Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

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INCOME TAXES
12 Months Ended
Dec. 31, 2021
INCOME TAXES  
INCOME TAXES

13. INCOME TAXES

For the year ended December 31, 2021, we recorded provision for income tax of $0.6 million. This provision for income tax was related to the state tax liability primarily due to revenue recognized for the Lilly Agreement. We do not expect to owe federal income taxes due to the sufficient net operating loss (NOL) carryforwards that were generated prior to the enactment of the Tax Cuts and Jobs Act (Tax Act), as well as significant research and development credit carryforwards. We continue to record a full valuation allowance on our deferred tax assets considering our cumulative losses in prior years and forecasted losses in the future. For the years ended December 31, 2020 and 2019, our loss before income taxes was from domestic operations and we did not record provision for income taxes other than minimum state taxes due to our net loss.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows (in thousands):

December 31,

 

    

2021

    

2020

 

Deferred tax assets

Net operating loss carryforwards

$

229,364

$

240,767

Orphan drug and research and development credits

 

66,616

 

64,252

Deferred compensation

 

8,819

 

7,760

Lease liabilities

2,564

4,399

Capitalized inventory

47

34

Deferred revenue

 

16,297

 

1,405

Other, net

 

1,626

 

1,765

Deferred tax liabilities

Operating lease right-of-use asset

(2,335)

(4,084)

Others

(607)

(537)

Total net deferred tax assets

322,391

315,761

Less: valuation allowance

 

(322,391)

 

(315,761)

Deferred tax assets, net of allowance

$

$

The reconciliation of the statutory federal income tax rate to the effective tax rate was as follows:

Year Ended December 31,

 

    

2021

    

2020

    

2019

 

Federal statutory tax rate

 

(21.0)

%  

(21.0)

%  

(21.0)

%

State, Net of Federal Benefit

2.8

%  

0.1

%  

0.1

%

Valuation allowance

 

27.5

%  

24.4

%  

21.7

%

Stock compensation

5.6

%  

4.7

%  

2.8

%

Orphan drug and research and development credits

(14.0)

%  

(12.7)

%  

(5.1)

%

Other, net

 

2.7

%  

4.6

%  

1.5

%  

Effective tax rate

 

3.6

%  

0.1

%  

0.0

%  

In general, under Section 382 of the Internal Revenue Code (Section 382), a corporation that undergoes an ownership change is subject to limitations on its ability to utilize its pre-change net operating loss carryovers and tax credits to offset future taxable income. Our existing net operating loss carryforwards and tax credits are subject to limitations arising from ownership changes which occurred in previous periods. We finalized our analysis of potential ownership changes and concluded our Section 382 owner shift analysis during the year ended December 31, 2012. We have updated our net operating loss carryforwards to reflect the results of the Section 382 owner shift analysis as of December 31, 2021. We did not experience any significant changes in ownership in 2021, 2020, and 2019. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 and result in additional limitations.

As of December 31, 2021, we had net operating loss carryforwards for federal income tax purposes of approximately $973.6 million. Of the federal net operating loss carryforward, $839.3 million, which expire beginning in the year 2025 and the remaining net operating loss carryforwards can be carried forward indefinitely, subject to annual limitation of 80% of taxable income. We also had state net operating loss carryforwards of approximately $371.7 million, which expire beginning in the year 2028.

We have general business credits of approximately $50.7 million, which will expire beginning in 2023, if not utilized, and is comprised of research and development credits and orphan drug credits. We also have state research and development tax credits of approximately $30.7 million, which have no expiration date.

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by approximately $6.6 million, $4.1 million and $21.6 million for the year ended December 31, 2021, 2020 and 2019, respectively.

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

Year Ended December 31,

 

    

2021

    

2020

    

2019

 

Balance at the beginning of the year

$

8,901

$

8,358

$

8,358

Increase related to current year tax positions

 

285

 

543

 

543

Balance at the end of the year

$

9,186

$

8,901

$

8,358

During the years ended December 2021, 2020 and 2019, the amount of unrecognized tax benefits increased due to additional research and development and orphan drug credits generated during those years. The reversal of the uncertain tax benefits would not affect the Company’s effective tax rate to the extent that we continue to maintain a full valuation allowance against our deferred tax assets.

We are subject to federal income tax and various state taxes. Because of net operating loss and research credit carryovers, substantially all of our tax years remain open to examination.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We currently have no tax positions that would be subject to interest or penalties.