Income Taxes
No income tax expense or benefit has been recorded for the years ended December 31, 2017, 2016 or 2015. This is due to the establishment of a valuation allowance against the deferred tax assets generated during those periods. At December 31, 2017, the Company has concluded that it is more likely than not that the Company may not realize the benefit of its deferred tax assets due to its history of losses. Accordingly, the net deferred tax assets have been fully reserved.
A reconciliation of the difference between the benefit for income taxes and income taxes at the statutory U.S. federal income tax rate is as follows for the years ended December 31, 2017, 2016, and 2015 (in thousands, except percentages):
|
| | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| Amount | | % of Pretax
Earnings | | Amount | | % of Pretax
Earnings | | Amount | | % of Pretax
Earnings |
Income tax benefit at statutory rate | $ | (24,134 | ) | | 34.0 | % | | $ | (25,973 | ) | | 34.0 | % | | $ | (39,907 | ) | | 34.0 | % |
State income taxes | (1,090 | ) | | 1.5 | % | | (1,544 | ) | | 2.0 | % | | (2,176 | ) | | 1.9 | % |
Research and development credits | (2,039 | ) | | 2.9 | % | | (2,691 | ) | | 3.5 | % | | (5,698 | ) | | 4.9 | % |
Foreign rate differential | 60 |
| | (0.1 | )% | | (2 | ) | | — | % | | 2 |
| | — | % |
Permanent items | 1,646 |
| | (2.3 | )% | | 2,537 |
| | (3.3 | )% | | 3,687 |
| | (3.1 | )% |
Provision to return adjustments | 1,212 |
| | (1.7 | )% | | 259 |
| | (0.3 | )% | | (426 | ) | | 0.2 | % |
Effect of change in federal tax rate | 57,950 |
| | (81.6 | )% | | — |
| | — | % | | — |
| | — | % |
Effect of change in state tax rate | 193 |
| | (0.3 | )% | | 1,585 |
| | (2.1 | )% | | 932 |
| | (0.8 | )% |
Removal of excess tax benefit | (12,930 | ) | | 18.2 | % | | — |
| | — | % | | — |
| | — | % |
Increase in unrecognized tax benefits | 403 |
| | (0.6 | )% | | 444 |
| | (0.6 | )% | | 950 |
| | (0.8 | )% |
Change in valuation allowance | (21,271 | ) | | 30.0 | % | | 25,385 |
| | (33.2 | )% | | 42,636 |
| | (36.3 | )% |
Net benefit | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | — |
| | — | % |
The components of deferred tax assets and liabilities at December 31, 2017 and 2016 were as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | |
| | |
|
Domestic net operating loss carryforwards | $ | 92,020 |
| | $ | 114,111 |
|
Foreign net operating loss carryforwards | 61 |
| | — |
|
Research and development expenses | 763 |
| | 813 |
|
Capitalized Section 174 expenses | 28 |
| | 48 |
|
Research and development credits | 12,437 |
| | 10,907 |
|
Accrued bonuses | 777 |
| | 1,006 |
|
Share-based compensation | 6,156 |
| | 7,214 |
|
Other | 983 |
| | 460 |
|
Total gross deferred tax assets | 113,225 |
| | 134,559 |
|
Valuation allowance | (113,225 | ) | | (134,496 | ) |
Total deferred tax assets | — |
| | 63 |
|
Deferred tax liabilities: | |
| | |
|
Other | — |
| | (63 | ) |
Total deferred tax liabilities | — |
| | (63 | ) |
Total deferred tax assets and liabilities, net | $ | — |
| | $ | — |
|
At December 31, 2017, the Company had net operating loss carryforwards for federal, state, and foreign tax purposes of approximately $408.1 million, $319.9 million and $0.4 million, respectively. At December 31, 2016, the Company had net operating loss carryforwards for federal and state tax purposes of approximately $356.1 million and $287.2 million, respectively. The federal losses begin to expire in 2020 and the state losses begin to expire in 2018. The foreign losses do not expire. In addition, the Company has tax credit carryforwards for federal tax purposes of approximately $16.6 million as of December 31, 2017, which begin to expire in 2022. The future utilization of net operating loss and tax credit carryforwards may be limited due to changes in ownership. Management has recorded a valuation allowance for all of the deferred tax assets due to the uncertainty of future taxable income.
The Company incorporated a subsidiary in the United Kingdom in 2014. However, the subsidiary has had minimal activity since inception. The subsidiary recorded a net loss as of December 31, 2017 and a small amount of net income as of December 31, 2016 and as such, has no undistributed earnings.
In general, if the Company experiences a greater than 50% aggregate change in ownership of certain significant stockholders over a three-year period (a Section 382 ownership change), utilization of its pre-change net operating loss carryforwards is subject to an annual limitation under Section 382 of the Internal Revenue Code (and similar state laws). The annual limitation generally is determined by multiplying the value of the Company’s stock at the time of such ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the net operating loss carryforwards before utilization and may be substantial. The ability of the Company to use its net operating loss carryforwards may be limited or lost if the Company experiences a Section 382 ownership change in connection with offerings or as a result of future changes in its stock ownership. Losses from a specific period may be subject to multiple limitations, and would generally be limited by the lowest of those limitations.
The Company has determined that a Section 382 ownership change occurred in 2002, and as such, losses incurred prior to that date are subject to an annual limitation of at least $64,000. Additionally, the Company has determined that a Section 382 ownership change occurred in 2007, and as such, losses incurred prior to that date are subject to an annual limitation of at least $762,000. The Company evaluated Section 382 ownership changes subsequent to 2007 through September 30, 2015 and concluded that a Section 382 ownership change occurred in 2013 as a result of the initial public offering. As such, losses incurred prior to that date are subject to an annual limitation of at least $6.7 million.
As of December 31, 2017, the Company has adopted ASU 2016-09 which is effective for public companies for annual periods beginning after December 15, 2016. The ASU requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement in the year in which they occur. As such, the Company has grossed up its net operation loss deferred tax asset to include all excess tax benefits as of December 31, 2017.
The Company has determined that there may be a future limitation on the Company’s ability to utilize its entire federal R&D credit carryover. Therefore, the Company recognized an uncertain tax benefit associated with the federal R&D credit carryover during the years ended December 31, 2017 and 2016, as follows (in thousands):
|
| | | |
Balance at December 31, 2015 | $ | 1,956 |
|
Increases related to 2016 | 444 |
|
Increases related to prior periods | — |
|
Balance at December 31, 2016 | 2,400 |
|
Increases related to 2017 | 403 |
|
Increases related to prior periods | 473 |
|
Balance at December 31, 2017 | $ | 3,276 |
|
The change in the amount of the unrecognized tax benefits accrued for prior years is due to the change in the federal tax rate and is reflected as a component of such in the statutory rate reconciliation.
The Company has determined that it had no other material uncertain tax benefits for the year ended December 31, 2017. As of January 1, 2018, due to the carry forward of unutilized net operating losses and research and development credits, the Company is subject to U.S. Federal and state income tax examinations for the tax years 2000 through 2017. The Company recognizes accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expense. No amounts were accrued for the payment of interest and penalties at December 31, 2017.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law, which reduced the federal corporate income tax rate to 21% for tax years beginning after December 31, 2017. As a result of the new enacted tax rate, the Company adjusted its deferred tax assets as of December 31, 2017 by applying the new 21% rate, which resulted in a decrease to the deferred tax assets and a corresponding decrease to the valuation allowance of approximately $58 million.
The Tax Legislation also implements a territorial tax system. Under the territorial tax system, in general, the Company's foreign earnings will no longer be subject to tax in the U.S. As part of transition to the territorial tax system the Tax Legislation includes a mandatory deemed repatriation of all undistributed foreign earnings that are subject to a U.S. income tax. The Company estimates that the deemed repatriation will not result in an additional U.S. income tax liability as it has no undistributed foreign earnings.
The SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118) which will allow the Company to record provisional amounts during a measurement period which is similar to the measurement period used when accounting for business combinations. Provisional amounts have been recorded related to deferred taxes for stock compensation and the deferred rate change. The Company will continue to assess the impact of the recently enacted tax law on its business and consolidated financial statements.