Income Taxes

The Company utilizes the liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established against deferred tax assets when, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company's policy is to record interest and penalties on uncertain tax positions as income tax expense.

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A reconciliation of the statutory U.S. federal rate to the Company's effective tax rate is as follows:



	Years ended December 31,
	2019		2018		2017
Percent of pre-tax income:
U.S. federal statutory income tax rate	21.0	%	21.0	%	35.0	%
State taxes, net of federal benefit	10.9	%	18.5	%	14.6	%
Permanent items	(1.0	)%	4.0	%	4.0	%
Remeasurement of deferred tax assets	—	%	—	%	49.9	%
Impact of state rate changes	0.1	%	(0.2	)%	(27.9	)%
Research and development credit	2.8	%	(2.4	)%	—	%
Alternative minimum tax credit	—	%	—	%	(1.3	)%
Change in valuation allowance	(33.6	)%	(42.6	)%	(78.6	)%
Effective income tax rate	0.2	%	(1.7	)%	(4.3	)%

The components of income tax benefit are as follows:



	Years ended December 31,
	2019			2018			2017
Current:
Federal	$	—		$	—		$	173
State	(111		)	(1,063		)	(1,356		)
Deferred:
Federal	—			—			(3,529		)
State	—			—			—
Income tax benefit	$	(111	)	$	(1,063	)	$	(4,712	)

Significant components of the Company's deferred tax assets (liabilities) for 2019 and 2018 consist of the following:



	As of December 31,
	2019			2018
Deferred tax assets (liabilities)
License and technology payments	7,116			7,221
Share-based compensation	22,131			20,342
Accrued expenses	362			371
Right-of-use asset	(163		)	—
Lease obligation	162			—
Depreciation	(18		)	(28		)
Federal and state net operating loss carryforwards	105,375			88,766
Research and development credits	7,353			5,933
Other	6			5
Deferred income tax assets	142,324			122,610
Valuation allowance	(142,324		)	(122,610		)
Net deferred tax assets	$	—		$	—

The Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible.

The Company incurred tax losses in 2019 and 2018. The Company has carried forward its federal and state tax losses due to the inability of carryback claims. Federal NOLs incurred prior to 2018 will begin to expire in 2034 if not utilized. Post 2017 Federal NOLs have an unlimited life. The state NOLs are expected to begin to expire in 2028. Due to the Company's history of losses and lack of other positive evidence to support taxable income, the Company has recorded a valuation allowance against those remaining deferred tax assets that are not expected to be realized. As of December 31, 2019, the Company has federal NOL carryforwards of approximately $369.7 million.

For the year ended December 31, 2019 and 2018, the Company recorded a benefit from income taxes of $0.1 million and $1.1 million, respectively, due primarily to the settlements of a local tax audits. For the year ended December 31, 2017, the Company recorded a benefit from income taxes of $4.7 million which was related to a $3.5 million reduction in its valuation allowances for AMT credits to reflect the impact of the TCJA enactment and the settlement of a state franchise tax audit for $1.4 million, partially offset by the reversal of previously recorded benefits related to the change in unrealized gains of the Company's investment portfolio. During 2019, the Company received $1.8 million related to the refund of the afore-mentioned AMT credits and recorded a tax receivable of $1.8 million to reflect the refund of AMT credits it expects to receive over the next three years.

The Company generated net income before income taxes for the years ended December 31, 2018 and 2017. This income was due to the Novo Termination Agreement and the July 2017 Letter Agreement with Novartis which had previously been recorded on the company's federal and state income tax returns. This recognition of income resulted in the reduction of a deferred tax asset that was completely offset by a previously recorded valuation allowance. With respect to the remaining deferred tax assets, except for the AMT credits previously discussed above, there was no change in the amount of assets realizable at December 31, 2019.

In the second quarter of 2017, the IRS concluded an audit of the Company’s U.S. federal income tax returns for the years 2013, 2014 and 2015, resulting in an immaterial amount of additional tax due. Federal NOLs for 2016 and general business credits generated between 2007 and 2016 remain subject to audit.

Pursuant to ASC 740, Income Taxes, the Company routinely evaluates the likelihood of success if challenged on income tax positions claimed on its income tax returns. During the year ended December 31, 2019, the Company reduced certain deferred tax assets by $19.7 million and increased the corresponding valuation allowance by an equivalent amount. Additionally, the Company amended certain state income tax returns to claim a refund for taxes previously paid. These claims may result in refunds to the Company of up to approximately $4.8 million. These items have not been recognized in the financial statements and if disallowed by the tax authorities, would not result in an adjustment to the Company’s effective tax rate, its balance sheet or its cash flow statements for the current year.

The Company's position with respect to uncertain tax positions is set forth below:



Opening balance	$	13,983
Gross amount of increases in unrecognized tax benefits during the period - current year provisions	—
Gross amount of increases in unrecognized tax benefits during the period - prior year provisions	18
Gross amount of decreases in unrecognized tax benefits during the period - other	(1,579		)
Decreases due to settlement with tax authorities during the period	(195		)
Reduction of unrecognized tax benefits due to expiration of the state of limitations during the period	—
Closing Balance	$	12,227

As the Company is currently under audit by the New Jersey Division of Taxation, an estimate of unrecognized tax benefits that may be realized over the next twelve months is expected to be in the range of zero to approximately $4.8 million.

The Company will continue to evaluate its ability to realize its deferred tax assets on a periodic basis and will adjust such amounts in light of changing facts and circumstances including, but not limited to, future projections of taxable income, tax legislation, rulings by relevant tax authorities, the progress of ongoing tax audits and the regulatory approval of product candidates currently under development. Any additional changes to the valuation allowance recorded on deferred tax assets in the future would impact the Company’s income taxes.