Income Taxes

12 Months Ended

Dec. 31, 2020

The following is a summary of the domestic and foreign components of income before income taxes for the years ended December 31, 2020, 2019 and 2018:


	Year Ended December 31,
(in thousands)	2020		2019		2018
Domestic	$	31,667	$	28,794	$	25,123
Foreign	(12)		234		223
Total income before income taxes	$	31,655	$	29,028	$	25,346

The following is a summary of the provision (benefit) for income taxes for the years ended December 31, 2020, 2019 and 2018:


	Year Ended December 31,
(in thousands)	2020		2019		2018
Current:
Federal	$	—	$	—	$	—
State	2,061		1,161		53
Foreign	68		81		99
Deferred:
Federal	6,076		(85,624)		—
State	155		(2,127)		—
Foreign	(42)		(16)		(14)
Provision (benefit) for income taxes	$	8,318	$	(86,525)	$	138

The Company assesses the need for a valuation allowance against its deferred tax asset each quarter through the review of all available positive and negative evidence. Deferred tax assets are reduced by a tax valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. The analysis depends on historical and projected taxable income. Projected taxable income includes significant assumptions related to revenue, commercial expenses and research and development activities. During 2019, after considering all available positive and negative evidence, including but not limited to cumulative income in recent periods, historical, current and future projected results and significant risks and uncertainties related to forecasts, the Company concluded that it was more likely than not that substantially all of its deferred tax assets in the U.S. are realizable in future periods. A valuation allowance was retained against certain District of Columbia state deferred tax assets as of December 31, 2020, and 2019.

The following is reconciliation between the federal statutory tax rate and the Company’s effective tax rate for the years ended December 31, 2020, 2019 and 2018:


	Year Ended December 31,
	2020		2019		2018
Federal tax at statutory rate	21.0	%	21.0	%	21.0	%
State taxes	2.6	%	1.8	%	1.7	%
Change in valuation allowance (1)	(3.5)	%	(357.6)	%	(16.4)	%
Research and development credit (2)	(5.4)	%	(10.9)	%	(9.1)	%
Orphan drug credit (2)	(1.3)	%	17.1	%	(2.7)	%
Section 162(m) limitation	1.7	%	2.7	%	3.1	%
Other tax rate changes	0.2	%	(0.5)	%	(0.7)	%
Other changes in state deferred taxes (3)	—	%	—	%	5.9	%
Uncertain tax positions (2)	4.7	%	26.3	%	—	%
Stock-based compensation	5.1	%	(1.0)	%	(3.9)	%
Other items	1.2	%	3.0	%	1.6	%
Effective tax rate	26.3	%	(298.1)	%	0.5	%

(1)Reductions in 2020 valuation allowances are attributable to 2020 income before income taxes. Reductions in 2019 valuation allowances include $7.5 million related to 2019 U.S. income before income taxes, $10.7 related to adjustments for prior period credit carryforwards and uncertain tax positions and $85.6 million related to a change in

beginning-of-the-year balances that resulted from a change in circumstances that caused a change in judgment about the realizability of U.S. deferred tax assets in future years. Reductions in 2018 valuation allowances are attributable to 2018 income before income taxes.

(2)2019 activity includes adjustments to prior year credit carryforwards and prior year tax positions. As a result of the tax valuation allowance previously recorded against deferred tax assets in the U.S., these adjustments resulted in no change in tax expense.

(3)Includes adjustments to state deferred taxes based on changes to filing jurisdictions.

The following is a summary of the components of the Company’s net deferred tax assets and the related tax valuation allowance as of December 31, 2020 and 2019. Certain prior period amounts in the table have been reclassified to conform to the current period presentation.


(in thousands)	December 31, 2020		December 31, 2019
Deferred tax assets:
Net operating loss carryforwards	$	43,623	$	52,034
Stock-based compensation	4,653		5,298
Accrued expenses	2,429		1,266
Allowance for returns and credit losses	1,169		1,468
Research and development and orphan drug credit carryforwards	37,737		36,041

Other	3,279		4,572
Total deferred tax assets	92,890		100,679
Deferred tax liabilities:
Intangible assets	(1,911)		(1,994)
Other	(2,412)		(2,850)
Total deferred tax liabilities	(4,323)		(4,844)
Deferred tax assets, net	88,567		95,835
Less: Valuation allowance	7,051		8,155
Net deferred tax assets	$	81,516	$	87,680

The following is a summary of changes in the Company’s tax valuation allowance for the years ended December 31, 2020, 2019 and 2018:


(in thousands)	Balance at Beginning of Year		Additions		Reductions		Balance at End of Year
Year Ended:
December 31, 2020	$	8,155	$	—	$	(1,104)	$	7,051
December 31, 2019	111,950		—		(103,795)		8,155
December 31, 2018	116,110		4,036		(8,196)		111,950

The Company has NOL and other tax credit carryforwards in several jurisdictions. As of December 31, 2020, the Company has $35.2 million of deferred tax assets relating to U.S. federal NOL carryforwards, along with deferred tax assets of $13.4 million and $24.4 million related to U.S. federal research and development credits and orphan drug credits, respectively. These tax attributes will begin to expire in 2031, 2024 and 2030, respectively. In addition, the Company has $8.4 million of deferred tax assets relating to U.S. state NOL carryforwards, which primarily relate to the District of Columbia. State NOLs for the District of Columbia will begin to expire in 2032 and other state NOLs will begin to expire in 2029.

Tax benefits are recognized from an uncertain tax position only if it is more likely than not that the position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized upon settlement.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:


	Year Ended December 31,
(in thousands)	2020		2019		2018
Unrecognized tax benefits at the beginning of the year	$	9,741	$	—	$	—
Increases (decreases) related to prior year tax positions	(121)		8,223		—
Increases related to current year tax positions	1,613		1,518		—
Unrecognized tax benefits at the end of the year	$	11,233	$	9,741	$	—

The amount of uncertain tax benefits that, if recognized, would impact the effective tax rate is $11.2 million. No material income tax interest or penalties have been recorded, and unrecognized tax benefits are not expected to change materially over the next 12 months. Income tax returns filed by the Company for all periods are open to examination by tax jurisdictions. As of December 31, 2020, the Company is not under examination by any federal or state tax jurisdiction.

Certain tax attributes of the Company, including NOLs and credits, would be subject to a limitation should an ownership change as defined under the Internal Revenue Code of 1986, as amended (IRC), Section 382, occur. The limitations resulting from a change in ownership could affect the Company’s ability to utilize its NOLs and credit carryforward (tax attributes). Ownership changes occurred in the years ending December 31, 2014 and December 31, 2008. The Company believes that the ownership changes in 2014 and 2008 will not impact its ability to utilize NOL and credit carryforwards; however, future ownership changes may cause the Company’s existing tax attributes to have additional limitations.