Income Taxes

12 Months Ended

Dec. 31, 2019

The Company had no federal income tax expense and immaterial state tax expense for the years ended December 31, 2019, 2018 and 2017.

The differences between the effective income tax rate and the statutory tax rates during the years ended 2019, 2018 and 2017 are as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
Net loss before tax	$	(213,256	)	$	(98,418	)	$	(70,430	)
Statutory combined U.S. federal and state tax rate	21.00		%	21.00		%	34.00		%
Statutory federal and state taxes	(44,784		)	(20,668		)	(23,946		)
Increase (decrease) in taxes recoverable resulting from:
Effect of change in valuation allowance	52,719			25,959			(4,154		)
Non-deductible share-based compensation	1,810			884			695
Tax deductions for share-based compensation	(6,917		)	(2,924		)	(80		)
Tax credits	(8,621		)	(5,130		)	(2,563		)
Write off of Methylgene US Inc. net operating loss	—			—			307
Change in tax rate	—			—			303
Tax Cuts and Jobs Act	—			—			28,569
Uncertain tax positions	2,143			1,283			646
Return to provision and other true-ups	(60		)	375			394
Non-deductible officers' compensation	3,527			179			—
Other differences	183			42			(171		)
Income tax benefit	$	—		$	—		$	—

Deferred Tax

The following table summarizes the significant components of our deferred tax assets (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Tangible and intangible depreciable assets	$	6,978		$	8,123
Stock compensation	12,321			6,515
Provisions	934			1,020
Other, net	35			—
Lease liability	137			—
Net operating loss carry forwards	116,345			74,721
Capital loss carryforward	178			178
Canada scientific research and experimental development expenditures	5,471			5,467
U.S. research and development tax credits	17,080			10,613
Total gross deferred tax assets	159,479			106,637
Less valuation allowance	(159,357		)	(106,637		)
Net deferred tax assets	$	122		$	—

Deferred tax liabilities:
Right-of-use Asset	$	(122	)	$	—

Net deferred income taxes	$	—		$	—

Total valuation allowance increased by $52.7 million for the year ended December 31, 2019. The Company has established a full valuation allowance against its net deferred tax assets as of December 31, 2019 due to the uncertainty surrounding the realization of such assets as evidenced by the cumulative losses from operations through December 31, 2019.

For Canadian federal income tax purposes, the Company's Canadian federal scientific research and experimental development expenditures amounted to $19.9 million at December 31, 2019, 2018 and 2017 and for provincial income tax purposes amounted to $21.6 million at December 31, 2019, 2018 and 2017. As operations in Canada ceased during 2014, no expenditures were incurred for the years ended December 31, 2019, 2018 and 2017. These expenditures are available to reduce future taxable income and have an unlimited carry forward period. Scientific research and development expenditures are subject to verification by the taxation authorities, and accordingly, these amounts may vary by a material amount. In addition, the Company has research and development tax credit carryforwards for U.S. federal and state income tax purposes as of December 31, 2019 of $17.2 million and $7.2 million, respectively. The federal credits will begin to expire in 2033 unless utilized and the state credits have an indefinite life.

At December 31, 2019, the Company's net operating loss carry forwards ("NOLs") for U.S. federal and state income taxes were $452.5 million and $81.2 million, respectively and the Company's NOLs for Canadian federal and provincial income tax purposes were $79.1 million and $78.4 million, respectively. The NOLs expire as follows (in thousands):



	US				Canada
	Federal		State		Federal		Provincial
Expires in:
2030	$	—	$	—	$	4,830	$	4,907
2031	—		—		7,059		7,066
2032	—		—		13,308		12,433
2033	2,225		2,232		18,623		19,385
2034	7,276		22,162		32,401		31,809
2035	53,359		52,950		1,084		1,084
2036	23,379		—		777		777
2037	65,509		—		697		697
2038	—		3,817		—		—
2039	—		—		274		274
Does not expire	300,763		—		—		—
	$	452,511	$	81,161	$	79,053	$	78,432

The future utilization of the U.S. federal and state NOL carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or may occur in the future. The Tax Reform Act of 1986 (the "Act") limits a company's ability to utilize certain tax credit carryforwards and net operating loss carryforwards in the event of a cumulative change in ownership in excess of 50% (by value) as defined in the Act. During 2017, the Company completed a study to assess whether an ownership change, as defined by Section 382 of the Act, had occurred from the Company’s formation through December 31, 2017. The results of the study have been extended through December 31, 2019. Based upon the study, the Company determined an ownership change had occurred during 2017, causing the annual utilization of the NOL and credit carryforwards to be limited. The Company does not believe any of the NOL and credit carryforwards generated through December 31, 2019 would expire solely as a result of annual limitations on the utilization of those attributes. The Canadian Federal and Provincial Tax Acts maintain similar rules in the case of acquisition of control, which may limit the utilization of tax attributes.

The Company files income tax returns in the U.S. (federal and state) and Canada (federal and provincial). The Company’s U.S. operations have not been audited for any open taxation years. The Company has experienced losses for U.S. tax purposes and therefore, the taxation authorities may review any loss year, if and when the losses are utilized.

For Canadian tax purposes, the Company remains subject to federal and provincial audit for the December 31, 2015 and subsequent taxable years. Where tax years remain open, the Company considers it reasonably possible that issues may be raised or tax positions agreed to with the taxation authorities, which may result in increases or decreases of the balance of non-refundable investment tax credits ("ITCs") and NOLs. However, an estimate of such increases and decreases cannot be currently made.

A reconciliation of the beginning and ending amounts of unrecognized tax positions are as follows (in thousands):



	Federal							Provincial/State
	December 31,							December 31,
	2019		2018		2017			2019		2018		2017
Unrecognized tax positions, beginning of year	$	2,617	$	1,693	$	1,095		$	8,010	$	7,556	$	7,333
Gross increase — current period tax positions	1,651		924		588			638		454		227
Gross decrease — prior period tax positions	—		—		—			—		—		(3		)
Gross increase — prior period tax positions	—		—		11			—		—		—
Expiration of statute of limitations	—		—		(1		)	—		—		(1		)
Unrecognized tax positions, end of year	$	4,268	$	2,617	$	1,693		$	8,648	$	8,010	$	7,556

If recognized, none of the unrecognized tax positions would impact the Company's income tax benefit or effective tax rate as long as the Company's net deferred tax assets remain subject to a full valuation allowance. The Company does not expect any significant increases or decreases to the Company's unrecognized tax positions within the next 12 months. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company had no accrual for

interest or penalties on tax matters as of December 31, 2019, 2018 and 2017, and the Company had no ongoing tax audits as of December 31, 2019.