11. Income Taxes
The substantial majority of the Company’s income and loss is generated in the U.S. and attributable to the U.S. tax jurisdiction. There was no foreign income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015.
The Tax Cuts and Jobs Act of 2017 (the TCJA) was signed into law in December 2017, and has resulted in significant changes to the U.S. corporate income tax system. The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, elimination, reduction or limitation of certain domestic deductions and credits, limitation of the deduction for net operating losses (NOLs) to 80% of current year taxable income, elimination of NOL carrybacks, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain significant exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modification or repeal of many business deductions and credits, including the orphan drug tax credit. The changes resulting from the TCJA are effective beginning in 2018; however, the impact to the Company’s deferred tax assets and liabilities as a result of these changes has been accounted for as of December 31, 2017 on a provisional basis.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows the Company to record provisional amounts for the effects of the TCJA in the period it was enacted for a measurement period not extend beyond one year of the enactment date. In accordance with SAB 118, the Company has determined that the impact of the TCJA to its deferred tax assets and liabilities and valuation allowance as of December 31, 2017 is a reasonable estimate and provisional amount. The final impact of the TCJA may differ from this provisional amount due to changes in the Company’s estimates and the issuance of additional regulatory or other guidance. The Company expects to complete its assessment of the final impact of the TCJA within the required measurement period under SAB 118.
A reconciliation of income tax expense (benefit) computed at the statutory federal income tax rate of 34% to income tax expense (benefit) as reflected in the financial statements is as follows (in thousands):
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal income tax benefit at statutory rate |
|
$ |
(24,876 |
) |
|
$ |
(21,556 |
) |
|
$ |
(7,756 |
) |
|
State income tax benefit, net of federal benefit |
|
|
(7,756 |
) |
|
|
(1,617 |
) |
|
|
(1,511 |
) |
|
Step-up in assets upon conversion to C-corporation |
|
|
— |
|
|
|
— |
|
|
|
(709 |
) |
|
Research and development credits |
|
|
(6,297 |
) |
|
|
(7,275 |
) |
|
|
— |
|
|
Stock-based compensation expense for incentive stock options and employee stock purchase plan |
|
|
(3,012 |
) |
|
|
1,805 |
|
|
|
283 |
|
|
Other non-deductible expenses and reconciling items |
|
|
(26 |
) |
|
|
170 |
|
|
|
129 |
|
|
Change in corporate tax rates |
|
|
16,598 |
|
|
|
42 |
|
|
|
111 |
|
|
Change in valuation allowance |
|
|
25,369 |
|
|
|
27,996 |
|
|
|
9,453 |
|
|
Total income tax expense (benefit) |
|
$ |
— |
|
|
$ |
(435 |
) |
|
$ |
— |
|
The significant components of the Company’s net deferred tax assets are as follows (in thousands):
|
|
|
December 31, 2017 |
|
|
December 31, 2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
37,658 |
|
|
$ |
25,625 |
|
|
Research and development tax credits |
|
|
21,137 |
|
|
|
10,890 |
|
|
Step-up in assets upon conversion to C-corporation |
|
|
721 |
|
|
|
953 |
|
|
Stock-based compensation expense for non-qualified stock options and restricted stock units |
|
|
4,263 |
|
|
|
1,401 |
|
|
Unrealized losses on marketable securities |
|
|
89 |
|
|
|
— |
|
|
Deferred rent |
|
|
458 |
|
|
|
258 |
|
|
Accruals and other |
|
|
1,540 |
|
|
|
1,132 |
|
|
Total deferred tax assets before valuation allowance |
|
|
65,866 |
|
|
|
40,259 |
|
|
Valuation allowance |
|
|
(65,669 |
) |
|
|
(40,084 |
) |
|
Total deferred tax assets |
|
|
197 |
|
|
|
175 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
(197 |
) |
|
|
(19 |
) |
|
Unrealized gains on marketable securities |
|
|
— |
|
|
|
(156 |
) |
|
Total deferred tax liabilities |
|
|
(197 |
) |
|
|
(175 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for its net deferred tax assets as of December 31, 2017 and 2016. The valuation allowance increased approximately $25.6 million and $28.0 million during the years ended December 31, 2017 and 2016, respectively, due primarily to federal net operating losses and research and development credits generated during the periods. The net increase in the valuation allowance during the year ended December 31, 2016 includes a partially offsetting decrease of $0.4 million for the income tax effects of gains on available-for-sale securities recognized in other comprehensive income for the period.
As of December 31, 2017 and 2016, the Company had U.S. federal NOL carryforwards of approximately $126.7 million and $66.4 million, respectively, which may be available to offset future income tax liabilities and expire at various dates beginning in 2034. As of December 31, 2017 and 2016, the Company also had U.S. state NOL carryforwards of approximately $167.8 million and $55.0 million, respectively, which may be available to offset future income tax liabilities and expire at various dates beginning in 2035.
As of December 31, 2017, the Company had federal research and development and orphan drug tax credit carryforwards of approximately $21.3 million which may be available to reduce future tax liabilities and expire at various dates beginning in 2035. The Company has conducted a formal study to document the qualified activities and expenses used to calculate the credits through the year ended December 31, 2016. The remaining portion of the credits as of December 31, 2017 are subject to future studies which may result in an adjustment to the Company’s credit carryforwards. The calculation of these credits requires assumptions to be made by management to estimate qualified research expenses. The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740, and accordingly, recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. As of December 31, 2017, the Company has unrecognized tax benefits of $0.1 million which have been reserved against the credit carryforwards as uncertain tax positions. No reserve for uncertain tax positions has been placed against qualified expenses for which a study has not been conducted. However, a full valuation allowance has been provided against the net credit carryforwards and, if an adjustment is required upon the completion of the study, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development credit carryforwards and the valuation allowance.
Under the provisions of the Internal Revenue Code, the NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed several financings since its inception which may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code, or could result in a change in control in the future.
The Company files income tax returns in the United States at the federal level and in states in which the Company conducts business activities. The federal and state income tax returns are generally subject to tax examinations for the tax years ended December 31, 2013 onward. 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 Internal Revenue Service or state tax authorities to the extent utilized in a future period.