INCOME TAXES

12 Months Ended

Dec. 31, 2021

INCOME TAXES

INCOME TAXES

11. INCOME TAXES

On August 6, 2018, ANI Pharmaceuticals Canada Inc. (“ANI Canada”) acquired all the issued and outstanding equity interests of WellSpring in a non-taxable transaction. Following the consummation of the transaction, WellSpring was merged into ANI Canada. For U.S. Federal and state income tax purposes, ANI Canada is not part of ANI’s consolidated group; rather, ANI Canada is subject to income taxes only in Canada and solely based on its stand-alone operations. The foreign current and foreign deferred provisions (benefits) below represent our tax provision (benefit) from the Canadian, Indian, and Israeli taxing jurisdictions.

We are required to establish a valuation allowance for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the projected future taxable income and tax planning strategies in making this assessment.

As part of purchase accounting in 2018, we established net deferred tax assets relating to differences in the book bases (determined based on fair value purchase accounting) and tax bases (determined based on the carryover nature of the nontaxable transaction) of ANI Canada’s assets and liabilities of approximately $1.9 million, offset by a full valuation allowance due to our determination that it was more likely than not that all of the deferred tax assets would

not be realized. During 2019, we adopted an intercompany transfer pricing policy that uses the “comparable profits method” for pricing intercompany services between ANI Pharmaceuticals, Inc. and ANI Canada. For U.S. and Canadian tax purposes, the policy was adopted in conjunction with the acquisition date of August 6, 2018. As a result of the newly adopted transfer pricing policy, our assessment of the amount of ANI Canada’s deferred tax assets that are more likely than not to be realized changed and, as a result, during 2019, we released the remaining net valuation allowance related to ANI Canada’s deferred tax assets.

As of December 31, 2021 and 2020, our consolidated valuation allowance was $0.4 million, related solely to deferred tax assets for net operating loss carryforwards in certain U.S. state jurisdictions.

Our total provision for income taxes consists of the following for the years ended December 31, 2021, 2020, and 2019:

(in thousands)	2021		2020		2019
Current income tax provision:
Federal	$	1,296	$	9,232	$	4,985
State		1,320		559		1,212
Foreign		691		—		—
Total		3,307		9,791		6,197
Deferred income tax benefit
Federal		(12,163)		(14,125)		(6,274)
State		(5,122)		744		(2,027)
Foreign		336		345		1,000
Total		(16,949)		(13,036)		(7,301)
Change in valuation allowance		187		(169)		(1,833)
Total benefit for income taxes	$	(13,455)	$	(3,414)	$	(2,937)

The difference between our expected income tax provision from applying U.S. Federal statutory tax rates to the pre-tax income and actual income tax provision relates primarily to the effect of the following:

	As of December 31,
	2021		2020		2019
US Federal statutory rate	21.0	%	21.0	%	21.0	%
State taxes, net of Federal benefit	3.3	%	1.9	%	3.2	%
Foreign taxes	(1.0)	%	(0.1)	%	0.4	%
Change in valuation allowance	(0.3)	%	0.7	%	(58.1)	%
Stock-based compensation	(1.7)	%	(2.5)	%	(6.7)	%
Non-deductible costs	(0.8)	%	(3.5)	%	9.1	%
Change in state apportionment factors, state and foreign rates	5.5	%	(7.3)	%	(28.1)	%
Research and experimentation and charitable credits	0.9	%	0.9	%	(33.5)	%
Transfer pricing and other	(2.9)	%	2.0	%	(0.3)	%
Effective income tax rate	24.0	%	13.1	%	(93.0)	%

Deferred income taxes reflect the net tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes. Our deferred income tax assets and liabilities consisted of the following:

	As of December 31,
(in thousands)	2021		2020
Deferred tax assets:
Accruals and advances	$	10,149	$	7,174
Stock-based compensation		5,108		4,277
Accruals for chargebacks and returns		18,371		13,831
Inventory		5,983		6,101
Intangible asset		23,470		21,911
Net operating loss carryforwards		6,038		4,090
Other		8,758		2,171
Total deferred tax assets	$	77,877	$	59,555
Deferred tax liabilities:
Depreciation	$	(6,601)	$	(5,913)
Intangible assets		(11)		(11)
Other		(2,879)		(1,664)
Total deferred tax liabilities	$	(9,491)	$	(7,588)
Valuation allowance		(450)		(263)
Deferred tax assets, net of deferred tax liabilities and valuation allowance	$	67,936	$	51,704

As of December 31, 2021, we had U.S. federal net operating loss carryforwards of approximately $17.7 million, all of which arose as a result of the 2013 merger with BioSante Pharmaceuticals, Inc. and from our taxable loss in 2021. Our net operating loss carryforwards related to our 2013 merger, if not used, expire in annual increments through 2033 and are limited on an annual basis as prescribed by Section 382 of the U.S. Internal Revenue Code; our current annual limitation is approximately $0.8 million per year. Our net operating losses that arose in 2021 do not expire and are not limited by Section 382. Additionally, as of December 31, 2021 we have total net operating losses in Canada of $4.7 million that begin expiring in 2038.

We are subject to income taxes in numerous jurisdictions in the U.S., Canada, and India. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. We establish liabilities for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These liabilities are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these liabilities in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of changes to the liability that is considered appropriate. We identified no material uncertain income tax positions as of December 31, 2021 and 2020.

We are subject to income tax audits in all jurisdictions for which we file tax returns. Tax audits by their nature are often complex and can require several years to complete. All of our income tax returns remain subject to examination by tax authorities due to the availability of net operating loss carryforwards.