8. Income Taxes
A reconciliation of the Company’s effective tax rate and federal statutory tax rate is summarized as follows (in thousands):
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal income taxes |
|
$ |
(6,686 |
) |
|
$ |
(9,453 |
) |
|
$ |
(8,300 |
) |
|
State income taxes, net of federal benefit |
|
|
(1,404 |
) |
|
|
— |
|
|
|
— |
|
|
Permanent items |
|
|
1,170 |
|
|
|
717 |
|
|
|
277 |
|
|
Uncertain tax positions |
|
|
(1,158 |
) |
|
|
1,644 |
|
|
|
749 |
|
|
Research and development credits |
|
|
(2,719 |
) |
|
|
(2,078 |
) |
|
|
(881 |
) |
|
California net operating loss carryforwards |
|
|
(2,208 |
) |
|
|
(1,054 |
) |
|
|
— |
|
|
Rate change |
|
|
— |
|
|
|
(489 |
) |
|
|
— |
|
|
Tax Cuts and Jobs Act |
|
|
11,478 |
|
|
|
— |
|
|
|
— |
|
|
Other, net |
|
|
(126 |
) |
|
|
5 |
|
|
|
82 |
|
|
Stock-based compensation |
|
|
123 |
|
|
|
— |
|
|
|
— |
|
|
Change in valuation allowance |
|
|
1,530 |
|
|
|
10,708 |
|
|
|
8,073 |
|
|
Provision for income taxes |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Significant components of the Company’s deferred tax assets are summarized as follows (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
23,198 |
|
|
$ |
24,484 |
|
|
Research and development credits and Orphan Drug credits |
|
|
6,518 |
|
|
|
3,262 |
|
|
Deferred revenue |
|
|
— |
|
|
|
441 |
|
|
Depreciation and amortization |
|
|
414 |
|
|
|
229 |
|
|
Other, net |
|
|
1,802 |
|
|
|
1,753 |
|
|
Total deferred tax assets |
|
|
31,932 |
|
|
|
30,169 |
|
|
Valuation allowance |
|
|
(31,932 |
) |
|
|
(30,169 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
The Company has net deferred tax assets relating primarily to net operating loss (NOL) carryforwards and research and development credit carryforwards. Subject to certain limitations, the Company may use these deferred tax assets to offset taxable income in future periods. Due to the Company’s history of losses and uncertainty regarding future earnings, a full valuation allowance has been recorded against the Company’s deferred tax assets, as it is more likely than not that such assets will not be realized. The net change in the total valuation allowance for the years ended December 31, 2017, 2016 and 2015 was $1.5 million, $10.7 million and $8.1 million, respectively.
At December 31, 2017, the Company had federal and California NOL carryforwards of approximately $83.1 million and $85.3 million, respectively. The federal and California NOL carryforwards will begin to expire in 2030, unless previously utilized. At December 31, 2017, the Company also had federal and California research and development and Orphan Drug credit carryforwards of approximately $7.0 million and $1.6 million, respectively. The federal research and development and Orphan Drug credit carryforwards will begin expiring in 2031 unless previously utilized. The California research credit will carry forward indefinitely under current law.
Pursuant to Sections 382 and 383 of the Code, the annual use of the Company’s NOL and research and development credit carryforwards may be limited in the event that a cumulative change in ownership of more than 50% occurs within a three-year period. The Company completed a Section 382/383 analysis regarding the limitation of NOL and research and development credit carryforwards as of December 31, 2015 and as a result of the analysis, an ownership change was determined to have occurred at the time of the Company’s initial public offering in January 2015. Future ownership changes may further limit the Company’s ability to utilize the remaining NOL and research and development credit carryforwards.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the Tax Act). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate income tax rate from a maximum of 35% to a flat 21% rate. The rate reduction is effective on January 1, 2018. As a result of the rate reduction, the Company has reduced the deferred tax asset balance as of December 31, 2017 by $11.5 million. Due to the Company's full valuation allowance position, the Company has also reduced the valuation allowance by the same amount. In accordance with Staff Accounting Bulletin 118, as of December 31, 2017, the Company has not completed its accounting for the tax effects of the enactment of the Tax Act; however, the Company has made a reasonable estimate of the effects on its existing deferred tax balances.
Due to uncertainties which currently exist in the interpretation of the provisions of the Tax Act regarding Internal Revenue Code Section 162(m), the Company has not completed its evaluation of the potential impacts of IRC Section 162(m) as amended by the Tax Act on its financial statements.
The changes in the Company’s unrecognized tax benefits are summarized as follows (in thousands):
|
Balance at December 31, 2014 |
|
$ |
369 |
|
|
Increase related to prior year positions |
|
|
1,135 |
|
|
Increase related to current year positions |
|
|
318 |
|
|
Balance at December 31, 2015 |
|
|
1,822 |
|
|
Increase related to prior year positions |
|
|
1,902 |
|
|
Increase related to current year positions |
|
|
453 |
|
|
Balance at December 31, 2016 |
|
|
4,177 |
|
|
Decrease related to prior year positions |
|
|
(2,701 |
) |
|
Increase related to current year positions |
|
|
690 |
|
|
Balance at December 31, 2017 |
|
$ |
2,166 |
|
|
|
|
|
|
|
The Company’s policy is to include interest and penalties related to unrecognized income tax benefits as a component of income tax expense. The Company has no accruals for interest or penalties in the accompanying consolidated balance sheets as of December 31, 2017 and 2016 and has not recognized interest or penalties in the accompanying consolidated statements of operations for the three years in the period ended December 31, 2017.
Due to the valuation allowance recorded against the Company’s deferred tax assets, future changes in unrecognized tax benefits will not impact the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly in the next 12 months.
The Company is subject to taxation in the United States and California. Due to the net operating loss carryforwards, the U.S. federal and California returns are open to examination for all years since inception. The Company has not been, nor is it currently, under examination by the federal or any state tax authority.