INCOME TAXES
For financial reporting purposes, net income (loss) before income taxes includes the following components (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | (55,611 | ) | | $ | (52,750 | ) | | $ | 107,038 |
|
Foreign | (2,752 | ) | | (4,832 | ) | | (1,571 | ) |
Total | $ | (58,363 | ) | | $ | (57,582 | ) | | $ | 105,467 |
|
The components of the provision (benefit) for income taxes, in the Consolidated Statement of Operations are as follows (in thousands): |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current | | | | | |
Federal | $ | 6,991 |
| | $ | 13,137 |
| | $ | 2,094 |
|
State | 802 |
| | (155 | ) | | 1,709 |
|
| 7,793 |
| | 12,982 |
| | 3,803 |
|
Deferred | |
| | |
| | |
|
Federal | (7,965 | ) | | (18,814 | ) | | (8,296 | ) |
State | 1,540 |
| | (3,847 | ) | | (7,277 | ) |
| (6,425 | ) | | (22,661 | ) | | (15,573 | ) |
Total tax provision (benefit) | $ | 1,368 |
| | $ | (9,679 | ) | | $ | (11,770 | ) |
The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate expressed as a percentage of income (loss) before income taxes: |
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Statutory rate - federal | (35.00 | )% | | (35.00 | )% | | 35.00 | % |
State taxes, net of federal benefit | (3.30 | )% | | (3.16 | )% | | 1.53 | % |
Change in FV of derivative liability (warrants) | 2.82 | % | | 1.10 | % | | 10.89 | % |
Change in federal tax rate | 23.29 | % | | — | % | | — | % |
Bargain purchase gain | — | % | | — | % | | (16.04 | )% |
Other permanent differences | 1.04 | % | | 2.05 | % | | 3.68 | % |
Tax credits | (5.79 | )% | | (1.58 | )% | | (7.85 | )% |
Return to provision adjustments and other true-ups | (3.48 | )% | | (1.15 | )% | | (10.40 | )% |
Other | 1.25 | % | | 3.09 | % | | (0.79 | )% |
Change in valuation allowance | 21.62 | % | | 16.30 | % | | (27.02 | )% |
Income tax provision (benefit) | 2.45 | % | | (18.35 | )% | | (11.00 | )% |
The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands): |
| | | | | | | |
| 2017 | | 2016 |
Deferred Tax Assets: | | | |
Net operating loss | $ | 1,099 |
| | $ | 1,832 |
|
Research and development and other tax credits | 1,599 |
| | 60 |
|
Contingent consideration | 23,080 |
| | 32,792 |
|
Other accrued expenses | 2,603 |
| | 4,621 |
|
Stock based compensation | 15,695 |
| | 18,520 |
|
Other | 358 |
| | 30 |
|
| 44,434 |
| | 57,855 |
|
Deferred Tax Liabilities: | | | |
Intangible assets | (16,810 | ) | | (34,153 | ) |
Deferred gain on installment sale | — |
| | (14,547 | ) |
Tax basis depreciation less than book depreciation | — |
| | — |
|
| (16,810 | ) | | (48,700 | ) |
| | | |
Net deferred tax assets (liabilities) before valuation allowance | 27,624 |
| | 9,155 |
|
Valuation allowance | (27,624 | ) | | (15,580 | ) |
Total deferred tax liability | $ | — |
| | $ | (6,425 | ) |
The Company has established a full valuation allowance against its U.S. federal and state deferred tax assets due to the uncertainty surrounding the realization of such assets in future periods. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred liabilities and tax planning strategies in making this assessment and evaluates the recoverability of the deferred tax assets as of each reporting date. At such time as it is determined that it is more likely than not that deferred assets are realizable, the valuation allowance will be reduced accordingly and recorded as a tax benefit.
The Company has recorded a valuation allowance of $27.6 million as of December 31, 2017 to reflect the estimated amount of deferred tax assets that may not be realized. The Company increased its valuation allowance by $12.0 million for the year ended December 31, 2017 largely as a result of the Tax Cuts and Jobs Act ("Tax Act"), which impacted our ability to utilize certain deferred tax assets in the future.
At December 31, 2017, the Company had available unused U.S. federal net operating loss (“NOL”) carryforwards of $5.2 million and a minimal amount of state NOL carryforwards, all of which are fully offset by a valuation allowance. The U.S. federal NOL carryforwards will expire beginning in 2030. In addition, at December 31, 2017, the Company had federal orphan drug tax credit carryforwards of $0.02 million that begin to expire in 2037 unless utilized and California Competes tax credit carryforwards of $2.0 million that begin to expire in 2022. The Company has international subsidiaries whose operations are not material for the year ended December 31, 2017.
The Company accounts for uncertain tax benefits in accordance with the provisions of ASC 740-10 of the Accounting for Uncertainty in Income Taxes. As of December 31, 2017 the Company had no unrecognized tax benefits.
The Company does not anticipate that the amount of unrecognized tax benefits as of December 31, 2017 will change materially within the following 12 months.
A reconciliation of the Company's unrecognized tax benefits for the years 2017 and 2016 is provided in the following table (in thousands): |
| | | | | | | |
| 2017 | | 2016 |
Balance as of January 1: | $ | 1,500 |
| | $ | 3,324 |
|
Increase in current period positions | — |
| | — |
|
Decrease in prior period positions | (1,500 | ) | | (1,824 | ) |
Increase in prior period positions | — |
| | — |
|
Balance as of December 31: | $ | — |
| | $ | 1,500 |
|
The Company files income tax returns in the U.S. federal jurisdiction, various state and local, and foreign jurisdictions. The Company’s income tax returns are open to examination by federal, state and foreign tax authorities, generally for the years ended December 31, 2015 and later.
The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes or unrecognized tax benefits as a component of its income tax provision. During the years ended 2017, 2016 and 2015 , the Company did not recognize any interest or penalties in its Consolidated Statements of Operations and Comprehensive Income (Loss) and there were no accruals recorded for interest or penalties at December 31, 2017 and 2016.
U.S. Tax Reform
The Tax Act was enacted on December 22, 2017. The Tax Act reduces the US federal corporate tax rate from 35% to 21%, as well as making several other significant changes to the tax law, effective January 1, 2018. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), given the amount and complexity of the changes in tax law resulting from the Tax Legislation, the Company has not finalized the accounting for the income tax effects of the Tax Legislation. This includes the provisional amounts recorded related to the re-measurement of the deferred taxes and the change to our valuation allowance. The impact of the Tax Legislation may differ from this estimate, during the one-year measurement period due to, among other things, further refinement of the Company's calculation, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Legislation.
The Company's accounting for the following elements of the Tax Act is incomplete. However, the Company was able to make reasonable estimates of certain effects and therefore, has recorded provisional amounts as follows:
Revaluation of deferred tax assets and liabilities
We have remeasured our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% plus state and local tax. The Company recorded a provisional decrease related to our deferred tax assets and liabilities of $13.0 million as a result of the tax rate decrease, with a corresponding adjustment to our valuation allowance for the year ended December 31, 2017.
Valuation allowances
The Company must assess whether its valuation allowance analyses for deferred tax assets are affected by various aspects of the Tax Act (e.g., deemed repatriation of deferred foreign income, future GILTI inclusions, new categories of foreign tax credits). Since, as discussed herein, the Company has recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional. The Company increased its valuation allowance by $12.0 million as a result of the Tax Act and its effects on the realizability of our deferred tax assets.