12. Income Taxes

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Act), resulting in significant modifications to existing law. The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation on qualified property and expanded limitations on the deductibility of executive compensation.

The Company recognized the income tax effects of the Tax Act in accordance with Staff Accounting Bulletin No. 118, which provides guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the Tax Act was signed into law. The Company's financial results in 2017 reflect the income tax effects of the Tax Act for which the accounting under ASC Topic 740 is provisional for those specific income tax effects of the Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. The Company did not identify items for which the income tax effects of the Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017.

The changes to existing U.S. tax laws as a result of the Tax Act that have most significant impact to the Company's federal income taxes is the reduction of the U.S. corporate income tax rate. The Company's deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent. The Company wrote down its net deferred tax assets as of December 31, 2017 by $9.7 million to reflect the estimated impact of the decrease in federal statutory rates on the value of its net deferred tax asset and recorded a corresponding net one-time income tax expense of $9.7 million, all of which was non-cash. Additionally, the provisional amount recognized by the Company in 2017 attributable to the accelerated depreciation on qualified property is not material. Based on analysis by the Company, the impact on the deductibility of executive compensation as it relates to the stock compensation is also not material.

The Company had substantially completed its analysis of the income tax effects of the Tax Act and does not anticipate material adjustments to the recorded amounts, however, the final results could vary from these recorded amounts. The net one-time charge related to the effects of the Tax Act may differ due to, among other things, further refinements of our calculations, changes in interpretations and assumptions that that Company has made, and related accounting policy decisions that the Company may take as a result of the Tax Act. Additionally potential further guidance, regulations, interpretations and rulings may be forthcoming from accounting and regulatory bodies and federal and state tax agencies, which could result in additional impacts. The Company will complete its analysis over a one-year measurement period ending December 22, 2018 and any adjustments during this measurement period will be included in net earnings from continuing operations as adjustment to income tax expense in the reporting period in which such adjustments are determined.

The components of the income tax (benefit)/ expense for the years ended December 31, 2017, 2016 and 2015 were as follow, in thousands of dollars:

	Year Ended December 31,
	2017			2016			2015
Current
Federal	$	18,288		$	544		$	624
State		3,822			78			42
Deferred
Federal		21,493			(39,898	)		—
State		(269	)		(1,576	)		—

Total	$	43,334		$	(40,852	)	$	666

A reconciliation of the expected income tax (benefit)/ expense computed using the U.S. Federal statutory income tax rate to the Company's effective income tax rate is as follows, in thousands of dollars:

	Year Ended December 31,
	2017			2016			2015
Income tax expense computed at U.S. Federal statutory tax rate	$	35,217		$	17,629		$	5,114
Permanent items		(2,311	)		715			601
State income taxes		2,714			(1,523	)		42
Change in valuation allowance		—			(56,019	)		(4,705	)
Uncertain income tax position		(1,137	)		143			533
Research and development credits		(2,196	)		(1,902	)		(979	)
Other		1,353			105			60
Deferred rate change		9,694			—			—

Income tax expense/ (benefit)	$	43,334		$	(40,852	)	$	666

The significant components of the Company's deferred income tax assets (liabilities) were as follow, in thousands of dollars:

	As of December 31,
	2017			2016
Deferred tax assets:
Net operating loss carryforward	$	5,072		$	24,926
Deferred rent credit		211			417
Accrued compensation and non-qualified stock options		7,090			8,128
Deferred financing costs		—			128
Depreciation and amortization		2,073			706
Research and development credits		3,795			7,119
Capitalized overhead into inventory (UNICAP §263A)		480			1,086
Nonrecourse liability related to sale of future royalties		6,377			11,223
Other		645			878
AMT credit		1,613			1,581
Accrued sales deductions		8,449			—

Net deferred tax asset		35,805			56,192
Deferred tax liability:
Debt discount on convertible notes		—			(141	)
Infringement legal cost		(10,557	)		(13,899	)
Depreciation		(264	)		(423	)
Section 481(a)		(4,141	)		—

Net deferred taxes	$	20,843		$	41,729

In assessing the realizability of deferred income tax assets, management considers whether it is more-likely-than-not that some or all of the deferred income tax assets will not be realized. The ultimate realization of the deferred income tax assets is dependent upon the generation of future taxable income during the periods in which the net operating loss (NOL) and tax credit carryforwards are available. Management considers projected future taxable income, the scheduled reversal of deferred income tax liabilities, and available tax planning strategies that can be implemented by the Company in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the NOL and credit carryforwards are available to reduce income taxes payable, management had determined it is more-likely-than-not to realize such net deferred tax assets.

As of December 31, 2017, the U.S. Federal and state NOL carryforwards amounted to approximately $32.1 million ($6.7 million tax effected) and $8.1 million ($0.5 million tax effected), respectively, and will expire in various years beginning in 2030. As of December 31, 2017, the Company has available research and development credit carryforwards of approximately $4.2 million, which expire, if unused, starting in 2026. The use of the Company's U.S. Federal and State NOL carryforwards and research and development credits are restricted in annual use due to changes in the Company's ownership. For the year ended December 31, 2017, the Company utilized NOLs of approximately $51.0 million and expects the remaining $32.1 million of Federal NOL carryforwards to become available over the years from 2018 to 2020, in amounts ranging from $7.1 million to $18.4 million per year. In addition, the Company has available research and development credits of approximately $4.2 million, expected to become available in 2019 to 2020. The Company's state NOLs will have a similar limitation to the amount noted for the U.S. Federal NOLs. Additionally, despite the NOL carryforwards, the Company may have a future tax liability due to state and local income tax requirements. The Company paid no Federal income taxes in the years ended December 31, 2016 or 2015.

The Company accounts for uncertain income tax positions pursuant to the guidance in FASB ASC Topic 740, Income Taxes. The Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax expense. As of December 31, 2017, the Company accrued interest of a nominal amount and penalties of $0.1 million related to uncertain tax positions. The Company's income taxes have not been subject to examination by any tax jurisdictions since its inception in 2005. Due to NOL and research and development credit carryforwards, all U.S. Federal and state income tax returns filed by the Company are subject to examination by the taxing jurisdictions. Some uncertain income tax position liabilities have been recorded against the Company's deferred income tax assets to offset such tax attribute carryforwards and other positions that can't be offset by tax attributes until a liability has been booked.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows, in thousands of dollars:

	Year Ended December 31,
	2017			2016			2015
Balance as of January 1	$	9,299		$	9,341		$	8,964
Gross increases (decreases) related to prior-year tax positions		947			—			(5	)
Gross increases related to current-year tax positions		1,178			662			646
Gross decreases related to prior-year tax positions		—			(375	)		—
Gross decreases related to current-year tax positions		—			(169	)		(243	)
Change in tax rates		(2,565	)		(160	)		(21	)

Balance as of December 31	$	8,859		$	9,299		$	9,341

As of December 31, 2017 and 2016, the Company recorded zero and $0.5 million of current tax expense on setting up an uncertain tax position related to the Alternative Minimum Tax. The Company also recorded a $0.4 million expense on setting up an uncertain tax position related to state tax nexus. The Company does not anticipate a significant increase or decrease in the uncertain income tax benefits within the next 12 months.