12. Income Taxes
A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 31, 2017, 2016 and 2015 is as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Statutory tax rate |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
State taxes, net of federal benefits |
|
|
1.38 |
% |
|
|
0.96 |
% |
|
|
-3.62 |
% |
|
Stock-based compensation |
|
|
-0.16 |
% |
|
|
-0.62 |
% |
|
|
-1.20 |
% |
|
Credits |
|
|
1.99 |
% |
|
|
1.46 |
% |
|
|
3.30 |
% |
|
Other |
|
|
-0.64 |
% |
|
|
-0.10 |
% |
|
|
-0.54 |
% |
|
Valuation allowance |
|
|
-4.03 |
% |
|
|
-26.22 |
% |
|
|
-31.94 |
% |
|
Warrant valuation |
|
|
0.00 |
% |
|
|
-9.48 |
% |
|
|
0.00 |
% |
|
Tax rate change |
|
|
-32.54 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
Effective tax rate |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
The tax effects of temporary differences and carryforwards that give rise to the Company’s deferred tax assets are as follows (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards |
|
$ |
68,807 |
|
|
$ |
71,858 |
|
|
Research and development credit |
|
|
17,365 |
|
|
|
10,969 |
|
|
Intangible assets |
|
|
824 |
|
|
|
1,653 |
|
|
Depreciation |
|
|
— |
|
|
|
191 |
|
|
Temporary differences |
|
|
8,017 |
|
|
|
4,682 |
|
|
Gross Deferred tax assets |
|
|
95,013 |
|
|
|
89,353 |
|
|
Less: valuation allowance |
|
|
(95,013 |
) |
|
|
(89,353 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The net valuation allowance increased by $5.7 million and $18.7 million during the years ended December 31, 2017 and 2016, respectively.
The Company had federal and state net operating loss carryforwards of approximately $297.5 million and $85.0 million, respectively, at December 31, 2017. The federal and state net operating loss carryforwards are available to reduce future taxable income, if any. If not utilized, the federal and state operating loss carryforwards will begin to expire in various amounts beginning 2023 and 2018, respectively. The Company also had federal and state research and development credit carryforwards of approximately $13.8 million and $7.2 million, respectively, at December 31, 2017. The federal research and development credits will begin to expire in 2025. The state research and development credits can be carried forward indefinitely.
Utilization of the net operating loss and research and development credits carryforwards may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of the net operating loss and research and development credits before utilization.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal and state income tax examinations by tax authorities for tax years from 2003 due to net operating losses and tax credits that are being carried forward for tax purposes.
The Company recognizes the financial statements effects of a tax position when it is more likely than not, based on technical merits, that the position will be sustained upon examination. A reconciliation of the Company’s unrecognized tax benefits is as follows (in thousands):
|
|
|
December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at beginning of year |
|
$ |
1,197 |
|
|
$ |
957 |
|
|
$ |
— |
|
|
Increase related to current year tax provision |
|
|
516 |
|
|
|
240 |
|
|
|
162 |
|
|
Increase related to tax rate change |
|
|
144 |
|
|
|
— |
|
|
|
— |
|
|
Increase related to prior year tax provision |
|
|
— |
|
|
|
— |
|
|
|
795 |
|
|
Balance at end of year |
|
$ |
1,857 |
|
|
$ |
1,197 |
|
|
$ |
957 |
|
The unrecognized tax benefits, if recognized and in absence of full valuation allowance, would impact the income tax provision by $1.7 million, $1.0 million and $0.8 million as of December 31, 2017, 2016 and 2015, respectively. Given the Company’s valuation allowance, the uncertain tax positions would not impact the effective tax rates.
The Company has elected to include interest and penalties as a component of tax expense. There was no interest or penalties accrued related to uncertain tax positions as of December 31, 2017.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted into law in the United States. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, the Company has not completed the accounting for the tax effects as a result of the Act. However, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and recognized a provisional amount of $40.9 million. In some cases, the Company has not been able to make a reasonable estimate and continues 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 the Act. In all cases, the Company will continue to make and refine its calculations as additional analysis and more thorough understanding of the tax law is completed.
Pursuant to SEC Staff Accounting Bulletin (SAB) 118 (regarding the application of ASC 740 associated with the enactment of the Act), the Company remeasured certain tax assets and liabilities based on the rates the Company expects them to reverse in the future, which is generally 21%. The Company is still analyzing certain aspects of the ACT and refining its calculations, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of the deferred tax balance was $40.9 million, which was fully offset by a valuation allowance.