Income Taxes

The Company's pre-tax income (loss) is comprised of the following components (in thousands):



	Year Ended December 31,
	2017			2016			2015
Pre-tax income (loss):
U.S.	$	(9,246	)	$	3,981		$	(33,452	)
Canada	(19,783		)	(2,085		)	—
Total pre-tax income (loss)	$	(29,029	)	$	1,896		$	(33,452	)

The Company's tax provision is comprised of the following components (in thousands):



	Year Ended December 31,
	2017		2016		2015
Current tax provision:
Federal	$	—	$	2	$	—
State	—		—		—
Foreign	—		—		—
Total current provision	—		2		—
Deferred tax provision:
Federal	—		3		—
State	—		—		—
Foreign	—		—		—
Total deferred provision	—		3		—
Total tax provision	$	—	$	5	$	—

A reconciliation of the expected income tax expense computed using the federal statutory income tax rate to the Company’s effective income tax rate was as follows:



	Year Ended December 31,
	2017		2016		2015
Income tax benefit computed at federal statutory tax rate	34.0	%	34.0	%	34.0	%
Impact of foreign rate differential	(2.6	)	7.7		—
State taxes, net of federal benefit	1.4		18.8		5.6
Net operating loss write off	—		14.4		—
Stock option cancellations	(0.8	)	49.6		—
Transaction costs	—		33.6		—
Contingent consideration	(10.7	)	(15.7	)	—
General business credits and other credits	0.8		(25.0	)	1.8
Permanent differences	0.3		5.3		2.4
Change in valuation allowance	28.2		(122.4	)	(43.8	)
Federal statutory rate change	(50.6	)	—		—
Total	—	%	0.3	%	—	%

The Company has incurred net operating losses ("NOLs" or "NOL") from inception. At December 31, 2017, the Company has U.S. federal and state NOL carryforwards of $119.3 million and $118.5 million, respectively, available to reduce future taxable income, that expire beginning in 2031 through 2037. The Company also had federal and state research and development tax credit carryforwards of $2.0 million and $1.0 million, respectively, available to reduce future tax liabilities that expire beginning in 2025 through 2037. As of December 31, 2017, the Company also has non-capital loss carryforwards available to offset future taxable income of $16.8 million for Canadian federal tax purposes that expire beginning in 2025 through 2027. As of December 31, 2017, the Company also has $4.2 million of Canadian scientific research and experimental development expense carryforwards available to offset future taxable income as well as $1 million of Canadian federal and provincial investment tax credit carryforwards available to offset future income taxes. The investment tax credits expire beginning in 2032 through 2037.

Under Section 382 of the Internal Revenue Code of 1986 and comparable provisions of state, local and foreign tax laws, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change by value in its equity ownership over a three year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes, such as research and development tax credits, to reduce its post-change income may be limited. We have determined that it is more likely than not that our net operating and tax credit amounts disclosed are subject to a material limitation under Section 382 and as such, have reduce our NOL carryforward by $0.8 million.

The Company’s deferred tax assets and liabilities consist of the following (in thousands):



	December 31,
	2017			2016
Deferred tax assets:
Net operating loss carryforwards	$	37,070		$	45,488
Research and development credit carryforwards	3,690			3,355
Accruals and other	2,263			2,079
Capitalized license and organization costs	—			61
Capitalized start-up costs	150			246
Other	38			—
Total gross deferred tax asset	43,211			51,229
Deferred tax liabilities:
IPR&D	(12,528		)	(16,335		)
Property and equipment	(107		)	(189		)
Total gross deferred tax liabilities	(12,635		)	(16,524		)
Valuation allowance	(43,104		)	(51,040		)
Net deferred tax liability	$	(12,528	)	$	(16,335	)

As required by ASC 740, Income Taxes (“ASC 740”), management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are composed principally of NOL carryforwards and research and development credit carryforwards. Management has determined that it is more likely than not that the Company will not recognize the benefits of its federal and state deferred tax assets, and, as a result, a valuation allowance of $43.1 million and $51.0 million has been established at December 31, 2017 and 2016, respectively. The change in the valuation allowance was for $7.9 million for the year ended December 31, 2017. The Company has not, as yet, conducted a study of its research and development credit carryforwards. Such a study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amount is being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development 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 consolidated statements of operations and comprehensive income (loss) if an adjustment were required.

The Company applies the accounting guidance in ASC 740 related to accounting for uncertainty in income taxes. The Company’s reserves related to taxes are based on a determination of whether, and how much of, a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit. As of December 31, 2017 and 2016, the Company had no unrecognized tax benefits. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

In 2017, the Company adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which eliminates the requirement that excess tax benefits be realized as a reduction in current taxes payable before the associated tax benefit can be recognized in additional paid-in capital. This created approximately $0.3 million of deferred tax assets relating to federal and state net operating losses that are fully offset by a corresponding increase in the valuation allowance. As a result, there was no cumulative effect adjustment to accumulated deficit.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“The Act”). This legislation reduced the U.S. corporate tax rate from the existing rate of 34% to 21% for tax years beginning after December 31, 2017. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities existing as of December 31, 2017 from the 34% federal rate in effect through the end of 2017, to the new 21% rate. This revaluation resulted in a reduction to the Company’s deferred tax asset of $14.7 million and a corresponding $14.7 million reduction to its valuation allowance. The other provisions of The Act did not have a material impact on the December 31, 2017 consolidated financial statements.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118, or SAB 118, to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has recognized the provisional tax impacts related to the revaluation of the deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.

The Company files income tax returns in the U.S., certain state and Canadian tax jurisdictions. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S., certain state and Canadian income tax authorities for all tax years in which a loss carryforward is available. There are currently no audits in process in any of its tax filing jurisdictions.