The Company’s loss before income taxes was $98.6 million and $39.2 million for the years ended December 31, 2020 and 2019, respectively and was generated entirely in the United States. The Company did not record current or deferred income tax expense or benefit during the years ended December 31, 2020 and 2019.

A reconciliation of income tax expense (benefit) to the amount computed by applying the statutory federal income tax rate to the loss from operations is summarized for the years ended December 31, 2020 and 2019, respectively, as follows (in thousands):


	Year Ended December 31,
	2020		2019
Income tax benefit at statutory rate	$	(20,699)	$	(8,242)
State income tax, net of federal benefit	(6,823)		(3,783)
Permanent items	8		16
Stock-based compensation	215		56
Orphan drug credit	(2,544)		(925)
Research and development credits	(863)		(763)
Uncertain tax positions	785		548
Change in state rate	74		(34)
Change in valuation allowance	28,090		13,179
Other	1,757		(52)
	$	—	$	—


	As of December 31,
	2020		2019
Deferred tax assets:
Net operating loss carryforwards	$	51,398	$	42,872
Research and development and orphan drug credits	8,662		6,212
Accrued expenses	936		519
Intangibles	43		60
Operating lease liabilities	562		545
Derivative liability	16,700		—
Other, net	628		322
Total deferred tax assets	78,929		50,530

Deferred tax liabilities:
Operating lease right-of-use assets	(540)		(527)
Property and equipment, net	(324)		(28)
Total deferred tax liabilities	(864)		(555)

Net deferred tax assets before valuation allowance	78,065		49,975
Valuation allowance	(78,065)		(49,975)
Net deferred tax assets	$	—	$	—

As of December 31, 2020 and 2019, management assessed the realizability of net deferred tax assets and evaluated the need for a valuation allowance against the net deferred tax assets. This evaluation utilizes the framework contained in ASC 740, Income Taxes, whereby management considers all available positive and negative evidence as of the balance sheet date to determine whether all or some portion of the Company’s net deferred tax assets will be realized. Under this guidance, a valuation allowance must be established for net deferred tax assets when it is more-likely-than-not (a probability level of more than 50%) that the asset will not be realized.

Management followed the guidance in ASC 740, which states that “a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome” and concluded that the Company’s net deferred tax assets were not realizable as of December 31, 2020 and 2019. Accordingly, a valuation allowance of $78.1 million and $50.0 million has been recorded to offset the net deferred tax assets. The change in valuation allowance for the years ended December 31, 2020 and 2019 was an increase of $28.1 million and an increase of $13.2 million, respectively.

At December 31, 2020, the Company had federal and state net operating loss (“NOL”) carryforwards of $185.1 million, and $167.2 million, respectively. The federal NOLs generated prior to 2018 may be used to offset up to 100% of future taxable income and will begin to expire in 2022, unless previously utilized or limited by other provisions within the tax law. The federal NOL generated post-2017 of $93.6 million may be available to offset up to 80% of future taxable income and may be carried forward indefinitely unless limited by other provisions within the tax law. The state NOLs will begin to expire in 2029, unless previously utilized. The Pennsylvania NOLs of $125.7 million may be used to offset 40% of future taxable income per year.

At December 31, 2020, the Company has federal and state research and development tax credit carryforwards totaling $4.5 million and $0.4 million, respectively. The federal and state research and development tax credit carryforwards will begin to expire in 2028 and 2029, respectively, unless previously utilized. The California research tax credit carryovers do not expire.

Through December 31, 2020, the Company has generated a combination of research and development credits and orphan drug credits. Certain of these credits were derived from tax credit studies to document the qualified activities and certain other credits were not derived from studies. For the credits that were calculated through a study, the IRS, on audit, may disagree

Under the Internal Revenue Code, the utilization of a corporation’s net operating loss and tax credit carryforwards may be limited following a greater than 50% change in ownership over a three-year period. Any unused annual limitation may be carried forward to future years for the balance of the net operating loss and tax credit carryforward period. Under these rules, prior ownership changes may have created a limitation in the Company’s ability to use certain tax carryforwards on a yearly basis. Additionally, certain state operating losses may also be similarly limited.

The Company applies the two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. Income tax positions must meet a more likely than not recognition threshold at the effective date to be recognized upon the adoption of ASC 740 and in subsequent periods. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions. Tax years 2017 and forward remain open for examination for federal tax purposes and tax years 2017 and forward remain open for examination for the Company’s more significant state tax jurisdictions. To the extent utilized in future years’ tax returns, net operating loss carryforwards at December 31, 2020 will remain subject to examination until the respective tax year is closed.


	Year Ended December 31
	2020		2019
Gross unrecognized tax benefits at the beginning of the year	$	2,560	$	1,809
Increases related to current year positions	871		645
Increases related to prior year positions	—		106
Decreases related to prior year positions	(86)		—
Expiration of unrecognized tax benefits	—		—
Gross unrecognized tax benefits at the end of the year	$	3,345	$	2,560

As of December 31, 2020, and 2019, the Company had unrecognized tax benefits of $3.3 million and $2.6 million, respectively. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. During the years ended December 31, 2020 and 2019, the Company did not accrue any interest and penalties on uncertain tax positions. The Company does not expect its unrecognized tax benefits to change significantly within the next 12 months.

On March 27, 2020, the Unites States enacted the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact the Company's financial statements include removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. The Company doesn't believe that the CARES Act will have a material impact on its financial position, results of operations, or cash flows.