|
11. |
Income Taxes |
The Company accounts for income taxes under ASC 740. Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
For the years ended December 31, 2017, 2016, and 2015, the Company has not recorded a provision for federal or state income taxes as it has incurred cumulative net operating losses since inception.
On December 22, 2017, the Tax Cuts and Jobs Act ("the Act") was enacted in the United States. The Act reduces the U.S. federal corporate tax rate from a graduated rate of 35% to a flat rate of 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, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. For the year ended December 31, 2017, we recognized no transition tax.
As of December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $418,700,000 and $363,600,000, respectively, which were available to reduce future taxable income. The net operating loss carryforwards expire at various times beginning in 2030 for federal purposes and 2019 for state purposes. As a result of adopting FASB ASU 2016-09 in the first quarter of 2017, the Company recorded a cumulative-effect adjustment to retained earnings of $14.9 million to record a net deferred tax asset related to excess equity based compensation tax deductions relative to these tax attribute carryforwards. The deferred tax asset was offset by a corresponding adjustment to the valuation allowance.
The Company also had federal and state tax credits of approximately $11,200,000 and $7,400,000, respectively, which may be used to offset future tax liabilities. These tax credit carryforwards will expire at various times beginning in 2030 for federal purposes and 2018 for state purposes
The net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders 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. Following the Roche transaction, as discussed in detail in Note 3, the Company conducted a Section 382 study covering the period from corporate inception through April 7, 2015, which was the closing date of the Roche transaction. This study concluded that limitations on the Company’s NOL carryforwards are not restrictive, with the exception of approximately $1,500,000 of pre-March 31, 2010 NOLs.
The Company has not recorded any reserves for uncertain tax positions as of December 31, 2017 or 2016. If the Company did record a reserve, it would be a component of income tax expense. The Company has not yet conducted a study of research and development credit carryforwards. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. As of December 31, 2017, the Company had no accrued interest or penalties related to uncertain tax positions. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available. The Company is not currently under examination by the Internal Revenue Service or any other jurisdictions for any tax years.
The principal components of the Company’s deferred tax assets are as follows:
|
|
|
As of December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
111,819 |
|
|
$ |
102,963 |
|
|
Deferred revenue |
|
|
1,593 |
|
|
|
2,240 |
|
|
Accrued bonus |
|
|
3,609 |
|
|
|
2,963 |
|
|
Deferred rent |
|
|
3,400 |
|
|
|
4,137 |
|
|
Nonaccrual receivables |
|
|
18,510 |
|
|
|
8,437 |
|
|
Other |
|
|
3,127 |
|
|
|
3,509 |
|
|
Research and development credits |
|
|
17,067 |
|
|
|
12,512 |
|
|
Gross deferred tax assets |
|
|
159,125 |
|
|
|
136,761 |
|
|
Deferred tax liability |
|
|
(40 |
) |
|
|
(3,124 |
) |
|
Valuation allowance |
|
|
(159,085 |
) |
|
|
(133,637 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, the Company has recorded a valuation allowance against its deferred tax assets at December 31, 2017 and 2016, respectively, because the Company’s management has determined that is it more likely than not that these assets will not be fully realized. The increase in the valuation allowance of $25,400,000 in 2017 primarily relates to the net loss incurred by the Company during that period, offset by the reduction in the net deferred taxes from the federal statutory rate change. As a result of the Act, we remeasured certain deferred tax assets and liabilities based on the rates at which they are anticipated to reverse in the future, which is generally 21%. This resulted in a decrease to our gross deferred tax assets and a corresponding decrease in our valuation allowance of $63.3 million.
A reconciliation of the income tax expense at the federal statutory tax rate to the Company’s effective income tax rate follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Statutory tax rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
State taxes, net of federal benefit |
|
|
5.6 |
% |
|
|
3.3 |
% |
|
|
4.8 |
% |
|
Permanent differences |
|
|
4.1 |
% |
|
|
(0.9 |
)% |
|
|
(1.0 |
)% |
|
Research and development credits |
|
|
2.2 |
% |
|
|
2.6 |
% |
|
|
4.5 |
% |
|
Federal deferred rate change |
|
|
(39.2 |
)% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Other |
|
|
(0.1 |
)% |
|
|
(2.4 |
)% |
|
|
(0.6 |
)% |
|
Change in valuation allowance |
|
|
(6.6 |
)% |
|
|
(36.6 |
)% |
|
|
(41.7 |
)% |
|
Effective tax rate |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |