Income Taxes

12 Months Ended

Dec. 31, 2019

The components of loss before provision for income taxes were as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017

	(in thousands)
United States	$	(69,930	)	$	(84,313	)	$	(83,214	)
Foreign	207			88			—
Total	$	(69,723	)	$	(84,225	)	$	(83,214	)

The components of the provision for income taxes are as follows:



	Year Ended December 31,
	2019			2018		2017

	(in thousands)
Current:
State	$	3		$	4	$	—
Foreign	266			34		7
Total current tax expense	$	269		$	38	$	7
Deferred:
Federal	$	(1,652	)	$	—	$	—
State	(311		)	—		—
Foreign	(178		)	—		—
Total deferred tax expense	$	(2,141	)	$	—	$	—
Total provision for income taxes	$	(1,872	)	$	38	$	7

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows:



	Year Ended December 31,
	2019			2018

	(in thousands)
Deferred tax assets:
Net operating losses carryforwards	$	90,534		$	36,783
Intangible assets	14,165			17,107
Accruals and reserves	4,936			5,127
Research and development credits	11,031			5,753
Stock-based compensation	3,143			1,289
Lease liabilities	10,195			—
Other	160			210
Total deferred tax asset	$	134,164		$	66,269
Deferred tax liabilities:
Property and equipment	$	(119	)	$	(73	)
Section 481 (a) adjustment	(914		)	—
Right-of-use asset	(7,363		)	—
Unrealized gain/loss on investments	(346		)	—
Less: valuation allowance	(125,245		)	(66,196		)
Net deferred tax assets	$	177		$	—

The following table presents a reconciliation of the income tax expense computed at the statutory federal rate and the Company’s income tax expense for the periods presented:



	Year Ended December 31,
	2019			2018			2017

	(in thousands)
Tax at the statutory federal rate	$	(14,642	)	$	(17,690	)	$	(28,293	)
Other nondeductible items	887			329			371
Stock-based compensation	(33,042		)	497			3,819
Research and development credits	(5,266		)	(1,726		)	(714		)
Change in valuation allowance	59,049			22,516			5,415
State taxes, net of federal benefits	(8,253		)	(4,231		)	(1,868		)
Change in tax rate due to Tax Act	—			—			21,346
Other	(605		)	343			(69		)
Total provision for (benefit from) income taxes	$	(1,872	)	$	38		$	7

The Company’s actual tax expense differed from the statutory federal income tax expense using a tax rate of 21% for the year ended December 31, 2019 primarily due to state and foreign income taxes, nondeductible expenses, research and development tax credits, the acquisition of Bellwether Bio, and the change in valuation allowance. The Company’s actual tax expense differed from the statutory federal income tax expense using a tax rate of 21% and 34% for the years ended December 31, 2018, and 2017, respectively, primarily due to state income taxes, nondeductible expenses, research and development tax credits, and the change in valuation allowance. The benefit from income taxes for the year ended December 31, 2019 included a release of a valuation allowance of $1.6 million associated with nondeductible intangible assets recorded as a result of the acquisition of Bellwether Bio. In connection with the acquisition of Bellwether Bio, a deferred tax liability was established for the book-tax basis differences related to the non-goodwill intangible assets. The net deferred tax liability from this acquisition creates an additional source of income to offset the Company’s deferred tax assets. The benefit from income taxes for the year ended December 31, 2019 also included a benefit of $0.4 million associated with the utilization of tax losses from continuing operations against other comprehensive income gains in accordance with intra-period tax allocation under ASC Topic 740.

As of December 31, 2019 and 2018, the Company had a net operating loss carryforwards of $365.3 million and $152.3 million for federal purposes, respectively, and $223.2 million and $73.2 million for state and local purposes, respectively, which may be subject to limitations as described below. If not utilized, these carryforwards will begin to expire in 2031 for federal, and 2020 for state and local purposes. Under the newly enacted federal income tax law, federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. It is uncertain if and to what extent various states will conform to the newly enacted federal income tax law.

As of December 31, 2019 and 2018, the Company had research and development tax credit carryforwards for federal tax purposes of $6.8 million and $3.5 million, and state research and development tax credit carryforwards of $5.3 million and $2.9 million, respectively. The federal research and development tax credit carryforwards will expire at various dates beginning in the year 2032. The Company’s state research and development tax credit carryforwards do not expire.

Utilization of the net operating loss (“NOL”) carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of NOL carryforwards and credits before utilization. Current laws impose substantial restrictions on the utilization of NOL carryforwards and credits in the event of an “ownership change” within a three-year period as defined by the Internal Revenue Code Section 382 (“Section 382”). If there should be an ownership change, the Company’s ability to utilize its NOL carryforwards and credits could be limited. The Company has not performed a Section 382 analysis.

Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Due to the Company’s history of U.S. operating losses, the Company believes that the recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not more likely than not to be realized and, accordingly, have provided a full valuation allowance against net U.S. deferred tax assets. The net change in total valuation allowance was an increase of $59.0 million and an increase of $22.5 million for the years ended December 31, 2019 and 2018, respectively.

The SEC staff issued SAB 118 on December 23, 2017 regarding application of the Tax Act. It provides a “measurement period,” lasting through December 22, 2018, to allow registrants time to obtain, prepare and analyze information to complete the accounting required under ASC 740, Income Taxes. The Company completed its analysis during the measurement period and there were no measurement period adjustments recognized during 2019.

The Company has not recorded a provision for deferred U.S. tax expense that could result from the remittance of foreign undistributed earnings since the Company intends to reinvest the earnings in its foreign subsidiaries indefinitely.

The Company has made an accounting policy election to treat Global Intangible Low-Taxed Income ("GILTI") taxes as a current period expense rather than including these amounts in the measurement of deferred taxes.

Uncertain Tax Positions

The Company records unrecognized tax benefits, where appropriate, for all uncertain income tax positions. The Company recorded unrecognized tax benefits for uncertain tax positions of $6.5 million and $3.4 million as of December 31, 2019 and 2018, respectively, none of which would impact the Company’s effective tax rate if recognized, because the benefit would be offset by an increase in the valuation allowance.

A reconciliation of the beginning and ending balance of total unrecognized tax benefits is as follows:



	Year Ended December 31,
	2019		2018		2017

	(in thousands)
Unrecognized tax benefits - Beginning of period	$	3,427	$	1,712	$	884
Increases related to current year’s tax positions	3,116		1,635		828
Increases related to prior years’ tax positions	—		80		—
Unrecognized tax benefits - End of period	$	6,543	$	3,427	$	1,712

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. During the years ended December 31, 2019 and 2018, the Company recognized no interest and penalties associated with unrecognized tax benefits. There are no tax positions for which it is reasonably possible that

the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.

Due to the net operating loss carryforwards, all years remain open for income tax examination by tax authorities in the United States, various states and foreign tax jurisdictions in which the Company files tax returns.