Income Taxes

12 Months Ended

Dec. 31, 2019

The Company has reported pre-tax operating losses for all periods presented. The Company has not reflected any benefit for corresponding tax net operating loss carryforwards in the accompanying consolidated financial statements. The Company has established a full valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets.

The effective tax rate for the years ended December 31, 2019, 2018, and 2017 is different from the federal statutory tax rate primarily due to the valuation allowance against deferred tax assets. The Company's effective tax rate differs from the federal statutory rate as follows:


	Year Ended December 31,
	2019		2018		2017
Taxes at the U.S. statutory tax rate	21.0	%	21.0	%	34.0	%
Effect of Tax Act	—		—		(26.6)
Change in valuation allowance	(24.4)		(20.7)		(7.3)
Research tax credits	3.5		10.2		1.0
Stock-based compensation	0.1		(0.7)		(1.0)
Nondeductible acquisition-related costs	—		(9.5)		—
Other	(0.1)		(0.3)		(0.1)
Total provision for income taxes	0.1	%	—	%	—	%

The components of the Company’s net deferred tax assets are as follows (in thousands):


	December 31,
	2019		2018
Deferred tax assets:
Net operating loss carryforwards	$	56,612	$	35,023
Tax credit carryforwards	19,133		9,565
Contract liabilities	13,516		—
Operating lease liability	15,686		—
Stock-based compensation	9,513		3,305
Accruals and other	11,815		17,181
Gross deferred tax assets	126,275		65,074
Valuation allowance	(112,713)		(60,915)
Net deferred tax assets	13,562		4,159
Deferred tax liabilities:
Property and equipment	(6,225)		(4,159)
Operating lease right-of-use asset	(7,337)		—
Net deferred tax assets	$	—	$	—

Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. Based upon the weight of available evidence, especially the uncertainties surrounding the realization of deferred tax assets through future taxable income, the Company believes it is not more likely than not that the deferred tax assets will be fully realizable. Accordingly, the Company has provided a 100% valuation allowance against its net deferred tax assets as of December 31, 2019 and 2018. There was an increase in the net valuation allowance of $51.8 million during the year ended December 31, 2019.

As of December 31, 2019, the Company has federal net operating loss (“NOL”) carryforwards of approximately $221.5 million, which are available to reduce future taxable income, and has federal R&D and orphan drug tax credits of approximately $14.5 million and $1.7 million respectively, both of which may be used to offset future tax liabilities. The federal NOL and federal tax credit carryforwards will begin to expire in 2035. The Company also has state NOL carryforwards of approximately $144.2 million, which are available to reduce future taxable income, and has state tax credits of approximately $9.8 million which may be used to offset future tax liabilities. The state NOL will begin to expire in 2035 and the state tax credit carryforwards will be carried forward indefinitely. The NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service (“IRS”) and state tax authorities and may become subject to an annual limitation in the event of certain future cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized.

The Company follows the provisions of ASC 740, Accounting for Income Taxes, and the accounting guidance related to accounting for uncertainty in income taxes. The Company determines its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings is more likely than not to be sustained upon examination by the relevant income tax authorities.

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


	December 31,
	2019		2018		2017
Unrecognized tax benefits at January 1	$	2,642	$	1,146	$	531
Additions for tax positions taken in a prior year	107		—		—
Additions for tax positions taken in the current year	2,595		1,506		640
Reductions for tax positions taken in the prior year	(45)		(10)		(25)
Unrecognized tax benefits at December 31	$	5,299	$	2,642	$	1,146

If recognized, none of the unrecognized tax benefits would reduce the annual effective tax rate, primarily due to corresponding adjustments to the valuation allowance. The Company will recognize both accrued interest and penalties related to unrecognized benefits in income tax expense. As of December 31, 2019, no liability has been recorded for potential interest or penalties. The Company does not expect the unrecognized tax benefits to change significantly over the next 12 months.

Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available.