v3.22.4
INCOME TAXES
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXES
Income (loss) before income taxes and the related tax (benefit) expense is as follows (in thousands):
Year Ended December 31,
202220212020
Income (loss) before income taxes:
   Domestic$21,068 $64,751 $17,000 
   Foreign(7,766)(8,347)3,089 
      Total income before income taxes$13,302 $56,404 $20,089 
Current taxes:
   Federal$— $— $(6)
   State5,309 3,533 1,185 
   Foreign29 19 — 
      Total current taxes$5,338 $3,552 $1,179 
Deferred taxes:
   Federal$(2,781)$12,554 $(99,164)
   State(5,164)(1,682)(27,449)
      Total deferred taxes$(7,945)$10,872 $(126,613)
      Total income tax (benefit) expense$(2,607)$14,424 $(125,434)
A reconciliation of income tax (benefit) expense at the U.S. federal statutory rate to the provision for income taxes is as follows (dollars in thousands):
 Year Ended December 31,
 202220212020
AmountTax RateAmountTax RateAmountTax Rate
U.S. statutory rate applied to income before taxes$2,793 21.00 %$11,845 21.00 %$4,219 21.00 %
State taxes(448)(3.37)%2,154 3.82 %632 3.15 %
Foreign taxes248 1.86 %(651)(1.15)%639 3.18 %
Executive compensation1,267 9.53 %719 1.27 %765 3.81 %
Change in valuation allowance2,871 21.58 %3,695 6.55 %(130,150)(647.87)%
Stock-based compensation(1,795)(13.49)%(2,144)(3.80)%(216)(1.08)%
Tax credits(2,542)(19.11)%(1,690)(3.00)%(1,591)(7.92)%
Interest expense(3,477)(26.14)%— — %— — %
Contingent consideration(3,841)(28.88)%247 0.44 %— — %
Nondeductible expenses1,164 8.75 %1,929 3.42 %149 0.74 %
Reserves984 7.40 %(738)(1.31)%1,539 7.66 %
Convertible debt— — %— — %(1,048)(5.22)%
Other169 1.27 %(942)(1.67)%(372)(1.84)%
Income tax (benefit) expense and effective tax rate$(2,607)(19.60)%$14,424 25.57 %$(125,434)(624.39)%
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, 2022 and 2021 are as follows (in thousands):
 December 31,
 20222021
Deferred tax assets:  
Net operating loss carryforwards$151,495 $174,203 
Federal and state credits23,098 35,414 
Accruals and reserves19,979 29,691 
Stock based compensation27,473 24,545 
Deferred revenue— 2,430 
Inventory reserves4,889 572 
Other11,036 2,441 
Total deferred tax assets237,970 269,296 
Deferred tax liabilities:
Depreciation and amortization(54,743)(81,418)
Discount on convertible senior notes13 (15,521)
Total deferred tax liabilities(54,730)(96,939)
Deferred tax assets, net of deferred tax liabilities183,240 172,357 
Less: valuation allowance(22,931)(18,993)
Net deferred tax assets$160,309 $153,364 
As of December 31, 2022, the Company’s federal net operating losses, or NOLs, and federal tax credit carryforwards totaled $571.8 million and $16.6 million, respectively. The Company also had state NOLs and state tax credit carryforwards of $518.0 million and $6.5 million, respectively, which are subject to change on an annual basis due to variations in the Company’s annual state apportionment factors. The federal and state NOLs will begin to expire in 2032 and 2028, respectively. The Company had non-U.S. tax NOLs of $6.5 million at December 31, 2022. 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 NOLs, 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, other financing transactions and the Flexion Acquisition in 2021. As a result of these ownership changes, the Company estimates $516.2 million of federal NOLs are subject to annual limitations and are estimated to be available as follows: $32.6 million will come available in 2023, $32.5 million in 2024, $32.4 million in 2025, $28.3 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 $3.9 million and $16.5 million for the years ended December 31, 2022 and 2021, respectively. The current year net increase in The Company’s valuation allowance includes $2.5 million against U.S. capital loss carryforwards, $0.9 million against Flexion Acquisition state attributes and $0.5 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.
In 2022, the Company recorded a $2.7 million net reduction to unrecognized tax benefits, or UTBs of which $3.7 million is a full reduction in Flexion acquired tax credits, offset by a $0.2 million increase related to prior year tax credit and $0.8 million related to tax credit positions taken during the year. The Company’s UTB liability at December 31, 2022 was $6.3 million. The change in the Company’s UTBs for the year ended December 31, 2022 is summarized as follows (in thousands):
Unrecognized
Tax Benefit
Balance as December 31, 2020$6,076 
Reduction for prior year positions(1,355)
Additions for current year positions4,300 
Balance at December 31, 20219,021 
Reduction for prior year positions(3,526)
Additions for current year positions827 
Balance at December 31, 2022$6,322 
The UTBs as of December 31, 2022, 2021 and 2020 would, if subsequently recognized, favorably impact the effective income tax rate.
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, 2022, 2021 and 2020.
The Company is currently subject to audit by the U.S. Internal Revenue Service, or IRS, for the years 2019 through 2022, and state tax jurisdictions for the years 2018 through 2022. 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.