Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.10.0.1
Income Taxes
12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes

11. Income Taxes

No provision for U.S. income taxes exists due to tax losses incurred in all periods presented. All losses incurred were U.S. based. Significant components of the Company’s deferred tax assets are as follows (in thousands):

 

 

 

December 31

 

 

 

2018

 

 

2017

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Federal and state net operating loss carryforwards

 

$

85,571

 

 

$

63,935

 

Capitalized research and development

 

 

10,466

 

 

 

9,455

 

Federal and state tax credit carryforwards

 

 

18,590

 

 

 

13,529

 

Stock based compensation

 

 

2,848

 

 

 

1,493

 

Other

 

 

1,499

 

 

 

438

 

Total deferred tax assets

 

 

118,974

 

 

 

88,850

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Fixed assets

 

 

(622

)

 

 

-

 

Total deferred tax liabilities

 

 

(622

)

 

 

-

 

Valuation allowance

 

 

(118,352

)

 

 

(88,850

)

Net deferred tax assets

 

$

-

 

 

$

-

 

 

On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (Tax Act). The Tax Act contains, among other things, 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% for tax years beginning after December 31, 2017, limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S. owned undistributed foreign earnings and profits known as the transition tax.

 

Pursuant to SAB 118, an entity may select between one of three scenarios to determine a reasonable estimate arising from the Tax Act. The 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. As such, the Company recorded a $38.2 million reduction in deferred tax assets for the revaluation of deferred taxes in 2017 which was offset by a corresponding decrease to the Company’s full valuation allowance. The ultimate impact of the Act did not differ materially from provision amounts recorded. Adjustments, if any, would not have impacted the consolidated statement of operations and comprehensive loss due to the full valuation allowance on the Company’s deferred tax assets.    

 

Realization of the net deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which is uncertain. Based on the weight of available positive and negative objective evidence, management believes it more likely than not that the Company’s deferred tax assets are not realizable. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The net valuation allowance increased by $29.5 million during the year ended December 31, 2018 and decreased by $32.7 million during the year ended December 31, 2017, respectively.

The following is a reconciliation of the expected statutory federal income tax provision to the actual income tax provision (in thousands):

 

 

 

December 31

 

 

 

2018

 

 

2017

 

 

2016

 

Income tax benefit at federal statutory tax rate

 

$

(15,235

)

 

$

(9,369

)

 

$

(9,068

)

Change in valuation allowance

 

 

29,501

 

 

 

(32,709

)

 

 

9,775

 

Effect of change in enacted tax rates

 

 

-

 

 

 

38,194

 

 

 

-

 

State income taxes, net of federal benefit

 

 

(10,112

)

 

 

5,094

 

 

 

(458

)

Permanent items

 

 

563

 

 

 

4,027

 

 

 

196

 

Research credits

 

 

(4,717

)

 

 

(5,237

)

 

 

(445

)

Income tax (benefit) expense

 

$

-

 

 

$

-

 

 

$

-

 

 

Pursuant to Internal Revenue Code (IRC), Section 382 and 383, use of the Company’s U.S. federal and state net operating loss and research and development income tax credit carryforwards may be limited in the event of a cumulative change in ownership of more than 50.0% within a three-year period. The Company completed an analysis under IRC Sections 382 and 383 through December 21, 2007 and determined that the Company’s net operating losses and research and development credits were subject to limitations due to changes in ownership through December 31, 2007. The net operating loss carryforwards reflected in the deferred tax assets at December 31, 2018 have been adjusted to reflect Section 382 limitations resulting from that change. The Company has been in a net operating loss position since 2008. The Company has not performed any additional analysis for IRC Sections 382 and 383 and there is a risk that additional changes in ownership could have occurred since December 31, 2007. If a change in ownership were to have occurred, additional net operating loss and tax credit carryforwards could be eliminated or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance.

As of December 31, 2018, the Company has federal net operating loss carryforwards of $332.7 million and state net operating loss carryforwards of $224.8 million to offset future taxable income, if any. In addition, the Company has federal research and development tax credit carryforwards of $8.5 million, federal research and development orphan drug tax credit carryforwards of $11.2 million, and state research and development tax credit carryforwards of $4.5 million. If not utilized, the federal net operating loss and tax credit carryforwards for years beginning before January 1, 2018 will expire beginning in 2024 through 2037 and the state net operating loss carryforwards will expire beginning in 2028 through 2038. Under the Act, federal net operating losses for tax years beginning after January 1, 2018 will be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. It is uncertain to what extent various states will conform to the Act with regard to net operating loss carry forwards. The state tax credit will carry forward indefinitely.

The following table summarizes activity related to the Company’s gross unrecognized tax benefits (in thousands):

 

 

 

Total

 

Balances as of December 31, 2015

 

$

2,127

 

Increases related to prior year tax positions

 

 

-

 

Increases related to 2016 tax positions

 

 

159

 

Balances as of December 31, 2016

 

$

2,286

 

Increases related to prior year tax positions

 

 

-

 

Increases related to 2017 tax positions

 

 

1,009

 

Balances as of December 31, 2017

 

$

3,295

 

Increases related to prior year tax positions

 

 

6

 

Increases related to 2018 tax positions

 

 

1,283

 

Balances as of December 31, 2018

 

$

4,584

 

 

The unrecognized tax benefits, if recognized, would not have an impact on the Company’s effective tax rate assuming the Company continues to maintain a full valuation allowance position. Based on prior year’s operations and experience, the Company does not expect a significant change to its unrecognized tax benefits over the next twelve months. The unrecognized tax benefits may increase or change during the next year for unexpected or unusual items for items that arise in the ordinary course of business.

The Company files income tax returns in the U.S. federal and California jurisdictions and is not currently under examination by federal, state, or local taxing authorities for any open tax years. Due to net operating loss carryforwards, all years remain open for income tax examination by tax authorities in the U.S. and states in which the Company files tax returns.