Note 16 - Income Taxes

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 16.  Income Taxes

The provision for income taxes consists of the following (in thousands):

	Year Ended December 31,
	2021		2020		2019
Current:
Federal	$	—	$	—	$	—
State		1		3		2
Foreign		106		235		488
Total Current		107		238		490
Deferred:
Federal		—		—		—
State		—		—		—
Foreign		—		—		—
Total Deferred		—		—		—
Provision for income taxes	$	107	$	238	$	490

The components of the deferred tax assets are as follows (in thousands):

	December 31, 2021			December 31, 2020			December 31, 2019
Deferred tax assets:
Net operating loss carryforwards	$	30,256		$	14,161		$	6,924
Research and development tax credits		4,923			2,497			1,591
Capitalized research and development		4,016			4,534			4,773
Sale of future royalties		5,826			7,178			7,486
Lease liability		3,184			1,695			492
Accruals, reserves and other		3,043			1,327			1,253
Total deferred tax assets		51,248			31,392			22,519
Valuation allowance		(42,589	)		(21,952	)		(13,365	)
Deferred tax assets net of valuation allowance		8,659			9,440			9,154
Deferred tax liabilities:
Intangible assets		(5,410	)		(7,832	)		(8,730	)
Right-of-use assets		(3,223	)		(1,608	)		(424	)
Depreciation on property and equipment		(26	)		—			—
Total deferred tax liabilities		(8,659	)		(9,440	)		(9,154	)
Net deferred tax assets	$	—		$	—		$	—

A reconciliation of the provision for income taxes with the expected provision for income taxes computed by applying the federal statutory income tax rate of 21% to the net loss before provision for income taxes:

	Year Ended December 31,
	2021			2020			2019
U.S. federal taxes at statutory rate		21.0	%		21.0	%		21.0	%
State taxes (net of federal benefit)		4.0			2.9			0.4
Foreign rate differential		0.3			(0.7	)		(2.6	)
Permanently non-deductible items		0.2			2.2			(3.7	)
Tax credits		3.4			2.8			1.7
Change in valuation allowance		(29.3	)		(26.8	)		194.2
Tax attributes write-off due to change in control		—			0.5			(208.3	)
Prior year true-up		0.6			(2.5	)		(0.9	)
Other		(0.3	)		(0.1	)		(4.5	)
Provision for income taxes		(0.1	)%		(0.7	)%		(2.7	)%

The Company’s actual tax expense differed from the statutory federal income tax expense using a tax rate of 21% for the year ended December 31, 2019, primarily due to the write-off of tax attributes due to a change in control. In addition, in each of the years ended December 31, 2021, 2020 and 2019, significant reasons for the difference between the actual tax rate and the federal rate of 21% were foreign income taxes being taxed at different rates, nondeductible expenses, research and development tax credits and the change in valuation allowance.

As of December 31, 2021, 2020 and 2019, the Company had net operating loss (“NOL”) carryforwards of $115.9 million, $51.6 million and $18.0 million for federal purposes, and $84.8 million, $26.8 million and $1.6 million for state purposes, respectively. If not utilized, these carryforwards will begin to expire in 2024 for federal, and 2028 for state purposes. The reductions in carryforwards in 2019 were primarily due to a change in ownership.

As of December 31, 2021, the Company also has accumulated tax losses of $6.7 million for Australia available for carry forward against future earnings, which under relevant tax laws do not expire but may not be available under certain circumstances.

As of December 31, 2021, 2020 and 2019, the Company had federal research and development tax credit carryforwards of $3.1 million, $0.9 million and $0.1 million, respectively and state research and development tax credit carryforwards of $5.0 million, $3.4 million and $2.7 million, respectively, before offset for unrecognized tax benefits, to offset future income tax liabilities. The federal research and development tax credits will expire at various dates beginning in 2039, if not utilized, while the state research and development tax credit can be carried forward indefinitely.

Sections 382 and 383 of the Internal Revenue Code provide for a limitation on the annual use of NOL and tax credit carryforwards following certain ownership changes that could limit the Company’s ability to utilize these carryforwards. The Company has completed an analysis to determine if such ownership changes have occurred and concluded it was more likely than not that there were changes in ownership. Due to the existence of full valuation allowance, limitations under Section 382 and 383 will not impact the Company’s effective tax rate. Further analyses will be performed prior to recognizing the benefits of any losses or credits in the consolidated financial statements.

The Company is required to reduce its deferred tax assets by a valuation allowance if it is more likely than not that some or all of its deferred tax assets will not be realized. Management must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of the valuation allowance, if any, the Company assesses the likelihood that it will be able to recover its deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical cumulative losses, the Company determined that, based on all available evidence, there was substantial uncertainty as to whether it will recover recorded net deferred taxes in future periods. Accordingly, the Company recorded a valuation allowance against all its net deferred tax assets as of December 31, 2021, 2020 and 2019. The net change in total valuation allowance was an increase of approximately $20.6 million and $8.6 million for the years ended December 31, 2021 and 2020, respectively, a decrease of approximately $35.3 million for the year ended December 31, 2019. The decrease in 2019 is primarily due to the reduction in NOL and tax credit carryforwards that were triggered by the change in ownership on September 30, 2019.

The Company records unrecognized tax benefits, where appropriate, for all uncertain income tax positions. The Company recorded unrecognized tax benefits for uncertain tax positions of approximately $2.4 million and $1.3 million as of December 31, 2021 and 2020, respectively, none of which would impact the effective tax rate, if recognized, because the benefit would be offset by an increase in the valuation allowance. 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	Year Ended December 31,
	2021		2020			2019
Beginning Balance	$	1,281	$	851		$	1,582
Additions based on tax positions related to the current year		1,132		431			159
Increase (decreases) related to prior years’ tax positions		9		(1	)		(890	)
Ending Balance	$	2,422	$	1,281		$	851

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. During the years ended December 31, 2021, 2020 and 2019, the Company recognized no interest and penalties associated with unrecognized tax benefits. There are no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.

The Company files income tax returns in the U.S. and Australia, as well as with various U.S. states. The Company is subject to tax audits in all jurisdictions in which it files income tax returns. Tax audits by their very nature are often complex and can require several years to complete. There are currently no tax audits that have commenced with respect to income tax returns in any jurisdiction.

Under the tax statute of limitations applicable to the Internal Revenue Code, the Company and its U.S. subsidiary, either standalone or as part of the consolidated group, is no longer subject to U.S. federal income tax examinations by the Internal Revenue Service for tax years before tax year 2018. Under the statute of limitations applicable to most state income tax laws, the Company is no longer subject to state income tax examinations by tax authorities for tax years before 2017 in states in which it has filed income tax returns. However, because the Company is carrying forward income tax attributes, such as net operating losses and tax credits, from earlier tax years, these attributes can still be audited when utilized on returns filed in the future. The Company is subject to foreign tax examinations by tax authorities for fiscal year 2016 and forward.