Income Taxes

In accordance with the guidance pursuant to accounting for income taxes, a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax asset will be realized.

The components of the provision for income taxes are presented in the following table:



	Year Ended December 31,
	2016		2015			2014
Current:
Federal	$	—	$	—		$	—
State	—		—			2,000
	—		—			2,000
Deferred:
Federal	—		(1,594,000		)	18,000
State	—		(504,000		)	9,000
	—		(2,098,000		)	27,000
	$	—	$	(2,098,000	)	$	29,000

The reconciliation of income taxes attributable to continuing operations computed at the statutory tax rates to income tax expense (recovery), using a 35% statutory tax rate, is:



	Year Ended December 31,
	2016			2015			2014
Income (benefit) taxes at statutory rates	$	(25,809,000	)	$	(10,920,000	)	$	(12,639,000	)
State income tax, net of federal benefit	(4,000		)	(2,640,000		)	(2,362,000		)
Change in valuation allowance	29,678,000			7,882,000			14,235,000
Research and development tax credits	(3,117,000		)	(1,537,000		)	(849,000		)
Fair value warrant	(47,000		)	(253,000		)	(180,000		)
Stock compensation	113,000			2,288,000			1,573,000
Uncertain tax positions	1,367,000			1,968,000			340,000
Expired NOL's and credits	4,269,000			339,000			728,000
Limited NOL's and credits	(6,456,000		)	(297,000		)	(749,000		)
Change in state tax rate	(495,000		)	676,000			(60,000		)
Other	501,000			396,000			(8,000		)
	$	—		$	(2,098,000	)	$	29,000

The income tax benefit recorded during the year ended December 31, 2015 of $2.1 million is principally due to a requirement under Accounting Standards Codification ("ASC") 740, Accounting for Income Taxes, that a Company must consider all sources of income in order to determine the tax benefit resulting from a loss from continuing operations. As a result of the requirement under ASC 740-20-45-7, the pretax income which the Company generated from other comprehensive income was a source of income which resulted in the partial realization of the current year loss from continuing operations.

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2016 and 2015 are shown below:



	As of December 31,
	2016			2015
Deferred tax assets:
Capitalized research expense	$	567,000		$	1,201,000
Net operating loss carryforwards	95,500,000			71,848,000
Research and development and other tax credits	5,300,000			3,339,000
Deferred revenue	5,452,000			5,213,000
Deferred rent	2,231,000			2,171,000
Stock-based compensation	4,511,000			2,135,000
Acquired intangibles	269,000			—
Other	4,328,000			3,457,000
	118,158,000			89,364,000
Valuation allowance	(113,407,000		)	(83,245,000		)
Total deferred tax assets	4,751,000			6,119,000
Deferred tax liabilities:
Acquired intangibles	—			(596,000		)
Investment in affiliated entity	(3,624,000		)	(4,399,000		)
Fixed assets	(1,302,000		)	(1,299,000		)
Net deferred tax liabilities	$	(175,000	)	$	(175,000	)

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, an update to ASC 740, Income Taxes (“Update”). Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update.

For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Board also decided to permit earlier application by all entities as of the beginning of any interim or annual reporting period. The Board further provides that this Update may be applied to all deferred tax liabilities and assets retrospectively to all periods presented. The Company chose to adopt the Update in fiscal year ended December 31, 2015 and apply this Update on a prospective basis.

As of December 31, 2016, the Company had federal, California and Pennsylvania tax net operating loss carry forwards of approximately $255.6 million, $73.6 million and $75.6 million, respectively, net of the net operating losses that will expire due to IRC Section 382 limitations. The federal and Pennsylvania net operating loss carry forwards will begin to expire in 2018 and 2021, respectively, unless previously utilized. The California net operating loss carry forwards will expire as follows:



	Amount (in millions)
2017	$	5.8
2028 and beyond	67.8
Total	$	73.6

In March 2016, the FASB issued ASU No. 2016-09, Compensation- Stock Compensation (Topic 718): Improvements to employee Shared-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies how several aspects of share-based payments are accounted for and presented in the financial statements. ASU 2016-09 is effective for public companies for annual reporting periods beginning after December 15, 2016. The Company will adopt this ASU in the first quarter of 2017. The Company has excess tax benefits for which a benefit could not be previously recognized of approximately $1.1 million. Upon adoption the balance of the unrecognized excess tax benefits will be reversed with the impact recorded to retained earnings including any change to the valuation allowance as a result of the adoption. Due to the full valuation allowance on the deferred tax assets, the Company does not expect any impact to the financial statements as a result of this adoption.

In addition, the Company had federal and state research tax credit carryforwards of approximately $7.6 million and $2.1 million, respectively. The federal tax credit carryforwards will begin to expire in 2018. The California research tax credits do not expire.

Utilization of the NOL and tax credit carryforwards will be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, and similar state provisions due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes will limit the amount of NOL and tax credit carryforwards and other deferred tax assets that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing ownership of certain stock holders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period.

The Company and VGX both experienced ownership changes under Section 382 as a result of the Merger on June 1, 2009. The ownership change resulted in annual limitations on the utilizations of tax attributes, including net operating loss carryforwards and tax credits. The Company estimates that approximately $20.8 million of tax benefits related to NOL and tax credit carryforwards will expire unused. Accordingly, the related NOL and R&D credit carryforwards have been removed from deferred tax assets accompanied by a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, limitations created by current and future ownership changes, if any, related to our operations in the United States will not impact our effective tax rate. Any additional ownership changes, may further limit the ability to use the net operating losses and credits carryovers.

The following table summarizes the activity related to our unrecognized tax benefits:



	Year ended December 31,
	2016		2015		2014
Balance at beginning of the year	$	5,455,000	$	2,759,000	$	2,416,000
Increases related to current year tax positions	1,183,000		615,000		331,000
Increases related to prior year tax positions	217,000		2,081,000		12,000
Balance at end of the year	$	6,855,000	$	5,455,000	$	2,759,000

The amount of unrecognized tax benefit that, if recognized and realized would affect the effective tax rate is $5.7 million as of December 31, 2016. The Company has not recorded any interest and penalties on the unrecognized tax positions as the Company has continued to generate net operating losses after accounting for the unrecognized tax benefits. The Company does not anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.

The Company and its subsidiaries are subject to United States federal income tax as well as income tax in multiple state jurisdictions. With few exceptions, the Company is no longer subject to United States federal income tax examinations for years before 2013 and state and local income tax examinations before 2012. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward amount. The Company is not currently under Internal Revenue Service (“IRS”), state or local tax examination.