Income Taxes
The Company provides for income taxes under ASC 740, Income Taxes ("ASC 740"). Under ASC 740, the Company provides deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the Company’s financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse.
For the years ended December 31, 2017, 2016 and 2015, the Company did not record a current or deferred income tax expense or benefit. The following table reconciles the federal statutory income rate to the Company's effective income tax rate: |
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax at U.S. statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
Changes from statutory rate: | | | | | |
State taxes, net of federal benefit | 5.8 | % | | 5.8 | % | | 5.7 | % |
Permanent items | (0.1 | )% | | (1.1 | )% | | (0.7 | )% |
Research tax credits/other | 0.5 | % | | 1.3 | % | | 1.0 | % |
Change in enacted rates | (35.8 | )% | | — | % | | — | % |
Valuation allowance, net | (6.7 | )% | | (39.8 | )% | | (40.0 | )% |
Other | 2.3 | % | | (0.2 | )% | | — | % |
Effective income tax rate | — | % | | — | % | | — | % |
Significant components of the Company's deferred tax assets (liabilities) consists of the following:
|
| | | | | | | |
| December 31, |
(In thousands) | 2017 | | 2016 |
Deferred tax assets | | | |
Net operating loss carryforwards | $ | 44,146 |
| | $ | 39,420 |
|
Research and development credits | 4,092 |
| | 3,052 |
|
Stock-based compensation expense | 959 |
| | 904 |
|
Deferred rent and other expenses | 263 |
| | 713 |
|
Deferred revenue | 4,021 |
| | 5,607 |
|
Patent costs/amortization | 4,264 |
| | 4,934 |
|
Total deferred tax assets | 57,745 |
| | 54,630 |
|
| | | |
Deferred tax liabilities | | | |
Depreciation | $ | (108 | ) | | $ | (131 | ) |
Debt discount | — |
| | (69 | ) |
Unrealized foreign exchange gain | — |
| | (1,525 | ) |
Total deferred tax liabilities | (108 | ) | | (1,725 | ) |
Net deferred tax assets | $ | 57,637 |
| | $ | 52,905 |
|
Valuation allowance | (57,637 | ) | | (52,905 | ) |
Net deferred tax assets | $ | — |
| | $ | — |
|
The Company has provided a full valuation allowance against its net deferred tax assets because the Company believes it is more likely than not that its deferred tax assets will not be realized. Realization of future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period. The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and concluded that it is more likely than not that the Company will not realize the benefit of its deferred tax assets. The valuation allowance increased by $4.7 million and $14.4 million for the years ended December 31, 2017 and 2016, respectively, primarily as a result of an increase in net operating loss. In 2014, the Company's Russian subsidiary was granted a 10 year tax holiday in Russia. The Company's foreign operations continue to benefit from the tax holiday, which is set to expire on December 31, 2023.
At December 31, 2017, the Company had federal and state net operating loss carryforwards of $162.9 million and $157.9 million, respectively, which will expire at various times through 2037. The Company also has federal and state research and development tax credit carryforwards of $2.5 million and $2.0 million, respectively, available to reduce future tax liabilities, which will expire at various dates through 2037.
Included in the net operating loss carryforwards above is approximately $0.8 million related to excess stock option deductions. On March 30, 2016, the FASB released ASU 2016-09, which the Company adopted during the first quarter of 2017. Upon adoption of ASU 2016-09, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based awards) will be recognized as income tax expense or benefit in the income statement. Prior to adoption of ASU 2016-09, such excess tax benefits were recognized as an adjustment to paid-in capital. Further, each award needed to be evaluated to determine if there was a deficiency or an excess. Although ASU 2016-09 will certainly reduce the complexity surrounding the accounting for excess tax benefits and deficiencies, it will create significant volatility in a company’s tax rate. The standard provides that the tax effects of exercised or vested awards will be treated as a discrete item in the reporting period in which they occur. Thus, the tax effect of excess benefits and deficiencies on a company’s tax rate will not be part of the overall effective tax rate.
Prior to December 31, 2016, the Company had federal and state NOLs relating to stock-based compensation in the amount of $0.8 million and $0.8 million, respectively, that were not included in deferred tax assets. Under the Company's previous accounting policy, when the excess stock-based compensation relating to the NOL carryforward were ultimately realized, the benefit would be credited directly to stockholders’ equity. During the first quarter of 2017, the Company adopted ASU 2016-09, which resulted in an increase to NOL deferred tax assets of $0.3 million, offset by a corresponding increase in the valuation allowance. The adoption of ASU 2016-09 had no impact to the Company’s consolidated statements of operations and comprehensive loss, balance sheet, or retained earnings.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act ("Tax Reform Act"). The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system, expanding the tax base and imposing a tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate federal income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Company has recognized the impact of the Tax Reform Act in these consolidated financial statements and related disclosures. Due to the complexities involved in accounting for the enactment of the Tax Reform Act, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which allows a registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. In accordance with SAB 118, the Company recorded provisional amounts reflecting the impact of the Tax Reform Act in these consolidated financial statements and related disclosures. The impact of the remeasurement of the Company’s U.S. deferred tax assets and liabilities to 21% resulted in the reduction of deferred tax assets of approximately $23.4 million, which is offset by a full valuation allowance, thus there is no net effect. The Company recorded no tax expense related to the deemed repatriation tax because its foreign entity, Selecta (RUS) is a foreign disregarded entity, which is not subject to the repatriation tax.
The Company's preliminary estimate of the Tax Reform Act and the remeasurement of its deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the Tax Reform Act, changes to certain estimates and the filing of its tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Reform Act may require further adjustments and changes in the Company's estimates. The final determination of the Tax Reform Act and the remeasurement of the Company's deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the Tax Reform Act.
Utilization of the net operating loss and research and development credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership change limitations that have occurred previously, or that could occur in the future. These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.
The Company applies ASC 740 to uncertain tax positions. As of the adoption date of January 1, 2010 and through December 31, 2017, the Company had no unrecognized tax benefits or related interest and penalties accrued.
The Company has not, as of yet, conducted a study of its research and development credit carryforwards. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. As a result, there would be no impact to the consolidated balance sheets, statements of operations and comprehensive loss, or cash flows if an adjustment was required.
Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying statement of operations and comprehensive loss. As of December 31, 2017, the Company had no accrued interest related to uncertain tax positions.
The statute of limitations for assessment by the Internal Revenue Service and Massachusetts tax authorities is open for tax years since inception. The Company files income tax returns in the United States and Massachusetts. There are currently no federal, state or foreign audits in progress.