Income Taxes

The components of the provision expense (benefit) were as follows for the years ended December 31, 2017, 2016 and 2015 (in thousands):



	2017			2016			2015
Current:
Federal	$	(366	)	$	(1,785	)	$	2,500
State	14			(600		)	621
Foreign	30			—			—
	(322		)	(2,385		)	3,121
Deferred:
Federal	(33,178		)	3,554			32,378
State	(2,538		)	(2,065		)	815
	$	(35,716	)	$	1,489		$	33,193

Totals	$	(36,038	)	$	(896	)	$	36,314

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The components of the Company’s net deferred tax liabilities and related valuation allowance are as follows as of December 31, 2017 and 2016 (in thousands):



	2017			2016
Deferred tax assets:
Amortization of intangibles	$	21,862		$	32,032
Deferred revenue	34,754			44,754
Tax credit carryforwards	10,160			5,693
Net operating loss carryforwards	21,172			6,237
Stock based compensation	1,743			3,898
Accrued expenses and other	1,877			1,558
Total deferred tax assets	91,568			94,172
Less valuation allowance	(43,405		)	(81,039		)
Total deferred tax assets	48,163			13,133
Deferred tax liabilities:
Amortization of intangibles	(15,225		)	(25,433		)
Depreciation	(757		)	(1,530		)
Investment in common stock	(47,716		)	(39,408		)
Total deferred tax liabilities	(63,698		)	(66,371		)

Net deferred tax assets / liabilities	$	(15,535	)	$	(53,238	)

The reconciliation between U.S. federal income taxes at the statutory rate and the Company’s provision for income taxes are as follows for the years ended December 31 (in thousands):



	2017			2016
Income tax expense (benefit) at federal statutory rate	$	(8,725	)	$	(23,357	)
State, net of federal tax benefit	(834		)	(1,522		)
Other permanent differences	1,290			2,882
Incentive stock compensation	1,025			767
Transaction costs	408			—
Other	715			120
Return to provision adjustment	(42		)	(16		)
Acquired in-process research and development	71			(2,360		)
Change in Federal rate	10,006			—
Change in State rate	810			(172		)
Research tax credits	(4,051		)	(2,318		)
Uncertain tax positions	1,027			(1,836		)
Prior year true-ups and carrybacks	(1,095		)	4,133
Stock compensation true-up	1,788			—
Change in valuation allowance	(38,431		)	22,783
Income tax provision	$	(36,038	)	$	(896	)

The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets, including the amount and timing of future taxable income, and has determined that it is more likely than not that the deferred tax assets will not be realized. Due to such uncertainties surrounding the realization of the domestic deferred tax assets, the Company maintains a valuation allowance of $43.4 million against its deferred tax assets as of December 31, 2017. Realization of the deferred tax assets will be primarily dependent upon the Company's ability to generate sufficient taxable income prior to the expiration of its net operating losses.

As of December 31, 2017, the Company had net operating loss carryforward of approximately $72.5 million and $55.9 million for federal and state income tax purposes, respectively. These may be used to offset future taxable income and will begin to expire in varying amounts in 2034 for federal income tax purposes and 2029 to 2037 for state income tax purposes. The Company also has research and development and orphan drug credits of approximately $8.9 million and $4.3 million for federal and state income taxes purposes, respectively. The federal credits may be used to offset future tax and will begin to expire in varying amounts in 2029 to 2037. The state credits may be used to offset future tax, such credits carryforward indefinitely.

Internal Revenue Code Section 382 rules apply to limit a corporation's ability to utilize existing net operating loss and tax credit carryforwards once the corporation experiences an ownership change as defined in Section 382. The Company has undergone an ownership change in a prior year. For the year ended December 31, 2017, there was no impact of such limitations on the income tax provision. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations or financial position of the Company.

The Company is subject to taxation in the U.S. and California jurisdictions and potentially, foreign jurisdictions outside the U.S., in conjunction with its transactions and activities. Currently, years ending December 31, 2015 and 2016 are under examination by a state tax authority. The Company’s tax years starting in December 31, 2007 through December 31, 2017 are open and subject to examination by the U.S. and state taxing authorities due to the carryforward of utilized net operating losses and research and development credits.

The Company adopted the provisions of ASC Topic 740 regarding uncertain tax positions on January 1, 2009. Under ASC Topic 740, the impact of an uncertain income tax position taken on a tax return must be recognized at the largest amount that is cumulatively “more likely than not” to be sustained upon audit by relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

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



	Amount
Unrecognized tax benefits balance at December 31, 2016	$	2,389
Increase related to current year tax positions	1,436
Increase related to prior year tax positions	58
Settlements	—
Lapse in statute of limitations	—
Unrecognized tax benefits balance at December 31, 2017	$	3,883

Included in the balance of unrecognized tax benefits at December 31, 2017, are $90 thousand that, if recognized, would affect the effective tax rate.

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. No interest has been recognized as of and for the period ended December 31, 2017.

The Company believes that no material amount of the liabilities for uncertain tax positions will expire within 12 months of December 31, 2017.

U.S. Tax Reform

The Tax Cut and Jobs Act (“Tax Act”) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, as well as making several other significant changes to the tax law, effective January 1, 2018. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), given the amount and complexity of the changes in tax law resulting from the Tax Act, the Company has not finalized the accounting for the income tax effects of the Tax Act. This includes the provisional amounts recorded related to the re-measurement of the deferred taxes and the change to our valuation allowance. The impact of the Tax Act may differ from this estimate, during the one-year measurement period due to, among other things, further refinement of the Company's calculation, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Act.

The Company's accounting for the following elements of the Tax Act is incomplete. However, the Company was able to make reasonable estimates of certain effects and therefore, has recorded provisional amounts as follows:

Revaluation of Deferred Tax Assets and Liabilities

We have remeasured our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% plus state and local tax. The Company recorded a provisional decrease related to our deferred tax assets and liabilities of $10.0 million as a result of the tax rate decrease, with a corresponding adjustment to tax expense for the year ended December 31, 2017.

Valuation Allowances

The Company must assess whether its valuation allowance analyses for deferred tax assets are affected by various aspects of the Tax Act (e.g., deemed repatriation of deferred foreign income, future GILTI inclusions, new categories of foreign tax credits). Since, as discussed herein, the Company has recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional. The Company's decrease in its valuation allowance by $38.4 million was substantially attributable to the Tax Act and its effects on our deferred tax assets.