INCOME TAXES
On December 22, 2017, the U.S. government enacted tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”). The 2017 Tax Act significantly revises how U.S. taxes corporations. The Company is currently evaluating provisions of the 2017 Tax Act, which among other things, lowers the U.S. corporate income tax rate from 35% to 21% and moves toward a territorial tax system. As a result, an adjustment has been recorded to the deferred tax asset and a corresponding adjustment to the full valuation allowance. As the Company does not have all of the necessary information to analyze all income tax effects of the 2017 Tax Act, the Company will continue to make and refine calculations and estimates as additional information is obtained, which could potentially affect the provisional amounts relating to the deferred income taxes, including but not limited to deferred tax assets related to share-based compensation expenses. Where the Company has not yet been able to make reasonable estimates of the impact of certain elements, the Company has not recorded any amounts related to those elements and has continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect immediately prior to the enactment of the 2017 Tax Act. The Company expects to complete a detailed analysis no later than the fourth quarter of 2018.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740, Income Taxes. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2017, 2016 and 2015, the Company had no uncertain tax positions and no interest or penalties have been charged to the Company for the years ended December 31, 2017, 2016 and 2015. If incurred, the Company will classify any interest and penalties as a component of interest expense and operating expense, respectively. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The tax years 2005 through 2017 remain open to examination by the Internal Revenue Service.
The reconciliation between federal income taxes at the statutory rate and the Company’s income tax expense for the year is as follows: |
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Tax benefit at statutory rate | $ | (31,204 | ) | | $ | (23,542 | ) | | $ | (16,506 | ) |
Stock options | 860 |
| | 394 |
| | 12 |
|
Other | (36 | ) | | 54 |
| | (165 | ) |
U.S. tax reform rate change | 37,848 |
| | — |
| | — |
|
Stock compensation | 333 |
| | — |
| | — |
|
Deferred tax valuation allowances | (1,824 | ) | | 24,872 |
| | 17,920 |
|
Research and development credit | (5,977 | ) | | (1,778 | ) | | (1,261 | ) |
Income tax expense | $ | — |
| | $ | — |
| | $ | — |
|
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes as of December 31, 2017 and 2016 are as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in thousands) |
Deferred tax assets: | | | |
Net operating loss carryforward | $ | 46,772 |
| | $ | 48,152 |
|
Stock compensation | 4,900 |
| | 5,146 |
|
Intangible assets | 8,820 |
| | 14,920 |
|
Research and development credit | 10,273 |
| | 4,296 |
|
Other | 648 |
| | 702 |
|
Total deferred tax assets | 71,413 |
| | 73,216 |
|
Valuation allowance | (71,413 | ) | | (73,216 | ) |
Net deferred tax assets | $ | — |
| | $ | — |
|
As of December 31, 2017 and 2016, the Company had gross federal income tax net operating loss (NOL) carryforwards of $222.7 million and $142.2 million, respectively, and federal research tax credits of $10.3 million and $4.3 million, respectively. The Internal Revenue Code Section 382 limits NOL and tax credit carry forwards when an ownership change of more than 50% of the value of the stock in a loss corporation occurs. Accordingly, the ability to utilize remaining NOL and tax credit carryforwards may be significantly restricted.
The NOL carryforwards will expire beginning in 2025, if not utilized. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during periods in which those temporary differences become deductible.
Due to the uncertainty surrounding the realization of the benefits of its deferred assets, including NOL carryforwards, the Company has provided a 100% valuation allowance on its deferred tax assets at December 31, 2017 and 2016. The changes in the valuation allowance were a decrease of $1.8 million and an increase of $24.9 million for the years ended December 31, 2017 and 2016, respectively.