Income Taxes

12 Months Ended

Dec. 31, 2019

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 are as follows (in thousands):



		December 31,
		2019			2018
Deferred Tax Assets:
	Accrued expenses	$	3,759		$	3,572
	Deferred revenue	—			13,719
	Bad debts	4,859			—
	Sales return and allowances	659			2,296
	Accrued settlement costs	3,276			2,689
	Research and development and other tax credits	2,349			2,326
	Net operating loss	14,350			3,118
	Share-based compensation	3,439			3,425
	Lease obligation	1,044			—
	Other	2,124			971
Deferred Tax Liabilities:
	Prepaid expenses	(1,189		)	(1,823		)
	Right of use asset	(868		)	—
	Property and equipment	(1,582		)	(2,519		)
	Unearned insurance refund	(894		)	—
	Deferred costs of goods sold	(322		)	—
	Intangible assets	(389		)	(443		)
Net Deferred Tax Assets		30,615			27,331
	Less: Valuation allowance	(30,615		)	(27,331		)
Net Deferred Tax Assets after Valuation Allowance		$	—		$	—

The reconciliation of the federal statutory income tax rate of 21% for 2019 and 2018, and 35% for 2017 to the effective rate is as follows:



	December 31,
	2019		2018		2017

Federal statutory rate	21.00	%	21.00	%	35.00	%
State taxes, net of federal benefit	(1.36	)%	3.52	%	0.40	%
Nondeductible compensation	(1.49	)%	(15.33	)%	0.66	%
Meals and entertainment	(2.04	)%	(24.16	)%	1.93	%
Keyman life insurance	(0.02	)%	(0.15	)%	0.02	%
Inventory contribution deduction	0.06	%	0.48	%	(0.06	)%
Domestic production activities deduction	—	%	—	%	(1.54	)%
Fair value adjustment	—	%	—	%	(2.76	)%
Share-based compensation	(5.05	)%	10.82	%	(9.90	)%
Tax credits	0.45	%	19.75	%	(3.37	)%
Uncertain tax position	1.22	%	(2.35	)%	0.46	%
Write-off of net operating losses	—	%	(11.81	)%	—	%
Payable true-up	0.52	%	(2.69	)%	0.65	%
Sale of Stability	—	%	—	%	(8.86	)%
Fixed asset true-up	—	%	5.33	%	—	%
Federal provision to return	0.02	%	1.58	%	0.13	%
Impact of federal rate change	—	%	—	%	26.79	%
Other	(0.46	)%	(0.25	)%	(0.03	)%
Valuation allowance	(12.83	)%	(788.33	)%	(83.08	)%
	0.02	%	(782.59	)%	(43.56	)%

Share-based Compensation had a significant impact on the Company's effective tax rate as of December 31, 2019. Additionally, state taxes, Meals and Entertainment, and Nondeductible Compensation had a significant impact on the Company's effective tax rate.

Meals and Entertainment had a significant impact on the Company's effective tax rate as of December 31, 2018 due to the impact of the Act on the Company's method of calculating this permanent adjustment. Additionally, Federal and state tax credits, mostly related to the Company's Research and Development activities, had a significant impact on the Company's effective rate.

Stock based compensation had a significant impact on the Company’s effective tax rate as of December 31, 2017 due to the Company’s adoption of ASU 2016-09. Additionally, on September 30, 2017, the Company completed the Stability Divestiture, which resulted in a significant reduction in the Company’s effective tax rate. See Note 4 for details regarding the transaction.

Current and deferred income tax expense (benefit) is as follows (in thousands):



	December 31,
	2019			2018		2017
Current:
Federal	$	(53	)	$	614	$	5,868
State	48			427		1,163
Total current	(5		)	1,041		7,031

Deferred:
Federal	—			19,452		(19,441		)
State	—			6,089		(7,229		)
Total deferred	—			25,541		(26,670		)

Total expense (benefit)	$	(5	)	$	26,582	$	(19,639	)

Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefit that, based on available evidence, is not expected to be realized. The Company establishes a valuation allowance for deferred tax assets for which realization is not likely. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

A valuation allowance of $30.6 million and $27.3 million was recorded against the deferred tax asset balance as of December 31, 2019 and December 31, 2018, respectively. To the extent the Company determines that, based on the weight of available evidence, all or a portion of its valuation allowance is no longer necessary, the Company will recognize an income tax benefit in the period such determination is made for the reversal of the valuation allowance. If management determines that, based on the weight of available evidence, it is more-likely-than-not that all or a portion of the net deferred tax assets will not be realized, the Company may recognize income tax expense in the period such determination is made to increase the valuation allowance.

At December 31, 2019 and 2018, the Company had income tax net operating loss (“NOL”) carryforwards for federal and state purposes of $56.8 million and $49.3 million and $11.4 million and $15.6 million, respectively. A portion of the Company’s NOLs and tax credits are subject to annual limitations due to ownership change limitations provided by Internal Revenue Code Section 382. If not utilized, the federal and state tax NOL carryforwards will expire between 2027 and 2037. As of December 31, 2019, the Company has recorded a deferred tax asset for both federal and state NOL carryforwards of approximately $11.9 million and $3.1 million, respectively. As of December 31, 2018, the Company has recorded a deferred tax asset for federal and state NOL carryforwards of $2.4 million and approximately $0.9 million, respectively.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands) included in other liabilities in the consolidated balance sheets:



	2019			2018		2017
Unrecognized tax benefits - January 1	$	938		$	847	$	336

Gross increases - tax positions in current period	56			91		130

Gross increases - tax positions in prior period	—			—		381

Gross decreases - lapse of statute of limitations	(367		)	—		—

Unrecognized tax benefits - December 31	$	627		$	938	$	847

Included in the balance of unrecognized tax benefits as of December 31, 2019 and December 31, 2018, are $0.6 million and $0.9 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.

The Company recognizes accrued interest related to unrecognized tax benefits and penalties as income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued $0.1 million of interest during 2019, and, in total, as of December 31, 2019 has recognized $0.1 million of interest. The Company accrued $0.1 million of interest during 2018, and, in total, as of December 31, 2018 had recognized $0.1 million of interest. The Company accrued $0.1 million of interest during 2017, and, in total, as of December 31, 2017 had recognized $0.1 million of interest.

Certain positions included in the tabular reconciliation above will be reduced as a result of the expiration of statutes of limitations within the next 12 months. The reserve would be reduced by approximately $0.2 million.

The Company is subject to taxation in the U.S. and various state jurisdictions. As of December 31, 2019, the Company’s tax returns for 2018, 2017 and 2016 were subject to full examination by the tax authorities. The 2013, 2011, 2010, 2009, and 2008 federal tax returns were open to the extent of the NOL carryovers generated. As of December 31, 2019, the Company was generally no longer subject to state or local examinations by tax authorities for years before 2016, except to the extent of NOLs generated in prior years claimed on a tax return.