Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

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, 2021 and 2020 are as follows:

 

	As of December 31,
	2021		2020
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	229,427	$	201,610
Research and development tax credits	29,290		29,304
Orphan drug credits	24,524		24,524
Capitalized research and development	36,770		47,075
Stock-based compensation	5,163		5,651
Interest	148		—
Other	1,308		844
Total deferred tax assets	326,630		309,008
Deferred tax liabilities:
Other	(412)		—
Total deferred tax liabilities	(412)		—
Less: valuation allowance	(326,218)		(309,008)
Net deferred tax liabilities	$	—	$	—

A reconciliation of the statutory tax rate to the effective tax rate for the years ended December 31, 2021, 2020 and 2019 consists of the following:

	Year Ended December 31,
	2021		2020		2019
	(in thousands)
Expected income tax expense (benefit) at 21%	$	(18,429)	$	(12,300)	$	26,065
State income taxes, net of federal benefit	—		(269)		445
Equity compensation	851		1,777		1,688
Write off of credit carryover due to 382 study	—		31,053		—
Change in valuation allowance	17,210		(20,418)		(35,276)
Other (1)	368		157		1,064
Income tax benefit	$	—	$	—	$	(6,014)

(1) Other is primarily comprised of expiring Research and Development credits for the year ended December 31, 2019 and nondeductible expenses for the years ended December 31, 2021 and 2020.

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, 2021, Lexicon had both federal and state NOL carryforwards of approximately $1.1 billion and $86.9 million, respectively.  In 2021, federal NOLs increased by $132.7 million related to a current year NOL. The Company had $342.0 million of U.S. federal NOL carryforwards as of December 31, 2021, which can be carried forward indefinitely. The remaining federal and state NOL carryforwards will begin to expire in 2022. 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, 2021, the valuation allowance increased $17.2 million, primarily due to NOLs generated partially offset by decreases in deferred tax assets associated with capitalized research and development expenses.

As of December 31, 2021 and 2020, the Company did not have any unrecognized tax benefits. Any interest and penalties related to uncertain tax positions will be reflected as a component of income tax expense.

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, 2021 and 2020, the Company had no accruals for interest or penalties related to income tax matters.