15.Income Taxes
(Loss) income before income taxes consists of the following:
|
|
|
Year Ended December 31, |
|
|||||||||
|
(in thousands) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
United States |
|
$ |
(83,762 |
) |
|
$ |
(98,465 |
) |
|
$ |
(70,860 |
) |
|
Foreign |
|
|
(4,554 |
) |
|
|
(13,171 |
) |
|
|
— |
|
|
Total |
|
$ |
(88,316 |
) |
|
$ |
(111,636 |
) |
|
$ |
(70,860 |
) |
The components of income tax (benefit) expense consist of the following:
|
|
|
Year Ended December 31, |
|
|||||||||
|
(in thousands) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Foreign |
|
|
753 |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
753 |
|
|
$ |
— |
|
|
$ |
— |
|
There is no provision for income taxes in the United States because the Company has historically incurred net operating losses and maintains a full valuation allowance against its net deferred tax assets. The provision for income taxes in foreign jurisdictions relate to withholding taxes incurred in the Zai territory. The reported amount of income tax expense for the years differs from the amount that would result from applying domestic federal statutory tax rates to pretax losses primarily because of changes in valuation allowance.
On December 22, 2017, the new tax reform law, which is commonly referred to as the “Tax Cuts and Jobs Act”, or The Act, was signed into law by President Trump. The Act includes a number of provisions, including the lowering of the U.S. corporate tax rate from 35 percent to 21 percent, effective January 1, 2018 and the establishment of a territorial-style system for taxing foreign-source income of domestic multinational corporations. The Company is in the process of quantifying the tax impacts of The Act. Due to the Company's full valuation allowance, no provisional tax expense or benefit associated with the re-measurement was recognized in the Company's consolidated statement of operations and comprehensive loss for the year ended December 31, 2017. However, the reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent resulted in increases to the amounts reflected in the “Change in valuation allowance” and "Impact of Tax Law Change" captions for the year ended December 31, 2017 in the Company’s tax reconciliation table compared to those amounts disclosed for the years ended December 31, 2016 and 2015. The change in the U.S. federal corporate tax rate, which is effective January 1, 2018, is also reflected in the Company’s deferred tax table. The Company is still in the process of analyzing the impact to the Company of the Tax Act. On December 22, 2017, the SEC staff issued SAB 118 to address the application of 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 Tax Act. The Company has recognized the provisional tax impacts related to the revaluation of the deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of The Act, which could result in changes to the provisional tax impacts during 2018.
A reconciliation of the Company’s effective tax rate to the statutory federal income tax rate is as follows:
|
|
Year Ended December 31, |
|
||||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal statutory rate |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
Change in valuation allowance |
|
|
17.61 |
|
|
|
(37.31 |
) |
|
|
(46.61 |
) |
|
Permanent differences |
|
|
0.66 |
|
|
|
0.17 |
|
|
|
1.67 |
|
|
State taxes, net of federal benefits |
|
|
5.57 |
|
|
|
4.61 |
|
|
|
6.13 |
|
|
Withholding Tax |
|
|
(0.85 |
) |
|
|
— |
|
|
|
— |
|
|
Impact of Tax Law Change |
|
|
(59.79 |
) |
|
|
— |
|
|
|
— |
|
|
Foreign Rate Differential |
|
|
(1.80 |
) |
|
|
(4.13 |
) |
|
|
— |
|
|
Other |
|
|
2.74 |
|
|
|
1.66 |
|
|
|
3.81 |
|
|
|
|
|
(0.86 |
)% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Significant components of the Company’s net deferred tax assets at December 31, 2017 and 2016 are as follows:
|
|
Year Ended December 31, |
|
||||||
|
(in thousands) |
|
2017 |
|
|
2016 |
|
||
|
Non-current deferred tax assets |
|
|
|
|
|
|
|
|
|
Net operating losses |
|
$ |
69,977 |
|
|
$ |
83,480 |
|
|
Accrued expenses |
|
|
228 |
|
|
|
2,774 |
|
|
Capitalized research and development |
|
|
24,904 |
|
|
|
29,882 |
|
|
Tax credit carryforwards |
|
|
12,843 |
|
|
|
9,478 |
|
|
Other |
|
|
47 |
|
|
|
100 |
|
|
Stock compensation and other |
|
|
8,218 |
|
|
|
6,425 |
|
|
Total non-current deferred tax assets |
|
|
116,217 |
|
|
|
132,139 |
|
|
Non-current deferred tax liabilities |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
(39 |
) |
|
|
(408 |
) |
|
Total non-current deferred tax liabilities |
|
|
(39 |
) |
|
|
(408 |
) |
|
Net non-current deferred tax asset |
|
|
116,178 |
|
|
|
131,731 |
|
|
Less: valuation allowance |
|
|
(116,178 |
) |
|
|
(131,731 |
) |
|
Net deferred tax asset |
|
$ |
— |
|
|
$ |
— |
|
As of December 31, 2017, the Company had federal and state net operating loss carryforwards of $283.0 million and $168.0 million, respectively, which begin to expire in 2018.
As of December 31, 2017, the Company had federal and state research and development tax credits carryforwards of $9.0 million and $4.4 million, respectively, which began to expire in 2018.
Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards and research and development credits. Under the applicable accounting standards, management has considered the Company’s history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets. Accordingly, a full valuation allowance of $116.2 million and $131.7 million, respectively, was established as of December 31, 2017 and 2016. A change in the Company’s valuation allowance was recorded in 2017, in the amount of $(15.5) million due primarily to the adjustment in the corporate tax rate from 35 percent to 21 percent enacted for 2018 partially offset by the generation of net operating losses.
Utilization of the net operating loss and research and development credit carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.
During 2016, the Company performed a formal study to determine if any of its remaining net operating loss and credit attributes might be further limited due to the ownership change rules of Section 382 or Section 383 of the Internal Revenue Code of 1986, as amended. As a result of that study, the Company has identified certain net operating losses that might expire unused. The Company has established a full valuation allowance against these attributes.
The Company follows the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes—an interpretation of ASC 740, which requires it to determine whether a tax position of the Company is more likely than not to be sustained upon examination, including resolution of any related appeals of litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon the ultimate settlement with the relevant taxing authority.
The Company is in the process of conducting a study of its research and development credit carryforwards. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until the study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credits, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheets or statements of operations if an adjustment were required.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. The earliest tax years that remain subject to examination by jurisdiction is 2014 for both federal and Massachusetts. However, to the extent the Company utilizes net operating losses from years prior to 2014, the statute remains open to the extent of the net operating losses or other credits are utilized. The Company’s policy is to record interest and penalties related to income taxes as part of the tax provision. There was no interest or penalties pertaining to uncertain tax positions in 2017 or 2016.