Income Taxes
The following table presents consolidated loss before income taxes by income tax jurisdiction for continuing operations (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
United States | $ | (26,895 | ) | | $ | (26,749 | ) | | $ | (24,624 | ) |
No provision for federal or state income taxes has been recorded, as the Company has incurred cumulative net operating losses since inception. A reconciliation of the loss from continuing operations at the federal statutory tax rate of 34% to the Company's effective income tax rate is as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
Income tax benefit at statutory rate | $ | (9,144 | ) | | $ | (9,094 | ) | | $ | (8,372 | ) |
State income tax, net of federal benefit | 54 |
| | 693 |
| | (4,180 | ) |
Orphan drug expenses | 998 |
| | 817 |
| | 1,045 |
|
Stock-based compensation | 488 |
| | 54 |
| | (45 | ) |
Other permanent items | 10 |
| | 35 |
| | 98 |
|
Tax credits | (2,162 | ) | | (1,769 | ) | | (3,156 | ) |
Change in valuation allowance | 9,756 |
| | 9,264 |
| | 14,610 |
|
Provision for income taxes | $ | — |
| | $ | — |
| | $ | — |
|
Components of the Company's deferred tax assets and liabilities for federal and state income tax purposes are as follows (in thousands):
|
| | | | | | | |
| Years Ended December 31, |
| 2016 | | 2015 |
Deferred tax assets: | |
Net operating loss carryforwards | $ | 49,635 |
| | $ | 42,754 |
|
Tax credit carryforwards | 8,932 |
| | 7,141 |
|
Stock-based compensation | 4,164 |
| | 3,162 |
|
Other | 127 |
| | 45 |
|
Deferred tax assets before valuation allowance | 62,858 |
| | 53,102 |
|
Valuation allowance | (62,858 | ) | | (53,102 | ) |
Deferred tax assets: | $ | — |
| | $ | — |
|
The Company has evaluated the evidence bearing upon the realizability of its net deferred tax assets including the Company's history of operating losses and has concluded that it is not more likely than not that the Company will realize the benefit of its deferred tax assets. Accordingly, the Company has recorded a full valuation allowance against its net deferred tax assets at December 31, 2016 and 2015.
As of December 31, 2016, the Company has $131.6 million of United States federal net operating loss carryforwards and $10.7 million of orphan drug credit carryforwards, and $2.5 million of United States federal research and development carryforwards available for use, all of which have a full valuation allowance and will begin to expire in 2019 unless utilized.
Not included in the deferred income tax asset balance at December 31, 2016 is approximately $0.3 million which pertains to certain net operating loss carryforwards resulting from the exercise of employee stock options, which to-date have not been recognized.
As of December 31, 2016, the Company has North Carolina net economic loss carryforwards of approximately $5.4 million, which will begin to expire in 2022 unless utilized, and $0.2 million of research and development credits that will begin to expire in 2028 unless utilized. As of December 31, 2016, the Company has California state net operating loss carryforwards of approximately $63.1 million, which have begun to expire as of 2016, and $2.5 million of California research and development carryforwards that do not expire.
Pursuant to Internal Revenue Code ("IRC") Sections 382 and 383, annual use of the Company’s net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. Additional limitations as to the ability to use net operating loss or tax credit carryforwards may arise if the Company experiences an ownership change in subsequent years. The Company has not performed a Section 382 or 383 analysis.
As of December 31, 2016, the Company had $6.0 million of unrecognized tax benefits. A reconciliation of the current and prior year changes to the Company’s unrecognized tax benefits is as follows (in thousands):
|
| | | |
Unrecognized tax benefits as of December 31, 2013 | $ | 1,840 |
|
Increases in prior period positions | 647 |
|
Increases in current period positions | 1,286 |
|
Unrecognized tax benefits as of December 31, 2014 | 3,773 |
|
Increases in prior period positions | 8 |
|
Increases in current period positions | 980 |
|
Unrecognized tax benefits as of December 31, 2015 | 4,761 |
|
Increases in prior period positions | — |
|
Increases in current period positions | 1,194 |
|
Unrecognized tax benefits as of December 31, 2016 | $ | 5,955 |
|
As of December 31, 2016, no unrecognized tax benefits are included in the balance sheet that would, if recognized, affect the Company's effective tax rate due to the valuation allowance that currently offsets deferred tax assets. The Company does not anticipate the total amount of unrecognized income tax benefits will significantly increase or decrease in the next 12 months. The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. The Company determined that no accrual for interest and penalties was required as of December 31, 2016.
The statute of limitations for assessment by the Internal Revenue Service ("IRS") and state tax authorities is open for tax years ended December 31, 2011 through 2016, although carryforward attributes that were generated prior to tax year 2011 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period. There are currently no federal or state audits in progress.