Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.6.0.2
Income Taxes
12 Months Ended
Dec. 31, 2016
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The components of the income tax expense (benefit) for continuing operations are as follows (in thousands):
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
Current expense (benefit):
 
 
 
 
 
 
Federal
$
21

 
$
11

 
$
15

 
State
12

 
7

 
19

 
 
33

 
18

 
34

 
Deferred expense (benefit):
 
 
 
 
 
 
Federal
10,534

 
(167,413
)
 
406

 
State
(240
)
 
(24,720
)
 
(30
)
 
 
$
10,327

 
$
(192,115
)
 
$
410

 


A reconciliation of income tax expense (benefit) from continuing operations to the amount computed by applying the statutory federal income tax rate to the net income (loss) from continuing operations is summarized as follows:
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Amounts computed at statutory federal rate
$
2,786

 
$
13,198

 
$
3,843

State taxes net of federal benefit
175

 
386

 
697

Meals & entertainment
16

 
16

 
9

Imputed interest
(1
)
 
(161
)
 
53

Section 162(m) limitation
94

 
197

 
490

Contingent liabilities
1,225

 
1,684

 
1,748

Stock-based compensation
263

 
140

 
89

Expired NOLs

 
232

 
88

Research and development credits
(1,525
)
 
304

 
(113
)
Change in uncertain tax positions
1,423

 
27,188

 
7

Rate change for changes in state law
25

 
(5,756
)
 
119

APIC Excess Tax Benefit True Up

(622
)
 

 

Increase in deferred tax assets from completion of 382 analysis
(120
)
 
3,329

 
43

Avinza true up


(2,107
)


Change in valuation allowance
6,283

 
(231,370
)
 
(7,243
)
Other
305

 
605

 
580

 
$
10,327

 
$
(192,115
)
 
$
410

 
    
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2016 and 2015 are shown below. The Company assesses the positive and negative evidence to determine if sufficient future taxable income will be generated to use the existing deferred tax assets. The Company's evaluation of evidence resulted in management concluding that the majority of the Company's deferred tax assets will be realized. However, the Company maintains a valuation allowance to offset certain net deferred tax assets as management believes realization of such assets are uncertain as of December 31, 2016, 2015 and 2014. The valuation allowance increased $6.3 million in 2016, decreased $231.7 million in 2015 and decreased $7.2 million in 2014.
 
December 31,
 
2016
 
2015
 
(in thousands)
Deferred assets:
 
 
 
Net operating loss carryforwards
$
150,226

 
$
160,595

Research credit carryforwards
26,878

 
25,613

Fixed assets and intangibles
4,385

 
8,839

Accrued expenses
943

 
1,523

Contingent liabilities
578

 
707

Deferred revenue

 
3

Present value of royalties
591

 
3,007

Deferred rent
45

 
68

Capital Loss Carryforward
4,432

 

Viking Equity Method Investment
5,692

 
1,840

Other
19,312

 
15,441

 
213,082

 
217,636

Valuation allowance for deferred tax assets
(15,349
)
 
(9,066
)
Net deferred tax assets
$
197,733

 
$
208,570

Deferred tax liabilities:
 
 
 
Retrophin fair value adjustment
$
(52
)
 
$
(1,256
)
Convertible debt
(1,196
)
 
(1,844
)
Identified intangibles
(68,631
)
 
(12,770
)
Identified indefinite lived intangibles
(3,963
)
 
(3,617
)
Total
$
123,891

 
$
189,083



    
Sections 382 and 383 of the U.S. tax code impose limitations (“382 and 383 limitations”) on the annual utilization of operating loss and credit carryforwards whenever a greater than fifty percent change in the ownership of a company occurs within a three year period. In addition to the annual limitations on operating loss and credit carryforwards, Section 382 can also restrict the utilization of certain post change losses if the tax basis in assets exceeds the fair value of assets (“net unrealized built in loss”) at the date of an ownership change. Companies with operating loss and credit carryforwards are required to test the cumulative three year change whenever there is an equity transaction that impacts the ownership of holders of more than five percent of the Company’s stock. During 2016, the Company completed a rollforward analysis through December 31, 2016. As a result of the rollforward analysis, it was determined that no additional ownership changes occurred at the Company within the meaning of section 382 since June 20, 2007. Future changes in the ownership of the Company could place additional restrictions on the Company’s ability to utilize operating loss and credit carryforwards arising through December 31, 2016.

As of December 31, 2016, the Company had federal and state net operating loss carryforwards set to expire through 2036 of $446.3 million and $140.5 million of state net operating loss carryforwards. The Company also has $21.9 million of federal research and development credit carryforwards, which expire through 2036. The Company has $19.4 million of California research and development credit carryforwards that have no expiration date.  
The Company accounts for income taxes by evaluating a probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Company’s remaining liabilities for uncertain tax positions are presented net of the deferred tax asset balances on the accompanying consolidated balance sheet.
A reconciliation of the amount of unrecognized tax benefits at December 31, 2016, 2015 and 2014 is as follows (in thousands):
 
December 31,
 
2016
 
2015
 
2014
Balance at beginning of year
$
36,452

 
$
8,524

 
$
8,504

     Additions based on tax positions related to the current year
70

 
154

 
40

     Additions for tax positions of prior years
2,408

 
28,224

 

     Reductions for tax positions of prior years
(160
)
 
(450
)
 
(20
)
Balance at end of year
$
38,770

 
$
36,452

 
$
8,524



Included in the balance of unrecognized tax benefits at December 31, 2016 is $35.5 million of tax benefits that, if recognized would impact the effective rate. There are no positions for which it is reasonably possible that the uncertain tax benefit will significantly increase or decrease within twelve months.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2016 and December 31, 2015, the Company recognized an immaterial amount of interest and penalties. The Company files income tax returns in the United States and in various state jurisdictions with varying statutes of limitations. The federal statute of limitation remains open for the 2013 tax year to present.  The state income tax returns generally remain open for the 2012 tax years through present.  Net operating loss and research credit carryforwards arising prior to these years are also open to examination if and when utilized.

In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting (''ASU 2016-09''). ASU 2016-09 simplifies how several aspects of share-based payments are accounted for and presented in the financial statements.  ASU 2016-09 is effective for public companies for annual reporting periods beginning after December 15, 2016. The Company will adopt this ASU in the first quarter of 2017. The Company has excess tax federal and state benefits for which a benefit could not be previously recognized of approximately $13.7 million and $11.5 million, respectively. Upon adoption the balance of the unrecognized excess tax benefits will be reversed with the impact recorded to retained earnings including any change to the valuation allowance as a result of the adoption.