12. Income Taxes

For the years ended December 31, 2016 and 2015, the effective income tax rate and tax provision was zero, primarily attributable to losses generated which are not more likely than not to be realized.

The provision for income taxes differs from the amount expected by applying the federal statutory rate to the loss before taxes as follows:

	Year Ended December 31,
	2016			2015
Federal statutory income tax rate		34.00	%		34.00	%
State taxes (tax effected)		7.87	%		7.19	%
Non-deductible expenses and other		(10.19	)%		—	%
Research and development credits		14.07	%		2.98	%
Change in valuation allowance		(45.75	)%		(44.17	)%
Total		—			—

As of December 31, 2016, and 2015, the components of the Company’s deferred tax assets are as follows (in thousands):

	As of December 31,
	2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	23,937		$	14,830
Deferred Revenue		—			5,656
Start-up costs		2,093			2,260
Research and development credits carryforwards		4,450			2,157
Depreciation		(527	)		(565	)
Other		865			437
Total deferred tax assets		30,818			24,775
Less valuation allowance		(30,818	)		(24,775	)
Net deferred tax assets	$	—		$	—

The Company’s primary deferred tax asset of $23.9 million at December 31, 2016 and $14.8 million at December 31, 2015 relates to its net operating loss carryforwards. Based on a history of cumulative losses in recent periods and consideration of other available positive and negative evidence, the Company has recorded a valuation allowance to offset the net deferred tax assets at December 31, 2016 and December 31, 2015, respectively.

As of December 31, 2016, the Company had approximately $60.5 million and $60.6 million of federal and state net operating losses, respectively, that will begin to expire in 2032. Included in the net operating loss carry forward amount is $0.4 million for federal and $0.4 million for state income tax purposes, which when recognized, will result in a credit to stockholder’s equity. This relates to the fact that we will not record the windfall to APIC until it reduces the taxes payable. As of December 31, 2016, the Company had approximately $2.8 million and $2.4 million of federal and state research and development tax credit carryovers, respectively. If not utilized, the federal credit carryforward will expire in 2032, and the state credit carryforward does not expire. As of December 31, 2016, the Company had approximately $1.5 million of federal orphan tax credit carryovers, which will expire in 2036 if not utilized. The valuation allowance increased by approximately $6.0 million and $10.1 million during the years ended December 31, 2016 and 2015 respectively. In general, if the Company experiences a greater than 50 percentage point aggregate change in ownership over a three-year period (a Section 382 ownership change), utilization of its pre-change net operating loss carryforwards, or NOLs, are subject to an annual limitation under Section 382 of the Internal Revenue Code, as well as a similar law under the laws of the state of California. The annual limitation generally is determined by multiplying the value of the Company’s stock at the time of such ownership change (subject to certain adjustments) by the applicable “long-term tax-exempt rate.” Such limitations may result in expiration of a portion of the NOLs before utilization. The Company has determined that an ownership change occurred on April 20, 2015 that resulted in an annual limitation, but that all NOLs generated prior to April 20, 2015 can be utilized prior to expiration.

As of December 31, 2016, and 2015, the Company did not have a liability related to unrecognized tax benefits. All unrecognized tax benefits have been netted against the research and development and orphan drug credit carryforwards deferred tax asset.

The Company records interest and penalties related to unrecognized tax benefits within interest and other income, net. As of December 31, 2016, and 2015, the Company had not accrued any interest or penalties related to unrecognized tax benefits. The Company is subject to U.S. federal and California income tax assessment for years beginning in 2012 and Australia beginning in 2015. However, since the Company has incurred federal and California net operating losses every year since inception, all its income tax returns are subject to examination and adjustments by the Internal Revenue Service for at least three years and by California Franchise Tax Board for four years following the year in which the tax attributes are utilized. The Company does not believe that there will be a material change in it unrecognized tax positions over the next twelve months. There is no amount of unrecognized tax benefit that, if recognized, would affect the effective tax rate.

Uncertain Tax Positions

The Company has not been audited by the Internal Revenue Service, any state tax authority, or the Australian Taxation Office. It is subject to taxation in the United States. Because of the net operating loss and research credit carryforwards, and orphan drug tax credit carryforwards, substantially all its tax years, from 2012 to 2016, remain open to U.S. federal and California state tax examinations.

There were no interest or penalties accrued at December 31, 2015 and 2016.

At December 31, 2016, 2015 and 2014, the Company's reserve for unrecognized tax benefits is approximately $1.5 million, $0.7 million and $0.5 million, respectively. Due to the full valuation allowance at December 31, 2016, current adjustments to the unrecognized benefits will have no impact to the Company's effective income tax rate.

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

	For the Year Ended December 31,
	2016		2015		2014
Beginning balance	$	719	$	465	$	56
Increases of unrecognized tax benefits related to current year		755		254		409
Ending balance	$	1,474	$	719	$	465

The Company does not anticipate material changes to its uncertain tax positions through the next 12 months.