Income Taxes

12 Months Ended

Dec. 31, 2019

Prior to the Conversion in October 2017, the Company had been treated as a partnership for tax purposes and had not been subject to U.S. federal or state income taxation. As a result, the Company had not recorded any U.S. federal or state income tax benefits for the net losses incurred prior to October 2017 or for earned research and orphan drug credits. Upon the Conversion in October 2017, the Company became subject to Corporate U.S. federal and state income taxes.

During the years ended December 31, 2019 and 2018, and the period from October 2, 2017 to December 31, 2017, the Company recorded no income tax benefits for the net operating losses, due to its uncertainty of realizing a benefit from those items.

A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows:


	Year Ended December 31,
	2019		2018		2017
Federal statutory income tax rate	21.0	%	21.0	%	34.0	%
State taxes, net of federal benefit	7.0		6.1		1.6
Research and orphan drug credit	5.4		9.6		7.7
Research and orphan drug credit addback	—		—		(6.6)
Impact of change in tax status	—		—		(8.7)
Effect of federal tax law change	—		—		(6.1)
Permanent adjustments and other	3.8		0.7		(0.3)
Increase in deferred tax asset valuation allowance	(37.2)		(37.4)		(21.6)
Effective income tax rate	—	%	—	%	—	%

Net deferred tax assets consisted of the following:


	December 31,
(in thousands)	2019		2018
Deferred tax assets (liabilities):
Net operating loss carryforwards	$	85,632	$	28,906
Research and orphan drug credit carryforwards	25,267		13,457
Stock-based compensation	5,535		4,681
Accrued expenses	2,951		1,270
Operating lease liabilities	5,841		3,200
Operating lease assets	(5,515)		—
Property and equipment	—		(3,200)
Other	(64)		(123)
Total gross deferred tax assets	119,647		48,191
Valuation allowance	(119,647)		(48,191)
Net deferred tax assets	$	—	$	—

On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into U.S. law. The TCJA includes a number of changes to existing tax law, including, among other things, a permanent reduction in the federal corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, effective as of January 1, 2018, as well as limitation of the deduction for net operating losses to 80% of annual taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2018 (though any such net operating losses may be carried forward indefinitely).

The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Job Act (SAB 118) which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The provisional amount was finalized during the year ended December 31, 2018, and did not result in a material change to the amount previously recorded. Due to the corresponding valuation allowance fully offsetting deferred taxes, there was no impact to the statement of operations and comprehensive loss.

The change in the valuation allowance was as follows:


	Year Ended December 31,
(in thousands)	2019		2018
Valuation allowance as of beginning of year	$	(48,191)	$	(10,835)
Net increases recorded to income tax provision	(71,456)		(37,356)
Valuation allowance as of end of year	$	(119,647)	$	(48,191)

As of December 31, 2019, the Company had net operating loss carryforwards for federal income tax purposes of $324.2 million, of which $14.5 million begin to expire in 2037 and $309.7 million may be carried forward indefinitely. As of December 31, 2019, the Company had net operating loss carryforwards for state income tax purposes of $288.6 million, which begin to expire in 2037. As of December 31, 2019, the Company also had available research and orphan drug credit carryforwards for federal and state income tax purposes of $23.1 million and $2.8 million, respectively, which begin to expire in 2037 and 2032, respectively. Utilization of the net operating loss carryforwards and research and orphan drug credit

carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), and similar state law due to ownership changes that have occurred previously or that could occur in the future.

These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. The Company has not conducted a formal study to assess whether a change of control has occurred or whether there have been multiple changes of control since the IPO due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382 of the Code and similar state law, at any time since the IPO, utilization of the net operating loss carryforwards or research and orphan drug credit carryforwards may be subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of the Company's stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and orphan drug credit carryforwards before utilization.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company's history of cumulative net losses incurred since inception and its lack of commercialization of any products since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2019. Management reevaluates the positive and negative evidence at each reporting period.

The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2019. The Company will recognize interest and penalties related to uncertain tax positions in income tax expense when, if ever, it is in a taxable income position. As of December 31, 2019 and 2018, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company's statement of operations and comprehensive loss.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending income tax examinations. The Company's tax years that are open under statute are from October 2, 2017 to the present. The Company's policy is to record interest and penalties related to income taxes as part of its income tax provision.