Assertio Holdings, Inc. - 10-K filing on 2022-03-10

INCOME TAXES

12 Months Ended

Dec. 31, 2021

The following table reflects Net loss before income taxes by source for the years ended December 31, 2021 and 2020 (in thousands):


	Year ended December 31,
	2021		2020

U.S.	$	(574)	$	(45,327)
Outside the U.S.	21		(186)
Net loss before income taxes	$	(553)	$	(45,513)

The following table reflects benefit provision for income taxes for the years ended December 31, 2021 and 2020 (in thousands):


	Year ended December 31,
	2021		2020
Current:
Federal	$	124	$	(9,100)
State	387		155
Total current taxes	$	511	$	(8,945)
Deferred:
Federal	$	—	$	(7,037)
State	217		(1,387)
Total deferred taxes	217		(8,424)
Total provision (benefit) for income taxes	$	728	$	(17,369)

The following table reflects a reconciliation of income taxes at the statutory federal income tax rate to the actual tax rate included in the Consolidated Statement of Comprehensive Income for the years ended December 31, 2021 and 2020 (in thousands):


	Year ended December 31,
	2021		2020
Tax at federal statutory rate	$	(116)	$	(9,558)
State tax, net of federal benefit	242		276
Goodwill impairment	—		3,661
Disallowed officers' compensation	207		818
Non-deductible transaction cost	—		451
Change in valuation allowance	(2,131)		(13,029)
Uncertain tax provisions	233		(190)
Tax return benefit	(63)		—
Return to provision	2,330		—
Other	26		202
Total tax provision (benefit)	$	728	$	(17,369)

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted. The CARES ACT was a massive tax-and-spending package intended to provide additional economic relief to address the impact of the

COVID-19 pandemic. The CARES Act, among other business tax provisions, included legislative changes and updates to net operating losses (NOLs), interest disallowance, and depreciation for qualified improvement property. As the new guidance and regulations continued to be issued during 2021, the Company considered the income tax accounting implications from CARES Act to the Company’s income tax provision calculation for the year ended December 31, 2021. Prior to the enactment of the CARES Act, federal NOLs generated after December 31, 2017 could not be carried back to prior tax years. Upon the enactment of the CARES Act, federal NOLs generated in tax years 2018, 2019, and 2020 can now be carried back to the previous five tax years without taxable income limitation. During 2021, the Company filed a carryback claim for the 2020 federal taxable loss to the 2018 and 2019 tax years to offset taxable income (and federal taxes paid) for those two tax years. The estimated cash tax refund is approximately, $8.3 million which is expected to be received in 2022.

During the year ended December 31, 2021, the Company recorded an income tax expense of $0.7 million, principally due to the state tax expense, disallowed officer’s compensation, and interest accrued for uncertain tax position, offset by the changes in valuation allowance.

During 2020, the Company recorded an income tax benefit of $17.4 million, principally due to the carryback of the Company’s 2020 federal NOL to its 2018 and 2019 tax years under the NOL carryback provisions enacted as part of the CARES Act mentioned above and the current year reversal of valuation allowance related to the utilization of the Company’s deferred tax assets (“DTA”) to offset the deferred tax liabilities (“DTL”) of Zyla recorded through acquisition accounting.

Utilization of the Company’s net operating loss and credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

Deferred income taxes reflect the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table reflects significant components of the Company’s deferred tax assets are as of December 31, 2021 and 2020 (in thousands):


	December 31,
	2021		2020
Deferred tax assets:
Net operating losses	$	78,085	$	81,471
Tax credit carryforwards	2,813		3,360
Stock-based compensation	2,770		2,999
Operating lease liabilities	545		1,248
Fixed assets	—		1,315
Reserves and other accruals not currently deductible	19,800		20,652
Disallowed interest carryforward	15,147		15,496
Total deferred tax assets	119,160		126,541
Valuation allowance for deferred tax assets	(101,775)		(103,906)
	$	17,385	$	22,635
Deferred tax liabilities:
Intangible assets	$	(16,812)	$	(21,739)
Convertible debt	(228)		(459)
Fixed Assets	(349)		—
Operating lease right-of-use assets	(168)		(437)
Net deferred tax liability	$	(172)	$	—

During the year ended December 31, 2021, the Company recorded a valuation allowance of $101.8 million because realization of the future benefits is uncertain. The Company reviewed both positive evidence such as, but not limited to, the projected availability of future taxable income and negative evidence such as the history of cumulative losses in recent years. The Company will continue to assess the realizability of its deferred tax assets on a quarterly basis and assess whether an additional reserve or a release of the valuation allowance is required in future periods.

The valuation allowance decreased $2.1 million to $101.8 million during the year ended December 31, 2021 and increased $13.1 million to $103.9 million during the year ended December 31,2020.

As of December 31, 2021, the Company had federal NOLs of $286.9 million with no expiration and $40.1 million expiring in varying amounts from 2032 through 2036. NOL carryforwards for state income tax purposes are $171.7 million, which begin to expire in 2022. Utilization of the Company’s NOL and credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

The Company does not have any significant federal or state tax examinations in process as of December 31, 2021. The federal and state statute of limitations remains open primarily for the 2017 through 2020 tax years. The California statute of limitations is open for the 2007 through 2020 tax years.

The following table reflects activity related to the Company’s unrecognized tax benefits for the years ended December 31, 2021 and 2020 (in thousands):


Unrecognized tax benefits—December 31, 2019	$	4,033
Increases related to current year tax positions	194
Changes in prior year tax positions	(2)
Decreases related to lapse of statutes	(124)
Unrecognized tax benefits—December 31, 2020	$	4,101
Increases related to current year tax positions	—
Changes in prior year tax positions	—
Decreases related to lapse of statutes	—
Unrecognized tax benefits—December 31, 2021	$	4,101

The total amount of unrecognized tax benefit that would affect the effective tax rate is $4.1 million as of December 31, 2021 and December 31, 2020.

The Company does not expect a significant change to its unrecognized tax benefits over the next twelve months. The unrecognized tax benefits may increase or change during the next year for items that arise in the ordinary course of business.