17. Income Taxes
The components of loss before income taxes for the years ended December 31, 2017, 2016, and 2015 are as follows (in thousands)
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
|
|||
|
Domestic |
|
$ |
(21,942 |
) |
|
$ |
(8,502 |
) |
|
$ |
(8,999 |
) |
|
|
|
Foreign |
|
|
(11,489 |
) |
|
|
(2,778 |
) |
|
|
— |
|
|
|
|
Total |
|
$ |
(33,431 |
) |
|
$ |
(11,280 |
) |
|
$ |
(8,999 |
) |
|
|
The Company recorded a federal tax benefit of $2.8 million for income tax related to a rate reduction on a deferred tax liability for the year ended December 31, 2017 and no federal tax provision for income tax for the years ended December 31, 2016 and 2015 due to the reported net losses. The Company recorded no state provision for income taxes for the years ended December 31, 2017, 2016, and 2015, due to revenues below the minimum tax threshold. The Company recorded a foreign current income tax benefit related to the refundable research credit. The components of the provision (benefit) for income taxes are as follows for the years ended December 31, 2017, 2016, and 2015 (in thousands):
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
(814 |
) |
|
|
(357 |
) |
|
|
— |
|
|
Total Current |
|
|
(814 |
) |
|
|
(357 |
) |
|
|
— |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(2,820 |
) |
|
|
— |
|
|
|
— |
|
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Foreign |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total Deferred |
|
|
(2,820 |
) |
|
|
— |
|
|
|
— |
|
|
Total Income tax expense (benefit) |
|
$ |
(3,634 |
) |
|
$ |
(357 |
) |
|
$ |
— |
|
A reconciliation of the expected income tax expense (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 (in thousands):
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Income Tax Expense (Benefit) Computed at Federal Statutory Tax Rate |
|
$ |
(11,367 |
) |
|
$ |
(3,835 |
) |
|
$ |
(3,059 |
) |
|
Change in Valuation Allowance |
|
|
1,487 |
|
|
|
4,009 |
|
|
|
3,488 |
|
|
Orphan Drug & Research Credits Generated |
|
|
(3,427 |
) |
|
|
(2,435 |
) |
|
|
(1,983 |
) |
|
Orphan Drug & Research Credit Expense Disallowance |
|
|
1,691 |
|
|
|
1,126 |
|
|
|
674 |
|
|
State Research Credits Generated, net of Federal Benefit |
|
|
— |
|
|
|
— |
|
|
|
(175 |
) |
|
Contingent Liability |
|
|
762 |
|
|
|
— |
|
|
|
— |
|
|
Impact of Foreign Operations |
|
|
1,363 |
|
|
|
333 |
|
|
|
— |
|
|
Note Conversion |
|
|
618 |
|
|
|
— |
|
|
|
— |
|
|
Change in Tax Rate Due to the 2017 Tax Act |
|
|
4,096 |
|
|
|
— |
|
|
|
— |
|
|
Transaction Costs |
|
|
657 |
|
|
|
— |
|
|
|
— |
|
|
Interest on Convertible Debt |
|
|
— |
|
|
|
— |
|
|
|
867 |
|
|
Other Permanent Differences |
|
|
486 |
|
|
|
445 |
|
|
|
188 |
|
|
Total |
|
|
(3,634 |
) |
|
|
(357 |
) |
|
|
— |
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has established a valuation allowance due to uncertainties regarding the realization of deferred tax assets based upon the Company’s lack of earnings history. During the years ended December 31, 2017 and December 31, 2016, the valuation allowance increased by $7.9 million and $4.0 million, respectively.
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred Tax Liabilities: |
|
|
|
|
|
|
|
|
|
Stock-based Compensation |
|
$ |
— |
|
|
$ |
2 |
|
|
Depreciation |
|
|
87 |
|
|
|
257 |
|
|
Prepaid Assets |
|
|
378 |
|
|
|
— |
|
|
Intangible Assets |
|
|
7,181 |
|
|
|
2,305 |
|
|
Total Deferred Tax Liabilities |
|
|
7,646 |
|
|
|
2,564 |
|
|
Deferred Tax Assets: |
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards |
|
|
13,194 |
|
|
|
7,483 |
|
|
Amortization |
|
|
6 |
|
|
|
11 |
|
|
Credit Carryforwards |
|
|
9,770 |
|
|
|
7,241 |
|
|
Charitable Contributions |
|
|
— |
|
|
|
— |
|
|
Accrued Liabilities & Other |
|
|
345 |
|
|
|
455 |
|
|
Total Deferred Tax Assets |
|
|
23,315 |
|
|
|
15,190 |
|
|
Subtotal |
|
|
15,669 |
|
|
|
12,626 |
|
|
Valuation Allowance |
|
|
(22,850 |
) |
|
|
(14,931 |
) |
|
Net Deferred Taxes |
|
$ |
(7,181 |
) |
|
$ |
(2,305 |
) |
On December 22, 2017, the 2017 Tax Act was signed into law making significant changes to the Internal Revenue Code. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates from a maximum of 35% to a flat 21% rate and reducing the orphan drug credit from 50% to 25% of qualifying expenditures, effective for tax years beginning after December 31, 2017. 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. As a result of the reduction in the U.S. corporate income tax rate under the 2017 Tax Act, the Company revalued its deferred tax assets and liabilities as of December 31, 2017 resulting in a net income tax benefit of 2.8 million. The accounting for the income tax effects of the 2017 Tax Act and related adjustments are reflected as provisional amounts in the financial statements as of and for the year ended December 31, 2017.
Given the significant risk associated with the completion and commercialization of the Company’s products that will be derived from the indefinite lived in-process research and development asset, management is not considering the corresponding deferred tax liability as a source of income for purposes of its valuation allowance due to the uncertainty of if and when this temporary difference would ever reverse. As of December 31, 2017 and 2016, the Company had net operating loss (“NOL”) carryforwards for federal income tax purposes of approximately $52.8 million and $21.7 million, respectively. The Company also had available research and orphan drug tax credit carryforwards for federal income tax purposes of approximately $9.7 million and $7.2 million, respectively. If not utilized, these carryforwards expire at various dates beginning in 2028. As of December 31, 2017 and 2016, the Company had state research and development tax credit carryforwards of approximately $143,000 and $69,000, respectively, which will begin to expire in 2034 if not utilized. As of December 31, 2017 and 2016, the Company had foreign NOL carryforwards of approximately $9.5 million and $0.4 million, respectively, which have an indefinite carryforward period.
Utilization of the NOL and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future, as provided by Section 382 of the Internal Revenue Code of 1986 (“Section 382”), as well as similar state provisions. Ownership changes may limit the amount of NOL carryforwards and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions that increase the ownership of 5% shareholders in the stock of a corporation by more than 50 percentage points in the aggregate over a three-year period. The Company has not performed a study to determine whether any ownership change has occurred since the Company’s formation through December 31, 2017. However, the Company believes that it has experienced at least two ownership changes in the past and that it may experience additional ownership changes as a result of subsequent shifts in its stock ownership. Should there be an ownership change that has occurred or will occur, the Company’s ability to utilize existing carryforwards could be substantially restricted and may result in the expiration of such carryforwards prior to utilization.
The Company applies the accounting guidance in ASC 740 related to accounting for uncertainty in income taxes. The Company’s reserves related to taxes are based on a determination of whether, and how much of, a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit. As of December 31, 2017 and 2016, the Company had no unrecognized tax benefits. During the years ended December 31, 2017 and 2016, the Company had no interest and penalties related to income taxes.
The Company files income tax returns in the U.S. federal, state, and foreign jurisdictions. As of December 31, 2017, the statute of limitations for assessment by the Internal Revenue Service (“IRS”) is open for the 2014 and subsequent tax years, although carryforward attributes that were generated for tax years prior to then may still be adjusted upon examination by the IRS if they either have been, or will be, used in a future period. The 2013 and subsequent tax years remain open and subject to examination by the state taxing authorities. The 2016 and subsequent tax years remain open and subject to examination by the foreign taxing authorities. There are currently no federal, state, or foreign income tax audits in progress.