
| | |
|
Net operating loss carryforwards | $ | 186,342 |
| | $ | 228,729 |
|
General business credits | 66,371 |
| | 50,648 |
|
Product license | 7,730 |
| | 11,783 |
|
Alternative minimum tax (AMT) credit | — |
| | 418 |
|
Other | 17,217 |
| | 16,265 |
|
Gross deferred tax assets | $ | 277,660 |
| | $ | 307,843 |
|
Deferred tax liabilities: | |
| | |
|
In-process research and development | $ | (16,360 | ) | | $ | (23,245 | ) |
Deferred tax liabilities | $ | (16,360 | ) | | $ | (23,245 | ) |
Net deferred tax assets | $ | 261,300 |
| | $ | 284,598 |
|
Valuation allowance | (261,300 | ) | | (284,598 | ) |
Net deferred tax assets | $ | — |
| | $ | — |
|
The net deferred tax assets (prior to applying the valuation allowance) of $261.3 million and $284.6 million at December 31, 2017 and 2016, respectively, primarily consist of net operating loss carryforwards for income tax purposes. Due to the Company's history of operating losses, the Company recorded a full valuation allowance on its net deferred tax assets by decreasing the valuation allowance by $23.3 million in 2017 and increasing by $68.4 million in 2016, respectively, as it was more likely than not that such tax benefits will not be realized. As of December 31, 2017, the Company's gross deferred tax assets were also impacted by the Tax Act which required the change to a 21% US tax rate (see below for further discussion on the Tax Act).
At December 31, 2017, the Company had federal net operating loss carryforwards for income tax purposes of approximately $721.8 million. Due to the limitation on NOLs as more fully discussed below, $544.0 million of the NOLs are available to offset future taxable income, if any. The NOL carryovers and general business tax credits expire in various years beginning in 2018. For state tax purposes, the Company has approximately $296.0 million of New Jersey NOLs available to offset against future taxable income. The Company also has California and Virginia NOLs that are entirely limited due to Section 382 (as discussed below), in addition to changing state apportionment allocations, as the Company is now 100% resident in New Jersey.
During 2014, the Company completed an Internal Revenue Code Section 382 (Section 382) analysis in order to determine the amount of losses that are currently available for potential offset against future taxable income, if any. It was determined that the utilization of the Company's NOL and general business tax credit carryforwards generated in tax periods up to and including December 2010 were subject to substantial limitations under Section 382 due to ownership changes that occurred at various points from the Company's original organization through December 2010. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of shareholders that own, directly or indirectly, 5% or more of a corporation's stock, in the stock of a corporation by more than 50 percentage points over a testing period (usually 3 years). Since the Company's formation, it has raised capital through the issuance of common stock on several occasions which, combined with the purchasing shareholders' subsequent disposition of those shares, resulted in multiple changes in ownership, as defined by Section 382 since the Company's formation in 1999. These ownership changes resulted in substantial limitations on the use of the Company's NOLs and general business tax credit carryforwards up to and including December 2010. The Company continues to track all of its NOLs and tax credit carryforwards but has provided a full valuation allowance to offset those amounts.
On December 22, 2017, the US government enacted the Tax Act. The Tax Act significantly revises US tax law by, among other provisions, lowering the US federal statutory income tax rate from 35% to 21%, imposing a mandatory one-time transition tax on previously deferred foreign earnings, and eliminating or reducing certain income tax deductions.
The Tax Act
ASC 740, Income Taxes requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the Tax Act’s provisions, the SEC staff issued SAB 118, which allows companies to record the tax effects of the Tax Act on a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment.
The Tax Act did not have a material impact on the Company's financial statements because its deferred temporary differences are fully offset by a valuation allowance and the Company does not have any significant offshore earnings from which to record the mandatory transition tax. However, given the significant complexity of the Tax Act, anticipated guidance from the US Treasury about implementing the Tax Act, and the potential for additional guidance from the SEC or the FASB related to the Tax Act, these estimates may be adjusted during the measurement period. The provisional amounts disclosed in our footnotes were based on the Company’s present interpretations of the Tax Act and current available information, including assumptions and expectations about future events, such as its projected financial performance, and are subject to further refinement as additional information becomes available (including the Company’s actual full year 2018 results of operations, as well as potential new or interpretative guidance issued by the FASB or the Internal Revenue Service and other tax agencies) and further analyses are completed. The Company continues to analyze the changes in certain income tax deductions, assess calculations of earnings and profits in certain foreign subsidiaries, including if those earnings are held in cash or other assets, and gather additional data to compute the full impacts on the Company’s deferred and current tax assets and liabilities.