Income Taxes

12 Months Ended

Dec. 31, 2020

The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States to provide emergency assistance to individuals and businesses affected by the COVID-19 pandemic. The CARES Act includes temporary changes to both income and non-income based tax laws. For the year ended December 31, 2020 the impact of the CARES Act was immaterial to the Company’s tax provision. Future regulatory guidance under the CARES Act or additional legislation enacted by Congress in connection with the COVID-19 pandemic could impact our tax provision in future periods.

Lexicon recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized differently in the financial statements and tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of liabilities and assets using enacted tax rates and laws in effect in the years in which the differences are expected to reverse. Deferred tax assets are evaluated for realization based on a more-likely-than-not criteria in determining if a valuation allowance should be provided.

The components of Lexicon’s deferred tax assets (liabilities) at December 31, 2020 and 2019 are as follows:


	As of December 31,
	2020		2019
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	201,610	$	193,270
Research and development tax credits	29,304		46,306
Orphan drug credits	24,524		24,524
Capitalized research and development	47,075		58,596
Stock-based compensation	5,651		5,340


Other	844		5,533
Total deferred tax assets	309,008		333,569
Deferred tax liabilities:
Deferred tax liability related to acquisition of Symphony Icon	—		(4,140)
Other	—		(3)
Total deferred tax liabilities	—		(4,143)
Less: valuation allowance	(309,008)		(329,426)
Net deferred tax liabilities	$	—	$	—

A reconciliation of the statutory tax rate to the effective tax rate for the years ended December 31, 2020, 2019 and 2018 consists of the following:


	Year Ended December 31,
	2020		2019		2018
	(in thousands)
Expected income tax expense (benefit) at 21%	$	(12,300)	$	26,065	$	(25,315)
State income taxes, net of federal benefit	(269)		445		(809)
Equity compensation	1,777		1,688		1,059
Research and development credit	—		—		(978)




Write off of credit carryover due to 382 study	31,053		—		—
Change in valuation allowance	(20,418)		(35,276)		25,928
Other (1)	157		1,064		115
Income tax benefit	$	—	$	(6,014)	$	—

(1) Other is primarily comprised of expiring Research and Development credits for the years ended December 31, 2019 and nondeductible expenses for the years ended December 31, 2020 and 2018.

Section 382 of the Internal Revenue Code of 1986, contains rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating loss and tax credit carryovers and certain built-in losses recognized in years after the “ownership change.” An “ownership change” is generally defined as any change in ownership of more than 50% of a corporation’s stock over a rolling three-year period by stockholders that own (directly or indirectly) 5% or more of the stock of a corporation, or arising from a new issuance of stock by a corporation. If an ownership change occurs, Section 382 generally imposes an annual limitation on the use of pre-ownership change net operating loss carryovers to offset taxable income earned after the ownership change. The Company completed a Section 382 study and determined that historical ownership changes occurred. The Section 382 annual limitation related to historical ownership changes impacts our ability to utilize our tax attributes. In 2020, the federal deferred tax assets and valuation allowance decreased due to the write-off of attributes that will expire still subject to limitation.

At December 31, 2020, Lexicon had both federal and state NOL carryforwards of approximately $918.1 million and $86.9 million, respectively. In 2020, federal NOLs increased by $38.4 million primarily related to a current year NOL partially offset by $66.9 million decrease in historical NOLs which will expire still subject to Section 382 limitation. The state NOL carryforwards increased due to a legislative change from pre-apportionment to post-apportionment reporting in New Jersey. The federal and state NOL carryforwards will begin to expire in 2024. In 2020, the Company’s R&D tax credit carryforwards decreased by $17.0 million due to Section 382 limitations to approximately $29.3 million which will begin to expire in 2027. Based on the federal tax law limits and the Company’s cumulative loss position, the Company concluded it was appropriate to establish a full valuation allowance for its net deferred tax assets until an appropriate level of profitability is sustained. During the year ended December 31, 2020, the valuation allowance decreased $20.4 million, primarily due to decreases in deferred tax assets associated with attributes subject to IRC 382 limitation and capitalized research and development expenses partially offset by NOLs generated in the current year and the reversal of the deferred tax liability related to the acquisition of Symphony Icon.

Lexicon recorded an income tax benefit of $6.0 million in the year ended December 31, 2019 despite reporting pretax income for the year. The result reflects the impact of the impairment of intangible assets associated with Symphony Icon and the benefit from the utilization of federal NOLs for which a tax benefit had not previously been recognized, partially offset by nondeductible expenses. There were no income tax benefits in the years ended December 31, 2020 and 2018, respectively. As of December 31, 2020 and 2019, the Company did not have any unrecognized tax benefits.

The Company is primarily subject to U.S. federal and New Jersey and Texas state income taxes. The tax years 1999 to current remain open to examination by U.S. federal authorities and 2012 to current remain open to examination by state authorities. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2020 and 2019, the Company had no accruals for interest or penalties related to income tax matters.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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