INCOME TAXES

12 Months Ended

Dec. 31, 2019

During the years ended December 31, 2019 and 2018, the Company recorded no income tax benefits for the net operating losses incurred in each year, due to its uncertainty of realizing a benefit from those items.

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



	Year Ended December 31,
	2019		2018
Federal statutory income tax rate	21.00	%	21.00	%
State taxes, net of federal benefit	3.16		3.71
Research and development tax credits	3.25		8.77
Permanent differences and other	(2.51	)	2.36
Transaction costs	(1.88	)	—
Stock-based compensation	(1.02	)	—
Change in tax rate	0.02		1.80
Change in deferred tax asset valuation allowance	(22.02	)	(37.64	)
Effective income tax rate	—	%	—	%

Approximate deferred tax assets (liabilities) resulting from timing differences between financial and tax bases were associated with the following items (in thousands):



	Year Ended December 31,
	2019			2018
Net operating loss carryforwards	$	82,703		$	8,918
Research and development credit	15,509			3,207
Depreciable assets	10,443			—
Accrued expenses	719			—
Deferred revenue	449			2,040
Net book value of intangible assets	415			75
Stock-based compensation	332			520
Other	63			514
Net deferred tax asset	110,633			15,274
Less: valuation allowance	(110,633		)	(15,274		)
Net deferred tax assets	$	—		$	—

At December 31, 2019, the Company had deferred tax assets of $110.6 million. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation allowance has been established to offset the net deferred tax asset.

As of December 31, 2019 and 2018, the Company had available federal NOL carryforwards of approximately $403.9 million and $36.4 million, respectively. The NOL generated in 2019 of $25.1 million and 2018 of $2.4 million will carry forward indefinitely and be available to offset up to 80% of future taxable income each year. NOLs generated prior to 2018 will expire from 2019 through 2038. In addition, the Company had federal research and development credits and orphan drug credit carryforwards of $30.3 million and $3.2 million as of December 31, 2019 and 2018, respectively, to reduce future federal income taxes, if any. These carryforwards expire from 2019 through 2038 and are subject to review and possible adjustment by the IRC. The Company also has available state NOL carryforwards of approximately $350.6 million and $31.0 million as of December 31, 2019 and 2018, respectively, which expire from 2028 to 2038. In addition, through the Merger, the Company acquired Vical’s California research and development credits of approximately $9.3 million as of December 31, 2019 and 2018, to reduce future California income tax, if any. The California research and development credits do not expire.

Pursuant to Sections 382 and 383 of the Internal Revenue Code “IRC,” annual use of the Company’s net operating loss (“NOL”) and credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. Vical completed a Section 382 analysis through December 31, 2011 and as a result of an ownership change on December 29, 2006, the Company estimates that $89.3 million of Vical’s acquired NOL carryforwards were effectively eliminated under Section 382 for federal tax purposes. The Company also estimates $10.8 million of Vical’s acquired research and development credits and other tax credits were effectively eliminated under Section 383 for federal purposes. Accordingly, after consideration of these limitations, the Company recorded federal and state NOL carryforward of $253.1 million and $291.5 million, respectively, and federal and state credit carryforwards of $24.6 million as a result of the Merger. Vical has not conducted a Section 382 study for periods between December 31, 2011 and the date of the Merger. As such, the Company cannot provide any assurance that a change in ownership within the meaning of the IRC has not occurred between those dates. There is a risk that additional changes in ownership could have occurred between those dates.

It is further noted, the Company has not completed an IRC 382 and 383 analysis to determine if a change in ownership has incurred since the inception of the Company. If a change in ownership were to have occurred, additional NOL and tax credit carryforwards could be eliminated or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance.

All federal and state NOL and credit carryforwards listed above are reflected before the reduction for amounts effectively eliminated under Sections 382 and 383. Based upon statute, federal and state NOLs and credits are expected to expire as follows (in thousands):



Expiration Date:	Federal NOLs		State NOLs		Federal R&D Credit		Federal Orphan Drug Credit		State R&D Credit
2020	$	13,311	$	—	$	334	$	2,288	$	—
2021	9,866		—		334		1,962		—
2022	24,100		—		483		1,610		—
2023	24,743		—		322		929		—
2024	26,332		—		213		663		—
2025 and thereafter	242,941		350,557		7,387		13,813		—
Indefinite	62,618		—		—		—		9,265
Totals	$	403,911	$	350,557	$	9,073	$	21,264	$	9,265

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2019 and 2018. Management reevaluates the positive and negative evidence at each reporting period. The Company’s valuation allowance increased by approximately $95.4 million for year ended December 31, 2019, which includes a full valuation allowance against the acquired deferred tax assets from the Merger. For the year ended December 31, 2018, the valuation allowance increased by $3.5 million.

The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes that it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcome of examinations by tax authorities in determining the adequacy of its provision for income taxes. Before the merger, the Company had no material unrecognized tax benefits and no adjustments to its financial positions. However, the Merger brought with it certain unrecognized tax benefits.

As a result of the Merger, the Company acquired gross unrecognized tax benefits with a balance of $21.7 million as of December 31, 2019. The Company does not anticipate any significant decreases in its unrecognized tax benefits over the next 12 months. The Company’s policy is to recognize the interest expense and/or penalties related to income tax matters as a component of income tax expense. The Company had no accrual for interest or penalties on its balance sheets at December 31, 2019 and 2018, and has not recognized interest and/or penalties in its statements of operations for the years ended December 31, 2019 and 2018.

As of December 31, 2019, the Company’s U.S. federal and state tax returns remain subject to examination by tax authorities beginning with the tax year ended December 31, 2016. However, due to NOLs and credit carryforwards being generated and carried forward from prior tax years, substantially all tax years may also be subject to examination.