8. Income Taxes
The following table presents loss before provision for income taxes (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
|
2017 |
|
|
|
2016 |
|
|
|
2015 |
|
|
Income/(loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
(100,107 |
) |
|
$ |
(66,210 |
) |
|
$ |
(17,489 |
) |
|
Foreign |
|
|
(31,162 |
) |
|
|
(14,614 |
) |
|
|
(18,327 |
) |
|
Total loss before provision for income taxes |
|
$ |
(131,269 |
) |
|
$ |
(80,824 |
) |
|
$ |
(35,816 |
) |
The federal, state and foreign income tax provisions for the years ended December 31, 2017, 2016 and 2015 are summarized as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
Current |
|
|
|
|
|
|
|
|
|
|
Federal |
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
State |
|
— |
|
|
— |
|
|
— |
|
|
Foreign |
|
56 |
|
|
— |
|
|
— |
|
|
Total Current |
|
56 |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
Federal |
|
— |
|
|
— |
|
|
— |
|
|
State |
|
— |
|
|
— |
|
|
— |
|
|
Foreign |
|
— |
|
|
— |
|
|
— |
|
|
Total Deferred |
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
$ |
56 |
|
$ |
— |
|
$ |
— |
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 34% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The 2017 Tax Act had no impact on tax expense primarily due to us maintaining a full valuation allowance against our net deferred tax assets.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. We did not identify items for which the income tax effects of the 2017 Tax Act have not been completed and could not be reasonably estimated as of December 31, 2017, and as such, our financial results reflect the income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is complete.
Income tax expense for the years ended December 31, 2017, 2016 and 2015 differed from the amount expected by applying the statutory federal tax rate to the loss before taxes as summarized below (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal tax benefit at statutory rate |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
State tax benefit, net of federal benefit |
|
|
0.54 |
% |
|
|
0.39 |
% |
|
|
3.02 |
% |
|
Stock compensation |
|
|
1.72 |
% |
|
|
(1.75 |
)% |
|
|
(1.59 |
)% |
|
Change in valuation allowance |
|
|
(9.31 |
)% |
|
|
(27.45 |
)% |
|
|
(20.55 |
)% |
|
Research and development credits |
|
|
1.70 |
% |
|
|
2.53 |
% |
|
|
2.52 |
% |
|
Foreign income taxed at different rates |
|
|
(8.11 |
)% |
|
|
(6.13 |
)% |
|
|
(17.40 |
)% |
|
Impact related to 2017 Tax Act |
|
|
(20.46 |
)% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
Other |
|
|
(0.12 |
)% |
|
|
(1.59 |
)% |
|
|
0.00 |
% |
|
Income tax expense |
|
|
(0.04 |
)% |
|
|
0.00 |
% |
|
|
0.00 |
% |
The significant components of our deferred taxes are as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets (liabilities): |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
38,626 |
|
|
$ |
27,109 |
|
|
Start-up costs |
|
|
740 |
|
|
|
1,282 |
|
|
Stock-based compensation |
|
|
3,115 |
|
|
|
3,427 |
|
|
Tax credit carryforwards |
|
|
6,353 |
|
|
|
3,585 |
|
|
Accruals |
|
|
1,153 |
|
|
|
1,041 |
|
|
Other |
|
|
35 |
|
|
|
22 |
|
|
Subtotal deferred tax assets |
|
|
50,022 |
|
|
|
36,466 |
|
|
Less: valuation allowance |
|
|
(49,934 |
) |
|
|
(36,466 |
) |
|
Total deferred tax assets |
|
|
88 |
|
|
|
— |
|
|
Basis differences in fixed assets |
|
|
(88 |
) |
|
|
|
|
|
Net deferred income taxes |
|
$ |
— |
|
|
$ |
— |
|
We recognize deferred income taxes for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. We periodically evaluate the positive and negative evidence bearing upon realizability of our deferred tax assets. Based upon the weight of available evidence, which includes our historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting our future results, we maintained a full valuation allowance on the net deferred tax assets as of December 31, 2017 and 2016. We remeasured our deferred tax assets and liabilities at the applicable tax rate of 21% in accordance with the 2017 Tax Act. The remeasurement resulted in a total decrease in the deferred tax assets of $26.9 million with an equal reduction to the valuation allowance recorded against our net deferred tax assets. We intend to maintain a full valuation allowance on the federal and state deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance. The net change in the valuation allowance for the years ended December 31, 2017 and December 31, 2016 was an increase of $13.5 million and $22.1 million, respectively.
As of December 31, 2017, we had net operating loss, or NOL, carryforwards for Federal, California and other state income tax purposes of $177.9 million, $12.0 million, and $11.5 million, respectively. As of December 31, 2016, we had NOL carryforwards for Federal, California and other state income tax purposes of $81.0 million, $12.0 million, and $2.4 million, respectively, which will begin to expire in 2031, 2031, and 2030, respectively, if not utilized.
As of December 31, 2017, we had Federal and California research credit carryforwards of $6.7 million and $1.6 million, respectively. As of December 31, 2016, we had Federal and California research credit carryforward of approximately $3.9 million and $0.9 million, respectively. The Federal research credits will begin to expire in 2032, while the California research credits have no expiration date.
Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in its equity ownership over a rolling three-year period, the corporation’s ability to use its pre-change net operating loss, or NOL, carryforwards to offset its post-change taxable income may be limited. Limitations may also apply to the utilization of other pre-change tax attributes as a result of an ownership change.
Following the equity investment by Nestle Health Science in November 2016, we performed a Section 382 analysis and determined that we experienced multiple ownership changes under Section 382 of the Code prior to July 31, 2017. Utilization of the NOL and tax credit carryforwards are subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382 and similar state provisions. Such annual limitations could impact the utilization of NOL and tax credit carryforwards in the future. We experienced no significant permanent losses of tax attributes due to these ownership changes.
In addition, we may experience more ownership changes under Section 382 of the Code as a result of future changes in our stock ownership, some of which may be outside our control. As a result, our ability to utilize NOL carryforwards or other tax attributes, such as research tax credits, in any taxable year may be further limited if we have experienced an ownership change.
Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement.
The following table summarizes the activity related to our unrecognized benefits (in thousands):
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
|
2017 |
|
|
|
2016 |
|
|
Beginning balance - unrecognized tax benefit, gross |
|
$ |
960 |
|
|
$ |
— |
|
|
Increases related to tax positions taken during a prior year |
|
|
— |
|
|
|
— |
|
|
Decreases related to a tax position taken during a prior year |
|
|
(2 |
) |
|
|
— |
|
|
Increases related to tax positions taken during the current year |
|
|
699 |
|
|
|
960 |
|
|
Decreases related to settlements with taxing authorities |
|
|
— |
|
|
|
— |
|
|
Decreases related to expiration of statute of limitations |
|
|
— |
|
|
|
— |
|
|
Ending balance - unrecognized tax benefits, gross |
|
$ |
1,657 |
|
|
$ |
960 |
|
At December 31, 2017, the unrecognized tax benefits for uncertain tax positions were offset against the deferred tax assets and would not affect the income tax rate if recognized due to our being in a valuation allowance position. Our policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of operations. We did not accrue any interest or penalties for the years ended December 31, 2017 and 2016. We do not have any tax positions for which it is reasonably possible that the total amount of gross unrecognized tax benefits will significantly change within 12 months of December 31, 2017.
We file federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. Due to our NOL carryforwards, our income tax returns remain subject to examination by federal and most state taxing authorities for all tax years.