15. Income Taxes
2017 U.S. Tax Reform
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “TCJA”) that significantly reforms the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, effective as of January 1, 2018; limitation of the tax deduction for interest expense; limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such tax losses may be carried forward indefinitely); modifying or repealing many business deductions and credits, including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”; and repeal of the federal Alternative Minimum Tax (“AMT”).
The staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 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 TCJA. In connection with the initial analysis of the impact of the TCJA, the Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The remeasurement of the Company's deferred tax assets and liabilities was offset by a change in the valuation allowance.
The Company is still in the process of analyzing the impact to the Company of the TCJA. Where the Company has been able to make reasonable estimates of the effects related to which its analysis is not yet complete, the Company has recorded provisional amounts. The ultimate impact to the Company’s consolidated financial statements of the TCJA may differ from the 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 TCJA. The accounting is expected to be complete when the Company’s 2017 U.S. corporate income tax return is filed in 2018.
Income Taxes
The Company completed the Asset Sale and recorded the income tax implications of the sale in the second quarter of 2017. The Asset Sale generated taxable income for the Company, which has resulted in income tax expense. The Company released a portion of its valuation allowance in the year ended December 31, 2017, as it is now able to utilize its net operating loss carryforwards to offset the taxable income generated from the Asset Sale. The Company’s current income tax expense for the year ended December 31, 2017 is $4.2 million, which is comprised of federal AMT of $0.3 million and state income tax of $3.9 million.
Intraperiod tax allocation rules require the Company to allocate the provision for income taxes between continuing operations and other categories of earnings, such as discontinued operations. In periods in which there is pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as discontinued operations, the Company must allocate to continuing operations an income tax benefit for the loss in continuing operations with an offsetting income tax expense to discontinued operations.
For the years ended December 31, 2017, 2016 and 2015, the Company recognized an income tax benefit of $42.4 million, $13.2 million and $11.2 million, respectively, in continuing operations and income tax expense in discontinued operations of $46.6 million, $13.2 million and $11.2 million, respectively.
A reconciliation of the Company’s effective tax rate to the statutory federal income tax rate is as follows:
|
|
|
Years Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal income tax at statutory federal rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State taxes |
|
|
1.7 |
|
|
|
0.6 |
|
|
|
1.2 |
|
|
Permanent differences |
|
|
(3.0 |
) |
|
|
(6.3 |
) |
|
|
(2.4 |
) |
|
Stock-based compensation |
|
|
(7.2 |
) |
|
|
(1.5 |
) |
|
|
(1.0 |
) |
|
Tax Cuts and Jobs Act impact |
|
|
(19.9 |
) |
|
|
— |
|
|
|
— |
|
|
Tax credits |
|
|
11.6 |
|
|
|
12.6 |
|
|
|
9.0 |
|
|
Change in deferred state tax rate |
|
|
7.7 |
|
|
|
(0.3 |
) |
|
|
(1.9 |
) |
|
Other |
|
|
0.3 |
|
|
|
3.7 |
|
|
|
(0.5 |
) |
|
Change in valuation allowance |
|
|
9.9 |
|
|
|
(36.0 |
) |
|
|
(32.5 |
) |
|
Total |
|
|
36.1 |
% |
|
|
7.8 |
% |
|
|
6.9 |
% |
Temporary differences that give rise to significant net deferred tax assets as of December 31, 2017 and 2016 are as follows:
|
|
December 31, |
|
|||||
|
(in thousands) |
2017 |
|
|
2016 |
|
||
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Net operating losses |
$ |
43,133 |
|
|
$ |
194,027 |
|
|
Capitalized research and development expenses |
|
847 |
|
|
|
15,854 |
|
|
Credit carryforwards |
|
164,709 |
|
|
|
144,823 |
|
|
Depreciation |
|
2,605 |
|
|
|
2,557 |
|
|
Deferred compensation |
|
5,855 |
|
|
|
12,463 |
|
|
Accrued expenses |
|
905 |
|
|
|
3,601 |
|
|
Deferred revenue |
|
— |
|
|
|
21,935 |
|
|
Other temporary differences |
|
2,145 |
|
|
|
25,276 |
|
|
Installment sale tax basis |
|
15,868 |
|
|
|
— |
|
|
Total gross deferred tax assets |
|
236,067 |
|
|
|
420,536 |
|
|
Valuation allowance |
|
(236,067 |
) |
|
|
(414,558 |
) |
|
Net deferred tax assets |
|
— |
|
|
|
5,978 |
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Intangible assets |
|
— |
|
|
|
(1,428 |
) |
|
Debt discount |
|
— |
|
|
|
(4,550 |
) |
|
Net deferred taxes |
$ |
— |
|
|
$ |
— |
|
At December 31, 2017, the Company had net operating loss carryforwards for federal and state income tax purposes of $138.1 million and $223.4 million, respectively. In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718),” effective for annual periods beginning after December 15, 2016. The guidance changes how companies account for certain aspects of share-based payments to employees. Entities will be required to recognize income tax effects of awards in the income statement when the awards vest or are settled. In accordance with the updated guidance, the Company has increased the federal and state net operating loss carryforwards by approximately $39.2 million and $25.2 million, respectively, for the deductions related to the exercise of stock options. The Company's existing federal and state net operating loss carryforwards begin to expire 2028 through 2036. The Company also had available research and development credits for federal and state income tax purposes of approximately $28.8 million and $18.7 million, respectively. The federal and state research and development credits will begin to expire in 2022 and 2026, respectively. As of December 31, 2017, the Company also had available investment tax credits for state income tax purposes of $0.4 million, which began to expire in 2018 and will continue to expire through 2020 if they are not utilized. The Company has orphan drug credits of $120.8 million, which begin to expire in 2031.
Utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code 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 tax credit carryforwards that can be utilized annually to offset future taxable income and tax. The Company completed an evaluation of ownership changes through December 31, 2017 to assess whether utilization of the Company’s net operating loss or tax credit carryforwards would be subject to an annual limitation under Section 382 of the Internal Revenue Code. The Company believes it can utilize all of its existing tax attributes as a result of the analysis. To the extent an ownership change occurs in the future, the net operating loss and tax credit carryforwards may be subject to limitation.
The Company has not, as of yet, conducted a study of its domestic research and development credit carryforwards and orphan drug credits. This study may result in an increase or decrease to the Company's credit carryforwards; however, until a 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 credits, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. As a result, there would be no impact to the statement of operations and comprehensive loss, balance sheet or cash flows if an adjustment were required.
In the second quarter of 2017, when the Asset Sale was consummated, the Company determined that it would utilize a portion of its deferred tax assets to offset the income generated from the Asset Sale and released a portion of its valuation allowance. As of December 31, 2017, the Company has evaluated the positive and negative evidence bearing upon the realizability of its remaining 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 its deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets. The change in the valuation allowance against the deferred tax assets in the years ended December 31, 2017, 2016 and 2015 was as follows:
|
(in thousands) |
|
Balance at Beginning of Period |
|
|
Additions |
|
|
Deductions |
|
|
Balance at End of Period |
|
||||
|
December 31, 2015 |
|
$ |
257,489 |
|
|
$ |
69,088 |
|
|
$ |
— |
|
|
$ |
326,577 |
|
|
December 31, 2016 |
|
|
326,577 |
|
|
|
87,981 |
|
|
|
— |
|
|
|
414,558 |
|
|
December 31, 2017 |
|
|
414,558 |
|
|
|
66,801 |
|
|
|
(245,292 |
) |
|
|
236,067 |
|
The change in the valuation allowance in in the year ended December 31, 2017 primarily relates to the release of the valuation allowance as a result of the net operating loss utilization of $217.8 million to offset the gain on the sale of the Commercial Business. The change in valuation allowance also includes a net decrease of $27.5 million related to the impact of the TCJA. Additions to the table above relate to losses generated in the current period.