Income Taxes

12 Months Ended

Dec. 31, 2021

Income Taxes

Income Taxes

Note 15.    Income Taxes

No income tax expense was recorded by the Company for the year ended December 31, 2021.

The Company recorded income tax expense of $1.3 million for the year ended December 31, 2020. During the second quarter of 2020, the Company’s Australia subsidiary sold beneficial rights to discovery intellectual property to its U.S. entity, and the U.S. entity reimbursed the Australia subsidiary for certain direct development costs. Upon completion of the sale, the Company analyzed tax planning strategies and future income and concluded that a full valuation allowance is necessary for its Australia subsidiary. Income tax expense for the year ended December 31, 2020 reflects this sale of intellectual property rights, cost reimbursements and related adjustments to the deferred tax asset, establishing a valuation allowance and certain uncertain tax position liabilities. The Company’s effective income tax rate differed from the Company’s federal statutory rate of 21%, primarily because its U.S. loss cannot be benefited due to the full valuation position and reduced by foreign taxes.

The Company recorded an income tax benefit of $0.7 million for the year ended December 31, 2019 primarily due to research and development tax credits and the recognition of deferred tax assets in the Company’s Australia subsidiary.

The following table presents domestic and foreign components of net loss before income taxes (in thousands):

	Year Ended December 31,
	2021		2020		2019
Domestic	$	(125,797)	$	(71,073)	$	(72,271)
Foreign		246		6,228		(5,607)
Total net loss before taxes	$	(125,551)	$	(64,845)	$	(77,878)

The federal, state and foreign components of the income tax expense (benefit) are summarized as follows:

	Year Ended December 31,
	2021		2020		2019
Current:
Federal	$	—	$	—	$	—
State		—		—		—
Foreign		—		(88)		84
Total current tax (benefit) expense		—		(88)		84
Deferred:
Federal		—		—		—
State		—		—		—
Foreign		—		1,393		(775)
Total deferred tax expense (benefit)		—		1,393		(775)
Total income tax expense (benefit)	$	—	$	1,305	$	(691)

The effective tax rate of the provision for income taxes differs from the federal statutory rate as follows:

	Year Ended December 31,
	2021		2020		2019
Federal statutory income tax rate	21.0	%	21.0	%	21.0	%
State taxes, net of federal benefit	1.9		1.9		1.2
Research and development credits	4.3		6.5		4.3
Foreign tax rate difference	—		(0.9)		0.7
Change in valuation allowance	(28.0)		(34.3)		(23.8)
Other	0.8		3.8		(2.5)
(Provision) benefit for income taxes	—	%	(2.0)	%	0.9	%

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

	December 31,
	2021		2020
Deferred tax assets:
Net operating loss carryforwards	$	75,649	$	50,272
Depreciation and amortization		1,153		1,237
Accruals/other		5,716		5,332
Operating lease liability		1,230		1,252
Research and development and foreign credits		21,197		14,856
Total deferred tax assets		104,945		72,949
Deferred tax liabilities:
Operating right-of-use asset		(1,037)		(1,040)
Total deferred tax liabilities		(1,037)		(1,040)
Valuation allowance		(103,908)		(71,909)
Net deferred tax assets	$	—	$	—

Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. The Company established a valuation allowance to offset U.S. deferred tax assets as of December 31, 2021, 2020 and 2019 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. The Company also established a valuation allowance to offset Australian deferred tax assets as of December 31, 2021. The valuation allowance increased by approximately $32.0 million, $19.4 million and $18.5 million during the years ended December 31, 2021, 2020 and 2019, respectively.

Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an ownership change for tax purposes, as defined in Section 382 of the Internal Revenue Code. As a result of such ownership changes, the annual limitation may result in the expiration of net operating losses and credits before utilization. The Company performed a Section 382 analysis through December 31, 2021. The Company has experienced ownership changes in the past and in the current year. The ownership changes will not result in a limitation that will materially reduce the total amount of net operating loss carryforwards and credits that can be utilized. Subsequent ownership changes may affect the limitation in future years.

At December 31, 2021, the Company had $347.7 million of federal net operating loss carryforwards and $336.2 million of state net operating loss carryforwards. $78.7 million of the federal net operating loss carryforwards will begin to expire in 2033, if not utilized, and the remaining $269.0 million have no expiration date. The state net operating loss carryforwards will begin to expire in 2035, if not utilized.

At December 31, 2021, the Company also had fully utilized the remaining Australian tax losses of AUD 3.1 million ($2.3 million) carryforward.

As of December 31, 2021, the Company had $19.2 million of federal and $7.9 million of state research and development tax credit carryforwards available to reduce future income taxes. The federal research and development tax credits will begin to expire in 2035, if not utilized. The state research and development tax credits have no expiration date.

As of December 31, 2021, the Company had AUD 2.9 million ($2.1 million) of Australian research and development tax credit carryforwards available to reduce future income taxes. The Australian research and development tax credits have no expiration date.

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

	Year Ended December 31,
	2021		2020		2019
Balance at beginning of year	$	19,885	$	16,631	$	9,466
(Decreases) increases based on tax positions related to prior years		—		(3,799)		184
Increases based on tax positions related to current year		13,274		7,053		6,981
Balance at end of year	$	33,159	$	19,885	$	16,631

At December 31, 2021, the Company had unrecognized tax benefits of $33.2 million, which are subject to a valuation allowance and would not affect the effective tax rate if recognized. The Company does not anticipate that the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes, as necessary. Management determined that no accrual for interest or penalties was required as of December 31, 2021, 2020 and 2019.

The Company files income tax returns in the United States federal jurisdiction, the State of California, the state of Florida, and Australia. The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions. The Company’s tax returns remain open for examination for all years.

The Company’s Australia subsidiary had an accumulated deficit at December 31, 2021 and, accordingly, no provision has been provided thereon for any unremitted earnings.

The Company has elected to recognize any potential global intangible low-taxed income (“GILTI”) obligation as an expense in the period it is incurred.