Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

11. Income Taxes

The Company accounts for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which these temporary differences are expected to be recovered or settled. Valuation allowances are provided if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Management believes that it is more likely than not that all deferred tax assets will not be realized.

The Company recognizes liabilities for potential tax payments to various tax authorities related to uncertain tax positions. The liabilities are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filing is more likely

than not to be realized following resolution of any potential contingencies present related to the tax benefit. Potential interest and penalties associated with such uncertain tax positions, if any, are recorded as components of income tax expense.

The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available as of the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, the Company does not recognize a tax benefit in the consolidated financial statements.

Income (loss) before provision for income taxes consisted of the following:

	Years Ended December 31,
(in thousands)	2022			2021
Federal		(113,389	)		49,045
Foreign		(55,586	)		(220,000	)
Loss before provision for income taxes	$	(168,975	)	$	(170,955	)

The provision for income taxes for the years ended December 31, 2022 and 2021 consisted of the following:

	Years Ended December 31,
(in thousands)	2022			2021
Current income tax (benefit) expense:
Federal	$	(246	)		987
State		(19	)		20
Foreign		—			—
Total current income tax (benefit) expense		(265	)		1,007
Deferred income tax (benefit) expense:
Federal		—			—
State		—			—
Foreign		—			—
Total deferred income tax (benefit) expense		—			—
Total income tax (benefit) expense	$	(265	)	$	1,007

The Company’s income tax (benefit) expense for the years ended December 31, 2022 and 2021 relating to federal, state and foreign tax jurisdictions differs from the amounts determined by applying the statutory federal income tax rate based on the following:

	Years Ended December 31,
(in thousands)	2022					2021
Benefit at the federal rate	$	(35,472	)	21.0	%	$	(35,901	)	21.0	%
Increase (decrease) resulting from:
Foreign tax rate differential		2,177		(1.3	)%		43,786		(25.6	)%
State taxes, net of federal benefit		(1,603	)	0.9	%		1,018		(0.6	)%
Change in valuation allowance		35,406		(21.0	)%		22,268		(13.0	)%
Intellectual property transfer		—		0.0	%		(25,538	)	14.9	%
Tax credits		(6,992	)	4.1	%		(5,540	)	3.3	%
Officer's compensation		695		(0.4	)%		2,648		(1.5	)%
Stock compensation		4,637		(2.7	)%		(2,464	)	1.4	%
Permanent differences		(182	)	0.1	%		—		—
Other		1,069		(0.6	)%		730		(0.5	)%
Total income tax (benefit) expense	$	(265	)	0.1	%	$	1,007		(0.6	)%

During the year ended December 31, 2022, the Company began applying the requirement to capitalize U.S. research and development expenses in the period incurred, as required by the Tax Cuts and Job Act of 2017. During the year ended December 31, 2021, the Company transferred intellectual property rights between tax jurisdictions, resulting in a deferred tax benefit on the basis

difference in our intangible assets. The additional deferred tax asset was offset by valuation allowance, resulting in no net impact to deferred tax expense (benefit). The transfer of intellectual property rights generated U.S. current income tax expense of $1.0 million after utilization of net operating loss and tax credit carryforwards.

Components of deferred income taxes consist of the following:

	December 31,
(in thousands)	2022			2021
Deferred tax assets:
Net operating loss carryforwards	$	9,374		$	5,460
Tax credit carryforwards		12,374			4,683
Intangible assets		25,537			25,538
Operating lease liabilities		8,074			6,865
Non-qualified stock compensation		12,017			8,028
Restricted stock compensation		235			1,778
Capitalization of R&D expenses		20,375			—
Other		1,661			1,646
Total deferred tax assets		89,647			53,998
Valuation allowance		(82,228	)		(46,823	)
Net deferred tax asset (liability)	$	7,419		$	7,175
Deferred tax liabilities:
Operating lease right-of-use assets		(7,218	)		(6,791	)
Restricted stock compensation		—			—
Depreciation		(186	)		(350	)
Other		(15	)		(34	)
Total deferred tax liabilities		(7,419	)		(7,175	)
Net deferred tax asset (liability)	$	—		$	—

The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. The Company primarily considered such factors as its history of operating losses, the nature of the Company’s deferred tax assets, and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. At December 31, 2022 and 2021, the Company does not believe that it is more likely than not that the deferred tax assets will be realized; accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying consolidated balance sheets. For the year ended December 31, 2022, the valuation allowance for deferred tax assets increased by $35.4 million, which was principally due to net operating losses, tax credits, tax basis generated from the intellectual property transfer, and U.S. research and development expense capitalization.

At December 31, 2022 and 2021, the Company had unused federal net operating loss carryforwards of $0 and $13.3 million, respectively. The federal net operating loss carryforwards have no expiration. The CARES Act temporarily allows the Company to carryback net operating losses arising in 2018, 2019 and 2020 to the five prior tax years. In addition, net operating losses generated in these years could fully offset prior year taxable income without the 80% of the taxable income limitation under the TCJA which was enacted on December 22, 2017. Given that the Company utilized a substantial portion of its net operating losses in 2021, is expected to utilize all remaining net operating losses in 2022, the net operating loss carryback provisions under the CARES Act are not applicable to the Company.

At December 31, 2022 and 2021, the Company had unused state net operating loss carryforwards of $3.6 million and $8.5 million, respectively. The state net operating loss carryforwards expire in 2035.

At December 31, 2022 and 2021, the Company had unused foreign net operating loss carryforwards of $72.9 million and $16.8 million, respectively. The foreign net operating loss carryforwards have no expiration.

At December 31, 2022 and 2021, the Company had $6.6 million and $2.8 million of research and development tax credit carryforwards that may be available to offset future federal income taxes through 2040. Additionally, at December 31, 2022, the Company had a federal orphan drug credit (ODC) carryforward related to qualifying research of $4.8 million that will begin to expire

in 2041. At December 31, 2022 and 2021, the Company also had $1.3 million and $0.8 million of research and development tax credit carryforwards that may be available to offset future state income taxes in the state of Massachusetts through 2035.

Utilization of net operating loss and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and research and development tax credit carryforwards that can be utilized annually to offset future taxable income and tax expense, respectively. The Company has completed several financings since its inception which may result in a change of control as defined in Section 382 of the Internal Revenue Code or could result in a change in control in the future.

The Company complies with the provisions of ASC 740 in accounting for its uncertain tax positions. ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely that not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. At December 31, 2022 and 2021, the Company had no uncertain tax positions.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense. The Company had no accruals for interest and penalties at December 31, 2022 and 2021.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The statute of limitations for assessment by the Internal Revenue Service and state tax authorities remains open for the tax years December 31, 2019 through December 31, 2022 as the Company was incorporated in September 2018. There are currently no federal, state or foreign income tax audits in progress. The resolution of tax matters is not expected to have a material effect on the Company's consolidated financial statements.