Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of income tax expense (benefit) were as follows (in thousands):

	Year Ended December 31,
	2021		2020
Current
Federal	$	—	$	—
State	—		—
Foreign	1,600		—
Total current	1,600		—
Deferred
Federal	—		—
State	—		—
Foreign	—		—
Total deferred	—		—
Total income tax expense (benefit)	$	1,600	$	—

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 as follows (in thousands):

	Year Ended December 31,
	2021		2020
Income tax benefit at statutory rate	$	(27,189)	$	(20,699)
State income tax, net of federal benefit	(7,065)		(6,823)
Permanent items	348		8
Stock-based compensation	174		215
Orphan drug credit	(1,827)		(2,544)
Research and development credits	(2,489)		(863)
Uncertain tax positions	1,125		785
Change in state rate	910		74
Change in valuation allowance	36,284		28,090
Other	1,329		1,757
	$	1,600	$	—

Significant components of the Company’s deferred tax assets are shown below (in thousands):

	As of December 31,
	2021		2020
Deferred tax assets:
Net operating loss carryforwards	$	70,903	$	51,398
Research and development and orphan drug credits	12,061		8,662
Accrued expenses	921		936
Intangibles	31		43
Operating lease liabilities	411		562
Derivative liability	30,491		16,700
Other, net	615		628
Total deferred tax assets	115,433		78,929
Deferred tax liabilities:
Operating lease right-of-use assets	(390)		(540)
Property and equipment, net	(694)		(324)
Total deferred tax liabilities	(1,084)		(864)
Net deferred tax assets before valuation allowance	114,349		78,065
Valuation allowance	(114,349)		(78,065)
Net deferred tax assets	$	—	$	—

As of December 31, 2021 and 2020, 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, 2021 and 2020. Accordingly, a valuation allowance of $114.3 million and $78.1 million has been recorded to offset the net deferred tax assets. The change in valuation allowance for the years ended December 31, 2021 and 2020 was an increase of $36.3 million and an increase of $28.1 million, respectively.

At December 31, 2021, the Company had federal and state net operating loss (“NOL”) carryforwards of $259.1 million, and $227.6 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 $167.5 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 $125.8 million may be used to offset 40% of future taxable income per year.

At December 31, 2021, the Company has federal and state research and development tax credit carryforwards totaling $7.0 million and $0.8 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.

At December 31, 2021, the Company also has federal orphan drug credit carryforwards of $8.5 million, which will begin to expire in 2036, unless previously utilized.

Through December 31, 2021, 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 with the amount of credits calculated. When studies are ultimately performed for the other credits, they may result in an adjustment to those specific credits. 

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 has not analyzed the historical or potential impact of its equity financings on beneficial ownership and therefore no determination has been made as to whether the net operating loss carryforward is subject to any Internal Revenue Code Section 382 limitation.

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 2018 and forward remain open for examination for federal tax purposes and tax years 2018 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, 2021 will remain subject to examination until the respective tax year is closed.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits (in thousands):

	Year Ended December 31
	2021		2020
Gross unrecognized tax benefits at the beginning of the year	$	3,345	$	2,560
Increases related to current year positions	1,236		871
Increases related to prior year positions	55		—
Decreases related to prior year positions	—		(86)
Expiration of unrecognized tax benefits	—		—
Gross unrecognized tax benefits at the end of the year	$	4,636	$	3,345

Due to the Company's valuation allowance, none of the unrecognized tax benefits, if recognized, would affect the Company's effective tax rate.

As of December 31, 2021, and 2020, the Company had unrecognized tax benefits of $4.6 million and $3.3 million, respectively. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. During the years ended December 31, 2021 and 2020, 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.

On December 27, 2020, the United States enacted the Consolidated Appropriations Act, which extended many of the benefits of the CARES Act that were scheduled to expire. The Consolidated Appropriations Act did not have a material impact on the Company's consolidated financial statements and related disclosures.