G. Income Taxes

The difference between the Company’s expected tax benefit, as computed by applying the U.S. federal corporate tax rate of 34% to loss before the benefit for income taxes, and actual tax is reconciled in the following chart (in thousands):


	Year Ended		Six Months Ended
	December 31,		December 31,		Year Ended June 30,
	2017		2016		2016		2015
Loss before income tax expense	$	(96,012)	$	(78,883)	$	(144,817)	$	(60,739)
Expected tax benefit at 34%	$	(32,644)	$	(26,820)	$	(49,238)	$	(20,651)
Permanent differences		25		15		345		818
Incentive stock options		1,528		1,313		2,501		1,948
State tax benefit net of federal benefit		(3,537)		(4,157)		(7,954)		(3,252)
Change in valuation allowance, net		(63,238)		32,922		62,505		27,940
Federal research credit		(2,204)		(1,232)		(4,109)		(1,407)
Federal orphan drug credit		(7,118)		(2,901)		(4,241)		(5,471)
Expired loss and credit carryforwards		—		—		184		75
Change in U.S. tax law		97,479		—		—		—
Debt inducement		8,044		—		—		—
Stock option expirations		1,665		860		7		—
Benefit for income taxes	$	—	$	—	$	—	$	—

At December 31, 2017, the Company has net operating loss, or NOL, carryforwards of $473.6 million available to reduce federal taxable income, if any, that expire in 2027 through 2036 and $304 million available to reduce state taxable income, if any, that expire in fiscal 2033 through fiscal 2036. The Company also has federal and state credit carryforwards of $61.4 million available to offset federal and state income taxes, which expire beginning in 2018. Due to the degree of uncertainty related to the ultimate use of the loss carryforwards and tax credits, the Company has established a valuation allowance to fully reserve these tax benefits.

During the first quarter of 2017, the Company adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. There is no net income statement impact at adoption related to the tax affect. The gross federal net operating loss was increased by the prior year excess benefit of $27.0 million, tax affect $9.2 million, and a corresponding valuation allowance has been applied against it. The state net operating loss has been increased by the prior year excess benefit of $23.3 million, tax affect net of federal benefit of $1.2 million, and a corresponding valuation allowance has been applied against it as well.

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. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands):



	December 31,
	2017		2016
Deferred tax assets:
Net operating loss carryforwards	$	118,672	$	167,869
Research and development tax credit carryforwards		58,606		43,096
Property and other intangible assets		2,272		2,982
Deferred revenue		25,997		13,205
Stock-based compensation		12,125		16,794
Deferred lease incentive		2,889		4,264
Other liabilities		3,037		2,107
Royalty sale		47,143		73,973
Total deferred tax assets	$	270,741	$	324,290

Deferred tax liabilities:
Royalty sale transaction costs		(859)		(1,569)
Total deferred tax liabilities	$	(859)	$	(1,569)
Valuation allowance		(269,882)		(322,721)
Net deferred tax assets/(liabilities)	$	—	$	—

The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. As required by the provisions of ASC 740, the Company has determined that it is not more-likely-than-not that the tax benefits related to the federal and state deferred tax assets will be realized for financial reporting purposes. Accordingly, the deferred tax assets have been fully reserved at December 31, 2017 and 2016. The valuation allowance decreased by $52.8 million during the year ended December 31, 2017 due primarily to a reduction in the federal tax rate effective January 1, 2018 and the taxable income position of the Company for the year.

In December 2017, the Tax Cuts and Jobs Act, or the Tax Act (“TCJA”), was signed into law. Among other things, the Tax Act permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate federal income tax rate to 21%, U.S. GAAP requires companies to revalue their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. This revaluation resulted in a provision of $97.5 million to income tax expense in continuing operations and a corresponding reduction in the valuation allowance. As a result, there was no impact to the Company’s income statement as a result of the reduction in tax rates. The Company’s preliminary estimate of the TCJA and the remeasurement of the Company’s deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to certain estimates and the filing of our tax returns, including potential changes related to the impact of the TCJA provisions on executive compensation. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TJCA may require further adjustments and changes in our estimates. The final determination of the TCJA and the remeasurement of the Company’s deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the TCJA.

Utilization of the NOL and credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future as provided by Section 382 of the Internal Revenue Code of 1986, as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and credit carry forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three‑year period. Since the Company’s formation, it has raised capital through the issuance of capital stock on several occasions (both pre and post initial public offering) which, combined with the purchasing shareholders’ subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition. During fiscal year 2015, the Company completed a study to assess whether a change of control has occurred or whether there have been multiple changes of control since its formation and determined no ownership change occurred under Section 382. The study has not been updated beyond fiscal year 2015. Additionally, the Company has not completed a detailed Research and Development Credit Study (including the Orphan Drug Credit); accordingly, it is probable that a portion of the tax credit carryforward may not be available to offset future income.

The Company accounts for uncertain tax positions under the recognition and measurement criteria of ASC 740-10. For those tax positions for which it is more likely than not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. If the Company does not believe that it is not more likely than not that a tax benefit will be sustained, no tax benefit is recognized. As of December 31, 2017 and 2016, no uncertain tax positions have been recorded. Interest and penalties related to the settlement of uncertain tax positions, if any, will be reflected in income tax expense. The Company did not recognize any interest and penalties associated with unrecognized tax benefits in the accompanying consolidated financial statements. The Company does not expect any material changes to the unrecognized benefits within 12 months of the reporting date. Due to existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact our effective tax rate.

The statute of limitations for assessment by the Internal Revenue Service, or IRS, and state tax authorities is open for tax years ending after June 30, 2013, although carryforward attributes that were generated prior to fiscal year 2013 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period.