10.         Income Taxes

 

The Company provides for income taxes under ASC 740. Under ASC 740, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

 

The Company has not recorded a current or deferred income tax expense or benefit since its inception.

 

The Company’s loss before income taxes was $148.9 million, $72.4 million, and $35.9 million for the years ended December 31, 2017, 2016 and 2015, respectively, and was generated entirely in the U.S.

 

Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The significant components of the Company’s deferred tax assets are comprised of the following (in thousands):

 

 

On December 22, 2017, the Tax Cuts and Jobs Act” (the “2017 Tax Act”) was enacted. The 2017 Tax Act lowered the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, the change in the U.S. federal tax rate required the Company to re-measure its federal deferred tax assets and liabilities. Effective for tax years beginning on January 1, 2018, the 2017 Tax Act repealed the performance exception permitting certain executive officer compensation greater than $1 million to be deducted.

 

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) which also provides guidance on accounting for the impacts of the 2017 Tax Act. SAB 118 provides a measurement period of up to one year from enactment for a company to complete its tax accounting under ASC 740. Once a company is able to make a reasonable estimate and record a provisional amount for effects of the 2017 Tax Act, it is required to do so. Given the substantial uncertainties surrounding the Tax Act and the short period of time between December 22, 2017 and December 31, 2017 to calculate the impacts of the 2017 Tax Act, the Company is accounting for its impact on a provisional (estimated) basis as allowed by SAB 118. Such provisional measurement amounts are anticipated to change as remaining analysis and review are completed, until the Company records a final amount within the measurement period.

 

During the fourth quarter of 2017, the Company reduced its net deferred tax asset balance and offsetting valuation allowance by $38.8 million as a provisional amount for the re-measurement of its U.S. deferred tax balances. This amount represents the Company’s reasonable estimate of the impact from the 2017 Tax Act.

 

The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses since inception, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of December 31, 2017, 2016 and 2015. Although the Company expects that it will generate taxable income in 2018 to utilize some or all of the net operating loss carryforward, the Company does not expect to generate sufficient core earnings, and as a result, the expected level and character of future taxable income is not adequate to realize the benefit of previously recorded deferred tax assets. The valuation allowance increased by $29.7 million, $29.4 million, and $15.4 million for the years ended December 31, 2017, 2016 and 2015, respectively, due primarily to the generation of net operating losses during the periods.

 

A reconciliation of income tax benefit computed at the statutory federal income tax rate to income taxes as reflected in the financial statements is as follows:

 

 

As of December 31, 2017, 2016 and 2015, the Company had U.S. federal net operating loss carryforwards of $220.8 million, $116.7 million, and $52.1 million, respectively, which may be available to offset future income tax liabilities and will begin to expire at various dates starting in 2033. As of December 31, 2017, 2016 and 2015, the Company also had U.S. state net operating loss carryforwards of $209.3 million, $105.4 million and $40.2 million, respectively, which may be available to offset future income tax liabilities and will begin to expire at various dates starting in 2033.

 

As of December 31, 2017, 2016 and 2015, the Company had federal research and development tax credit carryforwards of $20.6 million, $3.9 million, and $1.9 million, respectively, available to reduce future tax liabilities which will begin to expire at various dates starting in 2033.

 

Under the provisions of the Internal Revenue Code, the NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards 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 of the Internal Revenue Code of 1986, respectively, as well as similar state tax provisions. This could limit the amount of tax attributes that the Company can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, will be determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company experienced ownership changes, as defined, in 2004 and 2017. Accordingly, the use of NOLs generated prior to these ownership changes is subject to an annual limitation. The Company does not expect the annual limitation will impact its ability to utilize some or all of the net operating loss carryforwards to offset the anticipated taxable income in 2018. If certain changes in ownership occur prospectively, there could be an additional annual limitation on the amount of utilizable NOLs.

 

Unrecognized income tax benefits represent income tax positions taken on income tax returns but not yet recognized in the consolidated financial statements. The company has unrecognized income tax benefits totaling $3.4 million as of December 31, 2017. If recognized, none of the unrecognized tax benefits would be recorded as a benefit to income tax expense on the consolidated statement of income.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

 

The Company files income tax returns in the U.S., and various state jurisdictions. The federal and state income tax returns are generally subject to tax examinations for the years ended December 31, 2017, 2016, 2015 and 2014. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities to the extent utilized in a future period.