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,
	2018		2017		2016
Current:
Federal	$	—	$	—	$	—
State	—		—		—
Foreign	2,170,000		—		—
	2,170,000		—		—
Deferred:
Federal	—		—
State	—		—		—
Foreign	—		—		—
	—		—		—
	$	2,170,000	$	—	$	—

The reconciliation of income taxes attributable to continuing operations computed at the statutory tax rates to income tax expense (recovery), using a 21% statutory tax rate for December 31, 2018, and 35% statutory tax rate for December 31, 2017 and 2016, is as follows:



	Year Ended December 31,
	2018			2017			2016
Income (benefit) taxes at statutory rates	$	(19,908,000	)	$	(30,872,000	)	$	(25,809,000	)
State income tax, net of federal benefit	(4,000		)	(4,000		)	(4,000		)
Foreign income taxes	2,170,000			—			—
Change in valuation allowance	20,898,000			(20,965,000		)	29,678,000
Research and development tax credits	(3,170,000		)	(3,456,000		)	(3,117,000		)
Fair value warrant	(76,000		)	(282,000		)	(47,000		)
Stock compensation	1,094,000			2,332,000			113,000
Uncertain tax positions	1,268,000			846,000			1,367,000
Expired NOLs and credits	2,176,000			454,000			4,269,000
Limited NOLs and credits	(2,176,000		)	(165,000		)	(6,456,000		)
Change in tax rates	—			50,019,000			(495,000		)
Other	(102,000		)	2,093,000			501,000
	$	2,170,000		$	—		$	—

The income tax expense recorded during the year ended December 31, 2018 of $2.2 million was related to foreign income taxes on the upfront payment received from ApolloBio in March 2018.

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2018 and 2017 are shown below:



	As of December 31,
	2018			2017
Deferred tax assets:
Capitalized research expense	$	7,408,000		$	8,546,000
Net operating loss carryforwards	89,399,000			71,665,000
Research and development and other tax credits	9,432,000			7,531,000
Deferred revenue	985,000			297,000
Deferred rent	2,013,000			2,097,000
Stock-based compensation	3,408,000			3,091,000
Acquired intangibles	912,000			858,000
Other	2,693,000			1,906,000
	116,250,000			95,991,000
Valuation allowance	(115,007,000		)	(94,039,000		)
Total deferred tax assets	1,243,000			1,952,000
Deferred tax liabilities:
Acquired intangibles	(142,000		)	(124,000		)
Investment in affiliated entity	(4,000		)	(422,000		)
Fixed assets	(1,121,000		)	(1,430,000		)
Net deferred tax liabilities	$	(24,000	)	$	(24,000	)

As of December 31, 2018, the Company had federal, California and Pennsylvania tax net operating loss carryforwards of approximately $383.3 million, $68.6 million and $75.6 million, respectively, net of the net operating losses that will expire due to IRC Section 382 limitations. The federal net operating loss generated in 2018 of $86.5 million will carryforward indefinitely and be available to offset up to 80% of future taxable income each year. The federal, California and Pennsylvania net operating loss carryforwards will begin to expire in 2019, 2028 and 2021, respectively, unless previously utilized.

In addition, the Company had federal and state research tax credit carryforwards of approximately $13.8 million and $2.7 million, respectively. The federal tax credit carryforwards will begin to expire in 2029. The California research tax credits do not expire.

Based upon statute, federal and state losses and credits are expected to expire as follows (in millions):



Expiration Date:	Federal NOLs		State NOLs		Federal R&D		State R&D

2019	$	2.4	$	—	$	—	$	—
2020	1.6		—		—		—
2021	2.3		0.3		—		—
2022	6.0		0.3		—		—
2023	4.5		0.4		—		—
2024 and thereafter	280.0		143.2		13.8		—
Indefinite	86.5		—		—		2.7
	$	383.3	$	144.2	$	13.8	$	2.7

Pursuant to Internal Revenue Code (IRC) Sections 382 and 383, annual use of the Company’s net operating loss and research and development credit carryforwards may be limited in the event that a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has completed an IRC Section 382/383 analysis, regarding the limitation of net operating loss and research and development credit carryforwards as of December 31, 2018. As a result of the analysis, the Company estimates that approximately $11.2 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 the Company's operations in the United States will not impact its effective tax rate. Any additional ownership changes, may further limit the ability to use the net operating losses and credits carryovers.

The Tax Cuts and Jobs Act ("the Act") was enacted on December 22, 2017. The Act included a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. federal corporate tax rate from a maximum of 35% to a flat 21%, effective January 1, 2018. In conjunction with the tax law changes, the SEC staff issued Staff Accounting Bulletin 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In these instances, a company can record provisional amounts in its financial statements for the income tax effects for which a reasonable estimate can be determined. For items for which a reasonable estimate cannot be determined, a company should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Act being enacted.

SAB 118

The Company applied the guidance in SAB 118 when accounting for the enactment-date effects of the Act in 2017 and throughout 2018. At December 31, 2017, the Company had not completed its accounting for all of the enactment-date income tax effects of the Act under ASC 740, Income Taxes, and recorded a provisional amount of $50.0 million, with respect to the remeasurement of deferred tax assets and liabilities, which was reduced by a valuation allowance of $(50.2) million for a net impact of $(0.2) million. At December 31, 2018, the Company has now completed its accounting for all of the enactment-date income tax effects of the Act and no adjustments were made to the provisional amounts recorded at December 31, 2017.

The following table summarizes the activity related to the Company's unrecognized tax benefits:



	Year ended December 31,
	2018		2017			2016
Balance at beginning of the year	$	8,313,000	$	6,855,000		$	5,455,000
Increases related to current year tax positions	1,319,000		1,532,000			1,183,000
Increases (decreases) related to prior year tax positions	—		(74,000		)	217,000
Balance at end of the year	$	9,632,000	$	8,313,000		$	6,855,000

The amount of unrecognized tax benefits that, if recognized and realized, would affect the effective tax rate was $8.3 million, $7.1 million and $5.7 million, as of December 31, 2018, 2017 and 2016, respectively, subject to valuation allowances. 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 U.S. 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 2015 and state and local income tax examinations before 2014. 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.