INCOME TAXES
Loss before provision for income tax is summarized as follows (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | (91,220 | ) | | $ | (60,147 | ) | | $ | (57,074 | ) |
International | — |
| | (26 | ) | | — |
|
Total | $ | (91,220 | ) | | $ | (60,173 | ) | | $ | (57,074 | ) |
The provision for income taxes is summarized as follows (in thousands):
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (1,730 | ) | | $ | (116 | ) | | $ | (5,273 | ) |
State | — |
| | 1 |
| | 1 |
|
Foreign | — |
| | — |
| | — |
|
| (1,730 | ) | | (115 | ) | | (5,272 | ) |
Deferred: | | | | | |
Federal | — |
| | — |
| | — |
|
State | — |
| | — |
| | — |
|
Foreign | — |
| | — |
| | — |
|
| — |
| | — |
| | — |
|
Benefit for income taxes | $ | (1,730 | ) | | $ | (115 | ) | | $ | (5,272 | ) |
The provision for income taxes differs from the amount computed by applying the federal income tax rate of 35% to pretax loss from operations as a result of the following:
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Statutory federal income tax rate | $ | (31,927 | ) | | $ | (21,079 | ) | | $ | (19,976 | ) |
State income taxes, net of federal tax benefits | (5,041 | ) | | (9 | ) | | 1 |
|
Foreign rate differential | — |
| | 10 |
| | — |
|
Tax credits | (2,306 | ) | | (3,905 | ) | | (8,303 | ) |
Impact of federal rate change | 24,907 |
| | — |
| | — |
|
Net operating loss carryback | — |
| | — |
| | 4,099 |
|
Change in statutory rates | (1,440 | ) | | 624 |
| | — |
|
Stock compensation | (2,558 | ) | | (1,109 | ) | | 821 |
|
State net operating losses | 633 |
| | 1,779 |
| | — |
|
Other | — |
| | 109 |
| | 1,330 |
|
Change in valuation allowance | 16,002 |
| | 23,465 |
| | 16,756 |
|
Income tax provision | $ | (1,730 | ) | | $ | (115 | ) | | $ | (5,272 | ) |
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Net operating loss carryforwards | $ | 44,177 |
| | $ | 29,102 |
|
Research and development tax credits | 16,189 |
| | 14,453 |
|
Accruals and reserves | 371 |
| | 395 |
|
Stock compensation | 6,244 |
| | 6,902 |
|
Depreciation and amortization | 1,638 |
| | 1,765 |
|
Total deferred tax assets | 68,619 |
| | 52,617 |
|
Less: Valuation allowance | (68,619 | ) | | (52,617 | ) |
Net deferred tax assets | $ | — |
| | $ | — |
|
The deferred income tax assets have been fully offset by a valuation allowance, as realization is dependent on future earnings, if any, the timing and amount of which are uncertain. The net valuation allowance increased by $16.0 million and $23.5 million for the years ended December 31, 2017 and 2016, respectively.
The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. The Company primarily considered such factors as its history of operating losses, the nature of the Company’s deferred tax assets, and the timing, likelihood, and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. The Tax Act repealed corporate alternative minimum tax (“AMT”) for tax years beginning after December 31, 2017, and provides that existing AMT credit carryovers are refundable beginning in 2018 through 2022. The Company has approximately $1.7 million of AMT credit carryovers that are fully refunded by 2022 and therefore the deferred tax asset has been reclassed to an income tax receivable. As for the remaining deferred tax assets, the Company does not believe that it is more likely than not that the deferred tax assets will be realized; accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying balance sheets.
As of December 31, 2017, and December 31, 2016, the Company had federal net operating loss carryforwards of approximately $163.3 million and $73.0 million, respectively, available to reduce future taxable income. The Company also had state net operating loss carryforwards of approximately $131.3 million and $61.8 million as of December 31, 2017 and December 31, 2016, respectively. The federal net operating loss carryforward begins expiring in 2025, and the non-utilized state net operating loss carryforward began expiring in 2016. In the year ended December 31, 2017, $11.0 million of California net operating loss carryforwards expired.
The Company has federal research and development tax credit carryforwards of approximately $3.5 million. If not utilized, the carryforwards will begin expiring in 2024. The Company has state research and development credit carryforwards of approximately $3.2 million which do not expire. The Company also has orphan drug credit carryforwards of $13.5 million.
Under federal and similar state tax statutes, changes in the Company’s ownership may limit its ability to use its available net operating loss and tax credit carryforwards. The annual limitation, as a result of a change of control, may result in the expiration of net operating losses and credits before utilization.
The Company’s ability to use its remaining net operating loss and tax credit carryforwards may be further limited if the Company experiences a Section 382 ownership change in connection with future changes in its stock ownership.
Uncertain Tax Positions
The total amounts of unrecognized tax benefits for the years ended December 31, 2017, 2016, and 2015 were $4.0 million, $3.2 million, and $1.8 million, respectively. If recognized, none of the unrecognized tax benefits would affect the effective tax rate.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Balance at the beginning of the year | $ | 3,188 |
| | $ | 1,820 |
| | $ | 2,608 |
|
Additions based on prior period tax positions | 43 |
| | 93 |
| | 980 |
|
Additions based on current period tax positions | 803 |
| | 1,275 |
| | — |
|
Reductions based on prior period tax positions | — |
| | — |
| | (1,768 | ) |
Balance at the end of the year | $ | 4,034 |
| | $ | 3,188 |
| | $ | 1,820 |
|
The Company’s policy is to account for interest and penalties as income tax expense. The Company accrued no interest related to unrecognized tax benefits during the years ended December 31, 2017, 2016, and 2015.
The Company files income tax returns in the U.S. federal jurisdiction, California, other state jurisdictions, and India. The Company is subject to U.S. federal income tax examination for the calendar years ending 2002 through 2017 due to net operating losses that have been carried forward for tax purposes. Additionally, the Company is subject to state income tax examinations for the 2006 through 2017 calendar years due to net operating losses that are being carried forward for tax purposes. The Company is subject to audit by the Indian tax authorities from 2014 onward. The Company is not currently under audit in any major tax jurisdiction.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017.
Pursuant to the SEC Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), a company may select between one of three scenarios to determine a reasonable estimate arising from the Tax Act. Those scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate as the law is still being analyzed. The Company was able to provide a reasonable estimate for the revaluation of deferred taxes by recording a net tax provision of $24.9 million in the period ending December 31, 2017, which is offset by a full valuation allowance. This reasonable estimate will leave the measurement window open for up to one year. This tax expense is primarily due to the corporate rate reduction. The Company has also recorded a tax benefit of $1.7 million for the AMT credits which are refundable in tax year 2018 through 2022.