Income Taxes
From inception through 2017, the Company has only generated pretax losses in the United States and has not generated any pretax income or loss outside of the United States. As a result of the Company's transfer of the economic rights to certain intellectual property to the Company's wholly owned subsidiary, Revance International Limited, the Company will begin to have operations outside of the U.S. The Company did not record a provision (benefit) for income taxes for the years ended December 31, 2017, 2016, and 2015.
The domestic and foreign components of loss before provision for income taxes were as follows (in thousands):
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Domestic | $ | (118,331 | ) | | $ | (89,270 | ) | | $ | (73,476 | ) |
Foreign | (2,256 | ) | | — |
| | — |
|
Loss before provision for income taxes | $ | (120,587 | ) | | $ | (89,270 | ) | | $ | (73,476 | ) |
Significant components of the Company’s deferred tax assets as of December 31, 2017 and 2016 consist of the following (in thousands):
|
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss carryforward | $ | 106,338 |
| | $ | 139,647 |
|
Accruals and reserves | 2,591 |
| | 2,433 |
|
Stock based compensation | 5,400 |
| | 4,805 |
|
Tax credits | 6,779 |
| | 4,053 |
|
Fixed and intangible assets | 7,221 |
| | 8,209 |
|
Valuation Allowance | (128,329 | ) | | (159,147 | ) |
Net deferred tax assets | $ | — |
| | $ | — |
|
Reconciliations of the statutory federal income tax (benefit) to the Company’s effective tax for the years ended December 31, 2017, 2016, and 2015 are as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax (benefit) at statutory federal rate | $ | (40,999 | ) | | $ | (30,352 | ) | | $ | (24,982 | ) |
Foreign rate differential and withholding taxes | 767 |
| | — |
| | — |
|
Nondeductible/nontaxable items | 738 |
| | 832 |
| | 224 |
|
Impact of the Tax Reform Act | 62,903 |
| | — |
| | — |
|
Sale of Intellectual Property(1) | 14,008 |
| | — |
| | — |
|
Research and development credits | (1,858 | ) | | (544 | ) | | (516 | ) |
Other | 224 |
| | 11 |
| | 607 |
|
Change in valuation allowance | $ | (35,783 | ) | | $ | 30,053 |
| | $ | 24,667 |
|
Provision for taxes | $ | — |
| | $ | — |
| | $ | — |
|
| |
(1) | This represents the tax effect of an inter-entity sale which was eliminated for financial reporting purposes. |
The valuation allowance is determined using an assessment of both positive and negative evidence. Based on the available objective evidence and the Company’s history of losses management believes it is more likely than not that the net deferred tax assets will not be realized. The Company has established a valuation allowance to offset deferred tax assets as of December 31, 2017 and 2016 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. The valuation allowance decreased by $30.8 million and increased by $29.2 million during the years ended December 31, 2017 and 2016, respectively. The valuation allowance decreased primarily due to the impact of the Tax Reform Act.
As of December 31, 2017, the Company had net operating loss carryforwards available to reduce future taxable income, if any, for Federal, California, and New Jersey income tax purposes of $453.1 million, $160.2 million, and $378.7 million, respectively. If not utilized, the Federal net operating loss carryforward begin expiring in 2020, the California net operating loss carryforwards began expiring in 2010, and the New Jersey state net operating loss carryforwards begin expiring in 2030. The Company recognizes excess tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized.
As of December 31, 2017, the Company also had research and development credit carryforwards of $4.3 million and $6.1 million available to reduce future taxable income, if any, for Federal and California state income tax purposes, respectively. If not utilized, the Federal credit carryforwards will begin expiring in 2023 and the California credit carryforwards have no expiration date.
In general, if the Company experiences a greater than 50 percentage point aggregate change in ownership over a 3-year period (a Section 382 ownership change), utilization of its pre-change NOL carryforwards are subject to an annual limitation under Section 382 of the Internal Revenue Code (California and New Jersey have similar laws). The annual limitation generally is determined by multiplying the value of the Company’s stock at the time of such ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization. The Company determined that an ownership change occurred on April 7, 2004 but that all carryforwards can be utilized prior to the expiration. The Company also determined that an ownership change occurred in February 2014. As a result of the 2014 change, the Company reduced the deferred tax assets and the corresponding valuation allowance to account for this limitation. Since the R&D credits for California carry over indefinitely, there was no change to the California R&D credits. The Company has reviewed its IRC §382 limitation through December 31, 2017 and have not identified any ownership changes resulting in a limitation.
The ability of the Company to use its remaining NOL carryforwards may be further limited if the Company experiences a Section 382 ownership change as a result of future changes in its stock ownership.
On December 22, 2017, the U.S. government enacted a comprehensive tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). The Tax Reform Act makes broad and complex changes to the US tax code including but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time transition tax on certain repatriated earnings of foreign subsidiaries, which has no impact to the Company; (3) generally eliminating US federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in US federal income of certain earnings of controlled foreign corporations; (5) creating a new limitation on deductible interest expense; and (6) changing rules related to the uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance on accounting for the tax effects of the Tax Reform Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Reform Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Reform Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Reform Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Reform Act.
Effect of Tax Reform Act and SAB 118 - The Tax Reform Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. In addition, the Company’s accounting for the tax effects of enactment of the Tax Reform Act is incomplete; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and valuation allowance. In certain aspects, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. The Company has determined that the $62.9 million recorded in connection with the re-measurement of certain deferred tax assets and liabilities, and corresponding valuation allowance was a provisional amount and a reasonable estimate at December 31, 2017. The Company has not completed the accounting with regard to the tax effects associated with an intra-entity transfer of certain intellectual property rights with the enactment of Tax Reform Act. Our accounting for the intra-entity transfer reflects the utilization of net operating losses on the basis of the laws in effect before the Tax Reform Act. The Company is evaluating the impact under Tax Reform Act on the Company's global business structure. In all aspects, the Company will continue to make and refine calculations as additional analysis is completed. The Company expects to complete the accounting assessment during the one year measurement period provided by SAB 118.
The Company follows the provisions of the FASB’s guidance for accounting for uncertain tax positions. The guidance indicates a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the financial statements due to the fact the liabilities have been netted against deferred attribute carryovers. It is the Company’s policy to include penalties and interest related to income tax matters in income tax expense.
The unrecognized tax benefit was $2.6 million and $1.8 million at December 31, 2017 and December 31, 2016, respectively. The Company does not expect that its uncertain tax positions will materially change in the next twelve months. No liability related to uncertain tax positions is recorded on the financial statements. During the year ending December 31, 2017, the amount of unrecognized tax benefits increased due to additional research and development credits generated for prior periods. The additional uncertain tax benefits would not impact the Company’s effective tax rate to the extent that the Company continues to maintain a full valuation allowance against its deferred tax assets.
The unrecognized tax benefit was as follows (in thousands):
|
| | |
| Unrecognized tax benefits |
Balance as of December 31, 2014 | 1,268 |
|
Additions for prior tax positions | 10 |
|
Additions for current tax positions | 259 |
|
Balance as of December 31, 2015 | 1,537 |
|
Additions for prior tax positions | 9 |
|
Additions for current tax positions | 273 |
|
Balance as of December 31, 2016 | 1,819 |
|
Additions for prior tax positions | — |
|
Additions for current tax positions | 758 |
|
Balance as of December 31, 2017 | 2,577 |
|
The Company files income tax returns in the United States, California, and other states. The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions. All tax returns will remain open for examination by the federal and state authorities for three and four years, respectively, from the date of utilization of any net operating loss or tax credits.