Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 10: INCOME TAXES

The Company recorded no federal income tax expense and due to the operating losses incurred for the years ended December 31, 2021 and December 31, 2020. The Company recorded no state income tax expense and less than $0.1 million state income expense for the years ended December 31, 2021 and December 31, 2020, respectively.

Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows (in thousands):

	Years Ended December 31,
	2021			2020
Noncurrent deferred tax assets:
Net operating loss carryforwards	$	41,162		$	39,264
Contribution carryforwards		48			39
Deferred rent		—			—
Lease liability		1,526			2,336
Deferred revenue		20,294			18,684
Other assets		11,647			5,015
Tax credits		20,942			15,959
Less: valuation allowance		(94,071	)		(79,273	)
Total deferred tax assets, noncurrent		1,548			2,024
Noncurrent deferred tax liability:
Property and equipment		—			601
Investments and other		587			—
Right of use asset		961			1,423
Total deferred tax liabilities, noncurrent		1,548			2,024
Net deferred tax assets	$	—		$	—

As of December 31, 2021 and December 31, 2020, the Company has provided a valuation allowance for the full amount of the net deferred tax assets as the realization of the net deferred tax assets is not determined to be more likely than not. The net increase in the valuation allowance for the year ended December 31, 2021 of $14.8 million is comprised of an increase in the valuation allowance recorded against the deferred tax assets, primarily related to tax credits and NOL carryforwards for the year.

The reasons for the difference between actual income tax benefit for the years ended December 31, 2021 and December 31, 2020 and the amount computed by applying the statutory federal income tax rate to losses before income tax benefit are as follows (in thousands):

	Year Ended December 31, 2021						Year Ended December 31, 2020
	Amount			% of Pre-Tax Earnings			Amount			% of Pre-Tax Earnings
Income tax expense at statutory rate	$	(6,677	)		21.8	%	$	(22,887	)		21.0	%
State income taxes, net of federal tax benefit		(634	)		2.1	%		(1,309	)		1.2	%
Non-deductible expenses		121			(0.4	%)		(963	)		0.9	%
Stock compensation - nondeductible		(2,094	)		6.8	%		—			0.0	%
R&D and orphan drug credits		(5,239	)		17.1	%		(6,869	)		6.3	%
Other		567			(1.9	%)		7			0.1	%
Change in state tax rate		(843	)		2.8	%		512			(0.6	%)
Change in valuation allowance		14,799			(48.3	%)		31,532			(28.9	%)
Income tax (benefit) expense	$	—			0.0	%	$	23			0.0	%

As of December 31, 2021, the Company had federal, state, and foreign NOL carryforwards of approximately $181.0 million, $122.2 million, and $0.4 million respectively. As of December 31, 2020, the Company had federal, state, and foreign NOL carryforwards of approximately $172.7 million, $116.5 million, and $0.6 million, respectively.

Federal NOL carryforwards of $19.7 million begin to expire in 2030 while the remaining federal NOL carryforward of $161.2 million carries forward indefinitely. The state NOL carryforwards begin to expire in 2025. The foreign NOLs carryforward indefinitely. At December 31, 2021, the Company had federal and state R&D tax credits of $11.4 million and an amount less than $0.1 million, which

begin to expire in 2027 and 2030, respectively. At December 31, 2020, the Company had federal and state tax R&D credits of $9.9 million and an amount less than $0.1 million which begin to expire in 2027 and 2030, respectively. As of December 31, 2021 and December 31, 2020, the Company had federal Orphan Drug credits of $9.5 million and $6.0 million, respectively, which begin to expire in 2038. At December 31, 2021 and December 31, 2020, the Company had federal contribution carryforwards of $0.2 million which begin to expire in 2022.

The Company incorporated a subsidiary in Australia in 2018. However, in 2021, as part of the ELO transaction, the subsidiary was transferred to New Elo. There are no undistributed earnings as of December 31, 2021 and December 31, 2020.

The Company incorporated a subsidiary in the UK in 2019. However, the subsidiary has had minimal activity since inception. As such, there are no undistributed earnings as of December 31, 2021 and December 31, 2020.

The Company’s ability to utilize its NOL and R&D credit carryforwards may be substantially limited due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change,” as defined by Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percent of the outstanding stock of a company by certain stockholders or public groups. The Company has not completed a study to assess whether one or more ownership changes have occurred since the Company became a loss corporation under the definition of Section 382. If the Company has experienced an ownership change, utilization of the NOL or R&D credit carryforwards would be subject to an annual limitation, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any such limitation may result in the expiration of a portion of the NOL or R&D credit carryforwards before utilization. Until a study is completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Any carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations of the Company.

The Company reflects in the accompanying consolidated financial statements the benefit of positions taken in a previously filed tax return or expected to be taken in a future tax return only if it is considered ‘more-likely-than-not’ that the position taken will be sustained by the appropriate taxing authority. As of December 31, 2021 and December 31, 2020, the Company had no unrecognized income tax benefits. The Company’s policy for recording interest and penalties relating to uncertain income tax positions is to record them as a component of income tax expense in the accompanying consolidated statements of operations. As of December 31, 2021 and December 31, 2020, the Company had no such accruals.

In November 2021, North Carolina enacted the 2021 Appropriations Act, which included a gradual corporate income tax rate decrease from the current 2.5% to 0% by 2030. Due to the uncertainty of projecting income through 2030, the Company calculated, before consideration of the valuation allowance, its North Carolina net operating losses using the current 2.5% rate which is in effect through 2024. The Company will continue to monitor its future North Carolina taxable income and its ability to utilize its deferred tax asset for its net operating loss carryover. If the Company does not become profitable in North Carolina prior to 2025, or it becomes more certain that the Company will not be able to utilize its North Carolina net operating losses before the tax rate drops to 0%, the Company will then remeasure its deferred tax asset at that time.

The TCJA of 2017 subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognized deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected to account for GILTI in the year the tax is incurred. The Company does not have a GILTI inclusion in years ends December 31, 2021 or December 31, 2020 and therefore, no GILTI tax has been recorded for the years then ended.