Income Taxes

12 Months Ended

Dec. 31, 2019

Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and net operating loss and other tax credit carry-forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted and included additional requirements effective for the Company in 2019. Those provisions include a tax on global intangible low-taxed income (“GILTI”), a tax determined by base erosion and anti-abuse tax benefits (BEAT) from certain payments between a U.S. corporation and foreign subsidiaries, a limitation of certain executive compensation, a deduction for foreign derived intangible income (“FDII”), and interest expense limitations. The Company’s foreign subsidiaries do not have accumulated earnings.

The income tax (benefit) provision consisted of the following (in thousands):



	Current			Deferred			Total
Year ended December 31, 2019
Federal	$	(61,951	)	$	195		$	(61,756	)
State	509			30			539
Foreign	—			209			209
	$	(61,442	)	$	434		$	(61,008	)
Year ended December 31, 2018
Federal	$	2,768		$	(40,345	)	$	(37,577	)
State	(1,677		)	(2,093		)	(3,770		)
Foreign	32			5,042			5,074
	$	1,123		$	(37,396	)	$	(36,273	)
Year ended December 31, 2017
Federal	$	78,806		$	(105,006	)	$	(26,200	)
State	1,706			(9,785		)	(8,079		)
Foreign	89			(458		)	(369		)
	$	80,601		$	(115,249	)	$	(34,648	)

The income tax provision differs from the “expected” tax expense computed by applying the U.S. Federal corporate income tax rates of 21% to loss before income taxes, as follows (in thousands):



	Years Ended December 31,
	2019			2018			2017
Computed “expected” tax provision	$	(60,433	)	$	(92,018	)	$	(20,719	)
Change in income taxes resulting from:
State income taxes, net of Federal income tax	(7,402		)	(11,667		)	(537		)
Change in state income tax rate, net of Federal income tax	728			(16		)	(4,714		)
Foreign income tax (benefit) provision	(2,623		)	(1,658		)	2,206
Deduction for domestic production activities	—			—			(2,527		)
Stock compensation	4,565			2,480			(1,316		)
R&D tax credits	(1,428		)	(750		)	(1,200		)
Nondeductible acquisition fees	—			(1,165		)	1,974
Uncertain tax positions	(47,357		)	7,935			15,650
Federal rate change	—			(3,027		)	(26,902		)
Lapse of statute of limitations	(16,034		)	570			1,561
Taxes receivable true up	2,651			—			—
Deferred tax adjustment	17,578			—			—
162(m) Officers Compensation Limitation	340			1,483			—
Other expense, net	408			934			1,201
Valuation allowance change	47,999			60,626			675
Income tax (benefit)	$	(61,008	)	$	(36,273	)	$	(34,648	)

The geographic allocation of the Company’s income before income taxes between U.S. and foreign operations was as follows (in thousands):



	2019			2018			2017
Pre-tax (loss) from U.S. operations	$	(237,474	)	$	(428,299	)	$	(49,572	)
Pre-tax (loss) from foreign operations	(50,304		)	(9,883		)	(9,626		)
Total pre-tax (loss)	$	(287,778	)	$	(438,182	)	$	(59,198	)

Net deferred income taxes at December 31, 2019 and 2018 include (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Net operating loss carry-forward	$	51,125		$	48,766
Stock-based compensation	8,912			9,071
Chargeback reserves	3,336			14,173
Reserve for product returns	8,001			8,012
Inventory valuation reserve	8,423			9,688
Legal reserve	15,294			—
Long-term debt	56,117			16,156
Other	16,793			16,444
Total deferred tax assets	$	168,001		$	122,310
Valuation allowance	(119,156		)	(71,157		)
Net deferred tax assets	$	48,845		$	51,153
Deferred tax liabilities:
Prepaid expenses	$	(2,190	)	$	(2,137	)
Right of Use Asset	(5,311		)	—
Depreciation & amortization – tax over book	(41,534		)	(49,547		)
Other	$	(35	)	$	(35	)
Total deferred tax liabilities	$	(49,070	)	$	(51,719	)
Net deferred income tax (liability)	$	(225	)	$	(566	)

The Company records a valuation allowance to reduce net deferred income tax assets to the amount that is more likely than not to be realized. In performing its analysis of whether a valuation allowance to reduce the deferred income tax asset was necessary, the Company evaluated the data and believes that it is not more likely than not that the deferred tax assets in the US, India, and Switzerland will be realized. Accordingly, the Company has recorded a full valuation allowance against US, India, and Switzerland deferred tax assets. The Company has a valuation allowance of $119.2 million, $71.2 million and $10.5 million against its deferred tax assets as of December 31, 2019, 2018 and 2017, respectively.

The deferred tax balances have been reflected gross on the balance sheet and are netted only if they are in the same jurisdiction.

The Company’s net operating loss (“NOL”) carry-forwards as of December 31, 2019 consist of four component pieces: (i) U.S. Federal NOL carry-forwards valued at $21.2 million, (ii) State NOL carry-forwards valued at $1.1 million (iii) foreign (Indian) NOLs of $26.4 million and (iv) foreign (Swiss) NOLs of $2.4 million. The U.S. Federal NOL carry-forwards were obtained through the Merck Acquisition completed in the fourth quarter of 2013, the 2018 tax loss and the current year loss generated. State NOL carry-forwards are from the 2018 tax loss. The Company has established a full valuation allowance against U.S. Federal and State NOL carry-forwards due to uncertainty related to future earnings projections. The Indian NOL carry-forwards of $26.4 million relate to operating losses by the Company’s subsidiary in India, which was acquired in 2012. The Company has established a valuation allowance against this entire amount. A portion of the Swiss NOL was obtained through the Akorn AG acquisition completed in the first quarter of 2015 in addition to the loss generated in 2018 and 2019. The NOL carry-forwards begin to expire in 2023 and, accordingly, the Company has established a valuation allowance against the entire amount of NOL.

During 2019, the Company entered into the Original and First Amended Standstill Agreements, modifying its outstanding debt instruments to adjust interest and other provisions. For income tax purposes, these debt modifications were treated as taxable exchanges of debt instruments, which created cancellation of debt income, current interest expense, and deferred interest expense under the original issue discount rules. The Company’s NOL and deferred interest carryovers were adjusted to reflect the impact of these transactions.

The Company’s U.S. Federal income tax returns filed for years 2016 through 2018 are open for examination by the Internal Revenue Service. The majority of the Company’s state and local income tax returns filed for years 2016 through 2018 remain open for examination as well.

In accordance with ASC 740-10-25, Income Taxes - Recognition, the Company reviews its tax positions to determine whether it is “more likely than not” that its tax positions will be sustained upon examination, and if any tax positions are deemed to fall short of that standard, the Company establishes reserves based on the financial exposure and the likelihood that its tax positions would not be sustained.

Based on its review as of December 31, 2019, the Company determined that it would not recognize tax benefits as follows (in thousands):



Balance at December 31, 2016	$	1,301
Additions relating to 2017	416
Additions relating to prior years	$	24,297
Reductions of exposures relating to prior years	(619		)
Balance at December 31, 2017	$	25,395
Additions relating to 2018	269
Additions relating to prior years	4,425
Reductions of exposures relating to prior years	(702		)
Balance at December 31, 2018	$	29,387
Reductions of exposures relating to prior years	(26,992		)
Lapse of statute of limitations	$	(33	)
Balance at December 31, 2019	$	2,362

If recognized, $2.4 million of the above positions will impact the Company’s effective rate. The Company released approximately $27.1 million of the uncertain tax position that was reflected in the 2018 financial statements, due to the IRS acceptance of the non-automatic accounting method change related to chargebacks and rebate reserves in 2019. Due to the uncertainty of both timing and resolution of potential income tax examinations, the Company is unable to determine whether the remaining December 31, 2019 balance of uncertain tax positions could significantly change during the next twelve months. The Company accounts for interest and penalties as income tax expense. In the year ended December 31, 2019, the Company released $8.6 million of penalties and $12.0 million of interest that was accrued in the prior year. During 2019, the Company recorded $0.2 million of interest related to uncertain tax positions resulting in a total accrued interest balance of approximately $0.3 million as of December 31, 2019.