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INCOME TAX
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
INCOME TAX INCOME TAX:
Loss before income taxes and the related tax expense (benefit) is as follows:
Year ended December 31
(in thousands)20212020
Loss before income taxes:
Domestic$69,196 $211,447 
Foreign4,581 44,379 
Total loss before taxes$73,777 $255,826 
Current taxes:
Federal$(456)$(258)
State8 5 
Total current taxes$(448)$(253)
A reconciliation of income taxes at the U.S. federal statutory rate to the provision for income taxes is as follows:
Year ended December 31
20212020
Federal income tax provision at statutory rate21.00 %21.00 %
State income tax provision, net of federal benefit(0.01)%— %
IPR&D Impairment & CSR Remeasurement— %(11.42)%
Transaction Costs— %(1.07)%
IP Gain— %(14.65)%
Change in valuation allowances(20.27)%6.16 %
Foreign tax rate differential— %0.35 %
Other(0.11)%(0.27)%
Effective income tax rate0.61 %0.10 %
The income tax expense for the years ended December 31, 2021 and 2020 differed from the amounts computed by applying the U.S. federal income tax rate of 21% to loss before tax expense as a result of nondeductible expenses, changes in state effective tax rates, foreign taxes, tax credits generated, true up of net operating loss carryforwards, and increase in the Company’s valuation allowance. The Company applies the elements of FASB ASC 740-10 regarding accounting for uncertainty in income taxes. This clarifies the accounting for uncertainty in income taxes recognized in financial statements and required impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing
authority. Included in Other Liabilities on the Consolidated Balance Sheets, are the total amount of unrecognized tax benefits of approximately $2.8 million and $3.1 million as of December 31, 2021 and 2020, respectively, net of the federal benefit, if recognized, would favorably affect the Company’s future effective tax rate. The Company’s policy is to recognize interest and penalties related to tax matters within the income tax provision. Tax years beginning in 2017 are generally subject to examination by taxing authorities, although net operating losses from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.
The significant components of the Company's deferred tax assets and liabilities are as follows:
December 31,
(in thousands)20212020
Deferred tax assets:
Net operating loss carry forward$73,259 $55,514 
Tax credit carryforwards7,905 7,387 
Share based compensation3,281 4,903 
Accrued expenses and other1,226 2,325 
Total gross deferred tax assets85,671 70,129 
Less - valuation allowance(85,555)(69,743)
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Other(40)(41)
Right of use assets(76)(345)
Total gross deferred tax liabilities(116)(386)
Net deferred tax assets$— $— 
Realization of deferred tax assets is contingent upon sufficient future taxable income during the period that deductible temporary differences and carry forward losses are expected to be available to reduce taxable income. As the achievement of required future taxable income is not likely, the Company recorded a full valuation allowance.
At December 31, 2021 and 2020, the Company recorded valuation allowance against its net deferred tax assets of approximately $85.6 million and $69.7 million, respectively. The change in the valuation allowance during the years ended December 31, 2021 and 2020 was an increase of approximately $15.8 million and a decrease of approximately $1.3 million, respectively. A valuation allowance has been recorded since, in the judgment of management, these assets are not more likely than not to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences and carryforwards become deductible or are utilized. As of December 31, 2021, the Company had federal and state pre-tax net operating loss carryforwards of approximately $315.0 million and $105.6 million, respectively.
As of December 31, 2021, research and development credit carryforwards for federal and state purposes are approximately $6.7 million and $1.2 million, respectively. As a result of U.S. tax reform legislation, federal net operating losses generated beginning in 2018 and subsequent years carryforward indefinitely, however, the Company has federal net operating losses that pre-date U.S. tax reform legislation which begin to expire in 2031 and federal credit carryforwards that begin to expire in 2031. State net operating loss carryforwards begin to expire in 2031, and the state credit carryforwards began to expire in 2031. Sections 382 and 383 of the Internal Revenue Code of 1986 subject the future utilization of net operating losses and certain other tax attributes, such as research and development tax credits, to an annual limitation in the event of certain ownership changes, as defined. The Company may have undergone ownership changes and therefore may be materially limited in the amount of NOL and R&D tax credit available for utilization in the future.
The Company generated research and development tax credits but has not conducted a study to document the qualified activities. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, a partial reserve has been presented as an uncertain tax position which
is offset against the gross research and development deferred tax asset. A full valuation allowance has been provided against the Company’s research and development credits and, if an adjustment is required, this would be offset by an adjustment to the deferred tax asset established for the research and development credit carryforwards and the valuation allowance.
Uncertain tax positions:
ASC No. 740, Income Taxes, requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect the operating results of the Company.
The following table summarizes the activity of the Company unrecognized tax benefits (in thousands):
Balance at January 1, 2020
$714 
Additions for prior year positions(1)
2,354 
Additions for current year positions273 
Reductions related to expiration of statute of limitations(258)
Balance at December 31, 2020$3,083 
Additions for prior year positions(1)
— 
Additions for current year positions$172 
Reductions related to expiration of statute of limitations$(456)
Balance at December 31, 2021$2,799 
(1) Balance related to research and development tax credit positions acquired through the Merger.
In December 2020, the Company began liquidation proceedings of its Israeli subsidiary, VYNE Pharmaceuticals Ltd., to align with its business strategy. As a result thereof, the Company's intellectual property was assigned to the U.S. parent company and we recognized a $163.0 million taxable gain in 2020 for Israeli income tax purposes. However, the taxable gain was fully offset by net operating loss carryforwards, resulting in no income tax expense to the Company. In addition, there was also no Israeli withholding tax due by the U.S. parent company.
The Corporate Restructuring is subject to complex tax and transfer pricing regulations administered by taxing authorities in the U.S. and Israel. The relevant taxing authorities may disagree with the Company’s determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and the Company’s position were not sustained, the Company could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates and reduced cash flows than otherwise would be expected.
The Company has tax assessments that are considered to be final through tax year 2015.