Entity information:

• Entity registrant name: ADURO BIOTECH, INC.
• CIK: 0001435049
• SEC filing page: http://www.sec.gov/Archives/edgar/data/1435049/000156459018004135/0001564590-18-004135-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/1435049/000156459018004135/adro-20171231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/1435049/000156459018004135/adro-20171231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0001435049
• Generator: Donnelley Financial Solutions
• Total assets: 445,128,000
• Income tax expense (benefit): -11,364,000
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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13. Income Taxes

The components of loss before income tax benefit were as follows (in thousands):

 

 

The income tax provision (benefit) consists of the following (in thousands):

 

 

A reconciliation of the statutory U.S. federal rate to the Company’s effective tax rate is as follows:

  

 

The decrease in the effective tax rate from 30.8% during 2016 to (11%) during 2017 was primarily related to the tax benefit associated with the carryback of 2017 losses.

The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets and liabilities are as follows (in thousands):

  

 

The Company is required to reduce its deferred tax assets by a valuation allowance if it is more likely than not that some or all of its deferred tax assets will not be realized. Management must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of the valuation allowance, if any, the Company assesses the likelihood that it will be able to recover its deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical consolidated cumulative losses, the Company determined that, based on all available evidence, there was substantial uncertainty as to whether it will recover its recorded net deferred taxes in future periods. As a result, the Company recorded a valuation allowance against the net deferred tax assets at December 31, 2017 and at December 31, 2016. The net valuation allowance increased by $8.7 million and $60.5 million in 2017 and 2016, respectively.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. Among other changes is a permanent reduction in the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018.  As a result of the reduction in the corporate income tax rate, the Company revalued its net deferred tax assets, which resulted in a reduction in the value of our deferred tax asset of approximately $26.5 million, offset by the change in valuation allowance of $26.5 million, for the year ended December 31, 2017. In addition, the Act repeals the two-year carryback for losses arising in tax years ending after 2017.  As a result, the Company recognized deferred tax expense of $3.4 million for the year ended December 31, 2017 due to the inability to carryback existing temporary differences after 2017.   

 

Also on December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax 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 to be included in the financial statements. Provisional amounts or adjustments to provisional amounts identified in the measurement period, as defined, would be included as an adjustment to tax expense or benefit from continuing operations in the period the amounts are determined. Due to the broad complexities of the Tax Act, under the guidance of Staff Accounting Bulletin 118, the Company has determined a reasonable estimate for the effects of the Tax Act, and reported the estimates as provisional amounts in our financial statements for which the accounting under ASC Topic 740 is completed.

At December 31, 2017, the Company has generated net operating loss, or NOL, carryforwards (before tax effects) for federal, state and foreign income tax purposes of $28.2 million, $17.4 million and $38.9 million, respectively. None of these amounts represent tax deductions from stock-based compensation, which will be recorded as an adjustment to additional paid-in capital when they reduce tax payable. These federal, state and foreign NOL carryforwards will begin to expire in 2027, 2033 and 2023, respectively, if not utilized. In addition, the Company has federal and state tax credit carryforwards of $36.5 million and $6.0 million, respectively, to offset future income tax liabilities. The federal tax credits can be carried forward for 20 years and will start to expire in 2034, if not utilized, while the state research and development tax credit can be carried forward indefinitely.

Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, the Company’s ability to utilize NOL carryforwards or other tax attributes, such as federal tax credits, in any taxable year may be limited if the Company has experienced an “ownership change.” Generally, a Section 382 ownership change occurs if one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Similar rules may apply under state tax laws. We have experienced an ownership change that we believe under Section 382 of the Code will result in limitations in our ability to utilize net operating losses and credits. In addition, the Company may experience future ownership changes as a result of future offerings or other changes in ownership of its stock. As a result, the amount of the NOLs and tax credit carryforwards presented in the financial statements could be limited and may expire unutilized.

Uncertain Tax Positions

A reconciliation of the Company’s unrecognized tax benefits for the years ended December 31, 2017 and 2016 is as follows (in thousands):

 

 

Without regard to the valuation allowance, $0.8 million of unrecognized tax benefits included in the consolidated balance sheet would, if recognized, affect the effective tax rate.

The Company does not foresee material changes to its gross uncertain income tax position liability within the next 12 months.

The Company files income tax returns in the United States and the Netherlands. The federal and state income tax returns are open under the statute of limitations subject to tax examinations for the tax years ended December 31, 2012 through December 31, 2016. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the IRS or state tax authorities to the extent utilized in a future period. For the Netherlands, the tax administration can impose an additional assessment within five years from the year in which the tax debt originated.

The Company will recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense in its consolidated statements of operations. At December 31, 2017, the Company has recorded no interest and penalties.