|
9. |
Income Taxes |
The Company accounts for income taxes using the liability method under ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences resulting from the different treatment of items for tax and financial reporting purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Additionally, the Company must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. The Company has provided a full valuation allowance on the Company’s deferred tax assets because the Company believes it is more likely than not that its deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets on a quarterly basis. The Company recorded a deferred tax liability of $244,000 and $397,000 on its balance sheet at both December 31, 2017 and 2016, that arose from tax amortization of an indefinite-lived intangible asset. The Company also recorded a deferred tax benefit of $153,000, zero and $8,000 related to the deferred tax liability in the years ended December 31, 2017, 2016 and 2015, respectively. The Company recorded an income tax expense in 2017 for state tax expense of $3,000. In addition, the Company recorded an income tax expense of $61,000 in 2015, related to the reversing tax benefit on a previously recorded unrealized gain on a marketable equity security.
The reconciliation of income tax expenses (benefit) at the statutory federal income tax rate of 34% to net income tax benefit included in the statements of operations and comprehensive loss for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. federal taxes benefit at statutory rate |
|
$ |
(1,307 |
) |
|
$ |
(11,733 |
) |
|
$ |
(7,681 |
) |
|
State taxes |
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
Change in valuation allowance |
|
|
(41,865 |
) |
|
|
10,847 |
|
|
|
7,725 |
|
|
Stock-based compensation |
|
|
1,832 |
|
|
|
2,045 |
|
|
|
530 |
|
|
Change in deferreds |
|
|
12 |
|
|
|
(3 |
) |
|
|
56 |
|
|
Deferred Tax Remeasurement |
|
|
42,528 |
|
|
|
— |
|
|
|
— |
|
|
Other |
|
|
(1,353 |
) |
|
|
(1,156 |
) |
|
|
(577 |
) |
|
Total income tax (benefit) provision |
|
$ |
(150 |
) |
|
$ |
— |
|
|
$ |
53 |
|
In 2017, 2016 and 2015, total income tax provision (benefit) expense was $(150,000), zero and $53,000, respectively. The Company has presented these amounts within interest and other income, net in the Statements of Operations and Comprehensive Loss. Deferred tax assets and liabilities reflect the net tax effects of net operating loss and research and other credit carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
82,369 |
|
|
$ |
123,107 |
|
|
Research and other credits |
|
|
16,303 |
|
|
|
13,441 |
|
|
Capitalized research and development expenses |
|
|
— |
|
|
|
10 |
|
|
Deferred revenue |
|
|
395 |
|
|
|
874 |
|
|
Stock-based compensation |
|
|
5,053 |
|
|
|
8,693 |
|
|
Other |
|
|
2,261 |
|
|
|
3,405 |
|
|
Total deferred tax assets |
|
|
106,381 |
|
|
|
149,530 |
|
|
Valuation allowance for deferred tax assets |
|
|
(106,381 |
) |
|
|
(149,530 |
) |
|
Deferred tax liabilities—Intangibles |
|
|
(244 |
) |
|
|
(397 |
) |
|
Net deferred tax assets and liabilities |
|
$ |
(244 |
) |
|
$ |
(397 |
) |
The Company recognizes deferred tax assets to the extent that the Company believes that these assets are more likely than not to be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If it is determined that the Company would be able to realize deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of tax benefit might change as new information becomes available. Given the Company’s history of operating losses, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by $43.1 million during 2017 and increased by $11.4 million and $7.2 million during 2016 and 2015, respectively.
As of December 31, 2017, the Company had net operating loss carryforwards for federal income tax purposes of approximately $327.1 million, which expire in the years 2019 through 2036, and federal research and development tax credits of approximately $12.5 million, which expire at various dates beginning in 2018 through 2037, if not utilized.
As of December 31, 2017, the Company had net operating loss carryforwards for state income tax purposes of approximately $204.9 million, which expire in the years 2028 through 2036, if not utilized, and state research and development tax credits of approximately $13.7 million, which do not expire.
Utilization of the net operating losses may be subject to a substantial annual limitation due to federal and state ownership change limitations. The annual limitation may result in the expiration of net operating losses before utilization.
At December 31, 2017 and December 31, 2016, the Company had unrecognized tax benefits of approximately $7.8 and $7.0 million, respectively (none of which, if recognized, would affect the Company’s effective tax rate). The Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Balance at beginning of the year |
|
$ |
6,982 |
|
|
$ |
6,965 |
|
|
Decreased related to prior year tax positions |
|
|
— |
|
|
|
(737 |
) |
|
Increased related to current year tax positions |
|
|
867 |
|
|
|
754 |
|
|
Settlements |
|
|
— |
|
|
|
— |
|
|
Reductions due to lapse of applicable statute of limitations |
|
|
— |
|
|
|
— |
|
|
Balance at end of the year |
|
$ |
7,849 |
|
|
$ |
6,982 |
|
Interest and penalty costs related to unrecognized tax benefits, if any, are classified as a component of interest income and other income, net in the Statements of Operations and Comprehensive Loss. The Company did not recognize any interest and penalty expense related to unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal and state income tax examination for calendar tax years ending 1998 through 2017 due to unutilized net operating losses and research credits.
On December 22, 2017, the 2017 Tax Cut and Jobs Act (the Act) was enacted into law. Among other provisions, the Act reduces the Federal statutory corporate income tax rate from 35% to 21%, effective January 1, 2018. The Company is required to recognize the effect of the tax law changes in the period of enactment, such as the re-measuring 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. The provisional amount related to the re-measurement of our deferred tax balance is a reduction of approximately $43.1 million. Due to the corresponding valuation allowance fully offsetting deferred taxes, there is no statement of operations impact.
Given the significance of the legislation, 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 companies 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, the Company considers the accounting of the deferred tax re-measurements to be incomplete. The Company expects to complete its analysis within the measurement period in accordance with SAB 118. The Company does not expect any material subsequent adjustment to these amounts. Any adjustments, if any, will have no impact to the statement of operations due to the Company’s full valuation allowance.