Income Taxes
In 2017, the Company adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which eliminates the requirement that excess tax benefits be realized as a reduction in current taxes payable before the associated tax benefit can be recognized in additional paid-in capital. This created approximately $6.2 million of deferred tax assets relating to federal and state net operating losses that are fully offset by a corresponding increase in the valuation allowance. As a result, there was no cumulative effect adjustment to accumulated deficit.
The Tax Cuts and Jobs Act of 2017 (the 2017 Tax Act), which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory tax rate reduction from 35% to 21%, which reduced the Company's deferred tax assets and corresponding valuation allowance. The Company reevaluates the positive and negative evidence bearing upon the realizability of its deferred tax assets on an annual basis. Since the Company has generated operating losses and expects to continue to incur future losses, the Company has concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of all of its deferred tax assets. Accordingly, the Company has recorded a full valuation allowance against its deferred tax assets. The $11.6 million decrease in the valuation allowance for the year ended December 31, 2017 was driven by $53.3 million reduction in the federal statutory tax rate partially offset by the current period net loss.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118, or SAB 118, to address the application of U.S. 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 Reform Act. The Company has recognized the provisional tax impacts related to the revaluation of the deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts 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 Reform Act. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The Company establishes a valuation allowance when uncertainty exists as to whether all or a portion of the net deferred tax assets will be realized. Components of the net deferred tax assets at December 31, 2017 and 2016 are as follows, in thousands:
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Federal and state net operating losses | $ | 99,252 |
| | $ | 94,793 |
|
Research credits | 36,819 |
| | 30,007 |
|
Deferred compensation | 8,274 |
| | 9,701 |
|
Deferred revenue | 9,184 |
| | 28,096 |
|
Accrued expenses | 4,977 |
| | 5,053 |
|
Intangibles | 2,020 |
| | 3,220 |
|
Depreciation | — |
| | 475 |
|
Unrealized loss on marketable securities | 13 |
| | — |
|
Total deferred tax assets | 160,539 |
| | 171,345 |
|
Deferred tax liabilities: | | | |
Depreciation | (802 | ) | | — |
|
Unrealized gain on marketable securities | — |
| | (30 | ) |
Total deferred tax liabilities | (802 | ) | | (30 | ) |
Valuation allowance | (159,737 | ) | | (171,315 | ) |
Net deferred tax assets | $ | — |
| | $ | — |
|
A reconciliation of the federal statutory income tax benefit to the Company's actual provision for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Benefit at federal statutory tax rate | $ | (29,941 | ) | | $ | (7,137 | ) | | $ | (28,323 | ) |
State taxes, net of federal benefit | (4,713 | ) | | (1,108 | ) | | (4,398 | ) |
Share-based compensation | 1,370 |
| | 5,148 |
| | 3,634 |
|
Tax credits | (2,733 | ) | | (4,120 | ) | | (2,652 | ) |
Other | 492 |
| | 272 |
| | 42 |
|
Change in valuation allowance | (17,817 | ) | | 6,945 |
| | 31,697 |
|
Federal statutory rate change | 53,342 |
| | — |
| | — |
|
Income tax provision | $ | — |
| | $ | — |
| | $ | — |
|
The Company generated U.S. taxable income during the years ended December 31, 2011 and 2010, and as a result, utilized $190.9 million and $26.3 million, respectively, of its historical available federal net operating loss carryforwards that were generated from 2001 to 2009 to offset this income.
At December 31, 2017, the Company had federal and state net operating loss carryforwards of $369.3 million and $343.5 million, respectively, available to reduce future taxable income that will expire at various dates through 2037. At December 31, 2017, the Company had federal and state research and development and other credit carryforwards, including the orphan drug credit, of $35.0 million and $12.0 million, respectively, available to reduce future tax liabilities. Federal and state research and development and other credit carryforwards expire at various dates through 2037, while the orphan drug credit does not expire. Ownership changes, as defined in the Internal Revenue Code, may limit the amount of net operating loss that can be utilized to offset future taxable income or tax liability.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017 and 2016 is as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Balance, beginning of year | $ | 6,678 |
| | $ | 5,116 |
| | $ | 4,064 |
|
Additions for tax positions related to the current year | 1,262 |
| | 1,602 |
| | 1,395 |
|
Reductions of tax positions of prior years | — |
| | (40 | ) | | (343 | ) |
Balance, end of year | $ | 7,940 |
| | $ | 6,678 |
| | $ | 5,116 |
|
As of December 31, 2017 and 2016, the Company had $7.9 million and $6.7 million of gross unrecognized tax benefits, respectively, of which $7.8 million and $6.6 million, respectively, if recognized, would not impact the Company's effective tax rate as there is a full valuation allowance on these credits.
The Company's policy is to recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company has not recognized any interest and penalties.
The Company does not anticipate that it is reasonably possible that the uncertain tax positions will significantly increase or decrease within the next twelve months.
The Company files income tax returns in the United States federal jurisdiction and in the Massachusetts jurisdiction. The Company is no longer subject to any tax assessment from an income tax examination for years before 2014, except to the extent that in the future it utilizes net operating losses or tax credit carryforwards that originated before 2014.
In March 2012, the Company entered into a Tax Incentive Agreement with the Massachusetts Life Sciences Center, or MLSC, under the MLSC's Life Sciences Tax Incentive Program, or the Program, to expand life sciences-related employment opportunities, promote health-related innovations and stimulate research and development, manufacturing and commercialization in the life sciences in the Commonwealth of Massachusetts. The Program was established in 2008 in order to incentivize life sciences companies to create new sustained jobs in Massachusetts. Under the Tax Incentive Agreement, companies receive an award from the MLSC upon attaining job creation commitment. The Company maintained its job creation commitment for five years and recorded one-fifth of the $1.1 million job creation tax award, or $0.2 million, on a straight-line basis as other income beginning in 2012 and ending in 2016.