Income Taxes

The Company did not record a provision for income taxes for the years ended December 2018, 2017 and 2016 due to a full valuation allowance against its deferred tax assets.

On December 22, 2017, the Tax Cuts and Jobs Act (2017 Tax Act) was enacted. The 2017 Tax Act included a number of changes to existing U.S. tax laws that impacted the Company, most notably a reduction of the U.S. corporate tax rate from 34% to 21%, for tax years beginning after December 31, 2017. The 2017 Tax Act also provided for the implementation of a territorial tax system, a one-time transition tax on certain foreign earnings, the acceleration of depreciation for certain assets placed into service after September 27, 2017 and other prospective changes beginning in 2018, including repeal of the domestic manufacturing deduction, acceleration of tax revenue recognition, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest.

Pursuant to the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, the Company had not finalized its accounting for the income tax effects of the 2017 Act for the year ended December 31, 2017, but included a provisional amount related to the re-measurement of deferred tax assets based on the rates at which they were expected to reverse in the future, which is generally 21% plus the applicable state tax rate, with a corresponding change to the valuation allowance as of December 31, 2017. The Company finalized its accounting for the income tax effects of the 2017 Act during the year ended December 31, 2018 and, as such, the Company’s financial results reflect the income tax effects of the 2017 Tax Act.

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



	December 31,
	2018			2017
Deferred tax assets:
Deferred royalty obligation	$	31,937		$	—
Stock-based compensation	11,904			6,744
Depreciation and amortization	1,033			511
Other	1,004			124
Total gross deferred tax assets	45,878			7,379
Valuation allowance	(45,878		)	(7,379		)
Net deferred tax assets	$	—		$	—

The difference between the provision for income taxes and income taxes computed using the effective U.S. federal statutory rate is as follows (in thousands):



	Year Ended December 31,
	2018			2017			2016
Federal statutory rate	$	(41,888	)	$	(39,033	)	$	(26,583	)
State tax benefit	(14,449		)	—			—
Research and development credits	(5,164		)	(2,691		)	(1,240		)
Foreign rate differential	(58		)	1,249			—
Change in valuation allowance	55,167			(35,246		)	25,091
Stock-based compensation	4,041			2,253			—
Expired tax attributes	1,936			2,228			(5		)
Impact of the 2017 Tax Act	—			71,199			—
Other permanent differences	415			41			2,737
Provision for income taxes	$	—		$	—		$	—

As of December 31, 2018 and 2017, the Company established a full valuation allowance against its federal and state deferred tax assets due to the uncertainty surrounding the realization of such assets.

Pursuant to Section 382 and 383 of the IRC, utilization of the Company’s federal net operating loss carryforwards and research and development credit carryforwards may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of net operating loss and research and development credit carryforwards prior to utilization. The Company has not completed an IRC Section 382 and 383 analysis regarding the limitation of net operating loss and research and development credit carryforwards.

As of December 31, 2018, the Company has estimated federal and state net operating loss carryforwards of approximately $560.2 million and $341.0 million, respectively. The difference between the federal and state tax net operating loss carryforwards is primarily attributable to the capitalization of research and development expenses for California income tax purposes. In addition, the Company has estimated federal and California research and development tax credit carryforwards of approximately $24.6 million and $15.4 million, respectively. The federal net operating loss carryforwards, federal research tax credit carryforwards and state net operating loss carryforwards will begin to expire in 2019, if not utilized. California research and development credit carryforwards will carry forward indefinitely until utilized. The Company believes that it experienced ownership changes in May 2010 and February 2009 at times when its enterprise value was minimal. As a result of the ownership changes and low enterprise values at such times, the Company’s federal and California net operating loss carryforwards and federal research and development credit carryforwards as of December 31, 2017 will likely be subject to annual limitations under IRC Section 382 and 383 and, more likely than not, will expire unused.

There were no unrecognized tax benefits as of the December 31, 2018 and 2017. The Company does not anticipate there will be a significant change in unrecognized tax benefits within the next 12 months.

The Company had no accrual for interest or penalties on the Company’s consolidated balance sheets as of December 31, 2018 or December 31, 2017, and has not recognized interest and/or penalties in the consolidated statements of operations for the years ended December 31, 2018, 2017 and 2016.

The Company is subject to taxation in the U.S. and various state jurisdictions. The Company’s tax returns since inception are subject to examination by the U.S. and various state tax authorities. The Company is not currently undergoing a tax audit in any federal or state jurisdiction.