21. Income Taxes

12 Months Ended

Dec. 31, 2015

Income Tax Disclosure [Abstract]

21. Income Taxes

Note 21. Income Taxes

During the year ended December 31, 2015, the Company established a valuation allowance against its deferred tax assets. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. In assessing the need for a valuation allowance, the Company considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. This evidence includes, but is not limited to, assessing changing business model(s) and market conditions, current and prior earnings history, expected future earnings, carry-back and carry-forward periods, and the feasibility of ongoing tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. The weight given to the positive and negative evidence is commensurate with the extent the evidence may be objectively verified. As such, the Company concluded that there was not sufficient positive evidence to outweigh the objective negative evidence of recent financial reporting losses and expected future losses resulting from its new business model.

The components of the provision (benefit) for income taxes are as follows for the years ending December 31, 2015, 2014 and 2013 (in thousands):

		Year Ended December 31,
		2015		2014		2013
Current:
Federal	$	6,923	$	(1,817)	$	1,176
State		508		232		583
Foreign		207		(387)		-
Total current provision (benefit)		7,638		(1,972)		1,759
Deferred Provision:
Federal		(1,329)		(9,497)		(18,985)
State		(551)		(952)		(3,531)
Foreign		1,304		(1,304)		-
Total deferred provision (benefit)		(576)		(11,753)		(22,516)
Total	$	7,062	$	(13,725)	$	(20,757)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The sources of the temporary differences and their effect on deferred taxes are as follows (in thousands): 

		Year Ended December 31,
		2015		2014
Deferred tax assets:
Accruals and other reserves	$	24,205	$	19,215
Differences in carrying value of property and equipment		-		93
Inventory		985		958
Stock awards		3,757		2,060
Net operating loss carryovers		8,038		9,045
Gross deferred tax assets		36,985		31,371
Valuation allowance		(31,453)		-
Net deferred tax asset		5,532		31,371
Deferred tax liabilities:
Fixed Assets		(1,021)		-
Other		-		(497)
Intangibles		(4,713)		(22,577)
Installment sale		-		(1,753)
Gross deferred tax liability		(5,734)		(24,827)
Net deferred tax asset/(liability)		(202)		6,544
Included in consolidated balance sheet:
Deferred income tax assets/(liabilities) - current		-		6,544
Deferred income tax assets/(liabilities) - long-term		(202)		-
Net deferred tax asset/(liability)	$	(202)	$	6,544

Somaxon has federal net operating loss carryforwards (NOL's) of approximately $250.2 million at December 31, 2015 ranging in expiration from 2023 to 2032. However, based on the change in ownership provision of IRC Section 382, $21.9 million of those NOL are expected to be available for utilization.

Pernix Therapeutics Holdings, Inc. has federal NOL's of approximately $9.8 million at December 31, 2015 ranging in expiration from 2023 to 2032. Included in the $9.8 million are $1.2 million of NOLs which have not been recognized for financial reporting purposes due to unrecognized tax benefits and excess tax benefits related to stock-based compensation. Excess tax benefits related to option exercises cannot be recognized until realized through a reduction of current taxes payable.

GTA has federal NOL's of approximately $85.3 million at December 31, 2015 ranging in expiration from 2024 to 2033. However, based on the change in ownership provisions of IRC Section 382, approximately $500,000 of those NOL are expected to be available for utilization.

Somaxon has federal research and development credit carryovers of approximately $4.5 million at December 31, 2015. However, based on the change in ownership provision of IRC Section 382, approximately $300,000 of those credits are expected to be available for utilization.

It should be noted that only those amounts that are expected to be utilized are included in the deferred tax assets (Somaxon and Pernix NOL's noted above).

The effective income tax rate from continuing operations is different from the federal statutory rate for the years ended December 31, 2015, 2014 and 2013 for the following reasons:

	Year Ended December 31,
	2015		2014		2013
Expected taxes at statutory rates	35.0	%	35.0	%	35.0	%
State taxes, net of federal tax benefit	-		1.0	%	4.1	%
Foreign income tax rate differential	(13.6)	%	(7.5)	%	-
Amortization and impairment of goodwill	(2.0)	%	-		-
Cypress put option - change in value and contingent gain	-		-		6.0	%
Deductible inducement payment	2.0	%	-		-
Change in valuation allowance	(21.7)	%	-		-
Change in liability for uncertain tax positions	(4.8)	%	-		-
Permanent differences and other	0.1	%	(0.5)	%	(0.4)	%
	(5.0)	%	28.0	%	44.7	%

Changes in tax laws or in their application or interpretation, such as to the transfer pricing between the Company's non-U.S. operations and the U.S., could increase our effective tax rate and negatively affect our results of operations.

Approximately $500,000 and $11.1 million of the deferred tax liability at December 31, 2015 and 2014, respectively, relates to the difference between the financial statement and tax basis of the intangibles acquired in the Cypress acquisition. The deferred tax liability related to these Cypress intangibles is reduced on an annual basis by the financial statement amortization of such intangibles.  

The following summarizes the activity related to the Company's unrecognized tax benefits (in thousands):

		Year Ended December 31,
		2015		2014
Balance at beginning of year	$	-	$	-
Tax positions taken in prior periods		-		-
Tax positions taken in current year		7,410		-
Accrual of interest related to tax positions taken		-		-
Settlements		-		-
Foreign currency translation		-		-
Balance at end of year	$	7,410	$	-

As of December 31, 2015, 2014 and 2013, the total amount of gross unrecognized tax benefits was $7.4 million, $0, and $0, respectively. Of these amounts as of December 31, 2015, 2014 and 2013, $0, $0 and $0, respectively would impact the effective tax rate if recognized as the unrecognized tax benefits are associated with deferred tax assets subject to a full valuation allowance.

It is the Company's policy to classify accrued interest and penalties as part of the accrued unrecognized tax benefits liability and record the expense in the provision for income taxes. For the years ended December 31, 2015, 2014 and 2013, the amount of accrued interest or penalties related to unrecognized tax benefit totaled $0, $0, and $0, respectively. For unrecognized tax benefits that existed at December 31, 2015, the Company does not anticipate any significant changes within the next twelve months.

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. As of December 31, 2015, the 2012 through 2014 tax years are open and may be subject to potential examinations in the United States.