Income Taxes Expense

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Tax Expense

Income Taxes Expense

The summary of the income tax expense (benefit) for the years ended December 31, 2020, 2019, and 2018 is as follows (dollars in thousands):

	Years Ended December 31,
	2020		2019		2018
Current
Federal	$	29,893	$	29,333	$	26,772
State	11,234		10,930		5,621
Deferred
Federal	2,200		(4,551)		(2,450)
State	(1,629)		(1,281)		(760)
Total income tax expense	$	41,698	$	34,431	$	29,183

A reconciliation of income tax expense at the U.S. federal statutory income tax rate to annual income tax expense at the Company's effective tax rate is as follows (dollars in thousands):

	Years Ended December 31,
	2020		2019		2018
Income tax expense computed at U.S. federal statutory income tax rate	$	35,417	$	30,972	$	29,437
State income taxes	7,281		7,543		3,674
Permanent items	2,654		1,332		(2,196)
Research and development credits	(3,602)		(2,071)		(3,199)
Uncertain income tax position	348		(2,992)		716
Other	(400)		(353)		751
Income tax expense	$	41,698	$	34,431	$	29,183

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

	As of December 31,
	2020		2019
Deferred tax assets:
Convertible bond hedge	$	12,420	$	17,197
Accrued product returns and rebates	17,529		15,123
Accrued compensation and stock based compensation	13,547		10,349
Non-recourse liability related to sale of future royalties	3,777		5,320
Research and development credit carryforwards	3,151		3,817
Amortization of intangibles	—		4,617
Net operating loss carryforwards	13,164		2,245
Operating lease liability	14,542		8,187
Other	5,303		2,510
Total deferred tax assets	83,433		69,365
Less: valuation allowance	(582)		(11)
Total deferred tax asset, net of valuation allowance	82,851		69,354
Deferred tax liabilities:
Amortization of intangibles	(79,545)		—
Debt discount on 2023 Notes	(10,190)		(14,109)
Patent infringement legal costs	(10,897)		(10,613)
Operating lease assets	(10,674)		(5,237)
Depreciation	(3,458)		(2,778)
IRC Section 481(a) liability	(315)		(2,126)
Unrealized gain on marketable securities	(2,987)		(2,428)
Total deferred tax liabilities	(118,066)		(37,291)
Net deferred tax (liabilities) assets	$	(35,215)	$	32,063

In assessing the realizability of deferred income tax assets, the Company 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. The Company 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, the Company had determined it is more-likely-than-not to realize such net deferred tax assets.

Associated with the acquisition of MDD US Enterprises, LLC (formerly USWM Enterprises, LLC), the Company recorded a valuation allowance of $0.6 million and $0.6 million as of the acquisition date and December 31, 2020, respectively, related to the foreign net operating losses and certain state charitable contribution carryforwards that are not expected to be realizable in the future.

The Company has NOL and other tax credit carryforwards in several jurisdictions. Due to changes in the Company's ownership, the utilization of net operating loss carryforwards and research and development credit carryforwards, that can be used to offset future taxable income, are subject to annual limits in accordance with Internal Revenue Code (IRC) provisions, as well as similar state provisions. In addition, states may also impose other future limitations through state legislation or similar measures. Despite the NOL carryforwards, the Company may incur higher state income tax expense in the future.

As of December 31, 2020, the U.S. federal and state NOL carryforwards amounted to approximately $57.9 million and $21.9 million, respectively, and will expire in various years beginning in 2023. For the year ended December 31, 2020, the Company utilized federal NOLs of approximately $6.4 million and state NOLs of approximately $13.6 million. The Company expects the remaining federal and state NOL carryforwards to become available in the future years.

As of December 31, 2020, the Company has available research and development credit carryforwards of $3.5 million, which will become available in 2021 and will expire, if unused, starting in 2027.

The Company is no longer subject to U.S. Federal income tax examinations for years prior to 2017. Operating loss or tax credit carryforwards generated prior to 2017 may be subject to tax audit adjustment.

The Company accounts for uncertain income tax positions pursuant to the guidance in ASC Topic 740, Income Taxes. The Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax expense. 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 cannot be offset by tax attributes until liability has been booked.

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

	Years Ended December 31,
	2020		2019		2018
Balance as of January 1	$	5,978	$	8,848	$	8,859
Gross increases related to current year tax positions	1,027		208		1,108
Gross increases related to prior year tax positions	221		—		—
Gross decreases related to prior year tax positions	—		(49)		(484)
Lapse of statute of limitations	(1,345)		(3,029)		(635)
Balance as of December 31	$	5,881	$	5,978	$	8,848

The Company recorded $0.6 million, $3.0 million, and $0.6 million of net tax benefit in 2020, 2019 and 2018, respectively, as a result of the expiration of statutes of limitation. The Company also recorded $0.3 million, $0.2 million, and $0.3 million for uncertain tax positions related to research and development tax credits in 2020, 2019, and 2018, respectively, and an additional expense of $0.2 million related to a prior year position. The Company does not anticipate a material impact to the financial statements in the next 12 months as a result of uncertain tax positions and expiring statutes of limitation.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The CARES Act is an emergency economic stimulus package that includes spending and tax incentives to strengthen the U.S. economy and fund a nationwide effort to curtail the effect of the COVID-19 pandemic. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact the Company’s financial statements include the removal of certain limitations on the utilization of net operating losses, increasing the ability to deduct interest expense, and amending certain provisions of the previously enacted Tax Cuts and Jobs Act.

As of December 31, 2020, the Company expects that these provisions will not have a material impact, as the Company does not have net operating losses that would fall under the provisions of this legislation, nor does it expect interest expense to be limited. The ultimate impact of the CARES Act may differ from this estimate due to changes in interpretations and assumptions, additional guidance that may be issued, and actions the Company may take in response to the CARES Act. The Company will continue to assess the impact that various provisions may have on its business.