Income Taxes

12 Months Ended

Dec. 31, 2021

Income Taxes

Income Taxes

15. Income Taxes

The components of net loss before income tax benefit are as follows:

	Year Ended December 31,
	2021		2020
U.S. operations	$	(78,583,331)	$	(50,735,735)
Non-U.S. operations		(18,507,493)		(3,725,766)
Net loss before income tax benefit	$	(97,090,824)	$	(54,461,501)

The components of the income tax benefit are as follows:

	Year Ended December 31,
	2021		2020
U.S. federal
Current	$	—	$	4,706,092
Deferred		—		—
U.S. state and local
Current		—		710,932
Deferred		—		—
Income tax benefit	$	—	$	5,417,024

Reconciliation between the effect of applying the federal statutory rate and the effective income tax rate used to calculate the Company’s income tax benefit is as follows:

	Year Ended December 31,
	2021		2020
Federal statutory rate	21.00	%	21.00	%
State income taxes, net of federal benefit	4.71		4.10
Research and development tax credit	(2.30)		(0.84)
Acquired in process research and development	(0.15)		(6.27)
CARES Act U.S. federal and state carryback claim	—		1.81
Other	(0.47)		0.29
Change in valuation allowance	(22.79)		(10.14)
Effective tax rate	—	%	9.95	%

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 and for tax carryforwards. Significant components of the Company’s deferred tax assets and liabilities are as follows:

	December 31,
	2021		2020
Deferred tax assets:
Net operating losses	$	37,229,317	$	18,978,410
Accrued expenses		352,040		495,301
Amortization		745,676		785,523
Stock compensation		1,275,987		584,507
Lease liability		422,424		502,151
Asset impairment		3,128,740		—
Other		109,015		106,197
Total deferred tax assets		43,263,199		21,452,089
Valuation allowance		(40,584,149)		(18,671,086)
Deferred tax assets, net		2,679,050		2,781,003
Deferred tax liabilities:
IPR&D assets		(2,359,604)		(2,386,667)
Right of use asset		(219,639)		(248,710)
Depreciation		(99,807)		(145,626)
Total deferred tax liabilities		(2,679,050)		(2,781,003)
Total deferred tax assets (liabilities), net	$	—	$	—

The Company assesses the need for a valuation allowance against our deferred tax assets and considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. This determination requires significant judgment, including assumptions about future taxable income that are based on historical and projected information. The increase in the valuation allowance during the year ended December 31, 2021 primarily relates to increases for current year losses in both the U.S. and foreign locations which the Company concluded needed a full valuation allowance. The Company has recorded a valuation allowance against its net U.S. deferred tax assets it believes are not more likely than not realizable and the net non-U.S. deferred tax assets. Deferred tax liabilities, consist primarily of indefinite life IPR&D assets located in a foreign subsidiary, which will be applied in the future to offset against net operating losses (“NOLs”) that have an indefinite life.

The Company has U.S. federal and state net operating loss carryforwards of approximately $107.8 million and $110.3 million, respectively, as of December 31, 2021, of which a portion of the federal and state amount of $6.6 million and $110.3 million, respectively, has a 20-year carry forward period that will expire at various dates beginning in 2024. Under current law, the remaining federal amount of $101.2 million has an indefinite life and amounts utilized in the future may not exceed 80% of taxable income. The Company also has foreign net operating loss carryforward of approximately $37.2 million which carryforward indefinitely.

Under Section 382 of the Internal Revenue Code of 1986 (“IRC 382”), as amended, substantial changes in the Company’s ownership may limit the amount of NOLs that can be utilized annually in the future to offset its U.S. federal and state taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of the Company of more than 50% within any three-year period. The amount of the annual limitation is determined based on the value of the Company immediately before the ownership change. The Company has reduced the NOL and related valuation allowance in historical periods.

Our existing NOLs are subject to limitations arising from previous ownership changes from 2020 and prior that impact the timing and amount. In addition, future changes in our stock ownership, many of which are outside of our control, could result in an ownership change. While we do not believe we have experienced ownership changes in 2021, it is possible we may have incurred a change as no new IRC 382 study was performed in 2021 to determine if there was another ownership change. Accordingly, we may not be able to utilize a material portion of our NOLs and this could harm our future operating results by effectively increasing our future tax obligations.

Significant judgment is required in evaluating tax positions and determining the provision for income taxes. The Company establishes liabilities for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes may be due. These liabilities are established when the Company believes that certain positions might be challenged despite its belief that its tax return positions are fully supportable. The Company adjusts these liabilities in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of changes to these liabilities.

The amount of unrecognized tax benefits was $0.2 million and $0.7 million as of December 31, 2021 and 2020, respectively. Any changes in the next twelve months are not anticipated to have a significant impact on the results of operations, financial position or cash flows of the Company. All of the Company’s uncertain tax positions, if recognized, would affect its income tax expense.

The Company has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2021 and 2020, potential interest and penalties on unrecognized tax benefits were not significant.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits excluding related interest and penalties:

	Year Ended December 31,
	2021		2020
Beginning balance	$	710,783	$	—
Increases for current year tax positions		—		710,783
Decreases for prior year tax positions		(474,458)		—
Ending balance	$	236,325	$	710,783

The Company files income tax returns in the United States, various U.S. states, U.K. and Australia. The Company is still open to examination by the applicable taxing authorities from 2010 forward, although tax attributes that were generated prior to 2010 may still be adjusted upon examination by federal, state, foreign or local tax authorities if they either have been or will be used in a future period.