13. Income Taxes
For the year ended December 31, 2017, the Company recorded an income tax benefit of $1.1 million due to an Alternative Minimum Tax (“AMT”) refundable credit as a result of the Tax Cuts and Jobs Act (“Tax Act”), enacted on December 22, 2017. For the years ended December 31, 2016 and 2015, the Company recorded an income tax provision of $14,000 and $20,000, respectively, due to interest on uncertain tax positions.
Loss before income taxes for the years ended December 31, 2017, 2016 and 2015 was from the United States.
The components of the income tax provision (benefit) are as follows (in thousands):
|
|
|
Year Ended December 31, |
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|
|
|
2017 |
|
|
2016 |
|
|
2015 |
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|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(1,084 |
) |
|
$ |
13 |
|
|
$ |
19 |
|
|
State |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
Total |
|
|
(1,083 |
) |
|
|
14 |
|
|
|
20 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Income tax provision (benefit) |
|
$ |
(1,083 |
) |
|
$ |
14 |
|
|
$ |
20 |
|
The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Tax at statutory federal rate |
|
|
35 |
% |
|
|
35 |
% |
|
|
35 |
% |
|
State tax—net of federal benefit |
|
|
1 |
% |
|
|
1 |
% |
|
|
3 |
% |
|
Tax credits |
|
|
12 |
% |
|
|
8 |
% |
|
|
9 |
% |
|
Stock compensation |
|
|
(7 |
)% |
|
|
(2 |
)% |
|
|
(1 |
)% |
|
Change in valuation allowance |
|
|
90 |
% |
|
|
(42 |
%) |
|
|
(46 |
%) |
|
Impact of corporate rate change on deferred taxes |
|
|
(129 |
)% |
|
|
— |
|
|
|
— |
|
|
Other |
|
|
1 |
% |
|
|
— |
|
|
|
— |
|
|
Income tax (provision) benefit |
|
|
3 |
% |
|
|
— |
% |
|
|
— |
% |
Net deferred tax assets as of December 31, 2017 and 2016 consist of the following (in thousands):
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
54,931 |
|
|
$ |
58,760 |
|
|
Accruals |
|
|
643 |
|
|
|
3,520 |
|
|
Tax credit carryovers |
|
|
63,406 |
|
|
|
53,047 |
|
|
Deferred revenue |
|
|
30,259 |
|
|
|
63,006 |
|
|
Other |
|
|
3,643 |
|
|
|
6,668 |
|
|
Gross deferred tax assets |
|
|
152,882 |
|
|
|
185,001 |
|
|
Deferred tax liability |
|
|
— |
|
|
|
— |
|
|
Valuation allowance |
|
|
(152,882 |
) |
|
|
(185,001 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
The valuation allowance decreased by $32.1 million and increased by $42.9 million for the year ended December 31, 2017 and 2016, respectively. The tax benefit of deductible temporary differences or carryforwards is recorded as a deferred tax asset to the extent that management assesses the realization is “more likely than not.” Future realization of the tax benefit ultimately depends on the existence of sufficient taxable income within the period available under the tax law. At December 31, 2017 and 2016, the Company has set up valuation allowances against all federal and state deferred tax assets because based on all available evidence, these deferred tax assets are not more likely than not to be realizable.
On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a partially territorial system, and the repeal of corporate AMT. The Company has calculated its best estimate of the impact of the Tax Act in accordance with its understanding of the Tax Act and guidance available as of the date of this filing. As a result, the Company recorded $1.1 million as income tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted. The tax rate decrease resulted in a reduction of $51.7 million in our deferred tax assets, and a corresponding decrease of the same amount in the valuation allowance against these deferred tax assets, as substantially all of the Company’s deferred tax assets, net of deferred tax liabilities, are subject to a full valuation allowance.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. 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. In accordance with SAB 118, the Company has determined that the adjustment to deferred taxes was a provisional amount and a reasonable estimate at December 31, 2017. The Company does not expect any impact on recorded deferred tax balances as the remeasurement of net deferred tax assets will be offset by a change in valuation allowance. The Company is analyzing certain aspects of the Tax Act which could potentially affect the remeasurement of the net deferred tax assets.
At December 31, 2017, the Company had federal and state net operating loss carryforwards aggregating approximately $229.3 million and $97.0 million, respectively. These federal and California net operating loss carryforwards will begin to expire in 2023 and 2018, respectively, if not utilized. At December 31, 2017, the Company also had federal and California research and development credit carryforwards aggregating approximately $23.3 million and $18.8 million, respectively. The federal credits will expire in 2025, if not utilized. California research and development credits have no expiration date. At December 31, 2017, the Company also had federal orphan drug credit and AMT carryforwards of approximately $39.3 million and $1.5 million, respectively. The federal orphan drug credits will begin to expire in 2034, if not utilized.
As part of the Tax Act, the corporate AMT was repealed. AMT credit is fully refundable by 2022. The company has a receivable of approximately $1.1 million for the expected refund.
Utilization of the net operating loss and tax credits carryforwards may be limited by “ownership change” rules, as defined in Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result in the expiration of the net operating losses and credits before utilization. The Company has performed an analysis to determine whether an “ownership change” has occurred from inception to December 31, 2017. Based on this analysis, management has determined that $0.7 million in federal and $0.7 million in California net operating losses generated during that period will expire without being used.
The Company recognizes the financial statements effects of a tax position when it is more likely than not, based on technical merits, that the position will be sustained upon examination.
A reconciliation of the Company’s unrecognized tax benefits is as follows (in thousands):
|
|
|
December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Balance at beginning of year |
|
$ |
14,260 |
|
|
$ |
10,022 |
|
|
$ |
5,434 |
|
|
Increase related to current year tax provision |
|
|
2,398 |
|
|
|
4,238 |
|
|
|
4,668 |
|
|
Increase related to prior year tax provision |
|
|
— |
|
|
|
— |
|
|
|
10 |
|
|
Decrease related to prior year tax provision |
|
|
— |
|
|
|
— |
|
|
|
(90 |
) |
|
Balance at end of year |
|
$ |
16,658 |
|
|
$ |
14,260 |
|
|
$ |
10,022 |
|
The unrecognized tax benefits, if recognized and in absence of full valuation allowance, would impact the income tax provision by $15.9 million and $13.1 million as of December 31, 2017 and 2016, respectively. As of December 31, 2017, the Company does not believe that it is reasonably possible that its unrecognized tax benefits would significantly change in the following 12 months.
The Company has elected to include interest and penalties as a component of tax expense. The Company accrued approximately $15,000 and $14,000 of interest and penalties during 2017 and 2016, respectively. As of December 31, 2017 and 2016, the Company had recognized a liability for interest and penalties of approximately $86,000 and $71,000, respectively.
The Company files federal and state income tax returns in the U.S. and California. Tax years from 2004 forward remain open to examination due to the carryover of net operating losses and other tax attributes.