10.	Income Taxes

There is no provision for income taxes because the Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. The reported amount of income tax expense for the years differs from the amount that would result from applying domestic federal statutory tax rates to pretax losses primarily because of changes in valuation allowance.

A reconciliation of U.S. statutory rate to the Company’s effective tax rate is as follows:

	Year Ended December 31,
	2016			2015			2014
Tax at Statutory Rate		34.0	%		34.0	%		34.0	%
State Taxes, net of federal benefit		4.2			4.0			4.5
Permanent Items		(1.0	)		(0.9	)		(1.0	)
Orphan Drug Credit Addback		(2.9	)		(4.2	)		—
Foreign Rate Differential		(3.1	)		(3.1	)		—
Federal and State Credits		10.3			13.2			8.5
Change in Valuation Allowance		(41.5	)		(43.1	)		(46.0	)
Other		—			0.1			—
		0.0	%		0.0	%		0.0	%

Significant components of the Company’s net deferred tax asset at December 31, 2016 and 2015 are as follows:

	December 31,
	2016			2015
	(in thousands)
Net operating losses	$	84,374		$	44,172
Capitalized start-up costs		2,155			2,335
Accounting method change		(673	)		(1,347	)
Tax credit carryforwards		33,477			17,013
Accrued expenses		2,287			1,062
Depreciation and amortization		999			716
Stock options		12,103			5,097
Others		350			21
Total net deferred tax asset before valuation allowance		135,072			69,069
Valuation allowance		(135,072	)		(69,069	)
Net deferred tax asset	$	-		$	-

As of December 31, 2016, the Company had federal and state net operating loss carryforwards of $235.4 million and $234.3 million, respectively, which begin to expire in 2031. As of December 31, 2016, the Company had federal and state research and development tax credits carryforwards of $4.1 million and $1.6 million, respectively, which begin to expire in 2031 and 2027, respectively. As of December 31, 2016, the Company had federal orphan drug tax credit carry forwards of $29.8 million, which begin to expire in 2034. At December 31, 2016, the Company has excess equity based compensation tax deductions related to net operating losses for federal and state purposes of $20.4 million and $20.4 million respectively. The Company has excess equity based compensation related to credits for federal and state purposes of $1.3 million and $0.2 million, respectively. These excess tax benefits have not been included in the net deferred tax assets before valuation allowance since these benefits would be credited directly to additional paid in capital if subsequently recognized through a reduction in taxes payable.

The deferred tax assets above exclude $8.0 million of net operating losses and $1.5 million of federal and state research and development credits related to tax deductions from the exercise of stock options subsequent to the adoption of the 2006 accounting standard on stock-based compensation. This amount represents an excess tax benefit and has not been included in the gross deferred tax assets. The Company will adopt ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, for the quarter ended March 31, 2017. As a result of adoption, the deferred tax assets associated with net operating losses will increase by $8.0 million and the deferred tax assets associated with federal and state research credits will increase by $1.5 million. These amounts will be offset by a corresponding increase in the valuation allowance. The adoption of ASU 2016-09 will have no impact to the Company’s income statement, balance sheet, or retained earnings.

As of December 31, 2016, net deferred tax assets increased approximately $66.0 million primarily due to the operating loss and tax credits incurred during the year. This increase in net deferred tax assets was offset by a corresponding increase in the valuation allowance.

Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards and tax credit carryforwards. Under the applicable accounting standards, management has considered the Company’s history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets. Accordingly, a full valuation allowance of $135.1 million and $69.1 million has been established at December 31, 2016 and 2015, respectively.

Pursuant to Section 382 of the Internal Revenue Code, certain substantial changes in the Company’s ownership may result in a limitation on the amount of net operating loss carryforwards and tax carryforwards that may be used in future years. Utilization of the net operating loss (“NOL”) and tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. The Company has not completed a study to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since its formation, due to significant complexity and related costs associated with such a study. There could also be additional ownership changes in the future which may result in additional limitations on the utilization of NOL carryforwards and credits. Further, until a study is completed and any limitation is known, no amounts are being presented as an uncertain tax position.

The Company applies the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires the Company to determine whether a tax position of the Company is more likely than not to be sustained upon examination, including resolution of any related appeals of litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon the ultimate settlement with the relevant taxing authority.

The following is a rollforward of the Company’s unrecognized tax benefits:

	Year Ended December 31,
	2016		2015		2014
	(in thousands)
Unrecognized tax benefits—as of the beginning of the year	$	—	$	—	$	2,880
Gross increases—current period tax positions		—		—		—
Gross decreases—tax positions of prior periods		—		—		(2,880	)
Unrecognized tax benefits—as of the end of the year	$	—	$	—	$	—

During 2014, the Company filed an application for change in accounting method with the IRS to capitalize start-up costs that were historically deducted and included as part of the NOL carryforward through December 31, 2013. As a result, the Company’s unrecognized tax benefits, which historically related to start-up costs, are zero at December 31, 2016. The Company has not, as of yet, conducted a study of its R&D credit carryforwards. This study may result in an adjustment to the Company’s R&D credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position under Topic 740. A full valuation allowance has been provided against the Company’s R&D credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheets or statements of operations if an adjustment were required.

The Company will recognize interest and penalties related to uncertain tax positions in income tax expense when in a taxable income position. As of December 31, 2016 and 2015, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statement of operations.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations, and the Company’s tax returns are open under statute from 2013 to the present. The tax attributes prior to 2013 may still be adjusted upon examination. The Company’s policy is to record interest and penalties related to income taxes as part of the tax provision.

During November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The standard is effective for public companies for fiscal years beginning after December 31, 2016, including interim periods within that reporting period. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. The Company early adopted ASU 2015-17 effective December 31, 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of the current deferred tax liability to a non-current deferred tax liability, in the amount of $0.6 million, which is netted with the long-term deferred tax asset in its consolidated balance sheet as of December 31, 2015. No prior periods were retrospectively adjusted.