Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income taxes

A reconciliation of the expected income tax benefit computed using the federal statutory income tax rate of 21% to the Company’s effective income tax rate is as follows (in thousands): 

	Years Ended December 31,
	2021		2020
Federal tax benefit at statutory rate	$	(25,772)	$	(19,162)
State tax benefit, net of federal benefit	(4,422)		(4,375)
Research and development and orphan drug credits	(350)		(480)
Uncertain tax positions	(302)		(16)
Permanent adjustments to expenses	1,779		710
Stock-based compensation	901		1,014
Return to provision adjustment	(2,450)		(1,203)
Statutory tax rate differential	663		—
Changes in valuation allowance	29,642		23,543
Other	311		(141)
Total income tax benefit	$	—	$	(110)

The benefit for income taxes for 2020 is attributable to an Australian research and development tax incentive that was refunded to the Company based on the 2020 income tax filing.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The guidance on accounting for income taxes provides important factors in determining whether a deferred tax asset will be realized, including whether there has been sufficient taxable income in recent years and whether sufficient income can reasonably be expected in future years in order to utilize the deferred tax asset. For the years ended December 31, 2021 and 2020, the Company evaluated the need to maintain a valuation allowance for deferred tax assets based on our assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance.

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

	December 31,
	2021		2020
Deferred tax assets:
Net operating losses	$	100,790	$	74,894
Federal research and orphan drug credits	7,184		8,362
Stock-based compensation	3,177		1,894
Other temporary differences	27,094		7,785
Valuation allowance	(137,881)		(92,493)
Total assets	364		442
Deferred tax liabilities:
Fixed and intangible assets	(197)		(404)
Other deferred tax liabilities	(5,109)		(38)
Total liabilities	(5,306)		(442)
Net deferred tax liabilities	$	(4,942)	$	—

As of December 31, 2021, the Company had federal net operating loss carryforwards of $475.7 million and various state net operating loss carryforwards of $309.7 million. As of December 31, 2020, the Company had federal net operating loss carryforwards of $284.8

million and various state net operating loss carryforwards of $220.6 million. Net operating loss carryforwards for U.S. federal income tax purposes that were generated prior to January 1, 2018 have a twenty-year carryforward life, and the earliest layers will begin to expire in 2025. Under the Tax Cuts and Jobs Act of 2017, federal net operating losses incurred in 2018 and later years may be carried forward indefinitely, but the deductibility of such net operating losses is limited to 80% of the current year’s taxable income. U.S. state net operating loss carryforwards will start to expire in 2029 for the earliest net operating loss layers to the extent there is not sufficient state taxable income to utilize those net operating loss carryforwards.

At December 31, 2021, the Company had $5.4 million and $2.5 million of federal and state income tax credits, respectively, to reduce future tax liabilities. At December 31, 2020, the Company had $8.0 million and $1.7 million of federal and state income tax credits, respectively, to reduce future tax liabilities. The federal income tax credits consist primarily of orphan drug credits and research and development credits. The U.S. state income tax credits consist primarily of California and Illinois research and development credits. Both the U.S. federal orphan drug credits and research and development credits have a twenty-year carryforward life. The U.S. federal orphan drug credits and research and development credits will both begin to expire in 2025.

A reconciliation of the beginning and ending amounts of valuation allowances for the years ended December 31, 2021 and 2020 is as follows (in thousands):

Valuation allowance at December 31, 2019	$	(68,950)
Increase for 2020 activity	(23,543)
Valuation allowance at December 31, 2020	(92,493)
Increase for 2021 activity	(45,388)
Valuation allowance at December 31, 2021	$	(137,881)

The Company is required to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company accounts for the uncertainty in income taxes by utilizing a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken, or are expected to be taken, on an income tax return. The changes in the Company's uncertain income tax positions for the years ended December 31, 2021 and 2020, excluding interest and penalties, consisted of the following (in thousands):

	December 31,
	2021		2020
Beginning balance - uncertain tax positions	$	929	$	945
Increases related to tax positions taken during the current year	17		48
Decreases related to tax positions taken during the prior year	(319)		(64)
Ending balance - uncertain tax positions	$	627	$	929

For the year ended December 31, 2021, the increase in current year uncertain tax positions was attributable primarily to U.S. federal orphan drug credits and research and development credits and the decrease related to tax positions taken during the prior year was a result of return to provision adjustments. In the Company’s balance sheet, uncertain tax positions of $0.6 million were offset against deferred tax assets. Tax years prior to 2018 generally are not subject to examination by the Internal Revenue Service or state or local taxing authorities.

The Company policy is to include interest and penalties related to uncertain tax penalties, if any, within the provision for taxes in the statements of operations. During the years ended December 31, 2021 and 2020, the Company incurred no interest and penalties related to income taxes.