13. Income Taxes
The provision for federal income taxes in 2017, 2016, and 2015 is as follows:
|
|
|
December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(247 |
) |
|
$ |
247 |
|
|
$ |
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
(247 |
) |
|
|
247 |
|
|
|
— |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total deferred tax expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total income tax expense |
|
$ |
(247 |
) |
|
$ |
247 |
|
|
$ |
— |
|
|
|
|
December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
United States |
|
$ |
(125,093 |
) |
|
$ |
(10,421 |
) |
|
$ |
(17,671 |
) |
|
Foreign |
|
|
39,867 |
|
|
|
(85,149 |
) |
|
|
(64,506 |
) |
|
Net loss before provision for income taxes |
|
$ |
(85,226 |
) |
|
$ |
(95,570 |
) |
|
$ |
(82,177 |
) |
Income tax expense (benefit) in 2017, 2016, and 2015 differed from the amount expected by applying the statutory federal tax rate to the income or loss before taxes as summarized below:
|
|
|
December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal tax benefit at statutory rate |
|
|
34 |
% |
|
|
34 |
% |
|
|
34 |
% |
|
State tax benefit net of federal effect |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Change in valuation allowance |
|
|
(7 |
)% |
|
|
(3 |
)% |
|
|
(8 |
)% |
|
Research and development credits |
|
|
16 |
% |
|
|
4 |
% |
|
|
2 |
% |
|
Non-deductible warrant |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Foreign loss not benefitted |
|
|
— |
|
|
|
(30 |
)% |
|
|
(26 |
)% |
|
Other Non-deductible expenses |
|
|
(3 |
)% |
|
|
(5 |
)% |
|
|
(2 |
)% |
|
Change in rate differential |
|
|
(38 |
)% |
|
|
— |
|
|
|
— |
|
|
Build-to-suit adjustments |
|
|
(2 |
)% |
|
|
— |
|
|
|
— |
|
|
Total |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Deferred income taxes reflect the net tax effects of net operating loss and tax credit carryforwards 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 at December 31, 2016 and 2017 are as follows (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Net operating loss carry forwards |
|
$ |
69,281 |
|
|
$ |
32,500 |
|
|
Research and development tax credits |
|
|
34,891 |
|
|
|
8,142 |
|
|
Stock based compensation and other |
|
|
5,693 |
|
|
|
7,256 |
|
|
Depreciation and amortization |
|
|
— |
|
|
|
78 |
|
|
Total deferred tax assets |
|
|
109,865 |
|
|
|
47,976 |
|
|
Less: Valuation allowance |
|
|
(108,782 |
) |
|
|
(47,976 |
) |
|
Deferred tax liabilities |
|
|
(1,083 |
) |
|
|
— |
|
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. The Company primarily considered such factors as its history of operating losses, the nature of the Company’s deferred tax assets, and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. At present, the Company does not believe that it is more likely than not that the deferred tax assets will be realized; accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying balance sheets.
The valuation allowance increased by approximately $60.8 million and $4.8 million in 2017 and 2016, respectively.
At December 31, 2017, the Company has net operating loss carryforwards for federal income tax purposes of approximately $230 million and federal research and development tax credits of approximately $860,000, which begin to expire in 2029. The Company also has net operating loss carryforwards for state income tax purposes of approximately $55 million, which begin to expire in 2029, and state research and development tax credits of approximately $2,460,000 which have no expiration date. Additionally, the Company has an Orphan Drug Credit of approximately $32 million for federal income tax purposes, which begins to expire in 2033. The Company has foreign net operating loss carryforwards of $171 million, which begin to expire in 2023.
As of December 31, 2017, our total gross deferred tax assets were $109.9 million. Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance. The deferred tax assets were primarily comprised of federal and state tax net operating losses and tax credit carryforwards. Utilization of net operating losses and tax credit carryforwards may be limited by the “ownership change” rules, as defined in Section 382 of the Internal Revenue Code (any such limitation, a “Section 382 limitation”). Similar rules may apply under state tax laws. The Company has performed an analysis to determine whether an “ownership change” occurred from inception through December 31, 2017. Based on this analysis, management determined that the Company did experience historical ownership changes of greater than 50% during this period. Therefore, the utilization of a portion of the Company’s net operating losses and credit carryforwards is currently limited. However, these Section 382 limitations are not expected to result in a permanent loss of the net operating losses and credit carryforwards. As such, a reduction to the Company’s gross deferred tax asset for its net operating loss and tax credit carryforwards is not necessary prior to considering the valuation allowance. In the event the Company experiences any subsequent changes in ownership, the amount of net operating losses and research and development credit carryforwards useable in any taxable year could be limited and may expire unutilized.
The Company follows the provisions of FASB Accounting Standards Codification 740-10 (ASC 740-10), Accounting for Uncertainty in Income Taxes. ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in consolidated financial statements of uncertain tax positions that have been taken or expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the consolidated financial statements. At December 31, 2017, 2016, and 2015, the Company’s reserve for unrecognized tax benefits is approximately $3,934,000, $10,116,000, and $4,061,000 respectively. Due to the full valuation allowance at December 31, 2017, current adjustments to the unrecognized tax benefit will have no impact on the Company’s effective income tax rate; any adjustments made after the valuation allowance is released will have an impact on the tax rate. The Company does not anticipate any significant change in its uncertain tax positions within 12 months of this reporting date. The Company includes penalties and interest expense related to income taxes as a component of other expense and interest expense, respectively, as necessary.
Because the statute of limitations does not expire until after the net operating loss and credit carryforwards are actually used, the statute is open for all tax years from inception, that is, for the period from December 10, 2008 (date of inception) to December 31, 2017 and forward for federal and state tax purposes.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
Amount |
|
|
|
Balance at January 1, 2015 |
|
$ |
332 |
|
|
Increases based on tax positions taken during a prior period |
|
|
3,562 |
|
|
Increases based on tax positions taken during a current period |
|
|
167 |
|
|
Balance at December 31, 2015 |
|
$ |
4,061 |
|
|
Gross increase/ (decrease) related to prior year tax positions |
|
|
1,069 |
|
|
Gross increase related to current year positions |
|
|
4,986 |
|
|
Reductions to unrecognized tax benefits related to lapsing statute of limitations |
|
|
— |
|
|
Balance at December 31, 2016 |
|
$ |
10,116 |
|
|
Gross increase/ (decrease) related to prior year tax positions1 |
|
|
(7,776 |
) |
|
Gross increase related to current year positions |
|
|
1,594 |
|
|
Reductions to unrecognized tax benefits related to lapsing statute of limitations |
|
|
— |
|
|
Balance at December 31, 2017 |
|
$ |
3,934 |
|
1 During 2017, the Company received new information related to its Orphan Drug Credit which provides clarification regarding tax
positions previously taken. As a result of this new information, Management re-assessed its Orphan Drug Credit uncertain tax position and made its best estimate to account for the higher level of certainty. The change in unrecognized tax benefit is fully offset by a corresponding change in valuation allowance and therefore has no impact on the income statement.
All tax years remain open for examination by federal and state tax authorities.
The Tax Cuts and Jobs Act ("the Act") was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. In all cases, we will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we gain a more thorough understanding of the Act. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the estimated transition tax, remeasuring our U.S. deferred tax assets and liabilities at a 21% rate as well as reassessing the net realizability of our deferred tax assets and liabilities.
We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The provisional amount related to the re-measurement of our deferred tax balance is a reduction of approximately $33 million. Due to the corresponding valuation allowance fully offsetting deferred taxes, there is no income statement impact.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118) which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of the transition tax and deferred tax re-measurements to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118.