INCOME TAXES

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Income (loss) before income taxes and the related tax expense (benefit) is as follows (in thousands):

	Year Ended December 31,
	2021		2020		2019
Income (loss) before income taxes:
Domestic	$	64,751	$	17,000	$	(7,026)
Foreign	(8,348)		3,089		(3,722)
Total income (loss) before income taxes	$	56,403	$	20,089	$	(10,748)
Current taxes:
Federal	$	—	$	(6)	$	—
State	3,533		1,185		2,096
Foreign	19		—		—
Total current taxes	$	3,552	$	1,179	$	2,096
Deferred taxes:
Federal	$	12,554	$	(99,164)	$	(1,828)
State	(1,682)		(27,449)		—
Total deferred taxes	$	10,872	$	(126,613)	$	(1,828)
Total income tax expense (benefit)	$	14,424	$	(125,434)	$	268

The income tax expense of $14.4 million for the year ended December 31, 2021 represents the effective tax rate applied to domestic operating results adjusted for certain discrete tax items including deductible stock-based compensation, non-deductible capital losses and tax credits. For the year ended December 31, 2020, the Company had an income tax benefit of $125.4 million primarily related to the release of a valuation allowance on its domestic net deferred assets. The income tax expense for the year ended December 31, 2019 consists primarily of state income taxes in jurisdictions where the availability of carryforward losses are either limited or fully utilized as well as state taxes on the one-time gain from the deemed sale of assets resulting from an IRC section 338(g) tax election made by the Company related to the MyoScience Acquisition. This was partially offset by a reduction in the Company’s valuation allowance on its deferred tax assets due to the MyoScience Acquisition.

A reconciliation of income taxes at the U.S. federal statutory rate to the provision for income taxes is as follows:

	Year Ended December 31,
	2021		2020		2019
U.S. federal statutory rate	21.00	%	21.00	%	21.00	%
State taxes	3.82	%	3.15	%	(7.33)	%
Foreign taxes	(1.15)	%	3.18	%	(3.95)	%
Change in valuation allowance	6.55	%	(647.87)	%	19.76	%
Stock-based compensation	(3.80)	%	(1.08)	%	(10.53)	%
Tax credits	(3.00)	%	(7.92)	%	19.93	%
Effect of rate changes	—	%	—	%	(0.42)	%
Convertible senior notes refinancing	—	%	(5.22)	%	—	%
Nondeductible expenses	5.13	%	4.55	%	(13.58)	%
Reserves	(1.31)	%	7.66	%	(15.41)	%
338(g) tax election	—	%	—	%	(9.61)	%
Other	(1.67)	%	(1.84)	%	(2.35)	%
Effective tax rate	25.57	%	(624.39)	%	(2.49)	%

The Company’s effective tax rates of 25.57%, (624.39)% and (2.49)% for the years ended December 31, 2021, 2020 and 2019, respectively, differed from the expected U.S. statutory tax rate of 21.0%. The difference in tax rates for the year ended December 31, 2021 was primarily driven by non-deductible expenses and valuation allowances recorded against capital loss carryforwards, partially offset by stock-based compensation deductions and tax credits. The difference in tax rates for the year ended December 31, 2020 was primarily due to the release of a domestic valuation allowance of $126.6 million as discussed below. The difference for the year ended December 31, 2019 was primarily driven by pretax losses for which the Company concluded that a majority of its tax benefits are not more-likely-than-not to be realized, resulting in the recording of a full valuation allowance.

Deferred taxes reflect the tax effects of the differences between the amounts recorded as assets and liabilities for financial reporting purposes and the comparable amounts recorded for income tax purposes. At each reporting date, the Company considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. During the year ended December 31, 2020, the Company determined there was sufficient positive evidence to conclude that it was more-likely-than-not the domestic deferred taxes of $126.6 million were realizable and, therefore, the domestic valuation allowance was released. The Company maintains a full valuation allowance on its foreign net deferred tax balances as it is more-likely-than-not the tax benefits are not realizable.

Significant components of the Company’s deferred tax assets and liabilities at December 31, 2021 and 2020 are as follows (in thousands):

	December 31,
	2021		2020
Deferred tax assets:
Net operating loss carryforwards	$	174,203	$	66,123
Federal and state credits	35,414		17,335
Accruals and reserves	80,237		7,254
Stock based compensation	24,545		21,862
Deferred revenue	2,430		—
Inventory	572		1,345
Other	2,441		2,138
Total deferred tax assets	319,842		116,057
Deferred tax liabilities:
Depreciation and amortization	(131,964)		13,473
Discount on convertible senior notes	(15,521)		(20,851)
Total deferred tax liabilities	(147,485)		(7,378)
Deferred tax assets, net of deferred tax liabilities	172,357		108,679
Less: valuation allowance	(18,993)		(2,515)
Net deferred tax assets	$	153,364	$	106,164

As of December 31, 2021, the Company’s federal net operating losses, or NOLs, and federal tax credit carryforwards totaled $662.6 million and $25.9 million, respectively. The Company also had state NOLs and state tax credit carryforwards of $171.6 million and $9.5 million, respectively, which are subject to change on an annual basis due to variations in the Company’s annual state apportionment factors. The Company’s federal and state NOLs carryforwards include $538.6 million and $28.6 million, respectively, attributed to the Flexion Acquisition. Additionally, the Company’s federal and state tax credits include $11.0 million and $3.6 million, respectively, as a result of the Flexion Acquisition. The federal and state NOLs will begin to expire in 2032 and 2028, respectively. The Company had non-U.S. tax NOLs of $10.3 million at December 31, 2021. The non-U.S. NOLs do not expire.

Since the Company had cumulative changes in ownership of more than 50% within a three-year period, under IRC sections 382 and 383, the Company’s ability to use certain net operating losses, tax attributes and credit carryforwards to offset taxable income or tax will be limited. Such ownership changes were triggered by the initial acquisition of the Company’s stock in 2007 as well as cumulative ownership changes arising as a result of the completion of the Company’s initial public offering and other financing transactions. Additionally, on November 19, 2021, the Company completed the Flexion Acquisition which also triggered an ownership change. As a result of these ownership changes, the Company estimates $531.7 million of federal net operating losses and $21.2 million of other tax attributes are subject to annual limitations. At December 31, 2021, all of these federal net operating losses and other tax attributes were available. The Company estimates that an additional $35.4 million will come available in each of 2022 to 2025, $30.8 million in 2026 and $6.9 million in 2027 and thereafter.

In accordance with ASC Topic 740, the Company establishes a valuation allowance for deferred tax assets that, in its judgment, are not more-likely-than-not realizable. These judgments are based on projections of future income, including tax-planning strategies, by individual tax jurisdictions. In each reporting period, the Company assesses the likelihood that its deferred tax assets will be realized and determines if adjustments to its valuation allowance are appropriate. The Company had a net increase in its valuation allowance of $16.5 million and a net reduction in its valuation allowance of $126.6 million for the years ended December 31, 2021 and December 31, 2020, respectively. The current year net increase in The Company’s valuation allowance includes $12.5 million as a result of the Flexion Acquisition, $2.2 million against U.S. capital loss carryforwards and $1.8 million against foreign net deferred tax assets. The Company continues to maintain a full valuation allowance against foreign net deferred tax assets since it is more-likely-than-not the tax benefit related to the foreign losses are not realizable. During the year ended December 31, 2020, the Company determined that there was sufficient positive evidence to conclude that it is more likely than not that additional domestic deferred taxes of $126.6 million are realizable and, therefore, reduced the valuation allowance accordingly.

In 2021, the Company recorded a reserve of $2.9 million related to unrecognized tax benefits, or UTBs of which $4.3 million related to tax credit positions taken during the year, offset by a $1.4 million reduction for prior year tax credit positions. The Company’s UTB liability at December 31, 2021 was $9.0 million. The change in the Company’s UTBs for the year ended December 31, 2021 is summarized as follows (in thousands):

	Unrecognized Tax Benefit
Balance at December 31, 2020	$	6,076
Additions for current year positions	4,300
Reduction for prior year positions	(1,355)
Balance at December 31, 2021	$	9,021

The Company regularly assesses the likelihood of additional tax assessments by jurisdiction and, if necessary, adjusts its reserve for UTBs based on new information or developments. Due to the Company’s tax credit carryforwards, the reserve was recorded as a reduction of the Company’s deferred tax assets, and any potential deficiency would not result in a tax liability. Therefore, no interest or penalties were recognized in income tax expense for the years ended December 31, 2021, 2020 and 2019.

The Company is currently subject to audit by the U.S. Internal Revenue Service, or IRS, for the years 2018 through 2021, and state tax jurisdictions for the years 2017 through 2021. However, the IRS or states may still examine and adjust an NOL arising from a closed year to the extent it is utilized in a year that remains subject to audit. The Company’s previously filed income tax returns are not presently under audit by the IRS or state tax authorities.