SEC Filings

ARRAY BIOPHARMA INC filed this Form 10-K on 08/11/2017
Entire Document

tax assets will not be realized. In recognition of this uncertainty, a full valuation allowance continues to be applied to the deferred tax assets. The Company did not record a tax provision for the years ended June 30, 2017, 2016 and 2015, due to its estimate that the effective tax rate for each year is 0%.

Future realization depends on the future earnings of Array, if any, the timing and amount of which are uncertain as of June 30, 2017. In the future, should management conclude that it is more likely than not that the deferred tax assets are partially or fully realizable, the valuation allowance would be reduced to the extent of such expected realization and the amount would be recognized as a deferred income tax benefit in our statements of operations and comprehensive income (loss).

In the third quarter of fiscal 2017, the Company adopted ASU 2016-09 and applied this change in accounting policy on a modified retrospective basis with July 1, 2016 as the effective date of adoption. The new guidance requires, among other things, excess tax benefits and tax deficiencies to be recorded in the income statement in the provision for income taxes when awards vest or are settled and all previously unrecognized excess tax benefits and tax deficiencies to be recorded as of the beginning of the quarter of adoption. Upon adoption, the Company had excess tax benefits for which a benefit could not be previously recognized of approximately $14.4 million; however, there was no cumulative effect on retained earnings in the balance sheet since the Company has a full valuation allowance against its deferred tax assets. Prior to adoption, the deferred tax asset balance as of June 30, 2016 excluded excess tax benefits from stock option exercises of approximately $5.3 million.

As of June 30, 2017, the Company had available total net operating loss carryforwards of approximately $596.3 million, which expire in the years 2020 through 2037, federal research and experimentation credit carryforwards of $42.7 million, which expire in the years 2022 through 2036, and orphan drug credit carryforwards of $80.7 million, which begin to expire in 2033.

The Tax Reform Act of 1986 and certain state tax statutes limit the utilization of net operating loss and tax credit carryforwards to offset future taxable income and tax, and may therefore result in the expiration of a portion of those carryforwards before they are utilized, if there has been a "change of ownership" as described in Section 382 of the Internal Revenue Code ("IRC"), and under similar state provisions. Array has performed a detailed analysis of Section 382 of the IRC though June 30, 2017.  Based the Company's analysis, approximately $40 thousand of net operating losses as of the year ended June 30, 2017, may not be used to offset taxable income. The Company has provided a valuation allowance against the entire amount of its net operating loss and tax credit carryforwards. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change.  Any limitation may result in expiration of a portion of the net operating loss or research and development credit carryforwards before utilization.  The Company will continue to evaluate future events that could limit its ability to utilize its net operating losses and tax credit carryforwards in future years.

Array follows a comprehensive model for recognizing, measuring, presenting and disclosing uncertain tax positions taken or expected to be taken on a tax return. Tax positions must initially be recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.