Income Taxes

12 Months Ended

Dec. 31, 2019

The following is a summary of the domestic and foreign components of income (loss) before income taxes for the years ended December 31, 2019, 2018 and 2017:



	Year Ended December 31,
(in thousands)	2019		2018		2017
Domestic	$	28,794	$	25,123	$	(15,693	)
Foreign	234		223		262
Total income (loss) before income taxes	$	29,028	$	25,346	$	(15,431	)

The following is a summary of the provision (benefit) for income taxes for the years ended December 31, 2019, 2018 and 2017:



	Year Ended December 31,
(in thousands)	2019			2018			2017
Current:
Federal	$	—		$	—		$	—
State	1,161			53			65
Foreign	81			99			(66		)
Deferred:
Federal	(85,624		)	—			—
State	(2,127		)	—			—
Foreign	(16		)	(14		)	137
Provision (benefit) for income taxes	$	(86,525	)	$	138		$	136

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 has been retained against certain U.S. federal tax attributes with short carryforward periods and District of Columbia state deferred tax assets as of December 31, 2019. A full valuation allowance was recorded against all net U.S. deferred tax assets as of December 31, 2018.

The income tax benefit for 2019 was primarily due to the reduction of the Company's valuation allowance against substantially all of its deferred tax assets in the U.S. Tax expense associated with U.S. income before income taxes for the years ended December 31, 2019 and 2018 was offset by a corresponding tax benefit for the reduction of the valuation allowance recorded against tax attributes that were utilized in those periods. Tax benefit associated with U.S. loss before income taxes for the year ended December 31, 2017 was offset by a corresponding tax expense for the increase of the valuation allowance recorded against tax attributes that were generated in that period. The following is reconciliation between the federal statutory tax rate and the Company’s effective tax rate for the years ended December 31, 2019, 2018 and 2017:



	Year Ended December 31,
	2019		2018		2017
Federal tax at statutory rate	21.0	%	21.0	%	35.0	%
State taxes	1.8	%	1.7	%	1.7	%
U.S. Tax Cuts and Job Act (1)	—	%	—	%	(262.6	)%
Change in valuation allowance - U.S. Tax Cuts and Jobs Act	—	%	—	%	262.6	%
Other change in valuation allowance (2)	(357.6	)%	(16.4	)%	(47.8	)%
Research and development credit (3)	(10.9	)%	(9.1	)%	9.0	%
Orphan drug credit (3)	17.1	%	(2.7	)%	6.3	%
Section 162(m) limitation	2.7	%	3.1	%	8.1	%
Other tax rate changes	(0.5	)%	(0.7	)%	(2.6	)%
Other changes in state deferred taxes (4)	—	%	5.9	%	5.1	%
Uncertain tax positions (5)	26.3	%	—	%	—	%
Stock-based compensation	(1.0	)%	(3.9	)%	(13.0	)%
Other items	3.0	%	1.6	%	(2.7	)%
Effective tax rate	(298.1	)%	0.5	%	(0.9	)%


(1)	Includes the effect of the Tax Cuts and Jobs Act, which primarily relates to the remeasurement of existing deferred taxes as a result of the change to the U.S. federal tax rate.

(2)

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.


(3)	2019 activity includes adjustments to prior year credit carryforwards. 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.


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


(5)	2019 activity includes adjustments to 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.

The following is a summary of the components of the Company’s deferred tax assets (liabilities) and the related tax valuation allowance as of December 31, 2019 and 2018:



(in thousands)	December 31, 2019			December 31, 2018
Deferred tax assets:
Net operating loss carryforwards	$	52,034		$	55,742
Stock-based compensation	5,298			5,202
Accrued and deferred expenses	2,101			2,096
Allowance for returns and uncollectable receivables	1,468			1,247
Research and development and orphan drug credit carryforwards	36,041			48,066
Other	1,301			1,405
Total deferred tax assets	98,243			113,758
Deferred tax liabilities:
Intangible assets	(1,994		)	(1,247		)
Other	(414		)	(576		)
Total deferred tax liabilities	(2,408		)	(1,823		)
Deferred tax assets, net	95,835			111,935
Less: Valuation allowance	8,155			111,950
Net deferred tax assets (liabilities)	$	87,680		$	(15	)

The Company’s net deferred tax liability of less than $0.1 million as of December 31, 2018 is included as a component of other non-current liabilities.

The following is a summary of changes in the Company’s tax valuation allowance for the years ended December 31, 2019, 2018 and 2017:



(in thousands)	Balance at Beginning of Year		Additions		Reductions			Balance at End of Year
Year Ended:
December 31, 2019	$	111,950	$	—	$	(103,795	)	$	8,155
December 31, 2018	116,110		4,036		(8,196		)	111,950
December 31, 2017	146,012		12,403		(42,305		)	116,110

The Company has NOL and other tax credit carryforwards in several jurisdictions. As of December 31, 2019, the Company has $43.3 million of deferred tax assets relating to U.S. federal NOL carryforwards, along with deferred tax assets of $12.0 million and $24.0 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 $8.7 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 2031 and other state NOLs will begin to expire in 2021.

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)	2019		2018		2017
Unrecognized tax benefits at the beginning of the year	$	—	$	—	$	—
Increases related to prior year tax positions	8,223		—		—
Increases related to current year tax positions	1,518		—		—
Unrecognized tax benefits at the end of the year	$	9,741	$	—	$	—

The amount of uncertain tax benefits that, if recognized, would impact the effective tax rate is $9.7 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, 2019, 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.

The Tax Cuts and Jobs Act (TCJA) was enacted in December 2017. The TCJA reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred and creates new taxes on certain foreign sourced earnings. During the fourth quarter of 2018, the Company completed its accounting for the tax effects of the TCJA. Effects of the TCJA resulted in no tax expense in 2018 or 2017 as they were fully offset by a change in the Company's tax valuation allowance.