NOTE

16.

Income Taxes

The provision for income taxes consists of the following for the years ended

December 31, 2019

and

2018

	Year Ended December 31,
	2019		2018
	(In thousands)
Current:
Federal	$	—	$	—
State		2		3
Foreign		488		106

Total Current		490		109

Deferred:
Federal		—		—
State		—		—
Foreign		—		—

Total Deferred		—		—

Provision for income taxes	$	490	$	109

The components of the deferred tax assets as of

December 31, 2019

and

2018

, are as follows:

	December 31, 2019			December 31, 2018
Deferred tax assets:	(In thousands)
Net operating loss carry-forwards	$	6,924		$	43,822
Research and development tax credits		1,591			3,357
Capitalized research and development		4,773			2,326
Sale of future royalties		7,486			8,383
Accruals, reserves and other		1,321			714
Total deferred tax assets		22,095			58,602
Valuation allowance		(13,365	)		(48,626	)
Deferred tax assets net of valuation allowance		8,730			9,976
Deferred tax liabilities:
Intangible assets		(8,730	)		(9,976	)
Total deferred tax liabilities		(8,730	)		(9,976	)

Net deferred tax assets	$	—		$	—

A reconciliation of the provision for income taxes with the expected provision for income taxes computed by applying the federal statutory income tax rate of

21%

to the net loss before provision for income taxes for the years ended

December 31, 2019

and

2018

	Year Ended December 31,
	2019		2018

U.S. federal taxes at statutory rate	21.0	%	21.0	%
State taxes (net of federal benefit)	0.4		0.6
Foreign rate differential	(2.6	)	3.1
Global intangible low-taxed income	—		(8.8	)
Permanently non-deductible items	(3.7	)	(2.5	)
Tax credits	1.7		2.1
Change in valuation allowance	194.2		(20.4	)
Tax attributes write-off due to change in control	(208.3	)	—
Prior year true-up	(0.9	)	—
NOL and credit adjustments	—		(3.8	)
Bargain purchase gain	—		8.1
Other	(4.5	)	—

Provision for income taxes	(2.7	)%	(0.6	)%

The Company’s actual tax expense differed from the statutory federal income tax expense using a tax rate of

21%

for the year ended

December 31, 2019

, primarily due to the write-off of tax attributes due to a change in control, foreign income taxes being taxed at different rates, nondeductible expenses, research and development tax credits, and the change in valuation allowance. The Company’s actual tax expense differed from the statutory federal income tax expense using a tax rate of

21%

for the year ended

December 31, 2018

, primarily due to state and foreign income taxes, nondeductible expenses, research and development tax credits, and the change in valuation allowance.

As of

December 31, 2019

and

2018

, the Company had a net operating loss (“NOL”) carryforwards of

$18.0

million and

$92.3

million for federal purposes, and

$1.6

million and

$76.9

million for state purposes, respectively. If

not

utilized, these carryforwards will begin to expire in

2024

for federal, and

2028

for state purposes. The reductions in carryforwards in

2019

were primarily due to a change in ownership.

As of

December 31, 2019

, the Company also has accumulated tax losses of

$10.1

million for Australia available for carry forward against future earnings, which under relevant tax laws do

not

expire but

may

not

be available under certain circumstances. As of

December 31, 2019

, the Company’s foreign subsidiaries have

positive accumulated earnings. As such,

federal or state income taxes have been provided on the losses of its foreign subsidiaries. If in the future there are positive earnings generated from the Company’s foreign subsidiaries, the Company will evaluate whether to record any applicable federal and state income taxes on such earnings.

As of

December 31, 2019

and

2018

, the Company had federal research and development tax credit carryforwards of

$0.1

million and

$3.0

million, respectively and state research and development tax credit carryforwards of

$2.7

million and

$2.3

million, respectively, before offset for unrecognized tax benefits, to offset future income tax liabilities. The federal research and development tax credits will expire in

2039,

not

utilized, while the state research and development tax credit can be carried forward indefinitely.

Sections

382

and

383

of the Internal Revenue Code provide for a limitation on the annual use of NOL and tax credit carryforwards following certain ownership changes that could limit the Company’s ability to utilize these carryforwards. The Company’s losses and credit carryforwards

may

be subject to these limitations. The Company has completed an analysis covering the period from

February 13, 2018,

through

September 30, 2019,

to determine if such ownership changes have occurred and concluded it was more likely than

not

that there were changes in ownership, including a change on

September 30, 2019,

which resulted in an annual limitation of

$62,000.

Due to the existence of the valuation allowance, limitations under Section

382

and

383

will

not

impact the Company’s effective tax rate. Further analyses will be performed prior to recognizing the benefits of any losses or credits in the financial statements.

The Company is required to reduce its deferred tax assets by a valuation allowance if it is more likely than

not

that some or all of its deferred tax assets will

not

be realized. Management must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of the valuation allowance, if any, the Company assesses the likelihood that it will be able to recover its deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical cumulative losses, the Company determined that, based on all available evidence, there was substantial uncertainty as to whether it will recover recorded net deferred taxes in future periods. Accordingly, the Company recorded a valuation allowance against all of its net deferred tax assets as of

December 31, 2019

and

2018

. The net change in total valuation allowance was a decrease of approximately

$35.3

million for the year ended

December 31, 2019

and an increase of approximately

$25.7

million for the year ended

December 31, 2018.

The decrease in

2019

is primarily due to the reduction in NOL and tax credit carryforwards that were triggered by the change in ownership on

September 30, 2019.

The Company records unrecognized tax benefits, where appropriate, for all uncertain income tax positions. The Company recorded unrecognized tax benefits for uncertain tax positions of approximately

$851,000

as of

December 31, 2019,

none

of which would impact the effective tax rate, if recognized, because the benefit would be offset by an increase in the valuation allowance.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Year Ended December 31,
	2019			2018
	(in thousands)
Beginning Balance	$	1,582		$	1,404
Additions based on tax positions related to the current year		159			181
Decreases related to prior years’ tax positions		(890	)		(3	)

Ending Balance	$	851		$	1,582

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. During the years ended

December 31,

2019

and

2018

, the Company recognized

interest and penalties associated with unrecognized tax benefits. There are

tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within

twelve

months of the reporting date.

The Company files income tax returns in the U.S, Australia, France and the United Kingdom, as well as with various U.S. states. The Company is subject to tax audits in all jurisdictions in which it files income tax returns. Tax audits by their very nature are often complex and can require several years to complete. There are currently

tax audits that have commenced with respect to income tax returns in any jurisdiction.

Under the tax statute of limitations applicable to the Internal Revenue Code, the Company and its U.S. subsidiary, either standalone or as part of the consolidated group, is

longer subject to U.S. federal income tax examinations by the Internal Revenue Service for tax years before tax year

2016.

Under the statute of limitations applicable to most state income tax laws, the Company is

longer subject to state income tax examinations by tax authorities for tax years before

2015

in states in which it has filed income tax returns. However, because the Company is carrying forward income tax attributes, such as net operating losses and tax credits, from earlier tax years, these attributes can still be audited when utilized on returns filed in the future. The Company is subject to foreign tax examinations by tax authorities for fiscal year

2014

and forward.