(10) Income Taxes
The Company accounts for income taxes under the provisions of ASC 740. The Company recorded a $0.1 million tax provision for foreign withholding taxes in each of the years ended December 31, 2017 and 2016 in connection with the $1.0 million in reimbursement payments in 2017 related to manufacturing development activities conducted by the Company prior to the Effective Date and the $1.0 million upfront payment by CANbridge in March 2016 upon the execution of the collaboration and license agreement. For the year ended December 31, 2015, the Company did not have any federal, state, or foreign income tax expense as it generated taxable losses in all filing jurisdictions.
A reconciliation of the expected income tax benefit computed using the federal statutory income tax rate to the Company’s effective income tax rate is as follows for the years ended December 31, 2017, 2016 and 2015:
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Years Ended December 31, |
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2017 |
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|
2016 |
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|
2015 |
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|||
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Income tax computed at federal statutory tax rate |
|
34.0% |
|
|
34.0% |
|
|
34.0% |
|
|||
|
State taxes, net of federal benefit |
|
5.3% |
|
|
5.2% |
|
|
5.3% |
|
|||
|
Research and development credits |
|
|
0.4% |
|
|
1.4% |
|
|
2.0% |
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||
|
Other permanent differences |
|
(20.8)% |
|
|
6.1% |
|
|
(2.0)% |
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|||
|
Foreign rate differential |
|
|
0.0% |
|
|
(0.1)% |
|
|
(0.1)% |
|
||
|
Foreign withholding taxes |
|
(0.2)% |
|
|
(0.4)% |
|
|
|
— |
|
||
|
SEC settlement liability |
|
|
0.0% |
|
|
|
— |
|
|
(9.1)% |
|
|
|
Excess benefit stock compensation |
|
|
0.0% |
|
|
|
— |
|
|
|
— |
|
|
Tax reform - rate change |
|
(97.5)% |
|
|
|
— |
|
|
|
— |
|
|
|
Other |
|
|
0.1% |
|
|
(6.6)% |
|
|
(3.8)% |
|
||
|
Change in valuation allowance |
|
|
78.7% |
|
|
(39.6)% |
|
|
(26.3)% |
|
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Total |
|
|
— |
|
|
|
— |
|
|
|
— |
|
With limited exceptions, the Company has incurred net operating losses from inception. At December 31, 2017, the Company had domestic federal, state, and United Kingdom (UK) net operating loss carryforwards of approximately $503.6 million, $394.3 million, and $6.0 million respectively, available to reduce future taxable income. The federal net operating loss carryforwards expire beginning in 2022 through 2037 and the state loss carryforwards begin to expire in 2030 and continue through 2037 The foreign net operating loss carryforwards in the UK do not expire. The Company also had federal and state research and development tax credit carryforwards of approximately $10.5 million and $4.3 million, respectively, available to reduce future tax liabilities and which expire at various dates. The federal credits expire beginning in 2022 through 2037 and the state credits expire beginning in 2019 through 2032. The net operating loss and research and development carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of certain changes in the ownership interest of significant stockholders.
The Company’s net deferred tax assets as of December 31, 2017 and 2016 are as follows (in thousands):
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2017 |
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2016 |
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Deferred tax assets: |
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|
|
|
|
|
|
|
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NOL carryforwards |
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$ |
131,683 |
|
|
$ |
182,433 |
|
|
Research and development credits |
|
|
13,913 |
|
|
|
13,060 |
|
|
Deferred revenue and R&D reimbursements |
|
|
770 |
|
|
|
867 |
|
|
Estimated settlement liability |
|
|
4,664 |
|
|
|
— |
|
|
Other temporary differences |
|
|
4,420 |
|
|
|
4,570 |
|
|
Total deferred tax assets: |
|
|
155,450 |
|
|
|
200,930 |
|
|
Deferred tax liabilities: |
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|
|
|
|
|
|
|
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Insurance recovery |
|
|
(4,098 |
) |
|
|
— |
|
|
Total deferred tax liabilities: |
|
|
(4,098 |
) |
|
|
— |
|
|
Valuation allowance |
|
|
(151,352 |
) |
|
|
(200,930 |
) |
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Total |
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$ |
— |
|
|
$ |
— |
|
A full valuation allowance has been recorded in the accompanying consolidated financial statements to offset these deferred tax assets because the future realizability of such assets is uncertain. This determination is based primarily on the Company’s historical losses. Accordingly, future favorable adjustments to the valuation allowance may be required, if and when circumstances change. The valuation allowance decreased by $49.6 million as of December 31, 2017 which was primarily related to the “Tax Cuts and Jobs Act”, which reduced the federal tax rate from 35% to 21%. The valuation allowance increased $10.6 million and $3.9 million during the years ended December 31, 2016 and 2015, respectively, primarily due to the generation of net operating loss carryforwards.
As of December 31, 2016, the Company had federal and state net operating losses of approximately $4.1 million related to excess tax deductions that had been excluded from the above table. The benefit of these net operating losses would have been recognized as an increase in additional paid in capital when it resulted in a reduction of taxes payable. In January 2017, the Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. As part of the adoption, the Company recorded through retained earnings these additional deferred tax assets of $4.1 million related to previously unrecognized tax losses with an equal and offsetting adjustment to the Company's valuation allowance. The net impact of the adoption on the Company's deferred tax assets was $0.
On December 22, 2017, President Trump signed into law The Tax Cuts and Jobs Act (“the Act”). The Act, 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%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits.
On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law.
The Company recognizes the changes in tax law, including the Act, in the period the law is enacted. Accordingly, the effects of the Act have been recognized in the financial statements for the year ended December 31, 2017. As a result of the change in law, the Company recorded a reduction to its deferred tax assets of $63.3 million and a corresponding reduction to its valuation allowance. As a result, there was no impact to the Company’s income statement due to the reduction in the U.S. corporate tax rate.
At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Act; however in certain cases the Company has made a reasonable estimate of the effects of the Act. For the items for which we were able to determine a reasonable estimate and thus are considered provisional, we recorded a $63.3 million reduction to deferred tax assets. The Company’s preliminary estimate of the effects Act, including the remeasurement of deferred tax assets and liabilities, is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the Act and the filing of the Company’s tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Act may require further adjustments and changes in estimates. The final determination of the effects of the Act will be completed as additional information becomes available, but no later than one year from the enactment of the Act. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. In addition, the Company’s estimates may also be affected as it gains a more thorough understanding of the tax law.
The Company applies FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109” (codified within ASC 740, Income Taxes), for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. Unrecognized tax benefits represent tax positions for which reserves have been established. A full valuation allowance has been provided against the Company’s deferred tax assets, so that the effect of the unrecognized tax benefits is to reduce the gross amount of the deferred tax asset and the corresponding valuation allowance. Since the Company has incurred net operating losses since inception, it has never been subject to a revenue agent review. The Company is currently open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions for the tax years ended 2014 through 2017. Carryforward tax attributes generated in years past may still be adjusted upon future examination if they have or will be used in a future period. The Company is currently not under examination by the Internal Revenue Service or any other jurisdictions for any tax years.
The Company may from time to time be assessed interest or penalties by major tax jurisdictions. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. No interest and penalties have been recognized by the Company to date.
The Company anticipates that the amount of unrecognized tax benefits recorded will not change in the next twelve months.
The following is a reconciliation of the Company’s gross uncertain tax positions at December 31, 2017, 2016 and 2015:
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Years Ended December 31, |
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2017 |
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2016 |
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2015 |
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(in thousands) |
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Amount established upon adoption |
|
$ |
1,200 |
|
|
$ |
1,200 |
|
|
$ |
1,200 |
|
|
Additions for current year tax provisions |
|
|
— |
|
|
|
— |
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|
|
— |
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Additions for prior year tax provisions |
|
|
— |
|
|
|
— |
|
|
|
— |
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Reductions of prior year tax provisions |
|
|
— |
|
|
|
— |
|
|
|
— |
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Balance as of end of year |
|
$ |
1,200 |
|
|
$ |
1,200 |
|
|
$ |
1,200 |
|