Income Taxes
The Company generated a pretax loss of $31.0 million, $31.4 million and $33.7 million in the United States for the years ended December 31, 2017, 2016 and 2015, respectively. Since inception, the Company has not generated any pretax income or loss outside of the United States. The Company recorded no provision for income taxes during the years ended December 31, 2017, 2016 or 2015.
The Company follows FASB ASC No. 740, Income Taxes for the Computation and Presentation of its Tax Provision. The following table presents a reconciliation of the income tax expense computed at the statutory federal rate and the Company's income tax expense for the periods presented (in thousands of dollars):
|
| | | | | | | | | | | |
| Year Ended December, 31, |
| 2017 | | 2016 | | 2015 |
U.S. federal taxes at statutory rate | $ | (10,541 | ) | | $ | (10,662 | ) | | $ | (11,459 | ) |
State tax (net of federal benefit) | 15 |
| | 20 |
| | (30 | ) |
Permanent differences | 198 |
| | 153 |
| | 96 |
|
Incentive stock options | 994 |
| | 1,095 |
| | 789 |
|
Tax credits | (588 | ) | | (677 | ) | | (581 | ) |
Change in valuation allowance | (14,552 | ) | | 10,071 |
| | 11,185 |
|
Rate differential impact - Tax Cuts and Jobs Act | 24,474 |
| | — |
| | — |
|
Total | $ | — |
| | $ | — |
| | $ | — |
|
Deferred income taxes reflect the net tax effects 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 tax assets and liabilities are as follows (in thousands of dollars):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Deferred tax assets: | |
| | |
| | |
|
Net operating loss carryforwards | $ | 47,177 |
| | $ | 61,674 |
| | $ | 52,262 |
|
Research and development credits | 4,034 |
| | 3,174 |
| | 2,497 |
|
Stock-based compensation | 2,068 |
| | 2,847 |
| | 1,825 |
|
Genzyme co-promotion agreement | — |
| | — |
| | 330 |
|
Accruals, deferred rent and other | 2,375 |
| | 4,511 |
| | 4,698 |
|
Gross deferred tax assets | 55,654 |
| | 72,206 |
| | 61,612 |
|
Valuation allowance | (51,657 | ) | | (65,975 | ) | | (55,101 | ) |
Net deferred tax assets | 3,997 |
| | 6,231 |
| | 6,511 |
|
Deferred tax liabilities: | |
| | |
| | |
|
Property and equipment | (983 | ) | | (1,180 | ) | | (1,215 | ) |
In-process research and development | (3,014 | ) | | (5,051 | ) | | (5,296 | ) |
Gross deferred tax liabilities | (3,997 | ) | | (6,231 | ) | | (6,511 | ) |
Net deferred tax liabilities | (3,997 | ) | | (6,231 | ) | | (6,511 | ) |
Net deferred taxes | $ | — |
| | $ | — |
| | $ | — |
|
On December 22, 2017, the Tax Cuts and Jobs Act ("The Act") was signed into law. Among other changes is a permanent reduction in the statutory federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of the reduction in the corporate income tax rate, the Company revalued its net deferred tax asset at December 31, 2017, to the new statutory rate. This resulted in a reduction in the value of net deferred tax asset of approximately $24.5 million, which was offset by the change in valuation allowance resulting in no impact on the Company's tax expense. The Company has completed a preliminary assessment of the accounting for the income tax effects of the Act, as it relates to its current structure, including provisions that are effective for tax years beginning in 2018. The Company's preliminary assessment is subject to revisions to any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service, FASB, and other standard-setting and regulatory bodies. Adjustments may materially impact our provision for income taxes and the assessment of the accounting for the tax effects of The Act will not extend beyond one year from the enactment date.
The Company has established a full valuation allowance against its net deferred tax assets due to the uncertainty surrounding realization of such assets. The valuation allowance decreased $14.3 million during the year ended December 31, 2017 and increased $10.9 million and $11.7 million during the years ended December 31, 2016 and 2015, respectively.
On March 30, 2016, the FASB issued Accounting Standards Update 2016-09, Improvements to Employee Share-Based Accounting, (“ASU 2016-09”). The required adoption period is for financial statements issued for annual periods beginning after December 15, 2016. The Company adopted ASU 2016-09 in the first quarter of 2017 which was applied using a modified retrospective approach. As a result of adoption, the Company’s federal and state net operating losses have been adjusted by excess tax benefits of $1.6 million. Due to a full valuation allowance on all deferred tax assets, there is no impact to the statement of financial position.
As of December 31, 2017, the Company had net operating loss carryforwards of approximately $196.1 million and $91.8 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. The U.S. federal net operating loss carryforwards will begin to expire in 2026 while for state purposes, the net operating losses began to expire in 2028.
As of December 31, 2017, the Company had net research and development credit carryforwards of approximately $3.8 million and $3.2 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. The federal credit carryforwards begin to expire in 2028. California credits have no expiration date. Other state credit carryforwards begin to expire in 2023.
The Internal Revenue Code of 1986, as amended, imposes restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change" of a corporation. Accordingly, a company's ability to use net operating losses and tax credits may be limited as prescribed under Internal Revenue Code Section 382 and 383 ("IRC Section 382"). Events which may cause limitations in the amount of the net operating losses or tax credits that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Utilization of the federal and state net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 rules and similar state provisions. In the event the Company has any changes in ownership, net operating losses and research and development credit carryovers could be limited and may expire unutilized.
Uncertain Tax Positions
As of December 31, 2017, the Company had unrecognized tax benefits of $2.5 million, none of which would currently affect the Company's effective tax rate if recognized due to the Company's deferred tax assets being fully offset by a valuation allowance. The Company does not anticipate that the amount of unrecognized tax benefits relating to tax positions existing at December 31, 2017 will significantly increase or decrease within the next 12 months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands of dollars):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Unrecognized tax benefits, beginning of period | $ | 2,222 |
| | $ | 1,871 |
| | $ | 1,571 |
|
Gross increases—tax position in prior period | — |
| | — |
| | — |
|
Gross decreases—tax position in prior period | — |
| | — |
| | — |
|
Gross increases—current period tax position | 301 |
| | 351 |
| | 300 |
|
Lapse of statute of limitations | — |
| | — |
| | — |
|
Unrecognized tax benefits, end of period | $ | 2,523 |
| | $ | 2,222 |
| | $ | 1,871 |
|
It is the Company's policy to include penalties and interest expense related to income taxes as a component of other income (expense), net, and interest expense, respectively, as necessary. There was no interest expense or penalties related to unrecognized tax benefits recorded through December 31, 2017.
The Company's major tax jurisdictions are the United States and California. All of the Company's tax years will remain open for examination by the Federal and state tax authorities for three and four years, respectively, from the date of utilization of the net operating loss or research and development credit. The Company does not have any tax audits pending.