INCOME TAXES

12 Months Ended

Dec. 31, 2019

For the years ended December 31, 2019, 2018, and 2017, all of our profit or loss before income taxes was from U.S. operations. The income tax (benefit) expense consisted of the following (in thousands):



	Years Ended December 31,
	2019			2018			2017
Current:
Federal	$	(630	)	$	(1,136	)	$	2,162
State	179			1,469			5,358
Total current	$	(451	)	$	333		$	7,520
Deferred:
Federal	$	432		$	42,886		$	(172,048	)
State	(28		)	(3,565		)	(10,726		)
Total deferred	$	404		$	39,321		$	(182,774	)
Total income tax (benefit) expense	$	(47	)	$	39,654		$	(175,254	)

The reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate from continuing operations was as follows:



	Years Ended December 31,
	2019		2018		2017
Statutory U.S. federal tax rate	21.0	%	21.0	%	35.0	%
State taxes, net of federal benefit	2.6		4.7		3.3
Impact of 2017 tax reform on deferred tax balance	—		—		4.6
Equity-based compensation expense	(0.4	)	(1.5	)	(0.8	)
Contingent consideration	—		7.2		4.4
In-process research and development	(3.4	)	—		—
Other permanent items, net	(0.4	)	(1.4	)	(0.5	)
Tax credits	0.4		6.2		0.7
Valuation allowance	(19.8	)	(67.4	)	(0.8	)
Other, net	—		0.6		0.2
Effective tax rate	—	%	(30.6	)%	46.1	%

For the year ended December 31, 2019, we recognized an immaterial income tax benefit, representing an effective tax rate of 0.0%. The difference between the expected statutory federal tax rate of 21.0% and the effective tax rate of 0.0% for the year ended December 31, 2019, was primarily attributable to the valuation allowance established against our current period losses generated and the non-deductible IPR&D expense related to the Perosphere acquisition.We have established a valuation allowance on our deferred tax assets other than refundable AMT credits to the extent that our existing taxable temporary differences would not be available as a source of income to realize the benefits of those deferred tax assets. The income tax benefit for the year ended December 31, 2019 primarily related to the offset of the recognition of the income tax expense recorded in other comprehensive loss associated with the increase in the value of available-for-sale securities that we carried at fair market value during the period, partially offset by state income taxes.

For the year ended December 31, 2018, we recognized income tax expense of $39.7 million representing an effective tax rate of (30.6)%. The difference between the expected statutory federal tax rate of 21.0% and the (30.6)% effective tax rate for 2018 was primarily attributable to the establishment of a valuation allowance on net deferred tax assets other than refundable AMT credits, the impact of non-deductible stock compensation and other non-deductible expenses, partially offset by a benefit from contingent consideration associated with Lumara Health, state income taxes and orphan drug tax credits. The valuation allowance on our deferred tax assets, other than refundable AMT credits, increased during the year ended December 31, 2018 primarily because the deferred tax liabilities associated with the CBR business, which was reclassified to discontinued operations and sold during the year ended December 31, 2018, are no longer available as a source of income to realize the benefits of the net deferred tax assets.

For the year ended December 31, 2017, we recognized an income tax benefit of $175.3 million representing an effective tax rate of 46.1%. The difference between the expected statutory federal tax rate of 35.0% and the 46.1% effective tax rate for 2017 was primarily attributable to the impact of the 2017 federal tax reform legislation, as discussed below, contingent consideration associated with Lumara Health, federal research and orphan drug tax credits generated during the year, and the impact of state income taxes, partially offset by equity-based compensation expenses and an increase to our valuation allowance.

On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”), was enacted. The 2017 Tax Act includes significant changes to the U.S. corporate income tax system, including a reduction of the federal corporate income tax rate from 35.0% to 21.0%, effective January 1, 2018. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which those temporary differences are expected to be recovered or settled. As a result of the reduction in the federal tax rate from 35.0% to 21.0%, we revalued our ending net deferred tax liabilities at December 31, 2017 and recognized a $17.6 million tax benefit.

Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using future enacted rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. The components of our deferred tax assets and liabilities were as follows (in thousands):



	December 31,
	2019			2018
Assets
Net operating loss carryforwards	$	79,679		$	46,888
Tax credit carryforwards	28,641			24,290
Capital loss carryforwards	20,659			20,896
Interest expense carryforwards	5,746			4,318
Equity-based compensation expense	6,106			5,931
Capitalized research & development	2,347			4,635
Intangible assets	67,847			12,565
Reserves	5,721			2,683
Lease liability	5,739			—
Property, plant and equipment	391			—
Contingent consideration	4			87
Other	9,329			5,389
Valuation allowance	(216,774		)	(113,278		)
Liabilities
Property, plant and equipment depreciation	—			(614		)
Debt instruments	(9,195		)	(12,489		)
Right of use asset	(5,599		)	—
Other	(11		)	(41		)
Net deferred tax assets	$	630		$	1,260

The valuation allowance increased by approximately $103.5 million for the year ended December 31, 2019. We have established a valuation allowance on our deferred tax assets other than refundable AMT credits to the extent that our existing taxable temporary differences would not be available as a source of income to realize the benefits of those deferred tax assets. Our valuation allowance on our deferred tax assets, other than refundable AMT credits, increased during the year ended December 31, 2019, primarily due to our current period losses generated.

At December 31, 2019, we had federal and state NOL carryforwards of approximately $332.8 million and $184.6 million, respectively, of which $123.1 million and $16.6 million federal and state NOL carryforwards, were acquired as part of the Lumara Health transaction, respectively, and $21.4 million and $14.6 million federal and state NOL carryforwards were acquired as part of the Perosphere transaction, respectively. The majority of the federal and state NOLs expire at various dates

through 2039. We have $127.4 million of federal NOLs generated after 2017 which will not expire. We have federal tax credits of approximately $26.1 million to offset future tax liabilities of which $2.3 million were acquired as part of the Lumara Health transaction and $2.3 million of which were acquired as part of the Perosphere transaction. We have state tax credits of $2.5 million to offset future tax liabilities of which $1.2 million were acquired as part of the Perosphere transaction. These federal and state tax credits will expire periodically through 2039 if not utilized. We have a capital loss carryforward of $90.4 million from the sale of the CBR business that can only be used to offset future capital gains and expires in 2023. Our interest expense carryforward is $23.6 million, which may be carried forward indefinitely.

Utilization of our NOLs, interest expense carryforwards, and research and development (“R&D”) credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future in accordance with Section 382 of the Internal Revenue Code of 1986 (“Section 382”) as well as similar state provisions. These ownership changes may limit the amount of NOLs and interest expense carryforwards that can be utilized annually to offset future taxable income and may limit the amounts of R&D credit carryforwards that can be utilized annually to offset taxes. In general, an ownership change as defined by Section 382 results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. Since our formation, we have raised capital through the issuance of capital stock on several occasions. These financings, combined with the purchasing shareholders’ subsequent disposition of those shares, could result in a change of control, as defined by Section 382. We conducted an analysis under Section 382 to determine if historical changes in ownership through December 31, 2019, based upon publicly available information as of December 31, 2019, would limit or otherwise restrict our ability to utilize these NOLs, interest expense, and R&D credit carryforwards. As a result of this analysis, we do not believe there are any significant limitations on our ability to utilize these carryforwards. The NOLs and tax credits acquired from Lumara Health and Perosphere are subject to restrictions under Section 382. These restricted NOLs and credits may be utilized subject to an annual limitation. We identified ownership changes associated with the attributes acquired as part of the Lumara Health and Perosphere transactions and determined these attributes are subject to annual limitations. Future changes in ownership after December 31, 2019 could affect the limitation in future years and any limitation may result in expiration of a portion of the NOL or R&D credit carryforwards before utilization.

Unrecognized tax benefits represent uncertain tax positions for which reserves have been established. A reconciliation of our changes in unrecognized tax benefits is as follows (in thousands):



	Years Ended December 31,
	2019			2018		2017
Unrecognized tax benefits at the beginning of the year	$	11,180		$	10,560	$	13,020
Additions based on tax positions related to the current year	521			12		574
Additions for tax positions from prior years	2,173			608		340
Subtractions for federal tax reform	—			—		(3,296		)
Subtractions for tax positions from prior years	(336		)	—		(78		)
Unrecognized tax benefits at the end of the year	$	13,538		$	11,180	$	10,560

The amount of unrecognized tax benefits that would impact the effective tax rate if recognized is immaterial, as the majority of our uncertain tax positions relate to NOL and credit carryforwards, which, if recognized, are currently expected to require a full valuation allowance.

Our unrecognized tax benefits as of December 31, 2019 increased by $2.4 million as compared to December 31, 2018 primarily due to tax reserves associated with NOLs and R&D credit carryforwards acquired in connection with the Perosphere transaction.

Our unrecognized tax benefits as of December 31, 2018 increased by $0.6 million as compared to December 31, 2017 primarily due to tax reserves established on R&D tax credits.

Our unrecognized tax benefits as of December 31, 2017 decreased by $2.5 million as compared to December 31, 2016 primarily due to the change in the federal tax rate, which reduced the future value of our federal NOLs and the corresponding value of the unrecognized tax benefits related to those NOLs. This decrease was partially offset by tax reserves established on R&D tax credits.

We have recorded minimal interest or penalties on unrecognized tax benefits since inception. We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense. We do not expect our unrecognized tax benefits to change significantly in the next 12 months.

The statute of limitations for assessment by the Internal Revenue Service (the “IRS”) and most state tax authorities is closed for tax years prior to December 31, 2016, although carryforward attributes that were generated prior to tax year 2016 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period. We file income tax returns in the U.S. federal and various state jurisdictions. There are currently no federal or state audits in progress.