6. Income Taxes
The provision for taxes on income consists of the following at December 31 (in thousands):
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current |
|
$ |
3 |
|
|
$ |
(441 |
) |
|
$ |
(16,654 |
) |
|
Deferred |
|
|
— |
|
|
|
— |
|
|
|
17,802 |
|
|
Total provision for taxes on income |
|
$ |
3 |
|
|
$ |
(441 |
) |
|
$ |
1,148 |
|
The following table reconciles the Company’s effective income tax rate from continuing operations to the federal statutory tax rate of 35%:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. federal income taxes |
|
|
35 |
% |
|
|
35 |
% |
|
|
35 |
% |
|
Stock-based compensation |
|
|
— |
|
|
|
(2 |
) |
|
|
(80 |
) |
|
Change in valuation allowance |
|
|
48 |
|
|
|
(25 |
) |
|
|
(310 |
) |
|
2017 Tax Act |
|
|
(111 |
) |
|
|
— |
|
|
|
— |
|
|
Federal tax credits |
|
|
28 |
|
|
|
— |
|
|
|
— |
|
|
Other |
|
|
— |
|
|
|
(1 |
) |
|
|
(25 |
) |
|
Recorded federal income tax benefit (provision) |
|
|
0 |
% |
|
|
7 |
% |
|
|
(380 |
)% |
The Tax Cuts and Jobs Act of 2017 (the 2017 Tax Act), which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21% and the elimination or reduction in the deductibility of certain credits and limitations, such as tax credits related to designated orphan drugs, net operating losses, interest expense, and executive compensation. The federal statutory rate reduction takes effect on January 1, 2018. As a result of the reduction of federal corporate income tax rates, the Company has estimated a material reduction of $53,113,000 to its deferred tax assets. However, consistent with 2016, its deferred tax assets continue to be fully offset by a valuation allowance in 2017 as the Company cannot currently conclude that it is more likely than not that the remaining deferred tax assets will be utilized. Consequently, although the future potential benefit from its deferred tax assets has been materially reduced by the reduction of federal corporate income tax rates, there was no effect on its 2017 Consolidated Statement of Operations. On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. In accordance with SAB 118, the Company continues to evaluate the impact of the 2017 Tax Act, which may impact its current conclusions. Any subsequent adjustment to those amounts will be recorded to current tax expense in the third quarter of 2018 when the analysis is complete.
Deferred tax assets and liabilities reflect the net effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred tax assets as of December 31 are as follows (in thousands):
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
$ |
51,332 |
|
|
$ |
101,864 |
|
|
Net operating loss |
|
|
25,601 |
|
|
|
19,159 |
|
|
Federal tax credits |
|
|
20,928 |
|
|
|
— |
|
|
Stock-based compensation |
|
|
2,118 |
|
|
|
1,362 |
|
|
Depreciation |
|
|
318 |
|
|
|
608 |
|
|
Other |
|
|
301 |
|
|
|
392 |
|
|
Subtotal |
|
|
100,598 |
|
|
|
123,385 |
|
|
Less: Valuation allowance |
|
|
(100,598 |
) |
|
|
(123,385 |
) |
|
Net deferred tax asset |
|
$ |
— |
|
|
$ |
— |
|
Deferred tax assets are regularly reviewed for recoverability and valuation allowances are established based on historical and projected future taxable losses and the expected timing of the reversals of existing temporary differences. Additionally, as a result of the 2017 Tax Act, the Company’s net deferred tax assets have been re-measured at the reduced federal statutory rate as of December 31, 2017. The Company cannot currently conclude that it is more likely than not that the remaining deferred tax assets will be utilized. Therefore, the Company’s deferred tax assets have been fully offset by a valuation allowance in 2017. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including reversals of deferred tax liabilities) during the periods in which those temporary differences will become deductible. The valuation allowance decreased by $22,788,000 in 2017 and increased by $1,685,000 in 2016.
As of December 31, 2017, the Company had accumulated net operating losses of approximately $121,911,000 of which $315,000 are subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended (Section 382). Approximately $434,000 of the net operating loss carryforwards expire between fiscal years 2023 and 2024, with the remaining $121,477,000 expiring in fiscal year 2037.
As of December 31, 2017, the Company has federal orphan drug tax credit and research and development tax credit carryforwards of $20,805,000 and $123,000, respectively. These credits expire beginning in 2024.
As of December 31, 2017, there were no unrecognized tax benefits that, if recognized, would have an impact on the Company’s effective tax rate. The Company currently has a full valuation allowance against its deferred tax assets. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. The Internal Revenue Service (IRS) completed an examination of the Company’s U.S. income tax returns for 2009, 2011, and 2012, with no significant adjustments, and has commenced an examination of the Company’s U.S. income tax returns for 2013, 2014, and 2015. As of February 28, 2018, the Company has not been notified of any significant proposed adjustments by the IRS. All other tax years remain open to federal tax examination. The Company will classify interest and penalties related to unrecognized tax benefits as part of the income tax provision.